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Germany

Executive Summary

As Europe’s largest economy, Germany is a major destination for foreign direct investment (FDI) and has accumulated a vast stock of FDI over time.  Germany is consistently ranked as one of the most attractive investment destinations based on its stable legal environment, reliable infrastructure, highly skilled workforce, positive social climate, and world-class research and development.

Foreign investment in Germany mainly originates from other European countries, the United States, and Japan, although FDI from emerging economies (and China) has grown over 2015-2018 from low levels. The United States is the leading source of non-European FDI in Germany.

The German government continues to strengthen provisions for national security screening of inward investment in reaction to an increasing number of high-risk acquisitions of German companies by foreign investors in recent years, particularly from China.  In 2018, the government lowered the threshold for the screening of investments, allowing authorities to screen acquisitions by foreign entities of at least 10 percent of voting rights of German companies that operate or provide services related to critical infrastructure. The amendment also added media companies to the list of sensitive businesses.

Further amendments enacted in 2020 to implement the 2019 EU FDI Screening Regulation, which Germany strongly supported, include to:

a) facilitate a more pro-active screening based on “prospective impairment” of public order or security by an acquisition, rather than a de facto threat, b) take into account the impact on other EU member states, and c) formally suspend transactions during the screening process.

Furthermore, acquisitions by foreign government-owned or -funded entities will now trigger a review, and the healthcare industry will be considered a sensitive sector to which the stricter 10% threshold applies. A further amendment, in force since May 2021, introduced a list of sensitive sectors and technologies (similar to the current list of critical infrastructure) including artificial intelligence, autonomous vehicles, specialized robots, semiconductors, additive manufacturing and quantum technology, among others. Foreign investors who seek to acquire at least 10% of voting rights of a German company in one of those fields would be required to notify the government and potentially become subject to an investment review.

German legal, regulatory, and accounting systems can be complex but are generally transparent and consistent with developed-market norms.  Businesses operate within a well-regulated, albeit relatively high-cost, environment. Foreign and domestic investors are treated equally when it comes to investment incentives or the establishment and protection of real and intellectual property.  Foreign investors can rely on the German legal system to enforce laws and contracts; at the same time, this system requires investors to closely track their legal obligations. New investors should ensure they have the necessary legal expertise, either in-house or outside counsel, to meet all national and EU regulations.

German authorities are committed to fighting money laundering and corruption.  The government promotes responsible business conduct and German SMEs are aware of the need for due diligence.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2020 9 of 180 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2020 22 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2020 9 of 131 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2019 USD 148,259 https://apps.bea.gov/international/factsheet/
World Bank GNI per capita 2019 USD 48,580 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

The German government and industry actively encourage foreign investment. U.S. investment continues to account for a significant share of Germany’s FDI. The 1956 U.S.-Federal Republic of Germany Treaty of Friendship, Commerce and Navigation affords U.S. investors national treatment and provides for the free movement of capital between the United States and Germany. As an OECD member, Germany adheres to the OECD National Treatment Instrument and the OECD Codes of Liberalization of Capital Movements and of Invisible Operations.  The Foreign Trade and Payments Act and the Foreign Trade and Payments Ordinance provide the legal basis for the Federal Ministry for Economic Affairs and Energy to review acquisitions of domestic companies by foreign buyers, to assess whether these transactions pose a risk to the public order or national security (for example, when the investment pertains to critical infrastructure).  For many decades, Germany has experienced significant inbound investment, which is widely recognized as a considerable contributor to Germany’s growth and prosperity. The investment-related challenges facing foreign companies are broadly the same as face domestic firms, e.g relatively high tax rates, stringent environmental regulations, and labor laws that complicate hiring and dismissals. Germany Trade and Invest (GTAI), the country’s economic development agency, provides extensive information for investors: https://www.gtai.de/gtai-en/invest

Limits on Foreign Control and Right to Private Ownership and Establishment

Under German law, a foreign-owned company registered in the Federal Republic of Germany as a GmbH (limited liability company) or an AG (joint stock company) is treated the same as a German-owned company. There are no special nationality requirements for directors or shareholders.

Companies which seek to open a branch office in Germany without establishing a new legal entity, (e.g., for the provision of employee placement services, such as providing temporary office support, domestic help, or executive search services), must register and have at least one representative located in Germany.

Germany maintains an elaborate mechanism to screen foreign investments based on national security grounds. The legislative basis for the mechanism (the Foreign Trade and Payments Act and Foreign Trade and Payments Ordinance) has been amended several times in recent years in an effort to tighten parameters of the screening as technological threats evolve, particularly to address growing interest by foreign investors in both Mittelstand (mid-sized) and blue chip German companies. Amendments to implement the 2019 EU Screening Regulation are already in force or have been drafted as of March 2021. One major change in the amendments allows for authorities to make “prospective impairment” of public order and security the new trigger for an investment review, in place of the former standard (which requires a de facto threat).

Other Investment Policy Reviews

The World Bank Group’s “Doing Business 2020” Index provides additional information on Germany’s investment climate. The American Chamber of Commerce in Germany also publishes results of an annual survey of U.S. investors in Germany (“AmCham Germany Transatlantic Business Barometer”, https://www.amcham.de/publications).

Business Facilitation

Before engaging in commercial activities, companies and business operators must register in public directories, the two most significant of which are the commercial register (Handelsregister) and the trade office register (Gewerberegister).

Applications for registration at the commercial register, which is available under  www.handelsregister.de , are electronically filed in publicly certified form through a notary.  The commercial register provides information about all relevant relationships between merchants and commercial companies, including names of partners and managing directors, capital stock, liability limitations, and insolvency proceedings.  Registration costs vary depending on the size of the company. According to the World Bank’s Doing Business Report 2020, the median duration to register a business in Germany is 8 days.

Germany Trade and Invest (GTAI), the country’s economic development agency, can assist in the registration processes ( https://www.gtai.de/gtai-en/invest/investment-guide/establishing-a-company/business-registration-65532 ) and advises investors, including micro-, small-, and medium-sized enterprises (MSMEs), on how to obtain incentives.

In the EU, MSMEs are defined as follows:

  • Micro-enterprises:  less than 10 employees and less than €2 million annual turnover or less than €2 million in balance sheet total.
  • Small enterprises:  less than 50 employees and less than €10 million annual turnover or less than €10 million in balance sheet total.
  • Medium-sized enterprises:  less than 250 employees and less than €50 million annual turnover or less than €43 million in balance sheet total.

U.S.-based traders, who seek to sell in Germany, e.g., via commercial platforms, are required to register with one specific tax authority in Bonn, which can lead to significant delays due to capacity issues.

Outward Investment

Germany’s federal government provides guarantees for investments by Germany-based companies in developing and emerging economies and countries in transition in order to insure them against political risks. In order to receive guarantees, the investment must have adequate legal protection in the host country. The Federal Government does not insure against commercial risks. In 2020, the government issued investment guarantees amounting to €900 million for investment projects in 13 countries, with the majority of those in China and India.

3. Legal Regime

Transparency of the Regulatory System

Germany has transparent and effective laws and policies to promote competition, including antitrust laws. The legal, regulatory, and accounting systems are complex but transparent and consistent with international norms.

Public consultation by federal authorities is regulated by the Joint Rules of Procedure, which specify that ministries must consult early and extensively with a range of stakeholders on all new legislative proposals. In practice, laws and regulations in Germany are routinely published in draft for public comment. According to the Joint Rules of Procedure, ministries should consult the concerned industries’ associations , consumer organizations, environmental, and other NGOs. The consultation period generally takes two to eight weeks.

The German Institute for Standardization (DIN), Germany’s independent and sole national standards body representing Germany in non-governmental international standards organizations, is open to German subsidiaries of foreign companies.

International Regulatory Considerations

As a member of the European Union, Germany must observe and implement directives and regulations adopted by the EU. EU regulations are binding and enter into force as immediately applicable law. Directives, on the other hand, constitute a type of framework law that is to be transposed by the Member States in their respective legislative processes, which is regularly observed in Germany.

EU Member States must transpose directives within a specified period of time. Should a deadline not be met, the Member State may suffer the initiation of an infringement procedure, which could result in steep fines. Germany has a set of rules that prescribe how to break down any payment of fines devolving to the Federal Government and the federal states (Länder). Both bear part of the costs. Payment requirements by the individual states depend on the size of their population and the respective part they played in non-compliance.

The federal states have a say over European affairs through the Bundesrat (upper chamber of parliament). The Federal Government must inform the Bundesrat at an early stage of any new EU policies that are relevant for the federal states.

The Federal Government notifies draft technical regulations to the WTO Committee on Technical Barriers to Trade (TBT) through the Federal Ministry of Economic Affairs and Energy.

Legal System and Judicial Independence

German law is both stable and predictable.  Companies can effectively enforce property and contractual rights.  Germany’s well-established enforcement laws and official enforcement services ensure that investors can assert their rights.  German courts are fully available to foreign investors in an investment dispute.

The judicial system is independent, and the government does not interfere in the court system.  The legislature sets the systemic and structural parameters, while lawyers and civil law notaries use the law to shape and organize specific situations.  Judges are highly competent and impartial. International studies and empirical data have attested that Germany offers an effective court system committed to due process and the rule of law.

In Germany, most important legal issues and matters are governed by comprehensive legislation in the form of statutes, codes and regulations.  Primary legislation in the area of business law includes: the Civil Code (Bürgerliches Gesetzbuch, abbreviated as BGB), which contains general rules on the formation, performance and enforcement of contracts and on the basic types of contractual agreements for legal transactions between private entities;

  • the Civil Code (Bürgerliches Gesetzbuch, abbreviated as BGB), which contains general rules on the formation, performance and enforcement of contracts and on the basic types of contractual agreements for legal transactions between private entities;
  • the Commercial Code (Handelsgesetzbuch, abbreviated as HGB), which contains special rules concerning transactions among businesses and commercial partnerships;
  • the Private Limited Companies Act (GmbH-Gesetz) and the Public Limited Companies Act (Aktiengesetz), covering the two most common corporate structures in Germany – the ‘GmbH’ and the ‘Aktiengesellschaft’; and
  • the Act on Unfair Competition (Gesetz gegen den unlauteren Wettbewerb, abbreviated as UWG), which prohibits misleading advertising and unfair business practices.

Apart from the regular courts, which hear civil and criminal cases, Germany has specialized courts for administrative law, labor law, social law, and finance and tax law.  Many civil regional courts have specialized chambers for commercial matters. In 2018, the first German regional courts for civil matters (in Frankfurt and Hamburg) established Chambers for International Commercial Disputes introducing the possibility to hear international trade disputes in English.  Other federal states are currently discussing plans to introduce these specialized chambers as well. In November 2020, Baden-Wuerttemberg opened the first commercial court in Germany with locations in Stuttgart and Mannheim, with the option to choose English language proceedings.

The Federal Patent Court hears cases on patents, trademarks, and utility rights which are related to decisions by the German Patent and Trademarks Office.  Both the German Patent Office (Deutsches Patentamt) and the European Patent Office are headquartered in Munich.

Laws and Regulations on Foreign Direct Investment

The Federal Ministry for Economic Affairs and Energy may review acquisitions of domestic companies by foreign buyers in cases where investors seek to acquire at least 25 percent of the voting rights to assess whether these transactions pose a risk to the public order or national security of the Federal Republic of Germany. In the case of acquisitions of critical infrastructure and companies in sensitive sectors, the threshold for triggering an investment review by the government is 10 percent. The Foreign Trade and Payments Act and the Foreign Trade and Payments Ordinance provide the legal basis for screening investments. In 2019, the Federal Ministry for Economic Affairs and Energy screened a total of 106 foreign acquisitions. In at least one case it prohibited an acquisition – the planned takeover of German wireless communications technology developer IMST GmbH by Chinese state-owned defense company CASIC in December 2020. However, even without a formal decision, the mere prospect of rejection has reportedly caused foreign investors to pull out of prospective deals in the past. All national security decisions by the ministry can be appealed in administrative courts.

There is no general requirement for investors to obtain approval for any acquisition unless the target company poses a potential national security risk, such as operating or providing services relating to critical infrastructure, , is a media company, or operates in the health sector. The threshold for initiating such an investment review is an acquisition of at least 10 percent of voting rights. The Federal Ministry for Economic Affairs and Energy may launch a review within three months after obtaining knowledge of the acquisition; the review must be concluded within four months after receipt of the full set of relevant documents. An investor may also request a binding certificate of non-objection from the Federal Ministry for Economic Affairs and Energy in advance of the planned acquisition to obtain legal certainty at an early stage. If the Federal Ministry for Economic Affairs and Energy does not open an in-depth review within two months from the receipt of the request, this certificate shall be deemed as granted.

Special rules additionally apply for the acquisition of companies that operate in sensitive security areas, including defense and IT security. In contrast to the cross-sectoral rules described above, all sensitive acquisitions must be notified in written form including basic information of the planned acquisition, the buyer, the domestic company that is subject of the acquisition and the respective fields of business. The Federal Ministry for Economic Affairs and Energy may open a formal review procedure if a foreign investor seeks to acquire at least 10 percent of voting rights of a German company in a sensitive security area within three months after receiving notification, or the acquisition shall be deemed as approved. If a review procedure is opened, the buyer is required to submit further documents. The acquisition may be restricted or prohibited within three months after the full set of documents has been submitted.

The German government has continuously amended domestic investment screening provisions in recent years to transpose the relevant EU framework and address evolving security risks. An amendment in June 2017 clarified the scope for review and gave the government more time to conduct reviews, in reaction to an increasing number of acquisitions of German companies by foreign investors with apparent ties to national governments. The amended provisions provide a clearer definition of sectors in which foreign investment can pose a threat to public order and security, including operators of critical infrastructure, developers of software to run critical infrastructure, telecommunications operators or companies involved in telecom surveillance, cloud computing network operators and service providers, and telematics companies, and which are subject to notification requirements. The new rules also extended the time to assess a cross-sector foreign investment from two to four months, and for investments in sensitive sectors, from one to three months, and introduced the possibility of retroactively initiating assessments for a period of five years after the conclusion of an acquisition. Indirect acquisitions such as those through a Germany- or EU-based affiliate company are now also explicitly subject to the new rules.

With further amendments in 2020, Germany implemented the 2019 EU Screening Regulation.

The amendments a) introduced a more pro-active screening based on “prospective impairment” of public order or security by an acquisition, rather than a de facto threat, b) take into account the impact on other EU member states, and c) formally suspend transactions during the screening process.

a) introduced a more pro-active screening based on “prospective impairment” of public order or security by an acquisition, rather than a de facto threat, b) take into account the impact on other EU member states, and c) formally suspend transactions during the screening process.

Furthermore, acquisitions by foreign government-owned or -funded entities now trigger a review, and the healthcare industry is now considered a sensitive sector to which the stricter 10% threshold applies. In May 2021, a further amendment entered into force which introduced a list of sensitive sectors and technologies (similar to the current list of critical infrastructures), including artificial intelligence, autonomous vehicles, specialized robots, semiconductors, additive manufacturing and quantum technology. Foreign investors who seek to acquire at least 10% of ownership rights of a German company in one those fields would be required to notify the government and potentially become subject to an investment review. The screening can now also take into account “stockpiling acquisitions” by the same investor, “atypical control investments” where an investor seeks additional influence in company operations via side contractual agreements, or combined acquisitions by multiple investors, if all are controlled by one foreign government.

The Ministry for Economic Affairs and Energy provides comprehensive information on Germany’s investment screening regime on its website in English: https://www.bmwi.de/Redaktion/EN/Artikel/Foreign-Trade/investment-screening.html 

https://www.bmwi.de/Redaktion/EN/Artikel/Foreign-Trade/investment-screening.html 

The German Economic Development Agency (GTAI) provides extensive information for investors, including about the legal framework, labor-related issues and incentive programs, on their website: http://www.gtai.de/GTAI/Navigation/EN/Invest/investment-guide.html .

4. Industrial Policies

Investment Incentives

Federal and state investment incentives – including investment grants, labor-related and R&D incentives, public loans, and public guarantees – are available to domestic and foreign investors alike. Different incentives can be combined. In general, foreign and German investors must meet the same criteria for eligibility.

Germany Trade & Invest (GTAI), Germany’s federal economic development agency, provides comprehensive information on incentives in English at: https://www.gtai.de/gtai-en/invest/investment-guide/incentive-programs .

Foreign Trade Zones/Free Ports/Trade Facilitation

There are currently two free ports in Germany operating under EU law: Bremerhaven and Cuxhaven. The duty-free zones within the ports also permit value-added processing and manufacturing for EU-external markets, albeit with certain requirements. All are open to both domestic and foreign entities. In recent years, falling tariffs and the progressive enlargement of the EU have eroded much of the utility and attractiveness of duty-free zones.

Performance and Data Localization Requirements

In general, there are no requirements for local sourcing, export percentage, or local or national ownership. In some cases, however, there may be performance requirements tied to an incentive, such as creation of jobs or maintaining a certain level of employment for a prescribed length of time.

U.S. companies can generally obtain the visas and work permits required to do business in Germany. U.S. citizens may apply for work and residential permits from within Germany. Germany Trade & Invest offers detailed information online at https://www.gtai.de/gtai-en/invest/investment-guide/coming-to-germany .

There are no general localization requirements for data storage in Germany. However, the invalidation of the Privacy Shield by the European Court of Justice in July 2020 has led to increased calls for data storage in Germany, e.g., with regard to U.S. cloud service providers used by digital health app developers. In recent years, German and European cloud providers have also sought to market the domestic location of their servers as a competitive advantage.

5. Protection of Property Rights

Real Property

The German Government adheres to a policy of national treatment, which considers property owned by foreigners as fully protected under German law. In Germany, mortgage approvals are based on recognized and reliable collateral. Secured interests in property, both chattel and real, are recognized and enforced. According to the World Bank’s Doing Business Report, it takes an average of 52 days to register property in Germany.

The German Land Register Act dates back to 1897. The land register mirrors private real property rights and provides information on the legal relationship of the estate. It documents the owner, rights of third persons, as well as liabilities and restrictions. Any change in property of real estate must be registered in the land registry to make the contract effective. Land titles are now maintained in an electronic database and can be consulted by persons with a legitimate interest.

Intellectual Property Rights

Germany has a robust regime to protect intellectual property rights (IPR). Legal structures are strong and enforcement is good. Nonetheless, internet piracy and counterfeit goods remain issues, and specific infringing websites are occasionally included in USTR’s Notorious Markets Reviews. Germany has been a member of the World Intellectual Property Organization (WIPO) since 1970. The German Central Customs Authority annually publishes statistics on customs seizures of counterfeit and pirated goods. The statistics for 2019 can be found under: https://www.zoll.de/SharedDocs/Broschueren/DE/Die-Zollverwaltung/jahresstatistik_2019.html.

Germany is party to the major international IPR agreements: the Berne Convention for the Protection of Literary and Artistic Works, the Paris Convention for the Protection of Industrial Property, the Universal Copyright Convention, the Geneva Phonograms Convention, the Patent Cooperation Treaty (PCT), the Brussels Satellite Convention, the Rome Convention for the Protection of Performers, Producers of Phonograms and Broadcasting Organizations, and the World Trade Organization (WTO) Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). Many of the latest developments in German IPR law are derived from European legislation with the objective to make applications less burdensome and allow for European IPR protection. Germany is currently drafting legislation to implement EU Directive 2019/790 on Copyright and Related Rights in the Digital Single Market, including an ancillary copyright law for publishers.

The following types of protection are available:

Copyrights: National treatment is granted to foreign copyright holders, including remuneration for private recordings. Under the TRIPS Agreement, Germany grants legal protection for U.S. performing artists against the commercial distribution of unauthorized live recordings in Germany. Germany is party to the World Intellectual Property Organization (WIPO) Copyright Treaty and WIPO Performances and Phonograms Treaty, which came into force in 2010. Most rights holder organizations regard German authorities’ enforcement of IP rights as effective. In 2008, Germany implemented the EU Directive (2004/48/EC) on IPR enforcement with a national bill, thereby strengthening the privileges of rights holders and allowing for improved enforcement action. Germany is currently drafting legislation to implement EU Directive 2019/790 on Copyright and Related Rights in the Digital Single Market.

Trademarks: National treatment is granted to foreigners seeking to register trademarks at the German Patent and Trade Mark Office. Protection is valid for a period of ten years and can be extended in ten-year periods. It is possible to register for trademark and design protection nationally in Germany or for an EU Trade Mark and/or Registered Community Design at the EU Intellectual Property Office (EUIPO). These provide protection for industrial design or trademarks in the entire EU market. Both national trademarks and European Union Trade Marks (EUTMs) can be applied for from the U.S. Patent and Trademark Office (USPTO) as part of an international trademark registration system, or the applicant may apply directly for those trademarks from EUIPO at https://euipo.europa.eu/ohimportal/en/home .

Patents: National treatment is granted to foreigners seeking to register patents at the German Patent and Trade Mark Office. Patents are granted for technical inventions that are new, involve an inventive step, and are industrially applicable. However, applicants having neither a domicile nor an establishment in Germany must appoint a patent attorney in Germany as a representative filing the patent application. The documents must be submitted in German or with a translation into German. The duration of a patent is 20 years from the patent application filing date. Patent applicants can request accelerated examination under the Global Patent Prosecution Highway (GPPH) when filing the application, provided that the patent application was previously filed at the USPTO and that at least one claim had been determined to be patentable. There are a number of differences between U.S. and German patent law, including the filing systems (“first-inventor-to-file” versus “first-to-file”, respectively), that a qualified patent attorney can explain to U.S. patent applicants. German law also offers the possibility to register designs and utility models.

If a U.S. applicant seeks to file a patent in multiple European countries, this may be accomplished through the European Patent Office (EPO) which grants European patents for the contracting states to the European Patent Convention (EPC). The 38 contracting states include the entire EU membership and several additional European countries; Germany joined the EPC in 1977. It should be noted that some EPC members require a translation of the granted European patent in their language for validation purposes. The EPO provides a convenient single point to file a patent in as many of these countries as an applicant would like: https://www.epo.org/applying/basics.html . U.S. applicants seeking patent rights in multiple countries can alternatively file an international Patent Coordination Treaty (PCT) application with the USPTO.

Trade Secrets: Trade secrets are protected in Germany by the Law for the Protection of Trade Secrets, which has been in force since April 2019 and implements the 2016 EU Directive (2016/943). According to the law, the illegal accessing, appropriation, and copying of trade secrets, including through social engineering, is prohibited. Explicitly exempt from the law is “reverse engineering” of a publicly available item, and appropriation, usage, or publication of a trade secret to protect a “legitimate interest”, including journalistic research and whistleblowing. The law requires that companies have to implement “adequate confidentiality measures” for information to be protected as a trade secret under the law. Owners of trade secrets are entitled to omission, compensation, and information about the culprit, as well as the destruction, return and recall, and ultimately the removal of the infringing products from the market.

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

Country resources:

For additional information about how to protect IPR in Germany, please see Germany Trade & Invest website at https://www.gtai.de/gtai-en/invest/investment-guide/the-legal-framework/patents-licensing-trade-marks-65372 .

Statistics on the seizure of counterfeit goods are available through the German Customs Authority (Zoll): https://www.zoll.de/SharedDocs/Broschueren/DE/Die-Zollverwaltung/statistik_gew_rechtsschutz_2019.html;jsessionid=F8B0524DFF4F1ADF99DEBB858E4CAD31.internet412?nn=305648

https://www.zoll.de/SharedDocs/Broschueren/DE/Die-Zollverwaltung/statistik_gew_rechtsschutz_2019.html;jsessionid=F8B0524DFF4F1ADF99DEBB858E4CAD31.internet412?nn=305648

Investors can identify IPR lawyers in AmCham Germany’s Online Services Directory: https://www.amcham.de/services/overview/member-services/address-services-directory/  (under “legal references” select “intellectual property.”)

Businesses can also join the Anti-counterfeiting Association (APM) http://www.markenpiraterie-apm.de/index.php?article_id=1&clang=1 

http://www.markenpiraterie-apm.de/index.php?article_id=1&clang=1 

6. Financial Sector

Capital Markets and Portfolio Investment

As an EU member state with a well-developed financial sector, Germany welcomes foreign portfolio investment and has an effective regulatory system. Germany has a very open economy, routinely ranking among the top countries in the world for exports and inward and outward foreign direct investment. As a member of the Eurozone, Germany does not have sole national authority over international payments, which are a shared task of the European Central Bank and the national central banks of the 19 member states, including the German Central Bank (Bundesbank). A European framework for national security screening of foreign investments, which entered into force in April 2019, provides a basis under European law to restrict capital movements into Germany on the basis of threats to national security. Global investors see Germany as a safe place to invest, as the real economy – up until the COVID-19 crisis– continued to outperform other EU countries.German sovereign bonds continue to retain their “safe haven” status.

Listed companies and market participants in Germany must comply with the Securities Trading Act, which bans insider trading and market manipulation. Compliance is monitored by the Federal Financial Supervisory Authority (BaFin) while oversight of stock exchanges is the responsibility of the state governments in Germany (with BaFin taking on any international responsibility). Investment fund management in Germany is regulated by the Capital Investment Code (KAGB), which entered into force on July 22, 2013. The KAGB represents the implementation of additional financial market regulatory reforms, committed to in the aftermath of the global financial crisis. The law went beyond the minimum requirements of the relevant EU directives and represents a comprehensive overhaul of all existing investment-related regulations in Germany with the aim of creating a system of rules to protect investors while also maintaining systemic financial stability.

Money and Banking System

Although corporate financing via capital markets is on the rise, Germany’s financial system remains mostly bank-based. Bank loans are still the predominant form of funding for firms, particularly the small- and medium-sized enterprises that comprise Germany’s “Mittelstand,” or mid-sized industrial market leaders. Credit is available at market-determined rates to both domestic and foreign investors, and a variety of credit instruments are available. Legal, regulatory and accounting systems are generally transparent and consistent with international banking norms. Germany has a universal banking system regulated by federal authorities, and there have been no reports of a shortage of credit in the German economy. After 2010, Germany banned some forms of speculative trading, most importantly “naked short selling.” In 2013, Germany passed a law requiring banks to separate riskier activities such as proprietary trading into a legally separate, fully capitalized unit that has no guarantee or access to financing from the deposit-taking part of the bank. Since the creation of the European single supervisory mechanism (SSM) in November 2014, the European Central Bank directly supervises 21 banks located in Germany (as of January 2021) among them four subsidiaries of foreign banks.

Germany supports a global financial transaction tax and is pursuing the introduction of such a tax along with other EU member states.

Germany has a modern and open banking sector that is characterized by a highly diversified and decentralized, small-scale structure. As a result, it is extremely competitive, profit margins notably in the retail sector are low and the banking sector considered “over-banked” and in need of consolidation. The country’s “three-pillar” banking system consists of private commercial banks, cooperative banks, and public banks (savings banks/Sparkassen and the regional state-owned banks/Landesbanken). This structure has remained unchanged despite marked consolidation within each “pillar” since the financial crisis in 2008/9. The number of state banks (Landesbanken) dropped from 12 to 5, that of savings banks from 446 in 2007 to 374 at the end of 2019 and the number of cooperative banks has dropped from 1,234 to 814. Two of the five large private sector banks have exited the market (Dresdner, Postbank). The balance sheet total of German banks dropped from 304 percent of GDP in 2007 to about 265 percent of end-2019 GDP with banking sector assets worth €9.1 trillion. Market shares in corporate finance of the banking groups remained largely unchanged (all figures for end of 2019): Credit institutions 27 percent (domestic 17 percent, foreign banks 10 percent), savings banks 31 percent, state banks 10 percent, credit cooperative banks 21 percent, promotional banks 6 percent.

The private bank sector is dominated by globally active banks Deutsche Bank (Germany’s largest bank by balance sheet total) and Commerzbank (fourth largest bank), with balance sheets of €1.3 trillion and €466.6 billion respectively (2019 figures). Commerzbank received €18 billion in financial assistance from the federal government in 2009, for which the government took a 25 percent stake in the bank (now reduced to 15.6 percent). Merger talks between Deutsche Bank and Commerzbank failed in 2019. The second largest of the top ten German banks is DZ Bank, the central institution of the Cooperative Finance Group (after its merger with WGZ Bank in July 2016), followed by German branches of large international banks (UniCredit Bank or HVB, ING-Diba), development banks (KfW Group, NRW.Bank), and state banks (LBBW, Bayern LB, Helaba, NordLB).

German banks’ profitability deteriorated in the years prior to the COVID-19 crisis due to the prevailing low and negative interest rate environment that narrowed margins on new loans irrespective of debtors’ credit worthiness, poor trading results and new competitors from the fintech sector, and low cost efficiency. In 2018, according to the latest data by the Deutsche Bundesbank (Germany’s central bank), German credit institutions reported a pre-tax profit of €18.9 billion or 0.23 percent of total assets. Their net interest income remained below its long-term average to €87.2 billion despite dynamic credit growth (19 percent since end-2014 until end-2019 in retail and 23 percent in corporate loans) on ongoing cost-reduction efforts. Thanks to continued favorable domestic economic conditions, their risk provisioning has been at an all time low. Their average return on equity before tax in 2018 slipped to 3.74 percent (after tax: 2.4 percent) (with savings banks generating a higher return, big banks a lower return, and Landesbanken a –2.45 percent return). Both return on equity and return on assets were at their lowest level since 2010.

Brexit promptedsome banking activities to relocate from the United Kingdom to the EU, with many foreign banks (notably U.S. and Japanese banks) choosing Frankfurt as their new EU headquarters. Their Core Tier 1 equity capital ratios improved as did their liquidity ratios, but no German large bank has been able to organically raise its capital for the past decade.

In 2020, the insolvency of financial services provider WireCard revealed certain weaknesses in German banking supervision. WireCard, which many viewed as a promising innovative format for the processing of credit card transactions, managed to conceal inadequate equity from supervisory authorities while also inflating its actual turnover. The Wirecard insolvency led to the replacement of the head of banking supervisory authority BaFin and triggered both an ongoing overhaul of the German banking supervision and a continuing parliamentary investigation.

It remains unclear how the COVID-19 crisis will affect the German banking sector. Prior to the pandemic, the bleaker German economic outlook prompted a greater need for value adjustment and write-downs in lending business. German banks’ ratio of non-performing loans was low going into the crisis (1.24 percent). In March 2020, the German government provided large-scale asset guarantees to banks (in certain instances covering 100 percent of the credit risk) via the German government owned KfW bank to avoid a credit crunch. So far, German banks have come through the crisis unscathed thanks to extensive liquidity assistance from the ECB, moratoria and fiscal support for the economy. Nevertheless, 25 German banks were downgraded in 2020 and many more were put on negative watch, though CDS spreads for the two largest private banks have fallen dramatically since the height of the crisis in March 2020 and are currently around pre-COVID levels. The second and third COVID-waves, however, are likely to take a toll on credit institutions and 2021 could prove to be the toughest test for banks since the 2008/9 global financial crisis. According to the Bundesbank, loan defaults by German banks could quadruple to 0.8 percent of the loan portfolio (or €13 billion). The Bundesbank’s focus in particular is on aircraft loans. According to Bloomberg’s calculations, the major German regional banks have lent €15 billion for aircraft financing. At Deka alone, the asset manager of the savings banks, the ratio of non-performing loans in aircraft financing is at a relatively high 7.7 percent.

Foreign Exchange and Remittances

Foreign Exchange

As a member of the Eurozone, Germany uses the euro as its currency, along with 18 other EU countries. The Eurozone has no restrictions on the transfer or conversion of its currency, and the exchange rate is freely determined in the foreign exchange market.

The Deutsche Bundesbank is the independent central bank of the Federal Republic of Germany. It has been a part of the Eurosystem since 1999, sharing responsibility with the other national central banks and the European Central Bank (ECB) for the single currency, and thus has no scope to manipulate the bloc’s exchange rate. Germany’s persistently high current account surplus – the world’s second largest in 2020 at USD 261 billion (6.9 percent of GDP) – has shrunk for the fifth year in a row. Despite the decrease, the persistence of Germany’s surplus remains a matter of international controversy. German policymakers view the large surplus as the result of market forces rather than active government policies, while the European Commission (EC) and IMF have called on authorities to rebalance towards domestic sources of economic growth by expanding public investment, using available fiscal space, and other policy choices that boost domestic demand.

Germany is a member of the Financial Action Task Force (FATF) and is committed to further strengthening its national system for the prevention, detection and suppression of money laundering and terrorist financing. Federal law is enforced by regional state prosecutors. Investigations are conducted by the Federal and State Offices of Criminal Investigations (BKA/LKA). The administrative authority for imposing anti-money laundering requirements on financial institutions is the Federal Financial Supervisory Authority (BaFin).

The Financial Intelligence Unit (FIU) – located at the General Customs Directorate in the Federal Ministry of Finance – is the national central authority for receiving, collecting and analyzing reports of suspicious financial transactions that may be related to money laundering or terrorist financing. On January 1, 2020, legislation to implement the 5th EU Money Laundering Directive and the European Funds Transfers Regulation (Geldtransfer-Verordnung) entered into force. The Act amends the German Money Laundering Act (Geldwäschegesetz – GwG) and a number of further laws. It provides, inter alia, the FIU and prosecutors with expanded access to data. On March 9, 2021 the Bundestag passed an anti-money laundering law seeking to improve Germany’s criminal legal framework for combating money laundering while simultaneously implementing the EU’s 6th Money Laundering Directive (EU 2018/1673 – hereafter “the Directive”). The Directive lays down minimum rules on the definition of criminal offenses and sanctions to combat money laundering. The law goes beyond the minimum standard set out in the Directive by broadening the definition of activities that could be prosecuted as money laundering offenses. Previously, the money laundering section in the German Criminal Code was designed to criminalize acts in connection with a list of serious “predicate offenses,” the underlying crime generating illicit funds, e.g., drug trafficking. The new law dispenses with the previously defined list, allowing any crime to be considered as a “predicate offense” to money laundering (the “All- Crimes Approach”). This is a paradigm shift in German criminal law, and implements an additional priority laid out in Germany’s “Strategy to Combat Money Laundering and Terrorist Financing” adopted in 2019.

The number of suspected money laundering and terrorist financing cases rose sharply in 2019 from 77.000 suspicious activity reports (SARs) to 114.914 according to the 2019 annual report of FIU (a new record and 12-fold that of 2009). The vast majority (98 percent) of suspicious transaction reports were filed by German banks and other financial institutions in order to avoid legal risks after a court ruling that held anti-money laundering (AML) officers personally liable, thus including many “false positives”. At the same time, the activities resulted in just 156 criminal charges, 133 indictments and only 54 verdicts.

In its annual report 2018, the FIU noted an “extreme vulnerability” in Germany’s real estate market to money laundering activities. Transparency International found that about €30 billion in illicit funds were funneled into German real estate in 2017. The results of the first concerted action by supervisory authorities of the German federal states in the automotive industry in 2019, for example, were sobering: only 15 percent of car dealers had implemented AML provisions, the rest had deficiencies, showing the “need for further sensitization.” The report also noted a slight upward trend in the number of SARs related to crypto assets. Around 760 SARs cited “anomalies in connection with cryptocurrencies”, as reporting noted, especially the forwarding of funds to trading platforms abroad for the exchange of funds into cryptocurrencies. However, the FIU itself has come under criticism. Financial institutions deplore the quality of its staff and the effectiveness of its work. The Institute of Public Auditors in Germany (IDW) criticizes that the precautions taken to prevent money laundering in high-risk industries outside the financial sector are monitored much less intensively. A review of the FIU scheduled for 2020 has been postponed due to the pandemic.

There is no difficulty in obtaining foreign exchange.

Remittance Policies

There are no restrictions or delays on investment remittances or the inflow or outflow of profits.

Germany is the largest remittance-sending country in the EU, making up almost 18% of all outbound personal remittances of the EU-27 (Eurostat). Migrants in Germany posted USD 25.1 billion (0.6 percent of GDP) abroad in 2019 (World Bank). Remittance flows into Germany amounted to around USD 16.5 billion in 2019, approximately 0.4 percent of Germany’s GDP.

The issue of remittances played a role during the German G20 Presidency in 2017. During its presidency, Germany passed an updated version of its “G20 National Remittance Plan.” The document states that Germany’s focus will remain on “consumer protection, linking remittances to financial inclusion, creating enabling regulatory frameworks and generating research and data on diaspora and remittances dynamics.” The 2017 “G20 National Remittance Plan” can be found at https://www.gpfi.org/publications/2017-g20-national-remittance-plans-overview 

Sovereign Wealth Funds

The German government does not currently have a sovereign wealth fund or an asset management bureau.

7. State-Owned Enterprises

The formal term for state-owned enterprises (SOEs) in Germany translates as “public funds, institutions, or companies,” and refers to entities whose budget and administration are separate from those of the government, but in which the government has more than 50 percent of the capital shares or voting rights. Appropriations for SOEs are included in public budgets, and SOEs can take two forms, either public or private law entities. Public law entities are recognized as legal personalities whose goal, tasks, and organization are established and defined via specific acts of legislation, with the best-known example being the publicly-owned promotional bank KfW (Kreditanstalt für Wiederaufbau). KfW’s mandate is to promote global development. The government can also resort to ownership or participation in an entity governed by private law if the following conditions are met: doing so fulfills an important state interest, there is no better or more economical alternative, the financial responsibility of the federal government is limited, the government has appropriate supervisory influence, and yearly reports are published.

Government oversight of SOEs is decentralized and handled by the ministry with the appropriate technical area of expertise. The primary goal of such involvement is promoting public interests rather than generating profits. The government is required to close its ownership stake in a private entity if tasks change or technological progress provides more effective alternatives, though certain areas, particularly science and culture, remain permanent core government obligations. German SOEs are subject to the same taxes and the same value added tax rebate policies as their private sector competitors. There are no laws or rules that seek to ensure a primary or leading role for SOEs in certain sectors or industries. However, a white paper drafted by the Ministry of Economic Affairs and Energy in November 2019 outlines elements of a national industrial strategy, which includes the option of a temporary state participation in key technology companies as “last resort”. Private enterprises have the same access to financing as SOEs, including access to state-owned banks such as KfW.

The Federal Statistics Office maintains a database of SOEs from all three levels of government (federal, state, and municipal) listing a total of 18,566 entities for 2018, or 0.5 percent of the total 3.5 million companies in Germany. SOEs in 2018 had €609 billion in revenue and €583 billion in expenditures. 41 percent of SOEs’ revenue was generated by water and energy suppliers, 12 percent by health and social services, and 11 percent by transportation-related entities. Measured by number of companies rather than size, 88 percent of SOEs are owned by municipalities, 10 percent are owned by Germany’s 16 states, and 2 percent are owned by the federal government.

The Federal Finance Ministry is required to publish a detailed annual report on public funds, institutions, and companies in which the federal government has direct participation (including a minority share) or an indirect participation greater than 25 percent and with a nominal capital share worth more than €50,000. The federal government held a direct participation in 104 companies and an indirect participation in 433 companies at the end of 2018, most prominently Deutsche Bahn (100 percent share), Deutsche Telekom (32 percent share), and Deutsche Post (21 percent share). Federal government ownership is concentrated in the areas of infrastructure, economic development, science, administration/increasing efficiency, defense, development policy, culture. As the result of federal financial assistance packages from the federally-controlled Financial Market Stability Fund during the global financial crisis of 2008/9, the federal government still has a partial stake in several commercial banks, including a 15.6 percent share in Commerzbank, Germany’s second largest commercial bank. In 2020, in the wake of the COVID-19 pandemic, the German government acquired shares of several large German companies, including CureVac, TUI and Lufthansa, in an attempt to prevent companies from filing for insolvency or, in the case of CureVac, support vaccine research in Germany.

The 2019 annual report (with 2018 data) can be found here: https://www.bundesfinanzministerium.de/Content/DE/Downloads/Broschueren_Bestellservice/2020-05-14-beteiligungsbericht-des-bundes-2019.pdf?__blob=publicationFile&v=28

https://www.bundesfinanzministerium.de/Content/DE/Downloads/Broschueren_Bestellservice/2020-05-14-beteiligungsbericht-des-bundes-2019.pdf?__blob=publicationFile&v=28

Publicly-owned banks constitute one of the three pillars of Germany’s banking system (cooperative and commercial banks are the other two). Germany’s savings banks are mainly owned by the municipalities, while the so-called Landesbanken are typically owned by regional savings bank associations and the state governments. Given their joint market share, about 40 percent of the German banking sector is publicly owned. There are also many state-owned promotional/development banks which have taken on larger governmental roles in financing infrastructure. This increased role removes expenditures from public budgets, particularly helpful in light of Germany’s balanced budget rules, which took effect for the states in 2020.

A longstanding, prominent case of a partially state-owned enterprise is automotive manufacturer Volkswagen, in which the state of Lower Saxony owns the third-largest share in the company of around 12 percent but controls 20 percent of the voting rights. The so-called Volkswagen Law, passed in 1960, limited individual shareholder’s voting rights in Volkswagen to a maximum of 20 percent regardless of the actual number of shares owned, so that Lower Saxony could veto any takeover attempts. In 2005, the European Commission successfully sued Germany at the European Court of Justice (ECJ), claiming the law impeded the free flow of capital. The law was subsequently amended to remove the cap on voting rights, but Lower Saxony’s 20 percent share of voting rights was maintained, preserving its ability to block hostile takeovers.

Privatization Program

Germany does not have any privatization programs at this time. German authorities treat foreigners equally in privatizations of state-owned enterprises.

8. Responsible Business Conduct

In December 2016, the Federal Government passed the National Action Plan for Business and Human Rights (NAP). The action plan aims to apply the UN Guiding Principles for Business and Human Rights to the activities of German companies nationally as well as globally in their value and supply chains. The 2018 coalition agreement for the 19th legislative period between the governing Christian Democratic parties, CDU/CSU, and the Social Democratic Party of Germany (SPD) stated its commitment to the action plan, including the principles on public procurement. It further stated that, if the NAP 2020’s effective and comprehensive review came to the conclusion that the voluntary due diligence approach of enterprises was insufficient, the government would initiate legislation for an EU-wide regulation. With results of the review showing a majority of companies do not sufficiently fulfill due diligence requirements, the government has since sought to pass a national supply chain law to ensure businesses take responsibility for their supply chains and their operations do not impinge upon human rights. Draft legislation passed by the government in March 2021 is currently in the parliamentary process.

Germany adheres to the OECD Guidelines for Multinational Enterprises; the National Contact Point (NCP) is housed in the Federal Ministry of Economic Affairs and Energy. The NCP is supported by an advisory board composed of several ministries, business organizations, trade unions, and NGOs. This working group usually meets once a year to discuss all Guidelines-related issues. The German NCP can be contacted through the Ministry’s website: https://www.bmwi.de/Redaktion/EN/Textsammlungen/Foreign-Trade/national-contact-point-ncp.html .

There is general awareness of environmental, social, and governance issues among both producers and consumers in Germany, and surveys suggest that consumers increasingly care about the ecological and social impacts of the products they purchase. In order to encourage businesses to factor environmental, social, and governance impacts into their decision-making, the government provides information online and in hard copy. The federal government encourages corporate social responsibility (CSR) through awards and prizes, business fairs, and reports and newsletters. The government also organizes so called “sector dialogues” to connect companies and facilitate the exchange of best practices, and offers practice days to help nationally as well as internationally operating small- and medium-sized companies discern and implement their entrepreneurial due diligence under the NAP. To this end it has created a website on CSR in Germany ( http://www.csr-in-deutschland.de/EN/Home/home.html  in English). The German government maintains and enforces domestic laws with respect to labor and employment rights, consumer protections, and environmental protections. The German government does not waive labor and environmental laws to attract investment.

Social reporting is voluntary, but publicly listed companies frequently include information on their CSR policies in annual shareholder reports and on their websites.

Civil society groups that work on CSR include Amnesty International Germany, Bund für Umwelt und Naturschutz Deutschland e. V. (BUND), CorA Corporate Accountability – Netzwerk Unternehmensverantwortung, Forest Stewardship Council (FSC), Germanwatch, Greenpeace Germany, Naturschutzbund Deutschland (NABU), Sneep (Studentisches Netzwerk zu Wirtschafts- und Unternehmensethik), Stiftung Warentest, Südwind – Institut für Ökonomie und Ökumene, TransFair – Verein zur Förderung des Fairen Handels mit der „Dritten Welt“ e. V., Transparency International, Verbraucherzentrale Bundesverband e.V., Bundesverband Die Verbraucher Initiative e.V., and the World Wide Fund for Nature (WWF, known as the „World Wildlife Fund“ in the United States).

Additional Resources 

Department of State

Department of Labor

9. Corruption

Among industrialized countries, Germany ranks 9th out of 180, according to Transparency International’s 2020 Corruption Perceptions Index. Some sectors including the automotive industry, construction sector, and public contracting, exert political influence and political party finance remains only partially transparent. Nevertheless, U.S. firms have not identified corruption as an impediment to investment in Germany. Germany is a signatory of the OECD Anti-Bribery Convention and a participating member of the OECD Working Group on Bribery.

Over the last two decades, Germany has increased penalties for the bribery of German officials, corrupt practices between companies, and price-fixing by companies competing for public contracts. It has also strengthened anti-corruption provisions on financial support extended by the official export credit agency and has tightened the rules for public tenders. Government officials are forbidden from accepting gifts linked to their jobs. Most state governments and local authorities have contact points for whistle-blowing and provisions for rotating personnel in areas prone to corruption. There are serious penalties for bribing officials and price fixing by companies competing for public contracts.

According to the Federal Criminal Office, in 2019, 50 percent of all corruption cases were directed towards the public administration (down from 73 percent in 2018), 39 percent towards the business sector (up from 18 percent in 2018), 9 percent towards law enforcement and judicial authorities (up from 7 percent in 2018), and 2 percent to political officials (unchanged compared to 2018).

Parliamentarians are subject to financial disclosure laws that require them to publish earnings from outside employment. Disclosures are available to the public via the Bundestag website (next to the parliamentarians’ biographies) and in the Official Handbook of the Bundestag. Penalties for noncompliance can range from an administrative fine to as much as half of a parliamentarian’s annual salary. In early 2021, several parliamentarians stepped down due to inappropriate financial gains made through personal relationships to businesses involved in the procurement of face masks during the initial stages of the pandemic.

Donations by private persons or entities to political parties are legally permitted. However, if they exceed €50,000, they must be reported to the President of the Bundestag, who is required to immediately publish the name of the party, the amount of the donation, the name of the donor, the date of the donation, and the date the recipient reported the donation. Donations of €10,000 or more must be included in the party’s annual accountability report to the President of the Bundestag.

State prosecutors are generally responsible for investigating corruption cases, but not all state governments have prosecutors specializing in corruption. Germany has successfully prosecuted hundreds of domestic corruption cases over the years, including large scale cases against major companies.

Media reports in past years about bribery investigations against Siemens, Daimler, Deutsche Telekom, Deutsche Bank, and Ferrostaal have increased awareness of the problem of corruption. As a result, listed companies and multinationals have expanded compliance departments, tightened internal codes of conduct, and offered more training to employees.

UN Anticorruption Convention, OECD Convention on Combatting Bribery

Germany was a signatory to the UN Anti-Corruption Convention in 2003. The Bundestag ratified the Convention in November 2014.

Germany adheres to and actively enforces the OECD Anti-Bribery Convention which criminalizes bribery of foreign public officials by German citizens and firms. The necessary tax reform legislation ending the tax write-off for bribes in Germany and abroad became law in 1999.

Germany participates in the relevant EU anti-corruption measures and signed two EU conventions against corruption. However, while Germany ratified the Council of Europe Criminal Law Convention on Corruption in 2017, it has not yet ratified the Civil Law Convention on Corruption.

Resources to Report Corruption

There is no central government anti-corruption agency in Germany. Responsibilities in fighting corruption lies with the federal states.

Contact at “watchdog” organization:

Hartmut Bäumer, Chair
Transparency International Germany
Alte Schönhauser Str. 44, 10119 Berlin
+49 30 549 898 0
office@transparency.de 
https://www.transparency.de/en/ 

The Federal Criminal Office publishes an annual report on corruption: “Bundeslagebild Korruption” – the latest one covers 2019. https://www.bka.de/DE/AktuelleInformationen/StatistikenLagebilder/Lagebilder/Korruption/korruption_node.html;jsessionid=95B370E07C3C5702B4A4AAEE8EAC8B3F.live0601

https://www.bka.de/DE/AktuelleInformationen/StatistikenLagebilder/Lagebilder/Korruption/korruption_node.html;jsessionid=95B370E07C3C5702B4A4AAEE8EAC8B3F.live0601

10. Political and Security Environment

Political acts of violence against either foreign or domestic business enterprises are extremely rare. Isolated cases of violence directed at certain minorities and asylum seekers have not targeted U.S. investments or investors.

11. Labor Policies and Practices

The German labor force is generally highly skilled, well-educated, and productive. Before the economic downturn caused by COVID-19, employment in Germany had risen for the thirteenth consecutive year and reached an all-time high of 45.3 million in 2019, an increase of 402,000 (or 0.9 percent) from 2018—the highest level since German reunification in 1990. As a result of the COVID-19 pandemic, employment fell to 44.8 million in 2020.

Simultaneously, unemployment had fallen by more than half since 2005, and, in 2019, reached the lowest average annual value since German reunification. In 2019, around 2.34 million people were registered as unemployed, corresponding to an unemployment rate of 5.2 percent, according to Germany Federal Employment Agency calculations. Using internationally comparable data from the European Union’s statistical office Eurostat, Germany had an average annual unemployment rate of 3.2 percent in 2019, the second lowest rate in the European Union. For the pandemic year 2020, the Federal Employment Agency reports an average unemployment rate of 5.9% with an average 2.7 million unemployed in 2020. This is an increase of 429,000 over 2019. However, long-term effects on the labor market, and the economy as a whole, due to COVID-19 are not yet fully observable. All employees are by law covered by the federal unemployment insurance that compensates for the lack of income for up to 24 months. A government-funded temporary furlough program allows companies to decrease their workforce and labor costs with layoffs and has helped mitigate a negative labor market impact in the short term. The government made intense use of this program, which enrolled at peak times in 2020 more than six million employees. The government, through the national employment agency, has spent more than 22 billion euros on this program, which it considers the main tool to keep unemployment low during the COVID-19 economic crisis. The government extended the program for all companies already meeting its conditions by the end of 2020 to December 31, 2021.

Germany’s national youth unemployment rate was 5.8 percent in 2019, the lowest in the EU. The German vocational training system has gained international interest as a key contributor to Germany’s highly skilled workforce and its sustainably low youth unemployment rate. Germany’s so-called “dual vocational training,” a combination of theoretical courses taught at schools and practical application in the workplace, teaches and develops many of the skills employers need. Each year, there are more than 500,000 apprenticeship positions available in more than 340 recognized training professions, in all sectors of the economy and public administration. Approximately 50 percent of students choose to start an apprenticeship. The government is promoting apprenticeship opportunities, in partnership with industry, through the “National Pact to Promote Training and Young Skilled Workers.”

An element of growing concern for German business is the aging and shrinking of the population, which (absent large-scale immigration) will likely result in labor shortages. Official forecasts at the behest of the Federal Ministry of Labor and Social Affairs predict that the current working age population will shrink by almost 3 million between 2010 and 2030, resulting in an overall shortage of workforce and skilled labor. Labor bottlenecks already constrain activity in many industries, occupations, and regions. The government has begun to enhance its efforts to ensure an adequate labor supply by improving programs to integrate women, elderly, young people, and foreign nationals into the labor market. The government has also facilitated the immigration of qualified workers.

Labor Relations

Germans consider the cooperation between labor unions and employer associations to be a fundamental principle of their social market economy and believe this has contributed to the country’s resilience during the economic and financial crisis. Insofar as job security for members is a core objective for German labor unions, unions often show restraint in collective bargaining in weak economic times and often can negotiate higher wages in strong economic conditions. In an international comparison, Germany is in the lower midrange with regards to strike numbers and intensity. All workers have the right to strike, except for civil servants (including teachers and police) and staff in sensitive or essential positions, such as members of the armed forces.

Germany’s constitution, federal legislation, and government regulations contain provisions designed to protect the right of employees to form and join independent unions of their choice. The overwhelming majority of unionized workers are members of one of the eight largest unions — largely grouped by industry or service sector — which are affiliates of the German Trade Union Confederation (Deutscher Gewerkschaftsbund, DGB). Several smaller unions exist outside the DGB. Overall trade union membership has, however, been in decline over the last several years. In 2020, total DGB union membership amounted to less than 6 million. IG Metall is the largest German labor union with 2.2 million members, followed by the influential service sector union Ver.di (1.9 million members).

The constitution and enabling legislation protect the right to collective bargaining, and agreements are legally binding to the parties. In 2019, 52 percent of non-self-employed workers were covered by a collective wage agreement.

By law, workers can elect a works council in any private company employing at least five people. The rights of the works council include the right to be informed, to be consulted, and to participate in company decisions. Works councils often help labor and management to settle problems before they become disputes and disrupt work. In addition, “co-determination” laws give the workforce in medium-sized or large companies (corporations, limited liability companies, partnerships limited by shares, co-operatives, and mutual insurance companies) significant voting representation on the firms’ supervisory boards. This co-determination in the supervisory board extends to all company activities.

From 2010 to 2019, real wages grew by 1.2 percent on average. Generous collective bargaining wage increases in 2019 (+3.2 percent) and the increase of the federal Germany-wide statutory minimum wage to €9.35 (USD 10.15) on January 1, 2020, led to 2.6 percent nominal wage increase. Real wages grew by 1.2 percent in 2019. As a result of the COVID-19 pandemic, real wages fell in 2020 by 1% over the previous year (preliminary figures).

Labor costs increased by 3.4 percent in 2019. With an average labor cost of €35 (USD 41.20) per hour, Germany ranked seventh among the 27 EU-members states (EU average: €27.40/USD 32.26) in 2019.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source* USG or international statistical source USG or International Source of Data:  BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount  
Host Country Gross Domestic Product (GDP) ($M USD) 2020 €3.332,230 2019 $3.861,000 Federal Statistical Office, www.destatis.de

www.worldbank.org/en/country

Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data:  BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2018 €98,909 2019 $148,259 Bundesbank
BEA data available at https://apps.bea.gov/
international/factsheet/
Host country’s FDI in the United States ($M USD, stock positions) 2018 €361,401 2019 $521,979 Bundesbank,
BEA data available at https://www.bea.gov/international/
direct-investment-and-multinational-enterprises-comprehensive-data
Total inbound stock of FDI as % host GDP 2018 1.6% 2019 1.0% Federal Statistical Office, Bundesbank,
UNCTAD data available at
https://stats.unctad.org/handbook/
EconomicTrends/Fdi.html   

* Source for Host Country Data: Federal Statistical Office, www.destatis.de; Bundesbank, www.bundesbank.de   

Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward $1,023,358 100% Total Outward $1,754,585 100%
Luxembourg $189,366 18.5% United States $310,971 17.7%
The Netherlands $178,883 17.5% Luxembourg $213,181 12.1%
United States $119,195 11.6% The Netherlands $201,183 11.5%
Switzerland $84,618 8.3% United Kingdom $140,310 8.0%
United Kingdom $74,000 7.2% France $101,516 5.8%
“0” reflects amounts rounded to +/- USD 500,000.
Table 4: Sources of Portfolio Investment
Portfolio Investment Assets
Top Five Partners (Millions, current US Dollars)
Total Equity Securities Total Debt Securities
All Countries $3,706,904 100% All Countries $1,346,852 100% All Countries $2,360,052 100%
Luxembourg $688,255 19% Luxembourg $558,479 41% France $365,233 15%
United States $485,817 13% United States $211,170 16% United States $274,648 12%
France $459,604 12% Ireland $151,491 11% The Netherlands $266,276 11%
The Netherlands $307,341 8% France $94,371 7% United Kingdom $148,535 6%
Ireland $221,856 6% Switzerland $60,256 4% Spain $133,980 6%

14. Contact for More Information

Foreign Commercial Service
Pariser Platz 2, 14191 Berlin, Germany
+49-(0)30-8305-2940
Email: feedback@usembassy.de 

New Zealand

Executive Summary

The New Zealand economy has weathered the pandemic better than most countries, entering the pandemic with an enviable debt to GDP rate of 19.5 percent, which only increased to 27 percent by the end of the third quarter 2020, well below expectations. A swift border closure and the imposition of a seven-week nationwide lockdown helped stamp out community transmission cases and significantly reduced potential pandemic related health expenses. New Zealand maintained strong border restrictions through 2020, but economic border exemptions (requiring a 14-day quarantine) were granted for large-scale projects which helped boost investment and employment. The tourism sector suffered due to the border closure, but other aspects of the economic were strong including primary exports. Workers also benefited from of a sustained wage stimulus package and unemployment was 4.9 percent for the December 2020 quarter. The real estate sector also remained strong, fueled by low interest rates and a lack of supply, as prices nationally rose 19.8 percent from 2019 to 2020.

New Zealand has an international reputation for an open and transparent economy where businesses and investors can make commercial transactions with ease. Major political parties are committed to an open trading regime and sound rule of law practices. This is regularly reflected in high global rankings in the World Bank’s Ease of Doing Business report and Transparency International’s Perceptions of Corruption index.

Successive governments accept that foreign investment is an important source of financing for New Zealand and a means to gain access to foreign technology, expertise, and global markets. Some restrictions do apply in a few areas of critical interest including certain types of land, significant business assets, and fishing quotas. These restrictions are facilitated by a screening process conducted by the Overseas Investment Office (OIO).

The current Labour led government welcomes productive, sustainable, and inclusive foreign investment, but since being elected in October 2017 and reelected in October 2020, there has been a modest shift in economic priorities to social initiatives while continuing to acknowledge New Zealand’s dependence on trade and foreign investment. Current focus is on securing foreign capital for investment in forestry and infrastructure, as well as securing multilateral agreements and rules for e-commerce in the evolving digital economy.

The Government aims to align its Overseas Investment regime with international best practice by introducing a National Interest and Public Order test to certain assets of strategic and critical importance to New Zealand. The Government was quick to recognize the risks posed by a COVID-19 recession and fast-tracked implementation of Overseas Investment Act (OIA) Phase 2 reforms, which went into effect on June 16. These reforms grant the government increased oversight and approval authority for foreign investments, which may have fallen in value during the pandemic, to protect critical infrastructure such as telecoms, ports, airports, and dual use/military related sensitive technology, as well as media.

The implementation of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and imminent ratification of an upgrade to the New Zealand-China FTA has given those countries an advantage over those with which New Zealand does not have an agreement. The ten CPTPP countries, and in the future China, will not need to seek OIO approval for investments less than NZD 200 million (USD 130 million). However, these investments are still subject to a National Interest and Public Order test. For other countries, the default threshold is NZD 100 million (USD 65 million). CPTPP has triggered most-favored nation obligations New Zealand has under some agreements in addition to China, including bilateral FTAs with Australia and Singapore whose citizens are not subject to screening of residential property purchase or investment.

The Government has introduced a new infrastructure agency to administer a significant number of large projects following the announcement funding equal to 5 percent of New Zealand’s GDP. While it has an established history of non-discriminatory practice in awarding contracts for procurement, it has embarked on a reform of its public-private partnership (PPP) scheme.

The Government has sought to level the playing field for New Zealand business by requiring online businesses selling to New Zealanders to charge and submit the New Zealand 15 percent Goods and Services Tax (GST). In a similar populist move, the Government continues to hint at the introduction of a digital services tax (DST) on the revenues earned by large multinational companies although still participating in the OECD’s DST process.

The OIO approved many overseas applications, due in part to incentivized investment in the forestry sector and the requirement for foreign buyers of residential property. In 2019 New Zealand successfully made their first conviction of an offence under the Overseas Investment Act in the 14 years the law has been in effect.

COVID-19 has and will continue to have a major impact on the Government’s approach and it has moved quickly to enhance businesses’ access to credit, to accelerate some legislation including overseas investment and privacy law, and to suspend provisions in other law such as business insolvency. New Zealand also closed its borders in March due to COVID-19 and as of early April 2021 was looking to reopen travel in a Trans Tasman bubble with Australia and son after direct flights to the Cook Islands. Such travel will be restricted again in the event of sustained community transmission cases. Non-citizens/residents must apply for a waiver to enter and the “significant economic value” waivers are being issued, but are limited, and most businesses requiring travel to New Zealand must anticipate reduced access. Anyone entering New Zealand at this current time is subject to a mandatory 14-day self-quarantine at the expense of the New Zealand government.

The 2021 Investment Climate Statement for New Zealand uses the exchange rate of NZD 1 = USD 0.65

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2020 1 of 180 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2020 1 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2020 26 of 131 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2019 $12,018 https://apps.bea.gov/internationalfactsheet
World Bank GNI per capita 2019 $42,220 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Foreign investment in New Zealand is generally encouraged without discrimination. New Zealand has an open and transparent economy. Some restrictions do apply in a few areas of critical interest including certain types of land, significant business assets, and fishing quotas. These restrictions are facilitated by a screening process conducted by the Overseas Investment Office (OIO), described in the next section.

New Zealand has a rapidly expanding network of bilateral investment treaties and free trade agreements that include investment components. New Zealand also has a well-developed legal framework and regulatory system, and the judicial system is generally effective in enforcing property and contractual rights. Investment disputes are rare, and there have been no major disputes in recent years involving U.S. companies.

The Labour Party-led government elected in 2017 and re-elected in 2020 has continued its program of tighter screening of some forms of foreign investment and has moved to restrict the availability of permits for oil and gas exploration. It has also focused on different aspects of trade agreement negotiation compared with the previous government, such as an aversion to investor-state dispute settlement provisions.

The implementation of the CPTPP has eased the criteria for partner nations to seek approval for certain investments in New Zealand by increasing the monetary threshold when government approval is required. This has also been triggered by New Zealand’s ‘most favored nation’ obligation in their FTA with China once the upgrade to the 2008 agreement enters into force. A separate bilateral agreement with Australia allows for its threshold to be reviewed each year and is significantly higher before triggering the need for approval. Separate agreements with Australia and Singapore exempt their respective citizens from restrictions introduced in 2018 on the purchase of New Zealand residential property by non-residents. In this respect in the absence of a similar free-trade agreement with New Zealand, certain investments by United States citizens can be subject to higher scrutiny.

In 2019 the OIO approved 139 overseas investment applications, up from 94 the previous year. Net investment increased slightly from NZD 3.5 billion (USD 2.3 billion) to NZD 3.8 billion (USD 2.5 billion) while the total value of assets of approved applications more than doubled to NZD 2.3 billion (USD 1.5 billion) in 2018 to NZD 5.2 billion (USD 3.4 billion) in 2019. Over 22,000 hectares [86.7 square miles; 55,500 acres] of land was sold, leased, or granted forestry rights from 119 approvals. In 2018 there were fewer approvals (64) securing more land area of almost 50,000 hectares [193.1 square miles; 123,600 acres].

Crown entity New Zealand Trade and Enterprise (NZTE) is New Zealand’s primary investment promotion agency. In addition to its New Zealand central and regional presence, it has 40 international locations, including four offices in the United States. Approximately half of the NZTE staff is based overseas. The NZTE helps investors develop their plans, access opportunities, and facilitate connections with New Zealand-based private sector advisors: https://www.nzte.govt.nz/page/how-nzte-works-with-customers Once investors independently complete their negotiations, due diligence, and receive confirmation of their investment, the NZTE offers aftercare advice. The NZTE aims to channel investment into regional areas of New Zealand to build capability and to promote opportunities outside of the country’s main cities.

Under certain conditions, foreign investors can bid alongside New Zealand businesses for contestable government funding for research and development (R&D) grants. For more see: https://www.mbie.govt.nz/science-and-technology/science-and-innovation/international-opportunities/new-zealand-r-d/ . Most of the programs which are operated by NZTE, the Ministry of Business, Innovation, and Employment (MBIE), and Callaghan Innovation, provide financial assistance, and support through skills and knowledge, or supporting innovative business ventures in the early stages of operation. For more see: https://www.business.govt.nz/how-to-grow/getting-government-grants/what-can-i-get-help-with/ .

The New Zealand-United States Council, established in 2001, is a non-partisan organization funded by business and the government. It fosters a strong and mutually beneficial relationship between New Zealand and the United States through both government-to-government contacts, and business-to-business links. The American Chamber of Commerce in Auckland provides a platform for New Zealand and U.S. businesses to network among themselves and with government agencies.

Limits on Foreign Control and Right to Private Ownership and Establishment

The New Zealand government does not discriminate against U.S. or other foreign investors in their rights to establish and own business enterprises.  It has placed separate limitations on foreign ownership of airline Air New Zealand and telecommunications infrastructure provider Chorus Limited.

Air New Zealand’s constitution requires that no person who is not a New Zealand national hold 10 percent or more of the voting rights without the consent of the Minister of Transport. There must be between five and eight board directors, at least three of which must reside in New Zealand. In 2013 the government sold a partial stake in Air New Zealand reducing its equity interest from 73 percent to 53 percent.

The establishment of telecommunications infrastructure provider Chorus resulted from a demerger of provider Spark New Zealand Limited (Spark) in 2011. In 2019, Spark amended its constitution removing the requirement that half of the Spark Board be New Zealand citizens and in accordance with NZX Listing Rules, requires at least two directors be ordinarily resident in New Zealand.

Chorus owns most of the telephone infrastructure in New Zealand, and provides wholesale services to telecommunications retailers, including Spark. The demerger freed Spark from its foreign ownership restrictions allowing it to compete with other retail providers which do not have such restrictions. The foreign ownership restrictions apply to Chorus as a natural monopoly and infrastructure provider.

Chorus’s constitution requires at least half of its Board be New Zealand citizens. It requires no single shareholder may own more than 10 percent of the shares and no person who is not a New Zealand national may own more than 49.9 percent of the shares without the approval of the Minister of Finance. To date, approval has been granted to two private entities to exceed the 10 percent threshold, increasing their interest in Chorus up to 15 percent.

New Zealand otherwise screens overseas investment to ensure quality investments are made that benefit New Zealand. Failure to obtain consent before purchase can lead to significant financial penalties. The Overseas Investment Office (OIO) is responsible for screening foreign investment that falls within certain criteria specified in the Overseas Investment Act 2005.

The OIO requires consent be obtained by overseas persons wishing to acquire or invest in significant business assets, sensitive land, farmland, or fishing quota, as defined below.

A “significant business asset” includes: acquiring 25 percent or more ownership or controlling interest in a New Zealand company with assets exceeding NZD 100 million (USD 65 million); establishing a business in New Zealand that will be operational more than 90 days per year and expected costs of establishing the business exceeds NZD 100 million; or acquiring business assets in New Zealand that exceed NZD 100 million.

OIO consent is required for overseas investors to purchase “sensitive land” either directly or acquiring a controlling interest of 25 percent or more in a person who owns the land. Non-residential sensitive land includes land that: is non-urban and exceeds five hectares (12.35 acres); is part of or adjoins the foreshore or seabed; exceeds 0.4 hectares (1 acre) and falls under of the Conservation Act of 1987 or it is land proposed for a reserve or public park; is subject to a Heritage Order, or is a historic or wahi tapu area (sacred Maori land); or is considered “special land” that is defined as including the foreshore, seabed, riverbed, or lakebed and must first be offered to the Crown. If the Crown accepts the offer, the Crown can only acquire the part of the “sensitive land” that is “special land,” and can acquire it only if the overseas person completes the process for acquisition of the sensitive land.

Where a proposed acquisition involves “farm land” (land used principally for agricultural, horticultural, or pastoral purposes, or for the keeping of bees, poultry, or livestock), the OIO can only grant approval if the land is first advertised and offered on the open market in New Zealand to citizens and residents. The Crown can waive this requirement in special circumstances at the discretion of the relevant government Minister.

Commercial fishing in New Zealand is controlled by the Fisheries Act, which sets out a quota management system that prohibits commercial fishing of certain species without the ownership of a fishing quota which specifies the quantity of fish that may be taken. OIO legislation together with the Fisheries Act, requires consent from the relevant Ministers in order for an overseas person to obtain an interest in a fishing quota, or an interest of 25 percent or more in a business that owns or controls a fishing quota.

Investors subject to OIO screening must demonstrate in their application they meet the criteria for the “Investor Test” and the “Benefit to New Zealand test.” The former requires the investor to display the necessary business experience and acumen to manage the investment, demonstrate financial commitment to the investment, and be of “good character” meaning a person who would be eligible for a permit under New Zealand immigration law.

The “Benefit to New Zealand test” requires the OIO assess the investment against 21 factors, which are set out in the Overseas Investment Act and Regulations. The OIO applies a counterfactual analysis to benefit factors where such analysis can be applied, and the onus is upon the investor to consider the likely counterfactual if the overseas investment does not proceed. Economic factors are given weighting, particularly if the investment will create new job opportunities, retain existing jobs, and lead to greater efficiency or productivity domestically.

The screening thresholds are significantly higher for Australian investors and are reviewed each year in accordance with the 2013 Protocol on Investment to the New Zealand-Australia Closer Economic Relations Trade Agreement. In the 2020 calendar year Australian non-government investors are screened at NZD 536 million (USD 348 million) and Australian government investors at NZD 112 million (USD 73 million).

New Zealand and the People’s Republic of China (PRC) concluded negotiations on an upgrade to their FTA in November 2019. A side letter confirms higher screening thresholds applicable to investments from the PRC in New Zealand significant business assets, following the entry into force of CPTPP. Due to New Zealand’s “Most Favored Nation” obligations in the existing 2008 bilateral FTA, PRC non-government investments in New Zealand significant business assets are screened at NZD 200 million (USD 130 million), and PRC government investments in New Zealand significant business assets are screened at NZD100 million (USD 65 million).

New Zealand screens overseas investment mainly for economic reasons but has legislation that outlines a framework to protect the national security of telecommunication networks. The Telecommunications (Interception and Security) Act 2013 (TICSA) sets out the process for network operators to work with the Government Communications Security Bureau (GCSB) – in accordance with Section 7 – to prevent, sufficiently mitigate, or remove security risks arising from the design, build, or operation of public telecommunications networks; and interconnections to or between public telecommunications networks in New Zealand or with networks overseas.

In 2019 as part of the second phase of overseas investment reform, the Government consulted on and released details for the addition of a National Interest test that will be added to the screening process to protect New Zealand assets deemed sensitive and “high-risk.” This will be discussed in the next chapter.

Other Investment Policy Reviews

New Zealand has not conducted an Investment Policy Review through the OECD or the United Nations Conference on Trade and Development (UNCTAD) in the past three years. New Zealand’s last Trade Policy Review was in 2015 and the next will take place in 2021: https://www.wto.org/english/tratop_e/tpr_e/tp416_e.htm .

Business Facilitation

The New Zealand government has shown a strong commitment to continue efforts to streamline business facilitation. According to the World Bank’s Ease of Doing Business 2020 report New Zealand is ranked first in “Starting a Business,” and “Getting Credit,” and is ranked second for “Registering Property.”

There are no restrictions on the movement of funds into or out of New Zealand, or on the repatriation of profits. No additional performance measures are imposed on foreign-owned enterprises, other than those that require OIO approval. Overseas investors must adhere to the normal legislative business framework for New Zealand-based companies, which includes the Commerce Act 1986, the Companies Act 1993, the Financial Markets Conduct Act 2013, the Financial Reporting Act 2013, and the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (AML/CFT). The Contract and Commercial Law Act 2017 was passed to modernize and consolidate existing legislation underpinning contracts and commercial transactions.

The tightening of anti-money laundering laws has impacted the cross-border movement of remittance orders from New Zealanders and migrant workers to the Pacific Islands. Banks, non-bank institutions, and people in occupations that typically handle large amounts of cash, are required to collect additional information about their customers and report any suspicious transactions to the New Zealand Police. If an entity is unable to comply with the AML/CFT in its dealings with a customer, it must not do business with that person. For banks this would mean not processing certain transactions, withdrawing the banking products and services it offers, and choosing not to have that person as a customer. This has resulted in some banks charging higher fees for remittance services in order to reduce their exposure to risks, which has led to the forced closing of accounts held by some money transfer operators. Phase 1 sectors which include financial institutions, remitters, trust and company service providers, casinos, payment providers, and lenders have had to comply with the AML/CFT since 2013. Phase 2 sectors which include lawyers, conveyancers, accountants, bookkeepers, and realtors have had to comply from January 2019.

In order to combat the increasing use of New Zealand shell companies for illegal activities, the Companies Amendment Act 2014 and the Limited Partnerships Amendment Act 2014 introduced new requirements for companies registering in New Zealand. Companies must have at least one director that either lives in New Zealand or lives in Australia and is a director of a company incorporated in Australia. New companies incorporated must provide the date and place of birth of all directors and provide details of any ultimate holding company. The Acts introduced offences for serious misconduct by directors that results in serious losses to the company or its creditors and aligns the company reconstruction provisions in the Companies Act with the Takeovers Act 1993 and the Takeovers Code Approval Order 2000.

The Companies Office holds an overseas business-related register and provides that information to persons in New Zealand who intend to deal with the company or to creditors in New Zealand. The information provided includes where and when the company was incorporated, if there is any restriction on its ability to trade contained in its constitutional documents, names of the directors, its principal place of business in New Zealand, and where and on whom documents can be served in New Zealand. For further information on how overseas companies can register in New Zealand: https://companies-register.companiesoffice.govt.nz/help-centre/starting-a-company/ 

The New Zealand Business Number (NZBN) Act 2016 allows the allocation of unique identifiers to eligible entities to enable them to conduct business more efficiently, interact more easily with the government, and to protect the entity’s security and confidentiality of information. All companies registered in New Zealand have had NZBNs since 2013 and are also available to other types of businesses such as sole traders and partnerships.

Tax registration is recommended when the investor incorporates the company with the Companies Office, but is required if the company is registering as an employer and if it intends to register for New Zealand’s consumption tax, the Goods and Services Tax (GST), which is currently 15 percent. Companies importing into New Zealand or exporting to other countries which have a turnover exceeding NZD 60,000 (USD 39,000) over a 12-month period or expect to pass NZD 60,000 in the next 12 months, must register for GST. Non-resident businesses that conduct a taxable activity supplying goods or services in New Zealand and make taxable supplies in New Zealand, must register for GST: https://www.ird.govt.nz/gst/registering-for-gst . From 2014, non-resident businesses that do not make taxable supplies in New Zealand have been able to claim GST if they meet certain criteria.

To comply with GST registration, overseas companies need two pieces of evidence to prove their customer is a resident in New Zealand, such as their billing address or IP address, and a GST return must be filed every quarter even if the company does not make any sales.

In 2016 mandatory GST registration was extended to non-resident suppliers of “remote services” to New Zealand customers, if they meet the NZD 60,000 annual sales threshold. In 2019 legislation was enacted that requires non-resident suppliers of “low-value” import goods destined for New Zealand to register for GST, if they meet the NZD 60,000 annual sales threshold. Both are discussed in a later section.

Outward Investment

The New Zealand government does not place restrictions on domestic investors to invest abroad.

NZTE is the government’s international business development agency. It promotes outward investment and provides resources and services for New Zealand businesses to prepare for export and advice on how to grow internationally. The Ministry of Foreign Affairs and Trade (MFAT) and Customs New Zealand each operates business outreach programs that advise businesses on how to maximize the benefit from FTAs to improve the competitiveness of their goods offshore, and provides information on how to meet requirements such as rules of origin.

3. Legal Regime

Transparency of the Regulatory System

The New Zealand government policies and laws governing competition are transparent, non-discriminatory, and consistent with international norms. New Zealand ranks high on the World Bank’s Global Indicators of Regulatory Governance, scoring 4.25 out of a possible 5, but is marked down in part for a lack of transparency in some departments’ individual forward regulatory plans, and the development of the government’s annual legislative program (for primary laws), for which the Ministers responsible do not make public.

While regulations are not in a centralized location in a form similar to the United States Federal Register, the New Zealand government requires the major regulatory departments to publish an annual regulatory stewardship strategy.

Draft bills and regulations including those relating to FTAs and investment law, are generally made available for public comment, through a public consultation process. In a few instances there has been criticism of New Zealand governments choosing to follow a “truncated” or shortened public consultation process or adding a substantive legislative change after public consultation through the process of adding a Supplementary Order Paper to the Bill.

The Regulatory Quality Team within the New Zealand Treasury is responsible for the strategic coordination of the Government’s regulatory management system. Treasury exercises stewardship over the regulatory management system to maintain and enhance the quality of government-initiated regulation. The Treasury’s responsibilities include the oversight of the performance of the regulatory management system as a whole and making recommendations on changes to government and Parliamentary systems and processes. These functions complement the Treasury’s role as the government’s primary economic and fiscal advisor. New Zealand’s seven major regulatory departments are the Department of Internal Affairs, IRD, MBIE, Ministry for the Environment, Ministry of Justice, the Ministry for Primary Industries, and the Ministry of Transport.

In recent years there has been a revision to the Regulatory Impact Assessment (RIA) requirements in order to help New Zealand’s regulatory framework keep up with global standards. To improve transparency in the regulatory process, RIAs are published on the Treasury’s website at the time the relevant bill is introduced to Parliament or the regulation is published in the newspaper, or at the time of Ministerial release. An RIA provides a high-level summary of the problem being addressed, the options and their associated costs and benefits, the consultation undertaken, and the proposed arrangements for implementation and review.

MBIE is responsible for the stewardship of 16 regulatory systems covering about 140 statutes. In 2018 the government introduced three omnibus bills that contain amendments to legislation administered by MBIE, including economic development, employment relations, and housing: https://www.mbie.govt.nz/cross-government-functions/regulatory-stewardship/regulatory-systems-amendment-bills/. The government’s objective with this package of legislation is to ensure that they are effective, efficient, and accord with best regulatory practice by providing a process for making continuous improvements to regulatory systems that do not warrant standalone bills. In November 2019, the Regulatory Systems (Economic Development) Amendment Act 2019 passed and amended about 14 Acts including laws regarding business insolvency, takeovers, trademarks, and limited partnerships.

Most standards are developed through Standards New Zealand, which is a business unit within MBIE, operating on a cost-recovery basis rather than a membership subscription service as previously. The Standards and Accreditation Act 2015 set out the role and function of the Standards Approval Board which commenced from March 2016. Most standards in New Zealand are set in coordination with Australia.

The Resource Management Act 1991 (RMA) has drawn criticism from foreign and domestic investors as a barrier to investment in New Zealand. The RMA regulates access to natural and physical resources such as land and water. Critics contend that the resource management process mandated by the law is unpredictable, protracted, and subject to undue influence from competitors and lobby groups. In some cases, companies have been found to exploit the RMA’s objections submission process to stifle competition. Investors have raised concerns that the law is unequally applied between jurisdictions because of the lack of implementing guidelines. The Resource Management Amendment Act 2013 and the Resource Management (Simplifying and Streamlining) Amendment Act 2009 were passed to help address these concerns.

The Resource Legislation Amendment Act 2017 (RLAA) is considered the most comprehensive set of reforms to the RMA. It contains almost 40 amendments and makes significant changes to five different Acts including the RMA and the Public Works Act (PWA) 1981. Its aim is to balance environmental management with the need to increase capacity for housing development and to align resource consent processes in a consistent manner among New Zealand’s 78 local councils, by providing a stronger national direction, a more responsive planning process, and improved consistency with other legislation. Further amendments to the RMA are expected during 2020 to reduce regulatory barriers to reduce the time for significant infrastructure projects to gain approval.

The PWA enables the Crown to acquire land for public works by agreement or compulsory acquisition and prescribes landowner compensation. New Zealand continues to face a significant demand for large-scale infrastructure works and the PWA is designed to ensure project delivery and enable infrastructure development. In December 2019 a NZD 12 billion (USD 7.8 billion) upgrade fund was announced, amounting to 4 percent of New Zealand’s GDP. Further funding was added in the Government’s Budget delivered in May 2020. Compulsory acquisition of private land is exercised only after an acquiring authority has made all reasonable endeavors to negotiate in good faith the sale and purchase of the owner’s land, without reaching an agreement. The landowner retains the right to have their objection heard by the Environment Court, but only in relation to the taking of the land, not to the amount of compensation payable. The RLAA amendment to the PWA aims to improve the efficiency and fairness of the compensation, land acquisition, and Environment Court objection provisions.

The Land Transfer Act 2018 aims to simplify and modernize the law to make it more accessible and to add certainty around property rights. It empowers courts with limited discretion to restore a landowner’s registered title in cases of manifest injustice.

The Government of New Zealand is generally transparent about its public finances and debt obligations. The annual budget for the government and its departments publish assumptions, and implications of explicit and contingent liabilities on estimated government revenue and spending.

International Regulatory Considerations

In recent years, the Government of New Zealand has introduced laws to enhance regulatory coordination with Australia as part of their Single Economic Market agenda. In February 2017, the Patents (Trans-Tasman Patent Attorneys and Other Matters) Amendment Act took effect creating a single body to regulate patent attorneys in both countries. Other areas of regulatory coordination include insolvency law, financial reporting, food safety, competition policy, consumer policy and the 2013 Trans-Tasman Court Proceedings and Regulatory Enforcement Treaty, which allows the enforcement of civil judgements between both countries.

The Privacy Bill which if enacted will repeal the existing Privacy Act 1993 aims to bring New Zealand privacy law into line with international best practice, including the 2013 OECD Privacy Guidelines and the European General Data Protection Regulation (GDPR).

In 2016 the Financial Markets Authority issued the Disclosure Using Overseas Generally Accepted Accounting Principles (GAAP) Exemption and the Overseas Registered Banks and Licensed Insurers Exemption Notice. They ease compliance costs on overseas entities by allowing them under certain circumstances to use United States statutory accounting principles (overseas GAAP) rather than New Zealand GAAP, and the opportunity to use an overseas approved auditor rather than a New Zealand qualified auditor.

In August 2019, the government passed the Financial Markets (Derivatives Margin and Benchmarking) Reform Amendment Act to better align New Zealand’s financial markets law with new international regulations, to help strengthen the resilience of global financial markets. The Act amended several pieces of legislation relating to financial market regulation to help financial institutions maintain access to offshore funding markets and help ensure institutions – that rely on derivatives to hedge against currency and other risks – can invest and raise funds efficiently.

New Zealand is a Party to WTO Agreement on Technical Barriers to Trade (TBT). Standards New Zealand is responsible for operating the TBT Enquiry Point on behalf of MFAT. From 2016, Standards New Zealand became a business unit within MBIE administered under the Standards and Accreditation Act 2015. Standards New Zealand establishes techniques and processes built from requirements under the Act and from the International Organization for Standardization.

The Standards New Zealand TBT Enquiry Point operates as a service for producers and exporters to search for proposed TBT Notifications and associated documents such as draft or actual regulations or standards. They also provide contact details for the Trade Negotiations Division of MFAT to respond to businesses concerned about proposed measures. https://www.standards.govt.nz/develop-standards/international-engagement/technical-barriers-to-trade-tbt/ 

The government has a dedicated website to provide a centralized point of contact for businesses to access information and support on non-tariff trade barriers (NTB). New Zealand exporters can report issues, seek government advice and assistance with NTBs and other export issues. Exporters can confidentially register a trade barrier, and the website serves to track and trace the assignment and resolution across agencies on their behalf. It also provides the government with an accurate and timely report of NTBs and other trade issues encountered by exporters, and involves the participation of Customs, MFAT, MPI, MBIE, and NZTE. For more see: https://tradebarriers.govt.nz/ 

New Zealand ratified the WTO Trade Facilitation Agreement (TFA) in 2015 and it entered into force in February 2017. New Zealand was already largely in compliance with the TFA which is expected to benefit New Zealand agricultural exporters and importers of perishable items to enhanced procedures for border clearances.

Legal System and Judicial Independence

New Zealand’s legal system is derived from the English system and comes from a mix of common law and statute law. The judicial system is independent of the executive branch and is generally transparent and effective in enforcing property and contractual rights. The highest appeals court is a domestic Supreme Court, which replaced the Privy Council in London and began hearing cases July 1, 2004. New Zealand courts can recognize and enforce a judgment of a foreign court if the foreign court is considered to have exercised proper jurisdiction over the defendant according to private international law rules. New Zealand has well defined and consistently applied commercial and bankruptcy laws. Arbitration is a widely used dispute resolution mechanism and is governed by the Arbitration Act of 1996, Arbitration (Foreign Agreements and Awards) Act of 1982, and the Arbitration (International Investment Disputes) Act 1979.

Legislation to modernize and consolidate laws underpinning contracts and commercial transactions came into effect in September 2017. The Contract and Commercial Law Act 2017 consolidates and repeals 12 acts that date between 1908 and 2002. The Private International Law (Choice of Law in Tort) Act, passed in December 2017, clarifies which jurisdiction’s law is applicable in actions of tort and abolishes certain common law rules, and establishes the general rule that the applicable law will be the law of the country in which the events constituting the tort in question occur.

Laws and Regulations on Foreign Direct Investment

Overseas investments in New Zealand assets are screened only if they are defined as sensitive according to the definitions within the Overseas Investment Act 2005, as mentioned in the previous section. The OIO, a dedicated unit located within Land Information New Zealand (LINZ), administers the Act. The Overseas Investment Regulations 2005 set out the criteria for assessing applications, provide the framework for applicable fees, and criteria to determine if the investment will benefit New Zealand. Ministerial Directive Letters are issued by the Government to instruct the OIO on their general policy approach, their functions, powers, and duties as regulator. Letters have been issued in December 2010 and November 2017. Substantive changes, such as inclusion of another asset type within “sensitive land,” requires a legislative amendment to the Act. New Zealand companies seeking capital injections from overseas investors that require OIO approval, must meet certain criteria regarding disclosure to shareholders and fulfil other responsibilities under the Companies Act 1993.

The government ministers for finance, land information, and primary industries (where applicable) are responsible for assessing OIO recommendations and can choose to override OIO recommendations on approved applications. Ministers’ decisions on OIO applications can be appealed by the applicant in the New Zealand High Court. Ministers have the power to confer a discretionary exemption from the requirement for a prospective investor to seek OIO consent under certain circumstances. For more see: http://www.linz.govt.nz/regulatory/overseas-investment 

The OIO Regulations set out the fee schedule for lodging new applications which can be costly and current processing times regularly exceed six months. In recent years, some foreign investors have abandoned their applications, due to the costs and time frames involved in obtaining OIO consent.

The OIO monitors foreign investments after approval. All consents are granted with reporting conditions, which are generally standard in nature. Investors must report regularly on their compliance with the terms of the consent. Offenses include: defeating, evading, or circumventing the OIO Act; failure to comply with notices, requirements, or conditions; and making false or misleading statements or omissions. If an offense has been committed under the Act, the High Court has the power to impose penalties, including monetary fines, ordering compliance, and ordering the disposal of the investor’s New Zealand holdings.

The LINZ website reports on enforcement actions they have taken against foreign investors, including the number of compliance letters issued, the number of warnings and their circumstances, referrals to professional conduct body in relation to an OIO breach, and disposal of investments. For more see: https://www.linz.govt.nz/overseas-investment/enforcement/enforcement-action-taken .

In February 2020 New Zealand reported its first conviction under the Overseas Investment Act. The offender was charged for obstructing an OIO investigation which was initiated because he had not obtained OIO consent for his property purchase and for later submitting a fraudulent application.

In 2017 the Government announced a reform of the Overseas Investment Act shortly after being elected and has already implemented Phase 1 reforms with strengthened requirements for screening foreign investment in residential houses, building residential housing developments, and farmland acreage. Screening for investments in forestry were eased slightly to help meet the Government’s One Billion Tree policy. Phase 2 began in 2019 when the Government consulted on and released details for the introduction of a National Interest test to the screening process to protect New Zealand assets deemed sensitive and “high-risk.”

In December 2017, the government introduced regulatory changes that place greater emphasis on the assessment of significant economic benefits to New Zealand. For forestry investments, the OIO is required to place importance on investments that result in increased domestic processing of wood and advance government strategies. For rural land, importance is placed on the generation of economic benefits which were previously seldom applied for lifestyle rural property purchases that previously relied on non-economic benefits to gain OIO approval.

New rules reduced the area threshold for foreign purchases of rural land so that OIO approval is required for rural land of an area over five hectares, rather than the previous metric of farm land “more than ten times the average farm size,” which was about 7,146 hectares for sheep and beef farms, and 1,987 hectares for dairy farms. Foreign investors can still purchase rural land less than five hectares, but the government said it intends to introduce other measures to discourage “land bankers,” or investors holding onto land for speculative purposes.

The government issued new rules regarding residency for overseas investors intending to reside in New Zealand, that they move within 12 months and become ordinarily resident within 24 months.

In 2018, the Overseas Investment Amendment Act passed in order to help address housing affordability and reduce speculative behavior in the housing market. The 2005 Act was amended to bring residential land within the category of “sensitive land.” Residential land is defined as land that has a category of residential or lifestyle within the relevant district valuation roll; and includes a residential flat (apartment) in a building owned by a flat-owning company which could be on residential or non-residential land.

Since October 2018, the Overseas Investment Act generally requires persons who are not ordinarily resident in New Zealand to get OIO consent to purchase residential homes on residential land. Australian and Singaporean citizens are exempt due to existing bilateral trade agreements. To avoid breaching the Act, contracts to purchase residential land must be conditional on getting consent under the Act – entering into an unconditional contract will breach the Act. All purchasers of residential land (including New Zealanders) will need to complete a statement confirming whether the Act applies, and solicitors/conveyancers cannot lodge land transfer documents without that statement.

Overseas persons wishing to purchase one home on residential land will need to fulfil a “Commitment to Reside Test.” Applicants must hold the appropriate non-temporary visa (those on student visas, work visas, or visitor visas cannot apply), have lived in New Zealand for the immediate preceding 12 months and intend to reside in the property being purchased. If the applicant stops living in New Zealand they will have to sell the property. OIO applicants not intending to reside will generally need to show: (1) they will convert the land to another use and demonstrate this would have wider benefits to New Zealand; or (2) they will be adding to New Zealand’s housing supply. Applicants seeking approval under the latter – the “Increased Housing Test” – must intend to increase the number of dwellings on the property by one or more, and they cannot live in the dwellings once built (the “non-occupation condition”). Applicants must then on-sell the dwellings, unless they are building 20 or more new residential dwellings and they intend to provide a shared equity, rent-to-buy, or rental arrangement (the “On-Sale Condition”).

The Amendment also imposes restrictions on overseas persons buying into new residential property developments. Where pre-sales of the new residential dwellings are an essential aspect of the development funding, overseas purchasers may be able to rely on the “Increased Housing” Test, although they will be subject to the on-sale and non-occupation conditions. Otherwise, individual purchasers must apply for OIO consent and meet the “commitment to reside test,” or make their purchase conditional on receiving an “exemption certificate” held by an apartment developer. According to the OIO Regulations, developers can apply for an exemption certificate allowing them to sell 60 percent of the apartments “off the plan” to overseas buyers without those buyers requiring OIO consent but whom would have to meet the non-occupation condition.

Ministers may exercise discretion to waive the on-sale condition if an overseas person is applying for consent to acquire an ownership interest in an entity that holds residential land in New Zealand; if they are acquiring less than a 50 percent ownership interest; or if they are acquiring an indirect ownership interest, (e.g. through another entity). Exemptions can also apply for long-term accommodation facilities, hotel lease-back arrangements, retirement village developments, and for network utility companies needing to acquire residential land to provide essential services. Over 2019 the OIO issued several warnings and fines to overseas buyers of residential property who had failed to apply for OIO consent.

The Labour-led government formed after 2017 elections (reelected in 2020) indicated that forestry would be a priority in boosting regional development. In March 2018, the government announced forestry cutting rights be brought into the OIO screening regime, similar to the requirements for investment in leasehold and freehold forestry land. In addition to residential land, the Overseas Investment Amendment Act 2018 classified “forestry rights” within the asset class of “sensitive land.”

Overseas investors wanting to purchase up to 1,000 hectares of forestry rights per year or any forestry right of less than three years duration, do not generally require OIO approval.

Overseas investors can apply for consent to buy or lease land that is in forestry, or land to be used for forestry, or to buy forestry rights. In addition to meeting the “Benefit to New Zealand Test,” applicants wishing to buy or lease land for forestry purposes, convert farmland to forestry land, or purchase forestry rights, must meet either the “Special Forestry Test,” or the “Modified Benefits Test.”

The Special Forestry Test is the most streamlined test, and is used to buy forestry land and continue to operate it with existing arrangements remaining in place, such as public access, protection of habitat for indigenous plants and animals, and historic places, as well as log supply arrangements. The investor would be required to replant after harvest, unless exempted, and use the land exclusively or nearly exclusively for forestry activities. The land can be used for accommodation only to support forestry activities.

The Modified Benefits Test is suitable for investors who will use the land only for forestry activities, but who cannot maintain existing arrangements relating to the land, such as public access. The investor would need to pass the Benefit to New Zealand Test, replant after harvest, and use the land exclusively or nearly exclusively for forestry activities.

By 2020 the OIO issued several warnings and fines to overseas investors purchasing forestry rights for failing to comply with conditions or failing to apply for OIO approval.

[Phase 2 Reforms]

In April 2019, the government signaled it would be considering a “national interest” restriction on foreign investment, and issued a document for public consultation, later agreeing upon New Zealand’s most strategically important assets in November. The government aims to bring New Zealand to apply a National Interest Test to overseas investors wishing to purchase New Zealand high-risk, sensitive or monopoly assets such as ports and airports, telecommunications infrastructure, electricity and other critical infrastructure.

Current legislation does not consider National Security or Public Order investments under NZD 100 million (USD 65 million).

A “call in” power would apply to the sale of New Zealand’s most strategically important assets, such as firms developing military technology and direct suppliers to New Zealand defense and security agencies. This will apply to assets not currently screened under the Overseas Investment Act. The tests could also be used to control investments in significant media entities if they are likely to damage New Zealand security or democracy.

Phase 2 includes other measures to protect New Zealand’s interests announced in November 2019, such as equipping the OIO with enhanced enforcement powers and increasing the maximum penalties for non-compliance NZD 300,000 (USD 195,000) to NZD 10 million (USD 6.5 million) for corporates. The legislation will also include a requirement that overseas investors in farmland show substantial benefit to New Zealand, by adding something substantially new or creating additional value to the New Zealand economy. In recognition of complaints regarding cost and time to gain OIO consent, the government will set specific timeframes to give investors greater certainty and exempt a range of low risk transactions, such as some involving companies that are majority owned and controlled by New Zealanders.

There has been controversy and concern about water extraction investment by overseas investors in New Zealand, particularly water bottling to export, earning overseas companies profits from a high-value New Zealand resource without paying a charge. Under Phase 2 the Government will require overseas investors in water extraction take into consideration the environmental, economic, and cultural impact of their investment, and its effect on local water quality and the overall sustainability of a water bottling enterprise.

In February 2020, Treasury released all documents online, including the Cabinet Paper that recommended the Phase 2 reform.

[Phase 2 Reforms – Fast-Tracked Legislation]

The Government of New Zealand was quick to recognize the risks posed by a COVID-19 recession and fast-tracked implementation of Overseas Investment Act (OIA) Phase 2 reforms, which went into effect on June 16. These reforms grant the government increased oversight and approval authority for foreign investments, which may have fallen in value during the pandemic, to protect critical infrastructure such as telecoms, ports, airports, and dual use/military related sensitive technology, as well as media.

The changes bring forward the introduction of a national interest test to strategically important assets, and the temporary application of that test to any foreign investments, regardless of dollar value that result in more than a 25 percent ownership interest, or that increases an existing interest to or beyond 50 percent, 75 percent or 100 percent in a New Zealand business.

This includes purchases by “fundamentally New Zealand companies” and small changes in existing shareholdings. In addition, the Government will use regulations to extend existing exemptions and remove screening from two further classes of low risk lending and portfolio management transactions.

In addition, as of March 22, 2021, the “New Investor Test” is in force which includes Twelve character and capability factors including a review for convictions resulting in imprisonment, penalties for tax evasion, corporate fines, and civil pecuniary penalties. The test is satisfied when none of these factors are established or, if a factor is met, the decision-maker is satisfied that this does not make an investor unsuitable to own or control a sensitive New Zealand asset.

[Non-OIO Legislation Governing Foreign Investment]

Outside of the OIO framework, the previous government passed the Taxation (Bright-line Test for Residential Land) Bill to apply to domestic and foreign purchasers of residential land in part to counter criticism New Zealand’s lack of tax on capital gains was fueling house price inflation. Under this Act, properties bought after October 1, 2015 will accrue tax on any gain earned if the house is bought and sold within two years, unless it is the owner’s main home. The bill requires foreign purchasers to have both a New Zealand bank account and an IRD tax number and will not be entitled to the “main home” exception. The purchaser must also submit other taxpayer identification number held in countries where they pay tax on income. To assist the IRD in ensuring investors – foreign and domestic – meet their tax obligations, legislation was passed in 2016 that empowered LINZ to collect additional information when residential property is bought and sold, and to pass this information to the IRD.

In March 2018, the new government passed legislation to extend the “bright-line test” from two to five years as a measure to further deter property speculation in the New Zealand housing market.

In November 2018, the government passed the Crown Minerals (Petroleum) Amendment Act, to stop new exploration permits being granted offshore and onshore outside of the Taranaki province on the west coast of the North Island. The policy is part of the government’s efforts to transition away from fossil fuels and achieve their goal to have net zero emissions by 2050. The annual Oil and Gas Block Offers program has been operational since 2012 to raise New Zealand’s profile among international investors in the energy and mining sector and has been a significant source of government revenue.

There are currently about 20 offshore permits covering 38,000 square miles that will have the same rights and privileges as before the law came into force and will continue operation until 2030. If those permit holders are successful in their exploration, the companies could extract oil and gas from the areas beyond 2030.

Competition and Anti-Trust Laws

The Commerce Act 1986 prohibits contracts, arrangements, or understandings that have the purpose, or effect, of substantially lessening competition in a market, unless authorized by the Commerce Commission, an independent Crown entity. Before granting such authorization, the Commerce Commission must be satisfied that the public benefit would outweigh the reduction of competition. The Commerce Commission has legislative power to deny an application for a merger or takeover if it would result in the new company gaining a dominant position in the New Zealand market.

In addition, the Commerce Commission enforces certain pieces of legislation that, through regulation, aim to provide the benefits of competition in markets with certain natural monopolies, such as the dairy, electricity, gas, airports, and telecommunications industries. In order to monitor the changing competitive landscapes in these industries, the Commerce Commission conducts independent studies, currently including fiber networks (https://comcom.govt.nz/regulated-industries/telecommunications/regulated-services/fibre-regulation/fibre-services-study ), mobile phones (https://comcom.govt.nz/regulated-industries/telecommunications/projects/mobile-market-study ), and retail petrol (https://comcom.govt.nz/about-us/our-role/competition-studies/market-study-into-retail-fuel ).

The Commerce Amendment Act of 2018 empowers the Commerce Commission to undertake market (“competition”) studies where this is in the public interest in order to improve the agency’s enforcement actions without having to go to court. The Government introduced a market studies power to align the Commerce Commission with competition authorities in similar jurisdictions. The Act allows settlements to be registered as enforceable undertakings so breaches can be quickly penalized by the courts and saves the Commission from the expense and uncertainty of litigation. The amendment also strengthens the information disclosure regulations for airports.

The Dairy Industry Restructuring Act of 2001 (DIR) established dairy co-operative Fonterra Co-operative Group Limited (Fonterra). The DIR is designed to manage Fonterra’s dominant position in the domestic dairy market, until sufficient competition has emerged. A review by the Commerce Commission in 2016 found competition insufficient, but the findings from a subsequent review in 2018 resulted in the introduction of the DIR Amendment Bill (No 3) which passed its first reading in August 2019, and was advanced to the Select Committee stage for scrutiny on March 20, 2020.

This amendment, if passed, will ease the requirement that Fonterra accept all milk from new suppliers, allowing the cooperative the option to refuse milk if it does not meet environmental standards or if it comes from newly converted dairy farms. The bill would also limit Fonterra’s discretion in calculating the base milk price.

The Commerce Commission is also charged with monitoring competition in the telecommunications sector. Under the 1997 WTO Basic Telecommunications Services Agreement, New Zealand has committed to the maintenance of an open, competitive environment in the telecommunications sector.

Following a four-year government review of the Telecommunications Act 2001, the Telecommunications (New Regulatory Framework) Amendment Act of 2018 establishes a regulatory framework for fiber fixed line access services; removes unnecessary copper fixed line access service regulation in areas where fiber is available; streamline regulatory processes; and provides more regulatory oversight of retail service quality. The amendment requires the Commerce Commission to implement the new regulatory regime by January 2022.

Chorus won government contracts to build 70 percent of New Zealand’s new ultra-fast broadband fiber-optic cable network and has received subsidies. Chorus is listed on the NZX stock exchange and the Australian Stock Exchange but is subject to foreign investment restrictions. From 2020, Chorus and the local fiber companies are required under their open access deeds to offer an unbundled mass-market fiber service on commercial terms.

The telecommunications service obligations (TSO) regulatory framework established under the Telecommunications Act of 2001 enables certain telecommunications services to be available and affordable. A TSO is established through an agreement under the Telecommunications Act between the Crown and a TSO provider. Currently there are two TSOs. Spark (supported by Chorus) is the TSO Provider for the local residential telephone service, which includes charge-free local calling. Sprint International is the TSO Provider for the New Zealand relay service for deaf, hearing impaired and speech impaired people. Under the Telecommunications (New Regulatory Framework) Amendment Act, the TSOs which apply to Chorus and Spark will cease to apply in areas which have fiber. Consumers in these areas will have access to affordable fiber-based landline and broadband services.

Radio Spectrum Management (RSM) is a business unit within MBIE that is responsible for providing advice to the government on the allocation of radio frequencies to meet the demands of emerging technologies and services. Spectrum is allocated in a manner intended to ensure that radio spectrum provides the greatest economic and social benefit to New Zealand society. The allocation of spectrum is a core regulatory issue for the deployment of 5G in New Zealand. The Commerce Commission completed a two-year study in September 2019 of mobile network operators (MNOs) in New Zealand in order to assess the process for 5G spectrum allocation and whether it will impact the ability of new mobile network operators to enter the market. It found no case to support regulatory intervention to promote a fourth national MNO to enter the market, but that the spectrum allocation process should not preclude new parties from obtaining spectrum.

In March 2019, the government announced it freed up space on the spectrum for a fourth mobile network operator to compete with the three existing ones. In order to do so, the three existing operators lost parts of their spectrum, for which sources criticized the government, claiming they supported competition in principle but questioned the ability of the New Zealand market to cope with another operator. The Government claims it needs to keep some of that spectrum in reserve to retain flexibility and it might be used for new technologies or by the emergency services network.

The Government’s first auction of 5G spectrum planned for 2020 – and ready for use by November 2022 – was cancelled in May 2020 due to the COVID-19 pandemic. The Government directly allocated spectrum to the three MNOs, with these rights expiring in October 2022 after which the scheme will switch to long-term rights that will be gained in a separate auction process. The government determined the allocations in such a way as to prevent a single operator to prevent monopolistic behavior, but it also to set aside spectrum to deal with potential Treaty of Waitangi issues. Vodafone announced in February 2021 Vodafone that they were the first telco in New Zealand to stage a widespread 5G fixed-wireless access 5G launch. New Zealand telecom 2degress announced on April 14, 2021 it has selected Ericsson as its partner for a 5G RAN (Radio Access Network) and Core nationwide network launch.

The Commerce Commission has a regulatory role to promote competition within the electricity industry under the Commerce Act 1986 and the Fair Trading Act 1986. As natural monopolies, the electricity transmission and distribution businesses are subject to specific additional regulations, regarding pricing, sales techniques, and ensuring sufficient competition in the industry. The Commerce Commission completed a project in March 2020 that set the default price-quality path to determine the price caps that will apply to the 17 electricity distributors in New Zealand from April 1, 2020 to March 31, 2025. Due to increased expenditure for distributors to accommodate new technology, the Commerce Commission also recommended new recoverable costs to incentivize ongoing innovation in the electricity sector.

The New Zealand motor fuel market became more concentrated after Shell New Zealand sold its transport fuels distribution business in 2010 and Chevron sold its retail brands Caltex and Challenge in 2016 to New Zealand fuel distributor Z-Energy. Z-Energy holds almost half of the market share in New Zealand. A two-year study by the Commerce Commission was completed in December 2019 that evaluated whether competition in the retail fuel market is promoting outcomes that benefit New Zealand consumers over the long-term. They found that the lack of an active wholesale market in New Zealand has weakened price competition in the retail market and that the major fuel companies’ joint infrastructure network and supply relationships gave them an advantage over other fuel importers. The wholesale supply relationships, including restrictive contract terms between the majors and resellers, limits the ability of resellers to switch supplier.

The Commerce (Cartels and Other Matters) Amendment Act of 2017 empowers the Commerce Commission with easier enforcement action against international cartels. It created a new clearance regime allowing firms to test their proposed collaboration with the Commerce Commission and get greater legal certainty before they enter into the arrangements. It expanded prohibited conduct to include price fixing, restricting output, and allocating markets, and expands competition oversight to the international liner shipping industry. It empowers the Commerce Commission to apply to the New Zealand High Court for a declaration to determine if the acquisition of a controlling interest in a New Zealand company by an overseas person will have an effect of “substantially lessening” competition in a market in New Zealand.

The Commerce (Criminalization of Cartels) Amendment Act was passed in April 2019 to align New Zealand law with other jurisdictions – particularly Australia – by criminalizing cartel behavior. Individuals convicted of engaging in cartel conduct – price fixing, restricting output, or allocating markets – will face fines of up to NZD 500,000 (USD 325,000) and/or up to seven years imprisonment. For companies, the fines can be up to NZD 10 million (USD 6.5 million), or higher based on turnover. Business have been given two years to ensure compliance before the criminal sanctions enter into force. While not a significant issue in New Zealand, the government believes criminalizing cartel behavior provides a certain and stable operating environment for businesses to compete, and aligns New Zealand with overseas jurisdictions that impose criminal sanctions for cartel conduct, enhancing the ability of the Commerce Commission to cooperate with its overseas counterparts in investigations of international cartels.

In January 2019, the Government announced proposed amendments to section 36 of the Commerce Act, which relates to the misuse of market power. The government is seeking consultation on repealing sections of the Commerce Act that shield some intellectual property arrangements from competition law, in order to prevent dominant firms misusing market power by enforcing their patent rights in a way they would not do if it was in a more competitive market. It also seeks to strengthen laws and enforcement powers against the misuse of market power by aligning it with Australia and other developed economies, particularly because New Zealand competition law currently does not prohibit dominant firms from engaging in conduct with an anti-competitive effect. Section 36 of the Act only prohibits conduct with certain anti-competitive purposes.

The Commerce Commission has international cooperation arrangements with Australia since 2013 and Canada since 2016, to allow the sharing of compulsorily acquired information, and provide investigative assistance. The arrangements help effective enforcement of both competition and consumer law.

In May 2020, the Commerce Commission issued guidance easing restrictions on businesses to collaborate in order to ensure the provision of essential goods and services to New Zealand consumers during the COVID-19 pandemic.

Expropriation and Compensation

Expropriation is generally not an issue in New Zealand, and there are no outstanding cases. New Zealand ranks second in the World Bank’s 2020 Doing Business report for “registering property” and third for “protecting minority investors.”

The government’s KiwiBuild program aims to build 100,000 affordable homes over ten years, with half being in Auckland. However, progress on KiwiBuild has been slow and well below targets. The government has indicated it will use compulsory acquisition under the PWA if necessary to achieve planned government housing development.

The lack of precedent for due process in the treatment of residents affected by liquefaction of residential land caused by the Canterbury earthquake in 2011 resulted in prolonged court cases against the Government based largely on the amount of compensation offered to insured home and/or land owners and the lack of any compensation for uninsured owners. Several large areas of residential land in Christchurch were deemed Residential Red Zones (RRZ) meaning there had to be significant and extensive area wide land damage, the extent of the damage required an area-wide solution, engineering solutions would be uncertain, disruptive, not timely, and not cost-effective. One offer made by the government to uninsured Christchurch RRZ landowners for 50 percent of the rated value of their property was deemed unlawful in the Court of Appeal in 2013. A later offer was made by the government to uninsured residents, but only for the value of their land and not their house.

In 2018, the government opted to settle with a group of uninsured home and landowners, but some objected to the compensation because it was based on 2007/08 rating valuations. There were also reports some insurance companies paid out less to policy holders than the full value of some houses if they found based on the structural characteristics of the house that it was repairable, even though the repairs would be legally prohibited if in the RRZ.

LINZ currently manages Crown-owned land in the RRZ and can temporarily agree short-term leases of this land under the Greater Christchurch Regeneration Act 2016 but does not make offers to buy properties from RRZ residents. From June 2020 ownership and management of the land is progressively transitioning from the Crown back to the Christchurch City Council, according to the terms under an agreement made in September 2019 and to be legislated as an amendment to the 2016 Act. LINZ must review the interests of each of the 5,500 titles in the RRZ to check if anyone has rights to the land, such as an easement, a covenant, or a mortgage. For more see: https://www.linz.govt.nz/crown-property/types-crown-property/christchurch-residential-red-zone .

Dispute Settlement

ICSID Convention and New York Convention

New Zealand is a party to both the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the Washington Convention), and to the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards.

Proceedings taken under the Washington Convention are administered under the Arbitration (International Investment Disputes) Act 1979. Proceedings taken under the New York Convention are now administered under the Arbitration Act 1996.

Investor-State Dispute Settlement

Investment disputes are rare, and there have been no major disputes in recent years involving U.S. companies. The mechanism for handling disputes is the judicial system, which is generally open, transparent and effective in enforcing property and contractual rights.

Most of New Zealand’s recently enacted FTAs contain Investor-State Dispute Settlement (ISDS) provisions, and to date no claims have been filed against New Zealand. The current Government has signaled it will seek to remove ISDS from future FTAs, having secured exemptions with several CPTPP signatories in the form of side letters. ISDS claims challenging New Zealand’s tobacco control measures – under the Smoke-free Environments (Tobacco Standardized Packaging) Amendment Act 2016 – cannot be made against New Zealand under CPTPP.

International Commercial Arbitration and Foreign Courts

Arbitrations taking place in New Zealand (including international arbitrations) are governed by the Arbitration Act 1996. The Arbitration Act includes rules based on the United Nations Commission on International Trade Law (UNCITRAL) and its 2006 amendments. Parties to an international arbitration can opt out of some of the rules, but the Arbitration Act provides the default position.

The Arbitration Act also gives effect to the New Zealand government’s obligations under the Protocol on Arbitration Clauses (1923), the Convention on the Execution of Foreign Arbitral Awards (1927), and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958). Obligations under the Washington Convention are administered under the Arbitration (International Investment Disputes) Act 1979.

The New Zealand Dispute Resolution Centre (NZDRC) is the leading independent, nationwide provider of private commercial, family and relationship dispute resolution services in New Zealand. It also provides international dispute resolution services through its related entity, the New Zealand International Arbitration Centre (NZIAC). The NZDRC is willing to act as an appointing authority, as is the Arbitrators’ and Mediators’ Association of New Zealand (AMINZ).

Forms of dispute resolution available in New Zealand include formal negotiations, mediation, expert determination, court proceedings, arbitration, or a combination of these methods. Arbitration methods include ‘ad hoc,’ which allows the parties to select their arbitrator and agree to a set of rules, or institutional arbitration, which is run according to procedures set by the institution. Institutions recommended by the New Zealand government include the International Chamber of Commerce (ICC), the American Arbitration Association (AAA), and the London Court of International Arbitration (LCIA).

The Arbitration Amendment Act 2016 empowered the Minister of Justice to create an “appointed body” to exercise powers which were previously powers of the High Court. It also provides for the High Court to exercise the powers if the appointed body does not act, or there is a dispute about the process of the appointed body. The Minister of Justice has appointed the AMINZ the default authority for all arbitrations sited in New Zealand in place of the High Court. In 2017 AMINZ issued its own Arbitration Rules based on the latest editions of rules published in other Model Law jurisdictions, to be used in both domestic and international arbitrations, and consistent with the 1996 Act.

The Arbitration Amendment Act 2019 was passed to bring New Zealand’s policy of preserving the confidentiality of trust deed clauses in line with foreign arbitration legislation and case law. The amendment means arbitration clauses in trust deeds are given effect to extend the presumption of confidentiality in arbitration to the presumption of confidentiality in related court proceedings under the Act because often such cases arise from sensitive family disputes.

Bankruptcy Regulations

Bankruptcy is addressed in the Insolvency Act 2006, the Receiverships Act 1993, and the Companies Act 1993. The Insolvency (Cross-border) Act 2006 implements the Model Law on Cross-Border Insolvency adopted by the United Nations Commission on International Trade Law in 1997. It also provides the framework for facilitating insolvency proceedings when a person is subject to insolvency administration (whether personal or corporate) in one country, but has assets or debts in another country; or when more than one insolvency administration has commenced in more than one country in relation to a person. New Zealand bankrupts are subject to conditions on borrowing and international travel, and violations are considered offences and punishable by law.

The registration system operated by the Companies Office within MBIE, is designed to enable New Zealand creditors to sue an overseas company in New Zealand, rather than forcing them to sue in the country’s home jurisdiction. This avoids attendant costs, delays, possible language problems and uncertainty due to a different legal system. An overseas company’s assets in New Zealand can be liquidated for the benefit of creditors. All registered ‘large’ overseas companies are required to file financial statements under the Companies Act of 1993. See: https://companies-register.companiesoffice.govt.nz/help-centre/managing-an-overseas-company-in-nz/ 

The Insolvency and Trustee Service (the Official Assignee’s Office) is a business unit of MBIE. The Official Assignee is appointed under the State Sector Act of 1988 to administer the Insolvency Act of 2006, the insolvency provisions of the Companies Act of 1993 and the Criminal Proceeds (Recovery) Act of 2009. The Official Assignee administers all bankruptcies, No Asset Procedures, Summary Installment Orders, and some liquidations by collecting and selling assets to repay creditors. The bankrupt or company directors will be asked for information to help identify and deal with the assets. The money recovered is paid to creditors who have made a claim, in order according to the relevant Acts. Creditors can log in to the Insolvency and Trustee Service website to track the progress of their claim and how long it is likely to take.

In the World Bank’s Doing Business 2020 Report New Zealand slipped in the rankings for “resolving insolvency” from 31st last year to 36th. Despite a high recovery rate (79.7 cents per dollar compared with 70.2 cents for the average across high-income OECD countries), New Zealand scores lower based on the strength of its insolvency framework. Specific weaknesses identified in the survey include the management of debtors’ assets, the reorganization proceedings, and the participation of creditors.

The government has recognized the need for more insolvency law reform beyond the 2006 Act which repealed the Insolvency Act 1967. The Regulatory Systems (Economic Development) Amendment Act which passed in November 2019 included amendments to the Insolvency Act that strengthened some regulations and assigned more powers to the Official Assignee. After the previous government established an Insolvency Working Group in 2015, MBIE published a proposed set of reforms in November 2019, based on the group’s recommendations from 2017. The current government plans to introduce an insolvency law reform bill in early 2020. The omnibus COVID-19 Response (Further Management Measures) Legislation Bill passed on May 15, 2020, included provisions to provide temporary relief for businesses facing insolvency, and exemptions for compliance, due to the COVID-19 pandemic.

4. Industrial Policies

Investment Incentives

New Zealand has no specific economic incentive regime because of its free trade policy. The New Zealand government, through its bodies such as Tourism New Zealand and NZTE, assists certain sectors such as tourism and the export of locally manufactured goods. The government generally does not have a practice of jointly financing foreign direct investment projects.

In the Media and Entertainment sector, the New Zealand Film Commission administers a grant for international film and television productions on behalf of the Ministry for Culture and Heritage and MBIE. Established in 2014, the New Zealand Screen Production Grant provides rebates for international productions of 20 percent on specified goods and services purchased in New Zealand. An additional five percent is available for productions that meet a significant economic benefit points test for New Zealand.

Callaghan Innovation is a stand-alone Crown Entity established in February 2013. It connects businesses with research organizations offering services, and the opportunity to apply for government funding and grants that support business innovation and capability building. Callaghan Innovation requires businesses applying for any of their research and development grants to have at least one director who is resident in New Zealand and to have been incorporated in New Zealand, have a center of management in New Zealand, or have a head office in New Zealand. For more information see: http://www.business.govt.nz/support-and-advice/grants-incentives .

The government does not have a state policy on issuing guarantees on foreign direct investment projects. It provides some opportunities and initiatives for overseas investors to apply for joint financing mainly if the projects involve R&D, science and innovation that will ultimately benefit the New Zealand economy.

Foreign Trade Zones/Free Ports/Trade Facilitation

New Zealand does not have any foreign trade zones or duty-free ports.

Performance and Data Localization Requirements

The government of New Zealand does not maintain any measures that are alleged to violate the Trade Related Investment Measures text in the WTO. There are no government mandated requirements for company performance or local employment, and foreign investors that do not require OIO approval are treated equally with domestic investors. Overseas investors that require OIO approval must comply with legal obligations governing the OIO and the conditions of its approval including: satisfying the benefit to New Zealand test through local employment, using domestic content in goods, or promising the introduction of a new technology to New Zealand.

Investors requiring OIO approval also must maintain “good character” and meet reporting requirements. Investors are generally required to report annually to the OIO for up to five years from consent, but if benefits are expected to occur after that five-year period, monitoring will reflect the time span within which benefits will occur. Failure to meet obligations under the investors’ consent can result in fines, court orders, or forced disposal of their investment. A government-commissioned independent review in 2016 found the good character test to be robust after questions were asked whether it was being used consistently and accurately.

In 2019, the New Zealand High Court imposed civil penalties on a director for breaching the good character conditions of his company’s consent when it bought a controlling interest (50.2 percent) in New Zealand’s largest agricultural services company in 2011. The breach arose because the director was investigated by the United States Securities and Exchange Commission (SEC) and found to have violated United States securities law. As part of the settlement reached with the OIO, the director’s company agreed to divest its interest in the company below 50 percent (to 46.5 percent).

Businesses wanting to establish themselves in New Zealand and seeking to relocate their employees to New Zealand will need to apply for and satisfy the conditions of the Employees of Relocating Business Resident Visa: https://www.immigration.govt.nz/new-zealand-visas/apply-for-a-visa/about-visa/relocating-with-an-employer-resident-visa. These conditions include providing evidence the business is up and running, have the support of NZTE, and provide a letter from the business CEO. Immigration New Zealand may grant temporary work visas to key employees to get the business established and resident visas once the business is operating. Applicants must provide evidence the business is up and running, such as a certificate of incorporation, tax records, and documents showing a business site has been purchased or leased. Immigration New Zealand also considers if the relocation benefits New Zealand, if the business is trading profitably (or has the potential to do so in the next 12 months), and contributing to economic growth by, for example introducing new technology, management or technical skills; enhancing existing technology, management or technical skills; introducing new products or services; enhancing existing products or services; creating new export markets; expanding existing export markets; creating at least one full-time job for a New Zealander. Visa holders can bring family, and after meeting conditions of the visa may be eligible to live and work in New Zealand indefinitely.

As part of the KIWI Act U.S. Public Law 115-226, enacted on August 1, 2018, accorded nationals of New Zealand to E-1 and E-2 status for treaty trader/treaty investor purposes if the Government of New Zealand provides similar nonimmigrant status to nationals of the United States. The State Department confirmed that New Zealand offers similar nonimmigrant status to U.S. nationals and E visas may be issued to nationals of New Zealand beginning on June 10, 2019. See https://travel.state.gov/content/travel/en/us-visas/visa-information-resources/fees/treaty.html#16

New Zealand supports the ability to transfer data across borders, and does not force businesses to store their data within any particular jurisdiction. While data localization and cloud computing is not specifically legislated for, all businesses must comply with the Privacy Act 1993 to protect customers’ “personal information.” However, under certain circumstances the Commissioner of Inland Revenue must approve the storage electronic business and tax records outside of New Zealand. Alternatively, taxpayers can use an IRD authorized third party to store their information without having to seek individual approval. It remains the taxpayer’s responsibility to meet their obligations to retain business records for the retention period (usually seven years) required under the Act.

Under CPTPP, the New Zealand government has retained the ability to maintain and amend regulations related to data flows with CPTPP countries, but in such a way that does not create barriers to trade. These rules come with a “public policy safeguard”, which gives CPTPP governments the discretion to control the movement and storage of data for legitimate public policy objectives to ensure governments can respond to the changing technology in areas such as privacy, data protection, and cybersecurity.

As part of CPTPP, New Zealand has committed not to impose ‘localization requirements’ that would force businesses to build data storage centers or use local computing facilities in CPTPP markets. Another provision requires CPTPP countries not to impede companies delivering cloud computing and data storage services.

New Zealand is considering e-commerce issues in trade agreements beyond CPTPP, including upgrades of existing FTAs, and in January 2019 joined other WTO members to launch negotiations on E-Commerce.

The Digital Economy Partnership Agreement (DEPA), which came into effect on January 7, 2021 for Singapore, New Zealand, and Chile, includes a series of modules covering measures that affect the digital economy. Module 4 on Data Issues includes binding provisions on personal data protection and cross-border data flows that build on the CPTPP. In addition to the CPTPP obligations, DEPA encourages the adoption of data protection trust-marks for businesses to verify conformance with privacy standards. The agreement is an open plurilateral one that allows other countries to join the agreement as a whole, select specific modules to join, or replicate the modules in other trade agreements.

The Customs and Excise Act 2018 allows customers who are required to keep Customs-related records to apply to Customs New Zealand, to store their business records outside of New Zealand. Under the repealed 1996 Act it was an offence for businesses to not store physical records in New Zealand or their electronic records with a New Zealand-based cloud storage provider. Under the Act, a business can apply for permission to keep their Customs-related business records outside New Zealand, including in a cloud storage facility that is not based in New Zealand. Businesses denied permission must still be required to store business records in New Zealand, including with New Zealand-based cloud providers.

In March 2018, the government introduced the Privacy Bill to repeal and replace the Privacy Act 1993. The bill received Royal Assent to come into effect on June 30, 2020, and aims to strengthen the protection of confidential and personal information and modernize privacy regulations. It incorporate provisions included in the European General Data Protection Regulation (GDPR) but is not in strict alignment with the GDPR.

The provisions apply to all actions by a New Zealand agency regardless of where that agency is located, and apply to all personal information collected or held by a New Zealand agency regardless of where that information is collected or held, or where the relevant individual is located.

The provision extends the current law to apply to agencies located outside of New Zealand as long as that agency is “carrying on business in New Zealand.” It applies to personal information collected in the course of such business, again regardless of where the agency is located and where the information is held. Additionally, it will apply regardless of whether that agency charges monetary payment or makes a profit from its business in New Zealand. The intent is to ensure that global businesses doing business in New Zealand, irrespective of where the individual or the agency is located, comply with the new Privacy Act.

For most businesses, the most notable change in the new Act is the introduction of a requirement to report serious privacy breaches. Notifiable privacy breaches will require organizations to notify the Privacy Commissioner and any affected individuals if there is a breach that has caused serious harm or poses a risk of causing someone serious harm. In March 2020, an amendment to the bill was proposed to all the new legislation apply from November 1, 2020.

A provision affecting cloud service providers places the onus of liability for privacy breaches on the customer, as long as the provider is not using or disclosing that customer’s information for its own purposes. The Search and Surveillance Act 2012 includes powers to search and notification requirements of search power in connection to a “remote access search” defined in the Act as a search of a thing such as an Internet data storage facility that does not have a physical address that a person can enter and search. Such mandatory demands as mentioned are legal obligations that must be complied with and are made under a search warrant. The Privacy Act permits disclosure in such a case. The organization can only disclose the information requested and any excess information provided will be in breach of the Privacy Act unless it is able to be provided as part of a voluntary request.

New Zealand does not have any requirements for foreign information technology (IT) providers to turn over source code or provide access to encryption. There may be obligations on individuals to assist authorities under Section 130 of the Search and Surveillance Act 2012. An agency with search authority in terms of data held in a computer system or other data storage device may require a specified person to provide access information that is reasonable to allow the agency exercising the search power to access that data. This could include a requirement that they decrypt information which is necessary to access a particular device. The search power cannot be used to require the specified person to give information intending to incriminate them. Failure to assist a person exercising a search power under section 130(1), without reasonable excuse, is a criminal offence punishable with imprisonment for up to three months.

The Customs and Excise Act 2018 sets specific legal thresholds for Customs officers to search passengers’ electronic devices and imposes a fine of NZD 5,000 (USD 3,250) if they refuse to hand over passwords, pins, or encryption keys to access the device. The officer must have “reasonable cause to suspect,” that the passenger has been or is about to be involved in the commission of relevant offending.

There is not a particular government agency that enforces all privacy law, however the Office of the Privacy Commissioner is empowered through the Privacy Act 1993 and has a wide ability to consider developments or actions that affect personal privacy. Separately, New Zealand courts have developed a privacy tort allowing individuals to sue another for breach of privacy.

5. Protection of Property Rights

Real Property

New Zealand recognizes and enforces secured interest in property, both movable and real. Most privately owned land in New Zealand is regulated by the Land Transfer Act 2017. These provisions set forth the issuance of land titles, the registration of interest in land against land titles, and guarantee of title by the State. The Registrar-General of Land develops standards and sets an assurance program for the land rights registration system. New Zealand’s legal system protects and facilitates acquisition and disposition of all property rights.

The Land Transfer Act 2018 repealed law from 1952 but maintains the Torrens system of land title in which land ownership is transferred through registration of title instead of deeds, a system which has been in operation in New Zealand since the nineteenth century. The Act aims to improve the certainty of property rights, modernize, simplify and consolidate land transfer legislation. It empowers courts with limited discretion to restore a landowner’s registered title in rare cases, in the event of fraud or other illegality, where it is warranted to avoid a manifestly unjust result. The Act includes new provisions to prevent mortgage fraud, to protect Maori freehold land, and to extend the Registrar-General’s powers to withhold personal information to protect personal safety.

Land leasing by foreign or non-resident investors is governed by the OIO Act. About eight percent of New Zealand land is owned by the Crown. The Land Act of 1948 created pastoral leases which run for 33 years and can be continually renewed. Rent is reviewed every 11 years, basing the rent on how much stock the land can carry for pastoral farming. The Crown Pastoral Land Act 1998 and its amendments contain provisions governing pastoral leases that apply to foreign and domestic lease holders. Holders of pastoral leases have exclusive possession of the land, and the right to graze the land, but require permission to carry out other activities on their lease.

Foreign and domestic lessees can gain freehold title over part of the land under a voluntary process known as tenure review. Under this process, specified land areas of the lease can be restored to full Crown ownership, usually to be managed by the Department of Conservation. However, in February 2019 the government announced an end to tenure review because it has resulted in more intensive farming and subdivision on the 353,000 hectares of freehold land which has been affecting the landscape and biodiversity of the land. With tenure review ending, the remaining Crown pastoral lease properties, currently 171 covering 1.2 million hectares of Crown pastoral land which is just under 5 percent of New Zealand’s land area, will continue to be managed under the regulatory system for Crown pastoral lands. In April 2019 there had been 2,500 submissions for feedback to the government on the future management of the South Island high country.

The types of land ownership in New Zealand are: Freehold title, Leasehold title, Unit title, Strata title, and cross-lease. The majority of land in New Zealand is freehold. LINZ holds property title records that show a property’s proprietors, legal description and the rights and restrictions registered against the property title, such as a mortgage, easement or covenant. A title plan is the plan deposited by LINZ when the title was created. Property titles do not contain information about the value of the property.

No land tax is payable, but the local government authorities are empowered to levy taxes, termed as “rates,” on all properties within their territorial boundaries. Rates are assessed on either assessed annual rental value, land value or capital value. There is no stamp duty in New Zealand.

Mortgages and liens are available in New Zealand. There is no permanent government policy as such that discriminates lending to foreigners. However, the Reserve Bank of New Zealand (RBNZ) introduced a macro-prudential tool as a means to curb rising house prices. In October 2013, the RBNZ introduced temporary loan-to-valuation ratio restrictions on banks’ lending to (domestic and foreign) investors and owner-occupiers wanting to purchase residential housing. During 2018 and 2019 the RBNZ began easing these lending restrictions on banks.

In April 2020, the RBNZ announced a 12-month suspension of these restrictions on banks’ lending to investors and owner-occupiers to apply from May 1, in order to improve the equity positions of mortgage borrowers, so that fewer borrowers will have to sell their house or default on their mortgage as a result of the COVID-19 crisis.

A registered memorandum of mortgage is the usual form used to create a lien on real estate to secure an indebtedness. There is no mortgage recording or mortgage tax in New Zealand. However, since October 2018 all non-resident purchasers must complete a Residential Land Statement declaring they are eligible to buy residential property in New Zealand, before signing any sale and purchase agreement.

There are some statutory controls imposed on the amount of interest which may be charged on a loan secured by real property (and private and government agencies that monitor and report on interest charges) that ensure that interest rates and costs are not excessive or illegal. There are no laws that that restrict the ability to make a borrower or guarantor personally liable for indebtedness secured by real property.

Property legally purchased but unoccupied can generally not revert to other owners. The Land Transfer Act 2017 repealed an Act from 1963 which previously outlined the process for cases of “adverse possession” or “squatters’ rights.” Under Section 155 of the Act, a person can apply to the Registrar-General of Land for a record of title in that person’s name as owner of the freehold estate in land if: a record of title has already been created for the estate; the person has been in adverse possession of the land for a continuous period of at least 20 years and continues in adverse possession of the land; and the possession would have entitled the person to apply for a title to the freehold estate in the land if the land were not subject to the Act. The section applies to diverse instances, such as the case where an entire section is being occupied by someone unconnected to the registered owner, or in the case of a “boundary adjustment” between two properties. Section 159 of the Act lists instances when applications may not be made, such as land owned by the Crown, Māori land, or land occupied by the applicant – where the applicant owns an adjoining property – because of a mistaken marking of a boundary.

Intellectual Property Rights

New Zealand has a generally strong record on intellectual property rights (IPR) protection and is an active participant in international efforts to strengthen IPR enforcement globally. It is a party to nine World Intellectual Property Organization (WIPO) treaties and participates in the Trade Related Aspects of Intellectual Property Rights (TRIPS) Council.

In March 2019, New Zealand entered into force the WIPO Copyright Treaty, the WIPO Performances and Phonograms Treaty, the Budapest Treaty and the Berne Convention. It implemented the Madrid Treaty in December 2012, allowing New Zealand companies to file international trademarks through the Intellectual Property Office of New Zealand (IPONZ). Since 2013, an online portal hosted on the IPONZ and IP Australia websites has allowed applicants to apply for patent protection simultaneously in Australia and New Zealand with a single examiner assessing both applications according to the respective countries’ laws.

The New Zealand Government announced its intention to join the Marrakesh Treaty in June 2017 and the Copyright (Marrakesh Treaty Implementation) Amendment Act entered into force January 4, 2020. It amends the Copyright Act 1994 and the Copyright (General Matters) Regulations 1995 to implement New Zealand’s obligations under the Marrakesh Treaty. The legislation is administered by MBIE.

There are a number of statutes that provide civil and criminal enforcement procedures for IPR owners in New Zealand. The Copyright Act 1994 and the Trade Marks Act 2002 impose civil liability for activities that constitute copyright and trademark infringement. Both Acts also contain criminal offences for the infringement of copyright works in the course of business and the counterfeiting of registered trademarks for trade purposes. The Fair Trading Act 1986 imposes criminal liability for the forging of a trademark, falsely using a trademark or sign in a way that is likely to mislead or deceive, and trading in products bearing misleading and deceptive trade descriptions.

The government is reviewing the Copyright Act 1994 in light of significant technological changes since the last review in 2004. New Zealand had agreed to tougher IPR and copyright protections under the TPP agreement, but the CPTPP suspended some of the original TPP copyright obligations, such as increasing rights protection from 50 years to 70 years; requiring stronger protection for technological protection measures (TPMs) which act as “digital locks” to protect copyright work; nor alter its internet service provider liability provisions for copyright infringement.

In November 2018, MBIE, which administers the Act, released a 135-page Issues Paper which summarizes the operation of the New Zealand copyright regime, its shortcomings, and the wide range of issues that need to be addressed. MBIE is reviewing the issues raised from the public consultation which closed in April 2019. For more see: https://www.mbie.govt.nz/business-and-employment/business/intellectual-property/copyright/review-of-the-copyright-act-1994/ 

New Zealand has amended some legislation to comply with obligations under CPTPP. Customs New Zealand has authority to temporarily detain imported or exported goods that it suspects infringe copyright or trademarks and to inspect and detain any goods in its control that are suspected of being pirated. The New Zealand High Court has been empowered to award additional damages for trademark infringement, and unless exceptional circumstances exist, the courts must order the destruction of counterfeit goods. This is in addition to the existing availability of compensatory damages under the Trade Marks Act 2002.

The CPTPP will require New Zealand to provide a 12-month grace period for patent applicants. Under this requirement, inventors will not be deprived of a patent issuing in New Zealand if an inventor makes their invention public, provided the inventor files the patent application within 12 months of disclosure. In addition, pharmaceutical patent holders (who have provided their details to Medsafe) will have to be informed of someone seeking to use their drug’s clinical trial data before marketing approval is granted.

The Copyright Tribunal hears disputes about copyright licensing agreements under the Act and applications about illegal uploading and downloading of copyrighted work. The Copyright (Infringing File Sharing) Amendment Act 2011 implements a three-notice regime which gives alleged infringers up to three warnings before issuing a ruling that infringement has occurred. The legislation enables copyright owners to seek the suspension of the internet account for up to six months through the District Court.

The Smoke-free Environments (Tobacco Standardized Packaging) Amendment Act 2016 and from June 2018, all tobacco packets are required to be the same standard dark brown/green background color as Australia from June 2018. It requires the removal of all tobacco company marketing imagery. The Smoke-free Environments Regulations 2017 standardize the appearance of tobacco manufacturers’ brand names.

New Zealand meets the minimum requirements of the TRIPS Agreement, providing patent protection for 20 years from the date of filing. The Patents Act 2013 brought New Zealand patent law into substantial conformity with Australian law. Consistent with Australian patent law, an ‘absolute novelty’ standard is introduced as well as a requirement that all applications be examined for “obviousness” and utility. The Patents Act stops short of precluding from patentability all computer software and has a provision for patenting “embedded software.”

In June 2019, MBIE released a discussion paper regarding a proposed Intellectual Property Laws Amendment Bill. The omnibus bill intends to make technical amendments to the Patents Act 2013, the Trade Marks Act 2002, the Designs Act 1953, and their associated regulations. The Bill is not intended to be a full policy review of these Acts, or to review the criteria for granting patents, or registering trademarks and designs. For more see: https://www.mbie.govt.nz/business-and-employment/business/intellectual-property/proposed-intellectual-property-laws-amendment-bill 

New Zealand currently provides data exclusivity of five years from the date of marketing approval for a new pharmaceutical under Section 23B of the Medicines Act 1981. Data protection on pharmaceuticals applies from the date of marketing approval, regardless of whether it is granted before or after the expiration of the 20-year patent.

From July 2017 New Zealand wine and spirit makers can register the geographical origins of their products under the Geographical Indications (Wine and Spirits) Registration Act 2006 allows New Zealand wine and spirit makers to register the geographical origins of their products. The 2006 Act and its amendments are administered by IPONZ and aims to protect wine and spirit markers’ products, to allow the registration of New Zealand geographical indications (GIs) overseas, and to enforce action for falsely claiming a product comes from a certain region.

In 2019, MFAT released a discussion paper on proposed changes to New Zealand’s regulatory framework for protecting GIs as part of New Zealand’s free trade agreement negotiations with the European Union (EU). The EU has proposed that New Zealand adopt a regulatory framework for protecting GIs that is similar to the existing EU framework. The discussion paper, jointly prepared by MFAT and MBIE, outlines the EU’s proposals for protecting GIs and seeks public submissions until March 27, 2020. IF the EU framework is accepted it would require significant changes to New Zealand’s existing laws protecting GIs. For more see: https://www.mfat.govt.nz/en/trade/free-trade-agreements/agreements-under-negotiation/eu-fta/geographical-indications/ 

The most commonly intercepted counterfeit items by Customs New Zealand are fake toys according to an Official Information Act request. Electronics were the second most intercepted item, followed by clothing and accessories. Most items originate from China, the United Kingdom, Vietnam, and Hong Kong.

New Zealand is not on the USTR’s Special 301 report list.

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

6. Financial Sector

Capital Markets and Portfolio Investment

New Zealand policies generally facilitate the free flow of financial resources to support the flow of resources in the product and factor markets. Credit is generally allocated on market terms, and foreigners are able to obtain credit on the local market. The private sector has access to a limited variety of credit instruments. New Zealand has a strong infrastructure of statutory law, policy, contracts, codes of conduct, corporate governance, and dispute resolution that support financial activity. The banking system, mostly dominated by foreign banks, is rapidly moving New Zealand into a “cashless” society.

New Zealand adheres to International Monetary Fund (IMF) Article VIII and does not place restrictions on payments and transfers for international transactions.

New Zealand has a range of other financial institutions, including a securities exchange, investment firms and trusts, insurance firms and other non-bank lenders. Non-bank finance institutions experienced difficulties during the global financial crisis (GFC) due to risky lending practices, and the government of New Zealand subsequently introduced legal changes to bring them into the regulatory framework. This included the introduction of the Non-bank Deposit Takers Act 2013 and associated regulations which impose requirements on exposure limits, minimum capital ratios, and governance. It requires non-bank institutions be licensed and have suitable directors and senior officers. It also provides the RBNZ with powers to detect and intervene if a non-bank institution becomes distressed or fails.

The RBNZ is the prudential regulator and supervisor of all insurers carrying on insurance business in New Zealand and is responsible for administering the Insurance (Prudential Supervision) Act 2010. The RBNZ administers the Act to promote the maintenance of a sound and efficient insurance sector; and promoting public confidence in the insurance sector.

The GFC also prompted New Zealand to introduce broad-based financial market law reform which included the establishment of the Financial Markets Authority (FMA) in 2014. The Financial Markets Conduct Act (FMC) 2013 provided a new licensing regime to bring New Zealand financial market regulations in line with international standards. It expanded the role of the FMA as the primary regulator of fair dealing conduct in financial markets, provided enforcement for parts of the Financial Advisers Act 2008, and made the FMA one of the three supervisors for AML/CFT, alongside the RBNZ and the Department of Internal Affairs. The FMA supervises approximately 800 reporting entities.

Legal, regulatory, and accounting systems are transparent. Financial accounting standards are issued by the New Zealand Accounting Standards Board (NZASB), which is a committee of the External Reporting Board established under the Crown Entities Act 2004. The NZASB has the delegated authority to develop, adopt and issue accounting standards for general purpose financial reporting in New Zealand and are based largely on international accounting standards, and GAAP.

Smaller companies (except issuers of securities and overseas companies) that meet proscribed criteria face less stringent reporting requirements. Entities listed on the stock exchange are required to produce annual financial reports for shareholders. Stocks in a number of New Zealand listed firms are also traded in Australia and in the United States. Small, publicly held companies not listed on the NZX may include in their constitution measures to restrict hostile takeovers by outside interests, domestic or foreign. However, NZX rules generally prohibit such measures by its listed companies.

In December 2019, the government introduced the Financial Market Infrastructure Bill to establish a new regulatory regime for financial market infrastructures (FMI), and to provide certain FMIs with legal protections relating to settlement finality, netting, and the enforceability of their rules. The bill aims to maintain a sound and efficient financial system; avoid significant damage to the financial system resulting from problems with an FMI, an operator of an FMI, or a participant of an FMI; promote the confident and informed participation of businesses, investors, and consumers in the financial markets; and promote and facilitate the development of fair, efficient, and transparent financial markets. The bill if passed would be administered jointly by the RBNZ and the FMA. The bill passed its first reading in February 2020 and is with the select committee.

In 2018, the market capitalization of listed domestic companies in New Zealand was 42 percent of GDP, at USD 86 billion. The small size of the market reflects in part the risk averse nature of New Zealand investors, preferring residential property and bank term deposits over equities or credit instruments for investment. New Zealand’s stock of investment in residential property is valued at NZD 1.19 trillion (USD 774 billion).

Money and Banking System

The Reserve Bank (RBNZ) regulates banks in New Zealand in accordance with the Reserve Bank of New Zealand Act 1989. The RBNZ is statutorily independent and is responsible for conducting monetary policy and maintaining a sound and efficient financial system. The New Zealand banking system consists of 26 registered banks, and more than 90 percent of their combined assets are owned by foreign banks, mostly Australian. There is no requirement in New Zealand for financial institutions to be registered to provide banking services, but an institution must be registered to call itself a bank.

In November 2017, the government announced it would undertake the first ever review of the RBNZ Act. In December 2018, the government passed an amendment to the Act to broaden the legislated objective of monetary policy beyond price stability, to include supporting maximum sustainable employment. It also requires that monetary policy be decided by a consensus of a Monetary Policy Committee, which must also publish records of its meetings. While policy decisions at the RBNZ have been made by the Governing Committee for several years before the amendment, the Act had laid individual accountability with the Governor, who could be removed from office for inadequate performance according to the goals set through the Policy Targets Agreement.

Applicants for bank registration must meet qualitative and quantitative criteria set out in the RBNZ Act. Applicants who are incorporated overseas are required to have the approval of their home supervisor to conduct banking business in New Zealand, and the applicant must meet the ongoing prudential requirements imposed on it by the overseas supervisor. Accordingly, the conditions of registration that apply to branch banks mainly focus on compliance with the overseas supervisor’s regulatory requirements.

The RBNZ introduced a Dual Registration Policy for Small Foreign Banks in December 2016. Foreign-owned banks are permitted to apply for dual registration – operating both a branch and a locally incorporated subsidiary in New Zealand – provided both entities comply with relevant prudential requirements. Locally incorporated subsidiaries are separate legal entities from the parent bank. They are required, among other things, to maintain minimum capital requirements in New Zealand and have their own board of directors, including independent directors. In contrast, bank branches are essentially an extension of the parent bank with the ability to leverage the global bank balance sheet for larger lending transactions. Capital and governance requirements for branch banks are established by the home regulatory authority. There are no local capital or governance requirements for registered bank branches in New Zealand.

In addition to registered banks, the RBNZ supervises and regulates insurance companies in accordance with the Insurance (Prudential Supervision) Act of 2010 and non-bank lending institutions. Non-bank deposit takers are regulated under the Non-bank Deposit Takers Act of 2013.

New Zealand has no permanent deposit insurance scheme and the RBNZ has no requirement to guarantee the viability of a registered bank. The RBNZ operates the Open Bank Resolution (OBR) which allows a distressed bank to be kept open for business, while placing the cost of a bank failure primarily on the bank’s shareholders and creditors, rather than on taxpayers. While the scheme has been generally successful, in 2010 the government paid out NZD 1.6 billion (USD 1 billion) to cover investor losses when New Zealand’s largest locally-owned finance company at the time, went into receivership. There have since been bailouts of several insurance companies and other small finance companies.

New Zealand’s banking system relies on offshore wholesale funding markets as a result of low levels of domestic savings. Banks can raise funds in international markets relatively easily at reasonable cost, but are vulnerable to global market volatility, geopolitics, and domestic economic conditions. Domestically, banks face exposure due to the concentration of New Zealand exports in a small number of commodity-based sectors which can be subject to considerable price volatility. Residential mortgage and agricultural lending exposures have also presented risk.

The four largest banks (ASB, ANZ, BNZ and Westpac) control 88 percent of the retail and commercial banking market measured in terms of total banking assets. With the addition of Kiwibank, that rises to 91 percent. Kiwibank launched in 2002 and is majority owned by NZ Post (53 percent), with the NZ Superannuation Fund (25 percent), and the Accident Compensation Corporation (22 percent).

The RBNZ reports the total assets of registered banks to be about NZD 631 billion (USD 410 billion) as of March 2020. Assets of insurance companies’ assets were valued at NZD 81 billion (USD 53 billion) and NZD 14.4 billion (USD 9.4 billion) for non-bank lending institutions. The RBNZ estimates approximately 0.6 percent of bank loans are non-performing. Agriculture loans make up about 13 percent of bank lending and has seen higher rates of non-performing loans – particularly dairy farms – in 2019. The RBNZ expect non-performing to rise again having recovered only in the past few years from the Global Financial Crisis.

The four banks have capital generally above the regulatory requirements. The initial findings from a RBNZ review of bank capital requirements released in March 2017 found New Zealand banks to be “in the pack” in terms of capital ratios relative to international peers. There have since been subsequently four rounds of consultations revisiting capital requirements after the Australian Financial System Inquiry made recommendations that were subsequently accepted by the Australian Prudential Regulation Authority to improve the resilience of the Australian banks. While this contributes to the ultimate soundness of the New Zealand subsidiaries, it does not directly strengthen their balance sheets.

In February 2019, the RBNZ proposed to almost double capital requirements for the four big banks. The RBNZ proposed to require banks’ Tier 1 capital to be comprised solely of equity and to increase from the current minimum of 8.5 percent of total capital to 16 percent over five years. It also wants Tier 1 capital to be pure equity, rather than hybrid-type securities that usually behave as debt, but which can be converted into equity if required, and which are about a fifth of the cost of pure equity. Since the GFC, the minimum tier 1 capital has already been raised from 4 percent of risk-weighted assets to 8.5 percent.

In December 2019, the RBNZ announced the minimum total capital ratio will increase from 10.5 percent currently to 18 percent for the four largest banks, and 16 percent for the smaller local banks. For the largest banks, at least 16 percent must consist of tier 1 capital, and within this at least 13.5 percent must be common equity. For the small banks, the requirements are 14 percent and 11.5 percent respectively. Debt instruments that can be converted to equity will no longer count towards regulatory capital. However, banks will able to make greater use of redeemable preference shares. Initially in order to give the banks time to accumulate capital through retained earnings the changes were to be phased in over a seven-year period starting from July 2020. The RBNZ has delayed the introduction until July 1, 2021 due to the COVID-19 pandemic.

The penetration of New Zealand’s major banks has improved since the introduction of the voluntary superannuation scheme, KiwiSaver in 2007. The increase in their market share is also a result of the appointment of three additional banks as default KiwiSaver providers in 2014. People who start a new job are automatically enrolled in KiwiSaver and must opt-out if they do not want to be a member. Contributions are made by the employee, the employer and if eligible from the government in the form of a tax credit. At the start of 2021 there were more than 3 million KiwiSaver members, and the amount invested in KiwiSaver schemes is estimated to be NZD 62 billion (USD 40.3 billion). While funds can only be withdrawn at the age of 65 with very few exceptions, members can shift their funds. Over the course of 2020 as markets dropped, KiwiSavers shifted NZD 1.5 billion (USD 975 million) from share-heavy funds to cash or conservative funds.

There are some restrictions on opening a bank account in New Zealand that include providing proof of income and needing to be a permanent New Zealand resident of 18 years old or above. Access to money in the account will not be granted until the individual presents one form of photo ID and a proof of address in-person at a branch of the bank in New Zealand. Some banks will require a copy of the applicant’s visa. If the applicant does not apply for an IRD number, the tax rate on income earned will default to the highest rate of 33 percent. New Zealand banks typically have a dedicated branch for migrants and businesses to set up banking arrangements.

Foreign Exchange and Remittances

Foreign Exchange

New Zealand has revoked all foreign exchange controls. Accordingly, there are no such restrictions – beyond those that seek to prevent money laundering and financing of terrorism – on the transfer of capital, profits, dividends, royalties or interest into or from New Zealand. Full remittance of profits and capital is permitted through normal banking channels and there is no difficulty in obtaining foreign exchange. However, withholding taxes can apply to certain payments out of New Zealand including dividends, interest, and royalties, and may apply to capital gains for non-residents and on the payment of profits to certain non-resident contractors.

New Zealand operates a free-floating currency. As a small nation that relies heavily on trade and global financial and geopolitical conditions, the New Zealand currency experiences more fluctuation when compared with other developed high-income countries.

Remittance Policies

The Pacific Islands are the main destination of New Zealand remittances from residents and from temporary workers participating in the Recognized Seasonal Employer (RSE) scheme. The RSE allows the horticulture and viticulture industries to recruit workers from nine Pacific Island nations for seasonal work when there are not enough New Zealand workers. Other people who use remittance services include recently resettled refugees, and other migrant workers particularly in the hospitality and construction sectors.

Anti-money laundering and combatting terrorism financing laws have made access to cross-border financial services difficult for some Pacific island countries. Banks, non-bank institutions, and people in occupations that typically handle large amounts of cash, are required to collect additional information about their customers and report any suspicious transactions to the New Zealand Police.

Financial institutions have had to comply with the AML/CFT Act since 2013, including remitters, trust and company service providers, payment providers, and other lending institutions. If a bank is unable to comply with the Act in its dealings with a customer, it must not do business with that person. This would include not processing certain transactions, withdrawing the banking products and services it offers, and choosing not to have that person or entity as a customer. Since then New Zealand banks have been reducing their exposure to risks and charging higher fees for remittance services, which in some instances has led to the forced closing of accounts held by money transfer operators (MTOs).

The New Zealand government is working with banks to improve the bankability of small MTOs, and to develop low cost products for seasonal migrant workers in the RSE. New Zealand is also using its membership in global fora to encourage a coordinated approach to addressing high remittance costs, and is working with Pacific Island governments to find ways to lower costs in the receiving country, such as the adoption and use of an electronic payments systems infrastructure.

The New Zealand Treasury released a report in March 2017 to explore feasible policy options to address the issues in the New Zealand remittance market that would maintain access and reduce costs of remitting money from New Zealand to the Pacific. In 2018, the New Zealand and Australian governments hosted a series of roundtable meetings in Auckland, Sydney, and Tonga, with the Asian Development Bank and the International Monetary Fund that included officials from banks, MTOs, and regulators from Australia, New Zealand, and the Pacific, senior officials from international financial institutions, and training providers to discuss the issue and identify practical solutions to address the costs and risks of transferring remittances to Pacific countries and difficulties in undertaking cross-border transactions.

Barriers to remittances to Pacific nations remain a significant public policy issue during 2019, and work is underway led by MFAT and involving financial regulators in New Zealand and overseas, to address some of these barriers. A pilot of a Know Your Customer and Customer Due Diligence Utility is being planned for remittances between Samoa, Australia and New Zealand.

Sovereign Wealth Funds

The New Zealand Superannuation Fund was established in September 2003 under the New Zealand Superannuation and Retirement Income Act 2001. The fund was designed to partially provide for the future cost of New Zealand Superannuation, which is a universal benefit paid by the New Zealand government to eligible residents over the age of 65 years irrespective or income or asset levels.

The Act also created the Guardians of New Zealand Superannuation, a Crown entity charged with managing and administering the fund. It operates by investing government contributions and the associated returns in New Zealand and internationally, in order to grow the size of the fund over the long term. Between 2003 and 2009, the government contributed NZD 14.9 billion (USD 9.7 billion) to the fund, after which it temporarily halted contributions during the Global Financial Crisis. In December 2017, the newly elected government resumed contributions, with plans to resume contributions to the full amount according to the formula set out in the 2001 Act from 2022. The Fund received an estimated NZD 500 million (USD 325 million) payment in the year to June 2018, and a NZD 1 billion (USD 650 million) contribution in the year to June 2019.

Planned contributions for the year to June 2020 will be NZD 1.5 billion (USD 975 million) according to Budget 2020 announced in May. This increases to NZD 2.1 billion (USD 1.4 billion) in the year to June 2021 and NZD 2.4 billion (USD 1.6 billion) in the year to June 2022. The legislated formula suggests lower contributions be made due to the impact of COVID-19 on GDP forecasts. Between fiscal years 2019/20 and 2022/23, Budget 2020 transfers small amounts of the capital contributions to a new fund administered by the Guardians of New Zealand Superannuation, which will invest via the New Zealand Venture Investment Fund Limited (NZVIF). The government has not indicated it will suspend its contributions during the economic impact of the pandemic.

In June 2019, the fund was valued at NZD 43.1 billion (USD 28 billion) of which 48.8 percent was in North America, 17.3 percent in Europe, 12.9 percent in New Zealand, 10.9 percent in Asia excluding Japan, 6 percent in Japan, and 1.6 percent in Australia. During 2018/19 the fund earned a pre-tax return of 7 percent. In the first four months of 2020, the fund made losses of NZD 4.6 billion (USD 3 billion).

The guardians have a stated commitment to responsible investment, including environmental, social and governance factors, which is closely aligned to the United Nations Principles for Responsible Investment. It is a member of the International Forum of Sovereign Wealth Funds and is signed up to the Santiago Principles.

The fund operates its own environmental, social, and governance principles with a responsible investment framework. Companies that are directly involved in the following activities are excluded from the Fund: the manufacture of cluster munitions, testing of nuclear explosive devices, and anti-personnel mines; the manufacture of tobacco; the processing of whale meat; recreational cannabis; and the manufacture of civilian automatic and semi-automatic firearms, magazines or parts. As of December 2019, the fund does not make investments in 14 countries, mainly located in Africa and the Middle East.

Following the attack on two Christchurch mosques by a gunman using legally obtained guns on March 15, the fund divested NZD 19 million (USD 13 million) from seven companies (including four U.S. companies), involved in the manufacture of civilian automatic and semi-automatic firearms, magazines or parts that are prohibited under recently enacted New Zealand law. Due to the live-stream of the attack the NZSF announced on March 20, 2019 it had joined up with other New Zealand wealth funds as a shareholder of Facebook, Twitter, and YouTube owner Alphabet, to strengthen controls to prevent the live-streaming of objectionable content. The NZSF aims to achieve this from the collective action of New Zealand’s investor sector with a global coalition of shareholders as well as the pressure put on the companies by other stakeholder groups. The NZSF will undertake discussions with the companies concerned in confidence and will report on milestones achieved in future Annual Reports. For further information including a full list of participants see: https://www.nzsuperfund.nz/how-we-invest/ 

In recent years the NZSF has explicitly excluded companies that are directly involved in the manufacture of: cluster munitions, testing of nuclear explosive devices, anti-personnel mines, tobacco, recreational cannabis, and the processing of whale meat. In 2013, the fund divested a group of five U.S. companies due to their involvement with nuclear weapons. In 2007, the fund divested NZD 37.6 million (USD 24.4 million) in 20 tobacco companies.

In June 2017, the fund transitioned NZD 14 billion (USD 9 billion) passive global equity portfolio (constituting 40 percent of the fund) to low carbon, selling passive holdings in 297 companies worth NZD 950 million (USD 617 million). The aim of the Climate Change Investment Strategy is to reduce exposure to investments in carbon and fossil fuels. The guardians applied their carbon exclusion methodology again in June 2018 and June 2019.

The government manages two other wealth funds that also aim to reduce future liability and burden on New Zealanders. The Government Superannuation Fund (GSF) aims to meet the cost of 57,000 state sector employees who worked between 1948 to 1995 and are entitled to an additional fixed retirement income. The GSF was valued at NZD 4.5 billion (USD 2.9 billion) in June 2019. The Accident Compensation Corporation (ACC) covers all New Zealanders and visitors’ costs if they are injured in an accident under a no-fault scheme. In addition to ACC levies paid by workers and businesses, the ACC operates a fund to meet the future costs of injuries. As of June 2019, it was valued at NZD 44 billion (USD 29 billion), of which about 72 percent in New Zealand and 4 percent in Australia. Over 2018/19 the fund earned a return of 13.1 percent. ACC is one of the largest investors, owning about 2.6 percent of the market capitalization of the New Zealand share market, and directly owns 22 percent of Kiwibank.

7. State-Owned Enterprises

The Commercial Operations group in the New Zealand Treasury is responsible for monitoring the Crown’s interests as a shareholder in, or owner of organizations that are required to operate as successful businesses, or that have mixed commercial and social objectives. Each entity monitored by the Treasury has a primary legislation that defines its organizational framework, which include: State-Owned Enterprises (SOEs), Crown-Owned Entity Companies, Crown Research Institutions, Crown Financial Institutions, Other Crown Entity Companies, and Mixed Ownership Model Companies.

SOEs are subject to the State-Owned Enterprises Act 1986, are registered as companies, and are bound by the provisions of the Companies Act 1993. The board of directors of each SOE reports to two ministers, the Minister of Finance and the relevant portfolio minister. A list of SOEs and information on the Crown’s financial interest in each SOE is made available in the financial statements of the government at the end of each fiscal year. For a list of the SOEs see: http://www.treasury.govt.nz/statesector/commercial/portfolio/bytype/soes 

In the 12 months to June 30, 2020 New Zealand State-Owned Enterprises had revenue of NZD 5.08 billion (USD 2.2 billion) and expenses of NZD 5.14 billion (USD 3.34 billion with an operating balance of NZD -27 million (USD -17.6 million). Entities saw operating losses of NZD 206 million (USD 134 million) from KiwiRail and fair value write down of NZD 1.1 billion (USD 715 million) in relation to the Air New Zealand aircraft fleet suffering from reduced service due to the pandemic.

Most of New Zealand’s SOEs are concentrated in the energy and transportation sectors. Private enterprises can compete with public enterprises under the same terms and conditions with respect to markets, credit, and other business operations. Under SOE Continuous Disclosure Rules, SOEs are required to continuously report on any matter that may materially affect their commercial value.

Privatization Program

New Zealand governments have embarked on several privatization programs since the 1980s, to reduce government debt, move non-strategic businesses to the private sector to improve efficiency, and raise economic growth.

In 2014, the government completed a program of asset sales to raise funds to reduce public debt. It involved the partial sale of three energy companies and Air New Zealand, with the government retaining its majority share in each. The bulk of the initial share float was made available to New Zealand share brokers and international institutions, and unsold shares were made available to foreign investors. Foreign investors are free to purchase shares on the secondary market.

New Zealand has been using the public private partnership (PPP) method of procurement and increasingly so where the public sector seeks to complete needed infrastructure assets faster than conventional methods of procuring and financing would achieve.

The New Zealand Treasury was previously responsible for the PPP program. It lists the other agencies that are involved in the planning, implementing, and advising on infrastructure, including MBIE (telecommunications and energy infrastructure), Department of Corrections, and the Ministry of Defence among others. https://treasury.govt.nz/information-and-services/nz-economy/infrastructure/other-government-agencies 

In 2019 the Infrastructure Transaction Unit was created within Treasury as an interim measure to provide support to agencies and local authorities in planning and delivering major infrastructure projects. This unit moved into the newly formed Crown entity the Infrastructure Commission (InfraCom) and provides the Major Projects function. The New Zealand Infrastructure Commission Act was passed in September 2019, to create Crown Entity InfraCom, and it will be responsible for delivering New Zealand’s Public Private Partnership (PPP) Program https://infracom.govt.nz/major-projects/public-private-partnerships/ 

The Infrastructure Commission will support government agencies, local authorities and others to procure and deliver major infrastructure projects, and it will be responsible for: developing PPP policy and processes; assisting agencies with PPP procurement; the Standard Form PPP Project Agreement; engaging with potential private sector participants; and monitoring the implementation of PPP projects. InfraCom is currently reviewing the Standard Form PPP Agreement. On its website InfraCom likens its establishment to those in Australia, the United Kingdom, Singapore, Hong Kong, and China’s National Development and Reform Commission https://infracom.govt.nz/strategy/international-context/ 

InfraCom will publish PPP guidance material and project information for businesses wanting to enter into a long term contract for the delivery of a service, where the provision of the service requires the construction of a new asset, or the enhancement of an existing asset, that is financed from external (private) sources on a non-recourse basis and where full legal ownership of the asset is retained by the Crown. The government is increasing its focus on PPP due to its significant NZD 15 billion (USD 9.8 billion) funding package announced in December 2019 and May 2020 which amounts to 5 percent of New Zealand’s GDP.

The government aims for its PPP procurement process to improve the delivery of service outcomes from major public infrastructure assets by: integrating asset and service design; incentivizing whole of life design and asset management; allocating risks to the parties who are best able to manage them; and only paying for services that meet pre-agreed performance standards.

In December 2019, the government introduced the Infrastructure Funding and Financing Bill, which was passed and was given royal assent on August 6, 2020. The provisions provides a funding and financing model to support the provision of infrastructure for housing and urban development that supports the functioning of urban land markets and reduces the impact of local authority financing and funding constraints. It makes several amendments to the Public Works Act 1981 and the Resource Management Act 1991. It also outlines the administration, obligations, and monitoring of Special Purpose Vehicles (SPVs) which are responsible for raising capital for a project, transferring the infrastructure to the relevant central or local government entity after completion, and its obligations to effectively and efficiently construct the infrastructure.

MBIE administers the procurement process. In October 2019 MBIE issued substantive changes to the New Zealand Government’s Procurement Rules. The MBIE Guide to Mastering Procurement explains the eight stages of the procurement lifecycle. It is available at: https://www.procurement.govt.nz/procurement/  . Contract opportunities must be listed on Government Electronic Tenders Service (GETS) at: https://www.gets.govt.nz/ExternalIndex.htm , publish a Notice of Procurement on GETS, and provide access to all relevant tender documents. The Notice of Procurement includes the request for a quote, a registration of interest, and requests for tender and for proposal. The New Zealand Government’s Procurement Rules contain a specific section on non-discrimination, which in part states “All suppliers must be given an equal opportunity to bid for contracts. Agencies must treat suppliers from another country no less favorably than New Zealand suppliers. Procurement decisions must be based on the best value for money, which isn’t always the cheapest price, over the whole-of-life of the goods, services or works. Suppliers must not be discriminated against because of: a. the country the goods, services or works come from [or] b. their degree of foreign ownership or foreign business affiliations.”

Where applicable foreign bidders who are ultimately successful, they may still be required to meet tax obligations and approval from the Overseas Investment Office. The New Zealand government has recently entered and completed infrastructure roading projects in partnership with companies from Australia, Japan, the United States, and China. New Zealand is one of several countries cooperating with China on infrastructure investment relating to their USD 2.5 trillion Belt and Road Initiative. Chinese banks with a presence in New Zealand use capital to invest in New Zealand infrastructure projects including infrastructure in the Christchurch rebuild and Wellington’s 17-mile Transmission Gully motorway.

The upgrade to the New Zealand-China FTA adds a Government Procurement chapter, which among other provisions, includes a built-in agreement to enter into market access negotiations with New Zealand once China completes its accession to the WTO Agreement on Government Procurement, or if it were to negotiate market access on government procurement with another country. This commitment puts New Zealand at the ‘front of the line’ if China were to open its government procurement market in the future.

Infrastructure New Zealand is an industry association founded in 2004, and addresses key strategic challenges including the reform of complex regulatory and environmental approval and the appropriate use of public and private sector debt to finance infrastructure investment opportunities. It is supported by a board of 12 members who are industry leaders in their professional fields.

8. Responsible Business Conduct

The New Zealand government actively promotes corporate social responsibility (CSR), which is widely practiced throughout the country. There are New Zealand NGOs dedicated to facilitating and strengthening CSR, including the New Zealand Business Council for Sustainable Development, the Sustainable Business Network, and the American Chamber of Commerce in New Zealand.

New Zealand is committed to both the OECD due diligence guidance for responsible supply chains of minerals from conflict-affected and high-risk areas, and the OECD Guidelines for Multinational Enterprises. Multi-national businesses are the main focus, such as a New Zealand company that operates overseas, or a foreign-owned company operating in New Zealand. The guidance can also be applied to businesses with only domestic operations that form part of an international supply chain. Individuals wishing to complain about the activity of a multi-national business that happened in another country, will need to contact the National Contact Points of that country. In New Zealand, MBIE is the NCP to carry out the government’s responsibilities under the guidelines.

To help businesses meet their responsibilities, MBIE has developed a short version of the guidelines to assess the social responsibility ‘health’ of enterprises, and for assessing the actions of governments adhering to the guidelines. If further action is needed, MBIE provides resolution assistance, such as mediation, but do not adjudicate or duplicate other tribunals that assess compliance with New Zealand law. MBIE is assisted by a liaison group that meets once a year, with representatives from other government agencies, industry associations, and NGOs.

Additional Resources

Department of State

Department of Labor

9. Corruption

U.S. firms have not identified corruption as an obstacle to investing in New Zealand. New Zealand is renowned for its efforts to ensure a transparent, competitive, and corruption-free government procurement system. Stiff penalties against bribery of government officials as well as those accepting bribes are strictly enforced. The Ministry of Justice provides guidance on its website for businesses to create their own anti-corruption policies, particularly improving understanding of the New Zealand laws on facilitation payments.

New Zealand consistently achieves top ratings in Transparency International’s Perceptions of Corruption Perception Index. In 2020 Transparency International ranked New Zealand 1st out of 180 countries and territories, scoring 88 out of 100. An area of concern noted by Transparency International is New Zealand being one of several top-ranking countries that conduct “moderate and limited enforcement of foreign bribery.”

Transparency International NZ has had concerns with the historical inconsistency in the level of public accessibility and Parliamentary oversight and application of secondary legislation which is law made under powers delegated by Parliament to 150 government agencies, entities, and local government. New Zealand has 550 Acts, which delegate power to make secondary legislation.

In December 2019 the government introduced the Secondary Legislation Bill to improve and support the law relating to the making of secondary legislation by applying and adjusting the framework of access to, and Parliamentary oversight of, secondary legislation provided for in the Legislation Act 2019. It is currently with at the select committee stage: https://www.parliament.nz/en/pb/bills-and-laws/bills-proposed-laws/document/BILL_93428/secondary-legislation-bill 

New Zealand joined the WTO Government Procurement Agreement (GPA) in 2012, citing benefits for exporters, while noting that there would be little change for foreign companies bidding within New Zealand’s totally deregulated government procurement system. New Zealand’s accession to the GPA came into effect in August 2015. New Zealand supports multilateral efforts to increase transparency of government procurement regimes. New Zealand also engages with Pacific island countries in capacity building projects to bolster transparency and anti-corruption efforts.

New Zealand has regulations to counter conflict-of-interest in awarding contracts and government procurement. As mentioned in the previous section, MBIE operates a transparent procurement process using the Government Electronic Tenders Service (GETS) platform and their revised Procurement Rules which must be followed by New Zealand government departments, the Police, the Defense Force, and most Crown entities. All other New Zealand government agencies are encouraged to follow the Rules.

New Zealand has signed and ratified the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, and the UN Convention against Transnational Organized Crime. In 2003, New Zealand signed the UN Convention against Corruption and ratified it in 2015.

The legal framework for combating corruption in New Zealand consists of domestic and international legal and administrative methods. Domestically, New Zealand’s criminal offences related to bribery are contained in the Crimes Act 1961 and the Secret Commissions Act 1910. For the bribery offences under sections 99 to 106 of the Crimes Act, New Zealand authorities have jurisdiction where any act or omission takes place in New Zealand. If the acts or omissions alleged relate to Person of Position and occur outside New Zealand , proceedings may be brought against them under the Crimes Act if they are a New Zealand citizen, ordinarily resident in New Zealand, have been found in New Zealand and not been extradited, or are a body corporate incorporated under the law of New Zealand. Penalties include imprisonment up to 14 years and foreign bribery offences can incur fines up to the greater of NZD 5 million (USD 3.3 million) or three times the value of the commercial gain obtained.

The New Zealand government has a strong code of conduct, the Standards of Integrity and Conduct, which applies to all State Services employees and is rigorously enforced. The Independent Police Conduct Authority considers complaints against New Zealand Police and the Office of the Judicial Conduct Commissioner was established in August 2005 to deal with complaints about the conduct of judges. New Zealand’s Office of the Controller and Auditor-General and the Office of the Ombudsman take an active role in uncovering and exposing corrupt practices. The Protected Disclosures Act 2000 was enacted to protect public and private sector employees who engage in “whistleblowing.”

The Ministry of Justice is responsible for drafting and administering the Anti-Money Laundering and Countering Financing of Terrorism (AML/CFT) legislation and regulations. It also provides guidance online to companies and NGOs in how to combat corruption and bribery. The New Zealand Police Financial Intelligence Unit collates information required under AML/CFT legislation.

The Anti-Money Laundering and Countering Financing of Terrorism Amendment Act 2017 extends the 2009 Act to cover lawyers, conveyancers, accountants, real estate agents, and sports and racing betting. Businesses that deal in certain high-value goods, such as motor vehicles, jewelry and art, will also have obligations when they accept or make large cash transactions.

Businesses had two years to comply with the Act and compliance costs are estimated to be USD 554 million and USD 762 million over ten years. The New Zealand Police Financial Intelligence Unit estimate that NZD 1.35 billion (USD 878 million) of domestic criminal proceeds is generated for laundering in New Zealand each year, driven in part by New Zealand’s reputation as a safe and non-corrupt country. The Department of Internal Affairs is working on a solution for businesses that are facing difficulty meeting their AML/CFT obligations during COVID-19.

Following the “Panama Papers” incident in April 2016, an independent inquiry found New Zealand’s tax treatment of foreign trusts to be appropriate but recommended changes to the regime’s disclosure requirements, which were subsequently legislated to dispel concerns New Zealand was operating as a “tax haven”. The Taxation (Business Tax, Exchange of Information, and Remedial Matters) Act of 2017 changed foreign trust registration and disclosure to deter offshore parties from misusing New Zealand foreign trusts, and to reaffirm New Zealand’s reputation as being free of corruption.

In July 2019, the government passed the Trusts Act and repealed the Trustee Act of 1956 and the Perpetuities Act of 1964 to make trust law more accessible, clarify and simplify core trust principles and essential obligations for trustees. It also aims to preserve the flexibility of the common law to allow trust law to continue to evolve through the courts. It applies to all trusts including family trusts and those for corporate structures. New Zealand has one of the highest per capita number of trusts in the world due to favorable tax treatment and the absence of estate duty, gift duty, stamp duty, or capital gains tax. It is estimated that there are between 300,000 and 500,000 trusts in New Zealand.

After a standard review of the 2017 general election and 2016 local body elections, the Justice Select Committee conducted an inquiry in 2019 of the issue of foreign interference through politicized social media campaigns and from foreign donations to political candidates standing in New Zealand elections. New Zealand intelligence agencies acknowledged political donations as a legally sanctioned form of participation in New Zealand politics, but raised concerns when aspects of a donation is obscured or is channeled in a way that prevents scrutiny of the origin of the donation, when the goal is to covertly build and project influence.

In December 2019, the government passed the Electoral Amendment Act under urgency to ban donations from overseas persons to political parties and candidates over NZD 50 (USD 32.50) down from the previous NZD 1,500 (USD 975) maximum, to reduce the risk of foreign money influencing the election process. It also introduces a requirement for party secretaries “to take all reasonable steps to satisfy themselves that a donation over NZD 50 is not from an overseas person.”

The Act requires party secretaries to reside in New Zealand, and extending the existing offense of promoting anonymous advertisements relating to an election “so that it applies to all advertising mediums, including online advertising, in order to deter misleading anonymous online advertisements.”

Resources to Report Corruption

The Serious Fraud Office and the New Zealand Police investigate bribery and corruption matters. Agencies such as the Office of the Controller and Auditor-General and the Office of the Ombudsmen act as watchdogs for public sector corruption. These agencies independently report on and investigate state sector activities.

Serious Fraud Office
P.O. Box 7124 – Wellesley Street
Auckland, 1141
New Zealand
www.sfo.govt.nz 

Transparency International New Zealand is the recognized New Zealand representative of Transparency International, the global civil society organization against corruption.

Transparency International New Zealand
P.O. Box 5248 – Lambton Quay
Wellington, 6145
New Zealand
www.transparency.org.nz 

10. Political and Security Environment

New Zealand is a stable liberal democracy with almost no record of political violence.

The New Zealand government raised its national security threat level for the first time from “low” to “high” after the terrorist attack on two mosques in Christchurch on March 15, 2019. One month later it lowered the risk to “medium” where a “terrorist attack, or violent criminal behavior, or violent protest activity is assessed as feasible and could well occur.” The incident led to wide-ranging gun law reform that restricts semi-automatic firearms and magazines with a capacity of more than ten rounds. An amnesty buy-back scheme of prohibited firearms administered by the NZ Police ran until December 20, 2019.

11. Labor Policies and Practices

In 2019, the New Zealand labor market experienced a tightening in labor market conditions with the unemployment rate at historically low levels after a prolonged period of record population growth from record net migration. In the last quarter of 2019, the rate was 4 percent. The rise in net migration is comprised of international students, professionals, and returning New Zealand citizens. Youth unemployment has been a problem in New Zealand for at least a decade.

New Zealand operates a Recognized Seasonal Employer (RSE) scheme that allows the horticulture and viticulture industry to recruit workers from the Pacific Islands for seasonal work to supplement the New Zealand workforce. There have been prosecutions and convictions for the exploitation of migrant workers, with reports that the hospitality, agriculture, viticulture, and construction industries are most effected. New Zealand recruitment agencies that recruit workers from abroad must use a licensed immigration adviser.

Some foreign migrant workers were reported to have been charged excessive recruitment fees, experienced unjustified salary deductions, nonpayment or underpayment of wages, excessively long working hours, and restrictions on their movement. Reportedly, some had their passports confiscated and contracts altered.

New Zealand has consistently maintained an active and visible presence in the International Labour Organization (ILO), being a founding member in 1919, and its representatives have attended the annual International Labour Conferences since 1935. The ILO and the government of New Zealand have collaborated on several initiatives, including the elimination of child labor in Fiji, employment creation in Indonesia, and the improvement of labor laws in Cambodia.

The government has taken a more proactive approach to enforcing employment law in New Zealand, because the migrant worker population has increased rapidly in recent years and the resources to protect those workers have not kept up with the increase. The government has been steadily increasing the number of labor inspectorates – situated within MBIE – to double the number in 2017.

Immigration NZ reports and updates three different lists of Essential Skills in Demand. If an occupation is on a shortage list a visa applicant is exempt from an individual labor market test, and the employer does not need to demonstrate that no suitable New Zealanders are available to fill or be trained for each individual position. The Long-Term Shortage List contains occupations experiencing a sustained shortage and offers visa holders a chance to apply for residency after two years. The Regional Skill Shortage List – which replaced the Immediate Skill Shortage List in 2019 – identifies the regions with occupations that have an immediate shortage of skilled workers by 15 regions. The Construction and Infrastructure Skill Shortage List contains immediate short-term skill shortages in the construction labor market that are designed to meet the industry’s labor requirements and is also split into 15 regions.

There is no stated government policy on the hiring of New Zealand nationals, however certain jobs within government agencies that handle sensitive information may have a citizenship requirement, minimum duration of residency, and require background checks.

Labor laws are generally well enforced, and disputes are usually handled by the New Zealand Employment Relations Authority. Its decisions may be appealed in an Employment Court. MBIE is responsible for enforcement of laws governing work conditions. A number of employment statutes govern the workplace in New Zealand. The most important is the Employment Relations Act (ERA) of 2000, the Health and Safety at Work Act of 2015, the Holidays Act of 2003, Minimum Wage Act of 1983, the Equal Pay Act of 1972, the Parental Leave and Employment Protection Act of 1987, and Wages Protection Act of 1983.

MBIE provides guidance for employers on minimum standards of employment mandated by law, guidelines to help promote the employment relationship, and optional guidelines that are useful in some roles or industries. Agreements on severance and redundancy packages are usually negotiated in individual agreements. For more see: https://www.employment.govt.nz/ 

The Employment Relations Amendment Act 2018 repeals some laws made under the previous government, such as restricting the mandatory 90-day no-fault trial period to businesses with 19 employees or fewer and mandating set rest and meal breaks for employees based on the number of hours worked. The amendment also empowers contractors with more rights and allows employees in specified ‘vulnerable industries’ to transfer their existing terms and conditions in their employment contract if their work is restructured. If requested, reinstatement back to their job must be the first course of action considered by the Employment Relations Authority for employees who have found to be unfairly dismissed.

After a three-year review and consultation, the government introduced the Screen Industry Workers Bill in February 2020. The previous government passed the Employment Relations (Film Production Work) Amendment Act 2010 – commonly referred to as the “Hobbit law” -which put limits on the ability of workers on film productions to collective bargaining. The new bill if passed aims to provide clarity about the employment status of people doing screen production work, introduce a duty of good faith and mandatory terms for contracting relationships in the industry, allow collective bargaining at the occupation and enterprise levels, and create processes for resolving disputes arising from contracting relations or collective bargaining.

New Zealand law provides for the right of workers to form and join independent unions of their choice without previous authorization or excessive requirements, to bargain collectively, and to conduct legal strikes, with some restrictions. Contractors cannot join unions, bargain collectively, or conduct strike action. Police have the right to organize and bargain collectively but sworn police officers do not have the right to strike or take any form of industrial action. In November 2019 MBIE sought feedback on a discussion document entitled “Better protections for contractors” to strengthen legal protections for contractors. They aim to ensure that contractors receive their minimum rights and entitlements, reduce the imbalance of bargaining power between firms and contractors who are vulnerable to poor outcomes, and ensure that system settings encourage inclusive economic growth and competition. Submissions closed in February 2020.

The ERA requires registered unions to file annual membership returns with the Companies Office. MBIE estimates total union membership at 399,800 for the September 2019 quarter, representing about 18.7 percent of all employees in New Zealand.

Industrial action by employees who work for providers of key services are subject to certain procedural requirements, such as mandatory notice of a period determined by the service. New Zealand considers a broader range of key “essential services” than international standards, including: the production and supply of petroleum products; utilities, emergency workers; the manufacture of certain pharmaceuticals, workers in corrections and penal institutions; airports; dairy production; and animal slaughtering, processing, and related inspection services.

The number of work stoppages has been on a downward trend until the Labour-led government took office in 2017. The number of work stoppages has increased from 3 in 2016 (involving 430 employees causing 195 lost work days), to 143 in 2018 (involving 11,109 employees causing 192 lost work days and NZD 1.2 million (USD 780,000) in lost wages), to 159 in 2019 (involving 53,771 employees causing 142,670 lost work days and NZD 9.2 million (USD 6 million) in lost wages). In 2020 there were 112 work stoppages involving 595 employees causing 613 lost work days and NZD 120,00 (USD 78,000) in lost wages.

Work stoppages include strikes initiated by unions and lockouts initiated by employers, compiled from the record of strike or lockout forms submitted to MBIE under the Employment Relations Act 2000. The data does not cover other forms of industrial action such as authorized stop-work meetings, strike notices, protest marches, and public rallies which have also increased in recent years. Several strikes during the year involved employees of United States businesses or franchises particularly within the fast food industry. The New Zealand government does not get involved in individual work disputes unless the striking employees violate their legislated responsibilities.

The Labour-led government campaigned on a promise to lift the minimum wage to NZD20 (USD 13) by April 2021. From April 1, 2020 the minimum wage for adult employees who are 16 and over and are not new entrants or trainees is NZD 18.90 (USD12.29) per hour. The new entrants and training minimum wage is NZD 15.12 (USD 9.83) per hour. In recent years some local government agencies have raised minimum wages for their staff up from the government mandated rate to a “living wage” of nearly NZD 22.10 (USD 14.37) as of 2020. All businesses in New Zealand affected by COVID-19 have been eligible to receive from the government a wage subsidy from March, to pay their employees 80 percent of their salary to stem job losses.

The Health and Safety at Work Act 2015 sets out the health and safety duties for work carried out by a New Zealand business. The Act contains provisions that affect how duties apply where the work involves foreign vessels. These provisions take account of the international law principle that foreign vessels are subject to the law that applies in the flag state they are registered under. Generally New Zealand law does not apply to the management of a foreign-flagged vessel but does apply to a New Zealand business that does work on that vessel. Two exceptions when the law does apply, if the New Zealand business is operating a foreign-flagged vessel under a “demise charter” arrangement, or when the foreign flagged vessel is operating between New Zealand and a workplace in the New Zealand exclusive economic zone or on the continental shelf; and that workplace is carrying out an activity associated with mineral extraction (e.g. a drilling platform or fixed ship) that is regulated under the Exclusive Economic Zone (Environmental Effects) Act 2012 or the Crown Minerals Act 1991.

The Fisheries (Foreign Charter Vessels and Other Matters) Bill of 2014 has required all foreign charter fishing vessels to reflag to New Zealand and operate under New Zealand’s full legal jurisdiction since May 2016. The legislation was part of a range of measures that followed a Ministerial inquiry in 2012 into questionable safety, labor and fishing practices on some foreign-owned vessels. Other measures the government introduced include: compulsory individual New Zealand bank accounts for crew members; observers on all foreign-owned fishing vessels; and independent audits of charter parties to ensure crew visa requirements – including wages – are being adhered to.

In March 2017, the New Zealand government’s ratification of the ILO’s Maritime Labor Convention (MLC) came into effect. While New Zealand law is already largely consistent with the MLC, ratification gives the Government jurisdiction to inspect and verify working conditions of crews on foreign ships in New Zealand waters. More than 99 percent of New Zealand’s export goods by volume are transported on foreign ships. About 890 foreign commercial cargo and cruise ships visit New Zealand each year.

The Maritime Transport Amendment Act 2017 implements New Zealand’s accession to the intergovernmental International Oil Pollution Compensation’s Supplementary Fund Protocol, 2003. The fund gives New Zealand access to compensation in the event of a major marine oil spill from an oil tanker, and exercises New Zealand’s right to exclude the costs of wreck removal, cargo removal and remediating damage due to hazardous substances from liability limits. Accession to the Protocol was prompted in part by New Zealand’s worst maritime environmental disaster in October 2011 when a Greek flagged cargo ship ran aground creating a 331 ton oil spill resulting in NZD 500 million (USD 300 million) in clean-up costs.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Please note that the following tables include FDI statistics from three different sources, and therefore will not be identical.  Table 2 uses BEA data when available, which measures the stock of FDI by the market value of the investment in the year the investment was made (often referred to as historical value).  This approach tends to undervalue the present value of FDI stock because it does not account for inflation.  BEA data is not available for all countries, particularly if only a few US firms have direct investments in a country.  In such cases, Table 2 uses other sources that typically measure FDI stock in current value (or, historical values adjusted for inflation).  Even when Table 2 uses BEA data, Table 3 uses the IMF’s Coordinated Direct Investment Survey (CDIS) to determine the top five sources of FDI in the country.  The CDIS measures FDI stock in current value, which means that if the U.S. is one of the top five sources of inward investment, U.S. FDI into the country will be listed in this table.  That value will come from the CDIS and therefore will not match the BEA data.

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source* USG or international statistical source USG or International Source of Data:  BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2019 $202,172 2019 $206,929 https://data.worldbank.org/country/NZ
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data:  BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2019 $4,808 2019 $12018 BEA data available at
https://www.bea.gov/international/
direct-investment-and-multinational-enterprises-comprehensive-data
Host country’s FDI in the United States ($M USD, stock positions) 2019 $2,230 2019 $2550 BEA data available at
https://www.bea.gov/international/
direct-investment-and-multinational-enterprises-comprehensive-data
Total inbound stock of FDI as % host GDP 2019 39.7% 2019 39.7% UNCTAD data available at
https://unctad.org/en/Pages/DIAE/World
%20Investment%20Report/Country-Fact-Sheets.aspx
 

* Source for Host Country Data: Host country statistics differ from USG and international sources due to calculation methodologies, and timing of exchange rate conversions.  Almost a third of inbound foreign direct investment in New Zealand is in the financial and insurance services sector. Foreign direct investment data for March 2020 s released in September 2020.   Statistics New Zealand data available at www.stats.govt.nz

Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward 81,238 100% Total Outward 17,045 100%
Australia 39,957 49% Australia 8,944 53%
China,P.R.:Hong Kong 6,611 8% United States 2,003 12%
United States 5,236 7% China,P.R.:Hong Kong 1,279 8%
Singapore 3,906 6% United Kingdom 819 5%
Japan 3,830 5% Bermuda 678 4%
“0” reflects amounts rounded to +/- USD 500,000.
Table 4: Sources of Portfolio Investment
Portfolio Investment Assets
Top Five Partners (Millions, current US Dollars)
Total Equity Securities Total Debt Securities
All Countries 108,638 100% All Countries 69,687 100% All Countries 38,951 100%
Australia 26,396 24% United States 27,995 40% Japan 3,431 9%
Japan 6,159 6% Australia 20,237 29% United Kingdom 1,210 3%
United Kingdom 3,928 4% Japan 2,728 4% Japan 1,793 5%
Cayman Islands 2,556 2% United Kingdom 2,718 4% France 727 2%
France 2,272 2% Cayman Islands 2,115 3% Finland 482 1%

14. Contact for More Information

Economic Officer
U.S. Embassy Wellington
PO Box 1190
Wellington 6140
New Zealand
+64-4-462-6000

Peru

Executive Summary

The government of Peru (GOP)’s sound fiscal management and support of macroeconomic fundamentals contributed to the country’s region-leading economic growth since 2002. However, the COVID-19 pandemic caused a severe economic contraction of over 11 percent in 2020. In response, the GOP implemented a $39.5 billion stimulus plan in July 2020, which amounted to 19 percent of GDP. To finance the increased spending, the annual deficit grew to 8.9 percent of GDP in 2020, but the Ministry of Economy and Finance (MEF) projects that it will stabilize to 4.8 percent of GDP in 2021. GOP’s debt as a percentage of GDP increased from 26.8 percent in 2019 to 35 percent in 2020. Peru’s COVID-19 response and the perseverance of its macroeconomic stability led the IMF to project that Peru will grow its GDP by 8.5 percent in 2021, the highest growth forecast in the region. Net international reserves remained strong at $73.9 billion and inflation averaged 1.8 percent in 2020. Private sector investment comprised more than two-thirds of Peru’s total investment in 2020.

Peru fosters an open investment environment, which includes strong protections for contractual rights and property. Peru is well integrated in the global economy including with the United States-Peru Trade Promotion Agreement (PTPA), which entered into force in 2009. Through its investment promotion agency ProInversion, Peru seeks foreign investment in its infrastructure sector and free trade zones. Prospective investors would benefit from seeking local legal counsel in navigating Peru’s complex bureaucracy.

Corruption, social conflict, and congressional populist measures negatively affects Peru’s investment climate. Transparency International ranked Peru 94th out of 180 countries in its 2020 Corruption Perceptions Index. In 2020, Peru’s health minister and foreign minister resigned after admitting they irregularly received Sinopharm trial vaccines, along with former president Vizcarra. Social conflicts also adversely affect the investment climate. According to the Ombudsman, there were 145 active social conflicts in Peru as of January 2021 of which 66 were in the mining sector. Citing, in part, a recent congressional passage of populist measures, and the possibility of future executive-legislative tension, Fitch Ratings revised the rating outlook on Peru’s Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) to negative from stable in December of 2020.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2020 94 of 180 http://www.transparency.org/research/cpi/overview 
World Bank’s Doing Business Report 2020 76 of 190 https://www.doingbusiness.org/en/doingbusiness 
Global Innovation Index 2020 76 of 131 https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, historical stock positions) 2019 $7,470 https://www.bea.gov/international/di1usdbal 
World Bank GNI per capita 2019 $6,740 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD 

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Peru seeks to attract investment – both foreign and domestic – in nearly all sectors.. Peru reported $2 billion in Foreign Direct Investment (FDI) in 2020 and seeks increased investment for 2021. It has prioritized $6 billion in public-private partnership projects in transportation infrastructure, electricity, education, broadband expansion, gas distribution, health, and sanitation.

Peru’s Constitution of 1993grants national treatment for foreign investors and permits foreign investment in almost all economic sectors. Under the Peruvian Constitution, foreign investors have the same rights as national investors to benefit from investment incentives, such as tax exemptions. In addition to the Constitution of 1993, Peru has several laws governing FDI including the Foreign Investment Promotion Law (Legislative Decree (DL) 662 of September 1991) and the Framework Law for Private Investment Growth (DL 757 of November 1991). Other important laws include the Private Investment in State-Owned Enterprises Promotion Law (DL 674) and the Private Investment in Public Services Infrastructure Promotion Law (DL 758). Article 6 of Supreme Decree No. 162-92-EF (the implementing regulations of DLs 662 and 757) authorized private investment in all industries except within natural protected areas and weapons manufacturing.

Peru and the United States benefit from the United States-Peru Free Trade Agreement (PTPA), which entered into force on February 1, 2009. The PTPA established a secure, predictable legal framework for U.S. investors in Peru. The PTPA protects all forms of investment. U.S. investors enjoy the right to establish, acquire, and operate investments in Peru on an equal footing with local investors in almost all circumstances. https://ustr.gov/trade-agreements/free-trade-agreements/peru-tpa

The GOP created the investment promotion agency ProInversion in 2002 to manage privatizations and concessions of state-owned enterprises and natural resource-based industries. The agency currently manages private concession processes in the energy, education, transportation, health, sanitation, and telecommunication sectors, and organizes international roadshow events to attract investors. Major recent and upcoming concessions include ports, water treatment plants, power generation facilities, mining projects, electrical transmission lines, oil and gas distribution, and telecommunications. Project opportunities are available on ProInversion’s website: https://www.proyectosapp.pe/default.aspx?ARE=1&PFL=0&sec=30. Companies are required to register all foreign investments with ProInversion.

The National Competitiveness Plan 2019 – 2030 outlines Peru’s economic growth strategy for the next decade and seeks to close the country’s $110 billion infrastructure gap. The plan was supplemented by a National Infrastructure Plan in July 2019, which identified 52 infrastructure projects keyed to critical sectors. Priority projects include two Lima metro lines, an expansion of Jorge Chavez International Airport, and multiple energy projects including electricity transmission lines. Peru reported in February 2021 that the energy projects had advanced significantly while many transport and agricultural projects suffered significant delays. Of note, the Ministry of Transportation prioritized the Fourth Metro Line and Central Highway, each multi-billion dollar projects, which were not included in the National Infrastructure Plan. Peru maintains an investment research portal to promote these infrastructure investment opportunities: https://www.mef.gob.pe/es/aplicativos-invierte-pe?id=5455

Although Peruvian administrations since the 1990s have supported private investments, Peru occasionally passes measures that some observers regard as a contravention of its open, free market orientation. In December 2011, Peru signed into law a 10-year moratorium on the entry of live genetically modified organisms (GMOs) for cultivation. In December 2020, the moratorium was extended an additional 15 years and will now remain enforced until 2035. Peru also implemented two sets of rules for importing pesticides, one for commercial importers, which requires importers to file a full dossier with technical information, and another for end-user farmers, which only requires a written affidavit.

Peru reformed its agricultural labor laws in 2020 impacting labor costs and tax incentives that could adversely affect investors in Peru’s agricultural sector. The U.S. Department of Agriculture estimated U.S. direct investment in the agriculture sector to reach $1.3 billion in 2021.

Limits on Foreign Control and Right to Private Ownership and Establishment

Peru’s Constitution (Article 6 under Supreme Decree No. 162-92-EF) authorizes foreign investors to carry out economic activity provided that investors comply with all constitutional precepts, laws, and treaties. Exceptions exist, including exclusion of foreign investment activities in natural protected reserves and military weapons manufacturing. Peruvian law requires majority Peruvian ownership in media; air, land and maritime transportation infrastructure; and private security surveillance services. Foreign interests cannot “acquire or possess under any title, mines, lands, forests, waters, or fuel or energy sources” within 50 kilometers of Peru’s international borders. However, foreigners can obtain concessions in these areas and in certain cases the GOP may grant a waiver. The GOP does not screen, review, or approve foreign direct investment outside of those sectors that require a governmental waiver.

Other Investment Policy Reviews

The World Trade Organization (WTO) published a Trade Policy Review (HYPERLINK “https://www.wto.org/english/tratop_e/tpr_e/tp493_e.htm” https://www.wto.org/english/tratop_e/tpr_e/tp493_e.htm) on Peru in October 2019. The WTO commented that foreign investors received the same legal treatment as local investors in general, although Peru restricted foreign investment on property at the country’s borders, and in air transport and broadcasting. The report highlighted the government’s ongoing efforts to promote public-private partnerships (PPPs) and strengthen the PPP legal framework with Organization for Economic Cooperation and Development (OECD) principles. The report noted that Peru maintained a regime open to domestic and foreign investment that fostered competition and equal treatment.

Peru aspires to become a member of the OECD and launched an OECD Country Program in 2014, comprising policy reviews and capacity building projects. The OECD published the Initial Assessment of its Multi-Dimensional Review in 2015 (https://www.oecd.org/countries/peru/multi-dimensional-review-of-peru-9789264243279-en.htm), finding that, in spite of economic growth, Peru “still faces structural challenges to escape the middle-income trap and consolidate its emerging middle class.” In every year since this study was published, Peru has enacted and implemented dozens of reforms to modernize its governance practices in line with OECD recommendations. Recent OECD studies on Peru include: Investing in Youth (April 2019), Digital Government (June 2019), Pension Systems (September 2019), Transport Regulation (February 2020), and Tax Transparency (April 2020). Peru has adhered to 45 of OECD’s 248 existing legal instruments, but its accession roadmap remains unclear.

Peru has not had a third-party investment policy review through the OECD or UNCTAD in the past three years.

Business Facilitation

The GOP does not have a regulatory system to facilitate business operations but the Institute for the Protection of Intellectual Property, Consumer Protection, and Competition (INDECOPI) reviews the enactment of new regulations by government entities that can place burdens on business operations. INDECOPI has the authority to block any new business regulation. INDECOPI also has a Commission for Elimination of Bureaucratic Barriers : https://www.indecopi.gob.pe/web/eliminacion-de-barreras-burocraticas/presentacion.

Peru allows foreign business ownership, provided that a company has at least two shareholders and that its legal representative is a Peruvian resident. Businesses must reserve a company name through the national registry, SUNARP, and prepare a deed of incorporation through a Citizen and Business Services Portal (https://www.serviciosalciudadano.gob.pe/). After a deed is signed, businesses must file with a public notary, pay notary fees of up to one percent of a company’s capital, and submit the deed to the Public Registry. The company’s legal representative must obtain a certificate of registration and tax identification number from the national tax authority SUNAT (www.sunat.gob.pe). Finally, the company must obtain a license from the municipality of the jurisdiction in which it is located. Depending on the core business, companies might need to obtain further government approvals such as: sanitary, environmental, or educational authorizations.

Outward Investment

The GOP promotes outward investment by Peruvian entities through the Ministry of Foreign Trade and Tourism (MINCETUR). Trade Commission Offices of Peru (OCEX), under the supervision of Peru’s export promotion agency (PromPeru), are located in numerous countries, including the United States, and promote the export of Peruvian goods and services and inward foreign investment. The GOP does not restrict domestic investors from investing abroad.

3. Legal Regime

Transparency of the Regulatory System

Laws and regulations most relevant to foreign investors are enacted and implemented at the national level. Most ministries and agencies make draft regulations available for public comment. El Peruano, the state’s official gazette, publishes regulations at the national, regional, and municipal level. Ministries generally maintain current regulations on their websites. Rule-making and regulatory authority also exists through executive agencies specific to different sectors. The Supervisory Agency for Forest Resources and Wildlife (OSINFOR), the Supervisory Agency for Energy and Mining (OSINERGMIN), and the Supervisory Agency for Telecommunications (OSIPTEL), all of which report directly to the President of the Council of Ministers, can enact new regulations that affect investments in the economic sectors they manage. These agencies also have the right to enforce regulations with fines. Regulation is generally reviewed on the basis of scientific and data-driven assessments, but public comments are not always received or made public.

Accounting, legal, and regulatory standards are consistent with international norms. Peru’s Accounting Standards Council endorses the use of IFRS standards by private entities. Public finances and debt obligations, including explicit and contingent liabilities, are transparent and publicly available at the Ministry of Economy and Finance website: https://www.mef.gob.pe/es/estadisticas-sp-18642/deuda-del-sector-publico.

International Regulatory Considerations

Peru is a member of regional economic blocs. Under the Pacific Alliance, Peru looks to harmonize regulations and reduce barriers to trade with other members: Chile, Colombia, and Mexico. Peru is a member of the Andean Community (CAN), which issues supranational regulations – based on consensus of its members – that supersede domestic provisions.

Peru follows international food standard bodies, including: CODEX Alimentarius, World Organization for Animal Health (OIE), and International Plant Protection Convention (IPPC) guidelines for Sanitary and Phytosanitary (SPS) standards. When CODEX does not have limits or standards established for a product, Peru defaults to the U.S. maximum residue level or standard. Peru’s system is more aligned with the U.S. regulatory system and standards than with its other trading partners. Peru notifies all agricultural-related technical regulations to the World Trade Organization (WTO) Technical Barriers to Trade (TBT) committee.

Legal System and Judicial Independence

Peru uses a civil law system. Peru’s civil code includes a contract section and a general corporations law that regulates companies. Peru’s civil court resolves conflicts between companies. Companies can also access conflict resolution services in civil courts for conflicts and litigation for which a legal claim has been filed. Litigation processes in Peruvian courts are slow.

Peru has an independent judiciary. The executive branch does not interfere with the judiciary as a matter of policy. Regulations and enforcement actions are appealable through administrative process and the court system. Peru is in the process of reforming its justice system. The National Justice Board (Junta Nacional de Justicia), which began operating in January 2020, supervises the selection processes, appointments, evaluations, and disciplinary actions for judges.

Laws and Regulations on Foreign Direct Investment

Peru has a stable and attractive legal framework used to promote private investment. The 1993 Peruvian Constitution includes provisions that establish principles to ensure a favorable legal framework for private investment, particularly for foreign investment. A key principle is equal treatment to domestic and foreign investment. Some of the main private investment regulations include:

  • Legislative Decree 662 that approves foreign investment legal stability regulations,
  • Legislative Decree 757 that approves the private investment growth framework law, and
  • Supreme Decree 162-92-EF that approves private investment guarantee mechanism regulations

Peru’s legal system is available to investors. All laws relevant to foreign investment along with pertinent explanations and forms can be found on the ProInversion website: https://www.proinversion.gob.pe/modulos/LAN/landing.aspx?are=1&pfl=1&lan=9&tit=institucional .

Competition and Antitrust Laws

INDECOPI is the GOP agency responsible for reviewing competition-related concerns of a domestic nature. Congress published a mergers and acquisitions (M&A) control law in January 2021. The law requires INDECOPI to review and approve M&As involving companies, including multinationals, that have combined annual sales or gross earnings over $146 million in Peru and if the value of the sales or annual gross earnings in Peru of two or more of the companies involved in the proposed M&A operation exceed $22 million each.

A legislative decree issued in September 2018 (DL 1444) modified the public procurement law to allow government agencies to use government-to-government (G2G) agreements to facilitate procurement processes.  The GOP sees this G2G procurement model as a method for expediting priority infrastructure projects in a manner that is more transparent and less susceptible to corruption. The USG, however, does not have a mechanism to support Peru’s G2G contracts and the U.S. Embassy has raised concerns with the GOP that its use limits U.S. firms’ participation in infrastructure solicitations. Peru expanded the use of G2G agreements in 2020 to include large infrastructure projects including a $1.6 billion general reconstruction initiative (related to damages caused by the El Nino event of 2017) and a $5 billion Lima metro line project.

Expropriation and Compensation

The Peruvian Constitution states that Peru can only expropriate private property based on public interest, such as public works projects or for national security. Article 70 of the Constitution states that the State can only expropriate through a judicial process, prior mandate of the law, and after payment of compensation, which must include compensation for possible damage. Peruvian law bases compensation for expropriation on fair market value. Article 70 also guarantees the inviolability of private property.

Illegal expropriation of foreign investment has been alleged in the extractive industry. A U.S. company alleged indirect expropriation due to changes in regulatory standards. Landowners have also alleged indirect expropriation due to government inaction and corruption in “land-grab” cases that have, at times, been linked to local government endorsed projects.

Dispute Settlement

ICSID Convention and New York Convention, and PTPA

Peru is a party to the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) and to the International Center for the Settlement of Investment Disputes (ICSID convention). Disputes between foreign investors and the GOP regarding pre-existing contracts must still enter national courts, unless otherwise permitted, such as through provisions found in the PTPA. In addition, investors who enter into a juridical stability agreement may submit disputes with the government to national or international arbitration if stipulated in the agreement. Several private organizations – including the American Chamber of Commerce, the Lima Chamber of Commerce, and the Catholic University – operate private arbitration centers. The quality of such centers varies and investors should choose arbitration venues carefully.

The PTPA includes a chapter on dispute settlement, which applies to implementation of the Agreement’s core obligations, including labor and environment provisions. Dispute panel procedures set high standards of openness and transparency through the following measures: open public hearings, public release of legal submissions by parties, admission of special labor or environment expertise for disputes in these areas, and opportunities for interested third parties to submit views. The Agreement emphasizes compliance through consultation and trade-enhancing remedies and encourages arbitration and other alternative dispute resolution measures.

Investor-State Dispute Settlement

The PTPA provides investor-state claim mechanisms. It does not require that an investor exhaust local judicial or administrative remedies before a claim is filed. The investor may submit a claim under various arbitral mechanisms, including the Convention on the Settlement of Investment Disputes (ICSID Convention) and ICSID Rules of Procedure, the ICSID Additional Facility Rules, the United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules, or, if the disputants agree, any other arbitration institution or rules. Peru has paid previous arbitral awards; however, a U.S. court found in one case that Peru altered its tax code prior to payment, thus reducing interest payments.

In February 2016, a U.S. investor filed a Notice of Intent to pursue international arbitration against the GOP for violation of the U.S.-Peru Trade Promotion Agreement. The investor, which refiled its claim in August 2016, holds agrarian land reform bonds that it argues the GOP has undervalued.

In September 2019, a U.S. investor filed an arbitration claim against the GOP over alleged interference over environmental permitting and contractual issues for a hydro power project.

In February 2020, a claimant filed an arbitration claim against Peru for violation of the U.S.-Peru Trade Promotion Agreement regarding a tax and royalty dispute between its mining subsidiary and Peru’s tax authority SUNAT.

There is no recent history of extrajudicial action against foreign investors.

International Commercial Arbitration and Foreign Courts

The 1993 Constitution allows disputes among foreign investors and the government or state-controlled enterprises to be submitted to international arbitration.

Bankruptcy Regulations

Peru has a creditor rights hierarchy similar to that established under U.S. bankruptcy law, and monetary judgments are usually made in the currency stipulated in the contract. However, administrative bankruptcy procedures are slow and subject to judicial intervention. Compounding this difficulty are occasional laws passed to protect specific debtors from action by creditors that would force them into bankruptcy or liquidation. In August 2016, the GOP extended the period for bankruptcy from one to two years. Peru does not criminalize bankruptcy. World Bank’s 2020 Doing Business Report ranked Peru 90 of 190 countries for ease of “resolving insolvency.”

4. Industrial Policies

Investment Incentives

Peru offers foreign and national investors legal and tax stability agreements to stimulate private investment. These agreements guarantee that the statutes on income taxes, remittances, export promotion regimes (such as drawbacks, or refunds of duties), administrative procedures, and labor hiring regimes in effect at the time of the investment contract will remain unchanged for that investment for 10 years. To qualify, an investment must exceed $10 million in the mining and hydrocarbons sectors or $5 million within two years in other sectors. An agreement to acquire more than 50 percent of a state-owned company’s shares in a privatization process may also qualify an investor for a legal or tax stability agreement, provided that the added investment will expand the installed capacity of the company or enhance its technological development.

Foreign Trade Zones/Free Ports/Trade Facilitation

Peru was accepted as a member of the Association of Free Zones of the Americas (AZFA) as well as the World Free Zone Organization (WFZO) in 2019. Peru has seven Special Economic Zones (SEZ): a Free Zone in Tacna, and Special Development Zones (SDZ) in Ilo, Matarani, Paita, Tumbes, Loreto and Puno (the last three are not in operation). Companies can become SEZ users through public auctions. This condition gives them access to tax benefits and customs advantages promoting entry, permanence, and exit facilitation procedures for goods and tax exemptions in the development of their activities. Benefits include:

Taxes

  • Income Tax exemption (rate outside of the SEZ is 29.5 percent)
  • General Sales Tax (IGV) exemption (rate outside of the SEZ is 16 percent)
  • Municipal Promotion Tax exemption (rate outside of the SEZ is 2 percent)
  • Excise Tax (ISC) exemption (rate outside of the SEZ goes from 2 to 30 percent depending on the product)
  • Ad Valorem tariff exemption when importing products from overseas (rates outside of the SEZ are 0, 6, and 11 percent); and
  • Exemption from all central, regional or municipal government taxes created in the future, except for social security (EsSalud) contributions and fees

Customs

  • Entry of machinery, equipment, raw materials and supplies from abroad is eligible to the suspension of import duties and taxes payments
  • Indefinite permanence of goods within the SEZ, as long as company maintains user status
  • Products manufactured in the SEZ can be exported directly without having to undergo a nationalization customs regime
  • Products manufactured in the SEZ can be entered into national territory under international agreements and conventions; and
  • Entry of goods into the SEZ is direct and does not require prior storage

MINCETUR Supreme Decree 005-2019 published in August 2019, implemented regulations for the SDZ of Tumbes, Ilo, Matarani and Paita. SDZ businesses can perform activities in seven economic sectors: industrial, logistics, repair/overhaul, telecommunications, information technology, scientific, technological research, and development. SDZs enjoy the same economic benefits as the SEZs. The MINCETUR Foreign Trade Facilitation Office oversees Peru’s free trade zones.

Performance and Data Localization Requirements

Under the PTPA, Peru made concessions beyond its commitments to the World Trade Organization (WTO). Peru does not maintain any measures that are inconsistent with Trade-Related Investment Measure (TRIM) requirements, according to a WTO Committee on Trade-Related Investment Measure notification dated August 19, 2010.

Current law limits foreign employees to 20 percent of the total number of employees in a local company (whether owned by foreign or national interests). However, under the PTPA, Peru does not to apply most of its nationality-based hiring requirements to U.S. professionals and specialty personnel.

A company’s combined salaries of foreign employees are limited to no more than 30 percent of its payroll. However, DL 689 from November 1991 provides a variety of exceptions to these limits. For example, a foreigner is not counted against a company’s total if they hold an immigrant visa, are an investor in the company, or are a national of a country that has a reciprocal labor or dual nationality agreement with Peru. The United States and Peru recognize dual nationality but do not have a formal agreement. The law exempts foreign banks, and international transportation companies from these hiring limits, as well as all firms located in free trade zones. Companies may apply for exemptions from the limitations for managerial or technical personnel.

The process to obtain a Peruvian visa or permit for residency or work can be cumbersome and lengthy.

Data Storage

Peru adopted the Personal Data Protection Law (Law Number 29733) 2011 and went into effect in 2013. A data controller who processes personal data must notify the National Authority for Personal Data Protection (ANPDP for its Spanish acronym), which maintains a public register. Personal data is defined as any information on an individual which identifies or makes him/her identifiable through reasonable means. Personal data includes: biometric data; data on racial and ethnic origin; political, religious, philosophical or moral opinions or convictions; personal habits; union membership; and information related to health or sexual preference. Unless otherwise exempted by statute, data controllers are generally required to obtain the consent of data subjects for the processing of personal data. Consent must be prior, informed, expressed, and unequivocal. A data controller may transfer personal data to places outside of Peru only if the recipients have adequate protection measures.

Data controllers must adopt technical, organizational, and legal measures to guarantee the security of personal data and avoid their alteration, loss, unauthorized processing or access. Peru’s law does not require any notifications to any data subject or any other entity upon a breach. Peru does not mandate special regulations be enacted for the processing of personal data of minors. The ANPDP is responsible for enforcement and can issue administrative sanctions/fines based upon whether the violation is mild, serious or very serious. The law provides a “principle for availability of recourse for the data subject” stating that any data subject must have the administrative and/or jurisdictional channel necessary to claim and enforce his/her rights when they are violated by the processing of his/her personal data. There are no requirements for foreign IT providers to turn over source code and/or provide access to encryption.

In January 2020, Peru established the Digital Trust Framework (Urgency Decree 007-2020) which provides for personal data protection and transparency, consumer protection, and digital security. The law established the National Digital Secretariat under the Prime Minister’s Office as the overall coordinator and digital trust governing body but placed data protection and transparency under the Ministry of Justice and Human Rights MINJUS (The ANPDP falls under MINJUS). The order created a national data center as a digital platform to manage, direct, articulate, and supervise the operation, education, promotion, collaboration and cooperation of data nationwide.

5. Protection of Property Rights

Real Property

World Bank’s 2020 Doing Business Report ranked Peru 55 of 190 for ease of “registering property.” Peru enforces property rights and interests.  Mortgages and liens exist, and the recording system is reliable, performed by SUNARP, the National Superintendency of Public Records. Foreigners and/or non-resident investors cannot own land within 50 km of a border.

Intellectual Property Rights

Peru is listed on the Watch List in the United States Trade Representative’s (USTR’s) 2021 Special 301 Report, and the Polvos Azules market is included on USTR’s the 2020 Notorious Markets List. The primary reasons for Watch List inclusion are the long-standing implementation issues with the intellectual property provisions of the PTPA, particularly with respect to establishing statutory damages for copyright infringement and trademark counterfeiting.

Peru’s legal framework provides for easy registration of trademarks, and inventors have been able to patent their inventions since 1994. Peruvian law does not provide pipeline protection for patents or protection from parallel imports. Peru’s Copyright Law is generally consistent with the World Trade Organization’s (WTO) Agreement on Trade-Related Aspects of Intellectual Property (TRIPS).

Peruvian law provides the same protections for U.S. companies as Peruvian companies in all intellectual property rights (IPR) categories under the PTPA and other international commitments such as the World Intellectual Property Organization (WIPO) and the World Trade Organization Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). Peru joined the Global Patent Prosecution Highway Agreement (GPPH) with Japan effective in 2019. Peru is reinforcing its Patent Support System with the adoption of the WIPO Technology and Innovation Support Center (TISC) Program.

INDECOPI is a reliable partner for the U.S. government, the private sector, and civil society, having made good faith efforts to decrease the trademark and patent registration backlog and filing time. Although INDECOPI is the GOP agency charged with promoting and defending intellectual property rights, IPR enforcement also involves other GOP agencies and offices, including: the Public Ministry (Fiscalia), the Peruvian National Police (PNP), the Tax and Customs Authority (SUNAT), the Ministry of Production (PRODUCE), the Judiciary, and the Ministry of Health’s (MINSA’s) Directorate General for Medicines (DIGEMID).

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

6. Financial Sector

Capital Markets and Portfolio Investment

Peru allows foreign portfolio investment and does not place restrictions on international transactions. The private sector has access to a variety of credit instruments. Peruvian mutual funds managed $12.7 billion in December 2020. Private pension funds managed a total of $47.2 billion in December 2020.

The Lima Stock Exchange (BVL) is a member of the Integrated Latin American Market, which includes stock markets from Pacific Alliance countries (Peru, Chile, Colombia, and Mexico). As of July 2018, mutual funds registered in Pacific Alliance countries may trade in the Lima Stock Exchange.

The Securities Market Superintendent (SMV) regulates the securities and commodities markets. SMV’s mandate includes controlling securities market participants, maintaining a transparent and orderly market, setting accounting standards, and publishing financial information about listed companies. SMV requires stock issuers to report events that may affect the stock, the company, or any public offerings. Trading on insider information is a crime, with some reported prosecutions in past years. SMV must vet all firms listed on the Lima Stock Exchange or the Public Registry of Securities. SMV also maintains the Public Registry of Securities and Stock Brokers.

London Stock Exchange Group FTSE Russell downgraded Peru from Secondary Emerging Market to Frontier status in March 2020. In a statement, the BVL stated that the decision is not necessarily replicable among the other index providers adding that Morgan Stanley Capital International, which is considered a main benchmark for emerging markets, is not expected to reconsider the BVL’s status.

Money and Banking System

Peru’s banking sector is highly consolidated. Sixteen commercial banks account for 90 percent of the financial system’s total assets, valued at $164 billion in December of 2020. In 2020, three banks accounted for 72 percent of loans and 70 percent of deposits among commercial banks. Peru has a relatively low level of access to financial services at 50 percent, particularly outside Lima and major urban areas.

The Central Bank of Peru (BCRP) is an independent institution, free to manage monetary policy to maintain financial stability. The BCRP’s primary goal is to maintain price stability via inflation targeting between one to three percent. Year-end inflation reached 1.8 percent in 2020.

The banking system is considered generally sound, thanks to the GOP’s lessons learned during the 1997-1998 Asian financial crisis. Non-performing bank loans accounted for 3.8 percent of gross loans as of December 2020, an increase from the three percent registered in 2019. The rapid implementation of the $39.5 billion BCRP loan guarantee program in response to the COVID-19 pandemic attenuated loan default risk, but banks are still expected to feel an impact on credit operations within sensitive sectors such as tourism, services, and retail.

Under the PTPA, U.S. financial service suppliers have full rights to establish subsidiaries or branches for banks and insurance companies. Peruvian law and regulations do not authorize or encourage private firms to adopt articles of incorporation or association to limit or restrict foreign participation. However, larger private firms often use “cross-shareholding” and “stable shareholder” arrangements to restrict investment by outsiders – not necessarily foreigners – in their firms. As close families or associates often control ownership of Peruvian corporations, hostile takeovers are practically non-existent. In the past few years, several companies from the region, China, North America, and Europe have begun actively buying local companies in power transmission, retail trade, fishmeal production, and other industries. While foreign banks are allowed to freely establish banks in the country, they are subject to the supervision of Peru’s Superintendent of Banks and Securities (SBS).

Foreign Exchange and Remittances

Foreign Exchange

There were no reported difficulties in obtaining foreign exchange. Under Article 64 of the Constitution, the GOP guarantees the freedom to hold and dispose of foreign currency. Exporters and importers are not required to channel foreign exchange transactions through the Central Bank and can conduct transactions freely on the open market. Anyone may open and maintain foreign currency accounts in Peruvian commercial banks. Under the PTPA, portfolio managers in the United States are able to provide portfolio management services to both mutual funds and pension funds in Peru, including funds that manage Peru’s privatized social security accounts.

The Constitution guarantees free convertibility of currency. However, limited capital controls still exist as private pension fund managers (AFPs) are constrained by how much of their portfolio can be invested in foreign securities. The maximum limit is set by law (currently 50 percent since July 2011), but the BCRP sets the operating limit AFPs can invest abroad. Over the years, the BCRP has gradually increased the operating limit. Peru reached the 50 percent limit in September 2018.

The foreign exchange market mostly operates freely. Funds associated with any form of investment can be freely converted into any world currency. To quell “extreme variations” of the exchange rate, the BCRP intervenes through purchases and sales in the open market without imposing controls on exchange rates or transactions. Since 2014,BCRP has pursued de-dollarization to reduce dollar denominated loans in the market and purchased U.S. dollars to mitigate the risk that spillover from expansionary U.S. monetary policy might result in over-valuation of the Peruvian Sol relative to the U.S. dollar. In December 2020, dollar-denominated loans reached 22 percent, and deposits 32 percent.

The U.S. Dollar averaged PEN 3.49 per $1 in 2020.

Remittance Policies

Article 7 of the Legislative Decree 662 issued in 1991 provided that foreign investors may send, in freely convertible currencies, remittances of the entirety of their capital derived from investments, including the sale of shares, stocks or rights, capital reduction or partial or total liquidation of companies, the entirety of their dividends or proven net profit derived from their investments, and any considerations for the use or enjoyment of assets that are physically located in Peru, as registered with the competent national entity, without a prior authorization from any national government department or decentralized public entities, or regional or municipal Governments, after having paid all the applicable taxes.

Sovereign Wealth Funds

Peru’s Ministry of Economy and Finance (MEF) manages the Fiscal Stabilization Fund which serves as a buffer for the GOP’s fiscal accounts in the event of adverse economic conditions. It consists of treasury surplus, concessional fees, and privatization proceeds, and is capped at four percent of GDP. The fund was nearly completely exhausted to finance increased spending in response to the COVID-19 pandemic, dropping from $5.5 billion at the end of 2019 to $1 million at the end of 2020. The Fund is not a party to the IMF International Working Group or a signatory to the Santiago Principles.

7. State-Owned Enterprises

Peru wholly owns 35 state-owned enterprises (SOEs), 34 of which are under the parastatal conglomerate FONAFE. The list of SOEs under FONAFE can be found here: https://www.fonafe.gob.pe/empresasdelacorporacion . FONAFE appoints an independent board of directors for each SOE using a transparent selection process. There is no notable third-party analysis on SOEs’ ties to the government. The largest SOE is PetroPeru which refines oil, operates Peru’s main oil pipeline, and maintains a stake in select concessions. SOE ownership practices are generally consistent with OECD guidelines.

Privatization Program

The GOP initiated an extensive privatization program in 1991, in which foreign investors were encouraged to participate. Since 2000, the GOP has promoted multi-year concessions as a means of attracting investment in major projects, including a 30-year concession to a private group (Lima Airport Partners) to operate the Lima airport in 2000 and a 30-year concession to Dubai Ports World to improve and operate a new container terminal in the Port of Callao in 2006.

8. Responsible Business Conduct

Peru has legal and regulatory frameworks to support responsible business conduct (RBC) standards. However, Peru does not have a holistic action plan or national standards for RBC, and there are still challenges of enforcement – particularly in remote regions of the country and with respect to informal workers, indigenous people, and other vulnerable groups. Many multinational companies already adhere to high standards for RBC. Several independent NGOs freely monitor and promote RBC. Standards for conduct on environmental, social, and governance issues are implemented through sector-specific regulation. The UN Working Group on Business & Human Rights is pressing Peru to join the Voluntary Principles on Human Rights and Security Initiative as part of its work towards implementing the UN Principles.

Given its importance to the Peruvian economy, the extractives sector has been a GOP priority for promoting RBC. Supreme Decree No. 042-2003-EM promotes social responsibility in the mining sector, encouraging local employment opportunities, support to communities’ projects, development activities, and purchase of local goods and services. The decree requires mining companies to publish an annual report on sustainable development activities. In 2012, Peru was listed as a compliant country under the Extractive Industries Transparency Initiative (EITI), as the GOP and extractive industries openly publish all company payments and government revenues from oil, gas, and mining. The EITI Board found that Peru had made meaningful progress in meeting the EITI Standard in its first Validation in 2017. The EITI Board will review Peru for revalidation on October 1, 2021.

ProInversion serves as the National Point of Contact (NCP) for the OECD Guidelines for Multinational Enterprises (MNE), to which Peru is an adherent. The NCP participates in activities with the NCP OECD Network located in 50 countries and is in permanent coordination with the OECD Responsible Business Conduct working group.

Additional Resources 

Department of State

Department of Labor

9. Corruption

Generally, corruption in Peru is widespread and systematic, affecting all levels of government and the whole of society, which, until recently, had developed a high tolerance to corruption. Embezzlement, collusion, bribery, extortion or fraud in the justice system, politics and public works, by high level authorities or key public officers is common. In public procurement, weak control and risk management systems, lack of ethical or integrity values among some public officials, lack of transparency and accountability in procurement processes, social tolerance of corruption, and minimal or no enforcement contribute to the problem. This embedded dynamic has eroded trust, credibility and integrity of public entities and engendered mistrust in the private sector.

Between 2019 and 2020, Peru improved three points and climbed 11 positions (to 94 among 189 countries) in Transparency International’s 2020 Corruption Perceptions Index. This progress reflected GOP investigations and reforms over the past two years. The reforms included eliminating parliamentary immunity and creating a new judicial oversight body, but also the prohibition of convicted criminals from running for elected office and campaign finance reform.

It is illegal in Peru for a public official or an employee to accept any type of outside remuneration for the performance of his or her official duties. The law extends to family members of officials and to political parties. In 2019, Peru made the irregular financing of political campaigns a crime, carrying penalties up to eight years jail time. Peru has ratified both the UN Convention against Corruption and the Organization of American States Inter-American Convention against Corruption. Peru has signed the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions and has adopted OECD public sector integrity standards through the GOP’s National Integrity and Anticorruption Plan.

The Public Auditor (Contraloria) oversees public administration. In January 2017, the GOP passed legislative decrees extending the scope of civil penalties for domestic acts of bribery, including by NGOs, corporate partners, board members, and parent companies if its subsidiaries acted under authorization.  Penalties include an indefinite exclusion from government contracting and substantially increased fines. The Public Auditor also began auditing reconstruction projects in parallel to the project, rather than after project implementation, in an effort to improve transparency. It is also running parallel audits to the different government actions at all levels (central, regional, and local) to combat the COVID-19 crisis. In one of the largest transnational bribery scandals in Latin America, the Peruvian company admitted in a 2016 settlement with the United States, Brazil, and Switzerland that it had paid $29 million in bribery between 2004 and 2015. High-ranking officials from the last four Peruvian administrations have also been investigated in connection with the scandal, including former presidents. U.S. firms have reported problems resulting from corruption, usually in government procurement processes and in the judicial sector, with defense and police procurement generally considered among the most problematic.

In one of the largest transnational bribery scandals in Latin America, the Peruvian company admitted in a 2016 settlement with the United States, Brazil, and Switzerland that it had paid $29 million in bribery between 2004 and 2015. High-ranking officials from the last four Peruvian administrations have also been investigated in connection with the scandal, including former presidents. U.S. firms have reported problems resulting from corruption, usually in government procurement processes and in the judicial sector, with defense and police procurement generally considered among the most problematic.

Resources to Report Corruption

Secretary of Public Integrity of the Prime Minister Office and General Coordinator
Eloy Munive Pariona
Jr. Carabaya Cdra. 1 S/N – Lima,
(51) (1) 219-7000, ext. 1137
emunive@pcm.gob.pe

General Comptroller’s Office
Jr. Camilo Carrillo 114, Jesus Maria, Lima
(51) (1) 330-3000
contraloria@contraloria.gob.pe

ProEtica, the Peruvian chapter of Transparency International
Samuel Rotta
Executive Director
Calle Manco Capac 816, Miraflores, Lima
(51) (1) 446-8581, 446-8941, 446-8943
srotta@proetica.org.pe 

10. Political and Security Environment

According to the Ombudsman, there were 145 active social conflicts in Peru as of January 2021. Although political violence against investors is rare, protests are common. In many cases, protestors sought public services not provided by the government. Widespread protests in late 2020 across several agricultural producing regions resulted in the repeal and rewriting of the nation’s major agricultural law. Protests related to extractives activities stopped operations of Peru’s northern oil pipeline for nearly two months in 2018 and effectively closed Peru’s second largest copper mine, Las Bambas for a month in early 2019. In October 2019, protests erupted in the mining province of Arequipa over Peru’s approval of a construction license for a Mexican copper company, which indefinitely halted its $1.4 billion plan for a copper mine project.

Violence remains a concern in coca-growing regions. The Shining Path (Sendero Luminoso, “SL”) narco-terrorist organization continued to conduct a limited number of attacks in its base of operations in the Valley of the Apurimac, Ene, and Mantaro Rivers (VRAEM) emergency zone, which includes parts of Ayacucho, Cusco, Huancavelica, Huanuco, and Junin regions. Estimates vary, but most experts and Peruvian security services assess SL membership numbers between 250 and 300, including 60 to 150 armed fighters. SL collects “revolutionary taxes” from those involved in the drug trade and, for a price, provides security and transportation services for drug trafficking organizations to support its terrorist activities.

At present, there is little government presence in the remote coca-growing zones of the VRAEM. The U.S. Embassy in Lima restricts visits by official personnel to these areas because of the threat of violence by narcotics traffickers and columns of the Shining Path. Information about insecure areas and recommended personal security practices can be found at http://www.osac.gov  or http://travel.state.gov.

11. Labor Policies and Practices

Labor is abundant, although several large investment projects in recent years led to localized shortages of highly skilled workers in some fields. According to the National Bureau for Statistics (INEI), 75.3 percent of the labor force is informal. Unemployment was 7.4 percent in 2020. Unemployment is most prevalent among 14-24 year olds (14.7 percent unemployment in 2020). Additionally, 96 percent of unemployed people reside in urban areas.

Workers in Peru are usually paid monthly. Some workers, like formal miners, are relatively highly paid and also (per statute) receive a share of company profits up to a maximum total annual amount of 18 times their base monthly salary. The statutory monthly minimum wage is PEN 930/month ($266 USD). INEI estimated the poverty line to be PEN 344/month ($99) per person, although it varied by region due to different living costs. Many workers in the unregulated informal sector, most of them self-employed, make less than the minimum wage. Peru’s labor law provides for a 48-hour workweek and one day of rest, and requires companies to pay overtime for more than eight hours of work per day and additional compensation for work at night.

Peru does not have a specific unemployment insurance program, however, the “Compensation for Time of Service” (CTS) requirement mandates an employer pay one month’s salary of an employee per year of work into the employee’s CTS Account. When the employee stops working for the employer (willingly or not), she/he can access the CTS Account. In addition, a fired employee receives one month’s salary per year worked, up to a maximum of twelve months.

In 2020, the government announced implementation of a leave without pay policy to address employers’ inability to pay worker salaries due to the COVID-19 pandemic. To support furloughed workers, the government offered a PEN 760 ($217) monthly cash transfer, allowed workers near retirement to access a portion of their accrued national pension accounts, and covered them under EsSalud, the public health insurance system for formal workers.

Peru’s Decree Law 22342 from 1978 and Law 27360 from 2000 relaxed labor laws for the non-traditional exports (NTE) sector, which includes textiles and certain agricultural products. The laws allowed businesses in the NTE and agricultural sectors to employ workers indefinitely on consecutive short-term contracts, in contrast to the five-year limit on consecutive short-term contracts in place for other sectors. In 2016, the U.S. Department of Labor identified serious concerns that provisions may violate the U.S.-Peru Trade Promotion Agreement by infringing on workers’ freedom of association. In December 2020, acting in response to unrelated agricultural worker protests, Congress repealed a 2019 Executive Order (Urgency Decree 043-2019) that had extended the exemptions until 2031.

Labor unions are independent of the government and employers. Approximately six percent of Peru’s private sector labor force was organized in 2017 (latest date available), with unionization highest in electricity, water, construction, and mining (from 39 percent to 22 percent) and generally low in the rest of the economy. The labor procedure law (No.29497) requires the resolution of labor conflicts in less than six months, allows unions or their representatives to appear in court on behalf of workers, requires proceedings to be conducted orally and video-recorded, and relieves the employee from the burden of proving an employer-employee relationship.

Either unions or management can request binding arbitration in contract negotiations. Strikes can be called only after approval by a majority of all workers (union and non-union), voting by secret ballot, and only in defense of labor rights. Unions in essential public services, as determined by the government, must provide a sufficient number of workers during a strike to maintain operations.

While the government has made improvements in recent years, it often does not dedicate sufficient personnel and resources to labor law enforcement. The Ministry of Labor created the National Labor Inspectorate Superintendent (SUNAFIL) in 2014 and oversees regional offices to represent the labor inspectorate nationally. In 2020, SUNAFIL had 800 labor inspectors. SUNAFIL labor inspectors also help identify and investigate cases of forced and child labor. Additional information on forced labor in Peru can be found in the 2019 Trafficking in Persons Report: https://www.state.gov/trafficking-in-persons-report-2019.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source* USG or international statistical source USG or International Source of Data: BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2020 $203,527 2019 $226,848 https://data.worldbank.org/country/peru 
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data: BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2020 $2,776 2019 $7,470 BEA data available at
https://www.bea.gov/international/di1usdbal 
Host country’s FDI in the United States ($M USD, stock positions) N/A N/A 2019 $209 BEA data available at
https://www.bea.gov/international/di1fdibal 
Total inbound stock of FDI as % host GDP N/A N/A 2019 50.1% UNCTAD data available at
https://unctad.org/en/pages/diae/
world%20investment%20report/
country-fact-sheets.aspx 

* Source for Host Country Data: Peru’s Central Bank of Reserve , ProInversion .

Table 3: Sources and Destination of FDI
Data not available.

Table 4: Sources of Portfolio Investment
Data not available.

14. Contact for More Information

Esteban Sandoval
Senior Economic Specialist
U.S. Embassy Peru
+51 1-618-2672
sandovalej@state.gov