Policies Towards Foreign Direct Investment

The Government of Argentina has identified its top economic priorities for 2021 as resolving its debt situation with the IMF, controlling inflation, responding to the COVID-19 pandemic by providing financial aid to the most vulnerable sectors of society. When the Fernandez administration took office in late 2019, the Ministry of Foreign Affairs, International Trade, and Worship became the lead governmental entity for investment promotion.  The Fernandez administration does not have a formal business roundtable or other dialogue established with international investors, although it does engage with domestic and international companies.

Market regulations such as capital controls, trade restrictions, and price controls enhance economic distortion that hinders the investment climate in the country.

Foreign and domestic investors generally compete under the same conditions in Argentina. The amount of foreign investment is restricted in specific sectors such as aviation and media. Foreign ownership of rural productive lands, bodies of water, and areas along borders is also restricted.

Argentina has a National Investment and Trade Promotion Agency that provides information and consultation services to investors and traders on economic and financial conditions, investment opportunities, and Argentine laws and regulations. The agency also provides matchmaking services and organizes roadshows and trade delegations. Upon the change of administration, the government placed the Agency under the direction of the Ministry of Foreign Affairs (MFA) to improve coordination between the Agency and Argentina´s foreign policy. The Under Secretary for Trade and Investment Promotion of the MFA works as a liaison between the Agency and provincial governments and regional organizations. The new administration also created the National Directorate for Investment Promotion under the Under Secretary for Trade and Investment Promotion, making the Directorate responsible for promoting Argentina as an investment destination. The Directorate´s mission also includes determining priority sectors and projects and helping Argentine companies expand internationally and/or attract international investment.

The agency’s web portal provides information on available services ( https://www.inversionycomercio.org.ar/ ). The 23 provinces and the City of Buenos Aires also have their own provincial investment and trade promotion offices.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign and domestic commercial entities in Argentina are regulated by the Commercial Partnerships Law (Law 19,550), the Argentina Civil and Commercial Code, and rules issued by the regulatory agencies. Foreign private entities can establish and own business enterprises and engage in all forms of remunerative activity in nearly all sectors.

Full foreign equity ownership of Argentine businesses is not restricted, for the most part, with exception in the air transportation and media industries. The share of foreign capital in companies that provide commercial passenger transportation within the Argentine territory is limited to 49 percent per the Aeronautic Code Law 17,285. The company must be incorporated according to Argentine law and domiciled in Buenos Aires. In the media sector, Law 25,750 establishes a limit on foreign ownership in television, radio, newspapers, journals, magazines, and publishing companies to 30 percent.

Law 26,737 (Regime for Protection of National Domain over Ownership, Possession or Tenure of Rural Land) establishes that a foreigner cannot own land that allows for the extension of existing bodies of water or that are located near a Border Security Zone. In February 2012, the government issued Decree 274/2012 further restricting foreign ownership to a maximum of 30 percent of national land and 15 percent of productive land. Foreign individuals or foreign company ownership is limited to 1,000 hectares (2,470 acres) in the most productive farming areas. In June 2016, the Government of Argentina issued Decree 820 easing the requirements for foreign land ownership by changing the percentage that defines foreign ownership of a person or company, raising it from 25 percent to 51 percent of the social capital of a legal entity. Waivers are not available.

Argentina does not maintain an investment screening mechanism for inbound foreign investment. U.S. investors are not at a disadvantage to other foreign investors or singled out for discriminatory treatment.

Other Investment Policy Reviews

Argentina was last subject to an investment policy review by the OECD in 1997 and a trade policy review by the WTO in 2013. The United Nations Conference on Trade and Development (UNCTAD) has not done an investment policy review of Argentina.

Business Facilitation

In 2019, stemming from the country’s deteriorating financial and economic situation, the Argentine government re-imposed capital controls on business and consumers, limiting their access to foreign exchange.  Strict capital controls and increases in taxes on exports and imports the Argentine government instituted at the end of 2019 have generated uncertainty in the business climate.

With the stated aim of keeping inflation under control and avoiding production shortages during the COVID-19 pandemic, the government increased market interventions in 2020, creating further market distortions that may deter investment. Argentina currently has two consumer goods price control programs, “Precios Cuidados,” a voluntary program established in 2014, and “Precios Máximos,” an emergency program established in March 2020. The Argentine Congress also passed the Shelves Law (No. 27,545), which regulates the supply, display, and distribution of products on supermarket shelves and virtual stores. Key articles of the Law are still pending implementing regulations. Private companies expressed concern over the final regulatory framework of the Law, which could affect their production, distribution, and marketing business model.

In August 2020, the government issued an edict freezing prices for telecommunication services (mobile and land), cable and satellite TV, and internet services until December 2020, later extending the measure into 2021. In Argentina’s high inflation environment, companies sought a 20 to 25 percent increase, however, the regulator allowed the telecom sector a five percent rate increase as of January 2021. The health sector was also subject to limits on price increases. In February 2021, the Secretary of Trade took administrative action against major consumer firms and food producers for purportedly causing supermarket shortages by withholding production and limiting distribution. Companies are currently contesting this decision. In March 2021, the Secretary of Domestic Trade issued Resolution 237/2021 establishing a national registry to monitor the production levels, distribution, and sales of private companies. If companies fail to comply, they could be subject to fines or closure. Tighter import controls imposed by the Fernandez administration have affected the business plans of private companies that need imported inputs for production. The private sector noted increased discretion on the part of trade authorities responsible for approving import licenses.

The Ministry of Production eased bureaucratic hurdles for foreign trade through the creation of a Single Window for Foreign Trade (“VUCE” for its Spanish acronym) in 2016. The VUCE centralizes the administration of all required paperwork for the import, export, and transit of goods (e.g., certificates, permits, licenses, and other authorizations and documents). The Argentine government has not fully implemented the VUCE for use across the country. Argentina subjects imports to automatic or non-automatic licenses that are managed through the Comprehensive Import Monitoring System (SIMI, or Sistema Integral de Monitoreo de Importaciones), established in December 2015 by the National Tax Agency (AFIP by its Spanish acronym) through Resolutions 5/2015 and 3823/2015. The SIMI system requires importers to submit detailed information electronically about goods to be imported into Argentina. Once the information is submitted, the relevant Argentine government agencies can review the application through the VUCE and make any observations or request additional information. The list of products subject to non-automatic licensing has been modified several times since the beginning of the SIMI system. Due to the Covid-19 pandemic, the government reclassified goods needed to combat the health emergency previously subject to non-automatic import licenses to automatic import licenses. Approximately 1,500 tariff lines are currently subject to non-automatic licenses.

The Argentine Congress approved an Entrepreneurs’ Law in March 2017, which allows for the creation of a simplified joint-stock company (SAS, or Sociedad por Acciones Simplificada) online within 24 hours of registration. However, in March 2020, the Fernandez administration annulled the 24-hour registration system. Industry groups said this hindered the entrepreneurship ecosystem by revoking one of the pillars of the Entrepreneurs´ Law.

In December 2020, the government issued the regulatory framework for the Knowledge Based-Economy Law, which was passed in October 2020. The Law establishes tax benefits for entrepreneurs until December 2029. The complete list of activities included in the tax benefit can be found at: http://servicios.infoleg.gob.ar/infolegInternet/verNorma.do;jsessionid=56625A2FC5152F34ECE583158D581896?id=346218 .

Foreign investors seeking to set up business operations in Argentina follow the same procedures as domestic entities without prior approval and under the same conditions as local investors. To open a local branch of a foreign company in Argentina, the parent company must be legally registered in Argentina. Argentine law requires at least two equity holders, with the minority equity holder maintaining at least a five percent interest. In addition to the procedures required of a domestic company, a foreign company establishing itself in Argentina must legalize the parent company’s documents, register the incoming foreign capital with the Argentine Central Bank, and obtain a trading license.

A company must register its name with the Office of Corporations (IGJ, or Inspección General de Justicia). The IGJ website describes the registration process and some portions can be completed online ( https://www.argentina.gob.ar/justicia/igj/guia-de-tramites ). Once the IGJ registers the company, the company must request that the College of Public Notaries submit the company’s accounting books to be certified with the IGJ. The company’s legal representative must obtain a tax identification number from AFIP, register for social security, and obtain blank receipts from another agency. Companies can register with AFIP online at www.afip.gob.ar or by submitting the sworn affidavit form No. 885 to AFIP.

Details on how to register a company can be found at the Ministry of Productive Development’s website: https://www.argentina.gob.ar/produccion/crear-una-empresa . Instructions on how to obtain a tax identification code can be found at: https://www.argentina.gob.ar/obtener-el-cuit-por-internet .

The enterprise must also provide workers’ compensation insurance for its employees through the Workers’ Compensation Agency (ART, or Aseguradora de Riesgos del Trabajo). The company must register and certify its accounting of wages and salaries with the Secretariat of Labor, within the Ministry of Labor, Employment, and Social Security.

In April 2016, the Small Business Administration of the United States and the Ministry of Production of Argentina signed a Memorandum of Understanding (MOU) to set up small and medium sized business development centers (SBDCs) in Argentina.  Under the MOU, in June 2017, Argentina set up a SBDC in the province of Neuquén to provide small businesses with tools to improve their productivity and increase their growth.

The Ministry of Productive Development offers attendance-based courses and online training for businesses. The training menu can be viewed at: https://www.argentina.gob.ar/produccion/capacitacion .

Outward Investment

The National Directorate for Investment Promotion under the Under Secretary for Trade and Investment Promotion at the MFA assists Argentine companies in expanding their business overseas, in coordination with the National Investment and Trade Promotion Agency. Argentina does not have any restrictions regarding domestic entities investing overseas, nor does it incentivize outward investment.

Transparency of the Regulatory System

The Secretary of Strategic Affairs under the Cabinet is in charge of transparency policies and the digitalization of bureaucratic processes as of December 2019.

Argentine government authorities and a number of quasi-independent regulatory entities can issue regulations and norms within their mandates. There are no informal regulatory processes managed by non-governmental organizations or private sector associations. Rulemaking has traditionally been a top-down process in Argentina, unlike in the United States where industry organizations often lead in the development of standards and technical regulations.  The Constitution establishes a procedure that allows for citizens to draft or propose legislation, which is subject to Congressional and Executive approval before being passed into law.

Ministries, regulatory agencies, and Congress are not obligated to provide a list of anticipated regulatory changes or proposals, share draft regulations with the public, or establish a timeline for public comment. They are also not required to conduct impact assessments of the proposed legislation and regulations.

All final texts of laws, regulations, resolutions, dispositions, and administrative decisions must be published in the Official Gazette ( https://www.boletinoficial.gob.ar ), as well as in the newspapers and the websites of the Ministries and agencies. These texts can also be accessed through the official website Infoleg ( http://www.infoleg.gob.ar/ ), overseen by the Ministry of Justice and Human Rights. Interested stakeholders can pursue judicial review of regulatory decisions.

In September 2016, Argentina enacted a Right to Access Public Information Law (27,275) that mandates all three governmental branches (legislative, judicial, and executive), political parties, universities, and unions that receive public funding are to provide non-classified information at the request of any citizen. The law also created the Agency for the Right to Access Public Information to oversee compliance.

During 2017, the government introduced new procurement standards including electronic procurement, formalization of procedures for costing-out projects, and transparent processes to renegotiate debts to suppliers. The government also introduced OECD recommendations on corporate governance for state-owned enterprises to promote transparency and accountability during the procurement process. The regulation may be viewed at:   http://servicios.infoleg.gob.ar/infolegInternet/verNorma.do?id=306769 .

http://servicios.infoleg.gob.ar/infolegInternet/verNorma.do?id=306769 .

In April 2018, Argentina passed the Business Criminal Responsibility Law (27,041) through Decree 277. The decree establishes an Anti-Corruption Office in charge of outlining and monitoring the transparency policies with which companies must comply to be eligible for public procurement.

Under the bilateral Commercial Dialogue, Argentina and the United States discuss good regulatory practices, conducting regulatory impact analyses, and improving the incorporation of public consultations in the regulatory process. Similarly, under the bilateral Digital Economy Working Group, Argentina and the United States shared best practices on promoting competition, spectrum management policy, and broadband investment and wireless infrastructure development.

The Argentine government has sought to increase public consultation in the rulemaking process; however, public consultation is non-binding and has been done in an ad-hoc fashion. In 2017, the Government of Argentina issued a series of legal instruments that seek to promote the use of tools to improve the quality of the regulatory framework. Amongst them, Decree 891/2017 for Good Practices in Simplification establishes a series of tools to improve the rulemaking process. The decree introduces tools on ex-ante and ex-post evaluation of regulation, stakeholder engagement, and administrative simplification, amongst others. Nevertheless, no formal oversight mechanism has been established to supervise the use of these tools across the line of ministries and government agencies, which make implementation difficult and severely limit the potential to adopt a whole-of-government approach to regulatory policy, according to a 2019 OECD publication on Regulatory Policy in Argentina.

Some ministries and agencies developed their own processes for public consultation by publishing drafts on their websites, directly distributing the draft to interested stakeholders for feedback, or holding public hearings.

In November 2017, the Government of Argentina launched a new website to communicate how the government spends public funds in a user-friendly format ( https://www.argentina.gob.ar/economia/transparencia/presupuesto ).

The Argentine government also made an effort to improve citizens’ understanding of the budget, through the citizen’s budget “Presupuesto Ciudadano” website: https://www.economia.gob.ar/onp/presupuesto_ciudadano/seccion6.php . The initiative aligns with the Global Initiative for Fiscal Transparency (GIFT) and UN Resolution 67/218 on promoting transparency, participation, and accountability in fiscal policy.

Argentina requires public companies to adhere to International Financial Reporting Standards (IFRS). Argentina is a member of UNCTAD’s international network of transparent investment procedures.

International Regulatory Considerations

Argentina is a founding member of MERCOSUR and has been a member of the Latin American Integration Association (ALADI for Asociación Latinoamericana de Integración) since 1980.  Once any of the decision-making bodies within MERCOSUR agrees on applying a certain regulation, each of the member countries has to incorporate it into its legislation according to its own legislative procedures. Once a regulation is incorporated in a MERCOSUR member’s legislation, the country has to notify MERCOSUR headquarters.

Argentina has been a member of the WTO since 1995, and it ratified the Trade Facilitation Agreement in January 2018. Argentina notifies technical regulations, but not proposed drafts, to the WTO Committee on Technical Barriers to Trade.  Argentina submitted itself to an OECD regulatory policy review in March 2018, which was released in March 2019.  The Fernandez administration has not actively pursued OECD accession.  Argentina participates in all 23 OECD committees.

Additionally, the Argentine Institute for Standards and Certifications (IRAM) is a member of international and regional standards bodies including the International Standardization Organization (ISO), the International Electrotechnical Commission (IEC), the Pan-American Commission on Technical Standards (COPAM), the MERCOSUR Association of Standardization (AMN), the International Certification Network (i-Qnet), the System of Conformity Assessment for Electrotechnical Equipment and Components (IECEE), and the Global Good Agricultural Practice network (GLOBALG.A.P.).

Legal System and Judicial Independence

Argentina follows a Civil Law system. In 2014, the Argentine government passed a new Civil and Commercial Code that has been in effect since August 2015. The Civil and Commercial Code provides regulations for civil and commercial liability, including ownership of real and intangible property claims. The current judicial process is lengthy and suffers from significant backlogs. In the Argentine legal system, appeals may be brought from many rulings of the lower court, including evidentiary decisions, not just final orders, which significantly slows all aspects of the system. The Justice Ministry reported in December 2018 that the expanded use of oral processes had reduced the duration of 68 percent of all civil matters to less than two years.

According to the Argentine constitution, the judiciary is a separate and equal branch of government. In practice, there are continuous instances of political interference in the judicial process. Companies have complained that courts lack transparency and reliability, and that the Argentine government has used the judicial system to pressure the private sector. Media revelations of judicial impropriety and corruption feed public perception and undermine confidence in the judiciary.

Many foreign investors prefer to rely on private or international arbitration when those options are available. Claims regarding labor practices are processed through a labor court, regulated by Law 18,345 and its subsequent amendments and implementing regulations by Decree 106/98. Contracts often include clauses designating specific judicial or arbitral recourse for dispute settlement.

Laws and Regulations on Foreign Direct Investment

According to the Foreign Direct Investment Law 21,382 and Decree 1853/93, foreign investors may invest in Argentina without prior governmental approval, under the same conditions as investors domiciled within the country. Foreign investors are free to enter into mergers, acquisitions, greenfield investments, or joint ventures. Foreign firms may also participate in publicly-financed research and development programs on a national treatment basis. Incoming foreign currency must be identified by the participating bank to the Central Bank of Argentina (www.bcra.gob.ar).

All foreign and domestic commercial entities in Argentina are regulated by the Commercial Partnerships Law (Law No. 19,550) and the rules issued by the commercial regulatory agencies. Decree 27/2018 amended Law 19,550 to eliminate regulatory barriers and reduce bureaucratic burdens, expedite and simplify processes in the public domain, and deploy existing technological tools to better focus on transparency. Full text of the decree can be found at: http://servicios.infoleg.gob.ar/infolegInternet/anexos/305000-309999/305736/norma.htm.  All other laws and norms concerning commercial entities are established in the Argentina Civil and Commercial Code, which can be found at: http://servicios.infoleg.gob.ar/infolegInternet/anexos/235000-239999/235975/norma.htm 

Further information about Argentina’s investment policies can be found at the following websites:

Ministry of Productive Development ( https://www.argentina.gob.ar/produccion )

Ministry of Economy ( https://www.argentina.gob.ar/economia )

The Central Bank of the Argentine Republic ( http://www.bcra.gob.ar/ )

The National Securities Exchange Commission (https://www.argentina.gob.ar/cnv)

The National Investment and Trade Promotion Agency (https://www.inversionycomercio.org.ar/)

Investors can download Argentina’s investor guide through this link: ( https://drive.google.com/file/d/0B-086VB27JBjN0x0NmM4Y09GODA/view )

Competition and Antitrust Laws

The National Commission for the Defense of Competition and the Secretariat of Domestic Trade, both within the Ministry of Productive Development, have enforcement authority of the Competition Law (Law 25,156). The law aims to promote a culture of competition in all sectors of the national economy. In May 2018, the Argentine Congress approved a new Defense of Competition Law (Law 27,442), which would have, among other things, established an independent competition agency and tribunal. The new law incorporates anti-competitive conduct regulations and a leniency program to facilitate cartel investigation. The full text of the law can be viewed at: http://servicios.infoleg.gob.ar/infolegInternet/verNorma.do?id=310241 . The Government of Argentina, however, has thus far not taken steps to establish the independent agency or tribunal. In February 2021, a bill introducing amendments to the Defense of Competition Law was passed by the Senate and is currently under study in the Lower House. The main changes are related to the removal of the “Clemency Program,” which encourages public reports of collusive and cartel activities, and the elimination of public hearings to appoint members of the Competition Office. The private sector has expressed concern over this bill, stating these changes are contrary to transparency standards embodied in the Law.

In September 2014, Argentina amended the 1974 National Supply Law to expand the ability of the government to regulate private enterprises by setting minimum and maximum prices and profit margins for goods and services at any stage of economic activity. Private companies may be subject to fines and temporary closure if the government determines they are not complying with the law. Although the law is still in effect, the U.S. Government has not received any reports of it being applied since December 2015.  However, the Fernandez administration has expressed its potential use in response to the COVID-19 pandemic.

In March 2020, the Government of Argentina enacted the Supermarket Shelves Law (Law 27,545) that states that any single manufacturer and its associated brands cannot occupy more than 30 percent of a retailer’s shelf space devoted to any one product category.  The law’s proponents claim it will allow more space for domestic SME-produced products, encourage competition, and reduce shortages. U.S. companies have expressed concern over the pending regulations, seeking clarification about issues such as whether display space percentages would be considered per brand or per production company, as it could potentially affect a company’s production, distribution, and marketing business model.

Expropriation and Compensation

Section 17 of the Argentine Constitution affirms the right of private property and states that any expropriation must be authorized by law and compensation must be provided. The United States-Argentina BIT states that investments shall not be expropriated or nationalized except for public purposes upon prompt payment of the fair market value in compensation.

Argentina has a history of expropriations under previous administrations. The most recent expropriation occurred in March 2015 when the Argentine Congress approved the nationalization of the train and railway system. A number of companies that were privatized during the 1990s under the Menem administration were renationalized under the Kirchner administrations. Additionally, in October 2008, Argentina nationalized its private pension funds, which amounted to approximately one-third of total GDP, and transferred the funds to the government social security agency.

In May 2012, the Fernandez de Kirchner administration nationalized oil and gas company Repsol-YPF. Most of the litigation between the Government of Argentina and Repsol was settled in 2016.  An American hedge fund still holds a claim against YPF and is in litigation in U.S. courts.

Dispute Settlement

ICSID Convention and New York Convention

Argentina is signatory to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitration Awards, which the country ratified in 1989. Argentina is also a party to the International Center for Settlement of Investment Disputes (ICSID) Convention since 1994.

There is neither specific domestic legislation providing for enforcement under the 1958 New York Convention nor legislation for the enforcement of awards under the ICSID Convention. Companies that seek recourse through Argentine courts may not simultaneously pursue recourse through international arbitration.

Investor-State Dispute Settlement

The Argentine government officially accepts the principle of international arbitration. The United States-Argentina BIT includes a chapter on Investor-State Dispute Settlement for U.S. investors.

In the past ten years, Argentina has been brought before the ICSID in 54 cases involving U.S. or other foreign investors. Argentina currently has three pending arbitration cases filed against it by U.S. investors. For more information on the cases brought by U.S. claimants against Argentina, go to: https://icsid.worldbank.org/en/Pages/cases/AdvancedSearch.aspx #.

Local courts cannot enforce arbitral awards issued against the government based on the public policy clause. There is no history of extrajudicial action against foreign investors.

Argentina is a member of the United Nations Commission on International Trade Law (UNCITRAL) and the World Bank’s Multilateral Investment Guarantee Agency (MIGA).

Argentina is also a party to several bilateral and multilateral treaties and conventions for the enforcement and recognition of foreign judgments, which provide requirements for the enforcement of foreign judgments in Argentina, including:

Treaty of International Procedural Law, approved in the South-American Congress of Private International Law held in Montevideo in 1898, ratified by Argentina by law No. 3,192.

Treaty of International Procedural Law, approved in the South-American Congress of Private International Law held in Montevideo in 1939-1940, ratified by Dec. Ley 7771/56 (1956).

Panama Convention of 1975, CIDIP I: Inter-American Convention on International Commercial Arbitration, adopted within the Private International Law Conferences – Organization of American States, ratified by law No. 24,322 (1995).

Montevideo Convention of 1979, CIDIP II: Inter-American Convention on Extraterritorial Validity of Foreign Judgments and Arbitral Awards, adopted within the Private International Law Conferences – Organization of American States, ratified by law No. 22,921 (1983).

International Commercial Arbitration and Foreign Courts

Alternative dispute resolution (ADR) mechanisms can be stipulated in contracts. Argentina also has ADR mechanisms available such as the Center for Mediation and Arbitrage (CEMARC) of the Argentine Chamber of Trade. More information can be found at: http://www.intracen.org/Centro-de-Mediacion-y-Arbitraje-Comercial-de-la-Camara-Argentina-de-Comercio—CEMARC–/#sthash.RagZdv0l.dpuf .

Argentina does not have a specific law governing arbitration, but it has adopted a mediation law (Law 24.573/1995), which makes mediation mandatory prior to litigation. Some arbitration provisions are scattered throughout the Civil Code, the National Code of Civil and Commercial Procedure, the Commercial Code, and three other laws. The following methods of concluding an arbitration agreement are non-binding under Argentine law: electronic communication, fax, oral agreement, and conduct on the part of one party. Generally, all commercial matters are subject to arbitration. There are no legal restrictions on the identity and professional qualifications of arbitrators. Parties must be represented in arbitration proceedings in Argentina by attorneys who are licensed to practice locally. The grounds for annulment of arbitration awards are limited to substantial procedural violations, an ultra petita award (award outside the scope of the arbitration agreement), an award rendered after the agreed-upon time limit, and a public order violation that is not yet settled by jurisprudence when related to the merits of the award. On average, it takes around 21 weeks to enforce an arbitration award rendered in Argentina, from filing an application to a writ of execution attaching assets (assuming there is no appeal). It takes roughly 18 weeks to enforce a foreign award. The requirements for the enforcement of foreign judgments are set out in section 517 of the National Procedural Code.

No information is available as to whether the domestic courts frequently rule in cases in favor of state-owned enterprises (SOE) when SOEs are party to a dispute.

Bankruptcy Regulations

Argentina’s bankruptcy law was codified in 1995 in Law 24,522. The full text can be found at: http://www.infoleg.gov.ar/infolegInternet/anexos/25000-29999/25379/texact.htm .

Under the law, debtors are generally able to begin insolvency proceedings when they are no longer able to pay their debts as they mature. Debtors may file for both liquidation and reorganization. Creditors may file for insolvency of the debtor for liquidation only. The insolvency framework does not require approval by the creditors for the selection or appointment of the insolvency representative or for the sale of substantial assets of the debtor. The insolvency framework does not provide rights to the creditor to request information from the insolvency representative, but the creditor has the right to object to decisions by the debtor to accept or reject creditors’ claims. Bankruptcy is not criminalized; however, convictions for fraudulent bankruptcy can carry two to six years of prison time.

Financial institutions regulated by the Central Bank of Argentina (BCRA) publish monthly outstanding credit balances of their debtors; the BCRA National Center of Debtors (Central de Deudores) compiles and publishes this information. The database is available for use of financial institutions that comply with legal requirements concerning protection of personal data. The credit monitoring system only includes negative information, and the information remains on file through the person’s life. At least one local NGO that makes microcredit loans is working to make the payment history of these loans publicly accessible for the purpose of demonstrating credit history, including positive information, for those without access to bank accounts and who are outside of the Central Bank’s system. Equifax, which operates under the local name “Veraz” (or “truthfully”), also provides credit information to financial institutions and other clients, such as telecommunications service providers and other retailers that operate monthly billing or credit/layaway programs.

The World Bank’s 2020 Doing Business Report ranked Argentina 111 out of 190 countries for the effectiveness of its insolvency law, remaining unchanged compared to 2019 ranking. The report notes that it takes an average of 2.4 years and 16.5 percent of the estate to resolve bankruptcy in Argentina.

Investment Incentives

Government incentives do not make any distinction between foreign and domestic investors.

The Argentine government offers a number of investment promotion programs at the federal, provincial, and municipal levels to attract investment to specific economic sectors such as capital assets and infrastructure, innovation and technological development, and energy, with no discrimination between national or foreign-owned enterprises. Some of the investment promotion programs require investments within a specific region or locality, industry, or economic activity. Some programs offer refunds on Value-Added Tax (VAT) or other tax incentives for local production of capital goods. The Investment and International Trade Promotion Agency provides cost-free assessment and information to investors to facilitate operations in the country. Argentina’s investment promotion programs and regimes can be found at: https://www.inversionycomercio.org.ar/es/inversores , https://www.investargentina.org.ar/, and https://www.argentina.gob.ar/produccion .

The National Fund for the Development of Micro, Small, and Medium Enterprises provides low- cost credit to small and medium-sized enterprises for investment projects, labor, capital, and energy efficiency improvement with no distinction between national or foreign-owned enterprises. More information can be found at: https://www.argentina.gob.ar/produccion/financiamiento 

Due to the Covid-19 pandemic, the Ministry of Productive Development launched several financial assistance programs for small and medium-sized enterprises (SMEs) affected by the pandemic. More information can be found at: https://www.argentina.gob.ar/produccion/medidas-pymes-covid .

The Ministry of Productive Development supports employment training programs that are frequently free to the participants and do not differentiate based on nationality.

Foreign Trade Zones/Free Ports/Trade Facilitation

Argentina has two types of tax-exempt trading areas: Free Trade Zones (FTZ), which are located throughout the country, and the more comprehensive Special Customs Area (SCA), which covers all of Tierra del Fuego Province and is scheduled to expire at the end of 2023.

Argentine law defines an FTZ as a territory outside the “general customs area” (GCA, i.e., the rest of Argentina) where neither the inflows nor outflows of exported final merchandise are subject to tariffs, non-tariff barriers, or other taxes on goods. Goods produced within a FTZ generally cannot be shipped to the GCA unless they are capital goods not produced in the rest of the country. The labor, sanitary, ecological, safety, criminal, and financial regulations within FTZs are the same as those that prevail in the GCA. Foreign firms receive national treatment in FTZs.

Merchandise shipped from the GCA to a FTZ may receive export incentive benefits, if applicable, only after the goods are exported from the FTZ to a third country destination. Merchandise shipped from the GCA to a FTZ and later exported to another country is not exempt from export taxes. Any value added in an FTZ or re-export from an FTZ is exempt from export taxes. For more information on FTZ in Argentina see: http://www.afip.gob.ar/zonasFrancas/ .

Products manufactured in the SCA may enter the GCA free from taxes or tariffs. In addition, the government may enact special regulations that exempt products shipped through the SCA (but not manufactured therein) from all forms of taxation except excise taxes. The SCA program provides benefits for established companies that meet specific production and employment objectives.

Performance and Data Localization Requirements

The Argentine national government does not have local employment mandates nor does it apply such schemes to senior management or boards of directors. However, certain provincial governments do require employers to hire a certain percentage of their workforce from provincial residents. There are no excessively onerous visa, residence, work permit, or similar requirements inhibiting mobility of foreign investors and their employees. Under Argentine law, conditions to invest are equal for national and foreign investors. As of March 2018, citizens of MERCOSUR countries can obtain legal residence within five months and at little cost, which grants permission to work. Argentina suspended its method for expediting this process in early 2018.

Argentina has local content requirements for specific sectors. Requirements are applicable to domestic and foreign investors equally. Argentine law establishes a national preference for local industry for most government procurement if the domestic supplier’s tender is no more than five to seven percent higher than the foreign tender. The amount by which the domestic bid may exceed a foreign bid depends on the size of the domestic company making the bid. In May 2018, Argentina issued Law 27,437, giving additional priority to Argentine small and medium-sized enterprises and, separately, requiring that foreign companies that win a tender must subcontract domestic companies to cover 20 percent of the value of the work. The preference applies to procurement by all government agencies, public utilities, and concessionaires.  There is similar legislation at the sub-national (provincial) level.

In November 2016, the government passed a public-private partnership (PPP) law (27,328) that regulates public-private contracts. The law lowered regulatory barriers to foreign investment in public infrastructure projects with the aim of attracting more foreign direct investment. Several projects under the PPP initiative have been canceled or put on hold due to an ongoing investigation on corruption in public works projects during the last administration. The PPP law contains a “Buy Argentina” clause that mandates at least 33 percent local content for every public project.

Argentina is not a signatory to the WTO Agreement on Government Procurement (GPA), but it became an observer to the GPA in February 1997.

In July 2016, the Ministry of Production and Labor and the Ministry of Energy and Mining issued Joint Resolutions 123 and 313, which allow companies to obtain tax benefits on purchases of solar or wind energy equipment for use in investment projects that incorporate at least 60 percent local content in their electromechanical installations.  In cases where local supply is insufficient to reach the 60 percent threshold, the threshold can be reduced to 30 percent.  The resolutions also provide tax exemptions for imports of capital and intermediate goods that are not locally produced for use in the investment projects.

In 2016, Argentina passed law 27,263, implemented by Resolution 599-E/2016, which provides tax credits to automotive manufacturers for the purchase of locally-produced automotive parts and accessories incorporated into specific types of vehicles. The tax credits range from 4 percent to 15 percent of the value of the purchased parts.  The list of vehicle types included in the regime can be found here: http://servicios.infoleg.gob.ar/infolegInternet/anexos/260000-264999/263955/norma.htm . In 2018, Argentina issued Resolution 28/2018, simplifying the procedure for obtaining the tax credits. The resolution also establishes that if the national content drops below the minimum required by the resolution because of relative price changes due to exchange rate fluctuations, automotive manufacturers will not be considered non-compliant with the regime. However, the resolution sets forth that tax benefits will be suspended for the quarter when the drop was registered.

The Media Law, enacted in 2009 and amended in 2015, requires companies to produce advertising and publicity materials locally or to include 60 percent local content. The Media Law also establishes a 70 percent local production content requirement for companies with radio licenses. Additionally, the Media Law requires that 50 percent of the news and 30 percent of the music that is broadcast on the radio be of Argentine origin. In the case of private television operators, at least 60 percent of broadcast content must be of Argentine origin. Of that 60 percent, 30 percent must be local news and 10 to 30 percent must be local independent content.

Argentina establishes percentages of local content in the production process for manufacturers of mobile and cellular radio communication equipment operating in Tierra del Fuego province.  Resolution 66/2018 maintains the local content requirement for products such as technical manuals, packaging, and labeling. The percentage of local content required ranges from 10 percent to 100 percent depending on the process or item. In cases where local supply is insufficient to meet local content requirements, companies may apply for an exemption that is subject to review every six months. A detailed description of local content percentage requirements can be found at: http://servicios.infoleg.gob.ar/infolegInternet/verNorma.do;jsessionid=0CA1B74C2D7EC353E66F1CC6CFD8B41D?id=255494 .

There are no requirements for foreign IT providers to turn over source code and/or provide access to encryption, nor does the government prevent companies from freely transmitting customer or other business-related data outside the country’s territory.

Argentina does not have forced localization of content in technology or requirements of data storage in country.

There is no discrimination between domestic and foreign investors in investment incentives. There are no performance requirements. A complete guide of incentives for investors in Argentina can be found at: https://www.inversionycomercio.org.ar/es/inversores .

Real Property

Secured interests in property, including mortgages, are recognized in Argentina. Such interests can be easily and effectively registered. They also can be readily bought and sold. Argentina manages a national registry of real estate ownership (Registro de la Propiedad Inmueble) at http://www.dnrpi.jus.gov.ar/ . No data is available on the percent of all land that does not have clear title. There are no specific regulations regarding land lease and acquisition of residential and commercial real estate by foreign investors. Law 26,737 (Regime for Protection of National Domain over Ownership, Possession or Tenure of Rural Land) establishes the restrictions of foreign ownership on rural and productive lands, including water bodies. Foreign ownership is also restricted on land located near borders.

Legal claims may be brought to evict persons unlawfully occupying real property, even if the property is unoccupied by the lawful owner. However, these legal proceedings can be quite lengthy, and until the legal proceedings are complete, evicting squatters is problematic. The title and actual conditions of real property interests under consideration should be carefully reviewed before acquisition.

Argentine Law 26.160 prevents the eviction and confiscation of land traditionally occupied by indigenous communities in Argentina or encumbered with an indigenous land claim. Indigenous land claims can be found in the land registry. Enforcement is carried out by the National Institute of Indigenous Affairs, under the Ministry of Justice and Human Rights.

Intellectual Property Rights

The Government of Argentina adheres to some treaties and international agreements on intellectual property (IP) and belongs to the World Intellectual Property Organization and the World Trade Organization. The Argentine Congress ratified the Uruguay Round agreements, including the provisions on intellectual property, in Law 24425 in 1995.

The U.S. Trade Representative (USTR) 2021 Special 301 Report listed Argentina on the Priority Watch List. Trading partners on the Priority Watch List present the most significant concerns regarding inadequate or ineffective IP protection or enforcement or actions that otherwise limit market access for persons relying on IP protection. For a complete version of the 2020 Report, see: https://ustr.gov/sites/default/files/2020_Special_301_Report.pdf .

Argentina continues to present long-standing and well-known challenges to intellectual property (IP)-intensive industries, including those from the United States.  A key deficiency in the legal framework for patents is the unduly broad limitations on patent eligible subject matter.  Pursuant to a highly problematic 2012 Joint Resolution establishing guidelines for the examination of patents, Argentina rejects patent applications for categories of pharmaceutical inventions that are eligible for patentability in other jurisdictions, including in the United States.  Additionally, to be patentable, Argentina requires that processes for the manufacture of active compounds disclosed in a specification be reproducible and applicable on an industrial scale.  Stakeholders assert that Resolution 283/2015, introduced in September 2015, also limits the ability to patent biotechnological innovations based on living matter and natural substances.  These measures have interfered with the ability of companies investing in Argentina to protect their IP and may be inconsistent with international norms.

Another ongoing challenge to the innovative agricultural chemical and pharmaceutical sectors is inadequate protection against the unfair commercial use, as well as unauthorized disclosure, of undisclosed test or other data generated to obtain marketing approval for products in those sectors.  Finally, Argentina struggles with a substantial backlog of patent applications resulting in long delays for innovators seeking patent protection in the market.  Government-wide hiring restrictions that remain in place, going back to a hiring freeze in 2018, have resulted in a limited number of patent examiners.  Argentina did not extend the Patent Prosecution Highway signed between the National Institute of Industrial Property’s (INPI) and the U.S. Patent and Trademark Office, which expired in March 2020.

Enforcement of IP rights in Argentina continues to be a challenge, and stakeholders report widespread unfair competition from sellers of counterfeit and pirated goods and services.  La Salada in Buenos Aires remains the largest counterfeit market in Latin America and is cited in USTR’s 2020 Review of Notorious Markets for Piracy and Counterfeiting.  Argentine police generally do not take ex officio actions, prosecutions can stall and languish in excessive formalities, and, when a criminal case does reach final judgment, criminal infringers rarely receive deterrent sentences. Hard goods counterfeiting and optical disc piracy are widespread, and online piracy continues to grow due to nearly nonexistent criminal enforcement against such piracy.  As a result, IP enforcement online in Argentina consists mainly of right holders trying to convince Argentine internet service providers to agree to take down specific infringing works, as well as attempting to seek injunctions in civil cases, both of which can be time-consuming and ineffective.  Right holders also cite widespread use of unlicensed software by Argentine private enterprises and the government.

Argentina made limited progress in IP protection and enforcement in a year marked by a severe economic recession aggravated by the consequences of the confinement measures taken to mitigate the COVID-19 pandemic.  The pressing economic situation led to an increase of counterfeit products sales in informal markets once the confinement measures were relaxed in the second semester of 2020. Online sales of counterfeit products, especially apparel and footwear spiked amidst the pandemic. The Argentine Confederation of Small and Medium-Sized Enterprises noted an increase of national production of counterfeit sportswear. Flight and border crossing restrictions applied during the COVID-19 health emergency prevented purchases of counterfeit products from China, Paraguay and Bolivia.

INPI began accepting electronic filing of patent, trademark, and industrial designs applications in 2018. During 2020, the agency successfully transitioned to an all-electronic filing system.  Argentina continued to improve procedures for trademarks, with INPI reducing the time for a trademark opposition from an average of 3.5 years to one year.  On trademarks, the law provides for a fast-track option that reduces the time to register a trademark to four months.

Argentina formally created the Federal Committee to Fight Against Contraband, Falsification of Trademarks, and Designations, formalizing the work on trademark counterfeiting under the National Anti-Piracy Initiative launched in 2017.  In November 2020, Argentina and the United States held a virtual bilateral meeting under the Innovation and Creativity Forum for Economic Development, part of the U.S.-Argentina Trade and Investment Framework Agreement, to continue discussions and collaboration on IP topics of mutual interest.  The United States intends to monitor all the outstanding issues for progress and urges Argentina to continue its efforts to create a more attractive environment for investment and innovation.

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 Argentine Constitution sets as a general principle that foreign investors have the same status and the same rights as local investors. Foreign investors have free access to domestic and international financing.

Argentina’s economic recession began in 2018 and deepened further in 2019 after the presidential primary election. To slow the outflow of dollars from its reserves, in September 2019 the Argentine Central Bank introduced tight capital controls prohibiting transfers and payments that are likely in conflict with IMF Article VIII and tightened them thereafter. The Argentine government also implemented price controls and trade restrictions. In December 2019, the Fernandez administration passed an economic emergency law that created new taxes, increased export duties, and delegated broad powers to the Executive Branch, with the objectives of increasing social spending for the most vulnerable populations and negotiating revised terms for Argentina’s sovereign debt. These measures deteriorated the investment climate for local and foreign investors.

In April 2020, the government issued a decree postponing debt payments (both interest and principal) of dollar-denominated debt issued under local law until December 31, 2020. In May 2020, Argentina recorded its ninth sovereign default.

The government of Argentina restructured international law bonds for $65 billion and domestic law bonds for $42 billion in September 2020 bringing financial relief of $37.7 billion over the period 2020-2030. In August 2020, the government of Argentina formally notified the International Monetary Fund (IMF) of its intent to renegotiate $45 billion due to the Fund from the 2018 Stand-By Arrangement starting in 2021.

The Argentine Securities and Exchange Commission (CNV or Comisión Nacional de Valores) is the federal agency that regulates securities markets offerings. Securities and accounting standards are transparent and consistent with international norms. Foreign investors have access to a variety of options on the local market to obtain credit. Nevertheless, the domestic credit market is small – credit is 16 percent of GDP, according to the World Bank. To mitigate the recessionary impact of the COVID-19 crisis, the government introduced low-cost lending credit lines (carrying negative real interest rates), and the Central Bank reduced banks’ minimum reserve requirements to encourage banks to expand credit, particularly to SMEs. The Buenos Aires Stock Exchange is the organization responsible for the operation of Argentina’s primary stock exchange, located in Buenos Aires city. The most important index of the Buenos Aires Stock Exchange is the MERVAL (Mercado de Valores).

U.S. banks, securities firms, and investment funds are well-represented in Argentina and are dynamic players in local capital markets. In 2003, the government began requiring foreign banks to disclose to the public the nature and extent to which their foreign parent banks guarantee their branches or subsidiaries in Argentina.

Money and Banking System

Argentina has a relatively sound banking sector based on diversified revenues, well-contained operating costs, and a high liquidity level. Argentina’s banking sector has been resilient in the face of a multi-year economic contraction. Supported by government measures during the COVID-19 pandemic, credit to the private sector in local currency (for both corporations and individuals) increased 10 percent in real terms in 2020. Non-performing private sector loans constitute less than four percent of banks’ portfolios. However, the performance of the financial system has largely been driven by a series of temporary counter-cyclical measures, namely subsidized government-backed loans for small businesses. The banking sector is well positioned due to macro and micro-prudential policies introduced since 2002 that have helped to reduce asset-liability mismatches. The sector is highly liquid and its exposure to the public sector is modest, while its provisions for bad debts are adequate.

Private banks have total assets of approximately ARS 6.1 billion (USD $65 billion). Total financial system assets are approximately ARS 9.9 billion (USD $105 billion). The Central Bank of Argentina acts as the country’s financial agent and is the main regulatory body for the banking system.

Foreign banks and branches can establish operations in Argentina. They are subject to the same regulation as local banks. Argentina’s Central Bank has many correspondent banking relationships, none of which are known to have been lost in the past three years.

In November 2020, the Central Bank launched a new payment system, “Transfers 3.0,” seeking to reduce the use of cash. This system will boost digital payments and further financial inclusion in Argentina, expanding the reach of instant transfers to build an open and universal digital payment ecosystem.

The Central Bank has enacted a resolution recognizing cryptocurrencies and requiring that they comply with local banking and tax laws. No implementing regulations have been adopted. Block chain developers report that several companies in the financial services sector are exploring or considering using block chain-based programs externally and are using some such programs internally.

Foreign Exchange and Remittances

Foreign Exchange

Beginning in September 2019 and throughout 2020, the Argentine government and Central Bank issued a series of decrees and norms regulating and restricting access to foreign exchange markets.

As of October 2019, the Central Bank (Notice A6815) limits cash withdrawals made abroad with local debit cards to foreign currency bank accounts owned by the client in Argentina. Pursuant to Notice A6823, cash advances made abroad from local credit cards are limited to a maximum of USD $50 per transaction.

As of September 2020, and pursuant to Notice A7106, Argentine individuals can purchase no more than USD $200 per month on a rolling monthly basis. However, purchases abroad with credit and debit cards will be deducted from the USD $200 per month quota. While no limit on credit/debit card purchases is imposed, if the monthly expenses surpass the USD $200 limit, the deduction will be carried over to subsequent months until the amount acquired is completed. Also, the regulation prohibits individual recipients of government assistance programs and high-ranking federal government officials from purchasing foreign exchange. Purchases above the USD $200 limit require Central Bank approval. Pursuant to Public Emergency Law 27,541, issued December 23, 2019, all dollar purchases and individual expenses incurred abroad, in person or online, including international online purchases from Argentina, paid with credit or debit cards will be subject to a 30 percent tax. Pursuant to AFIP Resolution 4815 a 35 percent withholding tax in advance of the payment of income and/or wealth tax is also applied.

Non-Argentine residents are required to obtain prior Central Bank approval to purchase more than USD $100 per month, except for certain bilateral or international organizations, institutions and agencies, diplomatic representation, and foreign tribunals.

Companies and individuals need to obtain prior clearance from the Central Bank before transferring funds abroad. In the case of individuals, if transfers are made from their own foreign currency accounts in Argentina to their own accounts abroad, they do not need to obtain Central Bank approval.

Per Notice A6869 issued by the Central Bank in January 2020, companies will be able to repatriate dividends without Central Bank authorization equivalent to a maximum of 30 percent of new foreign direct investment made by the company in the country. To promote foreign direct investment the Central Bank announced in October 2020 (Notice A7123) that it will allow free access to the official foreign exchange market to repatriate investments as long as the capital contribution was transferred and sold in Argentine Pesos through the foreign exchange market as of October 2, 2020 and the repatriation takes place at least two years after the transfer and settlement of those funds.

Exporters of goods are required to transfer the proceeds from exports to Argentina and settle in pesos in the foreign currency market. Exporters must settle according to the following terms: exporters with affiliates (irrespective of the type of good exported) and exporters of certain goods (including cereals, seeds, minerals, and precious metals, among others) must convert their foreign currency proceeds to pesos within 15 days (or 30 days for some products) after the issuance of the permit for shipment; other exporters have 180 days to settle in pesos. Despite these deadlines, exporters must transfer the funds to Argentina and settle in pesos within five business days from the actual collection of funds. Argentine residents are required to transfer to Argentina and settle in pesos the proceeds from services exports rendered to non-Argentine residents that are paid in foreign currency either in Argentina or abroad, within five business days from collection of funds.

Payment of imports of goods and services from third parties and affiliates require Central Bank approval if the company needs to purchase foreign currency. Since May 2020, the Central Bank requires importers to submit an affidavit stating that the total amount of payments associated with the import of goods made during the year (including the payment that is being requested). The total amount of payments for importation of goods should also include the payments for amortizations of lines of credit and/or commercial guarantees.

In September 2020, the Central Bank limited companies’ ability to purchase foreign currency to cancel any external financial debt (including other intercompany debt) and dollar denominated local securities offerings. Companies were granted access to foreign currency for up to 40 percent of the principal amount coming due from October 15, 2020 to December 31, 2020. For the remaining 60 percent of the debt, companies had to file a refinancing plan with the Central Bank. In February 2021, the Central Bank extended the regulation to include debt maturing up to December 31, 2021. Indebtedness with international organizations or their associated agencies or guaranteed by them and indebtedness granted by official credit agencies or guaranteed by them are exempted from this restriction.

The Central Bank (Notice A7001) prohibited access to the foreign exchange market to pay for external indebtedness, imports of goods and services, and saving purposes for individuals and companies that have made sales of securities with settlement in foreign currency or transfers of these to foreign depositary entities within the last 90 days. They also should not make any of these transactions for the following 90 days.

Pre-cancellation of debt coming due abroad in more than three business days requires Central Bank approval to purchase dollars.

Per Resolution 36,162 of October 2011, locally registered insurance companies are mandated to maintain all investments and cash equivalents in the country. The Central Bank limits banks’ dollar-denominated asset holdings to 5 percent of their net worth.

In January 2020, the Central Bank presented its monetary policy framework showing that monetary and financial policies will be subject to the government’s objective of addressing current social and economic challenges. In particular, the Central Bank acknowledged that it would continue to provide direct financial support to the government (in foreign and domestic currency) as external credit markets remain closed. The Central Bank determined that a managed exchange rate is a valid instrument to avoid sharp fluctuations in relative prices, international competitiveness, and income distribution. The Central Bank also noted the exchange rate policy should also facilitate the preemptive accumulation of international reserves.

Remittance Policies

In response to the economic crisis in Argentina, the government introduced capital controls in September 2019 and tightened them in 2020.  Under these restrictions, companies in Argentina (including local affiliates of foreign parent companies) must obtain prior approval from the Central Bank to access the foreign exchange market to purchase foreign currency and to transfer funds abroad for the payment of dividends and profits.  In January 2020, the Central Bank amended the regime for the payment of dividends abroad to non-residents. The new regime allows companies to access the foreign exchange market to transfer profits and dividends abroad without prior authorization of the Central Bank, provided the following conditions are met:

1. Profits and dividends are be declared in closed and audited financial statements.
2. The dividends in foreign currency should not exceed the dividends determined by the shareholders’ meeting in local currency.
3. The total amount of dividends to be transferred cannot exceed 30 percent of the amount of new capital contributions made by non-residents into local companies since January 2020.
4. The resident entity must be in compliance with filing the Central Bank Survey of External Assets and Liabilities.

Sovereign Wealth Funds

The Argentine government does not maintain a Sovereign Wealth Fund.

The Argentine government has state-owned enterprises (SOEs) or significant stakes in mixed-capital companies in the following sectors: civil commercial aviation, water and sanitation, oil and gas, electricity generation, transport, paper production, satellite, banking, railway, shipyard, and aircraft ground handling services.

By Argentine law, a company is considered a public enterprise if the state owns 100 percent of the company’s shares. The state has majority control over a company if the state owns 51 percent of the company’s shares. The state has minority participation in a company if the state owns less than 51 percent of the company’s shares. Laws regulating SOEs and enterprises with state participation can be found at http://www.saij.gob.ar/13653-nacional-regimen-empresas-estado-lns0001871-1955-03-23/123456789-0abc-defg-g17-81000scanyel .

Through the government’s social security agency (ANSES), the Argentine government owns stakes ranging from one to 31 percent in 46 publicly listed companies. U.S. investors also own shares in some of these companies. As part of the ANSES takeover of Argentina’s private pension system in 2008, the government agreed to commit itself to being a passive investor in the companies and limit the exercise of its voting rights to 5 percent, regardless of the equity stake the social security agency owned. A list of such enterprises can be found at: http://fgs.anses.gob.ar/participacion .

State-owned enterprises purchase and supply goods and services from the private sector and foreign firms. Private enterprises may compete with SOEs under the same terms and conditions with respect to market share, products/services, and incentives. Private enterprises also have access to financing terms and conditions similar to SOEs. SOEs are subject to the same tax burden and tax rebate policies as their private sector competitors. SOEs are not currently subject to firm budget constraints under the law and have been subsidized by the central government in the past. Between 2016 and 2019, the Government of Argentina reduced subsidies in the energy, water, and transportation sectors. However, in 2019 the Government postponed its subsidy reduction program and redesigned it several times, citing pressing macroeconomic issues. During 2020 subsidies increased to maintain a tariff freeze on public services given the COVID-19 pandemic. The 2021 budget targets a reduction in subsidies in an effort to contain spending. Argentina does not have regulations that differentiate treatment of SOEs and private enterprises. Argentina has observer status under the WTO Agreement on Government Procurement and, as such, SOEs are subject to the conditions of Argentina’s observance.

Argentina does not have a specified ownership policy, guideline or governance code for how the government exercises ownership of SOEs. The country generally adheres to the OECD Guidelines on Corporate Governance of SOEs. The practices for SOEs are mainly in compliance with the policies and practices for transparency and accountability in the OECD Guidelines. In 2018, the OECD released a report evaluating the corporate governance framework for the Argentine SOE sector relative to the OECD Guidelines, which can be viewed here: http://www.oecd.org/countries/argentina/oecd-review-corporate-governance-soe-argentina.htm .

Argentina does not have a centralized ownership entity that exercises ownership rights for each of the SOEs. The general rule in Argentina is that requirements that apply to all listed companies also apply to publicly-listed SOEs.

Privatization Program

The current administration has not developed a privatization program.

There is an increasing awareness of corporate social responsibility (CSR) and responsible business conduct (RBC) among both producers and consumers in Argentina. RBC and CSR practices are welcomed by beneficiary communities throughout Argentina. There are many institutes that promote RBC and CSR in Argentina, the most prominent being the Argentine Institute for Business Social Responsibility ( http://www.iarse.org/ ), which has been working in the country for more than 18 years and includes among its members many of the most important companies in Argentina.

Argentina is a member of the United Nation’s Global Compact. Established in April 2004, the Global Compact Network Argentina is a business-led network with a multi-stakeholder governing body elected for two-year terms by active participants. The network is supported by the United Nations Development Program (UNDP) Argentina in close collaboration with other UN Agencies. The Global Compact Network Argentina is the most important RBC/CSR initiative in the country with a presence in more than 20 provinces. More information on the initiative can be found at: http://pactoglobal.org.ar .

Foreign and local enterprises tend to follow generally accepted CSR/RBC principles. Argentina subscribed to the Declaration on the OECD Guidelines for Multinational Enterprises in April 1997.

Many provinces, such as Mendoza and Neuquén, have or are in the process of enacting a provincial CSR/RBC law. There have been many previously unsuccessful attempts to pass a CSR/RBC law. Distrust over the State’s role in private companies had been the main concern for legislators opposed to these bills.

In February 2019, the Argentine government joined the Extractive Industries Transparency Initiative (EITI).  Argentina published its first report in 2020 ( https://eiti.org/document/argentina-2018-eiti-report ).

Additional Resources 

Department of State

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

Department of Labor

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

Argentina’s legal system incorporates several measures to address public sector corruption. The foundational law is the 1999 Public Ethics Law (Law 25,188), the full text of which can be found at: http://servicios.infoleg.gob.ar/infolegInternet/verNorma.do?id=60847 . A March 2019 report by the OECD’s Directorate for Public Governance underscored, however, that the law is heterogeneously implemented across branches of the government and that the legislative branch has not designated an application authority, approved an implementing regulation, or specified sanctions. It also noted that Argentina has a regulation on lobbying, but that it only applies to the executive branch, and only requires officials to disclose meetings with lobbyists. With regards to political parties, the report noted anonymous campaign donations are banned, but 90 percent of all donations in Argentina are made in cash, making it impossible to identify donors. Furthermore, the existing regulations have insufficient controls and sanctions, and leave gaps with provincial regulations that could be exploited.

Within the executive branch, the government institutions tasked with combatting corruption include the Anti-Corruption Office (ACO), the National Auditor General, and the General Comptroller’s Office. Public officials are subject to financial disclosure laws, and the Ministry of Justice’s ACO is responsible for analyzing and investigating federal executive branch officials based on their financial disclosure forms—which require the disclosure of assets directly owned by immediate family members. The ACO is also responsible for investigating corruption within the federal executive branch or in matters involving federal funds, except for funds transferred to the provinces. While the ACO does not have authority to independently prosecute cases, it can refer cases to other agencies or serve as the plaintiff and request that a judge initiate a case.

Argentina enacted a new Corporate Criminal Liability Law in November 2017 following the advice of the OECD to comply with its Anti-Bribery Convention. The full text of Law 27,401 can be found at: http://servicios.infoleg.gob.ar/infolegInternet/anexos/295000-299999/296846/norma.htm  . The new law entered into force in early 2018. It extends anti-bribery criminal sanctions to corporations, whereas previously they only applied to individuals; expands the definition of prohibited conduct, including illegal enrichment of public officials; and allows Argentina to hold Argentines responsible for foreign bribery. Sanctions include fines and blacklisting from public contracts. Argentina also enacted an express prohibition on the tax deductibility of bribes.

Official corruption remains a serious challenge in Argentina. In its March 2017 report, the OECD expressed concern about Argentina’s enforcement of foreign bribery laws, inefficiencies in the judicial system, politicization and perceived lack of independence at the Attorney General’s Office, and lack of training and awareness for judges and prosecutors. According to the World Bank’s worldwide governance indicators, corruption remains an area of concern in Argentina. In the latest Transparency International Corruption Perceptions Index (CPI), Argentina ranked 78 out of 180 countries in 2020, dropping 12 places compared to 2019. Allegations of corruption in provincial as well as federal courts remained frequent. Few Argentine companies have implemented anti-foreign bribery measures beyond limited codes of ethics.

In September 2016, Congress passed a law on public access to information. The law explicitly applies to all three branches of the federal government, the public justice offices, and entities such as businesses, political parties, universities, and trade associations that receive public funding. It requires these institutions to respond to citizen requests for public information within 15 days, with an additional 15-day extension available for “exceptional” circumstances. Sanctions apply for noncompliance. As mandated by the law, the executive branch created the Agency for Access to Public Information in 2017, an autonomous office that oversees access to information. In early 2016, the Argentine government reaffirmed its commitment to the Open Government Partnership (OGP), became a founding member of the Global Anti-Corruption Coalition, and reengaged the OECD Working Group on Bribery.

Argentina is a party to the Organization of American States’ Inter-American Convention against Corruption. It ratified in 2001 the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (Anti-Bribery Convention). Argentina also signed and ratified the UN Convention against Corruption (UNCAC) and participates in UNCAC’s Conference of State Parties. Argentina also participates in the Mechanism for Follow-up on the Implementation of the Inter-American Convention against Corruption (MESICIC).

Since Argentina became a party to the OECD Anti-Bribery Convention, allegations of Argentine individuals or companies bribing foreign officials have surfaced. A March 2017 report by the OECD Working Group on Bribery indicated there were 13 known foreign bribery allegations involving Argentine companies and individuals as of that date. According to the report, Argentine authorities investigated and closed some of the allegations and declined to investigate others. The authorities determined some allegations did not involve foreign bribery but rather other offenses. Several such allegations remained under investigation.

Resources to Report Corruption

Felix Pablo Crous
Director
Government of Argentina Anti-Corruption Office
Oficina Anticorrupción, 25 de Mayo 544, C1002ABL, Ciudad Autónoma de Buenos Aires.
Phone: +54 11 5300 4100
Email:  anticorrupcion@jus.gov.ar  and http://denuncias.anticorrupcion.gob.ar/ 

Poder Ciudadano (Local Transparency International Affiliate)
Piedras 547, C1070AAK, Ciudad Autónoma de Buenos Aires
Phone: +54 11 4331 4925 ext. 225
Fax: +54 11 4331 4925
Email: comunicaciones@poderciudadano.org 
Website: http://www.poderciudadano.org 

Demonstrations are common in metropolitan Buenos Aires and in other major cities and rural areas. Nevertheless, political violence is not widely considered a hindrance to the investment climate in Argentina.

Protesters regularly block streets, highways, and major intersections, causing traffic jams and delaying travel. While demonstrations are usually non-violent, individuals sometimes seek confrontation with the police and vandalize private property. Groups occasionally protest in front of the U.S. Embassy or U.S.-affiliated businesses. In February 2016, the Ministry of Security approved a National Anti-Street Pickets Protocol that provides guidelines to prevent the blockage of major streets and public facilities during demonstrations. However, this protocol did not often apply to venues within the City of Buenos Aires (CABA), which fall under the city’s jurisdiction. The CABA government often did not enforce security protocols against illegal demonstrations.

In December 2017, while Congress had called an extraordinary session to address the retirement system reforms, several demonstrations against the bill turned violent, causing structural damage to public and private property, injuries to 162 people (including 88 policemen), and arrests of 60 people. The demonstrations ultimately dissipated, and the government passed the bill.

Union disputes and politicized worker movements are common in CABA and the Provinces. In 2019 and early 2020, foreign-owned diamond mining companies in Neuquén were targeted by work stoppages and insider attacks in failed attempts to intimidate and force employers to increase salaries and benefits. These protesters were seemingly allowed to act without fear of response from local police forces, even after direct requests for assistance had been made. The companies believe the unions and protesters feel emboldened by the government’s stance towards Western companies and were forced to shut down operations for weeks in December 2019 and January 2020, in fear of the safety of their personnel at the local headquarters.

Argentine workers are among the most highly-educated and skilled in Latin America. Foreign investors often cite Argentina’s skilled workforce as a key factor in their decision to invest in Argentina. Argentina has relatively high social security, health, and other labor taxes, however, high labor costs are among foreign investors’ most often cited operational challenges. The unemployment rate reached 11 percent in 2020, according to official statistics. The government estimated unemployment for workers below 29 years old as more than double the national rate. Exacerbated by the COVID-19 pandemic, analysts estimate informality stands between 20 to 40 percent.

During 2020, the Argentine government implemented measures to alleviate the impact of the COVID-19 pandemic on the economy and employment. The government introduced measures to stimulate the economy and employment through public works and price limits; to protect workers in the workplace by promoting telework and offering leave for workers; and to support jobs and worker income by prohibiting employers from terminating employment. The government also facilitated social dialogue between the private sector and unions. The government has postponed implementation of Argentina’s ambitious Teleworking Contracts Regime, Law 27555, passed by Congress on July 30, 2020 and ratified by President Fernandez on August 14, 2020. This law provides the legal framework for teleworking in employment settings that allow it. However, it is so restrictive that many businesses have said that it deters telework.

Labor laws are comparatively protective of workers in Argentina, and investors cite labor-related litigation as an important factor increasing labor costs in Argentina. For example, one of the first measures passed by President Fernandez after he took office was Decree 34/2019 which established that employees dismissed without cause have the right to double the legal severance payment, the measure was extended until December 31, 2021 through Decree 39/2021. There are no special laws or exemptions from regular labor laws in the Foreign Trade Zones. Organized labor plays an important role in labor-management relations and in Argentine politics. Under Argentine law, the Ministry of Labor recognizes one union per sector per geographic unit (e.g., nationwide, a single province, or a major city) with the right to negotiate a collective bargaining agreement for that sector and geographic area. Roughly 40 percent of Argentina’s formal workforce is unionized. The Ministry of Labor ratifies collective bargaining agreements. Collective bargaining agreements cover workers in a given sector and geographic area whether they are union members or not, so roughly 70 percent of the workforce was covered by an agreement. While negotiations between unions and industry are generally independent, the Ministry of Labor often serves as a mediator. Argentine law also offers recourse to mediation and arbitration of labor disputes.

During 2020, the Ministry of Labor registered 840 labor and collective bargaining agreements. These agreements covered approximately 5.1 million workers. As a result of the COVID-19 pandemic, a large number of the agreements focused on the inability of workers to come to their workplace due to social distancing measures and the inability of employers to terminate employment during the crisis.

Tensions between management and unions occur. Many managers of foreign companies say they have good relations with their unions. Others say the challenges posed by strong unions can hinder further investment by their international headquarters. Depending on how sectors are defined, some activities such as oil and gas production or aviation involve multiple unions, which can lead to inter-union power disputes that can impede the companies’ operations.

The Fernandez government does not intend to pursue a broad labor reform bill, preferring instead to allow firms and workers to negotiate any adjustments to labor conditions through the collective bargaining process. The Ministry of Labor has indicated interest in proposing a “gig economy” bill (ley de plataformas) that would extend basic labor rights to, e.g., delivery workers coordinated through information technology applications. Labor-related demonstrations in Argentina occurred periodically in 2019, due to the pandemic, most Argentines’ outside activities were limited throughout 2020 which also limited demonstrations. Reasons for strikes include job losses, high taxes, loss of purchasing power, and wage negotiations. Labor demonstrations may involve tens of thousands of protestors. Past demonstrations have essentially closed sections of a city for a few hours or impeded traffic.

The Ministry of Labor has hotlines and an online website to report labor abuses, including child labor, forced labor, and labor trafficking. The Superintendent of Labor Risk (Superintendencia de Riesgos del Trabajo) has oversight of health and safety standards. Unions also play a key role in monitoring labor conditions, reporting abuses and filing complaints with the authorities. Argentina has a Service of Mandatory Labor Conciliation (SECLO), which falls within the Ministry of Labor. Provincial governments and the city government of Buenos Aires are also responsible for labor law enforcement.

The minimum age for employment is 16. Children between the ages of 16 and 18 may work in a limited number of job categories and for limited hours if they have completed compulsory schooling, which normally ends at age 18. The law requires employers to provide adequate care for workers’ children during work hours to discourage child labor. The Department of Labor’s 2019 Worst Form of Child Labor for Argentina can be accessed here: https://www.dol.gov/agencies/ilab/resources/reports/child-labor/argentina 

The Department of State’s 2019 Human Rights Report for Argentina can be accessed here: https://www.state.gov/reports/2019-country-reports-on-human-rights-practices/argentina/

Argentine law prohibits discrimination on the grounds of sex, race, nationality, religion, political opinion, union affiliation, or age. The law also prohibits employers, either during recruitment or time of employment, from asking about a worker’s political, religious, labor, and cultural views or sexual orientation. These national anti-discrimination laws also apply to labor relations and other social relations.

Argentina has been a member of the International Labor Organization since 1919.

* Source for Host Country Data:

Economic Section
U.S. Embassy Buenos Aires
Avenida Colombia 4300
(C1425GMN)
Buenos Aires, Argentina
+54-11-5777-474
ECONBA@state.gov

Policies Towards Foreign Direct Investment

Indonesia is an attractive destination for foreign direct investment (FDI) due to its young population, strong domestic demand, stable political situation, abundant natural resources, and well-regarded macroeconomic policy.  Indonesian government officials often state that they welcome increased FDI, aiming to create jobs, spur economic growth, and court foreign investors, notably focusing on infrastructure development and export-oriented manufacturing.  During the first term of President Jokowi’s administration, the government launched sixteen economic policy packages providing tax incentives in certain sectors, cutting red tape, reducing logistics costs, and creating a single submission system for business licensing applications.  Foreign investors, however, have complained about vague and conflicting regulations, bureaucratic inefficiencies, ambiguous legislation in regards to tax enforcement, poor existing infrastructure, rigid labor laws, sanctity of contract issues, and corruption.  To further improve the investment climate, the government drafted and parliament approved the Omnibus Law on Job Creation (Law No. 1/2020) in October 2020 to amend dozens of prevailing laws deemed to hamper investment.  It introduced a risk-based approach for business licensing, simplified environmental requirements and building certificates, tax reforms to ease doing business, more flexible labor regulations, and the establishment of the priority investment list.  It also streamlined the business licensing process at the regional level

The Indonesia Investment Coordinating 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.  BKPM’s OSS system streamlines almost all business licensing and permitting processes, based on the issuance of Government Regulation No. 24/2018 on Electronic Integrated Business Licensing Services.  While the OSS system is operational, overlapping authority for permit issuance across ministries and government institutions, both at the national and subnational level, remains challenging.  The Omnibus Law on Job Creation requires local governments to integrate their license systems into the OSS.  The law allows the central government to take over local governments’ authority if local governments are not performing.  The government has provided investment incentives particularly for “pioneer” sectors (please see the section on Industrial Policies).

Limits on Foreign Control and Right to Private Ownership and Establishment

As part of the implementation of the Omnibus Law on Job Creation, the Indonesian government enacted Presidential Regulation No. 10/2021 to introduce a significant liberalization of foreign investment in Indonesia, repealing the 2016 Negative List of Investment (DNI).  In contrast to the previous regulation, the new investment list sets a default principle that all business sectors are open for investment unless stipulated otherwise.  It details the seven sectors that are closed to investment, explains that public services and defense are reserved for the central government, and outlines four categories of sectors that are open to investment: priority investment sectors that are eligible for incentives; sectors that are reserved for micro, small, and medium enterprises (MSMEs) and cooperatives or open to foreign investors who cooperate with them; sectors that are open with certain requirements (i.e., with caps on foreign ownership or special permit requirements); and sectors that are fully open for foreign investment.  Although hundreds of sectors that were previously closed or subject to foreign ownership caps are in theory open to 100 percent foreign investment, in practice technical and sectoral regulations may stipulate different or conflicting requirements that still need to be resolved.

In total, 245 business fields listed in the new Investment Priorities List, or DPI, are eligible for fiscal and non-fiscal incentives, notably pioneer industries, export-oriented manufacturing, capital intensive industries, national infrastructure projects, digital economy, labor-intensive industries, as well as research and development activities.  Restrictions on foreign ownership in telecommunications and information technology (e.g., internet providers, fixed telecommunication providers, mobile network providers), construction services, oil and gas support services, electricity, distribution, plantations, and transportation were removed.  Healthcare services including hospitals/clinics, wholesale of pharmaceutical raw materials, and finished drug manufacturing are fully open for foreign investment, which was previously capped in certain percentages.  The regulation also reduced the number of business fields that are subject to certain requirements to only 46 sectors.  Domestic sea transportation and postal services are open up to 49 percent of foreign ownership, while press, including magazines and newspapers, and broadcasting sectors are open up to 49 percent and 20 percent, respectively, but only for business expansion or capital increases.  Small plantations, industry related to special cultural heritage, and low technology industries or industries with capital less than IDR10 billion (USD 700,000) are reserved for MSMEs and cooperatives.  Foreign investors in partnership with MSMEs and cooperatives can invest in certain designated areas.  The new investment list shortened the number of restricted sectors from 20 to 7 categories including cannabis, gambling, fishing of endangered species, coral extraction, alcohol, industries using ozone-depleting materials, and chemical weapons.  In addition, while education investment is still subject to the Education Law, Government Regulation No. 40/2021 permits education and health investment as business activities in special economic zones.

In 2016, Bank Indonesia (BI) 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 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 sign partnership agreements with one of Indonesia’s four NPG switching companies.  In December 2020, BI issued umbrella Regulation No. 22/23/2020 on the Payment System, which implements BI’s 2025 Payment System Blueprint and introduces a risk-based categorization and licensing system.  The regulation will enter into force on July 1, 2021.  It allows 85 percent foreign ownership of non-bank payment services providers, although at least 51 percent of shares with voting rights must be owned by Indonesians.  The 20 percent foreign equity cap remains in place for payment system infrastructure operators who handle clearing and settlement services, and a grandfathering provision remains in effect for existing licensed payment companies.

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 generally not subject to the limitation of foreign ownership as stipulated in Presidential Regulation No. 10/2021.

Indonesia’s vast natural resources have attracted significant foreign investment and continue to offer significant prospects.  However, some companies report that a variety of government regulations have made doing business in the resources sector increasingly difficult, and Indonesia now ranks 64th of 76 jurisdictions in the Fraser Institute’s 2019 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 full export ban did not come into effect until January 2017, when the government also issued new regulations allowing exports of copper concentrate and other specified minerals, while imposing onerous requirements.  Of note for foreign investors, provisions of the regulations require that in order to export 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 51 percent of shares to Indonesian interests over ten years, with the price of divested shares determined based on a “fair market value” determination that does not take into account existing reserves.  In January 2020, the government banned the export of nickel ore for all mining companies, foreign and domestic, in the hopes of encouraging construction of domestic nickel smelters.  In March 2021, the Ministry of Energy and Natural Resources issued a Ministerial Decision to allow mining business licenses holders who have not reached smelter development targets to continue exporting raw mineral ores under certain conditions.  The 2020 Mining Law returned the authority to issue mining licenses to the central government.  Local governments retain only authority to issue small scale mining permits

Other Investment Policy Reviews

The latest World Trade Organization (WTO) Investment Policy Review of Indonesia was conducted in December 2020 and can be found on the WTO website: https://www.wto.org/english/tratop_e/tpr_e/tp501_e.htm

The last OECD Investment Policy Review of Indonesia, conducted in 2020, can be found on the OECD website:

https://www.oecd.org/investment/oecd-investment-policy-reviews-indonesia-2020-b56512da-en.htm

The 2019 UNCTAD Report on ASEAN Investment can be found here: https://unctad.org/en/pages/PublicationWebflyer.aspx?publicationid=2568

Business Facilitation

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 fulfill business licensing requirements through the OSS system.  In February 2021, the Indonesian government issued Government Regulation No. 5/2021 introducing a risk-based approach and streamlined business licensing process for almost all sectors.  The regulation classifies business activities into categories of low, medium, and high risk which will further determine business licensing requirements for each investment.  Low-risk business activities only require a business identity number (NIB) to start commercial and production activities.  An NIB will also serve as import identification number, customs access identifier, halal guarantee statement (for low risk), and environmental management and monitoring capability statement letter (for low risk).  Medium-risk sectors must obtain an NIB and a standard certification.  Under the regulation, a standard certificate for medium-low risk is a self-declared statement of the fulfillment of certain business standards, while a standard certificate for medium-high risk must be verified by the relevant government agency.  High-risk sectors must apply for a full business license, including an environmental impact assessment (AMDAL).  A business license remains valid as long as the business operates in compliance with Indonesian laws and regulations.  A grandfather clause applies for existing businesses that have obtained a business license.

Foreign investors are generally prohibited from investing in MSMEs in Indonesia, although the Presidential Regulation No. 10/2021 opened some opportunities for partnerships in farming, two- and three-wheeled vehicles, automotive spare parts, medical devices, ship repair, health laboratories, and jewelry/precious metals.

According to Presidential Instruction 7/2019, BKPM is responsible for issuing “investment licenses” (the term used to encompass both NIB and other business licenses) that have been delegated from all relevant ministries and government institutions to foreign entities through the OSS system, an online portal which allows foreign investors to apply for and track the status of licenses and other services online.  BKPM has also been tasked to review policies deemed unfavorable for investors.  While the OSS’s goal is to help streamline investment approvals, investments in the mining, oil and gas, and financial sectors still require licenses from related ministries and authorities.  Certain tax and land permits, among others, typically must be obtained from local government authorities.  Though Indonesian companies are only required to obtain one approval at the local level, businesses report that foreign companies often must seek additional approvals in order to establish a business.  Government Regulation No. 6/2021 requires local governments to integrate their business licenses system into the OSS system and standardizes services through a service-level agreement between the central and local governments.

Outward Investment

Indonesia’s outward investment is limited, as domestic investors tend to focus on the large domestic market.  BKPM has responsibility for promoting and facilitating outward investment, to include providing information about investment opportunities in other countries.  BKPM also uses its investment and trade promotion centers abroad to match Indonesian companies with potential investment opportunities.  The government neither restricts nor provides incentives for outward private sector investment.  The Ministry of State-Owned Enterprises (SOEs) encourages Indonesian SOEs through the SOE Go Global Program to increase their investment abroad, aiming to improve Indonesia’s supply chain and establish demand for Indonesian exports in strategic markets.  Indonesian SOEs reportedly accounted for around USD17.5 billion in outward investment in 2019.

Indonesia has investment agreements with 38 countries, including Australia, Bangladesh, Chile, Cuba, Denmark, Finland, Iran, Jordan, Mauritius, the Philippines, Qatar, Russia, Saudi Arabia, South Korea, Thailand, and the United Kingdom.  In 2014, Indonesia began to abrogate its existing BITs by allowing the agreements to expire.  However, Indonesia ratified a new BIT with Singapore in March 2021, marking the first investment treaty signed and entered into force after years of review.  Indonesia reportedly developed a new model BIT which is currently reflected in the investment chapter of newly signed trade agreements.

The ASEAN Economic Community (AEC) arrangement came into effect in 2016 and was expected to reduce barriers for goods, services and the movement of 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, Hong Kong, India, Pakistan, and New Zealand under regional and bilateral agreements.  In November 2020, 10 ASEAN Member States and five additional countries (Australia, China, Japan, Korea and New Zealand) signed the Regional Comprehensive Economic Partnership (RCEP), representing around 30 percent of the world’s gross domestic product and population.  RCEP encompasses trade in goods, trade in services, investment, economic and technical cooperation, intellectual property rights, competition, dispute settlement, e-commerce, SMEs and government procurement.

Indonesia is actively engaged in bilateral FTA negotiations.  Indonesia recently signed trade agreements with Australia, Chile, Mozambique, the European Free Trade Association (Iceland, Liechtenstein, Norway, and Switzerland), and South Korea.  Indonesia is currently negotiating Bilateral Trade Agreements with the European Union, Bangladesh, Iran, Pakistan, Morocco, Mauritius, Tunisia, and Turkey.

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 and agreements, but foreign investors have indicated they still encounter challenges in comparison to domestic investors and have criticized the current regulatory system for its failure to establish clear and transparent rules for all actors.  Certain laws and policies establish sectors that are either fully off-limits to foreign investors or are subject to substantive conditions.  In an effort to improve the investment climate and create jobs, Indonesia overhauled more than 70 laws and thousands of regulations through the enactment of the Omnibus Law on Job Creation.  Presidential Regulation No. 10/2021, one of 51 implementing regulations for the Omnibus Law adopted in February 2021, replaced the 2016 DNI with a new investment scheme that significantly reduced the number of sectors that are closed to foreign investment.

U.S. businesses cite regulatory uncertainty and a lack of transparency as two significant factors hindering operations.  U.S. companies note that regulatory consultation in Indonesia is inconsistent, despite the existence of Law No. 12/2011 on the Development of Laws and Regulations and its implementing Government Regulation No. 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.  Laws and regulations are often vague and require substantial interpretation by the implementers, leading to business uncertainty and rent-seeking opportunities.

Decentralization has introduced another layer of bureaucracy and red tape for firms to navigate.  In 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.  The Omnibus Law on Job Creation provided a legal framework to streamline regulations.  It establishes the norms, standards, procedures, criteria (NSPK) and performance requirements in administering government affairs for both the central and local governments.  Law No. 11/2020 aims to harmonize licensing requirements at the central and regional levels.  Under that law and its implementing regulations, the central government has the authority to take over regional business licensing if local governments do not meet performance requirements.  Local governments must also obtain recommendations from the Ministries of Home Affairs and Finance prior to implementing local tax regulations.

In 2017, Presidential Instruction No. 7/2017 was enacted to improve coordination among ministries in the policy-making process.  The regulation requires lead ministries to coordinate with their respective coordinating ministry before issuing a regulation.  The regulation 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.  The Omnibus Law on Job Creation enhanced the predictability of trade policy by moving the authority to issue trade regulations from the ministry-level (Ministry of Trade regulation) to the cabinet-level (government regulation).

International Regulatory Considerations

As an ASEAN member, Indonesia has successfully implemented regional initiatives, including the real-time movement of electronic import documents through the ASEAN Single Window, which reduces shipping costs, speeds customs clearance, and limits corruption opportunities.  Indonesia has committed to ratifying the ASEAN Comprehensive Investment Agreement (ACIA), ASEAN Framework Agreement on Services (AFAS), and the ASEAN Mutual Recognition Arrangement.  Notwithstanding the 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).  Indonesia has met 88.7 percent of its commitments to the TFA provisions to date, including publication of information, consultations, advance rulings, detention and test procedures, , goods clearance, import/export formalities, and goods transit.

Indonesia is a Contracting Party to the Aircraft Protocol to the Convention of International Interests in Mobile Equipment (Cape Town Convention).  However, foreign investors bringing aircraft to Indonesia to serve the general aviation sector have faced difficulty utilizing Cape Town Convention provisions to recover aircraft leased to Indonesian companies.  Foreign owners of leased aircraft that have become the subject of contractual lease disputes with Indonesian lessees have been unable to recover their aircraft in certain circumstances.

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 review.

Corruption continues to plague Indonesia’s judiciary, with graft investigations involving senior judges and court staff.  Many businesses note that the judiciary is susceptible to 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.  A lack of clear land titles has plagued Indonesia for decades, although land acquisition law No. 2/2012 includes legal mechanisms designed to resolve some past land ownership issues.  The Omnibus Law on Job Creation also created a land bank to facilitate land acquisition for priority investment projects.  Government Regulation No. 27/2017 provided incentives for upstream energy development and also regulates 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 and 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 minimum capital of IDR 10 billion (USD 700,000) excluding land and building and with the foreign investor holding shares in the company.  The Omnibus Law on Job Creation allows foreign investors to invest below IDR 10 billion in technology-based startups in special economic zones.  The Law also introduces a number of provisions to simplify business licensing requirements, reforms rigid labor laws, introduces tax reforms to support ease of doing business, and establishes the Indonesian Investment Authority (INA) to facilitate direct investment.  In addition, the government repealed the 2016 Negative Investment List through the issuance of Presidential Regulation No. 10/2021, introducing major reforms that removed restrictions on foreign ownership in hundreds of sectors that were previously closed or subject to foreign ownership caps.  A number of sectors remain closed to investment or are otherwise restricted.  Presidential Regulation No. 10/2021 contains a grandfather clause that clarifies that existing investments will not be affected unless treatment under the new regulation is more favorable or the investment has special rights under a bilateral agreement.  The Indonesian government also expanded business activities in special economic zones to include education and health. (See section on limits on foreign control regarding the new list of investments.)  The website of the Indonesia Investment Coordinating Board (BKPM) provides information on investment requirements and procedures:  https://nswi.bkpm.go.id/guide.  Indonesia mandates reporting obligations for all foreign investors through the OSS system as stipulated in BKPM Regulation No.6/2020.  (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.  The Omnibus Law on Job Creation and its implementing regulation, Government Regulation No. 44/2021, removes criminal sanctions and the cap on administrative fines, which was set at a maximum of IDR 25 billion (USD 1.7 million) under the previous regulation.  Appeals of KPPU decisions must be processed through the commercial court.

Expropriation and Compensation

Indonesia’s political leadership has long championed economic nationalism, particularly concerning mineral and oil and gas reserves.  According to Law No. 25/2007 (the Investment Law), the Indonesian government is barred from nationalizing or expropriating an investor’s property rights, unless provided by law.  If the Indonesian government nationalizes or expropriates an investors’ property rights, it must provide market value compensation.

Presidential Regulation No. 77/2020 on Government Use of Patent and the Ministry of Law and Human Rights (MLHR) Regulation No. 30/2019 on Compulsory Licenses (CL) enables patent right expropriation in cases deemed in the interest of national security or due to a national emergency.  Presidential Regulation No.77/2020 allows a GOI agency or Ministry to request expropriation, while MLHR Regulation No. 30/2019 allows an individual or private party to request a CL.

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 in theory legally recognized and enforceable in Indonesian courts; however, some investors 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 2019, a Dutch arbitration court ruled in favor of the Indonesian government in a USD 469 million arbitration case against Indian firm Indian Metals & Ferro Alloys.  Two cases involving Newmont Nusa Tenggara under the BIT with the Netherlands and Oleovest under the 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 seek to better protect perceived national interests.  The Indonesian model BIT is reportedly reflected in newly signed investment agreements.

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 agreements 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 viewed as 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 seeks to facilitate investment 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.  Presidential Regulation No. 10/2021 on investment establishes 245 priority fields that are eligible for tax and other incentives, such as facilitated licensing and land use, to encourage investment in those sectors. The Omnibus Law on Job Creation offers a variety of tax incentives, including eliminating income tax on dividends earned in Indonesia and on certain income, including dividends earned abroad, as long as they are invested in Indonesia.  The Law also exempts dozens of goods and services from value added tax (VAT).  The provisions in the Omnibus Law on Job Creation complement several regulations in Law No. 2/2020, which was issued earlier in 2020.  Law No. 2 cut the corporate income tax rate, lowering it to 22 percent for 2020 and 2021, and to 20 percent for 2022.  In addition, a company can claim a further 3 percent reduction if it is publicly listed, with a total number of shares traded on an Indonesian stock exchange of at least 40 percent. Investment incentives are outlined at https://www.investindonesia.go.id/cn/invest-with-us/faq.

To cope with soaring demand and to improve domestic production of medical devices and supplies amid the COVID-19 pandemic, the government through BKPM Regulation No. 86/2020 streamlined licensing requirements for manufacturers of pharmaceuticals and medical devices.  The Ministry of Health also accelerated product registration and certification for medical devices and household health supplies.  Moreover, the Ministry of Trade issued Regulation 28/2020 to relax import requirements for certain medical-related products.

Foreign Trade Zones/Free Trade/ Trade Facilitation

Indonesia offers numerous incentives to foreign and domestic companies that operate in special economic and trade zones throughout Indonesia.  The largest zone is the free trade zone (FTZ) island of Batam, Bintan, and Karimun, located just south of Singapore.  The Omnibus Law on Job Creation and its implementing regulation, Government Regulation No. 41/2021 strengthened and unified the three islands (Batam, Bintan, and Karimun) into one integrated Free Trade Zone for the next 25 years to create an international logistics hub to support the industrial, trade, maritime, and tourism sectors.  Investors in FTZs are exempted from import duty, income tax, VAT, and sales tax on imported capital goods, equipment, and raw materials.  Fees are assessed on the portion of production destined for the domestic market which 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 the zone for two years.

Indonesia also has numerous Special Economic Zones (SEZs), regulated under Law No. 39/2009, Government Regulation No. 1/2020 on SEZ management, and Government Regulation No. 12/2020 on SEZ facilities.  These benefits include reduction of corporate income taxes (depending on the size of the investment), luxury tax, customs duty and excise, and expedited or simplified administrative processes for import/export, expatriate employment, immigration, and licensing.  Under the Omnibus Law on Job Creation, foreign technology start-up investments located within SEZs are exempt from the minimum investment threshold of IDR 10 billion (USD 700,000), excluding land and buildings.  There are minimal export processing requirements within the SEZs.  New business activities in the education and health sectors (for which licensing services remain under the central government’s authority) will be allocated by zones and determined by the administrator of the SEZ.  The Law lifted limits of imported goods into SEZs but maintained restrictions on specific banned goods in accompanying laws and regulations.  It also introduced new tax facilities and incentives for taxpayers in SEZs.  As of February 2021, Indonesia has identified fifteen SEZs in manufacturing and tourism centers that are operational or under construction, and two more have been approved.

Indonesian law also provides for several other types of zones that enjoy special tax and administrative benefits.  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 115 industrial estates that host thousands of industrial and manufacturing companies.  Ministry of Finance Regulation No. 105/2016 provides several different tax and customs accommodations 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 auction 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 No. 28/2018, providing additional guidance on the types of BLCs and shortening approval for BLC applications.  By October 2019, Indonesia had designated 106 BLCs in 159 locations, with plans to approve more in eastern Indonesia.  In 2018, the 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 No. 120/2013, bonded zones have a domestic sales quota of 50 percent of the initial 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 regions are only allowed for further processing to become capital goods, and to companies with a license from the economic area organizer for the goods relevant to their business.

Performance and Data Localization 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 foreign companies’ management.  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.  Government Regulation No. 34/2021, an implementing regulation of the Omnibus Law on Job Creation, on the utilization of foreign workers stipulates specific documents required for the RPTKA and introduces different types of RPTKA for temporary works (e.g. film production, audits, quality control, inspection and installation of machinery), employment for work under six months, employment that does not require payment to the Foreign Worker Utilization Compensation Fund (DKPTKA), and employment in SEZs.  Under the regulation, an RPTKA is not required for commissioners or executives.  Foreigners working in technology-based startups are also exempted from the RPTKA requirement in the first three months.  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.  While a technical recommendation from a relevant ministry is no longer required, ministries may still establish technical competencies or qualifications for certain jobs, or prohibit the use of foreign workers 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.

Government Regulation No. 34/2021 outlines 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 the DKPTKA for local manpower training at regional manpower offices.  Ministry of Manpower Decree No. 228/2019 details the number of jobs open for foreign workers across 18 sectors, ranging from construction, transportation, education, telecommunications, and professionals.  Foreign workers must obtain approval from the Manpower Minister or designated officials to apply for positions not listed in the decree.  Some U.S. firms report difficulty in renewing KITASs for their foreign executives.

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.

In 2019, Indonesia issued Government Regulation No. 71/2019 to replace Regulation No. 82/2012, further detailed in Ministry of Communication and Information Technology (MCIT) Regulation No. 5/2020, which classifies electronic system operators (ESO) into two categories:  public and private.  Public ESOs are either a state institution or an institution assigned by a state institution but not a financial sector regulator or supervisory authority.  Private ESOs are individuals, businesses and communities that operate electronic systems.  Public ESOs must manage, process, and store their data in Indonesia, unless the storage technology is not available locally.  Private ESOs have the option to choose where they will manage, process, and store their data.  However, if private ESOs decide to process data outside of Indonesia, they must provide access to their systems and data for government supervision and law enforcement purposes.  For private financial sector ESOs, Government Regulation 71/2019 provides that such firms are “further regulated” by Indonesia’s financial sector supervisory authorities regarding the private sector’s ESO systems, data processing, and data storage.

Additionally, to implement Government Regulation 71/2019, the Financial Services Authority (OJK) issued Regulation No. 13/2020, an amendment to Regulation No. 38/2016, which allows banks to operate their electronic data processing systems and disaster recovery centers outside of Indonesia, provided that the system receives approval from OJK.  Certain core banking data must also be stored within Indonesia.  OJK will evaluate whether offshore data arrangements could diminish its supervisory efficiency or negatively affect the bank’s performance, and if the data center complies with Indonesia’s laws and regulations.  The regulation became effective March 31, 2020.

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 Land Acquisition Law No. 2/2012,which was amended by the Omnibus Law on Job Creation (Law No. 11/2020), that enshrined the concept of eminent domain and established mechanisms for fair market value compensation and appeals.  The National Land Agency registers property under Government Regulation No. 18/2021, though the Ministry of Forestry administers all “forest land.”  The regulation introduced e-registration to cut bureaucracy and minimize land disputes.  Registration is not conclusive evidence of ownership, but rather strong evidence of such.  It allows foreigners domiciled in Indonesia to have housing property with land  under a “right to use” status for a maximum of 30 years, with extensions available for up to 20 additional years, as well as a “right to own” status for apartments located in special economic zones, free trade zones, and industrial areas.  The Omnibus Law on Job Creation aims to reduce uncertainty around the roles of the central and local governments, including around spatial planning and environmental and social impact assessments (AMDALs), by simplifying the licensing process through implementation of a risk-based approach.  The Omnibus Law also created a land bank to facilitate land acquisition for priority investment projects.

Intellectual Property Rights

Indonesia remains on the priority watch list in the U.S. Trade Representative’s (USTR) Special 301 Report due to the lack of adequate and effective IP protection and enforcement.  Indonesia’s patent law continues to raise serious concerns, including patentability criteria and compulsory licensing.  Counterfeiting and piracy are pervasive, IP enforcement remains weak, and there are continued market access restrictions for IP-intensive industries.  According to U.S. stakeholders, Indonesia’s failure to protect intellectual property and enforce IP rights laws has resulted in high levels of physical and online piracy.  Local industry associations have reported large amounts 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 Mangga Dua Market, and online markets Tokopedia and Bukalapak, were included in USTR’s Notorious Markets List in 2020.

The Omnibus Law on Job Creation amended key articles in Patent Law No. 13/2016 and the Trademark and Geographical Indications Law No. 20/2016.  While Patent Law amendments require the patent holder to exercise their patented invention locally within 36 months after the patent is granted, the new amendments provide flexibility to IP holders to meet local “working” requirements.  The new law also revokes a provision requiring patent holders to support technology transfer, investment, and employment in local manufacturing as a condition of patent protection.  The law reduces the processing time required for simple patent applications from 12 months to 6 months.

In January 2020, Indonesia ratified the Marrakesh Treaty through Presidential Regulation No. 1/2020 to facilitate access to public works for persons who are blind, visually impaired, or otherwise print-disabled.  Indonesia also ratified the Beijing Treaty on IPR protection for audiovisual performances to protect actors through Presidential Regulation No. 21/2020.  Indonesia deposited its instrument of accession to the Madrid Protocol with the World Intellectual Property Organization (WIPO) in 2017 and issued implementing regulations in 2018.  Under the new rules, applicants desiring international mark protection under the Madrid Protocol must first register their application with DGIP and 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 the treatment of internationally 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.

Ministry of Finance (MOF) Regulation No. 6/2019 grants  the Directorate General of Customs and Excise (DGCE) legal authority to hold shipments believed to contain imitation goods for up to two days, pending inspection.  Under Regulation No. 6/2019, rights holders are notified by DGCE (through a recordation system) when an incoming shipment is suspected of containing infringing products.  If the inspection reveals an infringement, the rights holder has four days to file a court injunction to request a shipment suspension.  Rights holders are required to provide a refundable monetary guarantee of IDR 100 million (USD 6,600) when they file a claim with the court.  If the court sides with the rights holder, then the guarantee money will be returned to the applicant.  DGCE intercepted three suspected infringement product imports in 2020 by using this recordation system, as only 17 trademarks and two copyrights are registered in the recordation system.  Despite business stakeholder concerns, the GOI retains a requirement that only companies with offices domiciled in Indonesia may use the recordation system.

Trademark, Patent, and Copyright legislation require a rights-holder complaint for investigation. 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: https://id.usembassy.gov/attorneys.

Capital Markets and Portfolio Investment

The Indonesia Stock Exchange (IDX) index has 713 listed companies as of December 2020 with a daily trading volume of USD 642.5 million and market capitalization of USD 486 billion.  Over the past six years, there has been a 43 percent increase in the number listed companies, but the IDX is dominated by its top 20 listed companies, which represent 55.5 percent of the market cap.  There were 51 initial public offerings in 2020 – one more than in 2019.  During the fourth quarter of  2020, domestic entities conducted 66 percent of total IDX stock trades.

Government treasury bonds are the most liquid bonds offered by Indonesia.  Corporate bonds are less liquid due to less public knowledge of the product and the shallowness of the market.  The government also issues sukuk (Islamic treasury notes) as part of its effort to diversify Islamic debt instruments and increase their liquidity.  Indonesia’s sovereign debt as of March 2021 was rated as BBB by Standard and Poor’s, BBB by Fitch Ratings and Baa2 by Moody’s.

OJK began overseeing capital markets and non-banking institutions in 2013, replacing the Capital Market and Financial Institution Supervisory Board.  In 2014, OJK also assumed BI’s supervisory role over commercial banks.  Foreigners have access to the Indonesian capital markets and are a major source of portfolio investment.  Indonesia respects International Monetary Fund (IMF) Article VIII by refraining from restrictions on payments and transfers for current international transactions.

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 net interest margins in the region.  As of December 2020, commercial banks had IDR 9,178 trillion (USD 640 billion) in total assets, with a capital adequacy ratio of 23.9 percent.  Outstanding loans fell by 2.4 percent in 2020 compared to growth of 6.08 percent in 2019, due to the COVID-19 pandemic induced recession.  Gross non-performing loans (NPL) in December 2020 increased to 3.06 percent from 2.53 percent the previous year.  Rising NPL rates were partly mitigated through a loan restructuring program implemented by OJK as part of the COVID-19 recovery efforts.

OJK Regulation No.56/03/2016 limits 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 among 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.

On March 16, 2020, OJK issued Regulation Number 12/POJK.03/2020 on commercial bank consolidation.  The regulation aims to strengthen the structure, and competitiveness of the national banking industry by increasing bank capital and encouraging consolidation of banks in Indonesia.  This regulation increases minimum core capital requirements for commercial banks and Capital Equivalency Maintained Asset requirements for foreign banks with branch offices by least IDR 3 trillion (USD 209 million), by December 31, 2022.

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.

Growing digitalization of banking services, spurred on by innovative payment technologies in the financial technology (fintech) sector, complements the conventional banking sector.  Peer-to-peer (P2P) lending companies and e-payment services have grown rapidly over the past decade.  Indonesian policymakers are hopeful that these fintech services can reach underserved or unbanked populations and micro, small, and medium-sized enterprises (MSMEs).  As of June 2020, fintech lending reached IDR 113.46 trillion (USD 7.6 billion) in loan disbursements, while payment transactions using e-money in 2020 are estimated to have increased by 38.5 percent to IDR 201 trillion (USD 14 billion) year-on-year.

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 (USD 6,600) or more, or the equivalent in another currency, must report the amount to the Directorate General of Customs and Excise (DGCE).  Taking more than IDR 100 million out of Indonesia in cash also requires prior approval of BI.  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 66,000).

Banks on their own behalf or for customers may conduct derivative transactions related to derivatives of foreign currency exchange 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.

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 use rupiah.  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.  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 2018, Indonesia was granted observer status by FATF, a necessary milestone toward becoming a full FATF member.

Sovereign Wealth Funds

The Indonesian Investment Authority (INA), also known as the sovereign wealth fund, was legally established by the 2020 Omnibus Law on Job Creation.  INA’s supervisory board and board of directors were selected through competitive processes and announced in January and February 2021.  The government has capitalized INA with USD 2 billion through injections from the state budget and intends to add another USD 3 to 4 billion in state-owned assets.  INA aims to attract foreign equity and invest that capital in long-term Indonesian assets to improve the value of the assets through enhanced management.  According to Indonesian government officials, the fund will consist of a master portfolio with sector-specific sub-funds, such as infrastructure, oil and gas, health, tourism, and digital technologies.

Indonesia had 114 state-owned enterprises (SOEs) and 28 subsidiaries divided into 12 sectors as of December 2019.  In April 2020, the Ministry of SOEs began consolidating SOEs, with the target of reducing the total number of SOEs to 41.  As of January 2021, 20 were listed on the Indonesian stock exchange.  In addition, 14 are special purpose entities under the SOE Ministry and eight are 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 2017, Indonesia announced the creation of a mining holding company, PT Inalum, the first of the six planned SOE-holding companies.  The others under discussion include plantations, fertilizer, and oil and gas.  In 2020, two holding companies in pharmaceuticals and insurance were established, and three state-owned sharia banks were merged.  A holding company in tourism is being prepared with a target of completion by the end of 2021.

Since his appointment by President Jokowi in November 2019, Minister of SOEs Erick Thohir has underscored the need to reform SOEs in line with President Jokowi’s second-term economic agenda.  Thohir has noted the need to liquidate underperforming SOEs, ensure that SOEs improve their efficiency by focusing on core business operations, and introduce better corporate governance principles.  Thohir has spoken publicly about his intent to push SOEs to undertake initial public offerings (IPOs) on the Indonesian Stock Exchange.  He also encourages SOEs to increase outbound investment to support Indonesia’s supply chain in strategic markets, including through acquisition of cattle farms, phosphate mines, and salt mines.

Information regarding 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).

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.  The government plans to capitalize the Indonesia Investment Authority (INA) with USD 4 billion in state-owned assets to attract equity investments in those assets, which may eventually be sold to investors or listed on the stock market.

Indonesian businesses are required to undertake responsible business conduct (RBC) activities under Law No. 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 face 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.

OJK regulates corporate governance issues, but the regulations and enforcement are not yet up to international standards for shareholder protection.

Indonesia does not adhere to the OECD Guidelines for Multinational Enterprises, and the government is not known to have encouraged 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 participates in the Extractive Industries Transparency Initiative (EITI).

Additional Resources

Department of State

Country Reports on Human Rights Practices (https://www.state.gov/reports-bureau-of-democracy-human-rights-and-labor/country-reports-on-human-rights-practices/);

Trafficking in Persons Report (https://www.state.gov/trafficking-in-persons-report/);

Guidance on Implementing the “UN Guiding Principles” for Transactions Linked to Foreign Government End-Users for Products or Services with Surveillance Capabilities (https://www.state.gov/key-topics-bureau-of-democracy-human-rights-and-labor/due-diligence-guidance/) and;

North Korea Sanctions & Enforcement Actions Advisory (https://home.treasury.gov/system/files/126/dprk_supplychain_advisory_07232018.pdf).

Department of Labor

Findings on the Worst forms of Child Labor Report (https://www.dol.gov/agencies/ilab/resources/reports/child-labor/findings );

List of Goods Produced by Child Labor or Forced Labor (https://www.dol.gov/agencies/ilab/reports/child-labor/list-of-goods);

Sweat & Toil: Child Labor, Forced Labor, and Human Trafficking Around the World (https://www.dol.gov/general/apps/ilab) and;

Comply Chain (https://www.dol.gov/ilab/complychain/).

President Jokowi was elected on a strong good-governance platform.  However, corruption remains a serious problem in the view of many, including some U.S. companies.  The Indonesian 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.  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 66,000).  The government began prosecuting companies that 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.  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 to life, depending on the severity of the charge.  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 2020 dropped to 102 out of 180 countries surveyed, compared to 85 out of 180 countries in 2019.  Indonesia’s score of public corruption in the country, according to Transparency International, dropped to 37 in 2020 from 40 in 2019 (scale of 0/very corrupt to 100/very clean).  Indonesia ranks below neighboring Timor Leste, Malaysia, and Brunei.

Corruption reportedly remains pervasive despite laws to combat it.   In September 2019, the Indonesia House of Representatives (DPR) passed Law No. 19/2019 on the Corruption Eradication Commission (KPK) which revised the KPK’s original charter, reducing the Commission’s independence and limiting its ability to pursue corruption investigations without political interference.  The current KPK Commissioner has stated that KPK’s main role will no longer be prosecution, but education and prevention.  This has led to overall case numbers dropping significantly.

Indonesia ratified the UN Convention against Corruption in September 2006.  However, Indonesia is not yet compliant with key components of the convention, including provisions on foreign bribery.  Indonesia has not yet acceded to the OECD Anti-Bribery Convention but attends meetings of the OECD Anti-Corruption Working Group.  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. Kuningan Persada Kav 4, Setiabudi
Jakarta Selatan 12950
Email: 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 Bali bombings in 2002 that killed over 200 people, Indonesian authorities have aggressively 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  conduct attacks with little or no warning, as do lone wolf-style ISIS sympathizers.

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 at least one large corporation there, including the death of a New Zealand citizen in an attack on March 30, 2020, as well as  armed groups seizing aircraft and temporarily holding pilots and passengers hostage.  Additionally, racially-motivated attacks against ethnic Papuans in East Java province led to violence in Papua and West Papua in late 2019, including riots in Wamena, Papua that left dozens dead and thousands more displaced.  Continued attacks and counter attacks between security personnel and local armed groups have exacerbated the region’s issues with internally displaced persons.

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 labor market faces a number of structural barriers, including skills shortages and lagging productivity, restrictions on the use of contract workers, and complicated labor laws.  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 from IDR 3.94 million (USD 260) per month in 2019 to IDR 4.26 million (USD 296) per month in 2020.  Unions staged largely peaceful protests across Indonesia in 2019 demanding the government increase the minimum wage, decrease the price for basic needs, and stop companies from outsourcing and employing foreign workers.

The 2020 Omnibus Law on Job Creation introduced labor reforms, intended to attract investors, boost economic growth and create jobs.  The Law aims to make the labor market more flexible to encourage job creation and more formal sector employment, as over half of Indonesia’s workers are in the informal sector.  Restrictions on the types of work that can be outsourced were lifted and a new working hours arrangement was established to accommodate jobs in the digital economy era.  The Law abolished sectoral minimum wages and reformulated the calculation of minimum wage at the provincial and regency/city level based on economic growth or inflation variables.  A new unemployment benefit is now officially part of the public safety net for workers, and severance pay requirements were reduced.  The business community’s initial reactions to the law were cautiously optimistic, while labor unions, student groups, and religious organizations staged strikes and protests against the law’s labor reforms.  Labor unions cite the loss of limits on temporary employment contracts and expansion of outsourcing flexibility as concerns.

Until the onset of the COVID-19 pandemic, unemployment had remained steady at 4.38 percent.  As of August 2020, Statistics Indonesia recorded that the unemployment rate jumped to 7.07 percent, or 9.77 million people, while the number of workers who were furloughed due to COVID-19 was much higher.

Employers note that the skills 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.

Labor unions are independent of the government; about 7.6 percent of the workforce is unionized.  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 Manpower maintains an inspectorate to monitor labor norms, but enforcement is stronger in the formal 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.

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/

Reggie Singh
Economic Section
U.S. Embassy Jakarta
+62-21-50831000
BusinessIndonesia@state.gov

Policies Towards Foreign Direct Investment (FDI)

The Government of South Africa is generally open to foreign investment to drive economic growth, improve international competitiveness, and access foreign markets. The Department of Trade and Industry and Competition’s (the DTIC) Trade and Investment South Africa (TISA) division assists foreign investors. It actively courts manufacturing in sectors where it believes South Africa has a competitive advantage. It favors sectors that are labor intensive and with the potential for local supply chain development. The DTIC publishes the “Investor’s Handbook” on its website: www.the DTIC.gov.za  and TISA provides investment support through One Stop Shops in Pretoria, Johannesburg, Cape Town, Durban, and online at http://www.investsa.gov.za/one-stop-shop/  (see Business Facilitation). The 2018 Competition Amendment Bill introduced a government review mechanism for FDI in certain sectors on national security grounds, including energy, mining, banking, insurance, and defense (see section on Laws and Regulations on Foreign Direct Investment). The private sector has expressed concern about the politicization of mergers and acquisitions.

Limits on Foreign Control and Right to Private Ownership and Establishment

Currently there is no limitation on foreign private ownership. South Africa’s efforts to re-integrate historically disadvantaged South Africans into the economy have led to policies that could disadvantage foreign and some locally owned companies. The Broad-Based Black Economic Empowerment Act of 2013 (B-BBEE), and associated codes of good practice, requires levels of company ownership and participation by black South Africans to obtain bidding preferences on government tenders and contracts. The DTIC created an alternative equity equivalence (EE) program for multinational or foreign owned companies to allow them to score on the ownership requirements under the law, but many view the terms as onerous and restrictive. Only eight multinationals, primarily in the technology sector, participate in the EE program. The government also is considering a new Equity Employment Bill that will set a numerical threshold, purportedly at the discretion of each Ministry, for employment based on race, gender and disability, over and above other B-BBEE criteria.

Other Investment Policy Reviews

The World Trade Organization published a Trade Policy Review for the Southern African Customs Union, which South Africa joined in 2015. OECD published an Economic Survey on South Africa, with investment-related information in 2020. UN Conference on Trade and Development (UNCTAD) has not conducted investment policy reviews for South Africa. https://www.oecd.org/economy/surveys/South-africa-2020-Overview_E.pdf

Business Facilitation

According to the World Bank’s Doing Business report, South Africa’s rank in ease of doing business in 2020 was 84 of 190, down from 82 in 2019. It ranks 139th for starting a business, 5 points lower than in 2019. In South Africa, it takes an average of 40 days to complete the process. South Africa ranks 145 of 190 countries on trading across borders.

The DTIC has established One Stop Shops (OSS) to simplify administrative procedures and guidelines for foreign companies wishing to invest in South Africa in Cape Town, Durban, and Johannesburg. OSS are supposed to have officials from government entities that handle regulation, permits and licensing, infrastructure, finance, and incentives, with a view to reducing lengthy bureaucratic procedures, reducing bottlenecks, and providing post-investment services. Some users of the OSS complain that some of the inter-governmental offices are not staffed, so finding a representative for certain transactions may be difficult. The virtual OSS web site is: http://www.investsa.gov.za/one-stop-shop/ .

The Companies and Intellectual Property Commission (CIPC) issues business registrations, and publishes a step-by-step guide and allows for online registration at ( http://www.cipc.co.za/index.php/register-your-business/companies/ ), through a self-service terminal, or through a collaborating private bank. New businesses must also request through the South African Revenue Service (SARS) an income tax reference number for turnover tax (small companies), corporate tax, employer contributions for PAYE (income tax), and skills development levy (applicable to most companies). The smallest informal companies may not be required to register with CIPC but must register with the tax authorities. Companies must also register with the Department of Labour (DoL) – www.labour.gov.za  – to contribute to the Unemployment Insurance Fund (UIF) and a compensation fund for occupational injuries. DoL registration may take up to 30 days but may be done concurrently with other registrations.

Outward Investment

South Africa does not incentivize outward investments. South Africa’s stock foreign direct investments in the United States in 2019 totaled USD 4.1 billion (latest figures available), a 5.1 percent increase from 2018. The largest outward direct investment of a South African company was a gas liquefaction plant in the State of Louisiana by Johannesburg Stock Exchange (JSE) and NASDAQ dual-listed petrochemical company SASOL. There are some restrictions on outward investment, such as a R1 billion (USD 83 million) limit per year on outward flows per company. Larger investments must be approved by the South African Reserve Bank and at least 10 percent of the foreign target entities’ voting rights must be obtained through the investment. https://www.resbank.co.za/RegulationAndSupervision/FinancialSurveillanceAndExchangeControl/FAQs/Pages/Corporates.aspx 

Transparency of the Regulatory System

South African laws and regulations are generally published in draft form for stakeholder comment. However, foreign stakeholders have expressed concern over the adequacy of notice and the government’s willingness to address comments. Legal, regulatory, and accounting systems are generally transparent and consistent with international norms. The DTIC is responsible for business-related regulations. It develops and reviews regulatory systems in the areas of competition, standards, consumer protection, company and intellectual property registration and protections, as well as other subjects in the public interest. It also oversees the work of national and provincial regulatory agencies mandated to assist the DTIC in creating and managing competitive and socially responsible business and consumer regulations. The DTIC publishes a list of Bills and Acts that govern its work at: http://www.theDTIC.gov.za/legislation/legislation-and-business-regulation/?hilite=%27IDZ%27 

South Africa’s Consumer Protection Act (2008) reinforces various consumer rights, including right of product choice, right to fair contract terms, and right of product quality. The law’s impact varies by industry, and businesses have adjusted their operations accordingly. A brochure summarizing the Consumer Protection Act can be found at: http://www.theDTIC.gov.za/wp-content/uploads/CP_Brochure.pdf . Similarly, the National Credit Act of 2005 aims to promote a fair and non-discriminatory marketplace for access to consumer credit and for that purpose to provide the general regulation of consumer credit and improves standards of consumer information. A brochure summarizing the National Credit Act can be found at: http://www.theDTIC.gov.za/wp-content/uploads/NCA_Brochure.pdf

International Regulatory Considerations

South Africa is a member of the African Continental Free Trade Area, which commenced trading in January 2021. It is a signatory to the SADC-EAC-COMESA Tripartite FTA and a member of the Southern Africa Customs Union (SACU), which has a common external tariff and tariff-free trade between its five members (South Africa, Botswana, Lesotho, Namibia, and Eswatini, formerly known as Swaziland). South Africa has free trade agreements with the Southern African Development Community (SADC); the Trade, Development and Cooperation Agreement (TDCA) between South Africa and the European Union (EU); the EFTA-SACU Free Trade Agreement between SACU and the European Free Trade Association (EFTA) – Iceland, Liechtenstein, Norway, and Switzerland; and the Economic Partnership Agreement (EPA) between the SADC EPA States (South Africa, Botswana, Namibia, Eswatini, Lesotho, and Mozambique) and the EU and its Member States. SACU and Mozambique (SACUM) and the United Kington (UK) signed an Economic Partnership Agreement (EPA) in September 2019.

South Africa is a member of the WTO. While it notifies some draft technical regulations to the Committee on Technical Barriers to Trade (TBT), it is often after implementation. In November 2017, South Africa ratified the WTO’s Trade Facilitation Agreement, implementing many of its commitments, including some Category B notifications. The South African Government is not party to the WTO’s Government Procurement Agreement (GPA).

Legal System and Judicial Independence

South Africa has a strong legal system composed of civil law inherited from the Dutch, common law inherited from the British, and African customary law. Generally, South Africa follows English law in criminal and civil procedure, company law, constitutional law, and the law of evidence, but follows Roman-Dutch common law in contract law, law of delict (torts), law of persons, and family law. South African company law regulates corporations, including external companies, non-profit, and for-profit companies (including state-owned enterprises). Funded by the Department of Justice and Constitutional Development, South Africa has district and magistrate courts across 350 districts and high courts for each of the provinces. Cases from Limpopo and Mpumalanga are heard in Gauteng. The Supreme Court of Appeals hears appeals, and its decisions may only be overruled by the Constitutional Court. South Africa has multiple specialized courts, including the Competition Appeal Court, Electoral Court, Land Claims Court, the Labor and Labor Appeal Courts, and Tax Courts to handle disputes between taxpayers and SARS. Rulings are subject to the same appeals process as other courts.

Laws and Regulations on Foreign Direct Investment

The February 2019 ratification of the Competition Amendment Bill (CAB) introduced, among other revisions, section 18A that mandates the President create an as-of-yet-unestablished committee comprised of 28 Ministers and officials chosen by the President to evaluate and intervene in a merger or acquisition by a foreign acquiring firm on the basis of protecting national security interests. The law also states that the President must identify and publish in the Gazette, the South African equivalent of the U.S. Federal Register, a list of national security interests including the markets, industries, goods or services, sectors or regions for mergers involving a foreign acquiring firm.

Competition and Antitrust Laws

The Competition Commission, separate from the above committee, is empowered to investigate, control, and evaluate restrictive business practices, abuse of dominant positions, and review mergers to achieve equity and efficiency. Its public website is www.compcom.co.za . The Competition Tribunal has jurisdiction throughout South Africa and adjudicates competition matters in accordance with the CAB. While the Commission is the investigation and enforcement agency, the Tribunal is the adjudicative body, very much like a court.

Expropriation and Compensation

Racially discriminatory property laws and land allocations during the colonial and apartheid periods resulted in highly distorted patterns of land ownership and property distribution in South Africa. Given land reform’s slow and mixed success, the National Assembly (Parliament) passed a motion in February 2018 to investigate amending the constitution (specifically Section 25, the “property clause”) to allow for land expropriation without compensation (EWC). Some politicians, think-tanks, and academics argue that Section 25 already allows for EWC in certain cases, while others insist that amendments are required to implement EWC more broadly. Parliament tasked an ad hoc Constitutional Review Committee composed of parliamentarians from various political parties to report back on whether to amend the constitution to allow EWC, and if so, how it should be done. In December 2018, the National Assembly adopted the committee’s report recommending a constitutional amendment. Following elections in May 2019 the new Parliament created an ad hoc Committee to Initiate and Introduce Legislation to Amend Section 25 of the Constitution. The Committee drafted constitutional amendment language explicitly allowing for EWC and accepted public comments on the draft language through March 2021. Parliament awaits the committee’s submission after granting a series of extensions to complete its work. Constitutional amendments require a two-thirds parliamentary majority (267 votes) to pass, as well as the support of six out of the nine provinces in the National Council of Provinces. Because no single political party holds such a majority, a two-third vote can only be achieved with the support of two or more political parties. Academics foresee EWC test cases in the next year primarily targeted at abandoned buildings in urban areas, informal settlements in peri-urban areas, and property with labor tenants in rural areas.

In October 2020, the Government of South Africa also published a draft expropriation bill in its Gazette, which would introduce the EWC concept into its legal system. The application of the draft’s provisions could conflict with South Africa’s commitments to international investors under its remaining investment protection treaties as well as its obligations under customary international law. Submissions closed in February 2021.

Existing expropriation law, including The Expropriation Act of 1975 (Act) and the Expropriation Act Amendment of 1992, entitles the government to expropriate private property for reasons of public necessity or utility. The decision is an administrative one. Compensation should be the fair market value of the property as agreed between the buyer and seller, or determined by the court per Section 25 of the Constitution.

In 2018, the government operationalized the 2014 Property Valuation Act that creates the office of Valuer-General charged with the valuation of property that has been identified for land reform or acquisition or disposal. The Act gives the government the option to expropriate property based on a formulation in the Constitution termed “just and equitable compensation.”

The Mineral and Petroleum Resources Development Act 28 of 2002 (MPRDA), enacted in 2004, gave the state ownership of South Africa’s mineral and petroleum resources. It replaced private ownership with a system of licenses controlled by the government and issued by the Department of Mineral Resources. Under the MPRDA, investors who held pre-existing rights were granted the opportunity to apply for licenses, provided they met the licensing criteria, including the achievement of certain B-BBEE objectives. Parliament passed amendment to the MPRDA in 2014 but the President never signed them. In August 2018, the Minister for the Department of Mineral Resources, Gwede Mantashe, called for the recall of the amendments so that oil and gas could be separated out into a new bill. He also announced the B-BBEE provisions in the new Mining Charter would not apply during exploration but would start once commodities were found and mining commenced. In November 2019, the newly merged Department of Mineral Resources and Energy (DMRE) published draft regulations to the MPRDA. In December 2019, the DMRE published the Draft Upstream Petroleum Resources Development Bill for public comment. Parliament continues to review this legislation. Oil and gas exploration and production is currently regulated under the Mineral and Petroleum Resources Development Act, 2002 (MPRDA), but the new Bill will repeal and replace the relevant sections pertaining to upstream petroleum activities in the MPRDA.

Dispute Settlement

ICSID Convention and New York Convention

South Africa is a member of the New York Convention of 1958 on the recognition and enforcement of foreign arbitration awards as implemented through the Recognition and Enforcement of Foreign Arbitral Awards Act, No. 40 of 1977 . It is not a member of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States or the World Bank’s International Center for the Settlement of Investment Disputes.

Investor-State Dispute Settlement

The 2015 Promotion of Investment Act removes the option for investor state dispute settlement through international courts typically afforded through bilateral investment treaties (BITs). Instead, investors disputing an action taken by the South African government must request the DTIC to facilitate the resolution by appointing a mediator. A foreign investor may also approach any competent court, independent tribunal, or statutory body within South Africa for the resolution of the dispute. Dispute resolution can be a time-intensive process in South Africa. If the matter is urgent, and the presiding judge agrees, an interim decision can be taken within days while the appeal process can take months or years. If the matter is a dispute of law and is not urgent, it may proceed by application or motion to be solved within months. Where there is a dispute of fact, the matter is referred to trial, which may take several years so there is a growing preference for Alternative Dispute Resolution.

International Commercial Arbitration and Foreign Courts

The Arbitration Act of 1965, which does not distinguish between domestic and international arbitration and is not based on UNCITRAL model law, governs arbitration in South Africa. South African courts retain discretion to hear a dispute over a contract using the law of a foreign jurisdiction. However, the South African court will interpret the contract with the law of the country or jurisdiction provided for in the contract. South Africa recognizes the International Chamber of Commerce, which supervises the resolution of transnational commercial disputes. It applies commercial and bankruptcy laws with consistency and has an independent, objective court system for enforcing property and contractual rights. Alternative Dispute Resolution is increasingly popular in South Africa for many reasons, including the confidentiality which can be imposed on the evidence, case documents, and the judgment. South Africa’s new Companies Act also provides a mechanism for Alternative Dispute Resolution.

Bankruptcy Regulations

South Africa’s bankruptcy regime grants many rights to debtors, including rejection of overly burdensome contracts, avoiding preferential transactions, and the ability to obtain credit during insolvency proceedings. South Africa ranks 68 out of 190 countries for resolving insolvency according to the 2020 World Bank Doing Business report, a drop from its 2019 ranking of 65.

Investment Incentives

The Public Investment Corporation SOC Limited (PIC) is an asset management firm wholly owned by the government of South Africa and is governed by the Public Investment Corporation Act, 2004 . PIC’s clients are mostly public sector entities, including the Government Employees Pension Fund (GEPF) and Unemployment Insurance Fund (UIF), among others. The PIC runs a diversified investment portfolio including listed equities, real estate, capital market, private equity, and impact investing. The PIC has been known to jointly finance foreign direct investment if the project will create social returns, primarily in the form of new employment opportunities for South Africans. South Africa also offers various investment incentives targeted at specific sectors or types of business activities, including tax allowances to support in the automotive sector and rebates for film and television production. More information regarding incentive programs may be found at: http://www.thedtic.gov.za/financial-and-non-financial-support/incentives/ 

Foreign Trade Zones/Free Ports/Trade Facilitation

South Africa designated its first Industrial Development Zone (IDZ) in 2001. IDZs offer duty-free import of production-related materials and zero VAT on materials sourced from South Africa, along with the right to sell in South Africa upon payment of normal import duties on finished goods. Expedited services and other logistical arrangements may be provided for small to medium-sized enterprises or for new foreign direct investment. Co-funding for infrastructure development is available from the DTIC. There are no exemptions from other laws or regulations, such as environmental and labor laws. The Manufacturing Development Board licenses IDZ enterprises in collaboration with the South African Revenue Service (SARS), which handles IDZ customs matters. IDZ operators may be public, private, or a combination of both. There are currently five IDZs in South Africa: Coega IDZ, Richards Bay IDZ, Dube Trade Port, East London IDZ, and Saldanha Bay IDZ. South Africa also has Special Economic Zones (SEZs) focused on industrial development. The SEZs encompass the IDZs but also provide scope for economic activity beyond export-driven industry to include innovation centers and regional development. There are six SEZs in South Africa: Atlantis SEZ, Nkomazi SEZ, Maliti-A-Phofung SEZ, Musina/Makhado SEZ, Tshwane SEZ, and O.R. Tambo SEZ. The broader SEZ incentives strategy allows for 15 percent Corporate Tax as opposed to the current 28 percent, Building Tax Allowance, Employment Tax Incentive, Customs Controlled Area (VAT exemption and duty free), and Accelerated 12i Tax Allowance. For more detailed information on SEZs, please see: http://www.theDTIC.gov.za/sectors-and-services-2/industrial-development/special-economic-zones/?hilite=%27SEZ%27 

Performance and Data Localization Requirements

Employment and Investor Requirements

Foreign investors who establish a business or invest in existing businesses in South Africa must show within twelve months of establishing the business that at least 60 percent of the total permanent staff are South African citizens or permanent residents. The Broad-Based Black Economic Empowerment (B-BBEE) program measures employment equity, management control, and ownership by historically disadvantaged South Africans for companies which do business with the government or bid on government tenders. Companies may consider the B-BBEE scores of their sub-contractors and suppliers, as their scores can sometimes contribute to or detract from the contracting company’s B-BBEE score.

A business visa is required for foreign investors or business owners. To qualify for a visa, investors must invest a prescribed financial capital contribution equivalent to R2.5 million (USD 178,000) and have at least R5 million (USD 356,000) in cash and capital available. The capital requirements may be reduced or waived if the investment qualifies under one of the following types of industries/businesses: information and communication technology; clothing and textile manufacturing; chemicals and bio-technology; agro-processing; metals and minerals refinement; automotive manufacturing; tourism; and crafts. The documentation required for obtaining a business visa is onerous and includes, among other requirements, a letter of recommendation from the DTIC regarding the feasibility of the business and its contribution to the national interest, and various certificates issued by a chartered or professional South African accountant. U.S. citizens have found the process lengthy, confusing, and difficult. Requirements frequently change mid-process. Many U.S. citizens use facilitation services.

In February 2021, the Minister of Home Affairs published the 2021 Critical Skills List for public comment, updating the 2014 version. This list forms the basis for granting business visas. Stakeholders are concerned that the list eliminates highly skilled jobs for which it is difficult to find local labor, particularly in ICT and engineering, which may have a negative impact on investment.

Goods, Technology, and Data Treatment

The government incentivizes the use of local content in goods and technology. The Protection of Personal Information Act (POPIA), which the government enacted in 2013 and which will enter fully into force in July 2021, regulates how personal information may be processed and under which conditions data may be transferred outside of South Africa. POPIA created an Information Regulator (IR) to draft and enforce regulations., Detailed guidance concerning transnational data transfers is scheduled to be released before July 2021. The IR acknowledges POPIA’s implementation will create substantial compliance costs for tech firms.

Investment Performance Requirements

There are no performance requirements on investments.

Real Property

The South African legal system protects and facilitates the acquisition and disposition of all property rights (e.g., land, buildings, and mortgages). Deeds must be registered at the Deeds Office. Banks usually register mortgages as security when providing finance for the purchase of property. Foreigners may purchase and own immovable property in South Africa without any restrictions, as foreigners are generally subject to the same laws as South African nationals. Foreign companies and trusts are also permitted to own property in South Africa if they are registered in South Africa as an external company. South Africa ranks 108 of 190 countries in registering property according to the 2020 World Bank Doing Business report.

Intellectual Property Rights

South Africa enforces intellectual property rights through civil and criminal procedures. It is a member of the World Intellectual Property Organization (WIPO) and in the process of acceding to the Madrid Protocol. 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/ . It is also a signatory to the WTO’s Trade-Related Aspects of Intellectual Property Rights Agreement (TRIPS).

Owners of patents and trademarks may license them locally, but when a patent license entails the payment of royalties to a non-resident licensor, the DTIC must approve the royalty agreement. Patents are granted for twenty years, usually with no option to renew. Trademarks are valid for an initial period of ten years, renewable for ten-year periods. A patent or trademark holder pays an annual fee to preserve ownership rights. All agreements relating to payment for applicable rights are subject to SARB approval. A royalty of up to four percent is the standard for consumer goods and up to six percent for intermediate and finished capital goods.

Literary, musical, and artistic works, as well as cinematographic films and sound recordings, are eligible for protection under the Copyright Act of 1978. New designs may be registered under the Designs Act of 1967, which grants copyrights for five years. The Counterfeit Goods Act of 1997 provides additional protection to owners of trademarks, copyrights, and certain marks under the Merchandise Marks Act of 1941. The Intellectual Property Laws Amendment Act of 1997 amended the Merchandise Marks Act of 1941, the Performers’ Protection Act of 1967, the Patents Act of 1978, the Copyright Act of 1978, the Trademarks Act of 1993, and the Designs Act of 1993 to bring South African intellectual property legislation into line with TRIPS.

To modernize its IPR regime further, the DTIC introduced the Copyright Amendment Bill (CB) and the Performers’ Protection Amendment Bill (PPA). The controversial bills remain under Parliamentary review after being returned by the President in June 2020 on constitutional grounds. Stakeholders have raised several concerns, including the CB bill’s application of “fair use,” and clauses in both bills that allow the DTIC Minister to set royalty rates for visual artistic work or equitable renumeration for direct or indirect uses of copyrighted works. Additional changes to South Africa’s IPR regime are under consideration through a draft DTIC policy document, Phase 1 of the Intellectual Property Policy of the Republic of South Africa.

Capital Markets and Portfolio Investment

South Africa recognizes the importance of foreign capital in financing persistent current account and budget deficits, and South Africa’s financial markets are regarded as some of the most sophisticated among emerging markets. A sound legal and regulatory framework governs financial institutions and transactions. The fully independent South African Reserve Bank (SARB) regulates a wide range of commercial, retail and investment banking services according to international best practices, such as Basel III, and participates in international forums such as the Financial Stability Board and G-20 Finance Ministers and Central Bank Governors. The Johannesburg Stock Exchange (JSE) serves as the front-line regulator for listed firms but is supervised by the Financial Services Board (FSB). The FSB also oversees other non-banking financial services, including other collective investment schemes, retirement funds and a diversified insurance industry. The South African government has committed to tabling a Twin Peaks regulatory architecture to provide a clear demarcation of supervisory responsibilities and consumer accountability and to consolidate banking and non-banking regulation.

South Africa has access to deep pools of capital from local and foreign investors that provides sufficient scope for entry and exit of large positions. Financial sector assets amount to almost three times the country’s GDP, and the JSE is the largest on the continent with capitalization of approximately USD 670 billion and 335 companies listed on the main, alternative, and other smaller boards as of January 2021. Non-bank financial institutions (NBFI) hold about two thirds of financial assets. The liquidity and depth provided by NBFIs make these markets attractive to foreign investors, who hold more than a third of equities and government bonds, including sizeable positions in local-currency bonds. A well-developed derivative market and a currency that is widely traded as a proxy for emerging market risk allows investors considerable scope to hedge positions with interest rate and foreign exchange derivatives.

SARB’s exchange control policies permit authorized currency dealers, to buy and borrow foreign currency freely on behalf of domestic and foreign clients. The size of transactions is not limited, but dealers must report all transactions to SARB. Non-residents may purchase securities without restriction and freely transfer capital in and out of South Africa. Local individual and institutional investors are limited to holding 25 percent of their capital outside of South Africa.

Banks, NBFIs, and other financial intermediaries are skilled at assessing risk and allocating credit based on market conditions. Foreign investors may borrow freely on the local market. In recent years, the South African auditing profession has suffered significant reputational damage with allegations that two large foreign firms aided, and abetted irregular client management practices linked to the previous administration, or engaged in delinquent oversight of listed client companies. South Africa’s WEF competitiveness rating for auditing and reporting fell from number one in the world in 2016, to number 60 in 2019.

Money and Banking System

South African banks are well capitalized and comply with international banking standards. There are 19 registered banks in South Africa and 15 branches of foreign banks. Twenty-nine foreign banks have approved local representative offices. Five banks – Standard, ABSA, First Rand (FNB), Capitec, and Nedbank – dominate the sector, accounting for over 85 percent of the country’s banking assets, which total over USD 390 billion. SARB regulates the sector according to the Bank Act of 1990. There are three alternatives for foreign banks to establish local operations, all of which require SARB approval: separate company, branch, or representative office. The criteria for the registration of a foreign bank are the same as for domestic banks. Foreign banks must include additional information, such as holding company approval, a letter of “comfort and understanding” from the holding company, and a letter of no objection from the foreign bank’s home regulatory authority. More information on the banking industry may be found at www.banking.org.za .

The Financial Services Board (FSB) governs South Africa’s non-bank financial services industry (see website: www.fsb.co.za/ ). The FSB regulates insurance companies, pension funds, unit trusts (i.e., mutual funds), participation bond schemes, portfolio management, and the financial markets. The JSE Securities Exchange SA (JSE), the sixteenth largest exchange in the world measured by market capitalization, enjoys the global reputation of being one of the best regulated. Market capitalization stood at USD 670 billion as of January 2021, with 335 firms listed. The Bond Exchange of South Africa (BESA) is licensed under the Financial Markets Control Act. Membership includes banks, insurers, investors, stockbrokers, and independent intermediaries. The exchange consists principally of bonds issued by government, state-owned enterprises, and private corporations. The JSE acquired BESA in 2009. More information on financial markets may be found at www.jse.co.za . Non-residents can finance 100 percent of their investment through local borrowing. A finance ratio of 1:1 also applies to emigrants, the acquisition of residential properties by non-residents, and financial transactions such as portfolio investments, securities lending and hedging by non-residents.

Foreign Exchange and Remittances

Foreign Exchange

The SARB Exchange Control Department administers foreign exchange policy. An authorized foreign exchange dealer, normally one of the large commercial banks, must handle international commercial transactions and report every purchase of foreign exchange, irrespective of the amount. Generally, there are only limited delays in the conversion and transfer of funds. Due to South Africa’s relatively closed exchange system, no private player, however large, can hedge large quantities of Rand for more than five years. While non-residents may freely transfer capital in and out of South Africa, transactions must be reported to authorities. Non-residents may purchase local securities without restriction. To facilitate repatriation of capital and profits, foreign investors should ensure an authorized dealer endorses their share certificates as “non-resident.” Foreign investors should also be sure to maintain an accurate record of investment.

Remittance Policies

Subsidiaries and branches of foreign companies in South Africa are considered South African entities, treated legally as South African companies, and subject to SARB’s exchange control. South African companies generally may freely remit to non-residents repayment of capital investments; dividends and branch profits (provided such transfers are made from trading profits and are financed without resorting to excessive local borrowing); interest payments (provided the rate is reasonable); and payment of royalties or similar fees for the use of know-how, patents, designs, trademarks or similar property (subject to SARB prior approval).

While South African companies may invest in other countries, SARB approval/notification is required for investments over R500 million (USD 33.5 million). South African individuals may freely invest in foreign firms listed on South African stock exchanges. Individual South African taxpayers in good standing may make investments up to a total of R4 million (USD 266,000) in other countries. As of 2010, South African banks are permitted to commit up to 25 percent of their capital in direct and indirect foreign liabilities. In addition, mutual and other investment funds can invest up to 25 percent of their retail assets in other countries. Pension plans and insurance funds may invest 25 percent of their retail assets in other countries.

Before accepting or repaying a foreign loan, South African residents must obtain SARB approval. SARB must also approve the payment of royalties and license fees to non-residents when no local manufacturing is involved. DTIC must approve the payment of royalties related to patents on manufacturing processes and products. Upon proof of invoice, South African companies may pay fees for foreign management and other services provided such fees are not calculated as a percentage of sales, profits, purchases, or income.

Sovereign Wealth Funds

Although the President and the Finance Minister announced in February 2020 the aim to create a Sovereign Wealth Fund, no action has been taken.

State-owned enterprises (SOEs) play a significant role in the South African economy in key sectors such as electricity, transport (air, rail, freight, and pipelines), and telecommunications. Limited competition is allowed in some sectors (e.g., telecommunications and air). The government’s interest in these sectors often competes with and discourages foreign investment.

The Department of Public Enterprises (DPE) oversees in full or in part for seven of the approximately 700 SOEs at the national, provincial, and local levels. These include: Alexkor (diamonds); Denel (military equipment); Eskom (electricity generation, transmission, and distribution); South African Express and Mango (budget airlines); South African Airways (national carrier); South African Forestry Company (SAFCOL); and Transnet (transportation). The seven SOEs employ approximately 105,000 people. For other national-level SOEs, the appropriate cabinet minister acts as shareholder on behalf of the state. The Department of Transport, for example, oversees South African’s National Roads Agency (SANRAL), Passenger Rail Agency of South Africa (PRASA), and Airports Company South Africa (ACSA), which operates nine of South Africa’s airports. The Department of Communications oversees the South African Broadcasting Corporation (SABC).

SOEs under DPE’s authority posted a combined loss of R13.9 billion (USD 0.9 billion) in 2019. Many are plagued by mismanagement and corruption, and repeated government bailouts have exposed the public sector’s balance sheet to sizable contingent liabilities. The debt of Eskom alone represents about 10 percent of GDP of which two-thirds is guaranteed by government, and the company’s direct cost to the budget has exceeded 9 percent of GDP since 2008/9.

Eskom, provides generation, transmission, and distribution for over 90 percent of South Africa’s electricity of which 80 percent comes from 15 coal-fired power plants. Eskom’s coal plants are an average of 39 years old, and a lack of maintenance has caused unplanned breakdowns and rolling blackouts, known locally as “load shedding,” as old coal plants struggle to keep up with demand. Load shedding reached a record 859 hours in 2020 costing the economy an estimated $7 billion and is expected to continue for the next several years until the South African Government can increase generating capacity and increase its Energy Availability Factor (EAF). In October 2019 the DMRE finalized its Integrated Resource Plan (IRP) for Electricity, which outlines South Africa’s policy roadmap for new power generation until 2030, which includes replacing 10,000 Mega Watts (MW) of coal-fired generation by 2030 with a mix of technologies, including renewables, gas and coal. The IRP also leaves the possibility open for procurement of nuclear technology at a “scale and pace that flexibly responds to the economy and associated electricity demand” and DMRE issued a Request for Information on new nuclear build in 2020. In accordance with the IRP, the South African government recently approved almost 14,000 Mega Watts (MW) of power to address chronic electricity shortages. The government announced the long-awaited Bid Window 5 (BW5) of the Renewable Energy Independent Power Procurement Program (REIPPP) in September 2020, the primary method by which renewable energy has been introduced into South Africa. The REIPP relies primarily on private capital and since the program launched in 2011 it has already attracted approx. ZAR 210 billion (USD 14 billion) of investment into the country. All three major credit ratings agencies have downgraded Eskom’s debt following Moody’s downgrade of South Africa’s sovereign debt rating in March 2020, which could impact investors’ ability to finance energy projects.

Transnet National Ports Authority (TNPA), the monopoly responsible for South Africa’s ports, charges some of the highest shipping fees in the world. High tariffs on containers subsidize bulk shipments of coal and iron. According to the South African Ports Regulator, raw materials exporters paid as much as one quarter less than exporters of finished products. TNPA is a division of Transnet, a state-owned company that manages the country’s port, rail, and pipeline networks. In April 2012, Transnet launched its Market Driven Strategy (MDS), a R336 billion (USD 28 billion) investment program to modernize its port and rail infrastructure. In March 2014, Transnet announced an average overall tariff increase of 8.5 percent at its ports to finance a USD 240 million modernization effort. In 2016, Transnet reported it had invested R124 billion (USD 10.3 billion) in the previous four years in rail, ports, and pipeline infrastructure. In May 2020 S&P downgraded Transnet’s local currency rating from BB to BB- based on a generally negative outlook for South Africa’s economy rather than Transnet’s outlook specifically.

Direct aviation links between the United States and South Africa have been sharply curtailed by the COVID-19 pandemic. The emergence of a more contagious South African strain of COVID-19 in December 2020 spurred a deadly spike in infections and led the United States and many African countries to restrict entry of persons traveling from South Africa. Consequently, many airlines suspended transcontinental flights between South Africa and Europe, as well as the United States. United Airlines and Delta Air Lines provided regular service between Atlanta (Delta) and Newark (United) to Johannesburg and Cape Town before the pandemic, but both airlines have suspended service indefinitely pending resumption of sufficient demand. The state-owned carrier, South African Airways (SAA), entered business rescue in December 2019 and suspended all operations indefinitely in September 2020. The pandemic exacerbated SAA’s already dire financial straits and complicated its attempts to find a strategic equity partner to help it resume operations. Industry experts doubt the airline will be able to resume operations.

The telecommunications sector, while advanced for the continent, is hampered by regulatory uncertainty and poor implementation of the digital migration, both of which contribute to the high cost of data. In 2006, South Africa agreed to meet an International Telecommunication Union deadline to achieve analogue-to-digital migration by June 1, 2015. As of March 2021, South Africa has initiated but not completed the migration due to legal delays. Until this process is finalized, South Africa will not be able to effectively allocate the resulting additional spectrum. The independent communications regulator initiated a spectrum auction in September 2020, which was enjoined by court action in February 2021 following suits by two of the three biggest South African telecommunications companies. The regulator temporarily released high-demand spectrum to mobile network operators in June 2020 and extended the temporary release in March 2021.

Privatization Program

The government has not taken any concrete action to privatize SOEs. Candidates for unbundling are Eskom and defense contractor Denel.

Responsible Business Conduct (RBC) is well-developed in South Africa, driven in part by the socio-economic development element of B-BBEE policy as firms have largely aligned their RBC activities to B-BBEE requirements. The B-BBEE target is one percent of net profit after tax spent on RBC, and at least 75 percent of the RBC activity must benefit historically disadvantaged South Africans and is directed primarily towards non-profit organizations involved in education, social and community development, and health.

The South African mining sector follows the rule of law and encourages adherence to the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Afflicted and High-Risk Areas. South Africa is a founding member of the Kimberley Process Certification Scheme (KPCS) aimed at preventing conflict diamonds from entering the market. It does not participate in the Extractive Industries Transparency Initiative (EITI). South African mining, labor and security legislation seek to embody the Voluntary Principles on Security and Human Rights. Mining laws and regulations allow for the accounting of all revenues from the extractive sector in the form of mining taxes, royalties, fees, dividends, and duties.

Additional Resources 

Department of State

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

Department of Labor

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

South Africa has a robust anti-corruption framework, but laws are inadequately enforced, and public sector accountability is low. High-level political interference has undermined the country’s National Prosecuting Authority (NPA). “State capture”, a term used to describe systemic corruption of the state’s decision-making processes by private interests, is synonymous with the administration of former president Jacob Zuma. In response to widespread calls for accountability, President Ramaphosa launched four separate judicial commissions of inquiry to investigate corruption, fraud, and maladministration, including in the Public Investment Corporation, South African Revenue Service, and the NPA which have revealed pervasive networks of corruption across all levels of government.

The Department of Public Service and Administration coordinates government initiatives against corruption, and South Africa’s Directorate for Priority Crime Investigations focuses on organized crime, economic crimes, and corruption. The Office of the Public Protector, a constitutionally mandated body, investigates government abuse and mismanagement. The Prevention and Combating of Corrupt Activities Act (PCCA) officially criminalizes corruption in public and private sectors and codifies specific offenses (such as extortion and money laundering), making it easier for courts to enforce the legislation. Applying to both domestic and foreign organizations doing business in the country, the PCCA covers receiving or offering bribes, influencing witnesses and tampering with evidence in ongoing investigations, obstruction of justice, contracts, procuring and withdrawal of tenders, and conflict of interests, among other areas. Inconsistently implemented, the PCCA lacks whistleblower protections. The Promotion of Access to Information Act and the Public Finance Management Act call for increased access to public information and review of government expenditures.

UN Anticorruption Convention, OECD Convention on Combatting Bribery

South Africa is a signatory to the Anticorruption Convention and the OECD Convention on Combatting Bribery. South Africa is also a party to the SADC Protocol Against Corruption, which seeks to facilitate and regulate cooperation in matters of corruption amongst Member States and foster development and harmonization of policies and domestic legislation related to corruption. The Protocol defines ‘acts of corruption,’ preventative measures, jurisdiction of Member States, as well as extradition. http://www.sadc.int/files/7913/5292/8361/Protocol_Against_Corruption2001.pdf

Resources to Report Corruption

To report corruption to the government:

Advocate Busisiwe Mkhwebane
Public Protector
Office of the Public Protector, South Africa
175 Lunnon Street, Hillcrest Office Park, Pretoria 0083
Anti-Corruption Hotline: +27 80 011 2040 or +27 12 366 7000
http://www.pprotect.org  or customerservice@pprotect.org 

Or for a non-government agency:

David Lewis
Executive Director
Corruption Watch
87 De Korte Street, Braamfontein/Johannesburg 2001 +27 80 002 3456 or +27 11 242 3900
+27 80 002 3456 or +27 11 242 3900
http://www.corruptionwatch.org.za/content/make-your-complaint 
info@corruptionwatch.org.za 

South Africa has strong institutions and is relatively stable, but it also has a history of politically motivated violence and civil disturbance. Violent protests against the lack of effective government service delivery are common. Killings of, and by, mostly low-level political and organized crime rivals occur regularly. In May 2018, President Ramaphosa set up an inter-ministerial committee in the security cluster to serve as a national task force on political killings. The task force includes the Police Minister‚ State Security Minister‚ Justice Minister‚ National Prosecuting Authority, and the National Police Commissioner. The task force ordered multiple arrests, including of high-profile officials, in what appears to be a crackdown on political killings. Criminal threats and labor-related unrest have impacted U.S. companies in the past.

The unemployment rate in the fourth quarter of 2020 was 32.5%. The results of the Quarterly Labour Force Survey (QLFS) for the fourth quarter of 2020 show that the number of employed persons increased by 333,000 to 15 million in the fourth quarter of 2020. The number of unemployed persons increased by 701, 000 to 7.2 million compared to the third quarter of 2020. The youth unemployment (ages 15-24) rate was 63.2% in the fourth quarter of 2020.

The South African government has replaced apartheid-era labor legislation with policies that emphasize employment security, fair wages, and decent working conditions. Under the aegis of the National Economic Development and Labor Council (NEDLAC), government, business, and organized labor negotiate all labor laws, apart from laws pertaining to occupational health and safety. Workers may form or join trade unions without previous authorization or excessive requirements. Labor unions that meet a locally negotiated minimum threshold of representation (often, 50 percent plus one union member) are entitled to represent the entire workplace in negotiations with management. As the majority union or representative union, they may also extract agency fees from non-union members present in the workplace. In some workplaces and job sectors, this financial incentive has encouraged inter-union rivalries, including intimidation and violence.

There are 205 trade unions registered with the Department of Labor as of February 2019 (latest published figures), up from 190 the prior year, but down from the 2002 high of 504. According to the 2019 Fourth Quarter Labor Force Survey (QLFS) report from Statistics South Africa (StatsSA), 4.071 million workers belonged to a union, an increase of 30,000 from the fourth quarter of 2018. Department of Labor statistics indicate union density declined from 45.2 percent in 1997 to 24.7 percent in 2014, the most recent data available. Using StatsSA data, however, union density can be calculated: The February 2020 QLFS reported 4.071 million union members and 13.868 million employees, for a union density of 29.4 percent.

The right to strike is protected on issues such as wages, benefits, organizational rights disputes, and socioeconomic interests of workers. Workers may not strike because of disputes where other legal recourse exists, such as through arbitration. South Africa has robust labor dispute resolution institutions, including the Commission for Conciliation, Mediation and Arbitration (CCMA), the bargaining councils, and specialized labor courts of both first instance and appellate jurisdiction. The government does not waive labor laws for foreign direct investment. The number of working days lost to strike action fell to 55,000 in 2020, compared with 1.2 million in 2019. The sharp decrease is attributable to the government’s imposition of the National State of Disaster at the onset of the COVID-19 pandemic, and the accompanying lockdown that commenced on March 26, which forced many businesses either to close or lay off workers and implement wage cuts or shorten time of work. The fact that many wage negotiations were put on hold also led to a reduction in strike figures.

Collective bargaining is a cornerstone of the current labor relations framework. As of February 2019, the South Africa Department of Labor listed 39 private sector bargaining councils through which parties negotiate wages and conditions of employment. Per the Labor Relations Act, the Minister of Labor must extend agreements reached in bargaining councils to non-parties of the agreement operating in the same sector. Employer federations, particularly those representing small and medium enterprises (SMEs) argue the extension of these agreements – often reached between unions and big business – negatively impacts SMEs. In 2019, the average wage settlement resulted in a 7.1 percent wage increase, on average 2.9 percent above the increase in South Africa’s consumer price index (latest information available).

Major labor legislation includes:

South Africa’s current national minimum wage is R21.69/hour, with lower rates for domestic workers (R19.09/hour). The rate is subject to annual increases by the National Minimum Wage Commission as approved by parliament and signed by the President. Employers and employees are each required to pay one percent of wages to the national unemployment fund, which will pay benefits based on reverse sliding scale of the prior salary, up to 58 percent of the prior wage, for up to 34 weeks. The Labor Relations Act (LRA) outlines dismissal guidelines, dispute resolution mechanisms, and retrenchment guideline. The Act enshrines the right of workers to strike and of management to lock out striking workers. It created the Commission on Conciliation, Mediation, and Arbitration (CCMA), which mediates and arbitrates labor disputes as well as certifies bargaining council impasses for strikes to be called legally.

The Basic Conditions of Employment Act (BCEA) establishes a 45-hour workweek, standardizes time-and-a-half pay for overtime, and authorizes four months of maternity leave for women. Overtime work must be conducted through an agreement between employees and employers and may not be more than 10 hours a week. The law stipulates rest periods of 12 consecutive hours daily and 36 hours weekly and must include Sunday. The law allows adjustments to rest periods by mutual agreement. A ministerial determination exempted businesses employing fewer than 10 persons from certain provisions of the law concerning overtime and leave. Farmers and other employers may apply for variances. The law applies to all workers, including foreign nationals and migrant workers, but the government did not prioritize labor protections for workers in the informal economy. The law prohibits employment of children under age 15, except for work in the performing arts with appropriate permission from the Department of Labor.

The Employment Equity Act of 1998 (EEA), amended in 2014, protects workers against unfair discrimination on the grounds of race, age, gender, religion, marital status, pregnancy, family responsibility, ethnic or social origin, color, sexual orientation, disability, conscience, belief, political, opinion, culture, language, HIV status, birth, or any other arbitrary ground. The EEA further requires large- and medium-sized companies to prepare employment equity plans to ensure that historically disadvantaged South Africans, as well as women and disabled persons, are adequately represented in the workforce. More information regarding South African labor legislation may be found at: www.labour.gov.za/legislation 

* Source for Host Country Data: N/A

Shelbie Legg
Trade and Investment Officer
877 Pretorius Street
Arcadia, Pretoria 0083 +27 (0)12-431-4343
+27 (0)12-431-4343
LeggSC@state.gov 

Policies Towards Foreign Direct Investment  

Turkey acknowledges that it needs to attract significant new foreign direct investment (FDI) to meet its ambitious development goals.  As a result, Turkey has one of the most liberal legal regimes for FDI among Organization for Economic Cooperation and Development (OECD) members.  According to the Central Bank of Turkey’s balance of payments data, Turkey attracted a total of USD 5.67 billion of FDI in 2020, almost USD 200 million down from USD 5.87 billion in 2019.  This figure is the lowest FDI figure for Turkey in the last 16 years, and likely reflects a need to improve enforcement of international trade rules, ensure the transparency and timely execution of judicial awards, increase engagement with foreign investors on policy issues, and to implement consistent monetary and fiscal economic policies to promote strong, sustainable, and balanced growth.  Turkey also needs to take other political measures to increase stability and predictability for investors.  A stable banking sector, tight fiscal controls, efforts to reduce the size of the informal economy, increased labor market flexibility, improved labor skills, and continued privatization of state-owned enterprises would, if pursued, have the potential to improve the investment environment in Turkey.

Most sectors open to Turkish private investment are also open to foreign participation and investment.  All investors, regardless of nationality, face similar challenges:  excessive bureaucracy, a slow judicial system, relatively high and inconsistently applied taxes, and frequent changes in the legal and regulatory environment.  Structural reforms that would create a more transparent, equal, fair, and modern investment and business environment remain stalled.  Venture capital and angel investing are still relatively new in Turkey.

Turkey does not screen, review, or approve FDI specifically.  However, the government has established regulatory and supervisory authorities to regulate different types of markets.  Important regulators in Turkey include the Competition Authority; Energy Market Regulation Authority; Banking Regulation and Supervision Authority; Information and Communication Technologies Authority; Tobacco, Tobacco Products and Alcoholic Beverages Market Regulation Board; Privatization Administration; Public Procurement Authority; Radio and Television Supreme Council; and Public Oversight, Accounting and Auditing Standards Authority.  Some of the aforementioned authorities screen as needed without discrimination, primarily for tax audits.  Screening mechanisms are executed to maintain fair competition and for other economic benefits.  If an investment fails a review, possible outcomes can vary from a notice to remedy, which allows for a specific period of time to correct the problem, to penalty fees.  The Turkish judicial system allows for appeals of any administrative decision, including tax courts that deal with tax disputes.

Limits on Foreign Control and Right to Private Ownership and Establishment  

There are no general limits on foreign ownership or control.  However, there is increasing pressure in some sectors for foreign investors to partner with local companies and transfer technology, and some discriminatory barriers to foreign entrants, on the basis of “anti-competitive practices,” especially in the information and communication technology (ICT) sector or pharmaceuticals.  In many areas Turkey’s regulatory environment is business-friendly.  Investors can establish a business in Turkey irrespective of nationality or place of residence.  There are no sector-specific restrictions that discriminate against foreign investor access, which are prohibited by World Trade Organization (WTO) Regulations.

Other Investment Policy Reviews 

The OECD published an Environmental Performance Review for Turkey in February 2019, noting the country was the fastest growing among OECD members.  Turkey’s most recent investment policy review through the World Trade Organization (WTO) was conducted in March 2016.  Turkey has cooperated with the World Bank to produce several reports on the general investment climate that can be found at: http://www.worldbank.org/en/country/turkey/research. 

Business Facilitation  

The Presidency of the Republic of Turkey Investment Office is the official organization for promoting Turkey’s investment opportunities to the global business community and assisting investors before, during, and after their entry into Turkey.  Its website is clear and easy to use, with information about legislation and company establishment. (http://www.invest.gov.tr/en-US/investmentguide/investorsguide/Pages/EstablishingABusinessInTR.aspx).  The website is also where foreigners can register their businesses.

The conditions for foreign investors setting up a business and transferring shares are the same as those applied to local investors.  International investors may establish any form of company set out in the Turkish Commercial Code (TCC), which offers a corporate governance approach that meets international standards, fosters private equity and public offering activities, creates transparency in managing operations, and aligns the Turkish business environment with EU legislation as well as with the EU accession process.

Turkey defines micro, small, and medium-sized enterprises according to Decision No. 2018/11828 of the Official Gazette dated June 2, 2018:

• Micro-sized enterprises: fewer than 10 employees and less than or equal to 3 million Turkish lira in net annual sales or financial statement.
• Small-sized enterprises: fewer than 50 employees and less than or equal to 25 million Turkish lira in net annual sales or financial statement.
• Medium-sized enterprises: fewer than 250 employees and less than or equal to 125 million Turkish lira in net annual sales or financial statement.

Outward Investment

The government promotes outward investment via investment promotion agencies and other platforms.  It does not restrict domestic investors from investing abroad.

Since 1962, Turkey has negotiated and signed agreements for the reciprocal promotion and protection of investments.  As of 2020, Turkey has 81 bilateral investment agreements in force with: Afghanistan, Albania, Argentina, Austria, Australia, Azerbaijan, Bahrain, Bangladesh, Belarus, Belgium, Bosnia and Herzegovina, Bulgaria, China, Croatia, Cuba, Czech Republic, Denmark, Egypt, Estonia, Ethiopia, Finland, France, Georgia, Germany, Greece, Guatemala, Hungary, India, Indonesia, Iran, Israel, Italy, Japan, Jordan, Kazakhstan, Kosovo, Kuwait, Kyrgyzstan, Latvia, Lebanon, Libya, Lithuania, Luxembourg, Macedonia, Malaysia, Malta, Mexico, Moldova, Mongolia, Mauritius, Morocco, Netherlands, Oman, Saudi Arabia, Pakistan, Philippines, Poland, Portugal, Qatar, Romania, Russia, Serbia, Senegal, Singapore, Slovakia, Slovenia, South Korea, Spain, Sweden, Switzerland, Syria, Tajikistan, Tanzania, Thailand, Tunisia, Turkmenistan, United Arab Emirates, United Kingdom, United States, Ukraine, Uzbekistan, and Yemen.

Turkey has a bilateral taxation treaty with the United States.

Since 1962, Turkey has negotiated and signed agreements for the reciprocal promotion and protection of investments.  As of 2020, Turkey has 81 bilateral investment agreements in force with: Afghanistan, Albania, Argentina, Austria, Australia, Azerbaijan, Bahrain, Bangladesh, Belarus, Belgium, Bosnia and Herzegovina, Bulgaria, China, Croatia, Cuba, Czech Republic, Denmark, Egypt, Estonia, Ethiopia, Finland, France, Georgia, Germany, Greece, Guatemala, Hungary, India, Indonesia, Iran, Israel, Italy, Japan, Jordan, Kazakhstan, Kosovo, Kuwait, Kyrgyzstan, Latvia, Lebanon, Libya, Lithuania, Luxembourg, Macedonia, Malaysia, Malta, Mexico, Moldova, Mongolia, Mauritius, Morocco, Netherlands, Oman, Saudi Arabia, Pakistan, Philippines, Poland, Portugal, Qatar, Romania, Russia, Serbia, Senegal, Singapore, Slovakia, Slovenia, South Korea, Spain, Sweden, Switzerland, Syria, Tajikistan, Tanzania, Thailand, Tunisia, Turkmenistan, United Arab Emirates, United Kingdom, United States, Ukraine, Uzbekistan, and Yemen.

Turkey has a bilateral taxation treaty with the United States.

Investment Incentives

Turkey’s regional incentives program divides the country into six different zones, providing the following benefits to investors:  corporate tax reduction; customs duty exemption; value added tax (VAT) exemption and VAT refund; employer’s share social security premium support; income tax withholding allowance; land allocation; and interest rate support for investment loans.  The program was launched in 2012; more detailed information can be found at the Presidency of the Republic of Turkey Investment Office website:  https://www.invest.gov.tr/en/investmentguide/pages/incentives-guide.aspx.   In a policy speech delivered on March 12, 2021, President Erdogan stated that Turkey will prioritize incentives for high-tech FDI and provide long-term loan support to investments in Turkey’s less developed southeast region (Zones 5 and 6).  Additional measures may be forthcoming.

The incentives program gives priority to high-tech, high-value-added, globally competitive sectors and includes regional incentive programs to reduce regional economic disparities and increase competitiveness.  The investment incentives’ “tiered” system provides greater incentives to invest in less developed parts of the country, and is designed to encourage investments with the potential to reduce dependency on the importation of intermediate goods seen as vital to the country’s strategic sectors.  Other primary objectives are to reduce the current account deficit and unemployment, increase the level of support instruments, promote clustering activities, and support investments to promote technology transfer.  The map and explanation of the program can be found at:  www.invest.gov.tr/en-US/Maps/Pages/InteractiveMap.aspx

Foreign firms are eligible for research and development (R&D) incentives if the R&D is conducted in Turkey.  However, investors, especially in the technology sector, say that Turkey has a retrograde brick-and-mortar definition of R&D that overlooks other types of R&D investments (such as in internet platform technologies).  Turkey is seeking to foster entrepreneurship and small and medium-sized enterprises (SMEs).  Through the Small and Medium Enterprises Development Organization (KOSGEB), the Government of Turkey provides various incentives for innovative ideas and cutting-edge technologies, in addition to providing SMEs easier access to medium and long-term financing.  There are also a number of technology development zones (TDZs) in Turkey where entrepreneurs are given assistance in commercializing business ideas.  The Turkish Government provides support to TDZs, including infrastructure and facilities, exemption from income and corporate taxes for profits derived from software and R&D activities, exemption from all taxes for the wages of researchers, software, and R&D personnel employed within the TDZVAT, corporate tax exemptions for IT-specific sectors, and customs and duties exemptions.

Turkey’s Scientific and Technological Research Council (TUBITAK) has special programs for entrepreneurs in the technology sector, and the Turkish Technology Development Foundation (TTGV) has programs that provide capital loans for R&D projects and/or cover R&D-related expenses.  Projects eligible for such incentives include concept development, technological research, technical feasibility research, laboratory studies to transform concept into design, design and sketching studies, prototype production, construction of pilot facilities, test production, patent and license studies, and activities related to post-scale problems stemming from product design.  TUBITAK also has a Technology Transfer Office Support Program, which provides grants to establish Technology Transfer Offices (TTO) in Turkey.

Foreign Trade Zones/Free Ports/Trade Facilitation

There are no restrictions on foreign firms operating in any of Turkey’s 21 free zones.  The zones are open to a wide range of activities, including manufacturing, storage, packaging, trading, banking, and insurance.  Foreign products enter and leave the free zones without imposition of customs or duties if products are exported to third country markets.  Income generated in the zones is exempt from corporate and individual income taxation and from the value-added tax, but firms are required to make social security contributions for their employees.  Additionally, standardization regulations in Turkey do not apply to the activities in the free zones, unless the products are imported into Turkey.  Sales to the Turkish domestic market are allowed with goods and revenues transported from the zones into Turkey subject to all relevant import regulations.

Taxpayers who possessed an operating license as of February 6, 2004, do not have to pay income or corporate tax on their earnings in free zones for the duration of their license.  Earnings based on the sale of goods manufactured in free zones are exempt from income and corporate tax until the end of the year in which Turkey becomes a member of the European Union.  Earnings secured in a free zone under corporate tax immunity and paid as dividends to real person shareholders in Turkey, or to real person or legal-entity shareholders abroad, are subject to 10 percent withholding tax.  See the Ministry of Trade’s website:  https://www.ticaret.gov.tr/serbest-bolgeler.

Performance and Data Localization Requirements  

The government mandates a local employment ratio of five Turkish citizens per foreign worker.  These schemes do not apply equally to senior management and boards of directors, but their numbers are included in the overall local employment calculations.  Foreign legal firms are forbidden from working in Turkey except as consultants; they cannot directly represent clients and must partner with a local law firm.  There are no onerous visa, residence, work permits or similar requirements inhibiting mobility of foreign investors and their employees.  There are no known government-imposed conditions on permissions to invest.

Recent laws targeting the Information and Communication Technology (ICT) sector have increased regulations on data, social media, online marketing, online broadcasting, tax collection, and payment platforms.  In particular, ICT and other companies report GOT pressure to localize data, which it views as a precursor to greater GOT access to user information and source code.  Law #6493 on Payment and Security Systems, Payment Services and e-money Institutions, also requires financial institutions to establish servers in Turkey in order to localize data.  The Turkish Banking Regulation and Supervision Agency (BDDK) is the authority that issues business licenses as long as companies 1) localize their IT systems in Turkey, and 2) keep the original data, not copies, in Turkey.  Regulations on data localization, internet content, and taxation/licensing have resulted in the departure of several U.S. tech companies from the Turkish market, and has chilled investment by other possible entrants to the e-commerce and e-payments sectors.  The laws potentially affect all companies that collect private user data, such as payment information provided online for a consumer purchase.

Turkey enacted the Personal Data Protection Law in April 2016.  The law regulates all operations performed upon personal data including obtaining, recording, storage, and transfer to third parties or abroad.  For all data previously processed before the law went into effect, there was a two-year transition period.  After two years, all data had to be compliant with new legislation requirements, erased, or anonymized.  All businesses are urged to assess how they currently collect and store data to determine vulnerabilities and risks in regard to legal obligations.  The law created the Data Protection Authority (KVKK), which is charged with monitoring and enforcing corporate data use.

There are no performance requirements imposed as a condition for establishing, maintaining, or expanding investment in Turkey.  GOT requirements for disclosure of proprietary information as part of the regulatory approval process are consistent with internationally accepted practices, though some companies, especially in the pharmaceutical sector, worry about data protection during the regulatory review process.  Enterprises with foreign capital must send their activity report submitted to shareholders, their auditor’s report, and their balance sheets to the Ministry of Trade, Free Zones, Overseas Investment and Services Directorate, annually by May.  Turkey grants most rights, incentives, exemptions, and privileges available to national businesses to foreign business on a most-favored-nation (MFN) basis.  U.S. and other foreign firms can participate in government-financed and/or subsidized research and development programs on a national treatment basis.

Offsets are an important aspect of Turkey’s military procurement, and increasingly in other sectors, and such guidelines have been modified to encourage direct investment and technology transfer.  The GOT targets the energy, transportation, medical devices, and telecom sectors for the usage of offsets.  In February 2014, Parliament passed legislation requiring the Ministry of Science, Industry, and Technology, currently named the Ministry of Industry and Technology, to establish a framework to incorporate civilian offsets into large government procurement contracts.  The Ministry of Health (MOH) established an office to examine how offsets could be incorporated into new contracts.  The law suggests that for public contracts above USD 5 million, companies must invest up to 50 percent of contract value in Turkey and “add value” to the sector.  In general, labor, health, and safety laws do not distort or impede investment, although legal restrictions on discharging employees may provide a disincentive to labor-intensive activity in the formal economy.

Real Property 

Secured interests in property, both movable and real, are generally recognized and enforced, and there is a reliable system of recording such security interests.  For example, real estate is registered with a land registry office.  Turkey’s legal system protects and facilitates acquisition and disposal of property rights, including land, buildings, and mortgages, although some parties have complained that the courts are slow to render decisions and are susceptible to external influence.  However, following the July 2016 coup attempt, the GOT confiscated over 1,100 companies as well as significant real estate holdings for alleged terrorist ties.  Although the seizures did not directly impact many foreign firms, it nonetheless raises investor concerns about private property protections.   

The Ministry of Environment and Urbanization enacted a law on title-deed registration in 2012 removing the previous requirement that foreign purchasers of real estate in Turkey had to be in partnership with a Turkish individual or company that owns at least a 50-percent share in the property, meaning foreigners can now own their own land.  The law is also much more flexible in allowing international companies to purchase real property.  The law also increases the upper limit on real estate purchases by foreign individuals to 30 hectares and allows further increases up to 60 hectares with permission from the Council of Ministers.  As of March 2020, a valuation report, based upon real market value, must be prepared for real estate sales transactions involving buyers that are foreign citizens.  To ensure that land has a clear title, interested parties may inquire through the General Directorate of Land Registry and Cadastre (www.tkgm.gov.tr).  The World Bank’s Doing Business Index gave Turkey a rank of 27 out of 190 countries for ease of registering property in 2019.  See: http://doingbusiness.org/en/rankings. 

Intellectual Property Rights 

Turkey continues to implement its intellectual property rights (IPR) law, the Industrial Property Code No. 6769, which entered into force in 2017.  The law brings together a series of “decrees” into a single, unified, modernized legal structure.  It also greatly increases the capacity of the country’s patent office (TurkPatent) and improves the framework for commercialization and technology transfer.  Turkey is a member of the World Intellectual Property Organization (WIPO) and party to many of its treaties, including the Berne Convention, the Paris Convention, the Patent Cooperation Treaty, the WIPO Copyright Treaty, and the WIPO Performances and Phonograms Treaty.

However, while legislative frameworks are improving, IPR enforcement remains lackluster.   Turkey remains on USTR’s Special 301 Watch List for 2021.  Concerns remain about policies requiring local production of pharmaceuticals, inadequate protection of test data, and a lack of transparency in national pricing and reimbursement.  IPR enforcement suffers from a lack of awareness and training among judges and officers, as well as a lack of prioritization relative to terrorism and other concerns.  Law enforcement officers do not have ex-officio authority to seize and destroy counterfeit goods, which are prevalent in the local markets.  Software piracy is also high.  The Istanbul Grand Bazaar in Turkey is included in USTR’s 2020 Notorious Markets List. 

Additionally, the practice of issuing search-and-seizure warrants varies considerably.  IPR courts and specialized IPR judges only exist in major cities.  Outside these areas, an application for a search warrant must be filed at a regular criminal court (Courts of Peace) and/or with a regular prosecutor.  The Courts of Peace are very reluctant to issue search warrants.  Although, by law, “reasonable doubt” is adequate grounds for issuing a search-and-seizure order, judges often set additional requirements, including supporting documentation, photographs, and even witness testimony, which risk exposing companies’ intelligence sources.  In some regions, Courts of Peace judges rarely grant search warrants, for example in popular tourist destinations.  Overall, according to some investors, it is difficult to protect IPR and general enforcement is deteriorating.  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 Turkish Government encourages and offers an effective regulatory system to facilitate portfolio investment.  Since the start of 2020, a currency crisis that has been exacerbated by the COVID-19 pandemic, and high levels of dollarization have raised liquidity concerns among some commentators.  Existing policies facilitate the free flow of financial resources into product and factor markets.  The government respects IMF Article VIII by refraining from restrictions on payments and transfers for current international transactions.  Credit is generally allocated on market terms, though the GOT has increased low- and no-interest loans for certain parties, and pressured state-owned, and even private banks to increase their lending, especially for stimulating economic growth and public projects.  Foreign investors are able to get credit on the local market.  The private sector has access to a variety of credit instruments.

The Turkish banking sector, a central bank system, remains relatively healthy.  The estimated total assets of the country’s largest banks were as follows at the end of 2020:  Ziraat Bankasi A.S. – USD 127.09 billion, Turkiye Vakiflar Bankasi – USD 93.04 billion,  Halk Bankasi – USD 91.64 billion, Is Bankasi – USD 79.92 billion, Garanti Bankasi– USD  66.31 billion, Yapi ve Kredi Bankasi – USD 61.86 billion, Akbank – USD 60.11 billion. (Conversion rate: 7.42 TL/1 USD).  According to the Turkish Banking Regulation and Supervision Agency (BDDK), the share of non-performing loans in the sector was approximately 4.08 percent at the end of 2020.  The only requirements for a foreigner to open a bank account in Turkey are a passport copy and either an identification number from the Ministry of Foreign Affairs or a Turkish Tax identification number.

The Turkish Government adopted a framework Capital Markets Law in 2012, aimed at bringing greater corporate accountability, protection of minority-shareholders, and financial statement transparency.  Turkish capital markets in 2020 drew growing interest from domestic investors, according to data from the Central Registry Agency (MKK).  In 2020, the number of local real investors reached 2 million, up an average of 65,200 per month, with the total portfolio value reaching USD 28.31 billion.

The BDDK monitors and supervises Turkey’s banks.  The BDDK is headed by a board whose seven members are appointed for six-year terms.  Bank deposits are protected by an independent deposit insurance agency, the Savings Deposit Insurance Fund (TMSF).  Because of historically high local borrowing costs and short repayment periods, foreign and local firms frequently seek credit from international markets to finance their activities.  Foreign banks are allowed to establish operations in the country.

Foreign Exchange and Remittances

Foreign Exchange

Turkish law guarantees the free transfer of profits, fees, and royalties, and repatriation of capital.  This guarantee is reflected in Turkey’s 1990 Bilateral Investment Treaty (BIT) with the United States, which mandates unrestricted and prompt transfer in a freely-usable currency at a legal market-clearing rate for all investment-related funds.  There is little difficulty in obtaining foreign exchange in Turkey, and there are no foreign-exchange restrictions, though in 2019, the GOT continued to encourage businesses to conduct trade in lira.  An amendment to the Decision on the Protection of the Value of the Turkish Currency was made with Presidential Decree No. 85 in September 2018 wherein the GOT tightened restrictions on Turkey-based businesses  conducting numerous types of transactions using foreign currencies or indexed to foreign currencies.  The Turkish Ministry of Treasury and Finance may grant exceptions, however.  Funds associated with any form of investment can be freely converted into any world currency.  The exchange rate is heavily managed by the Central Bank of the Republic of Turkey.  Turkish banking regulations and informal government instructions to Turkish banks limit the supply of Turkish lira to the London overnight swaps market.  Turkey took a variety of measures to prop up the lira in 2020, including the imposition of withdrawal limits and time delays, mostly for private individuals owning FX deposit accounts.  In March 2020, the bank insurance and transaction tax introduced in 2019 was increased from 0.2 percent to 1 percent for purchases of FX and gold.  Running down its FX reserves and freezing international banks out of its FX market provided short-term relief during June and July, but reduced these reserves to dangerously low levels.  The BDDK raised the limits for swap, forward, option and other derivative transactions that Turkish lenders can execute with nonresidents.  Previously, swap limits with foreigners were lowered to levels of 1 percent, 2 percent, and 10 percent for weekly, monthly and annual terms, respectively.  Then the limits were raised from 2 percent to 5 percent of bank equity for trades with seven days to maturity; from 5 percent to 10 percent  for those with 30 days to maturity; and from 20 percent to 30 percent for one-year to maturity transactions.

There is no limit on the amount of foreign currency that may be brought into Turkey, but not more than 25,000 Turkish lira or €10,000 worth of foreign currency may be taken out without declaration. Although the Turkish Lira (TL) is fully convertible, most international transactions are denominated in U.S. dollars or Euros due to their universal acceptance.  Banks deal in foreign exchange and do borrow and lend in foreign currencies.  While for the most part, foreign exchange is freely traded and widely available, a May 2019 government decree imposed a settlement delay for FX purchases by individuals of more than USD 100,000, while as mentioned above there is also a 0.2 percent tax on FX purchases.  Foreign investors are free to convert and repatriate their Turkish Lira profits.

The exchange rate was heavily managed by the Central Bank of the Republic of Turkey (CBRT) with a “dirty float” regime until November 2020, when a new central bank governor assumed responsibility.  After several months of increased policy rates, tight monetary policy, and a more stable Turkish Lira, the governor was fired, as a result of which the lira quickly depreciated by 10 percent.  It is still too early to predict the medium to long-term effects of the recent changes to the CBRT on currency and macroeconomic stability.

The BDDK announced on April 12, 2020 new limits to FX transactions.  The agency cut the limit for Turkish banks’ FX swap, spot and forward transactions with foreign entities to 1 percent of a bank’s equity, a move that effectively aims to curtail transactions that could raise hard currency prices.  The limit had already been halved to 25 percent in August 2018, when the currency crisis hit.  These moves to shield the lira have meant a de facto departure from Turkey’s official policy of a floating exchange rate regime over the past year.

Remittance Policies

In Turkey, there have been no recent changes or plans to change investment remittance policies, and indeed the GOT in 2018 actively encouraged the repatriation of funds.  The GOT announced “Assets Peace” in May 2018 which incentivized citizens to bring assets to Turkey in the form of money, gold, or foreign currency by eliminating any tax burden on the repatriated assets.  The Assets Peace has been extended until June 30, 2021.  There are also no time limitations on remittances.  Waiting periods for dividends, return on investment, interest and principal on private foreign debt, lease payments, royalties, and management fees do not exceed 60 days.   There are no limitations on the inflow or outflow of funds for remittances of profits or revenue.

According to the Presidential Decree No. 1948 published in the Official Gazette No. 30994 dated December 30, 2019, the above-mentioned notification and declaration periods for activities related to the “Asset Peace Incentive” defined in Paragraphs 1, 3 and 6 of Temporary Article 90 of Income Tax Code have been extended for six more months following the previous expiration dates.

Sovereign Wealth Funds

The GOT announced the creation of a sovereign wealth fund (called the Turkey Wealth Fund, or TVF) in August 2016.  Unlike traditional sovereign wealth funds, the controversial fund consists of shares of state-owned enterprises (SOEs) and is designed to serve as collateral for raising foreign financing.  However, the TVF has not launched any major projects since its inception.  In September 2018, the President became the Chair of the TVF.  Several leading SOEs, such as natural gas distributor BOTAS, Turkish Airlines, and Ziraat Bank have been transferred to the TVF, which in 2020 became the largest shareholder in domestic telecommunications firm Turkcell.  Critics worry management of the fund is opaque and politicized.  The fund’s consolidated financial statements are available on its website (https://www.tvf.com.tr/en/investor-relations/reports), although independent audits are not made publicly available.    Firms within the fund’s portfolio appear to have increased their debt loads substantially since 2016.  International ratings agencies consider the fund a quasi-sovereign.  The fund was already exempt from many provisions of domestic commercial law and new legislation adopted April 16 granted it further exemptions from the Capital Markets Law and Turkish Commercial Code, while also allowing it to take ownership of distressed firms in strategic sectors.  As part of its response to the COVID-19 pandemic, in 2020 Turkey allowed the TVF to take equity positions in private companies in distress.

As of 2020, the sectors with active State-owned enterprises (SOEs) include mining, banking, telecom, and transportation.  The full list can be found here: https://www.hmb.gov.tr/kamu-sermayeli-kurulus-ve-isletme-raporlari.  Allegations of unfair practices by SOEs are minimal, and the U.S. Mission is not aware of any ongoing complaints by U.S. firms.  Turkey is not a party to the World Trade Organization’s Government Procurement Agreement.  Turkey is a member of the OECD Working Party on State Ownership and Privatization Practices, and OECD’s compliance regulations and new laws enacted in 2012 by the Turkish Competitive Authority closely govern SOE operations.

Privatization Program

The GOT has made some progress on privatization over the last decade.  Of 278 companies  that the state once owned, 210 are fully privatized.  According to the Ministry of Treasury and Finance’s Privatization Administration, transactions completed under the Turkish privatization program generated USD 609 million in 2019 and USD 677 in 2020.  See: https://www.oib.gov.tr/.

The GOT has indicated its commitment to continuing the privatization process despite the contraction in global capital flows.  However, other measures, such as the creation of a sovereign wealth fund with control over major SOEs, suggests that the government currently sees greater benefit in using some public assets to raise additional debt rather than privatizing them.   Accordingly, the GOT has shelved plans to increase privatization of Turkish Airlines and instead moved them and other SOEs into the TVF.  Additional information can be found at the Ministry of Treasury and Finance’s Privatization Administration website: https://www.oib.gov.tr/.

In Turkey, responsible business conduct (RBC) is gaining traction.  Reforms carried out as part of the EU harmonization process have had a positive effect on laws governing Turkish associations, especially non-governmental organizations (NGOs).  However, recent democratic backsliding has reversed some of these gains, and there has been increasing pressure on civil society since the coup attempt.  Despite OECD Membership and adherence to the OECD Guidelines for Multinational Enterprises, Turkey has not yet established a National Contact Point, or central coordinating office to assist companies in their efforts to adopt a due-diligence approach to responsible conduct.  Rather, the topic of RBC is handled by various ministries.  Some U.S. companies have focused traditional ‘corporate social responsibility’ activities on improving community education.

NGOs that are active in the economic sector, such as the Turkish Union of Chambers and Commodity Exchanges (TOBB) and the Turkish Industrialists’ and Businessmen’s Association (TÜSIAD), issue regular reports and studies, and hold events aimed at encouraging Turkish companies to become involved in policy issues.  In addition to influencing the political process, these two NGOs also assist their members with civic engagement.  The Business Council for Sustainable Development Turkey (http://www.skdturkiye.org/en) and the Corporate Social Responsibility Association in Turkey (www.csrturkey.org), founded in 2005, are two NGOs devoted exclusively to issues of responsible business conduct.  The Turkish Ethical Values Center Foundation, the Private Sector Volunteers Association (www.osgd.org) and the Third Sector Foundation of Turkey (www.tusev.org.tr) also play an important role.

Additional Resources

Department of State

• Country Reports on Human Rights Practices (https://www.state.gov/reports-bureau-of-democracy-human-rights-and-labor/country-reports-on-human-rights-practices/);
• Trafficking in Persons Report (https://www.state.gov/trafficking-in-persons-report/);
• Guidance on Implementing the “UN Guiding Principles” for Transactions Linked to Foreign Government End-Users for Products or Services with Surveillance Capabilities (https://www.state.gov/key-topics-bureau-of-democracy-human-rights-and-labor/due-diligence-guidance/) and;

• North Korea Sanctions & Enforcement Actions Advisory (https://home.treasury.gov/system/files/126/dprk_supplychain_advisory_07232018.pdf).

Department of Labor

• Findings on the Worst forms of Child Labor Report (https://www.dol.gov/agencies/ilab/resources/reports/child-labor/findings );

• List of Goods Produced by Child Labor or Forced Labor (https://www.dol.gov/agencies/ilab/reports/child-labor/list-of-goods);
• Sweat & Toil: Child Labor, Forced Labor, and Human Trafficking Around the World (https://www.dol.gov/general/apps/ilab) and;

Comply Chain (https://www.dol.gov/ilab/complychain/).

Corruption remains a concern, a reality reflected in Turkey’s sliding score in recent years in Transparency International’s annual Corruption Perceptions Index, where it ranked 86 of 180 countries and territories around the world in 2020.  Government mechanisms to investigate and punish alleged abuse and corruption by state officials remained inadequate, and impunity remained a problem.  Though independent in principle, the judiciary remained subject to government, and particularly executive branch, interference, including with respect to the investigation and prosecution of major corruption cases.  (See the Department of State’s annual Country Reports on Human Rights Practices for more details:  https://www.state.gov/reports-bureau-of-democracy-human-rights-and-labor/country-reports-on-human-rights-practices/).  Turkey is a participant in regional anti-corruption initiatives such as the G20 Anti-Corruption working group.  Under the new presidential system, the Presidential State Supervisory Council is responsible for combating corruption.

Public procurement reforms were designed in Turkey to make procurement more transparent and less susceptible to political interference, including through the establishment of an independent public procurement board with the power to void contracts.  Critics claim, however, that government officials have continued to award large contracts to firms friendly with the ruling Justice and Development Party (AKP), especially for large public construction projects.

Turkish legislation outlaws bribery, but enforcement is uneven.  Turkey’s Criminal Code makes it unlawful to promise or to give any advantage to foreign government officials in exchange for their assistance in providing improper advantage in the conduct of international business.

The provisions of the Criminal Law regarding bribing of foreign government officials are consistent with the provisions of the Foreign Corrupt Practices Act of 1977 of the United States (FCPA).  There are, however, a number of differences between Turkish law and the FCPA.  For example, there is no exception under Turkish law for payments to facilitate or expedite performance of a “routine governmental action” in terms of the FCPA.  Another difference is that the FCPA does not provide for punishment by imprisonment, while Turkish law provides for punishment by imprisonment from 4 to 12 years.  The Presidential State Supervisory Council, which advises the Corruption Investigations Committee, is responsible for investigating major corruption cases brought to its attention by the Committee.  Nearly every state agency has its own inspector corps responsible for investigating internal corruption.  The Parliament can establish investigative commissions to examine corruption allegations concerning cabinet ministers; a majority vote is needed to send these cases to the Supreme Court for further action.

Turkey ratified the OECD Convention on Combating Bribery of Public Officials and passed implementing legislation in 2003 to provide that bribes of foreign, as well as domestic, officials are illegal.  In 2006, Turkey’s Parliament ratified the UN Convention against Corruption.

Resources to Report Corruption

Contact at government agency or agencies are responsible for combating corruption:
ORGANIZATION: Presidential State Supervisory Council
ADDRESS: Beştepe Mahallesi, Alparslan Türkeş Caddesi, Devlet Denetleme Kurulu, Yenimahalle
TELEPHONE NUMBER: Phone: +90 312 470 25 00  Fax : +90 312 470 13 03

NAME: Seref Malkoc
TITLE: Chief Ombudsman
ORGANIZATION: The Ombudsman Institution
ADDRESS: Kavaklidere Mah. Zeytin Dali Caddesi No:4 Cankaya ANKARA
TELEPHONE NUMBER: +90 312 465 22 00
EMAIL ADDRESS: iletisim@ombudsman.gov.tr

The period between 2015 and 2016 was one of the more violent in Turkey since the 1970s.   However, since January 2017, Turkey has experienced historically low levels of violence even when compared to past periods of calm, and the country has greatly ramped up internal security measures.  Turkey can experience politically-motivated violence, generally at the level of aggression against opposition politicians and political parties.  In a more dramatic example, a July 2016 attempted coup resulted in the death of more than 240 people, and injured over 2,100 others.  Since the July 2015 collapse of the cessation of hostilities between the government and the terrorist Kurdistan Workers’ Party (PKK), along with sister organizations like the Kurdistan Freedom Hawks (TAK), have regularly targeted security forces, with civilians often getting injured or killed, by PKK and TAK attacks.  (Both the PKK and TAK have been designated as terrorist organizations by the United States.)

Other U.S.-designated terrorist organizations such as the Islamic State of Iraq and Greater Syria (ISIS) and the leftist Revolutionary People’s Liberation Party/Front (DHKP/C) are present in Turkey and have conducted attacks in 2013, 2015, 2016, and early 2017.  The indigenous DHKP/C, for example, which was established in the 1970s and designated a terrorist organization by the U.S. in 1997, is responsible for several attacks against the U.S. Embassy in Ankara and the U.S. Consulate General Istanbul in recent years, including a suicide bombing at the embassy in 2013 that killed one local employee.  The DHKP/C has stated its intention to commit further attacks against the United States, NATO, and Turkey.  Still, widespread internal security measures, especially following the failed July 2016 coup attempt, seem to have hobbled its success.  In addition, violent extremists associated with ISIS and other groups transited Turkey en route to Syria in the past, though increased scrutiny by government officials and a general emphasis on increased security has significantly curtailed this access route to Syria, especially when compared to the earlier years of the conflict.

There have been past instances of violence against religious missionaries and others perceived as proselytizing for a non-Islamic religion in Turkey, though none in recent years.  On past occasions, perpetrators have threatened and assaulted Christian and Jewish individuals, groups, and places of worship, many of which receive specially-assigned police protection, both for institutions and leadership.  Anti-Semitic discourse periodically features in both popular rhetoric and public media, and evangelizing activities by foreigners tend to be viewed suspiciously by the country’s security apparatus.  Still, government officials also often point to religious minorities in Turkey positively, as a sign of the country’s diversity, and religious minority figures periodically meet with the country’s president and other senior members of national political leadership.

Turkey has a population of 83.6 million, with 22.8 percent under the age of 14 as of 2020.  Ninety-three percent of the population lives in urban areas.  Official figures put the labor force at 30.9 million in December 2020.  Approximately one-fifth of the labor force works in agriculture (17.6 percent) while another fifth works in industrial sectors (20.5 percent).  The country retains a significant informal sector at 30.6 percent.  In 2020, the official unemployment rate stayed at 13.2 percent, with 25.3 percent unemployment among those 15-24 years old.  Turkey provides twelve years of free, compulsory education to children of both sexes in state schools.  Authorities continue to grapple with facilitating legal employment for working-age Syrians, a major subset of the 3.6 million displaced Syrian men, women, and children—unknown numbers of which were working informally—in the country in 2020.

Turkey has an abundance of unskilled and semi-skilled labor, and vocational training schools exist at the high school level.  There remains a shortage of high-tech workers.  Individual high-tech firms, both local and foreign-owned, typically conduct their own training programs.  Within the scope of employment mobilization, the Ministry of Family, Labor, and Social Services, Turkish Employment Agency (ISKUR) and Turkey Union of Chambers and Commodity Exchanges (TOBB) has launched the Vocational Education and Skills Development Cooperation Protocol (MEGIP).  Turkey has also undertaken a significant expansion of university programs, building dozens of new colleges and universities over the last decade.

The use of subcontracted workers for jobs not temporary in nature remained common, including by firms executing contracts for the state.  Generally ineligible for equal benefits or collective bargaining rights, subcontracted workers—often hired via revolving contracts of less than a year duration— remained vulnerable to sudden termination by employers and, in some cases, poor working conditions.  Employers typically utilized subcontracted workers to minimize salary/benefit expenditures and, according to critics, to prevent unionization of employees.

The law provides for the right of workers to form and join independent unions, bargain collectively, and conduct legal strikes.  A minimum of seven workers is required to establish a trade union without prior approval.  To become a bargaining agent, a union must represent 40 percent of the employees at a given work site and one percent of all workers in that particular industry.  Certain public employees, such as senior officials, magistrates, members of the armed forces, and police, cannot form unions.  Nonunionized workers,  such as migrant  seasonal agricultural laborers, domestic servants, and those in the informal economy, are also not covered by collective bargaining laws.

Unionization rates generally remain low.  Independent labor unions—distinct from their government-friendly counterpart unions—reported that employers continued to use threats, violence, and layoffs in unionized workplaces across sectors.  Service-sector union organizers report that private sector employers sometimes ignore the law and dismiss workers to discourage union activity.  Turkish law provides for the right to strike but prohibits strikes by public workers engaged in safeguarding life and property and by workers in the coal mining and petroleum industries, hospitals and funeral industries, urban transportation, and national defense.  The law explicitly allows the government to deny the right to strike for any situation it determines a threat to national security.  Turkey has labor-dispute resolution mechanisms, including the Supreme Arbitration Board, which addresses disputes between employers and employees pursuant to collective bargaining agreements. Labor courts function effectively and relatively efficiently.  Appeals, however, can last for years.  If a court rules that an employer unfairly dismissed a worker and should either reinstate or compensate him or her, the employer generally pays compensation to the employee along with a fine.

Turkey has ratified key International Labor Organization (ILO) conventions protecting workers’ rights, including conventions on Freedom of Association and Protection of the Right to Organize; Rights to Organize and to Bargain Collectively; Abolition of Forced Labor; Minimum Age; Occupational Health and Safety; Termination of Employment; and Elimination of the Worst Forms of Child Labor.  Implementation of a number of these, including ILO Convention 87 (Convention Concerning Freedom of Association and Protection of the Right to Organize) and Convention 98 (Convention Concerning the Application of the Principles of the Right to Organize and to Bargain Collectively), remained uneven.  Implementation of legislation related to workplace health and safety likewise remained uneven.  Child labor continued, including in its worst forms and particularly in the seasonal agricultural sector, despite ongoing government efforts to address the issue.  See the Department of State’s annual Country Reports on Human Rights Practices for more details on Turkey’s labor sector and the challenges it continues to face.

The U.S. International Development Finance Corporation (DFC) replaced the Overseas Private Investment Corporation (OPIC) in December 2019, and continues to offer programs in Turkey, including political risk insurance for U.S. investors, under its bilateral agreement.  Since 1987, Turkey has been a member of the Multinational Investment Guarantee Agency (MIGA), most recently financing a public hospital project in 2019. 

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

Table 3: Sources and Destination of FDI

Table 4: Sources of Portfolio Investment

“0” reflects amounts rounded to +/- USD 500,000.

IMF’s Coordinated Portfolio Investment Survey (CPIS) data available at: http://data.imf.org/regular.aspx?key=60587804

Economic Specialist 
American Embassy Ankara 
110 Atatürk Blvd. 
Kavaklıdere, 06100 Ankara – Turkey 
Phone: +90 (312) 455-5555 
Email:  Ankara-ECON-MB@state.gov