1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment
China continues to be one of the largest recipients of global FDI due to a relatively high economic growth rate and an expanding consumer base that demands diverse, high-quality products. FDI has historically played an essential role in China’s economic development. However, due to recent stagnant FDI growth and gaps in China’s domestic technology and labor capabilities, Chinese government officials have prioritized promoting relatively friendly FDI policies promising market access expansion and non-discriminatory, “national treatment” for foreign enterprises through general improvements to the business environment. They also have made efforts to strengthen China’s regulatory framework to enhance broader market-based competition.
In 2019, China issued an updated nationwide “negative list” that made some modest openings to foreign investment, most notably in the financial sector, and promised future improvements to the investment climate through the implementation of China’s new FIL. MOFCOM reported that FDI flows to China grew by 5.8 percent year-on-year in 2019, reaching USD137 billion. In 2019, U.S. businesses expressed concern over China’s weak protection and enforcement of intellectual property rights (IPR); corruption; discriminatory and non-transparent anti-monopoly enforcement that forces foreign companies to license technology at below-market prices; excessive cyber security and personal data-related requirements; increased emphasis on the role of CCP cells in foreign enterprises, and an unreliable legal system lacking in both transparency and the rule of law.
China seeks to support inbound FDI through the “Invest in China” website, where MOFCOM publishes laws, statistics, and other relevant information about investing in China. Further, each province has a provincial-level investment promotion agency that operates under the guidance of local-level commerce departments. See: MOFCOM’s Investment Promotion Website
Limits on Foreign Control and Right to Private Ownership and Establishment
Entry into the Chinese market is regulated by the country’s “negative lists,” which identify the sectors in which foreign investment is restricted or prohibited, and a catalogue for encouraged foreign investment, which identifies the sectors the government encourages foreign investment to be allocated to.
The Special Administrative Measures for Foreign Investment Access (̈the “Nationwide Negative List”);
The Special Administrative Measures for Foreign Investment Access to Pilot Free Trade Zones (the “FTZ Negative List”) used in China’s 18 FTZs
The Industry Catalogue for Encouraged Foreign Investment (also known as the “FIC”). The central government has used the FIC to encourage FDI inflows to key sectors – in particular semiconductors and other high-tech industries that would help China achieve MIC 2025 objectives. The FIC is subdivided into a cross-sector nationwide catalogue and a separate catalogue for western and central regions, China’s least developed regions.
In addition to the above lists, MOFCOM and NDRC also release the annual Market Access Negative List to guide investments. This negative list – unlike the nationwide negative list that applies only to foreign investors – defines prohibitions and restrictions for all investors, foreign and domestic. Launched in 2016, this negative list attempted to unify guidance on allowable investments previously found in piecemeal laws and regulations. This list also highlights what economic sectors are only open to state-owned investors.
In restricted industries, foreign investors face equity caps or joint venture requirements to ensure control is maintained by a Chinese national and enterprise. These requirements are often used to compel foreign investors to transfer technology in order to participate in China’s market. Foreign companies have reported these dictates and decisions are often made behind closed doors and are thus difficult to attribute as official Chinese government policy. Foreign investors report fearing government retaliation if they publicly raise instances of technology coercion.
Below are a few examples of industries where these sorts of investment restrictions apply:
Preschool, general high school, and higher education institutes require a Chinese partner.
Establishment of medical institutions also require a Chinese JV partner.
Examples of foreign investment sectors requiring Chinese control include:
Selective breeding and seed production for new varieties of wheat and corn.
Basic telecommunication services.
Radio and television listenership and viewership market research.
Examples of foreign investment equity caps include:
50 percent in automobile manufacturing (except special and new energy vehicles);
50 percent in value-added telecom services (except e-commerce domestic multiparty communications, storage and forwarding, call center services);
50 percent in manufacturing of commercial and passenger vehicles.
The 2019 editions of the nationwide and FTZ negative lists and the FIC for foreign investment came into effect July 30, 2019. The central government updated the Market Access Negative List in October 2019. The 2019 foreign investment negative lists made minor modifications to some industries, reducing the number of restrictions and prohibitions from 48 to 40 in the nationwide negative list, and from 45 to 37 in China’s pilot FTZs. Notable changes included openings in the oil and gas sector, telecommunications, and shipping of marine products. On July 2, 2019, Premier Li Keqiang announced new openings in the financial sector, including lifting foreign equity caps for futures by January 2020, fund management by April, and securities by December. While U.S. businesses welcomed market openings, many foreign investors remained underwhelmed and disappointed by Chinese government’s lack of ambition and refusal to provide more significant liberalization. Foreign investors noted these announced measures occurred mainly in industries that domestic Chinese companies already dominate.
Other Investment Policy Reviews
China is not a member of the Organization for Economic Co-Operation and Development (OECD), but the OECD Council established a country program of dialogue and co-operation with China in October 1995. The OECD completed its most recent investment policy review for China in 2008 and published an update in 2013.
China’s 2001 accession to the World Trade Organization (WTO) boosted China’s economic growth and advanced its legal and governmental reforms. The WTO completed its most recent investment trade review for China in 2018, highlighting that China remains a major destination for FDI inflows, especially in real estate, leasing and business services, and wholesale and retail trade.
In 2019, China climbed more than 40 spots in the World Bank’s Ease of Doing Business Survey to 31st place out of 190 economies. This was partly due to regulatory reforms that helped streamline some business processes, including improvements to addressing delays in construction permits and resolving insolvency. This ranking does not account for major challenges U.S. businesses face in China like IPR violations and forced technology transfer. Moreover, China’s ranking is based on data limited only to the business environments in Beijing and Shanghai.
Created in 2018, the State Administration for Market Regulation (SAMR) is now responsible for business registration processes. The State Council established a new website in English, which is more user-friendly than SAMR’s website, to assist foreign investors looking to do business in China. In December 2019, China also launched a Chinese-language nationwide government service platform on the State Council’s official website. The platform connected 40 central government agencies with 31 provincial governments, providing information on licensing and project approvals by specific agencies. The central government published the website under its “improving the business climate” reform agenda, claiming that the website consolidates information and offers cross-regional government online services.
Foreign companies still complain about continued challenges when setting up a business relative to their Chinese competitors. Numerous companies offer consulting, legal, and accounting services for establishing wholly foreign-owned enterprises, partnership enterprises, joint ventures, and representative offices in China. Investors should review their options carefully with an experienced advisor before choosing a corporate entity or investment vehicle.
Outward Investment
Since 2001, China has pursued a “going-out” investment policy. At first, the Chinese government mainly encouraged SOEs to secure natural resources and facilitate market access for Chinese exports. In recent years, China’s overseas investments have diversified with both state and private enterprises investing in nearly all industries and economic sectors. While China remains a major global investor, total outbound direct investment (ODI) flows fell 8.2 percent year-on-year in 2019 to USD110.6 billion, according to MOFCOM data.
In order to suppress significant capital outflow pressure, the Chinese government created “encouraged,” “restricted,” and “prohibited” outbound investment categories in 2016 to guide Chinese investors, especially in Europe and the United States. While the guidelines restricted Chinese outbound investment in sectors like property, hotels, cinemas, entertainment, and sports teams, they encouraged outbound investment in sectors that supported Chinese industrial policy by acquiring advanced manufacturing and high-tech assets. Chinese firms involved in MIC 2025 targeted sectors often receive preferential government financing, subsidies, and access to an opaque network of investors to promote and provide incentives for outbound investment. The guidance also encourages investments that promote China’s One Belt One Road (OBOR) initiative, which seeks to create connectivity and cooperation agreements between China and dozens of countries via infrastructure investment, construction projects, real estate, etc.
3. Legal Regime
Transparency of the Regulatory System
One of China’s WTO accession commitments was to establish an official journal dedicated to the publication of laws, regulations, and other measures pertaining to or affecting trade in goods, services, trade related aspects of intellectual property rights (TRIPS), and the control of foreign exchange. Despite mandatory 30-day public comment periods, Chinese ministries continue to post only some draft administrative regulations and departmental rules online, often with a public comment period of less than 30 days. U.S. businesses operating in China consistently cite arbitrary legal enforcement and the lack of regulatory transparency among the top challenges of doing business in China. Government agencies often do not make available for public comment and proceed to publish “normative documents” (opinions, circulars, notices, etc.) or other quasi-legal measures to address situations where there is no explicit law or administrative regulation in place. When Chinese officials claim an assessment or study was made for a law, the methodology of the study and the results are not made available to the public. As a result, foreign investors face a regulatory system rife with inconsistencies.
In China’s state-dominated economic system, the relationships are often blurred between the CCP, the Chinese government, Chinese business (state- and private-owned), and other Chinese stakeholders. Foreign-invested enterprises (FIEs) perceive that China prioritizes political goals, industrial policies, and a desire to protect social stability at the expense of foreign investors, fairness, and the rule of law. The World Bank Global Indicators of Regulatory Governance gave China a composite score of 1.75 out 5 points, attributing China’s relatively low score to the futility of foreign companies appealing administrative authorities’ decisions to the domestic court system; not having easily accessible and updated laws and regulations; the lack of impact assessments conducted prior to issuing new laws; and other concerns about transparency.
For accounting standards, Chinese companies use the Chinese Accounting Standards for Business Enterprises (ASBE) for all financial reporting within mainland China. Companies listed overseas or in Hong Kong may choose to use ASBE, the International Financial Reporting Standards, or Hong Kong Financial Reporting Standards.
International Regulatory Considerations
As part of its WTO accession agreement, China agreed to notify the WTO Committee on Technical Barriers to Trade (TBT) of all draft technical regulations. However, China continues to issue draft technical regulations without proper notification to the TBT Committee.
Legal System and Judicial Independence
The Chinese legal system borrows heavily from continental European legal systems, but with “Chinese characteristics.” The rules governing commercial activities are found in various laws, regulations, and judicial interpretations, including China’s civil law, contract law, partnership enterprises law, security law, insurance law, enterprises bankruptcy law, labor law, and several interpretations and regulations issued by the Supreme People’s Court (SPC). While China does not have specialized commercial courts, it has created specialized courts and tribunals for the hearing of intellectual property disputes, including in Beijing, Guangzhou, and Shanghai. In October 2018, the National People’s Congress approved the establishment of a national SPC appellate tribunal to hear civil and administrative appeals of technically complex intellectual property (IP) cases.
China’s constitution and various laws provide contradictory statements about court independence and the right of judges to exercise adjudicative power free from interference by administrative organs, public organizations, or powerful individuals. In practice, regulators heavily influence courts, and the Chinese constitution establishes the supremacy of the “leadership of the communist party.” U.S. companies often avoid challenging administrative decisions or bringing commercial disputes before local courts due to perceptions of futility or government retaliation.
Laws and Regulations on Foreign Direct Investment
China’s new investment law, the FIL, was passed on March 2019 and came into force on January 1, 2020, replacing China’s previous foreign investment framework. The FIL provides a five-year transition period for foreign enterprises established under previous foreign investment laws, after which all foreign enterprises will be subject to the same domestic laws as Chinese companies, such as the Company Law and, where applicable, the Partnership Enterprise Law. The FIL intends to abolish the case-by-case review and approval system on market access for foreign investment and standardize the regulatory regimes for foreign investment by including the negative list management system, a foreign investment information reporting system, and a foreign investment security review system all under one document. The FIL also seeks to address common complaints from foreign business and government by explicitly banning forced technology transfers, promising better IPR protection, and establishing a complaint mechanism for investors to report administrative abuses. However, foreign investors complain that the FIL and its implementing regulations lack substantive guidance, providing Chinese ministries and local officials significant regulatory discretion, including the ability to retaliate against foreign companies.
In addition to the FIL, in 2019, the State Council issued other substantive guidelines and administrative regulations, including:
Implementing Regulations of the Foreign Investment Law of the People’s Republic of China (Implementing Regulations);
Draft legislation issued by other government entities in 2020:
Draft Amendments to the Anti-Monopoly Law;
In addition to central government laws and implementation guidelines, ministries and local regulators have issued over 1,000 rules and regulatory documents that directly affect foreign investments within their geographical areas. While not comprehensive, a list of published and official Chinese laws and regulations is available at: http://www.gov.cn/zhengce/.
FDI Laws on Investment Approvals
Foreign investments in industries and economic sectors that are not explicitly restricted or prohibited on the foreign investment negative or market access lists do not require MOFCOM pre-approval. However, investors have complained that in practice, investing in an industry not on the negative list does not guarantee a foreign investor “national treatment,” or treatment no less favorable than treatment accorded to a similarly-situated domestic investor. Foreign investors must still comply with other steps and approvals like receiving land rights, business licenses, and other necessary permits. When a foreign investment needs ratification from the NDRC or a local development and reform commission, that administrative body is in charge of assessing the project’s compliance with a panoply of Chinese laws and regulations. In some cases, NDRC also solicits the opinions of relevant Chinese industrial regulators and consulting agencies acting on behalf of Chinese domestic firms, creating potential conflicts of interest disadvantageous to foreign firms.
Competition and Anti-Trust Laws
The Anti-Monopoly Bureau of the SAMR enforces China’s Anti-Monopoly Law (AML) and oversees competition issues at the central and provincial levels. The agency reviews mergers and acquisitions, and investigates cartel and other anticompetitive agreements, abuse of a dominant market position, and abuse of administrative powers by government agencies. SAMR issues new implementation guidelines and antitrust provisions to fill in gaps in the AML, address new trends in China’s market, and help foster transparency in AML enforcement. Generally, SAMR has sought public comment on proposed measures and guidelines, although comment periods can be less than 30 days. In 2019, the agency put into effect provisions on abuse of market dominance, prohibition of monopoly agreements, and restraint against abuse of administrative powers to restrict competition. In January 2020, SAMR published draft amendments to the AML for comment, which included, among other changes, stepped-up fines for AML violations and expanded factors to consider abuse of market dominance by Internet companies. (This is the first step in a lengthy process to amend the AML.) SAMR also oversees the Fair Competition Review System (FCRS), which requires government agencies to conduct a review prior to issuing new and revising existing laws, regulations, and guidelines to ensure such measures do not inhibit competition.
While these are seen as positive measures, foreign businesses have complained that enforcement of competition policy is uneven in practice and tends to focus on foreign companies. Foreign companies have expressed concern that the government uses AML enforcement as an extension of China’s industrial policies, particularly for companies operating in strategic sectors. The AML explicitly protects the lawful operations of government monopolies in industries that affect the national economy or national security. U.S. companies have expressed concerns that SAMR consults with other Chinese agencies when reviewing M&A transactions, allowing other agencies to raise concerns, including those not related to antitrust enforcement, in order to block, delay, or force transacting parties to comply with preconditions in order to receive approval. Foreign companies have also complained that China’s enforcement of AML facilitated forced technology transfer or licensing to local competitors.
Expropriation and Compensation
Chinese law prohibits nationalization of FIEs, except under vaguely specified “special circumstances” where there is a national security or public interest need. Chinese law requires fair compensation for an expropriated foreign investment, but does not detail the method used to calculate the value of the foreign investment. The Department of State is not aware of any cases since 1979 in which China has expropriated a U.S. investment, although the Department has notified Congress through the annual 527 Investment Dispute Report of several cases of concern.
Dispute Settlement
ICSID Convention and New York Convention
China is a contracting state to the Convention on the Settlement of Investment Disputes (ICSID Convention) and has ratified the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention). Chinese legislation that provides for enforcement of foreign arbitral awards related to these two Conventions includes the Arbitration Law adopted in 1994, the Civil Procedure Law adopted in 1991 (later amended in 2012), the law on Chinese-Foreign Equity Joint Ventures adopted in 1979 (amended most recently in 2001), and a number of other laws with similar provisions. The Arbitration Law embraced many of the fundamental principles of the United Nations Commission on International Trade Law’s Model Law on International Commercial Arbitration.
Investor-State Dispute Settlement (ISDS)
Initially, China was disinclined to accept ISDS as a method to resolve investment disputes based on its suspicions of international law and international arbitration, as well as its emphasis on state sovereignty. China’s early BITs, such as the 1982 China–Sweden BIT, only included state–state dispute settlement. As China has become a capital exporter under its initiative of “Going Global” and infrastructure investments under the OBOR initiative, its views on ISDS have shifted to allow foreign investors with unobstructed access to international arbitration to resolve any investment dispute that cannot be amicably settled within six months. Chinese investors did not use ISDS mechanisms until 2007, and the first known ISDS case against China was initiated in 2011 by Malaysian investors. On July 19, 2019, China submitted its proposal on ISDS reform to the United Nations Commission on International Trade Law (UNCITRAL) Working Group III. Under the proposal, China reaffirmed its commitment to ISDS as an important mechanism for resolving investor-state disputes under public international law. However, it suggested various pathways for ISDS reform, including supporting the study of a permanent appellate body. including supporting the study of a permanent appellate body.
International Commercial Arbitration and Foreign Courts
Chinese officials typically urge private parties to resolve commercial disputes through informal conciliation. If formal mediation is necessary, Chinese parties and the authorities typically prefer arbitration to litigation. Many contract disputes require arbitration by the Beijing-based China International Economic and Trade Arbitration Commission (CIETAC). Established by the State Council in 1956 under the auspices of the China Council for the Promotion of International Trade (CCPIT), CIETAC is China’s most widely utilized arbitral body for foreign-related disputes. Some foreign parties have obtained favorable rulings from CIETAC, while others have questioned CIETAC’s fairness and effectiveness. Besides CIETAC, there are also provincial and municipal arbitration commissions. A foreign party may also seek arbitration in some instances from an offshore commission. Foreign companies often encounter challenges in enforcing arbitration decisions issued by Chinese and foreign arbitration bodies. In these instances, foreign investors may appeal to higher courts. The Chinese government and judicial bodies do not maintain a public record of investment disputes. The SPC maintains an annual count of the number of cases involving foreigners but does not provide details about the cases. Rulings in some cases are open to the public.
In 2018, the SPC established the China International Commercial Court (CICC) to adjudicate international commercial cases, especially cases related to the OBOR initiative. The first CICC was established in Shenzhen, followed by a second court in Xi’an. The court held its first public hearing on May 2019, involving a Chinese company suing an Italian company, and issued its first ruling on March 2020, siding with the Chinese company. Parties to a dispute before the CICC can only be represented by Chinese law-qualified lawyers, as foreign lawyers do not have a right of audience in Chinese courts. Unlike other international courts, foreign judges are not permitted to be part of the proceedings. Judgments of the CICC, given it is a part of the SPC, cannot be appealed from, but are subject to possible “retrial” under the Civil Procedure Law. Local contacts and academics note that to-date, the CICC has not reviewed any OBOR or infrastructure related cases and question the CICC’s ability to provide “equal protection” to foreign investors.
China has bilateral agreements with 27 countries on the recognition and enforcement of foreign court judgments, but not with the United States. However, under Chinese law, local courts must prioritize China’s laws and other regulatory measures above foreign court judgments.
Bankruptcy Regulations
China introduced formal bankruptcy laws in 2007, under the Enterprise Bankruptcy Law, which applied to all companies incorporated under Chinese laws and subject to Chinese regulations. However, courts routinely rejected applications from struggling businesses and their creditors due to the lack of implementation guidelines and concerns over social unrest. Local government-led negotiations resolved most corporate debt disputes, using asset liquidation as the main insolvency procedure. Many insolvent Chinese companies survived on state subsidies and loans from state-owned banks, while others defaulted on their debts with minimal payments to creditors. After a decade of heavy borrowing, China’s growth has slowed and forced the government to make needed bankruptcy reforms. China now has more than 90 U.S.-style specialized bankruptcy courts. In 2019, the government added new courts in Beijing, Shanghai and Shenzhen. Court-appointed administrators—law firms and accounting firms that help verify claims, organize creditors’ meetings, and list and sell assets online as authorities look to handle more cases and process them faster. China’s SPC recorded over 19,000 liquidation and bankruptcy cases in 2019, double the number of cases in 2017. While Chinese authorities are taking steps to address mounting corporate debt and are gradually allowing some companies to fail, companies generally avoid pursing bankruptcy because of the potential for local government interference and fear of losing control over the bankruptcy outcome. According to experts, Chinese courts not only lack the resources and capacity to handle bankruptcy cases, but bankruptcy administrators, clerks, and judges lack relevant experience.
4. Industrial Policies
Investment Incentives
To attract foreign investment, different provinces and municipalities offer preferential packages like a temporary reduction in taxes, resources and land use benefits, reduction in import or export duties, special treatment in obtaining basic infrastructure services, streamlined government approvals, research and development subsidies, and funding for initial startups. Often, these packages stipulate that foreign investors must meet certain benchmarks for exports, local content, technology transfer, and other requirements. The Chinese government incentivizes foreign investors to participate in initiatives like MIC 2025 that seek to transform China into an innovation-based economy. Announced in 2015, China’s MIC 2025 roadmap has prioritized the following industries: new-generation information technology, advanced numerical-control machine tools and robotics, aerospace equipment, maritime engineering equipment and vessels, advanced rail, new-energy vehicles, energy equipment, agricultural equipment, new materials, and biopharmaceuticals and medical equipment. While mentions of MIC 2025 have all but disappeared from public discourse, a raft of policy announcements at the national and sub-national levels indicate China’s continued commitment to developing these sectors. Foreign investment plays an important role in helping China move up the manufacturing value chain. However, foreign investment remains closed off to many economic sectors that China deems sensitive due to broadly defined national or economic security concerns.
Foreign Trade Zones/Free Ports/Trade Facilitation
In 2013, the State Council announced the Shanghai pilot FTZ to provide open and high-standard trade and investment services to foreign companies. China gradually scaled up its FTZ pilot program to 12 FTZs, launching an additional six FTZs in 2019. China’s FTZs are in: Tianjin, Guangdong, Fujian, Chongqing, Hainan, Henan, Hubei, Liaoning, Shaanxi, Sichuan, Zhejiang, Jiangsu, Shandong, Hebei, Heilongjiang, Guanxi, and Yunnan provinces. The goal of all of China’s FTZs is to provide a trial ground for trade and investment liberalization measures and to introduce service sector reforms, especially in financial services, that China expects to eventually introduce in other parts of the domestic economy. The FTZs promise foreign investors “national treatment” for the market access phase of an investment in industries and sectors not listed on the FTZ negative list, or on the list of industries and economic sectors from which foreign investment is restricted or prohibited. However, the 2019 FTZ negative list lacked substantive changes, and many foreign firms have reported that in practice, the degree of liberalization in the FTZs is comparable to opportunities in other parts of China. The stated purpose of FTZs is also to integrate these areas more closely with the OBOR initiative.
Performance and Data Localization Requirements
As part of China’s WTO accession agreement, the PRC government promised to revise its foreign investment laws to eliminate sections that imposed on foreign investors requirements for export performance, local content, balanced foreign exchange through trade, technology transfer, and research and development as a prerequisite to enter China’s market. In practice, China has not completely lived up to these promises. Some U.S. businesses report that local officials and regulators sometimes only accept investments with “voluntary” performance requirements or technology transfer that help develop certain domestic industries and support the local job market. Provincial and municipal governments will sometimes restrict access to local markets, government procurement, and public works projects even for foreign firms that have already invested in the province or municipality. In addition, Chinese regulators have reportedly pressured foreign firms in some sectors to disclose IP content or provide IP licenses to Chinese firms, often at below market rates.
Furthermore, China’s evolving cybersecurity and personal data protection regime includes onerous restrictions on firms that generate or process data in China, such as requirements for certain firms to store data in China. Restrictions exist on the transfer of personal information of Chinese citizens outside of China. These restrictions have prompted many firms to review how their networks manage data. Foreign firms also fear that PRC laws call for the use of “secure and controllable,” “secure and trustworthy,” etc. technologies will curtail sales opportunities for foreign firms or pressure foreign companies to disclose source code and other proprietary intellectual property. In October 2019, China adopted a Cryptography Law that includes restrictive requirements for commercial encryption products that “involve national security, the national economy and people’s lives, and public interest.” This broad definition of commercial encryption products that must undergo a security assessment raises concerns that implementation will lead to unnecessary restrictions on foreign information and communications technology (ICT) products and services. Further, prescriptive technology adoption requirements, often in the form of domestic standards that diverge from global norms, in effect give preference to domestic firms. These requirements potentially jeopardize IP protection and overall competitiveness of foreign firms operating in China.
5. Protection of Property Rights
Real Property
The Chinese state owns all urban land, and only the state can issue long-term land leases to individuals and companies, including foreigners, subject to many restrictions. Chinese property law stipulates that residential property rights renew automatically, while commercial and industrial grants renew if the renewal does not conflict with other public interest claims. Several foreign investors have reported revocation of land use rights so that Chinese developers could pursue government-designated building projects. Investors often complain about insufficient compensation in these cases. In rural China, collectively owned land use rights are more complicated. The registration system suffers from unclear ownership lines and disputed border claims, often at the expense of local farmers whom village leaders exclude in favor of “handshake deals” with commercial interests. China’s Securities Law defines debtor and guarantor rights, including rights to mortgage certain types of property and other tangible assets, including long-term leases. Chinese law does not prohibit foreigners from buying non-performing debt, but such debt must be acquired through state-owned asset management firms, and PRC officials often use bureaucratic hurdles to limit foreigners’ ability to liquidate assets.
Intellectual Property Rights
In 2019, China’s legislature promulgated multiple reforms to China’s IP protection and enforcement systems. In January, the Guidelines on Interim and Preliminary Injunctions for Intellectual Property Disputes came into force. These SPC guidelines provide added clarity to the IP injunction process and offer additional procedural safeguards for trade secret cases. In April, the Standing Committee of the National People’s Congress passed amendments to the Trademark Law, the Anti-Unfair Competition Law (AUCL), and the Administrative Licensing Law, among other legislation that increases the potential punitive penalty for willful infringement to up to five times the value of calculated damages. China also amended the Administrative Licensing Law to provide administrative penalties for government officials who illegally disclose trade secrets or require the transfer of technology for the granting of administrative licenses. Similarly, in March, China’s State Council revised several regulations that U.S. and EU enterprises and governments had criticized for discriminating against foreign technology and IP holders. Finally, in November, the Amended Guidelines for Patent Examination came into effect. This measure provides further procedural guidance and defines patentability requirements for stem cells and graphical user interfaces.
Despite the changes to China’s legal and regulatory IP regime, some aspects of China’s IP protection regime fall short of international best practices. Ineffective enforcement of Chinese laws and regulations remains a significant obstacle for foreign investors trying to protect their IP, and counterfeit and pirated goods manufactured in China continue to pose a challenge. U.S. rights holders continued to experience widespread infringement of patents, trademarks, copyrights, and trade secrets, as well as problems with competitors gaming China’s IP protection and enforcement systems. In some sectors, Chinese law imposes requirements that U.S. firms develop their IP in China or transfer their IP to Chinese entities as a condition to accessing the Chinese market, or to obtain tax and other preferential benefits available to domestic companies. Chinese policies can effectively require U.S. firms to localize research and development activities, making their IP much more susceptible to theft or illicit transfer. These practices are documented in the 2019 Section 301 Report released by the Office of the U.S. Trade Representative (USTR). The PRC also remained on the Priority Watch List in the 2020 USTR Special 301 Report, and several Chinese physical and online markets were listed in the 2019 USTR Review of Notorious Markets for Counterfeiting and Piracy. Under the recently signed U.S.-China Phase One trade agreement, China is required to make a number of structural reforms to its IP regime, which will be captured in an IP action plan.
For detailed information on China’s environment for IPR protection and enforcement, please see the following reports:
Since Xi’s rise to power in 2012, China has undergone an intensive and large-scale anti-corruption campaign, with investigations reaching into all sectors of the government, military, and economy. Xi labeled endemic corruption an “existential threat” to the very survival of the CCP. Since then, each CCP annual plenum has touched on judicial, administrative, and CCP discipline reforms needed to root out corruption. In 2018, the CCP amended the constitution to enable the CCP’s Central Commission for Discipline Inspection (CCDI) to become a state organ, calling the new body the National Supervisory Commission-Central Commission for Discipline Inspection (NSC-CCDI). The NSC-CCDI wields the power to investigate any public official and those involved in corrupt officials’ dealings. From 2012 to 2019, the NSC-CCDI claimed it investigated 2.78 million cases – more than the total of the preceding 10 years. In 2019 alone, the NSC-CCDI investigated 619,000 cases and disciplined approximately 587,000 individuals, of whom 45 were officials at or above the provincial or ministerial level. The PRC’s overseas fugitive-hunting campaign, called “Operation Skynet,” has led to the capture of more than 7,500 fugitives suspected of corruption who were living in other countries. The PRC did not notify host countries of these operations. In 2019 alone, NSC-CCDI reported apprehending 2,041 alleged fugitives suspected of official crimes, including 860 corrupt officials, as well as recovering about USD797.5 million in stolen money.
Anecdotal information suggests the PRC’s anti-corruption crackdown is inconsistently and discretionarily applied, raising concerns among foreign companies in China. For example, to fight rampant commercial corruption in the medical/pharmaceutical sector, the PRC’s health authority issued “black lists” of firms and agents involved in commercial bribery, including several foreign companies. Anecdotal information suggests many PRC officials responsible for approving foreign investment projects, as well as some routine business transactions, delayed approvals so as not to arouse corruption suspicions, making it increasingly difficult to conduct normal commercial activity. While central government leadership has welcomed increased public participation in reporting suspected corruption at lower levels, direct criticism of central government leadership or policies remains off-limits and is seen as an existential threat to China’s political and social stability.
China ratified the United Nations Convention against Corruption in 2005 and participates in the Asia-Pacific Economic Cooperation (APEC) and OECD anti-corruption initiatives. China has not signed the OECDConvention on Combating Bribery, although Chinese officials have expressed interest in participating in the OECD Working Group on Bribery meetings as an observer.
Resources to Report Corruption
The following government organization receives public reports of corruption: Anti-Corruption Reporting Center of the CCP Central Commission for Discipline Inspection and the Ministry of Supervision, Telephone Number: +86 10 12388.
10. Political and Security Environment
Foreign companies operating in China face a low risk of political violence. However, protests in Hong Kong in 2019 exposed foreign investors to political risk due to Hong Kong’s role as an international hub for investment into and out of China. The CCP also punished companies that expressed support for Hong Kong protesters — most notably, a Chinese boycott of the U.S. National Basketball Association after one team’s general manager expressed his personal view supporting the Hong Kong protesters. In the past, the PRC government has also encouraged protests or boycotts of products from countries like the United States, South Korea, Japan, Norway, Canada, and the Philippines, in retaliation for unrelated policy decisions. Examples of politically motivated economic retaliation against foreign firms include boycott campaigns against Korean retailer Lotte in 2016 and 2017 in retaliation for the South Korean government’s decision to deploy the Terminal High Altitude Area Defense (THAAD) to the Korean Peninsula; and the PRC’s retaliation against Canadian companies and citizens for Canada’s arrest of Huawei Chief Financial Officer Meng Wanzhou.
PRC authorities also have broad authority to prohibit travelers from leaving China (known as an “exit ban”) and have imposed exit bans to compel U.S. citizens to resolve business disputes, force settlement of court orders, or facilitate government investigations. Individuals not directly involved in legal proceedings or suspected of wrongdoing have also been subject to lengthy exit bans in order to compel family members or colleagues to cooperate with Chinese courts or investigations. Exit bans are often issued without notification to the foreign citizen or without clear legal recourse to appeal the exit ban decision.
11. Labor Policies and Practices
For U.S. companies operating in China, finding, developing, and retaining domestic talent at the management and skilled technical staff levels remain challenging for foreign firms. In addition, labor costs, including salaries along with other production inputs, continue to rise. Foreign firms continue to cite air pollution concerns as a major hurdle in attracting and retaining qualified foreign talent. Chinese labor law does not provide for freedom of association or protect the right to strike. The PRC has not ratified the International Labor Organization conventions on freedom of association, collective bargaining, or forced labor, but it has ratified conventions prohibiting child labor and employment discrimination. Foreign companies complain of difficulty navigating China’s labor and social insurance laws, including local implementation guidelines. Compounding the complexity, due to ineffective enforcement of labor contract laws, Chinese domestic employers often hire local employees without contracts, putting foreign firms at a disadvantage. Without written contracts, workers struggle to prove employment, thus losing basic protections such as severance if terminated. Moreover, in 2018 and 2019, there were multiple U.S. government, media, and NGO reports that persons detained in internment camps in Xinjiang were subjected to forced labor in violation of international labor law and standards. In October 2019, CBP issued a Withhold Release Order barring importation into the United States of garments produced by Hetian Taida Apparel Co., Ltd. in Xinjiang, which were determined to be produced with prison or forced labor in violation of U.S. import laws. The Commerce Department added 28 Chinese commercial and government entities to its Entity List for their complicity in human rights abuses.
The All China Federation of Trade Unions (ACFTU) is the only union recognized under the law. Establishing independent trade unions is illegal. The law allows for “collective bargaining,” but in practice, focuses solely on collective wage negotiations. The Trade Union Law gives the ACFTU, a CCP organ chaired by a member of the Politburo, control over all union organizations and activities, including enterprise-level unions. ACFTU enterprise unions require employers to pay mandatory fees, often through the local tax bureau, equaling a negotiated minimum of 0.5 percent to a standard two percent of total payroll. While labor laws do not protect the right to strike, “spontaneous” worker protests and work stoppages regularly occur. Official forums for mediation, arbitration, and other similar mechanisms of alternative dispute resolution often are ineffective in resolving labor disputes. Even when an arbitration award or legal judgment is obtained, getting local authorities to enforce judgments is problematic.
India
1. Openness To, and Restrictions Upon, Foreign Investment
PoliciestowardForeign Direct Investment
Changes in India’s foreign investment rules are notified in two different ways: (1) Press Notes issued by the Department for Promotion of Industry and Internal Trade (DPIIT) for the vast majority of sectors, and (2) legislative action for insurance, pension funds, and state-owned enterprises in the coal sector. (Note: in January 2019, the government of India changed the name of DIPP to Department for Promotion of Industry and Internal Trade (DPIIT). End Note). FDI proposals in sensitive sectors will, however, require the additional approval of the Home Ministry.
The DPIIT, under the Ministry of Commerce and Industry, is the nodal investment promotion agency, responsible for the formulation of FDI policy and the facilitation of FDI inflows. It compiles all policies related to India’s FDI regime into a single document to make it easier for investors to understand, and this consolidated policy is updated every year. The updated policy can be accessed at: http://dipp.nic.in/foreign-direct-investment/foreign-direct-investment-policy. DPIIT, through the Foreign Investment Implementation Authority (FIIA), plays an active role in resolving foreign investors’ project implementation problems and disseminates information about the Indian investment climate to promote investments. The Department establishes bilateral economic cooperation agreements in the region and encourages and facilitates foreign technology collaborations with Indian companies and DPIIT oftentimes consults with ministries and stakeholders, but some relevant stakeholders report being left out of consultations.
LimitsonForeign Controland Right to Private OwnershipandEstablishment
In most sectors, foreign and domestic private entities can establish and own businesses and engage in remunerative activities. Several sectors of the economy continue to retain equity limits for foreign capital as well as management and control restrictions, which deter investment. For example, the 2015 Insurance Act raised FDI caps from 26 percent to 49 percent, but also limits for foreign capital as well as management and control restrictions, which deter investment. For example, the 2015 Insurance Act raised FDI caps from 26 percent to 49 percent, but also mandated that insurance companies retain “Indian management and control.” Similarly, in 2016, India allowed up to 100 percent FDI in domestic airlines; however, the issue of substantial ownership and effective control (SOEC) rules which mandate majority control by Indian nationals have not yet been clarified. A list of investment caps is accessible at: http://dipp.nic.in/foreign-direct-investment/foreign-direct-investment-policy.
In 2017, the government implemented moderate reforms aimed at easing investments in sectors including single-brand retail, pharmaceuticals, and private security. It also relaxed onerous rules for foreign investment in the construction sector. All FDI must be reviewed under either an “Automatic Route” or “Government Route” process. The Automatic Route simply requires a foreign investor to notify the Reserve Bank of India of the investment. In contrast, investments requiring review under the Government Route must obtain the approval of the ministry with jurisdiction over the appropriate sector along with the concurrence of DPIIT. In August 2019, the government announced a new package of liberalization measures removing restrictions on FDI in multiple additional sectors to help spur the slowing economy. The new measures included permitting investments in coal mining and contract manufacturing through the Automatic Route. The new rules also eased restrictions on investment in single-brand retail.
Screening of FDI
Since the abolition of the Foreign Investment Promotion Board in 2017, appropriate ministries have screened FDI. FDI inflows were mostly directed towards the largest metropolitan areas – Delhi, Mumbai, Bangalore, Hyderabad, Chennai – and the state of Gujarat. The services sector garnered the largest percentage of FDI. Further FDI statistics available at: http://dipp.nic.in/publications/fdi-statistics.
DPIIT is responsible for formulation and implementation of promotional and developmental measures for growth of the industrial sector, keeping in view national priorities and socio- economic objectives. While individual lead ministries look after the production, distribution, development and planning aspects of specific industries allocated to them, DPIIT is responsible for the overall industrial policy. It is also responsible for facilitating and increasing the FDI flows to the country.
Invest India is the official investment promotion and facilitation agency of the Government of India, which is managed in partnership with DPIIT, state governments, and business chambers. Invest India specialists work with investors through their investment lifecycle to provide support with market entry strategies, deep dive industry analysis, partner search, and policy advocacy as required. Businesses can register online through the Ministry of Corporate Affairs website: http://www.mca.gov.in/. After the registration, all new investments require industrial approvals and clearances from relevant authorities, including regulatory bodies and local governments. To fast-track the approval process, especially in case of major projects, Prime Minister Modi has started the Pro-Active Governance and Timely Implementation (PRAGATI initiative) – a digital, multi-modal platform to speed the government’s approval process. Per the Prime Minister’s Office as of November 2019 a total of 265 project proposals worth around $169 billion related to 17 sectors were cleared through PRAGATI. Prime Minister Modi personally monitors the process, to ensure compliance in meeting PRAGATI project deadlines. In December 2014, the Modi government also approved the formation of an Inter-Ministerial Committee, led by the DPIIT, to help track investment proposals that require inter-ministerial approvals. Business and government sources report this committee meets informally and on an ad hoc basis as they receive reports from business chambers and affected companies of stalled projects.
Outward Investment
According to the Reserve Bank of India (RBI), India’s central bank, the total overseas direct investment (ODI) outflow from India till December 2019 was $18.86 billion. According to the U.S. Bureau of Economic Analysis, Indian direct investment into the U.S. was $9.9 billion in 2017. RBI contends that the growth in magnitude and spread (in terms of geography, nature and types of business activities) of ODI from India reflects the increasing appetite and capacity of Indian investors.
2. Bilateral Investment Agreements and Taxation Treaties
India made public a new model Bilateral Investment Treaty (BIT) in December 2015. This followed a string of rulings against Indian firms in international arbitration. The new model BIT does not allow foreign investors to use investor-state dispute settlement methods, and instead requires foreign investors to first exhaust all local judicial and administrative remedies before entering into international arbitration. The Indian government also announced its intention to abrogate all BITs negotiated on the earlier model BIT. The government has served termination notices to roughly 58 countries, including EU countries and Australia. Currently 14 BITs are in force. The Ministry of Finance said the revised model BIT will be used for the renegotiation of existing and any future BITs and will form the investment chapter in any Comprehensive Economic Cooperation Agreements (CECAs)/Comprehensive Economic Partnership Agreements (CEPAs)/Free Trade Agreements (FTAs).
In September 2018, Belarus became the first country to execute a new BIT with India. The Belarus – India BIT is predominantly based on the new Model BIT. In December 2018, Taipei Cultural & Economic Centre (TECC) in India signed a BIT with India Taipei Association (ITA) in Taipei. The TECC is the representative office of the government in Taipei in India and is responsible for promoting bilateral relations between Taiwan and India. By December 2019, two BITs/ JIS have been concluded but not yet signed with Brazil and Cambodia. Several BITs and joint interpretative statements are under discussion such as with Iran, Switzerland, Morocco, Kuwait, Ukraine, UAE, San Marino, Hong Kong, Israel, Mauritius and Oman. The complete list of agreements can be found at: https://dea.gov.in/bipa.
Some government policies are written in a way that can be discriminatory to foreign investors or favor domestic industry; for example, approval for higher FDI in the insurance sector came with a new requirement for “Indian management and control.” On most occasions the rules are framed after thorough discussions by the competent government authorities and require the approval of the cabinet and, in some cases, the Parliament as well. Policies pertaining to foreign investments are framed by DPIIT, and implementation is undertaken by lead federal ministries and sub-national counterparts.
In December 2018, India unveiled new “Guidelines” on foreign-owned e-commerce operations that imposed restrictions disproportionately affecting over $20 billion in combined investments by U.S. companies. As of February 1, 2019, these platforms may not offer exclusive discounts; sell products from companies in which they own a stake; or have any vendor who sources more than 25 percent of their retail stock from a single source. The Guidelines were issued without prior notification or opportunity to provide public comments. While Indian officials argue this was a mere “clarification” of existing policy, the new Guidelines constituted a major regulatory change that severely affected U.S. investors’ operations and business models. The refusal of Indian authorities to extend the deadline for implementation beyond just over one month, further exacerbated the undue and unnecessary disruption to U.S. investors.
The Indian Accounting Standards were issued under the supervision and control of the Accounting Standards Board, a committee under the Institute of Chartered Accountants of India (ICAI), and has government, academic, and professional representatives. The Indian Accounting Standards are named and numbered in the same way as the corresponding International Financial Reporting Standards. The National Advisory Committee on Accounting Standards recommends these standards to the Ministry of Corporate Affairs, which all listed companies must then adopt. These can be accessed at: http://www.mca.gov.in/MinistryV2/Stand.html
InternationalRegulatory Considerations
India is a member of the South Asia Association for Regional Cooperation (SAARC), an eight- member regional block in South Asia. India’s regulatory systems are aligned with SAARC economic agreements, visa regimes, and investment rules. Dispute resolution in India has been through tribunals, which are quasi-judicial bodies. India has been a member of the WTO since 1994, and generally notifies all draft technical regulations to the WTO Committee on Technical Barriers to Trade; however, at times there are delays in publishing the notifications. The Governments of India and the United States cooperate in areas such as standards, trade facilitation, competition, and antidumping practices.
LegalSystem andJudicialIndependence
India adopted its legal system from English law and the basic principles of the Common Law as applied in the UK are largely prevalent in India. However, foreign companies need to make adaptations per Indian Law and the Indian business culture when negotiating and drafting contracts in India to ensure adequate protection in case of breach of contract. The Indian Judicial Structure provides for an integrated system of courts to administer both central and state laws. The legal system has a pyramidal structure, with the Supreme Court at the apex, and a High Court in each state or a group of states which covers a hierarchy of subordinate courts. Article 141 of the Constitution of India provide that a decision declared by the Supreme Court shall be binding on all courts within the territory of India. Apart from courts, tribunals are also vested with judicial or quasi-judicial powers by special statutes to decide controversies or disputes relating to specified areas.
Courts have maintained that the independence of the judiciary is a basic feature of the Constitution, which provides the judiciary institutional independence from the executive and legislative branches.
Lawsand RegulationsonForeign Direct Investment
The government has a policy framework on FDI, which is updated every year and formally notified as the Consolidated FDI Policy (http://dipp.nic.in/foreign-direct-investment/foreign- direct-investment-policy). DPIIT makes policy pronouncements on FDI through Press Notes/Press Releases, which are notified by the RBI as amendments to the Foreign Exchange Management (Transfer or Issue of Security by Persons Resident Outside India) Regulations, 2000 (Notification No. FEMA 20/2000-RB dated May 3, 2000). These notifications are effective on the date of the issued press release, unless otherwise specified. The judiciary does not influence FDI policy measures.
The government has introduced a “Make in India” program as well as investment policies designed to promote manufacturing and attract foreign investment. “Digital India” aims to open up new avenues for the growth of the information technology sector. The “Start-up India” program created incentives to enable start-ups to commercialize and grow. The “Smart Cities” project intends to open up new avenues for industrial technological investment opportunities in select urban areas. The U.S. Government continues to urge the Government of India to foster an attractive and reliable investment climate by reducing barriers to investment and minimizing bureaucratic hurdles for businesses.
Competitionand Anti-Trust Laws
The central government has been successful in establishing independent and effective regulators in telecommunications, banking, securities, insurance, and pensions. The Competition Commission of India (CCI), India’s antitrust body, is now taking cases against mergers, cartels, and abuse of dominance, as well as conducting capacity-building programs for bureaucrats and business officials. Mergers meeting certain thresholds must be notified to the CCI for its review. Upon receipt of a complaint, or upon its own enquiry, if the CCI is of the opinion that there exists a prima facie case, it must direct its investigative arm (the Director General) to investigate. Currently the Director General is required to seek the approval of the local chief metropolitan magistrate for any search and seizure operations. The Securities and Exchange Bureau of India (SEBI) enforces corporate governance standards and is well-regarded by foreign institutional investors. The RBI, which regulates the Indian banking sector, is also held in high regard. Some Indian regulators, including SEBI and the RBI, engage with industry stakeholders through periods of public comment, but the practice is not consistent across the government.
Expropriationand Compensation
The government has taken steps to provide greater clarity in regulation. In 2016, the government successfully carried out the largest spectrum auction in the country’s history. India also has transfer pricing rules that apply to related party transactions. The government implemented the Goods and Services Tax (GST) in July 2017, which reduced the complexity of tax codes and eliminated multiple taxation policies. It also enacted the Insolvency and Bankruptcy Code in 2016, which offers uniform, comprehensive insolvency legislation for all companies, partnerships and individuals (other than financial firms).
Though land is a State Government (sub-national) subject, “acquisition and requisitioning of property” is in the concurrent list, thus both the Indian Parliament and State Legislatures can make laws on this subject. Legislation approved by the Central Government is used as guidance by the State Governments. Land acquisition in India is governed by the Land Acquisition Act (2013), which entered into force in 2014, but continues to be a complicated process due to the lack of an effective legal framework. Land sales require adequate compensation, resettlement of displaced citizens, and 70% approval from landowners. The displacement of poorer citizens is politically challenging for local governments.
DisputeSettlement
India made resolving contract disputes and insolvency easier with the establishment of a modern bankruptcy regime with the enactment in 2016 and subsequent implementation of the Insolvency and Bankruptcy Code (IBC). Among the areas where India has improved the most in the World Bank’s Ease of Doing Business Ranking the past three years has been under the resolving insolvency metric. The World Bank Report noted that the 2016 law has introduced the option of insolvency resolution for commercial entities as an alternative to liquidation or other mechanisms of debt enforcement, reshaping the way insolvent companies can restore their financial well-being or close down. The Code has put in place effective tools for creditors to successfully negotiate and effectuated greater chances for creditors to realize their dues. As a result, the overall recovery rate for creditors jumped from 26.5 to 71.6 cents on the dollar and the time taken for resolving insolvency also came down significantly from 4.3 years to 1.6 years. (https://www.ibbi.gov.in/uploads/publication/62a9cc46d6a96690e4c8a3c9ee3ab862.pdf
India enacted the Arbitration and Conciliation Act in 1996, based on the United Nations Commission on International Trade Law model, as an attempt to align its adjudication of commercial contract dispute resolution mechanisms with most of the world. Judgments of foreign courts are enforceable under multilateral conventions, including the Geneva Convention. The government established the International Center for Alternative Dispute Resolution (ICADR) as an autonomous organization under the Ministry of Law and Justice to promote the settlement of domestic and international disputes through alternate dispute resolution. The World Bank has also funded ICADR to conduct training for mediators in commercial dispute settlement.
India is a signatory to the convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention). It is not unusual for Indian firms to file lawsuits in domestic courts in order to delay paying any arbitral award. Seven cases are currently pending, the oldest of which dates to 1983. India is not a member state to the International Centre for the Settlement of Investment Disputes (ICSID).
The Permanent Court of Arbitration (PCA) at The Hague and the Indian Law Ministry agreed in 2007 to establish a regional PCA office in New Delhi, although no progress has been made in establishing the office. The office would provide an arbitration forum to match the facilities offered at The Hague but at a lower cost.
In November 2009, the Department of Revenue’s Central Board of Direct Taxes established eight dispute resolution panels across the country to settle the transfer-pricing tax disputes of domestic and foreign companies. In 2016 the government also presented amendments to the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act to establish specialized commercial divisions within domestic courts to settle long-pending commercial disputes.
Though India is not a signatory to the ICSID Convention, current claims by foreign investors against India can be pursued through the ICSID Additional Facility Rules, the UN Commission on International Trade Law (UNCITRAL Model Law) rules, or through the use of ad hoc proceedings.
Since formal dispute resolution is expensive and time consuming, many businesses choose methods, including ADR, for resolving disputes. The most commonly used ADRs are arbitration and mediation. India has enacted the Arbitration and Conciliation Act based on the UNCITRAL Model Laws of Arbitration. Experts agree that the ADR techniques are extra-judicial in character and emphasize that ADR cannot displace litigation. In cases that involve constitutional or criminal law, traditional litigation remains necessary.
Dispute Resolutions Pending
An increasing backlog of cases at all levels reflects the need for reform of the dispute resolution system, whose infrastructure is characterized by an inadequate number of courts, benches and judges, inordinate delays in filling judicial vacancies, and only 14 judges per one million people. Almost 25 percent of judicial vacancies can be attributed to procedural delays.
Bankruptcy Regulations
According to the World Bank, it used to take an average of 4.3 years to recover funds from an insolvent company in India, compared to 2.6 years in Pakistan, 1.7 years in China and 1.8 years in OECD countries. The introduction and implementation of the Insolvency and Bankruptcy Code (IBC) in 2016 led to an overhaul of the previous framework on insolvency and paved the way for much-needed reforms. The IBC focused on creditor-driven insolvency resolution, and offers a uniform, comprehensive insolvency legislation encompassing all companies, partnerships and individuals (other than financial firms).
The law, however, does not provide for U.S. style Chapter 11 bankruptcy provisions. The government is proposing a separate framework for bankruptcy resolution in failing banks and financial sector entities. Supplementary legislation would create a new institutional framework, consisting of a regulator, insolvency professionals, information utilities, and adjudicatory mechanisms that would facilitate formal and time-bound insolvency resolution process and liquidation.
In August 2016, the Indian Parliament passed amendments to the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, and the Debt Recovery Tribunals Act. These amendments were geared at improving the effectiveness of debt recovery laws and helping address the problem of rising bad loans for domestic and multilateral banks. It will also help banks and financial institutions recover loans more effectively, encourage the establishment of more asset reconstruction companies (ARCs) and revamp debt recovery tribunals.
4. Industrial Policies
The regulatory environment in terms of foreign investment has been eased to make it investor- friendly. The measures taken by the Government are directed to open new sectors for foreign direct investment, increase the sectoral limit of existing sectors and simplifying other conditions of the FDI policy. The Indian government does issue guarantees to investments but only in case of strategic industries.
Foreign Trade Zones/Free Ports/Trade Facilitation
The government established several foreign trade zone initiatives to encourage export-oriented production. These include Special Economic Zones (SEZs), Export Processing Zones (EPZs), Software Technology Parks (STPs), and Export Oriented Units (EOUs). In 2018, the Indian government announced guidelines for the establishment of the National Industrial and Manufacturing Zones (NIMZs), envisaged as integrated industrial townships to be managed by a special purpose vehicle and headed by a government official. So far, three NIMZs have been accorded final approval and 13 have been accorded in-principle approval. In addition, eight investment regions along the Delhi-Mumbai Industrial Corridor (DIMC) have also been 12 established as NIMZs. SEZs are treated as foreign territory; businesses operating within SEZs are not subject to customs regulations, nor have FDI equity caps. They also receive exemptions from industrial licensing requirements and enjoy tax holidays and other tax breaks. EPZs are industrial parks with incentives for foreign investors in export-oriented businesses. STPs are special zones with similar incentives for software exports. EOUs are industrial companies, established anywhere in India, that export their entire production and are granted the following: duty-free import of intermediate goods, income tax holidays, exemption from excise tax on capital goods, components, and raw materials, and a waiver on sales taxes. These initiatives are governed by separate rules and granted different benefits, details of which can be found at: http://www.sezindia.nic.in, https://www.stpi.in/ http://www.fisme.org.in/export_schemes/DOCS/B-1/EXPORT%20ORIENTED%20UNIT%20SCHEME.pdfand http://www.makeinindia.com/home.
Performance and Data Localization Requirements
Preferential Market Access (PMA) for government procurement has created substantial challenges for foreign firms operating in India. State-owned “Public Sector Undertakings” and the government accord a 20 percent price preference to vendors utilizing more than 50 percent local content. However, PMA for government procurement limits access to the most cost effective and advanced ICT products available. In December 2014, PMA guidelines were revised and reflect the following updates:
Current guidelines emphasize that the promotion of domestic manufacturing is the objective of PMA, while the original premise focused on the linkages between equipment procurement and national security.
Current guidelines on PMA implementation are limited to hardware procurement only. Former guidelines were applicable to both products and services.
Current guidelines widen the pool of eligible PMA bidders, to include authorized distributors, sole selling agents, authorized dealers or authorized supply houses of the domestic manufacturers of electronic products, in addition to OEMs, provided they comply with the following terms:
The bidder shall furnish the authorization certificate by the domestic manufacturer for selling domestically manufactured electronic products.
The bidder shall furnish the affidavit of self-certification issued by the domestic manufacturer to the procuring agency declaring that the electronic product is domestically manufactured in terms of the domestic value addition prescribed.
It shall be the responsibility of the bidder to furnish other requisite documents required to be issued by the domestic manufacturer to the procuring agency as per the policy.
The current guidelines establish a ceiling on fees linked with the complaint procedure. There would be a complaint fee of INR 200,000 ($3000) or one percent of the value of the Domestically Manufactured Electronic Product being procured, subject to a maximum of INR 500,000 ($7500), whichever is higher.
In January 2017, the Ministry of Electronics & Information Technology (MeitY) issued a draft notification under the PMA policy, stating a preference for domestically manufactured servers in government procurement. A current list of PMA guidelines, notified products, and tendering templates can be found on MeitY’s website: http://meity.gov.in/esdm/pma.
Research and Development
The Government of India allows for 100 percent FDI in research and development through the automatic route.
Data Storage & Localization
In April 2018, the RBI, announced, without prior stakeholder consultation, that all payment system providers must store their Indian transaction data only in India. The RBI mandate went into effect on October 15, 2018, despite repeated requests by industry and the U.S. officials for a delay to allow for more consultations. In July 2019, the RBI, again without prior stakeholder consultation, retroactively expanded the scope of its 2018 data localization requirement to include banks, creating potential liabilities going back to late 2018. The RBI policy overwhelmingly and disproportionately affects U.S. banks and investors, who depend on the free flow of data to both achieve economies of scale and to protect customers by providing global real-time monitoring and analysis of fraud trends and cybersecurity. U.S. payments companies have been able to implement the mandate for the most part, though at great cost and potential damage to the long-term security of their Indian customer base, which will receive fewer services and no longer benefit from global fraud detection and AML/CFT protocols. Similarly, U.S. banks have been able to comply with RBI’s expanded mandate, though incurring significant compliance costs and increased risk of cybersecurity vulnerabilities.
In addition to the RBI data localization directive for payments companies and banks, the government formally introduced its draft Data Protection Bill in December 2019, which contains restrictions on all cross-border transfers of personal data in India. The Bill is currently under review by a Joint Parliamentary Committee and stipulates that personal data that is considered “critical” can only be stored in India. The Bill is based on the conclusions of a ten-person Committee of Experts, established by MeitY in July 2017.
5. Protection of Property Rights
Real Property
Several cities, including the metropolitan cities of Delhi, Kolkata, Mumbai, and Chennai have grown according to a master plan registered with the central government’s Ministry of Urban Development. Property rights are generally well-enforced in such places, and district magistrates—normally senior local government officials—notify land and property registrations. Banks and financial institutions provide mortgages and liens against such registered property.
In other urban areas, and in areas where illegal settlements have been built up, titling often remains unclear. As per the Department of Land Resources, in 2008 the government launched the National Land Records Modernization Program (NLRMP) to clarify land records and provide landholders with legal titles. The program requires the government to survey an area of
the National Land Records Modernization Program (NLRMP) to clarify land records and provide landholders with legal titles. The program requires the government to survey an area of approximately 2.16 million square miles, including over 430 million rural households, 55 million urban households, and 430 million land records. Initially scheduled for completion in 2016, the program is now scheduled to conclude in 2021. Traditional land use rights, including communal rights to forests, pastures, and agricultural land, are sanctioned according to various laws, depending on the land category and community residing on it. Relevant legislation includes the Scheduled Tribes and Other Traditional Forest Dwellers (Recognition of Forest Rights) Act 2006, the Tribal Rights Act, and the Tribal Land Act.
In 2016, India introduced its first regulator in the real estate sector in the form of the Real Estate Act. The Real Estate Act, 2016 aims to protect the rights and interests of consumers and promote uniformity and standardization of business practices and transactions in the real estate sector. Details are available at: http://mohua.gov.in/cms/TheRealEstateAct2016.php
Foreign and domestic private entities are permitted to establish and own businesses in trading companies, subsidiaries, joint ventures, branch offices, project offices, and liaison offices, subject to certain sector-specific restrictions. The government does not permit foreign investment in real estate, other than company property used to conduct business and for the development of most types of new commercial and residential properties. Foreign Institutional Investors (FIIs) can now invest in initial public offerings (IPOs) of companies engaged in real estate. They can also participate in pre-IPO placements undertaken by such real estate companies without regard to FDI stipulations.
To establish a business, various government approvals and clearances are required, including incorporation of the company and registration under the State Sales Tax Act and Central and State Excise Acts. Businesses that intend to build facilities on land they own are also required to take the following steps: register the land; seek land use permission if the industry is located outside an industrially zoned area; obtain environmental site approval; seek authorization for electricity and financing; and obtain appropriate approvals for construction plans from the respective state and municipal authorities. Promoters must also obtain industry-specific environmental approvals in compliance with the Water and Air Pollution Control Acts. Petrochemical complexes, petroleum refineries, thermal power plants, bulk drug makers, and manufacturers of fertilizers, dyes, and paper, among others, must obtain clearance from the Ministry of Environment and Forests.
The Foreign Exchange Management Regulations and the Foreign Exchange Management Act set forth the rules that allow foreign entities to own immoveable property in India and convert foreign currencies for the purposes of investing in India. These regulations can be found at: https://www.rbi.org.in/scripts/Fema.aspx. Foreign investors operating under the automatic route are allowed the same rights as an Indian citizen for the purchase of immovable property in India in connection with an approved business activity.
In India, a registered sales deed does not confer title ownership and is merely a record of the sales transaction. It only confers presumptive ownership, which can still be disputed. The title is established through a chain of historical transfer documents that originate from the land’s original established owner. Accordingly, before purchasing land, buyers should examine all documents that establish title from the original owner. Many owners, particularly in urban areas, do not have access to the necessary chain of documents. This increases uncertainty and risks in land transactions.
IntellectualProperty Rights
In 2018, India became a signatory to the WIPO Centralized Access to Search and Examination (CASE) and Digital Access Service (DAS) agreements. The CASE system enables patent offices to securely share and search examination documentation related to patent applications, and DAS provides details of the types of applications managed by individual digital libraries together with any operational procedures and technical requirements. However, the provision of Indian law prescribing criminal penalties for failure to furnish information pertaining to applications for a patent for the “same or substantially the same invention” filed in any country outside India remains in place.
Prime Minister Modi’s courtship of multinationals to invest and “Make in India” has not yet addressed longstanding hesitations over India’s lack of effective intellectual property rights (IPR) enforcement. Despite the release of the National IPR Policy and the establishment of India’s first intellectual property (IP) crime unit in Telangana in 2016, India’s IP regime continues to fall short of global best practices and standards. U.S. engagement has not yet translated into the progress and/or actions on IPR that were anticipated under the previous U.S. administration. Some “Notorious Markets” across the country continue to operate, while many smaller stores sell or deal with pirated content across the country. U.S. and Indian Government officials continued to engage on IPR issues. U.S. government representatives continued to meet government officials and industry stakeholders on IPR-related matters in 2018 and 2019, including during visits to India by officials from the U.S. Trade Representative (USTR), the U.S. Patent Trademark Office (USPTO), the U.S. Intellectual Property Enforcement Coordinator, and the Departments of State, Commerce, and Agriculture. India has made efforts to streamline its IP framework through administrative actions and awareness programs and is in the process of reducing its decade-long backlog of patent and trademark applications. India also addresses IPR in its recently established Commercial Courts, Commercial Divisions, and Commercial Appellate Divisions within India’s High Courts.
U.S. and Indian Government officials continued to engage on IPR issues. U.S. government representatives continued to meet government officials and industry stakeholders on IPR-related matters in 2018 and 2019, including during visits to India by officials from the U.S. Trade Representative (USTR), the U.S. Patent Trademark Office (USPTO), the U.S. Intellectual Property Enforcement Coordinator, and the Departments of State, Commerce, and Agriculture. India has made efforts to streamline its IP framework through administrative actions and awareness programs and is in the process of reducing its decade-long backlog of patent and trademark applications. India also addresses IPR in its recently established Commercial Courts, Commercial Divisions, and Commercial Appellate Divisions within India’s High Courts.
Although India’s copyright laws were amended in 2012, the amendments have not been fully implemented. Without an active copyright board in place to determine royalty rates for authors, weak enforcement of copyright regulations, and the widespread issue of pirated copyrighted materials are all contributing factors to why copyright law requires more emphasis on implementation.
The Delhi High Court diluted the publishing industry’s and authors’ rights and expanded the definition of fair use judgment, by allowing photocopiers to copy an entire book for educational purposes without seeking prior permission of the copyright holder. The movie industry identified new illegal cam cording hubs of operation in Indore and Noida, and the Telangana police cracked down on two syndicates that used under-age children to illegally record movies. After years of advocacy by industry groups, especially the Indian office of the Motion Picture Association (MPA), the GOI released a draft Cinematography Bill for comment in December 2018, which contained anti-cam cording legislation. Industry groups welcomed this move, which included criminal and financial penalties for offenders. The bill is now awaiting Parliamentary approval. However, the penalties for infringement and IP theft are significantly weakened from those suggested in the initial draft legislation in 2013.
The music industry remains concerned about a Section 31D memorandum that the Department of Industry and Policy Promotion (DIPP), now DPIIT,-issued announced in September 2016 to announce that all online transmissions fall under the statutory licensing provisions of section 31D of the Copyright Act. The memo places internet service providers on par with radio broadcasters, allowing them to provide music on their websites by paying the same royalties to copyright societies, two percent of ad revenues. The industry argues that most of the websites have little to no ad revenue, and some may be hosted on servers outside India, which makes collection of royalties challenging. However, in February 2017, India issued a notice to all event organizers that they would have to pay music royalties to artists when played at an event. On a more positive note, in April 2019, the Bombay High Court issued its decision in Tips Industries LTD v. Wynk Music LTD (Airtel) that statutory licensing under section 31D of the Copyright Act does not cover Internet transmissions (streaming), but rather is limited to traditional television and radio broadcasts. The Court also stated that Section 31D was an exception to copyright and must be distinctly interpreted. It is not clear if this judgement will move the Government of India to withdraw DPIIT’s 2016 memo. However, in 2019, the DPIIT proposed amendments to the Copyright Rules that would, in contravention to the plain statutory text, broaden the scope of the statutory licensing exception to encompass not only radio and television broadcasting, but also Internet broadcasting.
2018 was a year of great difficulty in the agriculture and biotechnology space, which has been reeling from the aftermath of a coordinated attack in 2016 and 2017 on the Monsanto Corporation’s India operations (reported in our 2016 and 2017 Special 301 submissions). In 2017, the Protection of Plant Varieties and Farmers Rights Act (PPVFRA) removed the long-standing requirement for breeders to produce a “No-Objection-Certificate” from the patentee of a particular genetically modified (GM) trait. The move was nearly unprecedented and removed a key preemptive tool for breeders to diligently ensure stakeholders are consulted and patentee’s innovations are not being infringed upon or used without permission.
In April 2018, the Delhi High Court judgment struck down a patent held by Monsanto in a summary judgment. In a series of decisions on this matter, most recently in August, 2019, the Supreme Court overturned Delhi High Court Divisional Bench judgement of April 2018 and reinstated the March 2017 Single Judge decision, pointing to the Divisional Bench failing to have confined itself to the examination of the validity of the order of injunction granted by the Single Judge 2017 decision. Issues remain complex and unsettled. The GM Licensing Guidelines remain in draft form but could have significant and wide-ranging implications for Monsanto and many other IP holders. Moreover, follow-on decisions and administrative legal actions could set important Indian legal precedents for stopping a patent, the role of the PVPFRA and its relationship to biological innovation, the application of administrative regulations regarding price and term of a patent, and the interplay between the Patents Act, PVPFRA, and the Biodiversity Act. It is worth noting that in December 2015, Monsanto terminated more than 40 of its license agreements with Indian companies for nonpayment of licensing fees. The Indian licensees subsequently challenged Monsanto’s patents in court on several grounds, including challenging the validity of the patent and efficacy of the technology.
The Government of India’s refusal to repudiate Ministry of Agriculture and Farmers Welfare’s GM licensing guidelines has already resulted in withdrawal of next-generation innovative biotechnology from the Indian marketplace and has given pause to many other companies who seek to protect their innovative products. Other biotech-led industries are also following this development and are greatly concerned, as the action reaches beyond compulsory licensing under the Patents Act.
Indian law still does not provide any statutory protection for trade secrets. After a workshop conducted in October 2016, DIPP agreed to provide guidance to start-ups on trade secrets. The Designs Act allows for the registration of industrial designs and affords a 15-year term of protection.
Other long-standing concerns remain. Since 2012, outstanding concerns that have not been addressed either in the IP Policy or by Government of India include; Section 3(d) of India’s Patent Act, which creates confusing criteria on “enhanced efficacy” for the patentability of pharmaceutical products; draft biotechnology licensing regulations from the Ministry of Agriculture which are mandatory, overly prescriptive, and severely limit the value of IPR; remaining lack of clarity on the conditions under which compulsory licensing may be allowed; lack of a copyright board; lack of a trade secrets law; lack of data exclusivity legislation; lack of an early dispute resolution mechanism for patents ; lack of a legislative framework facilitating public-private partnership in government-funded research (along the lines of Bayh-Dole in the United States); weak IP enforcement; and overall unwillingness to make IPR a priority within the Indian government. All these measures across various sectors create uncertainty at best, and at worst perceptions of a hostile business environment.
In addition, the Patent Act requires patentees to regularly report on a commercial scale “the working” of their patents. This is implemented by filing a required annual form called Form 27 on patent working. The current requirement to file Form 27 is not only onerous and costly for patentees and ill-suited to the reality of patented technology, it also hinders any incentives to invent and advance innovation.
Standard Essential Patents (SEPs) and fair, reasonable, and non-discriminatory (FRAND) licensing criteria and systems are another concerning area. Discussions on FRAND licensing terms restarted in 2019 but did not include stakeholders. Several cases are pending before the Delhi High Court surrounding the issue of royalty payments for standard essential patents. While initial indications from Delhi High Court proceedings are encouraging, a 2016 GOI discussion paper on SEPs raised concerns related to active government involvement in setting standards and determining FRAND royalties. Some decisions from the Competition Commission of India (CCI) have been inconsistent with the Delhi High Court, creating confusion related to the development of SEP policy and practices in India.
Another area of concern is the global blocking order against “Intermediaries”. A Delhi High Court judge issued an interim injunction directing Google, Facebook, YouTube, Twitter, and other “intermediaries” to remove – on a global basis – content uploaded to their platforms allegedly defaming the guru Baba Ramdev. The judgment moved beyond traditional “geo-blocking,” in which take down orders are limited to specific geographic regions. Facebook has challenged the judgment before a Division Bench.
In 2019, we observed that public notice and comment procedures on policy – including on IPR related issues – were often not followed. Stakeholders were not properly notified of meetings with agencies to discuss concerns, including for changes to critical issues like price controls on medical devices or changes to key policies. Moreover, Mission India remains concerned that when stakeholder input is solicited, it is often disregarded and/or ignored during the final determination of a policy.
India actively engages at multilateral negotiations, including the Trade Related Aspects of Intellectual Property Rights (TRIPS) Council. As a result, in April 2017, the MOHFW issued a notification that amended the manufacturing license form (Form 44), taking out any requirement to notify the regulator if the drug, for which manufacturing approval was being sought, is under patent or not. The GOI cited their view that Form 44 provisions were outside the scope of their WTO TRIPS agreement commitments as justification for the change. Industry contracts point to the clear benefit this change has delivered to the Indian generic pharmaceutical industry, which now has an even easier path to manufacture patented drugs for years, while IP holders are forced to discover the violation and challenge the infringement in separate courts. These negotiations will have an impact on innovation, trade, and investment in IP-intensive products and services.
Developments Strengthening the Rights of IP Holders
Clarification of Patentability Criteria: the Delhi High Court added clarity on the matter of the patentability criterion under Section 3(k) of the India Patents Act, ruling in Ferid Allani vs UOI & Ors that there is no absolute bar on the patentability of computer programs. Additionally, ‘technical effect’ or ‘technical contribution’ must be taken into consideration during examination when determining the patent eligibility of a computer program.
Bombay High Court Clarifies 31(D) of the Copyright Act: Ruling on “Tips Industries vs. Wynk Music,” the Bombay High Court stated that the extension of the Copyright Act, 2016’s Section 31(D) to the internet is flawed logic and unsound in law. The court also noted that Section 31(D) is an exception to copyright and must be strictly interpreted. It is to be seen if this judgement helps Government of India in withdrawing of DPIIT memo of 2016.
Delhi High Court Confronts Online Piracy: The Delhi High Court decided that approved site take down requests will apply to those sites with addresses specifically listed in the request as well as similar sites that operate under different addresses. This “dynamic injunction” is meant to eliminate the need for complainants to approach courts with new requests should a banned site reappear under a new address.
The Delhi High Court in July 2019 took steps to address the “gridlock” of the Intellectual Property Appellate Board (IPAB). IPAB was established in 2003 to adjudicate appeals over patents, trademarks, copyrights, and other decisions, but lacked the necessary number of technical members to form a quorum and make judgements, resulting in a significant backlog. To clear the backlog of cases, the court decided that until the appointments were filled, the chairman and available technical members could issue decisions despite lacking a quorum. If no technical members were available, the IPAB chairman could consult a scientific advisor from the panel of scientific advisors appointed under Section 115 of the 1970 Patents Act. Additionally, in October 2019, the court permitted the current IPAB chairman to serve past his term – which ended in September 2019, reinstating him until a replacement takes over.
9. Corruption
India is a signatory to the United Nation’s Conventions Against Corruption and is a member of the G20 Working Group against corruption. India showed marginal improvement and scored 41 out of 100 in Transparency International’s 2018 Corruption Perception Index, with a ranking of 78 out of the 180 countries surveyed (as compared to a score of 40 out of 100 and ranked 81 in 2017).
Corruption is addressed by the following laws: the Companies Act, 2013; the Prevention of Money Laundering Act, 2002; the Prevention of Corruption Act, 1988; the Code of Criminal Procedures, 1973; the Indian Contract Act, 1872; and the Indian Penal Code of 1860. Anti- corruption laws amended since 2004 have granted additional powers to vigilance departments in government ministries at the central and state levels. The amendments also elevated the Central Vigilance Commission (CVC) to be a statutory body. In addition, the Comptroller and Auditor General is charged with performing audits on public-private-partnership contracts in the infrastructure sector on the basis of allegations of revenue loss to the exchequer.
In November 2016, the Modi government ordered that INR 1000 and 500 notes, comprising approximately 86 percent of cash in circulation, be demonetized to curb “black money,” corruption, and the financing of terrorism. An August 2018 RBI report stated 99 percent of demonetized cash was deposited in legitimate bank accounts, leading analysts to question if the exercise enabled criminals to launder money into the banking system. Digital transactions increased due to demonetization, as mobile banking inclusion jumped from 40 percent to 60 percent of the populace. India is investigating 1.8 million bank accounts and 200 individuals associated with unusual deposits during demonetization, and banks’ suspicious transaction reports quadrupled to 473,000 in 2016. On August 7, SEBI directed stock exchanges to restrict trading and audit 162 suspected shell companies on the basis of large cash deposits during demonetization.
The Benami Transactions (Prohibition) Amendment Act of 2016 entered into effect in November 2016, and strengthened the legal and administrative procedures of the Benami Transactions Act 1988, which was ultimately never notified. (Note: A benamiproperty is held by one person, but paid for by another, often with illicit funds.) Analysts expect the government to issue a roadmap in 2017-2018 to begin implementing the Act. In May 2017, the Real Estate (Regulation and Development) Act, 2016 came into effect. The Act will regulate India’s real estate sector, which is notorious for its corruption and lack of transparency.
In November 2016, India and Switzerland signed a joint declaration to enter into an Agreement on the Exchange of Information (AEOI) to automatically share financial information on accounts held by Indian residents, beginning in 2018. India also amended its Double Taxation Avoidance Agreement with Singapore, Cyprus, and Mauritius in 2016 to prevent income tax evasion. The move follows the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, which replaced the Income Tax (IT) Act of 1961 regarding the taxation of foreign income. The new Act penalizes the concealment of foreign income, as well as provides criminal liability for foreign income tax evasion.
In February 2014, the government enacted the Whistleblower Act, intended to protect anti- corruption activists, but it has yet to be implemented. Experts believe that the prosecution of corruption has been effective only among the lower levels of the bureaucracy; senior bureaucrats have generally been spared. Businesses consistently cite corruption as a significant obstacle to FDI in India and identify government procurement as a process particularly vulnerable to corruption. To make the Whistle Blowers Protection Act, 2014 more effective, the government proposed an amendment bill in 2015. This bill is still pending with the Upper House of Parliament; however anti-corruption activists have expressed concern that the bill will dilute the Act by creating exemptions for state authorities, allowing them to stay out of reach of whistleblowers.
The Companies Act of 2013 established rules related to corruption in the private sector by mandating mechanisms for the protection of whistle blowers, industry codes of conduct, and the appointment of independent directors to company boards. As yet, the government has established no monitoring mechanism, and it is unclear the extent to which these protections have been instituted. No legislation focuses particularly on the protection of NGOs working on corruption issues, though the Whistleblowers Protection Act, 2011, may afford some protection once it has been fully implemented.
In 2013, Parliament enacted the Lokpal and Lokayuktas Act 2013, which created a national anti- corruption ombudsman and requires states to create state-level ombudsmen within one year of the law’s passage. Till December 2018, the government had not appointed an ombudsman. (Note: An ombudsman was finally appointed in March 2019.)
UN Anticorruption Convention, OECDConvention on Combatting Bribery
India is a signatory to the United Nations Conventions against Corruption and is a member of the G20 Working Group against Corruption. India is not party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.
Resourcesto ReportCorruption
Matt Ingeneri
Economic Growth Unit Chief U.S. Embassy New Delhi Shantipath, Chanakyapuri New Delhi
+91 11 2419 8000 ingeneripm@state.gov
Ashutosh Kumar Mishra
Executive Director
Transparency International, India
Lajpat Bhawan, Room no.4
Lajpat Nagar,
New Delhi – 110024 +91 11 2646 0826 info@transparencyindia.org
10. Political and Security Environment
Prime Minister Modi’s BJP-led National Democratic Alliance government won a decisive mandate in the May 2019 elections, winning a larger majority in the Lok Sabha (lower house of Parliament) than in 2014. The new government’s first 100 days of its second term were marked by the removal of special constitutional status from the state of Jammu and Kashmir (J&K) The government’s decision to remove J&K autonomy was preceded by a heavy paramilitary build-up in the State, arrests of local opposition leaders, and cutting of mobile phone and Internet services. Internet connections have since been largely opened, but with continued severe limitations on data download speeds to the extent that everyday activities of Kashmiris often take hours or need to be completed outside the region.
A number of areas of India suffered from terrorist attacks by separatists, including Jammu and Kashmir and some states in India’s northeast.
In December 2019, the government passed the Citizenship Amendment Act (CAA), which promises fast-tracked citizenship to applicants from six minority religious groups from Afghanistan, Bangladesh, and Pakistan, but does not offer a similar privilege to Muslims from these countries. The new law sparked widespread protests that sometimes-included violence by demonstrators, government supporters, and security services.
Although there are more than 20 million unionized workers in India, unions still represent less than 5 percent of the total work force. Most of these unions are linked to political parties. Unions are typically strong in state-owned enterprises. A majority of the unionized work force can be found in the railroads, port & dock, banking and insurance sectors. According to provisional figures form the Ministry of Labor and Employment (MOLE), over 1.74 million workdays were lost to strikes and lockouts during 2018. Labor unrest occurs throughout India, though the reasons and affected sectors vary widely. A majority of the labor problems are the result of workplace disagreements over pay, working conditions, and union representation.
India’s labor regulations are very stringent and complex, and over time have limited the growth of the formal manufacturing sector. In an effort to reduce the number of labor related statutes, the Indian parliament passed the Code on Wages legislation in 2019. This Code combines four previously existing statutes- The Payment of Wages Act, the Minimum Wages Act, the Payment of Bonus Act, and the Equal Renumeration Act- into one code to simplify compliance procedures for employers. Minimum industrial wages vary by state, ranging from about $2.20 per day for unskilled laborers to over $9.30 per day for skilled production workers. Retrenchment, closure, and layoffs are governed by the Industrial Disputes Act of 1947, which requires prior government permission to lay off workers or close businesses employing more than 100 people, although some states including Haryana, Madhya Pradesh, Rajasthan, and Maharashtra have increased the threshold to 300 people. RBI approval is also required for foreign banks to close branches. Permission is generally difficult to obtain, which has resulted in the increasing use of contract workers (i.e. non- permanent employees) to circumvent the law. Private firms successfully downsize through voluntary retirement schemes.
Since the current government assumed office in 2014, much of the movement on labor laws has taken place at the state level, particularly in Rajasthan, where the government has passed major amendments to allow for quicker hiring, firing, laying off, and shutting down of businesses. The Ministry of Labor and Employment launched a web portal in 2014 to assist companies in filing a single online report on compliance with 16 labor-related laws. The government has also drafted a Code on Industrial Relations that is currently being reviewed by a parliamentary committee. India’s major labor unions have opposed labor reforms, arguing that they compromise workers’ safety and job security.
In March 2017, the Maternity Benefits Act was amended to increase the paid maternity leave for women from 12 weeks to 26 weeks. The amendment also makes it mandatory for all industrial establishments employing 50 or more workers to have a creche for babies to enable nursing mothers to feed the child up to 4 times in a day.
In August 2016, the Child Labor Act was amended establishing a minimum age of 14 years for work and 18 years as the minimum age for hazardous work. In December 2016, the government promulgated legislation enabling employers to pay worker salaries through checks or e-payment in addition to the prevailing practice of cash payment.
There are no reliable unemployment statistics for India due to the informal nature of most employment. A 2019 report from India’s National Statistics Commission claimed that the official unemployment rate in India rose to 6.1 percent in 2018, a 45-year high. In contrast, the unemployment rate was only 2.2 percent the last time when the commission conducted this survey in 2012. The government acknowledges a shortage of skilled labor in high-growth sectors of the economy, including information technology and manufacturing. The current government has established a Ministry of Skill Development and has embarked on a national program to increase skilled labor.
Macau
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment
Under the concept of “one country, two systems,” Macau enjoys a high degree of autonomy in economic matters, and its economic system is to remain unchanged until at least 2049. The GOM maintains a transparent, non-discriminatory, and free-market economy. Macau has separate membership in the World Trade Organization (WTO) from that of mainland China.
There are no restrictions placed on foreign investment in Macau as there are no special rules governing foreign investment. Both overseas and domestic firms register under the same set and are subject to the same regulations on business, such as the Commercial Code (Decree 40/99/M).
Macau is heavily dependent on the gaming sector and tourism. The GOM aims to diversify Macau’s economy by attracting foreign investment and is committed to maintaining an investor-friendly environment. Corporate taxes are low, with a tax rate of 12 percent for companies whose net profits exceed MOP 300,000 (USD 37,500). For net profits less than USD 37,500, the tax ranges from three percent to 12 percent. The top personal tax rate is 12 percent. The tax rate of casino concessionaries is 35 percent on gross gaming revenue, plus a four percent contribution for culture, infrastructure, tourism, and a social security fund.
In 2002, the GOM ended a long-standing gaming monopoly, awarding two gaming concessions to consortia with U.S. interests. This opening has encouraged substantial U.S. investment in casinos and hotels and has spurred rapid economic growth. Macau is attempting to position itself to be a regional center for incentive travel, conventions, and tourism. In March 2019, the GOM extended for two years the gaming licenses of SJM (a locally-owned company) and MGM China (a joint venture with investment from U.S.-owned MGM Resorts International that holds a sub-concession from SJM), that were set to expire in 2020. The concessions of all six of Macau’s gambling concessionaires and sub-concessionaires are now set to expire in 2022. The GOM is currently drafting a bill to guide the gaming concession retendering process.
The Macau Trade and Investment Promotion Institute (IPIM) is the GOM agency responsible for promoting trade and investment activities. IPIM provides one-stop services, including notary service, for business registration, and it applies legal and administrative procedures to all local and foreign individuals or organizations interested in setting up a company in Macau.
Macau maintains an ongoing dialogue with investors through various business networks and platforms, such as the IPIM, the Macau Chamber of Commerce, AmCham Macau, and the Macau Association of Banks.
Limits on Foreign Control and Right to Private Ownership and Establishment
Foreign firms and individuals are free to establish companies, branches, and representative offices without discrimination or undue regulation in Macau. There are no restrictions on the ownership of such establishments. Company directors are not required to be citizens of, or resident in, Macau, except for the following three professional services which impose residency requirements:
Education – an individual applying to establish a school must have a Certificate of Identity or have the right to reside in Macau. The principal of a school must be a Macau resident.
Newspapers and magazines – applicants must first apply for business registration and register with the Government Information Bureau as an organization or an individual. The publisher of a newspaper or magazine must be a Macau resident or have the right to reside in Macau.
Legal services – lawyers from foreign jurisdictions who seek to practice Macau law must first obtain residency in Macau. Foreign lawyers must also pass an examination before they can register with the Lawyer’s Association, a self-regulatory body. The examination is given in Chinese or Portuguese. After passing the examination, foreign lawyers are required to serve an 18-month internship before they are able to practice law in Macau.
Other Investment Policy Reviews
Macau last conducted the WTO Trade Policy Review in May 2013. https://www.wto.org/english/tratop_e/tpr_e/g281_e.pdf
Business Facilitation
Macau provides a favorable business and investment environment for enterprises and investors. The IPIM helps foreign investors in registering a company and liaising with the involved agencies for entry into the Macau market. The business registration process takes less than 10 working days. http://www.ipim.gov.mo/en/services/one-stop-service/handle-company-registration-procedures/.
Outward Investment
Macau, as a free market economy, does not promote or incentivize outward investment, nor does it restrict domestic investors from investing abroad. Hong Kong and mainland China were the top two destinations for Macau’s outward investments in 2018.
3. Legal Regime
Transparency of the Regulatory System
The GOM has transparent policies and laws that establish clear rules and do not unnecessarily impede investment. The basic elements of a competition policy are set out in Macau’s Commercial Code.
The GOM will normally conduct a three-month public consultation when amending or making legislation, including investment laws, and will prepare a draft bill based on the results of the public consultation. The lawmakers will discuss the draft bill before putting it to a final vote. All the processes are transparent and consistent with international norms.
Public comments received by the GOM are not made available online to the public. The draft bills are made available at the Legislative Assembly’s website http://www.al.gov.mo/zh/, while this website http://www.io.gov.mo/ links to the GOM’s Printing Bureau, which publishes laws, rules, and procedures.
Macau’s anti-corruption agency the Commission Against Corruption (known by its Portuguese acronym CCAC) carries out ombudsman functions to safeguard rights, freedoms, and legitimate interests of individuals and to ensure the impartiality and efficiency of public administration.
Macau’s law on the budgetary framework (Decree 15/2017) aims to reinforce monitoring of public finances and to enhance transparency in the preparation and execution of the fiscal budget.
International Regulatory Considerations
Macau is a member of WTO and adopts international norms. The GOM notified all draft technical regulations to the WTO Committee on Technical Barriers to Trade.
Macau, as a signatory to the Trade Facilitation Agreement (TFA), has achieved a 100 percent rate of implementation commitments.
Legal System and Judicial Independence
Under “one country, two systems”, Macau maintains Continental European law as the foundation of its legal system, which is based on the rule of law and the independence of the judiciary. The current judicial process is procedurally competent, fair, and reliable. Macau has a written commercial law and contract law. The Commercial Code is a comprehensive source of commercial law, while the Civil Code serves as a fundamental source of contractual law. Courts in Macau include the Court of Final Appeal, Intermediate Courts, and Primary Courts. There is also an Administrative Court, which has jurisdiction over administrative and tax cases. These provide an effective means for enforcing property and contractual rights. At present, the Court of Final Appeal has three judges; the Intermediate Courts have nine judges; and the Primary Courts have 31 judges. The Public Prosecutions Office has 38 prosecutors.
Laws and Regulations on Foreign Direct Investment
Macau’s legal system is based on the rule of law and the independence of the judiciary. Foreign and domestic companies register under the same rules and are subject to the same set of commercial and bankruptcy laws (Decree 40/99/M).
Competition and Anti-Trust Laws
Macau has no agency that reviews transactions for competition-related concerns, nor a competition law. The Commercial Code (Law No. 16/2009) contains basic elements of a competition policy with regard to commercial practices that can distort the proper functioning of markets. While the GOM has stated that existing provisions are adequate and appropriate given the scale and scope of local economy, it announced in March 2019 that it was studying a fair competition law that would protect against monopolies and price-fixing. The GOM has since not disclosed the progress of the study.
Expropriation and Compensation
The U.S. Consulate General is not aware of any direct or indirect actions to expropriate. Legal expropriations of private property may occur if it is in the public interest. In such cases, the GOM will exchange the private property with an equivalent public property based on the fair market value and conditions of the former. The exchange of property is in accordance with established principles of international law. There is no remunerative compensation.
Dispute Settlement
ICSID Convention and New York Convention
Both the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention) and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) apply to Macau. The Law on International Commercial Arbitration (Decree 55/98/M) provides for enforcement of awards under the 1958 New York Convention.
Investor-State Dispute Settlement
The U.S. Consulate General is aware of one previous investment dispute involving U.S. or other foreign investors or contractors and the GOM. In March 2010, a low-cost airline carrier was reportedly forced to cancel flight services because of a credit dispute with its fuel provider, triggering events which led to the airline’s de-licensing. Macau courts declared the airline bankrupt in September 2010. The airline’s major shareholder, a U.S. private investment company, filed a case in the Macau courts seeking a judgment as to whether a GOM administrative act led to the airline’s demise. The Court of Second Instance held hearings in May and June 2012. In November 2013, the Court of Second Instance rejected the appeal. Private investment disputes are normally handled in the courts or via private negotiation. Alternatively, disputes may be referred to the Hong Kong International Arbitration Center or the World Trade Center Macau Arbitration Center.
International Commercial Arbitration and Foreign Courts
Macau has an arbitration law (Decree 55/98/M), which adopts the UN Commission on International Trade Law (UNCITRAL) model law for international commercial arbitration. The GOM accepts international arbitration of investment disputes between itself and investors. Local courts recognize and enforce foreign arbitral awards.
Macau established the World Trade Center Macau Arbitration Center in June 1998. The objective of the Center is to promote the resolution of disputes through arbitration and conciliation, providing the disputing parties with alternative resolutions other than judicial litigation.
Foreign judgments in civil and commercial matters may be enforced in Macau. The enforcement of foreign judgments is stipulated in Articles 1199 and 1200 of the Civil Procedure Code. A foreign court decision will be recognized and enforced in Macau, provided that it qualifies as a final decision supported by authentic documentation and that its enforcement will not breach Macau’s public policy.
Bankruptcy Regulations
Commercial and bankruptcy laws are written under the Macau Commercial Code, the Civil Procedure Code, and the Penal Code. Bankruptcy proceedings can be invoked by an application from the bankrupt business, by petition of the creditor, or by the Public Prosecutor. There are four methods used to prevent the occurrence of bankruptcy: the creditors meeting, the audit of the company’s assets, the amicable settlement, and the creditor agreement. According to Articles 615-618 of the Civil Code and Article 351-353 of the Civil Procedure Code, a creditor who has a justified fear of losing the guarantee of his credits may request seizure of the assets of the debtor. Bankruptcy offenses are subject to criminal liability.
There is no credit bureau or other credit monitoring authority serving Macau’s market.
4. Industrial Policies
Investment Incentives
To attract foreign investment, the GOM offers investment incentives to investors on a national treatment basis. These incentives are contained in Decrees 23/98/M and 49/85/M and are provided so long as companies can prove they are doing one of the following: promoting economic diversification, contributing to the promotion of exports to new unrestricted markets, promoting added value within their activity’s value chain, or contributing to technical modernization. There is no requirement that Macau residents own shares. These incentives are categorized as fiscal incentives, financial incentives, and export diversification incentives.
Fiscal incentives include full or partial exemption from profit/corporate tax, industrial tax, property tax, stamp duty for transfer of properties, and consumption tax. The tax incentives are consistent with the WTO Agreement on Subsidies and Countervailing Measures, as they are neither export subsidies nor import substitution subsidies as defined in the WTO Agreement. In 2019, the GOM put forward an enhanced tax deduction for research and development (R&D) expenditure incurred for innovation and technology projects by companies whose registered capital reached USD 125,000, or whose average taxable profits reached USD 62,500 per year in three consecutive years. The tax deduction amounts to 300 percent for the first USD 375,000 of qualifying R&D expenditure and 200 percent for the remaining amount, subject to a limit of USD 1.9 million in total). In addition, income received from Portuguese speaking countries is exempt from the corporate tax, provided such income has been subject to tax in its place of origin.
Two new laws to encourage financial leasing activities in Macau became effective in April 2019. Under the new regime, the minimum capital requirement of a financial leasing company is reduced from USD 3.75 million to USD 1.25 million. In addition, the acquisition by the financial leasing company of a property exclusively for its sole use has an exemption of up to USD 62,500 from a stamp duty.
Financial incentives include government-funded interest subsidies. Export diversification incentives include subsidies given to companies and trade associations attending trade promotion activities organized by IPIM. Only companies registered with Macau Economic Services (MES) may receive subsidies for costs such as space rental or audio-visual material production. Macau also provides other subsidies for the installation of anti-pollution equipment.
Foreign Trade Zones/Free Ports/Trade Facilitation
Macau is a free port; however, there are four types of dutiable commodities: liquors, tobacco, vehicles, and petrol (gasoline). Licenses must be obtained from the MES prior to importation of these commodities.
In order to promote the MICE (meetings, incentives, conventions, and exhibitions) and logistics industries in Macau, the GOM has accepted the ATA Carnet (Admission Temporaire/Temporary Admission), an international customs document providing an efficient method for the temporary import and re-export of goods that eases the way for foreign exhibitions and businesses.
The latest CEPA addition established principles of trade facilitation, including simplifying customs procedures, enhancing transparency, and strengthening cooperation.
Performance and Data Localization Requirements
Macau does not follow a forced localization policy in which foreign investors must use domestic content in goods or technology.
There are no requirements by the GOM for foreign IT providers to turn over source code and/or provide access to surveillance (i.e., backdoors into hardware and software or turning over keys for encryption).
According to the Personal Data Protection Act (Decree 8/2005), if there is transfer of personal data to a destination outside Macau, the opinion of the Office for Personal Data Protection — the regulatory authority responsible for supervising and enforcing the Act — must be sought to confirm if such destination ensures an adequate level of protection.
In December 2019, Macau’s Cybersecurity Law came into force. With this law, public and private network operators in certain industries have to meet obligations, including providing real-time access to select network data to Macau authorities, with the stated aim of protecting the information network and computer systems. For example, network operators must register and verify the identity of users before providing telecommunication services. The new law creates new investment and operational costs for affected businesses, and has raised some privacy and surveillance concerns.
One major U.S. cloud computing company reported that Macau’s Gaming Inspection and Coordination Bureau had refused permission for potential clients in the gaming sector to export personal data-to-data centers located outside of Macau.
5. Protection of Property Rights
Real Property
Private ownership of property is enshrined in the Basic Law. There are no restrictions on foreign property ownership. Macau has a sound banking mortgage system, which is under the supervision of the Macau Monetary Authority (MMA). There are only a small number of freehold property interests in the older part of Macau.
According to the Cartography and Cadaster Bureau, 21 percent of land parcels in Macau do not have clear title, for unknown reasons. Industry observers commented that no one knows whether these land parcels will be privately or publicly owned in the future.
The Land Law (Decree 10/2013) stipulates that provisional land concessions cannot be renewed upon their expiration if their leaseholders fail to finish developing the respective plots of land within a maximum concession period of 25 years. The leaseholders will not only be prohibited from renewing the undeveloped concessions – regardless of who or what caused the non-development – but also have no right to be indemnified or compensated.
Intellectual Property Rights
Macau is a member of the World Intellectual Property Organization (WIPO). Macau is not listed in USTR’s Special 301 Report. Macau has acceded to the Bern Convention for the Protection of Literary and Artistic Works. Patents and trademarks are registered under Decree 97/99/M. Macau’s copyright laws are compatible with the WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights, and government offices are required to use only licensed software. The GOM devotes considerable attention to intellectual property rights enforcement and coordinates with copyright holders. Source Identification Codes are stamped on all optical discs produced in Macau. The MES uses an expedited prosecution arrangement to speed up punishment of accused retailers of pirated products. The copyright protection law has been extended to cover online privacy. Copyright infringement for trade or business purposes is subject to a fine or maximum imprisonment of four years.
Macau Customs maintains an enforcement department to investigate incidents of intellectual property (IP) theft. Macau Customs works closely with mainland Chinese authorities, foreign customs agencies, and the World Customs Organization to share best practices to address criminal organizations engaging in IP theft. In 2019, Macau Customs seized a total of 3,849 pieces of counterfeit goods, including 3,329 garments, 7 leather products, and 513 electronic appliances. In 2019, the MES filed a total of 15,391 applications for trademark registrations.
In 2019, the MES filed a total of 15,391 applications for trademark registrations.
9. Corruption
Mainland China extended in February 2006 the United Nations Convention Against Corruption to Macau. Macau has laws to combat corruption by public officials and the private sector. Anti-corruption laws are applied in a non-discriminatory manner and effectively enforced. One provision stipulates that anyone who offers a bribe to foreign public officials (including officials from mainland China, Hong Kong, and Taiwan) and officials of public international organizations in exchange for a trade deal could receive a jail term of up to three years or fines.
The CCAC is a member of the International Association of Anti-Corruption Authorities and a member of the Anti-Corruption Action Plan for Asia and the Pacific. The CCAC’s guidelines on prevention and repression of corruption in the private sector and a booklet Corruption Prevention Tips for Private Companies provide rules of conduct that private companies must observe. In January 2019, the GOM completed a public consultation on public procurement in order to create a legal framework through which the GOM will seek to promote an efficient and transparent regime. The GOM expected that a draft bill will be ready in the second half of 2020.
Resources to Report Corruption
CHAN Tsz King, Commissioner
Commission Against Corruption
105, Avenida Xian Xing Hai, 17/F, Centro Golden Dragon, Macau
+853- 2832-6300 ccac@ccac.org.mo
10. Political and Security Environment
Macau is politically stable. The U.S. Consulate General is not aware of any incidents in recent years involving politically motivated damage to projects or installations.
11. Labor Policies and Practices
Macau’s unemployment rate in January 2020 was 1.7 percent. Foreign businesses cite a constant shortage of skilled workers – a result of the past decade’s boom in entertainment facilities – as a top constraint on their operations and future expansion. The government is studying proposals to resolve the human resources problem. For example, Macau has labor importation schemes for unskilled and skilled workers who cannot be recruited locally. However, both local and foreign casino operators in Macau are required by law to employ only Macau residents as croupiers. Taxi and bus drivers must also be local residents. There is no such restriction imposed on any other sector of the economy.
Macau does not have any policies that waive labor laws in order to attract or retain investment. The rights for workers to form trade unions and to strike are both enshrined in the Basic Law, but there are no laws in Macau that specifically deal with those rights. The law does not provide that workers can collectively bargain, and while workers have the right to strike, there is no specific protection in the law from retribution if workers exercise this right. Labor unions are independent of the government and employers, by law and in practice.
According to the Labor Relations Law, a female worker cannot be dismissed, except with just cause (e.g., willful disobedience to orders given by superiors, or violation of regulations on occupational hygiene and safety), during her pregnancy or within three months of giving birth. In practice, either the employer or the employee may rescind the labor contract with or without just cause. In general, any circumstance that makes it impossible to continue the labor relation can constitute just cause for rescission of the contract. If the employer terminates the contract with the worker without just cause, the employer must pay the employee severance pay. In addition, Macau’s social security system, which is regulated by Decree 84/89/M, provides local workers with economic aid when they are old, unemployed, or sick.
Workers who believe they were dismissed unlawfully can bring a case to court or lodge a complaint with the Labor Affairs Bureau. Even without formal collective bargaining rights, companies often negotiate with unions, although the government may act as an intermediary. There is no indication that past disputes or appeals were subject to lengthy delays.
The Labor Relations Law does not contain provisions regarding collective bargaining, which is not common at the company or industry level.
The GOM has put measures in place to replace some foreign workers with Macau residents. Macau has a law imposing criminal penalties for employers of illegal migrants and preventing foreign workers from changing employers in Macau. The government has used the proceeds of a tax on the import of temporary workers for retraining local unemployed people.
Effective September 1 2019, the statutory minimum hourly wage rate increased from USD 3.8 to USD 4.0. The Legislative Assembly is discussing a draft bill on mandating across-the-board minimum wages.
Russia
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment
The Ministry of Economic Development (MED) is responsible for overseeing investment policy in Russia. The Russian Direct Investment Fund (RDIF) was established in 2011 to facilitate FDI in Russia and has already attracted over $40 billion of foreign capital into the Russian economy through long-term strategic partnerships. In 2013, Russia’s Agency for Strategic Initiatives (ASI) launched an “Invest in Russian Regions” project to promote FDI on a regional basis. Since 2014, ASI has released an annual ranking of Russia’s regions in terms of the relative competitiveness of their investment climates, and provides potential investors with information about regions most open to foreign investment. In 2019, 69 Russian regions improved their Regional Investment Climate Index scores (https://asi.ru/investclimate/rating). The Foreign Investment Advisory Council (FIAC), established in 1994, is chaired by the prime minister and currently includes 53 international company members and four companies as observers. The FIAC allows select foreign investors to directly present their views on improving the investment climate in Russia and advises the government on regulatory policy.
Russia’s basic legal framework governing investment includes 1) Law 160-FZ, July 9, 1999, “On Foreign Investment in the Russian Federation;” 2) Law No. 39-FZ, February 25, 1999, “On Investment Activity in the Russian Federation in the Form of Capital Investment;” 3) Law No. 57-FZ, April 29, 2008, “Foreign Investments in Companies Having Strategic Importance for State Security and Defense;” and 4) the Law of the RSFSR No. 1488-1, June 26, 1991, “On Investment Activity in the Russian Soviet Federative Socialist Republic (RSFSR).” This framework of laws nominally attempts to guarantee equal rights for foreign and local investors in Russia. However, exemptions are permitted when it is deemed necessary to protect the Russian constitution, morality, health, human rights, national security, or defense, and to promote its socioeconomic development. Foreign investors may freely use the profits obtained from Russia-based investments for any purpose, provided they do not violate Russian law.
Limits on Foreign Control and Right to Private Ownership and Establishment
Russian law places two primary restrictions on land ownership by foreigners. The first is on the foreign ownership of land located in border areas or other sensitive territories in terms of national security. The second restricts foreign ownership of agricultural land, restricting foreign individuals and companies, persons without citizenship, and agricultural companies more than 50-percent foreign-owned from owning land. These entities may, however, hold agricultural land through leasehold rights. As an alternative to agricultural land ownership, foreign companies typically lease land for up to 49 years, the maximum term allowed.
A law “On Mass Media,” took effect in 2015 which restricts foreign ownership of any Russian media company to 20 percent (the previous law applied a 50 percent limit to Russia’s broadcast sector). In December 2018, the State Duma approved in its first reading a draft bill introducing new restrictions on online news aggregation services. If adopted, foreign companies, including international organizations and individuals, would be limited to a maximum of 20 percent ownership in Russian news aggregator websites. The second, final hearing was planned for February 2019 but was postponed. To date, this proposed law has not been passed.
U.S. stakeholders have raised concerns about similar limits on FDI in the mining and mineral extraction sectors, and describe the licensing regime as non-transparent and unpredictable.
Russia’s Commission on Control of Foreign Investment (Commission) was established in 2008 to monitor foreign investment in strategic sectors in accordance with the SSL. Between 2008 and 2019, the Commission received 621 applications for foreign investment, 282 of which were reviewed, according to the Federal Antimonopoly Service (FAS). Of those 282, the Commission granted preliminary approval for 259 (92 percent approval rate) and rejected 23 (https://fas.gov.ru/news/29330). International organizations, foreign states, and the companies they control are treated as distinct entities under the Commission. They are subject to restrictions applicable to a single foreign entity if they participate in a strategic business.
Other Investment Policy Reviews
The WTO conducted Russia’s first Trade Policy Review (TPR) in September 2016. Dates are still pending for the next Russia TPR. (Related reports are available at https://www.wto.org/english/tratop_e/tpr_e/tp445_e.htm).
The Federal Tax Service (FTS) operates Russia’s business registration website: www.nalog.ru. Per law (Article 13 of Law 129-FZ of 2001), a company must register with a local FTS office, and the registration process typically takes no more than three days. Foreign companies may be required to notarize the originals of incorporation documents included in the application package. To establish a business in Russia, a company must register with FTS and pay a registration fee of RUB 4,000. Since January 1, 2019, the registration fee is waived for online submission of incorporation documents.
In 2020, Russia moved up three notches to the 28th position in the World Bank’s Doing Business 2020 Index. The ranking acknowledged several reforms that helped Russia improve its position. Russia has improved the process for establishing connection to electricity by setting new deadlines and establishing specialized departments for connection. Russia has also strengthened minority investor protections by requiring greater corporate transparency, and facilitated the payment of taxes by reducing the tax authority review period of applications for VAT cash refunds, as well as enhancing the software used for tax and payroll preparation.
Outward Investment
The Russian government does not restrict Russian investors from investing abroad. Since 2015, Russia’s “De-offshorization Law” (376-FZ) requires that Russian tax residents disclose to the government their overseas assets, potentially subjecting these assets to Russian taxes.
While there are no restrictions on the distribution of profits to a nonresident entity, some foreign currency control restrictions apply to Russian residents (both companies and individuals) and to foreign currency transactions. As of January 1, 2018, all Russian citizens and foreign holders of Russian residence permits are considered Russian “currency control residents.” These “residents” are required to notify the tax authorities when a foreign bank account is opened, changed, or closed and when funds are moved in a foreign bank account. Individuals who have spent less than 183 days in Russia during the reporting period are exempt from the reporting requirements and restrictions using foreign bank accounts. On January 1, 2020, Russia abolished all currency control restrictions on payments of funds by non-residents to bank accounts of Russian residents opened with banks in OECD or FATF member states. This is provided that such states participate in the automatic exchange of financial account information with Russia. As a result, from 2020 onward, Russian residents will be able to freely use declared personal foreign accounts for savings and investment in a wide range of financial products.
2. Bilateral Investment Agreements and Taxation Treaties
Russia is party to 64 bilateral investment treaties (BITs) in force and six trade and investment agreements with investment provisions . (A full list is available here: http://investmentpolicyhub.unctad.org/IIA). The United States and Russia signed a bilateral investment treaty (BIT) in 1992, but it was never ratified by Russia and is not in force today. As such, investors from the two countries must rely on domestic courts and have no recourse to international arbitration unless specifically written into contracts.
Russia is a founding member of the Eurasian Economic Union (EAEU), which includes Armenia, Belarus, Kazakhstan, and Kyrgyzstan. The EAEU has concluded a number of free trade agreements (FTAs), beginning with Vietnam in 2016. The EAEU signed an interim three-year FTA with Iran in May 2018 that came into effect in 2019 and reduced or eliminated tariffs on goods accounting for roughly 50 percent of trade between the parties. In May 2018, the EAEU and China signed an agreement on trade and economic cooperation. The EAEU signed an FTA with Singapore on October 1, 2019, that reduces tariffs on 90 percent of goods exported by Singapore , expanding to 97 percent over 10 years. In October 2019, the EAEU signed an FTA with Serbia. Currently, the EAEU is negotiating FTAs with India, Israel, and Egypt (http://www.eurasiancommission.org/ru/nae/news/Pages/10-03-2020-3.aspx).
The U.S.-Russia Income Tax Convention, in effect since 1994, was designed to address the issue of double taxation and tax evasion. The treaty is available at https://www.irs.gov/pub/irs-trty/russia.pdf. Russia is party to 82 double taxation treaties (http://minfin.ru/ru/document/?id_4=117045).
3. Legal Regime
Transparency of the Regulatory System
While the Russian government at all levels offers moderately transparent policies, actual implementation is inconsistent. Draft bills and regulations are made available for public comment in accordance with disclosure rules set forth in Government Resolution 851 of 2012.
Key regulatory actions are published on a centralized web site that also maintains existing and proposed regulatory documents: www.pravo.gov.ru. (Draft regulatory laws are published on the web site: www.regulation.gov.ru. Draft laws can also be found on the State Duma’s legal database: http://asozd.duma.gov.ru/).
Accounting procedures are generally transparent and consistent. Documents compliant with Generally Accepted Accounting Principles (GAAP), however, are usually provided only by businesses that interface with foreign markets or borrow from foreign lenders. Reports prepared in accordance with the International Financial Reporting Standards (IFRS) are required for the consolidated financial statements of all entities who meet the following criteria: entities whose securities are listed on stock exchanges; banks and other credit institutions, insurance companies (except those with activities limited to obligatory medical insurance); non-governmental pension funds; management companies of investment and pension funds; and clearing houses.
Additionally, certain state-owned enterprises are required to prepare consolidated IFRS financial statements by separate decrees of the Russian government. Russian Accounting Standards, which are largely based on international best practices, otherwise apply.
International Regulatory Considerations
As a member of the EAEU, Russia has delegated certain decision-making authority to the EAEU’s supranational executive body, the Eurasian Economic Commission (EEC). In particular, the EEC has the lead on concluding trade agreements with third countries, customs tariffs (on imports), and technical regulations. EAEU agreements and EEC decisions establish basic principles that are implemented by the member states at the national level through domestic laws, regulations, and other measures involving goods. The EAEU Treaty establishes the priority of WTO rules in the EAEU legal framework. Authority to set sanitary and phytosanitary standards (SPS), however, remains at the individual country level.
U.S. companies cite SPS technical regulations and related product-testing and certification requirements as major obstacles to U.S. exports of industrial and agricultural goods to Russia. Russian authorities require evidence of product testing and certification as key elements of the approval process for a variety of products, and, in many cases, there are no mutual recognition arrangements in place; only an entity registered and residing in Russia can apply for the necessary documentation for product approvals. Consequently, opportunities for testing and certification performed by competent bodies outside Russia are limited. Manufacturers of telecommunications equipment, oil and gas equipment, construction materials and equipment, and pharmaceuticals and medical devices have reported serious difficulties in obtaining product approvals within Russia. Technical barriers to trade (TBT) issues have also arisen with alcoholic beverages, pharmaceuticals, and medical devices.
Russia joined the WTO in 2012. Although Russia has notified the WTO of numerous SPS technical regulations, it appears to be taking a narrow view regarding the types of measures that require notification that may not reflect the full set of technical regulations under the WTO TBT Agreement. Russia submitted 16 SPS notifications in 2019. (A full list of notifications is available at: http://www.epingalert.org/en).
Legal System and Judicial Independence
U.S. Embassy Moscow advises any foreign company operating in Russia to have competent legal counsel and create a comprehensive plan on steps to take in case the police carry out an unexpected raid. Russian authorities have exhibited a pattern of transforming civil cases into criminal matters, resulting in significantly more severe penalties. In short, unfounded lawsuits or arbitrary enforcement actions remain an ever-present possibility for any company operating in Russia.
Critics contend that Russian courts, in general, lack independent authority and, in criminal cases, have a bias towards conviction. In practice, the presumption of innocence tends to be ignored by Russian courts, and less than one-half of one percent of criminal cases end in acquittal. In cases that are appealed when the lower court decision resulted in a conviction, less than one percent are overturned. In contrast, when the lower court decision is “not guilty,” 37 percent of the appeals result in a finding of guilt.
Russia law is based on a system of legal code; the Civil Code of Russia governs contracts. Specialized commercial courts (also called “Arbitrage Courts”) handle a wide variety of commercial disputes. Russia was ranked by the World Bank’s 2020 Doing Business Index as 21st in contract enforcement.
Commercial courts are required by law to decide business disputes efficiently, and many cases are decided based on written evidence, with little or no live testimony by witnesses. The courts’ workload is dominated by relatively simple cases involving the collection of debts and firms’ disputes with the taxation and customs authorities, pension funds, and other state organs. Tax-paying firms often prevail in their disputes with the government in court. As with some international arbitral procedures, the weakness in the Russian arbitration system lies in the enforcement of decisions, and few firms voluntarily pay judgments against them.
A specialized court for intellectual property rights (IPR) disputes was established in 2013. The IPR Court hears matters pertaining to the review of decisions made by the Russian Federal Service for Intellectual Property (Rospatent) and determines issues of IPR ownership, authorship, and the cancellation of trademark registrations. It also serves as the court of second appeal for IPR infringement cases decided in commercial courts and courts of appeal.
Laws and Regulations on Foreign Direct Investment
The 1991 Investment Code and 1999 Law on Foreign Investment (160-FZ) guarantee that foreign investors enjoy rights equal to those of Russian investors, although some industries have limits on foreign ownership. Russia’s Special Investment Contract program, launched in 2015, aims to increase investment in Russia by offering tax incentives and simplified procedures for dealings with the government. In addition, a law on public-private-partnerships (224-FZ) took effect January 1, 2016. The legislation allows an investor to acquire ownership rights over a property. The SSL regulates foreign investments in “strategic” companies. Amendments to Federal Law No. 160-FZ “On Foreign Investments in the Russian Federation” and Russia’s SSL, signed into law in May 2018, liberalized access of foreign investments to strategic sectors of the Russian economy and made the strategic clearance process clearer and more convenient. The new approach is more investor-friendly, since applying a stricter regime can now potentially be avoided by providing the required beneficiary and controlling person information. In addition, the amendments expressly envisage a right for the Federal Anti-monopoly Service (FAS) to issue official clarifications on the nature and application of the SSL that may facilitate law enforcement.
Competition and Anti-Trust Laws
FAS implements antimonopoly laws and is responsible for overseeing matters related to the protection of competition. Russia’s fourth anti-monopoly legislative package, which took effect January 2016, introduced a number of changes to Russia’s antimonopoly laws. Changes included limiting the criteria under which an entity could be considered “dominant,” broadening the scope of transactions subject to FAS approval, and reducing government control over transactions involving natural monopolies. Over the past several years, FAS has opened a number of cases involving American companies. In February 2019, FAS submitted its fifth anti-monopoly legislative package, which is devoted to regulating the digital economy, to the Cabinet. It includes provisions on introducing new definitions of “trustee” and a definition of “price algorithms,” empowering FAS to impose provisions of non-discriminated access to data as a remedy. It also introduced data ownership as a set of criteria for market analysis. The legislative package is still undergoing an interagency approval process and will be submitted to the State Duma once it is approved by the Cabinet.
FAS has also claimed the authority to regulate IP, arguing that monopoly rights conferred by ownership of IP should not extend to the “circulation of goods,” a point supported by the Russian Supreme Court.
Expropriation and Compensation
The 1991 Investment Code prohibits the nationalization of foreign investments, except following legislative action and when such action is deemed to be in the public interest. In such instances, the investor must be adequately and promptly compensated for the seizure of property. Acts of nationalization may be appealed to Russian courts. At the sub-federal level, expropriation has occasionally been a problem, as well as local government interference and a lack of ability to enforce court rulings protecting investors.
Despite legislation prohibiting the nationalization of foreign investments, investors in Russia – particularly minority-share investors in domestically-owned energy companies – are encouraged to exercise caution. Russia has a history of indirectly expropriating companies through “creeping” and informal means, often related to domestic political disputes. Foreign investors can also be pressured into selling their Russia-based assets at below-market prices. Foreign investors, particularly minority investors, have little legal recourse in such instances.
Dispute Settlement
ICSID Convention and New York Convention
Russia is party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. While Russia does not have specific legislation providing for enforcement of the New York Convention, Article 15 of the Constitution specifies that “the universally recognized norms of international law and international treaties and agreements of the Russian Federation shall be a component part of [Russia’s] legal system. If an international treaty or agreement of the Russian Federation fixes other rules than those envisaged by law, the rules of the international agreement shall be applied.” Russia is a signatory but not a party and has never ratified the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID).
Investor-State Dispute Settlement
According to available information, at least 14 investment disputes have involved an American and the Russian government since 2006. Some attorneys refer international clients who have investment or trade disputes in Russia to international arbitration. A 1997 Russian law confirms New York Convention obligations by recognizing foreign arbitration awards for enforcement in Russia.. Russian law was amended in 2015 to give the Russian Constitutional Court authority to disregard verdicts by international bodies if it determines the ruling contradicts the Russian constitution.
International Commercial Arbitration and Foreign Courts
In addition to the court system, Russian law recognizes alternative dispute resolution (ADR) mechanisms, i.e. domestic arbitration, international arbitration, and mediation. Civil and commercial disputes may be referred to either domestic or international commercial arbitration. Institutional arbitration is more common in Russia than ad hoc arbitration. Arbitral awards can be enforced in Russia pursuant to international treaties, such as the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, the 1958 New York Convention, and the 1961 European Convention on International Commercial Arbitration, as well as domestic legislation. Mediation mechanisms were established by the Law on Alternative Dispute Resolution Procedure with Participation of the Intermediary in January 2011. Mediation is an informal extrajudicial dispute resolution method whereby a mediator seeks mutually acceptable resolution. However, mediation is not yet widely used in Russia.
Beginning in 2016, arbitral institutions were required to obtain the status of a “permanent arbitral institution” (PAI) in order to arbitrate disputes involving shares in Russian companies. The requirement ostensibly combats the problem of dubious arbitral institutions set up by corporations to administer disputes in which they themselves are involved. The PAI requirement applies to foreign arbitral institutions as well. Until recently there were only four arbitral institutions – all of them Russian – which had been conferred the status of PAI. In April 2019, however, the Hong Kong International Arbitration Centre became the first foreign arbitral tribunal to obtain PAI status. In June 2019, the Vienna International Arbitration Center became the second foreign institution licensed to administer arbitrations in Russia. The International Court of Arbitration of the International Chamber of Commerce, the London Court of International Arbitration, and the Arbitration Institute of the Stockholm Chamber of Commerce continue to be selected for administering international arbitrations seated in Russia, despite the fact that none of these have PAI status. Nonetheless, to date arbitral awards rendered by tribunals constituted under the rules of these institutions can be recognized and enforced in Russia.
Bankruptcy Regulations
Russia established a law providing for enterprises bankruptcy in the early 1990s. A law on personal bankruptcy came into force in 2015. Russia’s ranking in the World Bank’s Doing Business 2020 Index for “Resolving Insolvency” is 57 out of 190 economies. Article 9 of the Law on Insolvency requires an insolvent firm to petition the court of arbitration to declare the company bankrupt within one month of failing to pay the bank’s claims. The court then convenes a meeting of creditors, who petition the court for liquidation or reorganization. In accordance with Article 51 of the Law on Insolvency, a bankruptcy case must be considered within seven months of the day the petition was received by the arbitral court.
Liquidation proceedings by law are limited to six months and can be extended by six more months (art. 124 of the Law on Insolvency). Therefore, the time dictated by law is 19 months. However, in practice, liquidation proceedings are extended several times and for longer periods. The total cost of insolvency proceedings is approximately nine percent of the value of the estate.
In July 2017, amendments to the Law on Insolvency expanded the list of persons who may be held vicariously liable for a bankrupted entity’s debts and clarified the grounds for such liability. According to the new rules, in addition to the CEO, the following can also be held vicariously liable for a bankrupt company’s debts: top managers, including the CFO and COO, accountants, liquidators, and other persons who controlled or had significant influence over the bankrupted entity’s actions by kin or position or could force the bankrupted entity to enter into unprofitable transactions. In addition, persons who profited from the illegal actions by management may also be subject to liability through court action. The amendments clarified that shareholders owning less than 10 percent in the bankrupt company shall not be deemed controlling unless they are proven to have played a role in the company’s bankruptcy. The amendments also expanded the list of people who may be subject to secondary liability and the grounds for recognizing fault for a company’s bankruptcy.
Amendments to the Law on Insolvency approved in December 2019 gave greater protection, in the context of insolvency of a Russian counterparty, to collateral arrangements, close-out netting in respect of over-the-counter derivative transactions, repurchases, and certain other “financial” transactions documented under eligible master agreements.
4. Industrial Policies
Investment Incentives
The government also introduced Special Investment Contracts (SPICs) as an alternative incentive program in 2015. In 2017 the government changed the rules for concluding SPICs to increase investment in Russia by offering tax incentives and simplified procedures for government interactions. These contracts allow foreign companies in Russia access to import substitution programs, including certain subsidies, if they establish local production. In principle, these contracts may aid in expediting customs procedures. However, in practice, reports suggest companies that sign such contracts find their business hampered by policies biased in favor of local producers.
In August 2019, the Russian government created “SPIC-2,” which aimed to increase long-term private investment in high-technology projects and introduce advanced technology for local content in manufacturing products. The Ministry of Industry and Trade also extended the maximum SPIC term to 20 years, depending on the amount of investment. The key criteria for evaluating bids are speed of introducing technology, the volume of manufacturing, and the level of technology in local manufacturing processes.
Since 2005, Russia’s industrial investment incentive regime has granted tax breaks and other government incentives to foreign companies in certain sectors in exchange for producing locally. As part of its WTO Protocol, Russia agreed to eliminate the elements of this regime that are inconsistent with the Trade-Related Investment Measures (TRIMS) Agreement by July 2018. The TRIMS Agreement requires elimination of measures such as those that require or provide benefits for the use of domestically produced goods (local content requirements) or that restrict a firm’s imports to an amount related to its exports or related to the amount of foreign exchange a firm earns (trade balancing requirements). Russia notified the WTO that it had terminated these automotive investment incentive programs as of July 1, 2018. In 2019, the Ministry of Industry and Trade introduced a new points-based system to estimate vehicle local content levels to determine original equipment manufacturer (OEM)’s eligibility for Russian state support. The government provides state support only to OEMs whose finished vehicles are deemed to be of Russian origin, which will depend upon them scoring at least 2,000 points under the new system to get some assistance and 6,000 point to enjoy a full range of support measures. Points will be awarded for localizing the supply of certain components. Locally-sourced engines or transmissions used in vehicle assembly, for instance, are worth 40 points. OEMs running a research and development business in Russia score an additional 20 points, and a further 20 points are granted to those using locally-sourced aluminum or electronic systems in their vehicles.
Foreign Trade Zones/Free Ports/Trade Facilitation
Russia continues to promote the use of high-tech parks, special economic zones (SEZs), and industrial clusters, which offer additional tax and infrastructure incentives to attract investment. “Resident companies” can receive a broad range of benefits, including exemption from profit tax, value-added tax, property tax, and import duties and partial exemption from social fund payments. Russia currently has 23 SEZs (http://www.russez.ru/oez/). A Russian Accounts Chamber (RAC) investigation of SEZs in February 2020 found they have had no measurable impact on the Russian economy, despite RUB 136 billion ($1.8 billion) investment from the federal government from 2006 to 2018. In 2015, the Russian government created a separate but similar program – “Territories of Advanced Development” – with preferential tax treatment and simplified government procedures in Siberia, Kaliningrad, and the Russian Far East. In May 2016, President Putin stopped work on ten existing SEZ’s and suspended the creation of any new SEZs, pending better coordination with this new entity.
Performance and Data Localization Requirements
Russian law generally does not impose performance requirements, and they are not widely included as part of private contracts in Russia. Some have appeared, however, in the agreements of large multinational companies investing in natural resources and in production-sharing legislation. There are no formal requirements for offsets in foreign investments. Since approval for investments in Russia can depend on relationships with government officials and on a firm’s demonstration of its commitment to the Russian market, these conditions may result in offsets.
In certain sectors, the Russian government has pressed for localization and increased local content. For example, in a bid to boost high-tech manufacturing in the renewable energy sector, Russia guarantees a 12 percent profit over 15 years for windfarms using turbines with at least 65 percent local content. Russia is additionally considering local content requirements for industries that have high percentages of government procurement, such as medical devices and pharmaceuticals. Russia is not a signatory to the WTO’s Government Procurement Agreement. Consequently, restrictions on public procurement have been a major avenue for Russia to implement localization requirements without running afoul of international commitments.
The Central Bank of Russia (CBR) has imposed caps on the percentage of foreign employees in foreign banks’ subsidiaries. Russian employees in a subsidiary of a foreign bank should make up at least 75 percent of the staff. If the executive of the subsidiary is a non-resident of Russia, at least 50 percent of the bank’s managing body should be Russian citizens.
Russia’s data storage law (the “Yarovaya law”) took effect on July 1, 2018, requiring providers to store data in “full volume” beginning October 1, 2018. The law requires domestic telecoms and internet service providers (ISPs) to store all customers’ voice calls and texts for six months; ISPs must store data traffic for one month. The Yarovaya law initially required longer retention with a shorter implementation window, which companies criticized as costly and unworkable. Until recently, there were no special liabilities for violations of the data localization requirement. In December, President Putin signed into law legislative amendments establishing significant fines ranging from RUB 1 million ($13,400) to RUB 18 million ($241,000) for legal entities and from RUB 100,000 ($1,340) to RUB 800,000 ($10,700) for company CEOs.
5. Protection of Property Rights
Real Property
Russia ranks12th in the 2020 World Bank Doing Business Indexfor registering property, which analyzes the “steps, time and cost involved in registering property, assuming a standardized case of an entrepreneur who wants to purchase land and a building that is already registered and free of title dispute,” as well as the “the quality of the land administration system.”
The Russian Constitution, along with a 1993 presidential decree, gives Russian citizens the right to own, inherit, lease, mortgage, and sell real property. The state owns the majority of Russian land, although the structures on the land are typically privately owned. Mortgage legislation enacted in 2004 facilitates the process for lenders to evict homeowners who do not stay current in their mortgage payments.
Intellectual Property Rights
Russia remained on the U.S. Trade Representative (USTR) Special 301 Priority Watch List in 2020 and had several illicit streaming websites and online markets reported in the 2019 Notorious Markets List. Particular areas of concern include copyright infringement, trademark counterfeiting/hard goods piracy, and non-transparent royalty collection procedures. Stakeholders reported in 2019 that enforcement of intellectual property rights (IPR) continued to decline overall from 2018 following a reduction in resources for enforcement personnel. In December 2019, for the first time in Russia, the owner of several illegal streaming sites received a two-year suspended criminal sentence for violating Russia’s IPR protection legislation. This case has set an important precedent for enforcing IPR laws in Russia.
Online piracy continues to pose a significant problem in Russia. Russia has not honored its commitments to protect IPR, including commitments made to the United States as part of its WTO accession. Nevertheless, there are indications that the Russian internet piracy market is declining. According to Group-IB, the online pirated movie market declined by 27 percent year-on-year in 2019, while legal streaming services increased by 44.3 percent. Despite Russia’s 2018 ban on virtual private networks (VPNs), the ban has not been fully enforced. Since 2017, search engines, including Google and Yandex, have been required to block IPR-infringing websites and “mirror” sites as determined by federal communications watchdog Roskomnadzor. As a result of increased scrutiny, internet companies Yandex, Mail.Ru Group, Rambler, and Rutube signed an anti-piracy memorandum with several domestic right holders, which is valid through the end of 2021.
Modest progress has been made in the area of customs IPR enforcement since the Federal Customs Service (FCS) can now confiscate imported goods that violate IPR. From January to September 2018, the FCS seized 14.4 million counterfeit goods, compared with 10.1 million in the same period in 2017. In 2019, the FTS seized 11 million counterfeited goods in the same period. The FCS prevented infringement and damages to copyright holders amounting to RUB 5.9 billion ($79 million) between January and September in 2019, compared with RUB 4.5 billion ($60.3 million) in 2018.
9. Corruption
Despite some government efforts to combat it, the level of corruption in Russia remains high. Transparency International’s 2019 Corruption Perception Index (CPI) ranked Russia 137 out of 180, which was one notch below its 2018 rank.
Roughly 24 percent of entrepreneurs surveyed by the Russian Chamber of Commerce in October and November 2019 said they constantly faced corruption. Businesses mainly experienced corruption during applications for permits (35.3 percent), during inspections (22.1 percent), and in the procurement processes (38.7 percent). The areas of government spending that ranked highest in corruption were public procurement, media, national defense, and public utilities.
In March 2020, Russia’s new Prosecutor General Igor Krasnov reported RUB 21 billion ($281 million) were recovered in the course of anticorruption investigations in 2019. In December 2019, Procurator General’s Office Spokesperson Svetlana Petrenko reported approximately over 7,000 corruption convictions in 2019, including of 752 law enforcement officers, 181 Federal Penitentiary Service (FPS) officers, 81 federal bailiffs, and 476 municipal officials.
Until recently, one of the peculiarities of Russian enforcement practice was that companies were prosecuted almost exclusively for small and mid-scale bribery. Several 2019 cases indicate that Russian enforcement actions, finally, may extend to more severe offenses as well. To date, ten convictions of companies for large- or extra large-scale bribery with penalty payments of RUB 20 million ($268,000) or more have been disclosed in 2019 – compared to only four cases in the whole of 2018. In July 2019, Russian Standard Bank, which is among Russia’s 200 largest companies according to Forbes Russia, had to pay a penalty of RUB 26.5 million ($355,000) for bribing bailiffs in Crimea in order to speed up enforcement proceedings against defaulted debtors.
Still, there is no efficient protection for whistleblowers in Russia. In June 2019, the legislative initiative aimed at the protection of whistleblowers in corruption cases ultimately failed. The draft law, which had been adopted at the first reading in December 2017, provided for comprehensive rights of whistleblowers and responsibilities of employers and law enforcement authorities. Since August 2018, Russian authorities have been authorized to pay whistleblowers rewards which may exceed RUB 3 million ($40,000). However, rewards alone will hardly suffice to incentivize whistleblowing.
Russia adopted a law in 2012 requiring individuals holding public office, state officials, municipal officials, and employees of state organizations to submit information on the funds spent by them and members of their families (spouses and underage children) to acquire certain types of property, including real estate, securities, stock, and vehicles. The law also required public servants to disclose the source of the funds for these purchases and to confirm the legality of the acquisitions.
In July 2018, President Putin signed a two-year plan to combat corruption. The plan required public consultation for federal procurement projects worth more than RUB 50 million ($670,000) and municipal procurement projects worth more than RUB 5 million ($67,000). The government also expanded the list of property that can be confiscated if the owners fail to prove it was acquired using lawful income. The government maintains an online registry of officials charged with corruption-related offences, with individuals being listed for a period of five years.
The Constitutional Court has given clear guidance to law enforcement on asset confiscation due to the illicit enrichment of officials. Russia has ratified the UN Convention against Corruption, but its ratification did not include article 20, which deals with illicit enrichment. The Council of Europe’s Group of States against Corruption (GRECO) reported in 2019 that Russia had implemented only 10 out of 22 recommendations: eight concern members of the parliament, nine concern judges, and five concern prosecutors , according to a draft report by the office of the Prosecutor General of the Russian Federation that was submitted to the State Duma.
U.S. companies, regardless of size, are encouraged to assess the business climate in the relevant market in which they will be operating or investing and to have effective compliance programs or measures to prevent and detect corruption, including foreign bribery. U.S. individuals and firms operating or investing in Russia should take time to become familiar with the relevant anticorruption laws of both Russia and the United States in order to comply fully with them. They should also seek the advice of legal counsel when appropriate.
Resources to Report Corruption
Andrey Avetisyan Ambassador at Large for International Anti-Corruption Cooperation
Ministry of Foreign Affairs
32/34 Smolenskaya-Sennaya pl, Moscow, Russia
+7 499 244-16-06
Anton Pominov
Director General
Transparency International – Russia
Rozhdestvenskiy Bulvar, 10, Moscow
Email: Info@transparency.org.ru
Individuals and companies that wish to report instances of bribery or corruption that affect their operations and request the assistance of the United States government with respect to issues relating to corruption may call the Department of Commerce’s Russia Corruption Reporting hotline at (202) 482-7945, or submit the form provided at http://tcc.export.gov/Report_a_Barrier/reportatradebarrier_russia.asp.
10. Political and Security Environment
Russia continues to restrict the fundamental freedoms of expression, assembly, and association by cracking down on political opposition, independent media, and civil society. Since July 2012, Russia has passed a series of laws giving the government the authority to label NGOs as “foreign agents” if they receive foreign funding, greatly restricting the activities of these organizations. To date, more than 150 NGOs have been labelled foreign agents. A law enacted in May 2015 authorizes the government to designate a foreign organization as “undesirable” if it is deemed to pose a threat to national security or national interests. As of April 2020, 22 foreign organizations were included on this list. (https://minjust.ru/ru/activity/nko/unwanted)
According to the Russian Supreme Court, 7,763 individuals were convicted of economic crimes in 2019; the Russian business community alleges many of these cases stemmed from commercial disputes. Potential investors should be aware of the risk of commercial disputes being criminalized. Chechnya, Ingushetia, Dagestan, and neighboring regions in the northern Caucasus have a high risk of violence and kidnapping.
Public protests continue to occur intermittently in Moscow and other cities. In July and August 2019 in Moscow, large protests took place to voice frustration with the banning of opposition candidates from running in September municipal elections. Some protests were marred by police brutality and indiscriminate arrests of participants and innocent bystanders. In April, the Russian government imposed self-isolation orders in an effort to stop the spread of the COVID-19 pandemic. Protesters could not gather in person but did so virtually through on-line platforms, demanding the government provide social assistance or lift restrictions.
11. Labor Policies and Practices
The Russian labor market remains fragmented, characterized by limited labor mobility across regions and substantial differences in wages and employment conditions. Earning inequalities are significant, enforcement of labor standards remains relatively weak, and collective bargaining is underdeveloped. Employers regularly complain about shortages of qualified skilled labor. This phenomenon is due, in part, to weak linkages between the education system and the labor market and a shortage of highly skilled labor. In 2019, the minimum wage in Russia was linked to the official “subsistence” level. As of April 2020, this was RUB 12,130 ($162).
The 2002 Labor Code governs labor standards in Russia. Normal labor inspections identify labor abuses and enforce health and safety standards . The government generally complies with ILO conventions protecting worker rights, though enforcement is often insufficient, as labor inspectors are over-stretched. Employers are required to make severance payments when laying off employees in light of worsening market conditions.