Policies Toward Foreign Direct Investment

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

The new Companies Law went into effect on August 1, 2018. Under the law, foreign investment of up to 35 percent is allowed in domestic companies— which also opens the stock exchange to limited foreign participation.  It also updated and streamlined business regulations. The Companies Law makes it easier to start and operate small businesses and provides the government with tools to enforce corporate governance rules and regulations.

The Directorate for Investment and Company Administration (DICA), which is part of the Ministry of Investment and Foreign Economic Relations (MIFER) serves as Burma’s investment promotion agency. DICA encourages and facilitates foreign investment by providing information, fostering networks between investors. DICA has its head office in Yangon and has 14 branches throughout the country, including in Nay Pyi Taw, Mandalay, Taunggyi, Mawlamyine, Pathein, Monywa, Dawei, Hpa-an, Bago, Magway, Loikaw, Myitkyina, Sittwe, and Hakha. DICA uses seminars, workshops, investment fairs and other events to promote investment, as well as its website: http://www.dica.gov.mm/en .

The government maintains active dialogue with chambers of commerce (including the American Chamber of Commerce) and foreign companies on investment.

Limits on Foreign Control and Right to Private Ownership and Establishment

Generally, foreign and domestic private entities have the right to establish and own business enterprises and engage in remunerative activity with some sectoral exceptions. Under Article 42 of the Myanmar Investment Law, the Burmese government restricts investment in certain sectors. Some sectors are only open to government or domestic investors. Other sectors require foreign investors to set up a joint-venture with a citizen of Burma or citizen-owned entity or obtain a recommendation from the relevant ministries.

The State-Owned Economic Enterprises Law, enacted in March 1989, stipulates that SOEs have the sole right to carry out a range of economic activities in certain sectors, including teak extraction, oil and gas, banking and insurance, and electricity generation. However, in practice many of these areas are now open to private sector investment. For instance, the 2016 Rail Transportation Enterprise Law allows foreign and local businesses to make certain investments in railways, including in the form of public-private partnerships.

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

As one of their key functions, the Directorate of Investment and Company Administration (DICA) and the MIC are responsible for screening inbound foreign investment to ensure it does not pose a risk to national security, as well asto make a determination that such investment sufficiently furthers Burma’s growth and development.

Other Investment Policy Reviews

The World Bank’s Doing Business 2020 report includes an analysis of Burma’s investment sectors and business environment, and can be found at: https://www.doingbusiness.org/en/data/exploreeconomies/myanmar/

Business Facilitation

The government through the Directorate of Investment and Company Administration (DICA) provides limited business facilitation services.

The government instituted online company registration through “MyCo” (https://www.myco.dica.gov.mm ). Investors are able to submit forms, pay registration fees, and check availability of a company name through a searchable company registry on the “MyCo” website.

The Myanmar Investment Commission (MIC) is responsible for verifying and approving certain investment proposals and regularly issues notifications about sector-specific developments. The MIC is comprised of representatives and experts from government ministries, departments and governmental and non-governmental bodies. Companies can use the DICA website to retrieve information on requirements for MIC permit applications and submit a proposal to the MIC. If the proposal meets the criteria, it will be accepted within 15 days. If accepted, the MIC will review the proposal and reach a decision within 90 days. The MIC issued a March 2016 statement granting authority to state and regional investment committees to approve any investment with capital of under USD 5 million.

Outward Investment

The Burmese government does not directly promote or incentivize outward investment. However, the Burmese business community has responded positively to U.S. investment messaging under SelectUSA promotional efforts.  The Burmese delegations to the SelectUSA U.S. Investment Summits in Washington, D.C. numbered 15 delegates in 2018 and 36 delegates in 2019, highlighting growing interest.  Tourism/hospitality, oil & gas, ICT, and food processing investment opportunities were of the most interest to the Burmese investors. Burma does not restrict domestic investors from investing abroad.

Transparency of the Regulatory System

Regulatory and legal transparency continue to pose significant challenges for foreign investors in Burma. Most regulations relevant to foreign businesses are developed at the national level by the following ministries: Commerce; Planning, Finance, and Industry; Investment and Foreign Economic Relations; and Agriculture, Livestock, and Irrigation.

In the past, all regulations were subject to change with no advance or written notice, and without opportunity for public comment. Ministries are not legally obligated to share regulatory development plans with the public or conduct public consultations, though some ministries now hold limited public consultation before finalizing bills for parliamentary consideration or issuing new regulations. For instance, the government solicited public comments on the 2016 Investment Law, including the drafting of the rules and regulations, which went through three rounds of public consultations. In another example, the government conducted public consultations on the Gemstone Policy.

The Burmese government does publish new regulations and laws in government-run newspapers and “The State Gazette.” The Burmese government also publishes information online and has established websites through which businesses can access trade information and also sometimes posts new regulations on government ministry’s official Facebook page.

Foreign investors can appeal adverse regulatory decisions. The relevant ministry drafting the regulation has the mandate to appoint a regulatory body to manage a grievance system to resolve legal disputes and/or establish enforcement mechanisms. For instance, under the Myanmar Investment Law, the Myanmar Investment Commission (MIC) serves as the regulatory body and has the authority to impose penalties on any investor who violates or fails to comply with the law. Investors have the right to appeal any decision made by the MIC to the government within 60 days from the date of decision.

Public finance and debt obligations, exclusive of contingent liabilities are public and transparent. Budget reports are published on the Ministry of Planning, Finance, and Industry (MOPFI) website (https://www.mopfi.gov.mm/en/content/budget-news ). Burma has issued the annual Citizen Budget in the Burmese language since FY 2015-16. The Ministry of Planning, Finance, and Industry has published quarterly budget execution reports, six-month-overview-of-budget-execution reports, and annual budget execution reports on its website since FY 2015-16. However, details regarding the budget allocations for defense expenditures are not transparent. The Burmese government also publishes its debt obligation report on the Treasury Department’s Facebook page. (See: https://www.facebook.com/pages/biz/Treasury-Department-of-Myanmar-777018172438019/ ).

For more information on Burma’s regulatory transparency see: http://rulemaking.worldbank.org/en/data/explorecountries/myanmar 

International Regulatory Considerations

Burma has been a member of the Association of South East Asian Nations (ASEAN) since July 1997. As an ASEAN member state, Burma’s regulatory systems are expected to conform to harmonization principles established in the ASEAN Trade in Goods Agreement (ATIGA) to support regional economic integration. Such principles include the removal of unnecessary technical barriers to trade; addressing relevant non-tariff measures among ASEAN member states; facilitation of trade; and upgrading of regulation to ensure safety, consumer health, environmental protection, consumer protection and meeting other social objectives. In an example of ASEAN regulatory harmonization, Burma officially joined the ASEAN Single Window in March 2020 with the launch of the National Single Window Routing Platform, which streamlines the import process by adopting the ASEAN Certificate of Origin Form D.

The Ministry of Commerce’s National Trade Portal and Repository contains all of Burma’s laws, processes, forms, and points of contact for trade.  This portal increases transparency in Burma and also meets Burma’s requirements under Articles 12 and 13 of the ATIGA. The Trade Portal can be found at: http://www.myanmartradeportal.gov.mm/index.php  .

While Burma is not currently in compliance with WTO notification requirements, the government has developed a WTO notification strategy that could increase the number and quality of notifications.

Legal System and Judicial Independence

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

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

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

Certain regulatory actions are appealable and are adjudicated with the respective ministry. For instance, according to the Myanmar Investment Law, investment disputes that cannot be settled amicably are “settled in the competent court or the arbitral tribunal in accord with the applicable laws.” An investor dissatisfied with any enforcement action made by the regulatory body has the right to appeal to the government within 60 days from the date of administrative decision. The government may amend, revoke, or approve any decision made by the regulatory body. This decision is considered final and conclusive.

Laws and Regulations on Foreign Direct Investment

The Myanmar Investment Commission (MIC) plays a leading role in the regulation of foreign investment and approves all investment projects receiving incentives outside of the special economic zones, which are handled by the SEZ’s Central Working Body. Regulation of joint ventures between foreign investors and SOEs is the responsibility of the relevant line ministries.

The Myanmar Investment Law outlines the procedures the Myanmar Investment Commission must take when considering foreign investments. The MIC evaluates foreign investment proposals and stipulates the terms and conditions of investment permits. The MIC does not record foreign investments that do not require MIC approval. Many smaller investments may go unrecorded. Foreign companies may register locally without an MIC license, in which case they are not entitled to receive the benefits and incentives provided for in the Myanmar Investment Law. More information on the MIC can be found at: http://www.dica.gov.mm/en/apply-mic-permit .

There is no “one-stop-shop” for investors with the exemption of Special Economic Zones which can provide “one-stop-shop” service. However, in 2015 the General Administration Department established One Stop Shops (OSS) to facilitate tax payments and assist in obtaining other required permits. As of April 2019, the government has opened 316 One Stop Shops in 72 townships across the nation.

Competition and Anti-Trust Laws

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

The Myanmar Competition Commission serves as the regulatory body to enforce the Competition Law and its rules. The Commission is chaired by the Minister of Commerce, with the Director General of the Department of Trade serving as Secretary. Members also include a mixture of representatives from relevant line ministries and professional bodies, such as lawyers and economists.

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

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

Expropriation and Compensation

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

Dispute Settlement

ICSID Convention and New York Convention

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

Investor-State Dispute Settlement

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

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

International Commercial Arbitration and Foreign Courts

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

Bankruptcy Regulations

In February 2020, the government of Burma passed the new Insolvency Law, which replaces the Insolvency Act of 1910 and the Insolvency Act of 1920. The new law adopts the United Nations Commission on International Trade Law (UNCITRAL) Model Law on cross-border insolvency, providing greater legal certainty on transnational insolvency issues.

The legislation establishes an effective insolvency regime that addresses both corporate and personal insolvency, with a focus on protecting micro, small and medium-sized enterprises (MSMEs). With regards to personal insolvency, the new law encourages debtors to enter into a voluntary legally binding arrangement with their creditors. This agreement allows part or all of the debt to be written off over a fixed period of time. The law also provides equitable treatment for creditors by enabling an efficient liquidation process to ensure creditors receive maximum financial recovery from the property value of a non-viable business.

The new law establishes the Myanmar Insolvency Practitioners’ Regulatory Council to act as an independent regulatory body and assigns DICA the role of Registrar with the authority to fine individuals contravening the law. In addition, the court with legal jurisdiction can order an individual to make good on the default within a specified time.

Investment Incentives

In January 2020, the Ministry of Investment and Foreign Economic Relations (MIFER) announced tax exemptions for investments made in five priority sectors in all 14 states and regions in Burma as well as the capital territory. The tax exemption period is three, five, or seven years depending on the location. For a list of priority sectors by state and regions, please see MIFER’s website at: http://www.mifer.gov.mm/region 

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

The government has no established mechanism to provide joint-financing or any other type of fiscal support for infrastructure development.

Foreign Trade Zones/Free Ports/Trade Facilitation

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

Performance and Data Localization Requirements

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

Foreign investors may appoint expatriate senior management, technical experts, and consultants, but are required to submit a copy of the expatriate’s passport, proof of ability, and profile to the MIC for approval. Foreign investors have not cited onerous visa, residence, work permit, or similar requirements asa barrier to their mobility or that of their employees.

Foreign investors are not required to use domestic content in goods or technology. Burma is currently developing laws, rules and regulations on information technology (IT) and data protection standards, but does not currently have requirements for foreign IT providers to turn over source code and/or provide access to surveillance. Burma has no data localization laws.

Real Property

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

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

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

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

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

Intellectual Property Rights

Burma is a member of the World Trade Organization (WTO) and is obligated to provide intellectual property protection and enforcement consistent with the “Trade-Related Aspects of Intellectual Property (IPs) Agreement.” The WTO, however, has delayed required implementation of TRIPS for Least Developed Nations – including Burma – until 2021.

Burma’s current intellectual property (IP) protection and enforcement system does not meet international standards. While Burma’s Parliament passed four intellectual property laws in 2019 – the Trademark Law, Industrial Design Law, Patent Law, and Copyright Law – these laws have not yet entered into force at the time of this writing. The Burmese government is in the process of drafting implementing regulations and setting up an IP Office to administer the laws. Once in effect, the laws will likely improve intellectual property protection, and enforcement measures against intellectual property rights infringement. In March 2020, the government formed an IP Central Committee, chaired by a Vice-President, to oversee the IP Department. Establishing the committee is widely viewed as an important step in further developing Burma’s IPR protection regime.

The new Trademark Law introduces a “first-to-file” system from the previous “first-to-use” system. Trademark holders who previously used or registered their trademarks under the old system will need to re-register their trademarks under the new law. The new law also includes protections for “well-known” trademarks. Geographical indicators will also be protected through registration under the new law. The new IP Office anticipates receiving thousands of trademark applications from owners of existing trademarks during a six-month soft-opening period. With the anticipated workload and other issues, implementation of the other three IP laws will likely be delayed.

The Myanmar Police Force’s Criminal Investigative Department (CID) investigates and seizes counterfeit goods, including brands, documents, gold, products, and money, but not medicines. The CID provides evidence before presenting the case to the courts. The CID currently does not record the value of the amount seized. Industry has also identified Bangladesh, Myanmar, and Sri Lanka as emerging sources of counterfeit oncology drugs.

Burma is not listed in the USTR’s Special 301 report or the notorious market report.

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

Resources for Rights Holders

For Intellectual Property Rights issues in Burma, please contact:

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

Capital Markets and Portfolio Investment

The Burmese government has gradually opened up to foreign portfolio investment but both the stock and bond markets are small and lack sufficient liquidity to enter and exit sizeable positions. In July 2019, the Securities and Exchange Commission announced that foreign individuals and entities are permitted to hold up to 35 percent of the equity in Burmese companies listed on the Yangon Stock Exchange. As of March 2020, six companies are listed on the exchange. The Securities Exchange Law came into effect in 2013, establishing a securities and exchange commission and helping clarify licensing for securities businesses (such as dealing, brokerage, underwriting, investment advisory and company representation).

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

Burma enacted the Foreign Exchange Management Law in 2012 in order to improve foreign exchange management and to broaden international economic relations and cooperation. Domestic businesses and investors are able to obtain loans from local and foreign banks. According to the Myanmar Investment Law and Foreign Exchange Management Law, foreign investors need the approval of the Central Bank of Myanmar (CBM) to take a bank loan. The Central Bank allows loans with a maximum maturity of three years. The CBM also allows overdraft lending. Instead of using traditional loans, borrowers can take out overdrafts with collateral which can be rolled over every year without a maturity date. As per CBM regulations, banks are required to clear overdraft facilities within three years; otherwise such overdrafts will be classified as non-performing loans (NPLs).

Money and Banking System

There is limited penetration of banking services in the country but the usage of mobile payment systems is growing rapidly. An estimated 25 percent of the population has access to a savings account through a traditional bank. As of April 2020, Burma’s banking sector consisted of four state-owned banks, 27 domestic private banks, 17 foreign bank branches, and three foreign bank subsidiaries. The banking system is fragile with a high volume of non-performing loans. Financial analysts estimate that NPLs at some local banks account for 40 to 50 percent of outstanding credit.

The 2013 Central Bank of Myanmar Law made the Central Bank an independent institution headed by a Minister-level governor. The Central Bank of Myanmar (CBM) is responsible for the country’s monetary and exchange rate policies as well as regulating and supervising the banking sector.

The government has gradually opened the banking sector to foreign investors. The government began awarding limited banking licenses to foreign banks in October 2014. In November 2018, the CBM published new guidelines that permit foreign banks with local licenses to offer “any financing services and other banking services” to local corporations. Previously, foreign banks were only allowed to offer export financing and related banking services to foreign corporations.

In November 2019, the CBM announced that foreign banks will be allowed to apply for licenses to operate subsidiaries or branches. Under new directives, any foreign bank applying for a subsidiary license would be allowed to provide wholesale banking services at the start of operation. From January 2021, foreign banks with a subsidiary license will be allowed to offer retail banking services. The CBM will allow existing foreign bank branches to convert to subsidiaries starting from June 2020. In January 2020, the CBM announced foreign banks would be permitted to hold more than 35 percent of the capital in joint ventures with domestic banks.

No U.S. banks have correspondent relationships with Burmese banks.

Foreigners are allowed to open a bank account in Burma in either U.S. dollars or Burmese kyat. To open a bank account, foreigners must provide proof of a valid visa along with proof of income or a letter from their employer.

Foreign Exchange and Remittances

Foreign Exchange

According to Chapter 15 of the Myanmar Investment Law, foreign investors are able to convert, transfer, and repatriate profits, dividends, royalties, patent fees, license fees, technical assistance and management fees, shares and other current income resulting from any investment made under this law. Nevertheless, in practice, the transfer of money in or out of Burma has been difficult, as many international banks have internal prohibitions on conducting business in Burma given the long history of sanctions and significant money-laundering risks. The majority of foreign currency transactions are conducted through banks in Singapore.

Under the Foreign Exchange Management Law, transfer of funds can be made only through licensed foreign exchange dealers, using freely usable currencies. The Central Bank of Myanmar (CBM) grants final approval on any new loans or loan transfers by foreign investors. According to a new regulation in the Foreign Exchange Management Law, foreign investors applying for an offshore loan must get approval from the CBM. Applications are submitted through the Myanmar Investment Commission by providing a company profile, audited financial statements, draft loan agreement, and a recent bank credit statement.

Since February 5, 2019, the Central Bank calculates a market-based reference exchange rate from the volume-weighted average exchange rate of interbank and bank-customer deals during the day.

Remittance Policies

According to the Myanmar Investment Law, foreign investors can remit foreign currency through authorized banks. Nevertheless, in practice, the transfer of money in or out of Burma has been difficult, as many international banks have internal prohibitions on conducting business in Burma given the long history of sanctions and significant money-laundering risks. The majority of foreign currency transactions are conducted through banks in Singapore.

The difficulties presented by the formal banking system are reflected in the continued use of informal remittance services (such as the “hundi system”) by both the public and businesses. In November 15, 2019, the Central Bank of Myanmar adopted the Remittance Business Regulation in order to bring these informal networks into the official financial system. The regulations require remittance business licenses to conduct inward and outward remittance businesses from the Central Bank of Myanmar.

Sovereign Wealth Funds

Burma does not have a sovereign wealth fund.

State-owned enterprises (SOEs) in Burma are active in various sectors, including natural resource extraction, print news, energy production and distribution, banking, mobile telecommunications, and transportation. SOEs employ approximately 145,000 people, according to a 2018 report by the Natural Resource Governance Institute. The 1989 State-Owned Economic Enterprises Law does not establish a system of monitoring enterprise operations, hence detailed information on Burmese SOEs are difficult to obtain. However, according to commercial statements, the total net income of all SOEs during fiscal year 2018-19 was approximately USD 1.1 billion. The top profit-making SOEs are found in the natural resource sector, namely the Myanma Oil and Gas Enterprise, Myanma Gems Enterprise, and Myanma Timber Enterprise. Within Burma, there are 32 SOEs that are managed directly by six ministries without independent boards.

State-Owned Enterprises enjoy several advantages including serving in some cases as the market regulator, preferential land access, and access to low-interest credit. According to the State-Owned Economic Enterprises Law, SOEs wield regulatory powers that provide SOEs a significant market advantage, including through an ability to recommend specific tax exemptions to the Myanmar Investment Commission on behalf of private sector joint-venture partners and to monitor private sector companies’ compliance with contracts. In addition, the law stipulates that SOE managers have sole discretion in awarding contracts and licenses to private sector partners with limited oversight. SOEs can secure loans at low interest rates from state-owned banks, with approval from the cabinet. Private enterprises, unlike SOEs, are forced to provide land or other real estate as collateral in order to be considered for a loan. SOEs have historically had an advantage over private entities in land access because under the Constitution the State owns all the land.

Privatization Program

In May 2016, the government formed a privatization committee on SOEs, which is headed by a Vice-President, to examine measures such as public-private partnerships (PPP) to develop and operate infrastructure as well as to sell-off inefficient state-owned factories. The Minister for Planning, Finance, and Industry serves as secretary of the commission. Privatization can take the form of system-sharing, public-private partnership, private-private partnership, franchise, joint-venture, and sales of assets in line with international standards. In October 2017, the government sought to privatize state-owned factories in the ceramic, garment, plastic, and stainless-steel sectors, according to state media. According to government data and media reports, 55 state-owned factories have been restructured under various PPPs as of November 2019. The privatization committee does not have a website describing its current activities but general information in the Burmese language about the committee can be found at: https://www.mopfi.gov.mm/my/page/planning/committee/638 .

There is growing awareness of standards for responsible business conduct in Burma. Responsible business principles are cited in the Myanmar Investment Law and the Myanmar Sustainable Development Plan. Many privately-owned companies, particularly those seeking foreign investment, are increasing transparency and are striving to meet international standards of responsible business conduct. There remains, however, significant variance among companies and sectors. The Myanmar Centre for Responsible Business advises foreign investors to closely engage local partners to ensure they (as well as their contractors and supply chains) meet international standards for responsible business conduct.

Companies operating in Burma’s conflict zones or partnering with military-owned firms face significant reputational risk. Both foreign and domestic companies have been cited by international organizations and NGOs for supporting or enabling human rights abuses in Burma, including in reports by the United Nations Fact-Finding Mission on Myanmar.

Burma became a candidate country in the Extractive Industries Transparency Initiative in 2014.

The Burmese government has continued to prioritize fighting corruption, and resources have been allocated to facilitate the growth of the Anti-Corruption Commission (ACC) into an institution vested with the authority to lead that fight. In 2018, the government amended its anti-corruption law to give the ACC authority to scrutinize government procurements. The ACC has used that authority to initiate criminal cases even in the absence of victim complaints, leading to cases against several high-ranking and some mid-ranking officials for financial impropriety and abuse of office. Family members of politicians can also be prosecuted under the anti-corruption law, though office holders face higher penalties. The ACC opened branch offices in Yangon and Mandalay in 2019, as it continues to increase its investigative capacity.

Some companies are legally required to have compliance programs to detect and prevent bribery of government officials. Under Burma’s Anti-Money Laundering Law, law firms, banks, and companies operating in the insurance and gemstone sectors are required to appoint compliance officers and conduct heightened due diligence on certain customers.

There have also been non-legislative actions to counter corruption. Burma does not have laws to counter conflicts-of-interest in awarding contracts or government procurement. However, the President’s office has issued orders to prevent conflicts-of-interest for construction contracts and several ministries have put in place internal rules to avoid conflicts-of-interest in awarding tenders. In the private sector, some of Burma’s largest companies have developed anti-corruption policies, which they have published on-line.

Enforcement of Burma’s anti-corruption laws remains a challenge. While there have been efforts to reduce some opportunities for higher-level corruption, the lack of transparency regarding military budgets and expenditures remains a substantial impediment to reforms. In addition, a large swath of the economy is engaged in illegal activities beyond the control of the government. These include the production, transportation and distribution of narcotics, and the smuggling of jade, gemstones, timber, wildlife, and wildlife products. NGOs are working with the government to assist in fighting corruption in these areas, but lack any formal role in conducting investigations. There are efforts to promote accountability for government officials, but the lack of resources for key government functions, including law enforcement and civil service salaries, remains a driver for low-level corruption. In its 2019 Corruption Perceptions Index, Transparency International rated Burma 130 out of 175 countries. Investors might encounter corruption when seeking investment permits, during the taxation process, when applying for import and export licenses, and when negotiating land and real estate leases.

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

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

Resources to Report Corruption

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

* A new Anti Corruption Commission head office is currently under construction. However, the above address is still used for all official communications until the new office becomes operational.

The government is sensitive to the threat of terrorism and is engaged with international partners on this issue. There is no evidence to suggest that international terrorist organizations have operational capacity in Burma or are actively targeting Western interests. Additionally, crime in Burma is low compared to other countries within the region. While violence or demonstrations rarely target U.S. or other Western interests in Burma, several ethnic armed groups are engaged in ongoing civil conflict with the Burmese government, which occurs almost exclusively in the ethnic states.  On October 15, 2015, the Burmese government and eight ethnic armed groups (EAGs) signed a Nationwide Ceasefire Agreement (NCA). Two additional armed ethnic groups joined the NCA in February 2018. However, several ethnic armed groups, including the most powerful ones, have not signed the NCA and some signatories continue to fight with the military and other EAGs.

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

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

Burma plans to hold national elections in late 2020. Following decades of military rule, Burma elections were considered to be generally free and fair in November 2015, which the Aung San Suu Kyi-led National League for Democracy won. The military still retains considerable political power under provisions of the 2008 constitution, including 25 percent of all seats in parliament at both the national and region/state level.

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

The military’s nationalization of schools in 1964, its discouragement of English language classes in favor of Burmese, the lack of investment in education by the previous governments of Burma, and the repeated closing of Burmese universities from 1988 to the mid-2000’s have taken a toll on the country’s work force. Most people in the 15- to 39-year-old demographic lack technical skills and English proficiency. In order to address this gap, Burma’s Employment and Skill Development Law went into effect in December 2013 and is being revised. The law provides for compulsory contributions on the part of employers to a “skill development fund,” although this provision has not been implemented.

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

In October 2011, the Burmese government passed the Labor Organization Law, which legalized the formation of trade unions and allows workers to strike. As of April 2019, roughly 2,900 enterprise-level unions have been formed in a variety of industries ranging from garments and textiles to agriculture to heavy industry. The passage of the Labor Organization Law engendered a labor movement in Burma, and there is a low, yet increasing, level of awareness of labor issues among workers, employers, and even government officials. Still, at present, the use of collective bargaining remains limited. Strikes are increasingly common, though they are not currently a significant deterrent to foreign investment.

The Burmese government continues to bring the legal system into compliance with international labor standards. In recent years, the government has passed a number of labor reforms and amended a range of labor-related laws, such as the Shops and Establishment Law, the Payment of Wages Law, and the Occupational Safety and Health Law. In 2019, Parliament also passed the Settlement of Labor Disputes Law. Under this law, parties to labor disputes can seek mediation through arbitration councils. All stakeholders have a say in the selection of arbitration mediators. If arbitration fails, disputes enter the court system. Parliament approved Burma’s ratification of an international treaty to abolish child labor in the country (Minimum Age Convention 138) in December 2019. The ratification process is ongoing. A mechanism to submit forced labor complaints became operational in February 2020.

In November 2014, the governments of the United States, Burma, Japan, Denmark, and the International Labor Organization (ILO) formally launched the Initiative to Promote Fundamental Labor Rights and Practices in Myanmar (Initiative) and held the fourth Stakeholder’s Forum in February 2020. The overarching goal of the Initiative is to promote a culture of compliance with fundamental labor rights. The Initiative is intended to cultivate relationships between business, labor, and civil society stakeholders and the Burmese government.

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

Employers may face some restrictions in firing or laying off workers. Under Burmese law, certain employers must provide notice to the Ministry of Labor, Immigration, and Population when laying off workers. Employers also must provide warnings before firing a worker for breach of an employment contract. Fired or laid-off workers can collect unemployment insurance if they and their employer made contributions before termination.

Burma does not waive labor laws to attract foreign investment, though there is some ambiguity as to which labor laws apply in Special Economic Zones. This issue has yet to be definitively adjudicated.

There is high potential in Burma for additional DFC investment particularly in the ICT, retail, and agricultural sectors. The DFC’s predecessor organization, OPIC (Overseas Private Investment Corporation), focused its portfolio investments in Burma on the telecommunication and microfinance sectors. In May 2013, OPIC signed an Investment Incentive Agreement with Burma.

* https://www.dica.gov.mm/sites/dica.gov.mm/files/document-files/yearly_country_4.pdf 

** Accurate statistical data is limited in Burma, although this capacity is also being developed.

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

Table 4: Sources of Portfolio Investment
Data not available.

Geoffrey D. Chin, Economics Professional Associate
U.S. Embassy/110 University Avenue/Kamayut Township 11041/Rangoon, Burma
Telephone: 95 (0)1 7536 509
Email Address: chingd@state.gov

Policies Towards Foreign Direct Investment

Estonia is currently open for FDI and foreign investors are treated on an equal footing with local investors, though the government is developing a screening mechanism to adhere to the EU Foreign Investment Screening Regulation (Regulation 2019/452 ) entered into force on 10 April 2019. This new regulation will be applicable from 11 October 2020 and creates an information-sharing mechanism between Member States and allows Member States and the European Commission to comment on foreign investments foreseen in other Member States.

The Estonian Investment Agency (EIA), a part of Enterprise Estonia, is a government agency promoting foreign investments in Estonia and assisting international companies in finding business opportunities in Estonia. EIA offers comprehensive, one-stop investment consultancy services, free of charge. The agency’s goal is to increase awareness of business opportunities in Estonia and promote the image of Estonia as an attractive country for investments. More info: http://www.investinestonia.com/en/estonian-investment-agency/about-the-agency 

Limits on Foreign Control and Right to Private Ownership and Establishment

Estonia’s government has not set limitations on foreign ownership. Licenses are required for foreign investors to enter the following sectors: mining, energy, gas and water supply, railroad and transport, waterways, ports, dams and other water-related structures and telecommunications and communication networks. The Estonian Financial Supervision Authority issues licenses for foreign interests seeking to invest in or establish a bank. Additionally, the Estonian Competition Authority reviews transactions for anti-competition concerns. Government review and licensing have proven to be routine and non-discriminatory.

As a member of the EU, the Government of Estonia (GOE) maintains liberal policies in order to attract investment and export-oriented companies. Creating favorable conditions for FDI and openness to foreign trade has been the foundation of Estonia’s economic strategy. Existing requirements are not intended to restrict foreign ownership but rather to regulate it and establish clear ownership responsibilities.

Other Investment Policy Reviews

In 2019 the government had a third-party investment policy review (IPR) through the Organization for Economic Co-operation and Development (OECD).  The outcome showed Estonia’s economy is performing well and public finances are in excellent shape, yet growth is softening and spending pressures from infrastructure needs and an ageing population are mounting. The report said efforts should now focus on improving income equality and well-being, greening growth and accelerating the country’s digital transformation. Full report: http://www.oecd.org/economy/estonia-economic-snapshot.

Business Facilitation

The World Bank’s Ease of Doing Business report ranks Estonia in 18^th place out of 190 countries on the ease of Starting a Business. Economic freedom, ease of doing business, per capita investments, the record-low national debt, euro zone membership, and low corruption scores – all these factors play a role in fostering a good climate for business facilitation.

In Estonia there are two ways to register your business:

• Electronic registration via the e-Commercial Register’s Company Registration Portal (takes between 5 minutes and 1 business day)

• Through a notary (takes 2-3 business days)

Access to the Register: https://www.eesti.ee/en/doing-business/establishing-a-company/comparison-of-each-form-of-business/ 

On July 1, 2014, an amended Taxation Act establishing the employment register entered into force, requiring all natural and legal employers to register the persons employed by them with the Estonian Tax and Customs Board.  The company must register itself as a value-added tax payer if the taxable turnover of the company, excluding imports of goods, exceeds EUR 40,000 as calculated from the beginning of the calendar year.

There are certain areas of activity (like construction, electrical works, fire safety, financial services, security services, etc.) in which business operation requires an additional registration in the Register of Economic Activities (MTR), but this can be done after registration of the company in the Commercial Register: https://mtr.mkm.ee/ 

International institutions and organizations give Estonia’s economic policies high marks. The Wall Street Journal/Heritage Foundation’s 2020 Index of Economic Freedom ranked Estonia 10^th in the world. The index is a composite of scores in monetary policy, banking and finance, open markets, wages and prices. Full report: https://www.heritage.org/index/country/estonia  Estonia scores highly on this scale for investment freedom, fiscal freedom, financial freedom, property rights, business freedom, and monetary freedom.

The World Bank DB 2019 Starting a Business Score also ranks Estonia 18^th in the world.  https://www.doingbusiness.org/en/rankings

Outward Investment

Estonia does not restrict domestic investors from investing abroad nor does it promote outward investment. Estonia companies have invested abroad about USD 10 billion, mostly into EU countries. The main sectors for outward investments are services, manufacturing, real estate and financial.

Estonian BITs with third countries are available at the following link:

http://investmentpolicyhub.unctad.org/IIA/CountryBits/66#iiaInnerMenu 

A Bilateral Taxation Treaty with the U.S. came into force on January 1, 2000. The United States and Estonia signed a Foreign Account Tax Compliance Act (FATCA) agreement in April 2014.

List of agreements with the United States can be found at: http://www.vm.ee/en/countries/united-states-america?display=relations#agreements 

Transparency of the Regulatory System

The Government of Estonia has set transparent policies and effective laws to foster competition and establish “clear rules of the game.” Despite these measures, due to the small size of Estonia’s commercial community, instances of favoritism are not uncommon.

Accounting, legal, and regulatory procedures are transparent and consistent with international norms. Financial statements should be prepared in accordance with either:

• accounting principles generally accepted in Estonia; or
• International Financial Reporting Standards (IFRS) as adopted by the EU.

Listed companies and financial institutions are required to prepare financial statements in accordance with IFRS as adopted by the EU.

The Estonian Generally Accepted Accounting Principles (GAAP) are written by the Estonian Accounting Standards Board (EASB).  Estonian GAAP, effective since 2013, is based on IFRS for Small and Medium-sized Entities (IFRS for SMEs) with limited differences from IFRS for SMEs with regard to accounting policies as well as disclosure requirements. More info: https://investinestonia.com/business-in-estonia/establishing-company/accounting-requirements/ 

The Minister of Justice has responsibility for promoting regulatory reform. The Legislative Quality Division of the Ministry of Justice provides an oversight and coordination function for Regulatory Impact Analysis (RIA) and evaluations with regards to primary legislation. For government strategies, EU negotiations and subordinate regulations, oversight responsibilities lie within the Government Office.

The government of Estonia has placed a strong focus on accessibility and transparency of regulatory policy by making use of online tools. There is an up-to-date database of all primary and subordinate regulations (https://www.riigiteataja.ee/en/ ) in an easily searchable format. An online information system tracks all legislative developments, and makes available RIAs and documents of legislative intent (http://eelnoud.valitsus.ee/main ). Estonia also established the website www.osale.ee , an interactive website of all ongoing consultations where every member of the public can submit comments and review comments made by others. Regulations are reviewed on the basis of scientific and data-driven assessments.

Estonia, an OECD member country, has committed at the highest political level to an explicit whole-of-government policy for regulatory quality and has established sufficient regulatory oversight. Estonia scores the same as the United States on the World Bank`s Global Indicators of Regulatory Governance on whether governments publish or consult with public about proposed regulations: http://rulemaking.worldbank.org/en/data/explorecountries/estonia   Estonia’s widely-praised “e-governance” solutions and other bureaucratic procedures are generally far more streamlined and transparent than those of other countries in the region and are among the easiest to use globally. In addition, Estonia’s budget and debt obligations are widely and easily accessible to the general public on the Ministry of Finance website.

International Regulatory Considerations

Estonia is a member of the EU.  An EU regulation is a legal act of the European Union that becomes immediately enforceable as law in all member states simultaneously. Regulations can be distinguished from directives which, at least in principle, need to be transposed into national law. Regulations can be adopted by means of a variety of legislative procedures depending on their subject matter. European Standards are under the responsibility of the European Standardization Organizations (CEN, CENELEC, ETSI) and can be used to support EU legislation and policies.

Estonia has been a member of WTO since 13 November 1999. Estonia is a signatory to the Trade Facilitation Agreement (TFA) since 2015.

Legal System and Judicial Independence

Estonia’s judiciary is independent and insulated from government influence. The legal system in Estonia is based on the Continental European civil law model and has been influenced by the German legal system.  In contrast to common law countries, Estonia has detailed codifications.

Estonian law is divided into private and public law. Generally, private law consists of civil law and commercial law.  Public law consists of international law, constitutional law, administrative law, criminal law, financial law and procedural law.

Estonian arbitral tribunals can decide in cases of civil matters that have not previously been settled in court. More on Estonian court system: https://www.riigikohus.ee/en .  Arbitration is usually employed because it is less time consuming and cheaper than court settlements. The following disputes can be settled in arbitral tribunals:

–        Labor disputes;

–        Lease disputes;

–        Consumer complaints arguments;

–        Insurance conflicts;

–        Public procurement disputes;

–        Commercial and industrial disputes.

The Court of Arbitration of the Estonian Chamber of Commerce and Industry serves as a permanent arbitration court to settle disputes arising from private law relationships, including foreign trade and other international business relations. More info: https://www.koda.ee/en/about-chamber/court-arbitration 

Recognition of court rulings of EU Member States is regulated by EU legislation. More: http://www.europarl.europa.eu/RegData/etudes/STUD/2015/509988/IPOL_STU(2015)509988_EN.pdf 

Laws and Regulations on Foreign Direct Investment

Estonia is part of the Continental European legal system (civil law system). The most important sources of law are legal instruments such as the Constitution, European Union law, international agreements and Acts and Regulations. Major laws affecting incoming foreign investment include: the Commercial Code, Taxation Act, Income Tax Act, Value Added Tax Act, Social Tax Act, Unemployment Insurance Payment Act. More information is available at https://www.riigiteataja.ee/en/ .  An overview of the investment-related regulations can be found: http://www.investinestonia.com/en/investment-guide/legal-framework 

Competition and Anti-Trust Laws

The Estonian Competition Authority reviews transactions for anti-competition concerns. Government review and licensing have proven to be routine and non-discriminatory.

More info on specific competition cases: https://www.konkurentsiamet.ee/en

Expropriation and Compensation

Private property rights are observed in Estonia. The government has the right to expropriate for public interest related to policing the borders, public ports and airports, public streets and roads, supply to public water catchments, etc. Compensation is offered based on market value. Cases of expropriation are extremely rare in Estonia, and the Embassy is not aware of any expropriation cases involving discrimination against foreign owners.

Dispute Settlement

ICSID Convention and New York Convention

Estonia has been a member of the International Center for the Settlement of Investment Disputes (ICSID) since 1992 and a member of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards since 1993, meaning local courts are obliged to enforce international arbitration awards that meet certain criteria

Investor-State Dispute Settlement

The Embassy is not aware of any claims under Estonia’s Bilateral Investment Treaty (BIT) with the United States. Investment disputes concerning U.S. or other foreign investors in Estonia are rare.

In October 2014, AS Tallinna Vesi and its shareholder United Utilities (Tallinn) B.V., registered in the Kingdom of The Netherlands, commenced international arbitration proceedings against the Republic of Estonia for breach of the Agreement on the Encouragement and Reciprocal Protection of Investments between the Kingdom of The Netherlands and the Republic of Estonia. In June 2019 a majority of the arbitration tribunal decided to dismiss AS Tallinna Vesi´s and United Utilities (Tallinn) B.V.’s claims against the Republic of Estonia.

International Commercial Arbitration and Foreign Courts

The Arbitration Court of the Estonian Chamber of Commerce and Industry is a permanent arbitration court which settles disputes arising from contractual and other civil law relationships, including foreign trade and other international economic relations. More info: http://www.lawyersestonia.com/arbitration-in-estonia 

Recognition of court rulings of EU Member States is regulated by EU legislation. More: http://www.europarl.europa.eu/RegData/etudes/STUD/2015/509988/IPOL_STU(2015)509988_EN.pdf 

Local courts recognize and enforce foreign arbitral awards. The Embassy is not aware of any investment disputes involving SOEs.

Bankruptcy Regulations

Bankruptcy is not criminalized in Estonia.  Bankruptcy procedures in Estonia fall under the regulations of Bankruptcy Act that came into force in February 1997. The Estonian Bankruptcy Act focuses on the protection of the debtors and creditors’ rights. According to the Act, bankruptcy proceedings in Estonia can be compulsory, in which case a court will decide to commence the procedures for debt collection, or voluntarily by company reorganization. More info on bankruptcy procedures: http://www.lawyersestonia.com/bankruptcy-procedures-in-estonia 

The detailed information about the creditor’s rights: https://www.riigiteataja.ee/en/eli/ee/Riigikogu/act/504072016002/consolide 

More info from World Bank’s Doing Business Report on Estonian ranking for ease of “resolving insolvency” http://www.doingbusiness.org/data/exploreeconomies/estonia#resolving-insolvency 

Investment Incentives

Estonia is open for FDI and foreign investors are treated on an equal footing with local investors. There are no investment incentives or government guarantees available to foreign investors.

Foreign Trade Zones/Free Ports/Trade Facilitation

Estonia’s Customs Act permits the government to establish free trade zones. Goods in a free trade zone are considered to be outside the customs territory. Value-added tax, excise, import and export duties (as well as possible fees for customs services) do not have to be paid on goods brought into free trade zones for later re-export.

In Estonia, there are four free trade zones: Muuga port (near Tallinn), Sillamae port (northeast Estonia), Paldiski north port (northwest Estonia) and in Valga (southern Estonia). All free trade zones are open for FDI on the same terms as Estonian investments.

Performance and Data Localization Requirements

There are no specific performance requirements for foreign investments that differ from those required of domestic investments. The Estonian government does not mandate local employment or follow “forced localization” in which foreign investors must use domestic content in goods or technology.

Estonia continues to refine its immigration policies and practices. More info on work permits, visas, residence permits in Estonia: https://www.politsei.ee/en 

U.S. citizens are exempt from the quota regulating the number of immigration and residence permits issued, as are citizens of the EU and Switzerland.

There are no requirements for foreign IT service providers to turn over source code and/or provide access to surveillance (e.g., backdoors into hardware and software or turning over keys for encryption) or to maintain a certain amount of data storage in Estonia. There is no general requirement to register data processing activities in Estonia. Registration is required only if the data processor handles sensitive personal data.

The EU General Data Protection Regulation (GDPR) entered into force on May 25, 2018, with the goal of harmonizing the already existing data protection laws across Europe. The Estonian Personal Data Protection Act came into force on January 15, 2019.  More info: https://e-estonia.com/how-to-be-compliant-gdpr-5-steps/ 

Restrictions on transfer of data offshore:

Information on data transfer is available at: https://www.riigiteataja.ee/en/eli/523012019001/consolide  or by contacting

Estonian Data Protection Inspectorate
39 Tatari St., 10134 Tallinn
Tel: (+372) 627 4135.
https://www.aki.ee/en 

Real Property

Secured interests in property are recognized and enforced. Mortgages are quite common for both residential and commercial property and leasing as a means of financing is widespread and efficient.

The legal system protects and facilitates acquisition and disposition of all property rights, including land, buildings, and mortgages. As of 1 October 2011, land reform in Estonia was almost complete.  Restitution and privatization of lands commenced in 1991, but in almost every municipality there remain several complicated cases to be settled.  In total, less than 4 percent of the Estonian territory (waterbodies included) lacks a clear title.

Foreign individuals and companies are allowed to acquire real estate with the permission of the local authorities. There are legal restrictions on acquiring agricultural and woodland of 10 hectares or more, and permission from the county governor is needed.  Foreign individuals are not allowed to acquire land located on smaller islands, or listed territories adjacent to the Russian border.

Property may be taken from the owner without the owner`s consent only in the public interest, pursuant to a procedure provided by law, and for fair and immediate compensation. Everyone whose property has been taken from them without consent has the right to bring an action in the courts to contest the taking of the property, the compensation, or the amount of the compensation.

More info: http://www.globalpropertyguide.com/Europe/Estonia/Buying-Guide 

http://www.doingbusiness.org/en/data/exploreeconomies/estonia/registering-property#DB_rp 

http://www.lawyersestonia.com/purchase-a-property-in-estonia 

Intellectual Property Rights

Estonia maintains a robust intellectual property rights (IPR) regime. The quality of IP protection in legal structures is strong, enforcement is good, and infringement and theft are uncommon. Estonia adheres to the World Intellectual Property Organization (WIPO) Berne Convention, the Paris Convention, the Rome Convention, the Geneva Convention, and the World Trade Organization (WTO) Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).  Estonian legislation fully complies with EU directives granting protection to authors, performing artists, record producers, and broadcasting organizations.  Equal protection against unauthorized use is provided via international conventions and treaties to foreign and Estonian authors.

Companies should recognize that IPR is protected differently in Estonia than in the United States, and U.S. laws do not protect IPR in Estonia.  Registration of patents and trademarks in Estonia is on a first-in-time, first-in-right basis, so companies should consider applying for trademark and patent protection before selling products or services in the Estonian market. IPR is primarily a private right, and the U.S. government generally cannot enforce rights for private individuals in Estonia.  It is the responsibility of the rights’ holders to register, protect, and enforce their rights where relevant, retaining their own counsel and advisors.  Companies may wish to seek advice from local attorneys or IPR consultants.

Estonia is not included in USTR’s Special 301 Report or the Notorious Markets List.

Estonian Customs tracks and reports periodically on seizures of counterfeit goods.  In 2019, the Estonian Tax and Customs Board processed 249 cases involving counterfeit goods resulting in seizures of 10,013,641 items.  Most of the infringed goods were detected in mail, and the volume of goods seized per case was small.  The largest trademark-infringing commodity groups were footwear, clothes, accessories, toys, and electronics.  In Estonia, IPR crimes are prosecuted.

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/ 

Capital Markets and Portfolio Investment

Estonia is a member of the Euro zone. Estonia’s financial sector is modern and efficient. Credit is allocated on market terms and foreign investors are able to obtain credit on the local market. The private sector has access to an expanding range of credit instruments similar in variety to those offered by banks in Estonia’s Nordic neighbors Finland and Sweden.

Legal, regulatory, and accounting systems are transparent and consistent with international norms. The Estonian capital markets are rather inactive as both stock and bond market liquidity has been in a downward trend for the past ten years.

The Security Market Law complies with EU requirements and enables EU securities brokerage firms to deal in the market without establishing a local subsidiary. The NASDAQ OMX stock exchanges in Tallinn, Riga and Vilnius form the Baltic Market, which facilitates cross-border trading and attracting more investments to the region. This includes sharing the same trading system and harmonizing rules and market practices, all with the aim of reducing the costs of cross-border trading in the Baltic region.

Certain investment services and products may be limited to U.S. persons in Estonia due to financial institutions’ response to the U.S. Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).

Estonian financial services market overview:  https://www.fi.ee/en?id=12737 

IMF report on Estonia: https://www.imf.org/en/Publications/CR/Issues/2020/01/21/Republic-of-Estonia-2019-Article-IV-Consultation-Press-Release-Staff-Report-and-Statement-by-48963 

Money and Banking System

Estonia’s banking system has consolidated rapidly. Total assets of the commercial banks were approximately EUR 32 billion in early 2020. The banking sector is dominated by two major commercial banks, Swedbank and SEB, both owned by Swedish banking groups. These two banks control approximately 65 percent of the financial services market. The third largest bank is Luminor Bank. There are no state-owned commercial banks or other credit institutions.

More information is available at: http://statistika.eestipank.ee/#/en/p/FINANTSSEKTOR/147/645 

The Scandinavian-dominated Estonian banking system is modern and efficient. Local and international banks in Estonia provide both domestic and international services (including internet and mobile banking) at competitive rates, as well as a full range of financial, insurance, accounting, and legal services. Estonia has a highly advanced internet banking system: currently 98 percent of banking transactions are conducted via the internet.

The Bank of Estonia (Eesti Pank) is the independent central bank. As Estonia is part of the Euro zone, the core tasks of the Bank are to help to define the monetary policy of the European Community and to implement the monetary policy of the European Central Bank, including the circulation of cash in Estonia. Eesti Pank is also responsible for holding and managing Estonian official foreign exchange reserves as well as supervising overall financial stability and maintaining reliable and well-functioning payment systems. The Central Bank and the government hold no shares in the banking sector.

EU legislation requires Estonia to make its AML regime compliant with EU directives. Due to strict anti-money laundering (AML) regulations and bank compliance practices, it can be difficult for non-residents to open a bank account. More info on opening a bank account for investors: https://transferwise.com/gb/blog/opening-a-bank-account-in-estonia   Changes in local AML regulations and oversight are evolving following some large-scale money laundering cases through branches of Nordic banks uncovered in Estonia.

Foreign Exchange and Remittances

Foreign Exchange Policies

Estonia has been a member of the euro currency area since 2011. There are no restrictions on currency transfers or conversion.

Remittance Policies

There are no restrictions, limitations or delays involved in converting or transferring funds associated with an investment (including remittances of investment capital, earnings, loan repayments, or lease payments) into other currencies at market rates. There is no limit on dividend distributions as long as they correspond to a company’s official earnings records. If a foreign company ceases to operate in Estonia, all its assets may be repatriated without restriction. These policies are long-standing; there is no indication that they will be altered in the future. Foreign exchange is readily available for any purpose.

Sovereign Wealth Funds

There are no sovereign wealth funds or state owned investment funds in Estonia.

In Estonia SOEs are primarily engaged in the provision of services of strategic importance.

In early 2019, the Republic of Estonia held an interest in 29 companies of which 27 were solely owned by the state. The largest SOE`s are Eesti Energia (electricity production), Elering (electricity TSO), Estonian Railways, Tallinn Airport, and the Port of Tallinn.

The full list of SOEs is available at: https://www.eesti.ee/eng/contacts/riigi_osalusega_ariuhingud_1/riigi_osalusega_ariuhingud_2 

SOEs have assets worth about 6.6 billion euros, and they employ about 13,000 people.

Public enterprises operate on the same legal basis as private enterprises. Until recently SOEs had politically-appointed boards but today board members are appointed by an independent committee. SOEs are governed by the different ministries.

Competition and public procurement of SOEs is subject to EU law.  All SOEs have audited accounts. Large SOEs’ audits are publicly available on their websites.  The activities of the SOEs are also audited by the National Audit Office of Estonia, which conducts assessments and provides recommendations directly to the Parliament.

Privatization Program

Estonia’s privatization program is largely complete. Only a small number of enterprises remain wholly state-owned. There have been recent discussions on the political level about the possible listing of additional SOEs, such as Port of Tallinn and part of Eesti Energia.

The majority of OECD Guidelines for Multinational Enterprises are incorporated into Estonian legislation. The non-profit organization, Responsible Business Forum in Estonia, aims to further corporate social responsibility (CSR) in Estonia, and is a partner in the CSR360 Global Partner Network. CSR360 (www.csr360gpn.org) is a network of independent organizations, which work as the interface of business and society to mobilize business towards socially responsible aims.

The Estonian Ministry of Economy and Communication works closely with CSR on educating private businesses and SOEs on responsible business conduct, recognizing best practices, and factoring RBC policies or practices into its procurement decisions. The American Chamber of Commerce in Estonia also maintains a Corporate Social Responsibility committee.

Government in general enforces the labor, human rights, employment rights, consumer protection, and environmental protection related laws effectively and these requirements cannot be waived to attract foreign investment. Estonia has adhered to the OECD Guidelines for Multinational Enterprises since 2001. The National Contact Point can be accessed here:

https://www.mkm.ee/en/objectives-activities/economic-development/oecd-guidelines-and-surveillance%20 

Natural resource extraction related revenues, including mining licenses, are less than 0.6 percent of government budget revenues and less than 0.3 percent of the GDP.  The revenues are reflected in the national budget.

Here you can find a summary of the strength of minority shareholder protections against misuse of corporate assets by directors for their personal gain:  http://www.doingbusiness.org/data/exploreeconomies/estonia/protecting-minority-investors/ 

Estonia has laws, regulations, and penalties to combat corruption, and while corruption is not unknown, it has generally not been reported to pose a major problem for foreign investors. Both offering and taking bribes are criminal offenses which can bring imprisonment of up to five years. While “payments” that exceed the services rendered are not unknown, and “conflict of interest” is not a well-understood issue, surveys of American and other non-Estonian businesses have shown the issue of corruption is not a serious concern.

In 2019, Transparency International (TI) ranked Estonia 18th out of 180 countries on its Corruption Perceptions Index.

Anti-corruption policy and implementation are coordinated by the Ministry of Justice and the strategy is implemented by all ministries and local governments.  The Internal Security Service is effective in investigating corruption offences and criminal misconduct, leading to the conviction of several high-ranking state officials. Until recently corruption was most commonly associated with public sector activities. Recently the government initiated efforts to educate private sector businesses about the risks of business-to-business corruption, for example within procurement activities.

Estonia cooperates in fighting corruption at the international level and is a member of GRECO (Group of States Against Corruption). Estonia is a party to both the Council of Europe (CoE) Criminal Law Convention on Corruption and the Civil Law Convention. The Criminal Law Convention requires criminalization of a wide range of national and transnational conduct, including bribery, money-laundering, and accounting offenses. It also incorporates provisions on liability of legal persons and witness protection. The Civil Law Convention includes provisions on compensation for damage relating to corrupt acts, whistleblower protection, and validity of contracts, inter alia.

More info on the corruption level in different sectors in Estonia can be found at: https://www.business-anti-corruption.com/country-profiles/estonia/

UN Anticorruption Convention, OECD Convention on Combatting Bribery

The UN Anticorruption Convention entered into force in Estonia in 2010. Estonia has been a full participant in the OECD Working Group on Bribery in International Business since 2004; the underlying Convention entered into force in Estonia in 2005. The Convention obligates Parties to criminalize bribery of foreign public officials in the conduct of international business.

The United States meets its international obligations under the OECD Anti-bribery Convention through the U.S. Foreign Corrupt Practices Act.

Resources to Report Corruption

Government agency contacts responsible for combating corruption:

+372 6123657 Central Criminal Police corruption hotline

Or e-mail: korruptsioonivihje@politsei.ee

Transparency International in Estonia: http://www.transparency.org/whoweare/contact/org/nc_estonia 

Civil unrest generally is not a problem in Estonia, and there have been no incidents of terrorism. Public gatherings and demonstrations may occur on occasion in response to political issues, but these have proceeded, with very few exceptions, without incidence of violence in the past.

Estonia has a small population – 1.31 million people. The average monthly Estonian salary at the end of 2019 was about USD 1,700. About 75 percent of the workforce is employed in the services sector. With an aging population and a negative birth rate, Estonia, like many other countries of Central and Eastern Europe, faces demographic challenges affecting its long-term supply of labor. Improving labor efficiency is a key focus for Estonia in the short-to-mid-term.  At the end of 2019, the unemployment rate was 4.4 percent but it is expected to increase significantly in 2020 due to the Covid-19 crisis.  More on the labor market: http://www.eestipank.ee/en/publications/series/labour-market-review 

The Law of Obligations Act, the Individual Labor Dispute Resolution Act and the Occupational Health and Safety Act address employment and labor issues.  Labor laws may not be waived in order to attract or retain investment. Labor laws are generally strict, and the principle of employee protection is applied in which the worker is considered the economically weaker party. Upon termination of an employment contract due to a lay-off, an employer must pay an employee compensation in the amount of one month’s average wage. In addition, an insurance benefit shall be paid to an employee by the Estonian Unemployment Insurance Fund depending on the length of service. More info: https://www.oecd.org/els/emp/Estonia.pdf 

Trade union membership remains low compared to most countries in the EU. Estonia has ratified all eight ILO Core Conventions.

Estonian labor regulations on labor abuses, health and safety standards, labor disputes etc. are effectively monitored by the Estonian Labor Inspectorate: http://www.ti.ee/en/ 

Estonia has a bilateral agreement with the Overseas Private Investment Corporation, the predecessor agency to the U.S. International Development Finance Corporation (DFC).

Source: Bank of Estonia, IMF http://data.imf.org/regular.aspx?key=60587804 

United States Embassy, Political/Economic Section
Kentmanni 20, 15099 Tallinn, Estonia
Tel: 372 668 8130
Contact: Mrs. Reene Moschella, Economic/Commercial Specialist
E-mail:  Moschellar@state.gov

Policies Towards Foreign Direct Investment

Hong Kong is the world’s third-largest recipient of foreign direct investment (FDI) according to the United Nations Conference on Trade and Development’s (UNCTAD) World Investment Report 2019. The HKG’s InvestHK encourages inward investment, offering free advice and services to support companies from the planning stage through to the launch and expansion of their business. U.S. and other foreign firms can participate in government financed and subsidized research and development programs on a national treatment basis. Hong Kong does not discriminate against foreign investors by prohibiting, limiting, or conditioning foreign investment in a sector of the economy.

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

According to HKG statistics, 4,031 overseas companies had regional operations registered in Hong Kong in 2019. The United States has the largest number with 735. Hong Kong is working to attract more start-ups as it works to develop its technology sector and about 34 percent of start-ups in Hong Kong come from overseas.

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

Limits on Foreign Control and Right to Private Ownership and Establishment

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

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

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

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

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

Other Investment Policy Reviews

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

Business Facilitation

The Efficiency Office under the Innovation and Technology Bureau is responsible for business facilitation initiatives aimed at improving the business regulatory environment of Hong Kong.

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

Outward Investment

As a free market economy, Hong Kong does not promote or incentivize outward investment, nor restrict domestic investors from investing abroad. Mainland China and British Virgin Islands were the top two destinations for Hong Kong’s outward investments in 2018.

Transparency of the Regulatory System

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

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

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

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

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

International Regulatory Considerations

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

Legal System and Judicial Independence

Hong Kong’s common law system is based on the United Kingdom’s, and judges are appointed by the Chief Executive on the recommendation of the Judicial Officers Recommendation Commission.. Regulations or enforcement actions are appealable and they are adjudicated in the court system.

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

Laws and Regulations on Foreign Direct Investment

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

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

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

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

Competition and Anti-Trust Laws

The independent Competition Commission (CC) investigates anti-competitive conduct that prevents, restricts, or distorts competition in Hong Kong. In January 2019, a newly-established Hong Kong Seaport Alliance (HKSA) announced that they had agreed to operate and manage 23 berths, a reported market share of 95 percent, across eight terminals at Kwai Tsing Container Terminal in a bid to deliver more efficient services to carriers and enhance the overall port’s competitiveness.  The CC subsequently launched, as a matter of priority, a probe, still underway as of March 2020, into whether the HKSA acted in contravention of competition rules.

Expropriation and Compensation

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

Dispute Settlement

ICSID Convention and New York Convention

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

Investor-State Dispute Settlement

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

International Commercial Arbitration and Foreign Courts

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

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

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

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

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

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

Bankruptcy Regulations

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

The Companies (Winding Up and Miscellaneous Provisions) Ordinance aims to improve and modernize the corporate winding-up regime by increasing creditor protection and further enhancing the integrity of the winding-up process.

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

Hong Kong’s average duration of bankruptcy proceedings is just under ten months, ranking 45th in the world for resolving insolvency, according to the World Bank’s Doing Business 2020 rankings.

Investment Incentives

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

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

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

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

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

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

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

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

The HKG will set up a USD 256.4 million Re-industrialization Funding Scheme in 2020 to subsidize manufacturers, on a matching basis, setting up smart production lines in Hong Kong.

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

In February 2020, the Financial Secretary announced that the HKG will inject USD 44 million for a pilot subsidy scheme to encourage the logistics industry to enhance productivity through the application of technology.

Foreign Trade Zones/Free Ports/Trade Facilitation

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

Hong Kong and mainland China have a Free Trade Agreement Transshipment Facilitation Scheme that enables mainland-bound consignments passing through Hong Kong to enjoy tariff reductions in the mainland. The arrangement covers goods traded between mainland China and its trading partners, including ASEAN members, Australia, Bangladesh, Chile, Costa Rica, Iceland, India, New Zealand, Pakistan, Peru, South Korea, Sri Lanka, Switzerland and Taiwan.

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

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

Performance and Data Localization Requirements

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

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

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

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

Real Property

The Basic Law ensures protection of leaseholders’ rights in long-term leases that are the basis of the SAR’s real property system.  The Basic Law also protects the lawful traditional rights and interests of the indigenous inhabitants of the New Territories. The real estate sector, one of Hong Kong’s pillar industries, is equipped with a sound banking mortgage system. HK ranked 51st for ease of registering property, according to the World Bank’s Doing Business 2020 rankings.

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

Intellectual Property Rights

Hong Kong generally provides robust intellectual property rights (IPR) protection and enforcement and for the most part has instituted an IP regime consistent with international standards. Hong Kong has effective IPR enforcement capacity, a judicial system that supports enforcement efforts with an effective public outreach program that discourages IPR-infringing activities.   Despite the robustness of Hong Kong’s IP system, challenges remain, particularly in copyright infringement and effective enforcement against the heavy, bi-directional flow of counterfeit goods.

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

The HKG devotes significant resources to IPR enforcement. Hong Kong courts have imposed longer jail terms than in the past for violations of Hong Kong’s Copyright Ordinance. CED works closely with foreign customs agencies and the World Customs Organization to share best practices and to identify, disrupt, and dismantle criminal organizations engaging in IP theft that operate in multiple countries. The government has conducted public education efforts to encourage respect for IPR. Pirated and counterfeit products remain available on a small scale at the retail level throughout Hong Kong. CED detected a total of 888 infringement cases in 2019, a 6.6 percent decrease from 2018. Of these cases, 203 involved internet crime.

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

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

The HKG has consulted unsuccessfully with internet service providers and content user representatives on a voluntary framework for IPR protection in the digital environment. It has also failed to pass amendments to the Copyright Ordinance that would enhance copyright protection against online piracy. As of February 2020, the Infringing Website List Scheme (IWLS) established by the Hong Kong Creative Industries Association to clamp down on websites that display pirated content reportedly included 60 infringing websites in the portal. In addition, 25 HKG agencies have been assigned with an individual password for checking with the IWLS prior placing digital advertisements and tenders.

The Patent Ordinance allows for granting an independent patent in Hong Kong based on patents granted by the United Kingdom and Mainland China. Patents granted in Hong Kong are independent and capable of being tested for validity, rectified, amended, revoked, and enforced in Hong Kong courts. In December 2019, the Original Grant Patent system came into operation. The new system takes into account the patent systems generally established in regional and international patent treaties, while retaining the existing re-registration system for the granting of standard patents.

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

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

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

There are eight types of IP rights for which the capital expenditure, such as registration expenditure and purchase cost, are deductible.

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

Capital Markets and Portfolio Investment

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

Asset and wealth managed in Hong Kong posted a record high of USD 3.1 trillion in 2018 (the latest figure available), with two-thirds of that coming from overseas investors. In order to enhance the competitiveness of Hong Kong’s fund industry, open-ended fund companies as well as onshore and offshore funds are offered a profits tax exemption.

The HKMA’s Infrastructure Financing Facilitation Office (IFFO) provides a platform for pooling the efforts of investors, banks, and the financial sector to offer comprehensive financial services for infrastructure projects in emerging markets. IFFO is an advisory partner of World Bank Group’s Global Infrastructure Facility.

Under the Insurance Companies Ordinance, insurance companies are authorized by the Insurance Authority to transact business in Hong Kong. As of March 2020, there were 163 authorized insurance companies in Hong Kong, 70 of them foreign or mainland Chinese companies.

The Hong Kong Stock Exchange’s total market capitalization dropped by 28.0 percent to USD 4.9 trillion in 2019, with 2,449 listed firms at year-end. Hong Kong Exchanges and Clearing Limited, a listed company, operates the stock and futures exchanges. The Securities and Futures Commission, an independent statutory body outside the civil service, has licensing and supervisory powers to ensure the integrity of markets and protection of investors.

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

In 2019, a total of 284 Chinese enterprises had “H” share listings on the stock exchange, with combined market capitalization of USD 823.9 billion. The Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connects allow individual investors to cross trade Hong Kong and mainland stocks. In December 2018, the ETF Connect, which was planned to allow international and mainland investors to trade in exchange-traded fund products listed in Hong Kong, Shanghai and Shenzhen, was put on hold indefinitely due to “technical issues.”

By the end of 2019, 50 mainland mutual funds and 23 Hong Kong mutual funds were allowed to be distributed in each other’s markets through the mainland-Hong Kong Mutual Recognition of Funds scheme. Hong Kong also has mutual recognition of funds programs with Switzerland, Ireland, France, the United Kingdom, and Luxembourg.

Hong Kong has developed its debt market with the Exchange Fund bills and notes program. Hong Kong Dollar debt stood at USD 278.0 billion by the end of 2019. As of February 2020, RMB 1,056.6 billion (USD 147.9 billion) of offshore RMB bonds were issued in Hong Kong. Multinational enterprises, including McDonald’s and Caterpillar, have also issued debt. The Bond Connect, a mutual market access scheme, allows investors from mainland China and overseas to trade in each other’s respective bond markets through a financial infrastructure linkage in Hong Kong.

The HKG requires workers and employers to contribute to retirement funds under the Mandatory Provident Fund (MPF) scheme. Contributions are expected to channel roughly USD five billion annually into various investment vehicles. By the end of 2019, the net asset values of MPF funds amounted to USD 124.3 billion.

Money and Banking System

Hong Kong has a three-tier system of deposit-taking institutions: licensed banks (163), restricted license banks (17), and deposit-taking companies (13). HSBC is Hong Kong’s largest banking group. With its majority-owned subsidiary Hang Seng Bank, HSBC controls more than 40.3 percent of Hong Kong Dollar (HKD) deposits. The Bank of China (Hong Kong) is the second-largest banking group with 13.9 percent of HKD deposits throughout 200 branches. In total, the five largest banks in Hong Kong had more than USD 1.8 trillion in total assets at the end of 2018. Thirty-five U.S. “authorized financial institutions” operate in Hong Kong, and most banks in Hong Kong maintain U.S. correspondent relationships. Full implementation of the Basel III capital, liquidity, and disclosure requirements completed in 2019.

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

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

The HKMA welcomes the establishment of virtual banks, which are subject to the same set of supervisory principles and requirements applicable to conventional banks. The HKMA has granted eight virtual banking licenses by end-March 2020.

The HKMA’s Fintech Facilitation Office (FFO) aims to promote Hong Kong as a fintech hub in Asia. FFO has launched the faster payment system to enable banks customers to make cross-bank/e-wallet payments easily and created a blockchain-based trade finance platform to reduce errors and risks of fraud. The HKMA has signed nine fintech co-operation agreements with the regulatory authorities of Abu Dhabi, Brazil, Dubai, France, Poland, Singapore, Switzerland, Thailand and the United Kingdom.

Foreign Exchange and Remittances

Foreign Exchange

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

Remittance Policies

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

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

Sovereign Wealth Funds

The Future Fund, Hong Kong’s wealth fund, was established in 2016 with an endowment of USD 28.2 billion. The fund seeks higher returns through long-term investments and adopts a “passive” role as a portfolio investor. About half of the Future Fund has been deployed in alternative assets, mainly global private equity and overseas real estate, over a three-year period. The rest is placed with the Exchange Fund’s Investment Portfolio, which follows the Santiago Principles, for an initial ten-year period. In February 2020, the HKG announced that it will deploy 10 percent of the Future Fund to establish a new portfolio focusing on domestic investments.

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

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

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

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

Privatization Program

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

The Hong Kong Stock Exchange adopts a higher standard of disclosure – ‘comply or explain’ – about its environmental key performance indicators for listed companies. Results of a consultation process to review its environmental, social and governance (ESG) reporting guidelines indicate strong support for enhancing the ESG reporting framework. It will implement proposals from the consultation process in July 2020. Because Hong Kong is not a member of the OECD, OECD Guidelines for Multinational Enterprises are not applicable to Hong Kong companies. The HKG, however, commends enterprises for fulfilling their social responsibility.

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

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

Resources to Report Corruption

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

Hong Kong experienced sustained political unrest in 2019, with several protests turning violent at times. There were also instances of individuals detonating improvised incendiary devices or improvised explosive devices.  The U.S. Consulate General is not aware of recent incidents involving politically motivated damage to projects or installations, though protesters regularly vandalized companies linked to mainland China or associated with pro-government views.  Some companies faced pressure from mainland China to take political stances against Hong Kong protesters.  Beijing’s imposition of the National Security Law on June 30, 2020 has introduced heightened uncertainties for companies operating in Hong Kong.  As a result, U.S. citizens traveling or residing in Hong Kong may be subject to increased levels of surveillance, as well as arbitrary enforcement of laws and detention for purposes other than maintaining law and order.

Hong Kong’s unemployment rate stood at 3.3 percent in the fourth quarter of 2019, with the unemployment rate of youth aged 15-19 rising to 10.2 percent. In 2019, skilled personnel working as administrators, managers, professionals, and associate professionals accounted for 41.3 percent of the total working population. At the end of March 2019, there were about 391,500 foreign domestic helpers working in Hong Kong. In 2019, about 18,931 foreign professionals came to work in the city, more than 3,000 fewer than the previous year. The Employees Retraining Board provides skills re-training for local employees. To address a shortage of highly skilled technical and financial professionals, the HKG seeks to attract qualified foreign and mainland Chinese workers.

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

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

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

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

Local law provides for the rights of association and of workers to establish and join organizations of their own choosing. The government does not discourage or impede the formation of unions. As of 2018, Hong Kong’s 846 registered unions had 911,593 members, a participation rate of about 25.06 percent. In 2019, 23 new worker unions formed as a result of the political protests. Hong Kong’s labor legislation is in line with international laws. Hong Kong has implemented 41 conventions of the International Labor Organization in full and 18 others with modifications. Workers who allege discrimination against unions have the right to a hearing by the Labor Relations Tribunal. Legislation protects the right to strike. Collective bargaining is not protected by Hong Kong law; there is no obligation to engage in it; and it is not widely used. For more information on labor regulations in Hong Kong, please visit the following website: http://www.labour.gov.hk/eng/legislat/contentA.htm (Chapter 57 “Employment Ordinance”).

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

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

In January 2020, the HKG introduced bill amending the EO in order to increase the statutory maternity leave from the current ten weeks to 14 weeks. The bill is pending discussions in LegCo.

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

In August 2019, Hong Kong was hit by widespread strikes resulting from Hong Kong’s political unrest. Strikers included aviation workers, teachers, lifeguards, security workers, and construction workers.

In February 2020, about 2,500 medical workers of the Hospital Authority took part in an industrial action, demanding the HKG close its border to mainland China to prevent the spread of  COVID-19. They ended the strike a few days later without getting their demands realized.

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

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

Policies toward Foreign Direct Investment

Changes in India’s foreign investment rules are notified in two different ways: (1) Press Notes issued by the Department for Promotion of Industry and Internal Trade (DPIIT) for the vast majority of sectors, and (2) legislative action for insurance, pension funds, and state-owned enterprises in the coal sector. (Note: in January 2019, the government of India changed the name of DIPP to Department for Promotion of Industry and Internal Trade (DPIIT). End Note). FDI proposals in sensitive sectors will, however, require the additional approval of the Home Ministry.

The DPIIT, under the Ministry of Commerce and Industry, is the nodal investment promotion agency, responsible for the formulation of FDI policy and the facilitation of FDI inflows. It compiles all policies related to India’s FDI regime into a single document to make it easier for investors to understand, and this consolidated policy is updated every year. The updated policy can be accessed at: http://dipp.nic.in/foreign-direct-investment/foreign-direct-investment-policy.  DPIIT, through the Foreign Investment Implementation Authority (FIIA), plays an active role in resolving foreign investors’ project implementation problems and disseminates information about the Indian investment climate to promote investments. The Department establishes bilateral economic cooperation agreements in the region and encourages and facilitates foreign technology collaborations with Indian companies and DPIIT oftentimes consults with ministries and stakeholders, but some relevant stakeholders report being left out of consultations.

Limits on Foreign Control and Right to Private Ownership and Establishment

In most sectors, foreign and domestic private entities can establish and own businesses and engage in remunerative activities. Several sectors of the economy continue to retain equity limits for foreign capital as well as management and control restrictions, which deter investment. For example, the 2015 Insurance Act raised FDI caps from 26 percent to 49 percent, but also limits for foreign capital as well as management and control restrictions, which deter investment. For example, the 2015 Insurance Act raised FDI caps from 26 percent to 49 percent, but also mandated that insurance companies retain “Indian management and control.” Similarly, in 2016, India allowed up to 100 percent FDI in domestic airlines; however, the issue of substantial ownership and effective control (SOEC) rules which mandate majority control by Indian nationals have not yet been clarified. A list of investment caps is accessible at: http://dipp.nic.in/foreign-direct-investment/foreign-direct-investment-policy .

In 2017, the government implemented moderate reforms aimed at easing investments in sectors including single-brand retail, pharmaceuticals, and private security. It also relaxed onerous rules for foreign investment in the construction sector. All FDI must be reviewed under either an “Automatic Route” or “Government Route” process. The Automatic Route simply requires a foreign investor to notify the Reserve Bank of India of the investment. In contrast, investments requiring review under the Government Route must obtain the approval of the ministry with jurisdiction over the appropriate sector along with the concurrence of DPIIT. In August 2019, the government announced a new package of liberalization measures removing restrictions on FDI in multiple additional sectors to help spur the slowing economy. The new measures included permitting investments in coal mining and contract manufacturing through the Automatic Route. The new rules also eased restrictions on investment in single-brand retail.

Screening of FDI

Since the abolition of the Foreign Investment Promotion Board in 2017, appropriate ministries have screened FDI. FDI inflows were mostly directed towards the largest metropolitan areas – Delhi, Mumbai, Bangalore, Hyderabad, Chennai – and the state of Gujarat. The services sector garnered the largest percentage of FDI. Further FDI statistics available at: http://dipp.nic.in/publications/fdi-statistics. 

Other Investment Policy Reviews

2019 OECD Economic Survey of India: http://www.oecd.org/economy/india-economic-snapshot/ 

2015 WTO Trade Policy Review: https://docs.wto.org/dol2fe/Pages/FE_Search/FE_S_S009-  DP.aspx?language=E&CatalogueIdList=131827,6391,16935,35446,11982&CurrentCatal  ogueIdIndex=0&FullTextHash=&HasEnglishRecord=True&HasFrenchRecord=True&H  asSpanishRecord=True 

2015-2020 Government of India Foreign Trade Policy: http://dgft.gov.in/ForeignTradePolicy 

Business Facilitation

DPIIT is responsible for formulation and implementation of promotional and developmental measures for growth of the industrial sector, keeping in view national priorities and socio- economic objectives. While individual lead ministries look after the production, distribution, development and planning aspects of specific industries allocated to them, DPIIT is responsible for the overall industrial policy. It is also responsible for facilitating and increasing the FDI flows to the country.

Invest India  is the official investment promotion and facilitation agency of the Government of India, which is managed in partnership with DPIIT, state governments, and business chambers. Invest India specialists work with investors through their investment lifecycle to provide support with market entry strategies, deep dive industry analysis, partner search, and policy advocacy as required. Businesses can register online through the Ministry of Corporate Affairs website: http://www.mca.gov.in/ . After the registration, all new investments require industrial approvals and clearances from relevant authorities, including regulatory bodies and local governments. To fast-track the approval process, especially in case of major projects, Prime Minister Modi has started the Pro-Active Governance and Timely Implementation (PRAGATI initiative) – a digital, multi-modal platform to speed the government’s approval process. Per the Prime Minister’s Office as of November 2019 a total of 265 project proposals worth around $169 billion related to 17 sectors were cleared through PRAGATI. Prime Minister Modi personally monitors the process, to ensure compliance in meeting PRAGATI project deadlines. In December 2014, the Modi government also approved the formation of an Inter-Ministerial Committee, led by the DPIIT, to help track investment proposals that require inter-ministerial approvals. Business and government sources report this committee meets informally and on an ad hoc basis as they receive reports from business chambers and affected companies of stalled projects.

Outward Investment

According to the Reserve Bank of India (RBI), India’s central bank, the total overseas direct investment (ODI) outflow from India till December 2019 was $18.86 billion. According to the U.S. Bureau of Economic Analysis, Indian direct investment into the U.S. was $9.9 billion in 2017. RBI contends that the growth in magnitude and spread (in terms of geography, nature and types of business activities) of ODI from India reflects the increasing appetite and capacity of Indian investors.

India made public a new model Bilateral Investment Treaty (BIT) in December 2015. This followed a string of rulings against Indian firms in international arbitration. The new model BIT does not allow foreign investors to use investor-state dispute settlement methods, and instead requires foreign investors to first exhaust all local judicial and administrative remedies before entering into international arbitration. The Indian government also announced its intention to abrogate all BITs negotiated on the earlier model BIT. The government has served termination notices to roughly 58 countries, including EU countries and Australia. Currently 14 BITs are in force. The Ministry of Finance said the revised model BIT will be used for the renegotiation of existing and any future BITs and will form the investment chapter in any Comprehensive Economic Cooperation Agreements (CECAs)/Comprehensive Economic Partnership Agreements (CEPAs)/Free Trade Agreements (FTAs).

In September 2018, Belarus became the first country to execute a new BIT with India. The Belarus – India BIT is predominantly based on the new Model BIT. In December 2018, Taipei Cultural & Economic Centre (TECC) in India signed a BIT with India Taipei Association (ITA) in Taipei. The TECC is the representative office of the government in Taipei in India and is responsible for promoting bilateral relations between Taiwan and India. By December 2019, two BITs/ JIS have been concluded but not yet signed with Brazil and Cambodia. Several BITs and joint interpretative statements are under discussion such as with Iran, Switzerland, Morocco, Kuwait, Ukraine, UAE, San Marino, Hong Kong, Israel, Mauritius and Oman. The complete list of agreements can be found at: https://dea.gov.in/bipa. 

Bilateral Taxation Treaties

India has a bilateral taxation treaty with the United States, available at: https://www.irs.gov/pub/irs-trty/india.pdf 

Transparency of the Regulatory System

Some government policies are written in a way that can be discriminatory to foreign investors or favor domestic industry; for example, approval for higher FDI in the insurance sector came with a new requirement for “Indian management and control.” On most occasions the rules are framed after thorough discussions by the competent government authorities and require the approval of the cabinet and, in some cases, the Parliament as well. Policies pertaining to foreign investments are framed by DPIIT, and implementation is undertaken by lead federal ministries and sub-national counterparts.

In December 2018, India unveiled new “Guidelines” on foreign-owned e-commerce operations that imposed restrictions disproportionately affecting over $20 billion in combined investments by U.S. companies. As of February 1, 2019, these platforms may not offer exclusive discounts; sell products from companies in which they own a stake; or have any vendor who sources more than 25 percent of their retail stock from a single source. The Guidelines were issued without prior notification or opportunity to provide public comments. While Indian officials argue this was a mere “clarification” of existing policy, the new Guidelines constituted a major regulatory change that severely affected U.S. investors’ operations and business models. The refusal of Indian authorities to extend the deadline for implementation beyond just over one month, further exacerbated the undue and unnecessary disruption to U.S. investors.

The Indian Accounting Standards were issued under the supervision and control of the Accounting Standards Board, a committee under the Institute of Chartered Accountants of India (ICAI), and has government, academic, and professional representatives. The Indian Accounting Standards are named and numbered in the same way as the corresponding International Financial Reporting Standards. The National Advisory Committee on Accounting Standards recommends these standards to the Ministry of Corporate Affairs, which all listed companies must then adopt. These can be accessed at: http://www.mca.gov.in/MinistryV2/Stand.html 

International Regulatory Considerations

India is a member of the South Asia Association for Regional Cooperation (SAARC), an eight- member regional block in South Asia. India’s regulatory systems are aligned with SAARC economic agreements, visa regimes, and investment rules. Dispute resolution in India has been through tribunals, which are quasi-judicial bodies. India has been a member of the WTO since 1994, and generally notifies all draft technical regulations to the WTO Committee on Technical Barriers to Trade; however, at times there are delays in publishing the notifications. The Governments of India and the United States cooperate in areas such as standards, trade facilitation, competition, and antidumping practices.

Legal System and Judicial Independence

India adopted its legal system from English law and the basic principles of the Common Law as applied in the UK are largely prevalent in India. However, foreign companies need to make adaptations per Indian Law and the Indian business culture when negotiating and drafting contracts in India to ensure adequate protection in case of breach of contract. The Indian Judicial Structure provides for an integrated system of courts to administer both central and state laws. The legal system has a pyramidal structure, with the Supreme Court at the apex, and a High Court in each state or a group of states which covers a hierarchy of subordinate courts. Article 141 of the Constitution of India provide that a decision declared by the Supreme Court shall be binding on all courts within the territory of India. Apart from courts, tribunals are also vested with judicial or quasi-judicial powers by special statutes to decide controversies or disputes relating to specified areas.

Courts have maintained that the independence of the judiciary is a basic feature of the Constitution, which provides the judiciary institutional independence from the executive and legislative branches.

Laws and Regulations on Foreign Direct Investment

The government has a policy framework on FDI, which is updated every year and formally notified as the Consolidated FDI Policy (http://dipp.nic.in/foreign-direct-investment/foreign- direct-investment-policy). DPIIT makes policy pronouncements on FDI through Press Notes/Press Releases, which are notified by the RBI as amendments to the Foreign Exchange Management (Transfer or Issue of Security by Persons Resident Outside India) Regulations, 2000 (Notification No. FEMA 20/2000-RB dated May 3, 2000). These notifications are effective on the date of the issued press release, unless otherwise specified. The judiciary does not influence FDI policy measures.

The government has introduced a “Make in India” program as well as investment policies designed to promote manufacturing and attract foreign investment. “Digital India” aims to open up new avenues for the growth of the information technology sector. The “Start-up India” program created incentives to enable start-ups to commercialize and grow. The “Smart Cities” project intends to open up new avenues for industrial technological investment opportunities in select urban areas. The U.S. Government continues to urge the Government of India to foster an attractive and reliable investment climate by reducing barriers to investment and minimizing bureaucratic hurdles for businesses.

Competition and Anti-Trust Laws

The central government has been successful in establishing independent and effective regulators in telecommunications, banking, securities, insurance, and pensions. The Competition Commission of India (CCI), India’s antitrust body, is now taking cases against mergers, cartels, and abuse of dominance, as well as conducting capacity-building programs for bureaucrats and business officials. Mergers meeting certain thresholds must be notified to the CCI for its review. Upon receipt of a complaint, or upon its own enquiry, if the CCI is of the opinion that there exists a prima facie case, it must direct its investigative arm (the Director General) to investigate. Currently the Director General is required to seek the approval of the local chief metropolitan magistrate for any search and seizure operations. The Securities and Exchange Bureau of India (SEBI) enforces corporate governance standards and is well-regarded by foreign institutional investors. The RBI, which regulates the Indian banking sector, is also held in high regard. Some Indian regulators, including SEBI and the RBI, engage with industry stakeholders through periods of public comment, but the practice is not consistent across the government.

Expropriation and Compensation

The government has taken steps to provide greater clarity in regulation. In 2016, the government successfully carried out the largest spectrum auction in the country’s history. India also has transfer pricing rules that apply to related party transactions. The government implemented the Goods and Services Tax (GST) in July 2017, which reduced the complexity of tax codes and eliminated multiple taxation policies. It also enacted the Insolvency and Bankruptcy Code in 2016, which offers uniform, comprehensive insolvency legislation for all companies, partnerships and individuals (other than financial firms).

Though land is a State Government (sub-national) subject, “acquisition and requisitioning of property” is in the concurrent list, thus both the Indian Parliament and State Legislatures can make laws on this subject. Legislation approved by the Central Government is used as guidance by the State Governments. Land acquisition in India is governed by the Land Acquisition Act (2013), which entered into force in 2014, but continues to be a complicated process due to the lack of an effective legal framework. Land sales require adequate compensation, resettlement of displaced citizens, and 70% approval from landowners. The displacement of poorer citizens is politically challenging for local governments.

Dispute Settlement

India made resolving contract disputes and insolvency easier with the establishment of a modern bankruptcy regime with the enactment in 2016 and subsequent implementation of the Insolvency and Bankruptcy Code (IBC). Among the areas where India has improved the most in the World Bank’s Ease of Doing Business Ranking the past three years has been under the resolving insolvency metric. The World Bank Report noted that the 2016 law has introduced the option of insolvency resolution for commercial entities as an alternative to liquidation or other mechanisms of debt enforcement, reshaping the way insolvent companies can restore their financial well-being or close down. The Code has put in place effective tools for creditors to successfully negotiate and effectuated greater chances for creditors to realize their dues. As a result, the overall recovery rate for creditors jumped from 26.5 to 71.6 cents on the dollar and the time taken for resolving insolvency also came down significantly from 4.3 years to 1.6 years. (https://www.ibbi.gov.in/uploads/publication/62a9cc46d6a96690e4c8a3c9ee3ab862.pdf 

India enacted the Arbitration and Conciliation Act in 1996, based on the United Nations Commission on International Trade Law model, as an attempt to align its adjudication of commercial contract dispute resolution mechanisms with most of the world. Judgments of foreign courts are enforceable under multilateral conventions, including the Geneva Convention. The government established the International Center for Alternative Dispute Resolution (ICADR) as an autonomous organization under the Ministry of Law and Justice to promote the settlement of domestic and international disputes through alternate dispute resolution. The World Bank has also funded ICADR to conduct training for mediators in commercial dispute settlement.

India is a signatory to the convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention). It is not unusual for Indian firms to file lawsuits in domestic courts in order to delay paying any arbitral award. Seven cases are currently pending, the oldest of which dates to 1983. India is not a member state to the International Centre for the Settlement of Investment Disputes (ICSID).

The Permanent Court of Arbitration (PCA) at The Hague and the Indian Law Ministry agreed in 2007 to establish a regional PCA office in New Delhi, although no progress has been made in establishing the office. The office would provide an arbitration forum to match the facilities offered at The Hague but at a lower cost.

In November 2009, the Department of Revenue’s Central Board of Direct Taxes established eight dispute resolution panels across the country to settle the transfer-pricing tax disputes of domestic and foreign companies. In 2016 the government also presented amendments to the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act to establish specialized commercial divisions within domestic courts to settle long-pending commercial disputes.

Investor–State Dispute Settlement

According to the United Nations Conference on Trade and Development, India has been a respondent state for 25 investment dispute settlement cases, of which 11 remain pending (http://investmentpolicyhub.unctad.org/ISDS/CountryCases/96?partyRole=2 ).

Though India is not a signatory to the ICSID Convention, current claims by foreign investors against India can be pursued through the ICSID Additional Facility Rules, the UN Commission on International Trade Law (UNCITRAL Model Law) rules, or through the use of ad hoc proceedings.

International Commercial Arbitration and Foreign Courts

Alternate Dispute Resolution (ADR)

Since formal dispute resolution is expensive and time consuming, many businesses choose methods, including ADR, for resolving disputes. The most commonly used ADRs are arbitration and mediation. India has enacted the Arbitration and Conciliation Act based on the UNCITRAL Model Laws of Arbitration. Experts agree that the ADR techniques are extra-judicial in character and emphasize that ADR cannot displace litigation. In cases that involve constitutional or criminal law, traditional litigation remains necessary.

Dispute Resolutions Pending

An increasing backlog of cases at all levels reflects the need for reform of the dispute resolution system, whose infrastructure is characterized by an inadequate number of courts, benches and judges, inordinate delays in filling judicial vacancies, and only 14 judges per one million people. Almost 25 percent of judicial vacancies can be attributed to procedural delays.

Bankruptcy Regulations

According to the World Bank, it used to take an average of 4.3 years to recover funds from an insolvent company in India, compared to 2.6 years in Pakistan, 1.7 years in China and 1.8 years in OECD countries. The introduction and implementation of the Insolvency and Bankruptcy Code (IBC) in 2016 led to an overhaul of the previous framework on insolvency and paved the way for much-needed reforms. The IBC focused on creditor-driven insolvency resolution, and offers a uniform, comprehensive insolvency legislation encompassing all companies, partnerships and individuals (other than financial firms).

The law, however, does not provide for U.S. style Chapter 11 bankruptcy provisions. The government is proposing a separate framework for bankruptcy resolution in failing banks and financial sector entities. Supplementary legislation would create a new institutional framework, consisting of a regulator, insolvency professionals, information utilities, and adjudicatory mechanisms that would facilitate formal and time-bound insolvency resolution process and liquidation.

In August 2016, the Indian Parliament passed amendments to the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, and the Debt Recovery Tribunals Act. These amendments were geared at improving the effectiveness of debt recovery laws and helping address the problem of rising bad loans for domestic and multilateral banks. It will also help banks and financial institutions recover loans more effectively, encourage the establishment of more asset reconstruction companies (ARCs) and revamp debt recovery tribunals.

The regulatory environment in terms of foreign investment has been eased to make it investor- friendly.  The measures taken by the Government are directed to open new sectors for foreign direct investment, increase the sectoral limit of existing sectors and simplifying other conditions of the FDI policy.  The Indian government does issue guarantees to investments but only in case of strategic industries.

Foreign Trade Zones/Free Ports/Trade Facilitation

The government established several foreign trade zone initiatives to encourage export-oriented production.  These include Special Economic Zones (SEZs), Export Processing Zones (EPZs), Software Technology Parks (STPs), and Export Oriented Units (EOUs).  In 2018, the Indian government announced guidelines for the establishment of the National Industrial and Manufacturing Zones (NIMZs), envisaged as integrated industrial townships to be managed by a special purpose vehicle and headed by a government official.  So far, three NIMZs have been accorded final approval and 13 have been accorded in-principle approval.  In addition, eight investment regions along the Delhi-Mumbai Industrial Corridor (DIMC) have also been 12 established as NIMZs.  SEZs are treated as foreign territory; businesses operating within SEZs are not subject to customs regulations, nor have FDI equity caps.  They also receive exemptions from industrial licensing requirements and enjoy tax holidays and other tax breaks.  EPZs are industrial parks with incentives for foreign investors in export-oriented businesses.  STPs are special zones with similar incentives for software exports. EOUs are industrial companies, established anywhere in India, that export their entire production and are granted the following: duty-free import of intermediate goods, income tax holidays, exemption from excise tax on capital goods, components, and raw materials, and a waiver on sales taxes. These initiatives are governed by separate rules and granted different benefits, details of which can be found at: http://www.sezindia.nic.in,  https://www.stpi.in/  http://www.fisme.org.in/export_schemes/DOCS/B- 1/EXPORT%20ORIENTED%20UNIT%20SCHEME.pdf and http://www.makeinindia.com/home. 

Performance and Data Localization Requirements

Preferential Market Access (PMA) for government procurement has created substantial challenges for foreign firms operating in India.  State-owned “Public Sector Undertakings” and the government accord a 20 percent price preference to vendors utilizing more than 50 percent local content.  However, PMA for government procurement limits access to the most cost effective and advanced ICT products available.  In December 2014, PMA guidelines were revised and reflect the following updates:

1. Current guidelines emphasize that the promotion of domestic manufacturing is the objective of PMA, while the original premise focused on the linkages between equipment procurement and national security.
2. Current guidelines on PMA implementation are limited to hardware procurement only. Former guidelines were applicable to both products and services.
3. Current guidelines widen the pool of eligible PMA bidders, to include authorized distributors, sole selling agents, authorized dealers or authorized supply houses of the domestic manufacturers of electronic products, in addition to OEMs, provided they comply with the following terms:
   1. The bidder shall furnish the authorization certificate by the domestic manufacturer for selling domestically manufactured electronic products.
   2. The bidder shall furnish the affidavit of self-certification issued by the domestic manufacturer to the procuring agency declaring that the electronic product is domestically manufactured in terms of the domestic value addition prescribed.
   3. It shall be the responsibility of the bidder to furnish other requisite documents required to be issued by the domestic manufacturer to the procuring agency as per the policy.
4. The current guidelines establish a ceiling on fees linked with the complaint procedure. There would be a complaint fee of INR 200,000 ($3000) or one percent of the value of the Domestically Manufactured Electronic Product being procured, subject to a maximum of INR 500,000 ($7500), whichever is higher.

In January 2017, the Ministry of Electronics & Information Technology (MeitY) issued a draft notification under the PMA policy, stating a preference for domestically manufactured servers in government procurement.  A current list of PMA guidelines, notified products, and tendering templates can be found on MeitY’s website:  http://meity.gov.in/esdm/pma. 

Research and Development

The Government of India allows for 100 percent FDI in research and development through the automatic route.

Data Storage & Localization

In April 2018, the RBI, announced, without prior stakeholder consultation, that all payment system providers must store their Indian transaction data only in India. The RBI mandate went into effect on October 15, 2018, despite repeated requests by industry and the U.S. officials for a delay to allow for more consultations.  In July 2019, the RBI, again without prior stakeholder consultation, retroactively expanded the scope of its 2018 data localization requirement to include banks, creating potential liabilities going back to late 2018.  The RBI policy overwhelmingly and disproportionately affects U.S. banks and investors, who depend on the free flow of data to both achieve economies of scale and to protect customers by providing global real-time monitoring and analysis of fraud trends and cybersecurity.  U.S. payments companies have been able to implement the mandate for the most part, though at great cost and potential damage to the long-term security of their Indian customer base, which will receive fewer services and no longer benefit from global fraud detection and AML/CFT protocols.  Similarly, U.S. banks have been able to comply with RBI’s expanded mandate, though incurring significant compliance costs and increased risk of cybersecurity vulnerabilities.

In addition to the RBI data localization directive for payments companies and banks, the government formally introduced its draft Data Protection Bill in December 2019, which contains restrictions on all cross-border transfers of personal data in India.  The Bill is currently under review by a Joint Parliamentary Committee and stipulates that personal data that is considered “critical” can only be stored in India.  The Bill is based on the conclusions of a ten-person Committee of Experts, established by MeitY in July 2017.

Real Property

Several cities, including the metropolitan cities of Delhi, Kolkata, Mumbai, and Chennai have grown according to a master plan registered with the central government’s Ministry of Urban Development. Property rights are generally well-enforced in such places, and district magistrates—normally senior local government officials—notify land and property registrations. Banks and financial institutions provide mortgages and liens against such registered property.

In other urban areas, and in areas where illegal settlements have been built up, titling often remains unclear. As per the Department of Land Resources, in 2008 the government launched the National Land Records Modernization Program (NLRMP) to clarify land records and provide landholders with legal titles. The program requires the government to survey an area of

the National Land Records Modernization Program (NLRMP) to clarify land records and provide landholders with legal titles. The program requires the government to survey an area of approximately 2.16 million square miles, including over 430 million rural households, 55 million urban households, and 430 million land records. Initially scheduled for completion in 2016, the program is now scheduled to conclude in 2021. Traditional land use rights, including communal rights to forests, pastures, and agricultural land, are sanctioned according to various laws, depending on the land category and community residing on it. Relevant legislation includes the Scheduled Tribes and Other Traditional Forest Dwellers (Recognition of Forest Rights) Act 2006, the Tribal Rights Act, and the Tribal Land Act.

In 2016, India introduced its first regulator in the real estate sector in the form of the Real Estate Act. The Real Estate Act, 2016 aims to protect the rights and interests of consumers and promote uniformity and standardization of business practices and transactions in the real estate sector. Details are available at: http://mohua.gov.in/cms/TheRealEstateAct2016.php 

Foreign and domestic private entities are permitted to establish and own businesses in trading companies, subsidiaries, joint ventures, branch offices, project offices, and liaison offices, subject to certain sector-specific restrictions. The government does not permit foreign investment in real estate, other than company property used to conduct business and for the development of most types of new commercial and residential properties. Foreign Institutional Investors (FIIs) can now invest in initial public offerings (IPOs) of companies engaged in real estate. They can also participate in pre-IPO placements undertaken by such real estate companies without regard to FDI stipulations.

To establish a business, various government approvals and clearances are required, including incorporation of the company and registration under the State Sales Tax Act and Central and State Excise Acts. Businesses that intend to build facilities on land they own are also required to take the following steps: register the land; seek land use permission if the industry is located outside an industrially zoned area; obtain environmental site approval; seek authorization for electricity and financing; and obtain appropriate approvals for construction plans from the respective state and municipal authorities. Promoters must also obtain industry-specific environmental approvals in compliance with the Water and Air Pollution Control Acts. Petrochemical complexes, petroleum refineries, thermal power plants, bulk drug makers, and manufacturers of fertilizers, dyes, and paper, among others, must obtain clearance from the Ministry of Environment and Forests.

The Foreign Exchange Management Regulations and the Foreign Exchange Management Act set forth the rules that allow foreign entities to own immoveable property in India and convert foreign currencies for the purposes of investing in India. These regulations can be found at: https://www.rbi.org.in/scripts/Fema.aspx . Foreign investors operating under the automatic route are allowed the same rights as an Indian citizen for the purchase of immovable property in India in connection with an approved business activity.

In India, a registered sales deed does not confer title ownership and is merely a record of the sales transaction. It only confers presumptive ownership, which can still be disputed. The title is established through a chain of historical transfer documents that originate from the land’s original established owner. Accordingly, before purchasing land, buyers should examine all documents that establish title from the original owner. Many owners, particularly in urban areas, do not have access to the necessary chain of documents. This increases uncertainty and risks in land transactions.

Intellectual Property Rights

In 2018, India became a signatory to the WIPO Centralized Access to Search and Examination (CASE) and Digital Access Service (DAS) agreements.  The CASE system enables patent offices to securely share and search examination documentation related to patent applications, and DAS provides details of the types of applications managed by individual digital libraries together with any operational procedures and technical requirements.  However, the provision of Indian law prescribing criminal penalties for failure to furnish information pertaining to applications for a patent for the “same or substantially the same invention” filed in any country outside India remains in place.

Prime Minister Modi’s courtship of multinationals to invest and “Make in India” has not yet addressed longstanding hesitations over India’s lack of effective intellectual property rights (IPR) enforcement.  Despite the release of the National IPR Policy and the establishment of India’s first intellectual property (IP) crime unit in Telangana in 2016, India’s IP regime continues to fall short of global best practices and standards.  U.S. engagement has not yet translated into the progress and/or actions on IPR that were anticipated under the previous U.S. administration.  Some “Notorious Markets” across the country continue to operate, while many smaller stores sell or deal with pirated content across the country. U.S. and Indian Government officials continued to engage on IPR issues.  U.S. government representatives continued to meet government officials and industry stakeholders on IPR-related matters in 2018 and 2019, including during visits to India by officials from the U.S. Trade Representative (USTR), the U.S. Patent Trademark Office (USPTO), the U.S.  Intellectual Property Enforcement Coordinator, and the Departments of State, Commerce, and Agriculture. India has made efforts to streamline its IP framework through administrative actions and awareness programs and is in the process of reducing its decade-long backlog of patent and trademark applications.  India also addresses IPR in its recently established Commercial Courts, Commercial Divisions, and Commercial Appellate Divisions within India’s High Courts.

U.S. and Indian Government officials continued to engage on IPR issues.  U.S. government representatives continued to meet government officials and industry stakeholders on IPR-related matters in 2018 and 2019, including during visits to India by officials from the U.S. Trade Representative (USTR), the U.S. Patent Trademark Office (USPTO), the U.S.  Intellectual Property Enforcement Coordinator, and the Departments of State, Commerce, and Agriculture. India has made efforts to streamline its IP framework through administrative actions and awareness programs and is in the process of reducing its decade-long backlog of patent and trademark applications.  India also addresses IPR in its recently established Commercial Courts, Commercial Divisions, and Commercial Appellate Divisions within India’s High Courts.

Although India’s copyright laws were amended in 2012, the amendments have not been fully implemented. Without an active copyright board in place to determine royalty rates for authors, weak enforcement of copyright regulations, and the widespread issue of pirated copyrighted materials are all contributing factors to why copyright law requires more emphasis on implementation.

The Delhi High Court diluted the publishing industry’s and authors’ rights and expanded the definition of fair use judgment, by allowing photocopiers to copy an entire book for educational purposes without seeking prior permission of the copyright holder.  The movie industry identified new illegal cam cording hubs of operation in Indore and Noida, and the Telangana police cracked down on two syndicates that used under-age children to illegally record movies.  After years of advocacy by industry groups, especially the Indian office of the Motion Picture Association (MPA), the GOI released a draft Cinematography Bill for comment in December 2018, which contained anti-cam cording legislation.  Industry groups welcomed this move, which included criminal and financial penalties for offenders.  The bill is now awaiting Parliamentary approval.  However, the penalties for infringement and IP theft are significantly weakened from those suggested in the initial draft legislation in 2013.

The music industry remains concerned about a Section 31D memorandum that the Department of Industry and Policy Promotion (DIPP), now DPIIT,-issued announced in September 2016 to announce that all online transmissions fall under the statutory licensing provisions of section 31D of the Copyright Act.  The memo places internet service providers on par with radio broadcasters, allowing them to provide music on their websites by paying the same royalties to copyright societies, two percent of ad revenues.  The industry argues that most of the websites have little to no ad revenue, and some may be hosted on servers outside India, which makes collection of royalties challenging.  However, in February 2017, India issued a notice to all event organizers that they would have to pay music royalties to artists when played at an event. On a more positive note, in April 2019, the Bombay High Court issued its decision in Tips Industries LTD v. Wynk Music LTD (Airtel) that statutory licensing under section 31D of the Copyright Act does not cover Internet transmissions (streaming), but rather is limited to traditional television and radio broadcasts.  The Court also stated that Section 31D was an exception to copyright and must be distinctly interpreted.   It is not clear if this judgement will move the Government of India to withdraw DPIIT’s 2016 memo. However, in 2019, the DPIIT proposed amendments to the Copyright Rules that would, in contravention to the plain statutory text, broaden the scope of the statutory licensing exception to encompass not only radio and television broadcasting, but also Internet broadcasting.

2018 was a year of great difficulty in the agriculture and biotechnology space, which has been reeling from the aftermath of a coordinated attack in 2016 and 2017 on the Monsanto Corporation’s India operations (reported in our 2016 and 2017 Special 301 submissions).  In 2017, the Protection of Plant Varieties and Farmers Rights Act (PPVFRA) removed the long-standing requirement for breeders to produce a “No-Objection-Certificate” from the patentee of a particular genetically modified (GM) trait.  The move was nearly unprecedented and removed a key preemptive tool for breeders to diligently ensure stakeholders are consulted and patentee’s innovations are not being infringed upon or used without permission.

In April 2018, the Delhi High Court judgment struck down a patent held by Monsanto in a summary judgment.  In a series of decisions on this matter, most recently in August, 2019, the Supreme Court overturned Delhi High Court Divisional Bench judgement of April 2018 and reinstated the March 2017 Single Judge decision, pointing to the Divisional Bench failing to have confined itself to the examination of the validity of the order of injunction granted by the Single Judge 2017 decision.   Issues remain complex and unsettled.  The GM Licensing Guidelines remain in draft form but could have significant and wide-ranging implications for Monsanto and many other IP holders.  Moreover, follow-on decisions and administrative legal actions could set important Indian legal precedents for stopping a patent, the role of the PVPFRA and its relationship to biological innovation, the application of administrative regulations regarding price and term of a patent, and the interplay between the Patents Act, PVPFRA, and the Biodiversity Act.  It is worth noting that in December 2015, Monsanto terminated more than 40 of its license agreements with Indian companies for nonpayment of licensing fees.  The Indian licensees subsequently challenged Monsanto’s patents in court on several grounds, including challenging the validity of the patent and efficacy of the technology.

The Government of India’s refusal to repudiate Ministry of Agriculture and Farmers Welfare’s GM licensing guidelines has already resulted in withdrawal of next-generation innovative biotechnology from the Indian marketplace and has given pause to many other companies who seek to protect their innovative products.  Other biotech-led industries are also following this development and are greatly concerned, as the action reaches beyond compulsory licensing under the Patents Act.

Indian law still does not provide any statutory protection for trade secrets. After a workshop conducted in October 2016, DIPP agreed to provide guidance to start-ups on trade secrets.  The Designs Act allows for the registration of industrial designs and affords a 15-year term of protection.

Other long-standing concerns remain. Since 2012, outstanding concerns that have not been addressed either in the IP Policy or by Government of India include; Section 3(d) of India’s Patent Act, which creates confusing criteria on “enhanced efficacy” for the patentability of pharmaceutical products;  draft biotechnology licensing regulations from the Ministry of Agriculture which are mandatory, overly prescriptive, and  severely limit the value of IPR; remaining lack of clarity on the conditions under which compulsory licensing may be allowed; lack of a copyright board; lack of a trade secrets law; lack of data exclusivity legislation; lack of an early dispute resolution mechanism for patents ; lack of a legislative framework facilitating public-private partnership in government-funded research  (along the lines of  Bayh-Dole in the United States); weak IP enforcement; and overall unwillingness to make IPR a priority within the Indian government.  All these measures across various sectors create uncertainty at best, and at worst perceptions of a hostile business environment.

In addition, the Patent Act requires patentees to regularly report on a commercial scale “the working” of their patents.  This is implemented by filing a required annual form called Form 27 on patent working.  The current requirement to file Form 27 is not only onerous and costly for patentees and ill-suited to the reality of patented technology, it also hinders any incentives to invent and advance innovation.

Standard Essential Patents (SEPs) and fair, reasonable, and non-discriminatory (FRAND) licensing criteria and systems are another concerning area.  Discussions on FRAND licensing terms restarted in 2019 but did not include stakeholders.  Several cases are pending before the Delhi High Court surrounding the issue of royalty payments for standard essential patents.  While initial indications from Delhi High Court proceedings are encouraging, a 2016 GOI discussion paper on SEPs raised concerns related to active government involvement in setting standards and determining FRAND royalties.  Some decisions from the Competition Commission of India (CCI) have been inconsistent with the Delhi High Court, creating confusion related to the development of SEP policy and practices in India.

Another area of concern is the global blocking order against “Intermediaries”.  A Delhi High Court judge issued an interim injunction directing Google, Facebook, YouTube, Twitter, and other “intermediaries” to remove – on a global basis – content uploaded to their platforms allegedly defaming the guru Baba Ramdev.  The judgment moved beyond traditional “geo-blocking,” in which take down orders are limited to specific geographic regions.  Facebook has challenged the judgment before a Division Bench.

In 2019, we observed that public notice and comment procedures on policy – including on IPR related issues – were often not followed.  Stakeholders were not properly notified of meetings with agencies to discuss concerns, including for changes to critical issues like price controls on medical devices or changes to key policies.  Moreover, Mission India remains concerned that when stakeholder input is solicited, it is often disregarded and/or ignored during the final determination of a policy.

India actively engages at multilateral negotiations, including the Trade Related Aspects of Intellectual Property Rights (TRIPS) Council.  As a result, in April 2017, the MOHFW issued a notification that amended the manufacturing license form (Form 44), taking out any requirement to notify the regulator if the drug, for which manufacturing approval was being sought, is under patent or not.  The GOI cited their view that Form 44 provisions were outside the scope of their WTO TRIPS agreement commitments as justification for the change.  Industry contracts point to the clear benefit this change has delivered to the Indian generic pharmaceutical industry, which now has an even easier path to manufacture patented drugs for years, while IP holders are forced to discover the violation and challenge the infringement in separate courts.  These negotiations will have an impact on innovation, trade, and investment in IP-intensive products and services.

Developments Strengthening the Rights of IP Holders

Clarification of Patentability Criteria: the Delhi High Court added clarity on the matter of the patentability criterion under Section 3(k) of the India Patents Act, ruling in Ferid Allani vs UOI & Ors that there is no absolute bar on the patentability of computer programs.  Additionally, ‘technical effect’ or ‘technical contribution’ must be taken into consideration during examination when determining the patent eligibility of a computer program.

Bombay High Court Clarifies 31(D) of the Copyright Act: Ruling on “Tips Industries vs. Wynk Music,” the Bombay High Court stated that the extension of the Copyright Act, 2016’s Section 31(D) to the internet is flawed logic and unsound in law.  The court also noted that Section 31(D) is an exception to copyright and must be strictly interpreted.  It is to be seen if this judgement helps Government of India in withdrawing of DPIIT memo of 2016.

Delhi High Court Confronts Online Piracy: The Delhi High Court decided that approved site take down requests will apply to those sites with addresses specifically listed in the request as well as similar sites that operate under different addresses.  This “dynamic injunction” is meant to eliminate the need for complainants to approach courts with new requests should a banned site reappear under a new address.

The Delhi High Court in July 2019 took steps to address the “gridlock” of the Intellectual Property Appellate Board (IPAB).  IPAB was established in 2003 to adjudicate appeals over patents, trademarks, copyrights, and other decisions, but lacked the necessary number of technical members to form a quorum and make judgements, resulting in a significant backlog.  To clear the backlog of cases, the court decided that until the appointments were filled, the chairman and available technical members could issue decisions despite lacking a quorum.  If no technical members were available, the IPAB chairman could consult a scientific advisor from the panel of scientific advisors appointed under Section 115 of the 1970 Patents Act.  Additionally, in October 2019, the court permitted the current IPAB chairman to serve past his term – which ended in September 2019, reinstating him until a replacement takes over.

Capital Markets and Portfolio Investment

Total market capitalization of the Indian equity market stood around $2.2 trillion as of December 31, 2019. The benchmark Standard and Poor’s (S&P) BSE (erstwhile Bombay Stock Exchange) Sensex recorded gains of about 14 percent in 2019. Nonetheless, Indian equity markets were tumultuous throughout 2019. The BSE Sensex generally gained from the beginning of the year until July 5, when Finance Minister Nirmala Sitharaman introduced a tax increase on foreign portfolio investment in her post-election Union Budget for the remainder for FY 2020.  The Sensex declined, erasing all previous gains for the year as the new tax led to a rapid exodus of foreign portfolio investors from the market.  The market continued to fluctuate even after the tax increase was repealed on August 23 until September 20, when the Finance Minister made a surprise announcement to slash corporate tax rates.  After that, the Sensex surged and hit a record high of 41,854 on December 20. However, even as the benchmark Sensex hit record highs, the midcap and small cap indices disappointed investors with a year of negative returns.  The Sensex’s advance was driven by a handful of stocks; two in particular Reliance Industries Ltd. and ICICI Bank Ltd. accounted for about half the gain.   Foreign portfolio investors (FPIs), pumped a net of over $14 billion into India’s equity markets in 2019, making it their highest such infusion in six years.  In 2018, FPIs pulled out $ 4.64 billion from the market.  Domestic money also continued to flow into equity markets via systematic investment plans (SIP) of mutual funds.  SIP assets under management hit an all-time high of $43.94 billion in November, according to data from the Association of Mutual Funds of India.

Foreign portfolio investors (FPIs), pumped a net of over $14 billion into India’s equity markets in 2019, making it their highest such infusion in six years.  In 2018, FPIs pulled out $ 4.64 billion from the market.  Domestic money also continued to flow into equity markets via systematic investment plans (SIP) of mutual funds.  SIP assets under management hit an all-time high of $43.94 billion in November, according to data from the Association of Mutual Funds of India.

The Securities and Exchange Board of India (SEBI) is considered one of the most progressive and well-run of India’s regulatory bodies.  It regulates India’s securities markets, including enforcement activities, and is India’s direct counterpart to the U.S. Securities and Exchange Commission (SEC).  SEBI oversees three national exchanges: the BSE Ltd. (formerly the Bombay Stock Exchange), the National Stock Exchange (NSE), and the Metropolitan Stock Exchange.  SEBI also regulates the three national commodity exchanges: the Multi Commodity Exchange (MCX), the National Commodity & Derivatives Exchange Limited, and the National Multi-Commodity Exchange.

Foreign venture capital investors (FVCIs) must register with SEBI to invest in Indian firms.  They can also set up domestic asset management companies to manage funds.  All such investments are allowed under the automatic route, subject to SEBI and RBI regulations, and to FDI policy.  FVCIs can invest in many sectors, including software, information technology, pharmaceuticals and drugs, biotechnology, nanotechnology, biofuels, agriculture, and infrastructure.  Companies incorporated outside India can raise capital in India’s capital markets through the issuance of Indian Depository Receipts (IDRs) based on SEBI guidelines.  Standard Chartered Bank, a British bank which was the first foreign entity to list in India in June 2010, remains the only foreign firm to have issued IDRs.

Companies incorporated outside India can raise capital in India’s capital markets through the issuance of Indian Depository Receipts (IDRs) based on SEBI guidelines.  Standard Chartered Bank, a British bank which was the first foreign entity to list in India in June 2010, remains the only foreign firm to have issued IDRs.  External commercial borrowing (ECB), or direct lending to Indian entities by foreign institutions, is allowed if it conforms to parameters such as minimum maturity, permitted and non-permitted end-uses, maximum all-in-cost ceiling as prescribed by the RBI, funds are used for outward FDI, or for domestic investment in industry, infrastructure, hotels, hospitals, software, self-help groups or microfinance activities, or to buy shares in the disinvestment of public sector entities: https://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=47736.

Total external commercial borrowings through both the approval and automatic route increased 61.45 percent year-on-year to $50.15 billion as of December 2019, according to the Reserve Bank of India’s data.

The RBI has taken a number of steps in the past few years to bring the activities of the offshore Indian rupee market in Non Deliverable Forwards (NDF) onshore, in order to deepen domestic markets, enhance downstream benefits, and generally obviate the need for an NDF market.  FPIs with access to currency futures or the exchange-traded currency options market can hedge onshore currency risks in India and may directly trade in corporate bonds. In October 2019, the RBI allowed banks to freely offer foreign exchange quotes to non-resident Indians at all times and said trading on rupee derivatives would be allowed and settled in foreign currencies in the International Financial Services Centers (IFSCs).  This was based on the recommendations of the task force on offshore rupee markets to examine and recommend appropriate policy measures to ensure the stability of the external value of the Rupee (https://m.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=937).    The International Financial Services Centre at Gujarat International Financial Tec-City (GIFT City) in Gujarat is being developed to compete with global financial hubs.  The BSE was the first to start operations there, in January 2016.  The NSE and domestic banks including Yes Bank, Federal Bank, ICICI Bank, Kotak Mahindra Bank, IDBI Bank, State Bank of India, and IndusInd Bank have started IFSC banking units in GIFT city.  Standard Chartered Bank and Bank of America started operations in GIFT City in 2019.

The International Financial Services Centre at Gujarat International Financial Tec-City (GIFT City) in Gujarat is being developed to compete with global financial hubs.  The BSE was the first to start operations there, in January 2016.  The NSE and domestic banks including Yes Bank, Federal Bank, ICICI Bank, Kotak Mahindra Bank, IDBI Bank, State Bank of India, and IndusInd Bank have started IFSC banking units in GIFT city.  Standard Chartered Bank and Bank of America started operations in GIFT City in 2019.

Money and Banking System

The public sector remains predominant in the banking sector, with public sector banks (PSBs) accounting for about 66 percent of total banking sector assets. Although most large PSBs are listed on exchanges, the government’s stakes in these banks often exceeds the 51 percent legal minimum. Aside from the large number of state-owned banks, directed lending and mandatory holdings of government paper are key facets of the banking sector. The RBI requires commercial banks and foreign banks with more than 20 branches to allocate 40 percent of their loans to priority sectors which include agriculture, small and medium enterprises, export-oriented companies, and social infrastructure. Additionally, all banks are required to invest 18.25 percent of their net demand and time liabilities in government securities. The RBI plans to reduce this by 25 basis points every quarter until the investment requirement reaches 18 percent of their net demand and time liabilities.

PSBs currently face two significant hurdles: capital constraints and poor asset quality. As of September 2019, gross non-performing loans represented 9.3 percent of total loans in the banking system, with the public sector banks having an even larger share at 12.7 percent of their loan portfolio. The PSBs’ asset quality deterioration in recent years is driven by their exposure to a broad range of industrial sectors including infrastructure, metals and mining, textiles, and aviation. With the new bankruptcy law (IBC) in place, banks are making progress in non-performing asset recognition and resolution. As of December 2019, the resolution processes have been approved in 190 cases Lengthy legal challenges have posed the greatest obstacle, as time spent on litigation was not counted against the 270 day deadline.

In July 2019, Parliament amended the IBC to require final resolution within 330 days including litigation time. To address asset quality challenges faced by public sector banks, the government injected $30 billion into public sector banks in recent years. The capitalization largely aimed to address the capital inadequacy of public sector banks and marginally provide for growth capital. Following the recapitalization, public sector banks’ total capital adequacy ratio (CRAR) improved to 13.5 percent in September 2019 from 12.2 in March 2019. In 2019, the Indian authorities also announced a consolidation plan entailing a merger of 10 public sector banks into 4, thereby reducing the total number of public sector banks from 18 to 12.

Women in the Financial Sector

Women in India receive a smaller portion of financial support relative to men, especially in rural and semi-urban areas. In 2015, the Modi government started the Micro Units Development and Refinance Agency Ltd. (MUDRA), which supports the development of micro-enterprises. The initiative encourages women’s participation and offers collateral-free loans of around $15,000. The Acting Finance Minister Piyush Goyal while delivering the 2019 budget speech mentioned that 70 percent of the beneficiaries of MUDRA initiative are women. Under the MUDRA initiative, 155.6 million loans have been disbursed amounting to $103 billion. Following the Global Entrepreneurship Summit (GES) 2017, government agency the National Institute for Transforming India (NITI Aayog), launched a Women’s Entrepreneurship Platform, https://wep.gov.in/, a single window information hub which provides information on a range of issues including access to finance, marketing, existing government programs, incubators, public and private initiatives, and mentoring. About 5,000 members are currently registered and using the services of the portal said a NITI Aayog officer who has an oversight of the project.

Foreign Exchange and Remittances

Foreign Exchange

The RBI, under the Liberalized Remittance Scheme, allows individuals to remit up to $250,000 per fiscal year (April-March) out of the country for permitted current account transactions (private visit, gift/donation, going abroad on employment, emigration, maintenance of close relatives abroad, business trip, medical treatment abroad, studies abroad) and certain capital account transactions (opening of foreign currency account abroad with a bank, purchase of property abroad, making investments abroad, setting up Wholly Owned Subsidiaries and Joint Ventures outside of India, extending loans). The INR is fully convertible only in current account transactions, as regulated under the Foreign Exchange Management Act regulations of 2000 (https://www.rbi.org.in/Scripts/Fema.aspx ).

Foreign exchange withdrawal is prohibited for remittance of lottery winnings; income from racing, riding or any other hobby; purchase of lottery tickets, banned or proscribed magazines; football pools and sweepstakes; payment of commission on exports made towards equity investment in Joint Ventures or Wholly Owned Subsidiaries of Indian companies abroad; and remittance of interest income on funds held in a Non-Resident Special Rupee Scheme Account (https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10193#sdi ). Furthermore, the following transactions require the approval of the Central Government: cultural tours; remittance of hiring charges for transponders for television channels under the Ministry of Information and Broadcasting, and Internet Service Providers under the Ministry of Communication and Information Technology; remittance of prize money and sponsorship of sports activity abroad if the amount involved exceeds $100,000; advertisement in foreign print media for purposes other than promotion of tourism, foreign investments and international bidding (over $10,000) by a state government and its public sector undertakings (PSUs); and multi-modal transport operators paying remittances to their agents abroad. RBI approval is required for acquiring foreign currency above certain limits for specific purposes including remittances for: maintenance of close relatives abroad; any consultancy services; funds exceeding 5 percent of investment brought into India or USD $100,000, whichever is higher, by an entity in India by way of reimbursement of pre-incorporation expenses.

Capital account transactions are open to foreign investors, though subject to various clearances. NRI investment in real estate, remittance of proceeds from the sale of assets, and remittance of proceeds from the sale of shares may be subject to approval by the RBI or FIPB.

FIIs may transfer funds from INR to foreign currency accounts and back at market exchange rates. They may also repatriate capital, capital gains, dividends, interest income, and compensation from the sale of rights offerings without RBI approval. The RBI also authorizes automatic approval to Indian industry for payments associated with foreign collaboration agreements, royalties, and lump sum fees for technology transfer, and payments for the use of trademarks and brand names. Royalties and lump sum payments are taxed at 10 percent.

The RBI has periodically released guidelines to all banks, financial institutions, NBFCs, and payment system providers regarding Know Your Customer (KYC) and reporting requirements under Foreign Account Tax Compliance Act (FATCA)/Common Reporting Standards (CRS). The government’s July 7, 2015 notification (https://rbidocs.rbi.org.in/rdocs/content/pdfs/CKYCR2611215_AN.pdf ) amended the Prevention of Money Laundering (Maintenance of Records) Rules, 2005, (Rules), for setting up of the Central KYC Records Registry (CKYCR)—a registry to receive, store, safeguard and retrieve the KYC records in digital form of clients.

Remittance Policies

Remittances are permitted on all investments and profits earned by foreign companies in India once taxes have been paid. Nonetheless, certain sectors are subject to special conditions, including construction, development projects, and defense, wherein the foreign investment is subject to a lock-in period. Profits and dividend remittances as current account transactions are permitted without RBI approval following payment of a dividend distribution tax.

Foreign banks may remit profits and surpluses to their headquarters, subject to compliance with the Banking Regulation Act, 1949. Banks are permitted to offer foreign currency-INR swaps without limits for the purpose of hedging customers’ foreign currency liabilities. They may also offer forward coverage to non-resident entities on FDI deployed since 1993.

Sovereign Wealth Funds

The FY 2016 the Indian government established the National Infrastructure Investment Fund (NIIF), touted as India’s first sovereign wealth fund to promote investments in the infrastructure sector. The government agreed to contribute $3 billion to the fund, while an additional $3 billion will be raised from the private sector primarily from sovereign wealth funds, multilateral agencies, endowment funds, pension funds, insurers, and foreign central banks. So far, the Canada Pension Plan Investment Board (CPPIB), Abu Dhabi Investment Authority, Australian Super, Ontario Teachers’ Pension Plan, Temasek, Axis Bank, HDFC Group, ICICI Bank and Kotak Mahindra Life Insurance have committed investments into the NIIF Master Fund, alongside Government of India. NIIF Master Fund now has $2.1 billion in commitments with a focus on core infrastructure sectors including transportation, energy and urban infrastructure.

The government owns or controls interests in key sectors with significant economic impact, including infrastructure, oil, gas, mining, and manufacturing. The Department of Public Enterprises (http://dpe.gov.in ), controls and formulates all the policies pertaining to SOEs, and is headed by a minister to whom the senior management reports. The Comptroller and Auditor General audits the SOEs. The government has taken a number of steps to improve the performance of SOEs, also called the Central Public Sector Enterprises (CPSEs), including improvements to corporate governance. Reforms carried out in the 1990s focused on liberalization and deregulation of most sectors and disinvestment of government shares. These and other steps to strengthen CPSE boards and enhance transparency evolved into a more comprehensive governance approach, culminating in the Guidelines on Corporate Governance of State-Owned Enterprises issued in 2007 and their mandatory implementation beginning in 2010. Governance reforms gained prominence for several reasons: the important role that CPSEs continue to play in the Indian economy; increased pressure on CPSEs to improve their competitiveness as a result of exposure to competition and hard budget constraints; and new listings of CPSEs on capital markets.

According to the Public Enterprise Survey 2018-19 as of March 2019 there were 348 central public sector enterprises (CPSEs) with a total investment of $234 billion, of which 248 are operating CPSEs. The report puts the number of profit-making CPSEs at 178, while 70 CPSEs were incurring losses. The government tried to unsuccessfully privatize the state-run loss- incurring airline Air India.

Foreign investments are allowed in the CPSEs in all sectors. The Master List of CPSEs can be accessed at http://www.bsepsu.com/list-cpse.asp.  While the CPSEs face the same tax burden as the private sector, on issues like procurement of land they receive streamlined licensing that private sector enterprises do not.

Privatization Program

Despite the financial upside to disinvestment in loss-making state-owned enterprises (SOEs), the government has not generally privatized its assets as they have led to job losses in the past, and therefore engender political risks. Instead, the government has adopted a gradual disinvestment policy that dilutes government stakes in public enterprises without sacrificing control. Such disinvestment has been undertaken both as fiscal support and as a means of improving the efficiency of SOEs.

In recent years, however the government has begun to look to disinvestment proceeds as a major source of revenue to finance its fiscal deficit. For the first time in seven years, the government met its disinvestment target in fiscal year 2017-18, generating $15.38 billion against a target of $11.15 billion. For FY 2020, the government increased the disinvestment target of $12.3 billion but managed to generate only $2.5 billion till December 2019 The Government of India’s plan to sell state-owned carrier Air India could not happen in FY 2020. The Indian Government constituted inter-ministerial panel recommended 100 percent stake sale in Air India to make it more lucrative as against a 76 percent stake sale last year. Government did say that they have received some good bids, but the process might go to a back burner because of the COVID19 pandemic and its resulting impact on the economy.

Foreign institutional investors can participate in these disinvestment programs subject to these limits: 24 percent of the paid-up capital of the Indian company and 10 percent for non-resident Indians and persons of Indian origin. The limit is 20 percent of the paid-up capital in the case of public sector banks. There is no bidding process. The shares of the SOEs being disinvested are sold in the open market. Detailed policy procedures relating to disinvestment in India can be accessed at: https://dipam.gov.in/disinvestment-policy 

Among Indian companies there is a general awareness of standards for responsible business conduct. The Ministry of Corporate Affairs (MCA) administers the Companies Act of 2013 and is responsible for regulating the corporate sector in accordance with the law. The MCA is also responsible for protecting the interests of consumers by ensuring competitive markets.

The Companies Act of 2013 also established the framework for India’s corporate social responsibility (CSR) laws. While the CSR obligations are mandated by law, non-government organizations (NGOs) in India also track CSR activities provide recommendations in some cases for effective use of CSR funds. MCA released the National Guidelines on Responsible Business Conduct, 2018 (NGRBC) on March 13, 2019 (an improvement over the existing National Voluntary Guidelines on Social, Environmental & Economic Responsibilities of Business, 2011), as a means to nudge businesses to contribute towards wider development goals while seeking to maximize their profits. The NGRBC is dovetailed with the United Nations Guiding Principles on Business & Human Rights (UNGPs).

A CRISIL study reported that cumulative spending on CSR since it was mandated is more than $ 7 billion (Rs.50,000 crores) including $ 4.85 billion (Rs. 34,000 crores) by listed companies and nearly $ 2.7 billion (Rs.19,000 crores) by unlisted ones. The study further noted that overall, 1,913 companies met the government’s eligibility criteria but 667 of them could not spend for various reasons. About 153 companies spent 3 percent or more as against the mandated 2 percent of profits. In terms of spending, energy companies were front runners to spend $ 322 million (Rs. 2,253 crore) or 23 percent of the overall spending followed by manufacturing, financial services and information technology services. The preferred spending heads were education, skill development, healthcare, and sanitation and preferred areas being National Capital region, Karnataka and Maharashtra. The study however noted that there could be shrink both in terms of number of companies and their total spend after the Companies (Amendment) Act 2017 where the eligibility criteria is now based on financials of the “immediately preceding financial year” rather than the earlier stipulation of “any three preceding “immediately preceding financial year” rather than the earlier stipulation of “any three preceding financial years.”

India does not adhere to the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Afflicted and High-Risk Areas. There are provisions to promote responsible business conduct throughout the supply chain.

India is not a member of Extractive Industries Transparency Initiative (EITI) nor is it a member of Voluntary Principles on Security and Human Rights.

India is a signatory to the United Nation’s Conventions Against Corruption and is a member of the G20 Working Group against corruption. India showed marginal improvement and scored 41 out of 100 in Transparency International’s 2018 Corruption Perception Index, with a ranking of 78 out of the 180 countries surveyed (as compared to a score of 40 out of 100 and ranked 81 in 2017).

Corruption is addressed by the following laws: the Companies Act, 2013; the Prevention of Money Laundering Act, 2002; the Prevention of Corruption Act, 1988; the Code of Criminal Procedures, 1973; the Indian Contract Act, 1872; and the Indian Penal Code of 1860. Anti- corruption laws amended since 2004 have granted additional powers to vigilance departments in government ministries at the central and state levels. The amendments also elevated the Central Vigilance Commission (CVC) to be a statutory body. In addition, the Comptroller and Auditor General is charged with performing audits on public-private-partnership contracts in the infrastructure sector on the basis of allegations of revenue loss to the exchequer.

In November 2016, the Modi government ordered that INR 1000 and 500 notes, comprising approximately 86 percent of cash in circulation, be demonetized to curb “black money,” corruption, and the financing of terrorism. An August 2018 RBI report stated 99 percent of demonetized cash was deposited in legitimate bank accounts, leading analysts to question if the exercise enabled criminals to launder money into the banking system. Digital transactions increased due to demonetization, as mobile banking inclusion jumped from 40 percent to 60 percent of the populace. India is investigating 1.8 million bank accounts and 200 individuals associated with unusual deposits during demonetization, and banks’ suspicious transaction reports quadrupled to 473,000 in 2016. On August 7, SEBI directed stock exchanges to restrict trading and audit 162 suspected shell companies on the basis of large cash deposits during demonetization.

The Benami Transactions (Prohibition) Amendment Act of 2016 entered into effect in November 2016, and strengthened the legal and administrative procedures of the Benami Transactions Act 1988, which was ultimately never notified. (Note: A benami property is held by one person, but paid for by another, often with illicit funds.) Analysts expect the government to issue a roadmap in 2017-2018 to begin implementing the Act. In May 2017, the Real Estate (Regulation and Development) Act, 2016 came into effect. The Act will regulate India’s real estate sector, which is notorious for its corruption and lack of transparency.

In November 2016, India and Switzerland signed a joint declaration to enter into an Agreement on the Exchange of Information (AEOI) to automatically share financial information on accounts held by Indian residents, beginning in 2018. India also amended its Double Taxation Avoidance Agreement with Singapore, Cyprus, and Mauritius in 2016 to prevent income tax evasion. The move follows the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, which replaced the Income Tax (IT) Act of 1961 regarding the taxation of foreign income. The new Act penalizes the concealment of foreign income, as well as provides criminal liability for foreign income tax evasion.

In February 2014, the government enacted the Whistleblower Act, intended to protect anti- corruption activists, but it has yet to be implemented. Experts believe that the prosecution of corruption has been effective only among the lower levels of the bureaucracy; senior bureaucrats have generally been spared. Businesses consistently cite corruption as a significant obstacle to FDI in India and identify government procurement as a process particularly vulnerable to corruption. To make the Whistle Blowers Protection Act, 2014 more effective, the government proposed an amendment bill in 2015. This bill is still pending with the Upper House of Parliament; however anti-corruption activists have expressed concern that the bill will dilute the Act by creating exemptions for state authorities, allowing them to stay out of reach of whistleblowers.

The Companies Act of 2013 established rules related to corruption in the private sector by mandating mechanisms for the protection of whistle blowers, industry codes of conduct, and the appointment of independent directors to company boards. As yet, the government has established no monitoring mechanism, and it is unclear the extent to which these protections have been instituted. No legislation focuses particularly on the protection of NGOs working on corruption issues, though the Whistleblowers Protection Act, 2011, may afford some protection once it has been fully implemented.

In 2013, Parliament enacted the Lokpal and Lokayuktas Act 2013, which created a national anti- corruption ombudsman and requires states to create state-level ombudsmen within one year of the law’s passage. Till December 2018, the government had not appointed an ombudsman. (Note: An ombudsman was finally appointed in March 2019.)

UN Anticorruption Convention, OECD Convention on Combatting Bribery

India is a signatory to the United Nations Conventions against Corruption and is a member of the G20 Working Group against Corruption. India is not party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.

Resources to Report Corruption

Matt Ingeneri
Economic Growth Unit Chief U.S. Embassy New Delhi Shantipath, Chanakyapuri New Delhi
+91 11 2419 8000 ingeneripm@state.gov

Ashutosh Kumar Mishra
Executive Director
Transparency International, India
Lajpat Bhawan, Room no.4
Lajpat Nagar,
New Delhi – 110024 +91 11 2646 0826
info@transparencyindia.org

Prime Minister Modi’s BJP-led National Democratic Alliance government won a decisive mandate in the May 2019 elections, winning a larger majority in the Lok Sabha (lower house of Parliament) than in 2014. The new government’s first 100 days of its second term were marked by the removal of special constitutional status from the state of Jammu and Kashmir (J&K) The government’s decision to remove J&K autonomy was preceded by a heavy paramilitary build-up in the State, arrests of local opposition leaders, and cutting of mobile phone and Internet services. Internet connections have since been largely opened, but with continued severe limitations on data download speeds to the extent that everyday activities of Kashmiris often take hours or need to be completed outside the region.

A number of areas of India suffered from terrorist attacks by separatists, including Jammu and Kashmir and some states in India’s northeast.

In December 2019, the government passed the Citizenship Amendment Act (CAA), which promises fast-tracked citizenship to applicants from six minority religious groups from Afghanistan, Bangladesh, and Pakistan, but does not offer a similar privilege to Muslims from these countries. The new law sparked widespread protests that sometimes-included violence by demonstrators, government supporters, and security services.

Travelers to India are invited to visit the U.S. Department of State travel advisory website at: https://travel.state.gov/content/passports/en/country/india.html for the latest information and travel resources.

Although there are more than 20 million unionized workers in India, unions still represent less than 5 percent of the total work force. Most of these unions are linked to political parties. Unions are typically strong in state-owned enterprises. A majority of the unionized work force can be found in the railroads, port & dock, banking and insurance sectors. According to provisional figures form the Ministry of Labor and Employment (MOLE), over 1.74 million workdays were lost to strikes and lockouts during 2018. Labor unrest occurs throughout India, though the reasons and affected sectors vary widely. A majority of the labor problems are the result of workplace disagreements over pay, working conditions, and union representation.

India’s labor regulations are very stringent and complex, and over time have limited the growth of the formal manufacturing sector. In an effort to reduce the number of labor related statutes, the Indian parliament passed the Code on Wages legislation in 2019. This Code combines four previously existing statutes- The Payment of Wages Act, the Minimum Wages Act, the Payment of Bonus Act, and the Equal Renumeration Act- into one code to simplify compliance procedures for employers. Minimum industrial wages vary by state, ranging from about $2.20 per day for unskilled laborers to over $9.30 per day for skilled production workers.  Retrenchment, closure, and layoffs are governed by the Industrial Disputes Act of 1947, which requires prior government permission to lay off workers or close businesses employing more than 100 people, although some states including Haryana, Madhya Pradesh, Rajasthan, and Maharashtra have increased the threshold to 300 people. RBI approval is also required for foreign banks to close branches.  Permission is generally difficult to obtain, which has resulted in the increasing use of contract workers (i.e. non- permanent employees) to circumvent the law.  Private firms successfully downsize through voluntary retirement schemes.

Since the current government assumed office in 2014, much of the movement on labor laws has taken place at the state level, particularly in Rajasthan, where the government has passed major amendments to allow for quicker hiring, firing, laying off, and shutting down of businesses. The Ministry of Labor and Employment launched a web portal in 2014 to assist companies in filing a single online report on compliance with 16 labor-related laws. The government has also drafted a Code on Industrial Relations that is currently being reviewed by a parliamentary committee. India’s major labor unions have opposed labor reforms, arguing that they compromise workers’ safety and job security.

In March 2017, the Maternity Benefits Act was amended to increase the paid maternity leave for women from 12 weeks to 26 weeks.  The amendment also makes it mandatory for all industrial establishments employing 50 or more workers to have a creche for babies to enable nursing mothers to feed the child up to 4 times in a day.

In August 2016, the Child Labor Act was amended establishing a minimum age of 14 years for work and 18 years as the minimum age for hazardous work. In December 2016, the government promulgated legislation enabling employers to pay worker salaries through checks or e-payment in addition to the prevailing practice of cash payment.

There are no reliable unemployment statistics for India due to the informal nature of most employment. A 2019 report from India’s National Statistics Commission claimed that the official unemployment rate in India rose to 6.1 percent in 2018, a 45-year high. In contrast, the unemployment rate was only 2.2 percent the last time when the commission conducted this survey in 2012. The government acknowledges a shortage of skilled labor in high-growth sectors of the economy, including information technology and manufacturing. The current government has established a Ministry of Skill Development and has embarked on a national program to increase skilled labor.

The United States and India signed an Investment Incentive Agreement in 1987. This agreement covered the Overseas Private Investment Corporation (OPIC) and its successor agency, the U.S. International Development Finance Corporation (DFC). DFC is the U.S. Government’s development finance institution, launched in January 1, 2020, to incorporate OPIC’s programs as well as the Direct Credit Authority of the U.S. Agency for International Development. Since 1974, DFC (under its predecessor agency, OPIC) has provided support to over 200 projects in India in the form of loans, investment funds, and political risk insurance.

As of March 2020, DFC’s current outstanding portfolio in India comprises more than $1.7 billion, across 50 projects. These commitments are concentrated in utilities, financial services (including microfinance), and impact investments that include agribusiness and healthcare. 13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

*The Indian government source for GDP is: https://www.indiabudget.gov.in/economicsurvey/doc/Statistical-Appendix-in-English.pdf  The Indian government source for FDI statistics is: http://dipp.nic.in/publications/fdi-statistics  and the figure is the cumulative FDI from April 2000 to December 2017. The DIPP figures include equity inflows, reinvested earnings and “other capital,” and are not directly comparable with the BEA data. Outward FDI data has been sourced from: http://ficci.in/study-  page.asp?spid=20933&deskid=54531  

Note: Outward Direct Investment – According to India Brand Equity Foundation (IBEF) of the Department of Commerce, Ministry of Commerce and Industry, the outward FDI from India in equity, loan and guaranteed issue stood at US$ 12.59 billion in FY2018-19.
Source: Inward FDI DIPP, Ministry of Commerce and Industry
Outward Investments (July 2018-December 2018) RBI

Matt Ingeneri
Economic Growth Unit Chief
U.S. Embassy New Delhi
Shantipath, Chanakyapuri New Delhi +91 11 2419 8000
+91 11 2419 8000
IngeneriPM@state. gov

Policies Towards Foreign Direct Investment

With GDP growth of 5.02 percent in 2019, Indonesia is an attractive destination for foreign direct investment (FDI) due to its young population, strong domestic demand, stable political situation, and well-regarded macroeconomic policy.  Indonesian government officials often state that they welcome increased FDI, aiming to create jobs and spur economic growth, and court foreign investors, notably focusing on infrastructure development and export-oriented manufacturing.  Foreign investors, however, have complained about vague and conflicting regulations,  bureaucratic inefficiencies, ambiguous legislation in regards to  tax enforcement, poor existing infrastructure, rigid labor laws, sanctity of contract issues, and corruption.

The Indonesia Investment Coordinating Board, or BKPM, serves as an investment promotion agency, a regulatory body, and the agency in charge of approving planned investments in Indonesia.  As such, it is the first point of contact for foreign investors, particularly in manufacturing, industrial, and non-financial services sectors.  BKPM’s OSS system streamlines 492 licensing and permitting processes through the issuance of Government Regulation No.24/2018 on Electronic Integrated Business Licensing Services.  While the OSS system is operational, overlapping authority for permit issuance across ministries and government institutions, both at the national and subnational level, remains challenging.  Special expedited licensing services are available for investors meeting certain criteria, such as making investments in excess of approximately IDR100 billion (USD 6.6 million) or employing 1,000 local workers. The government has provided investment incentives particularly for “pioneer” sectors, (please see the section on Industrial Policies)

To further improve the investment climate, the government drafted an omnibus law on job creation to amend dozens of prevailing laws deemed to hamper investment.  In February 2020, the draft omnibus law was submitted to the legislature for deliberation.

Limits on Foreign Control and Right to Private Ownership and Establishment

Restrictions on FDI are, for the most part, outlined in Presidential Decree No.44/2016, commonly referred to as the Negative Investment List or the DNI. The DNI aims to consolidate FDI restrictions from numerous decrees and regulations, in order to create greater certainty for foreign and domestic investors.  The 2016 revision to the list eased restrictions in a number of previously closed or restricted fields.  Previously closed sectors, including the film industry (including filming, editing, captioning, production, showing, and distribution of films), on-line marketplaces with a value in excess of IDR 100 billion (USD 6.6 million), restaurants, cold chain storage, informal education, hospital management services, and manufacturing of raw materials for medicine, are now open for 100 percent foreign ownership.  The 2016 list also raises the foreign investment cap in the following sectors, though not fully to 100 percent:  online marketplaces under IDR 100 billion (USD 6.6 million), tourism sectors, distribution and warehouse facilities, logistics, and manufacturing and distribution of medical devices.  In certain sectors, restrictions are liberalized for foreign investors from other ASEAN countries.  Though the energy sector saw little change in the 2016 revision, foreign investment in construction of geothermal power plants up to 10 MW is permitted with an ownership cap of 67 percent, while the operation and maintenance of such plants is capped at 49 percent foreign ownership.  For investment in certain sectors, such as mining and higher education, the 2016 DNI is useful only as a starting point for due diligence, as additional licenses and permits are required by individual ministries.  A number of sensitive business areas, involving, for example, alcoholic beverages, ocean salvage, certain fisheries, and the production of some hazardous substances, remain closed to foreign investment or are otherwise restricted.

Foreign investment in small-scale and home industries (i.e. forestry, fisheries, small plantations, certain retail sectors) is reserved for micro, small and medium enterprises (MSMEs) or requires a partnership between a foreign investor and local entity.  Even where the 2016 DNI revisions lifted limits on foreign ownership, certain sectors remain subject to other restrictions imposed by separate laws and regulations.  As part of President Jokowi’s second-term economic reform agenda, Indonesian ministers have stated their interest in revising the 2016 DNI through a new presidential regulation that will be issued in 2020.  This new Investment Priorities List, or DPI, will incentivize investment into certain sectors, notably export-oriented manufacturing, digital technology projects, labor-intensive industries, and value-added processing, with the aim to spur innovation and reduce Indonesia’s current account deficit.  The government also intends to shorten the list of restricted sectors to six categories including cannabis, gambling, and chemical weapons..

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

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

The government issued Trade Minister Regulation 71/2019 to revoke the requirement for eighty percent local content and limitation of outlet numbers in the franchise industry.  Nevertheless, the government encourages companies to utilize domestic goods and services that meet franchisor quality standards.

Other Investment Policy Reviews

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

The last OECD Investment Policy Review of Indonesia, conducted in 2010, can be found on the OECD website:

http://www.oecd.org/daf/inv/investmentfordevelopment/indonesia-investmentpolicyreview-oecd.htm 

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

Business Facilitation

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

Once an investor has obtained a NIB, he/she may apply for a business license.  At this stage, investors must:  document their legal claim to the proposed project land/location; provide an environmental impact statement (AMDAL); show proof of submission of an investment realization report; and provide a recommendation from relevant ministries as necessary. Investors also need to apply for commercial and/or operational licenses prior to commencing commercial operations.  Special expedited licensing services are also available for investors meeting certain criteria, such as making investments in excess of approximately IDR 100 billion (USD 6.6 million) or employing 1,000 local workers.  After obtaining a NIB, investors in some designated industrial estates can immediately start project construction.

Foreign investors are generally prohibited from investing in MSMEs in Indonesia, although the 2016 Negative Investment List opened some opportunities for partnerships in farming and catalog and online retail.  In accordance with the Indonesian SMEs Law No. 20/2008, MSMEs are defined as enterprises with net assets less than IDR10 billion (USD 0.7 million) or with total annual sales under IDR50 billion (USD 3.3 million).  However, the Indonesian Central Bureau of Statistics defines MSMEs as enterprises with fewer than 99 employees.  The government provides assistance to MSMEs, including: expanded access to business credit for MSMEs in farming, fishery, manufacturing, creative business, trading and services sectors; a tax exemption for MSMEs with annual sales under IDR 200 million (USD 13,000); and assistance with international promotion.

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

BKPM is responsible for issuing “investment licenses” (the term used to encompass both NIB and business licenses) to foreign entities and has taken steps to simplify the application process. The OSS serves as an online portal which allows foreign investors to apply for and track the status of licenses and other services online.  The OSS coordinates many of the permits issued by more than a dozen ministries and agencies required for investment approval.  In November 2019, the government through Presidential Instruction 7/2019 appointed BKPM as the main institution to issue business permits and to grant investment incentives which have been delegated from all ministries and government institutions. BKPM has also been tasked to review policies deemed unfavorable for investors.  In addition, BKPM now issues soft-copy investment and business licenses.  While the OSS’s goal is to help streamline investment approvals, investments in the mining, oil and gas, plantation, and most other sectors still require multiple licenses from related ministries and authorities.  Likewise, certain tax and land permits, among others, typically must be obtained from local government authorities.  Though Indonesian companies are only required to obtain one approval at the local level, businesses report that foreign companies often must seek additional approvals in order to establish a business.

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

Outward Investment

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

Transparency of the Regulatory System

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

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

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

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

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

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

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

International Regulatory Considerations

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

Indonesia joined the WTO in 1995.  Indonesia’s National Standards Body (BSN) is the primary government agency to notify draft regulations to the WTO concerning technical barriers to trade (TBT) and sanitary and phytosanitary standards (SPS); however, in practice, notification is inconsistent.  In December 2017, Indonesia ratified the WTO Trade Facilitation Agreement (TFA).  At this point, Indonesia has met 88.7 percent of its commitments to the TFA provisions, including publication and availability information, consultations, advance ruling, review procedure, detention and test procedure, fee and charges discipline, goods clearance, border agency cooperation, import/export formalities, and goods transit.

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

Legal System and Judicial Independence

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

Corruption also continues to plague Indonesia’s judiciary, with graft investigations involving senior judges and court staffs.  Many businesses note that the judiciary is susceptible to influence from outside parties.  Certain companies have claimed that the court system often does not provide the necessary recourse for resolving property and contractual disputes and that cases that would be adjudicated in civil courts in other jurisdictions sometimes result in criminal charges in Indonesia.

Judges are not bound by precedent and many laws are open to various interpretations.  A lack of clear land titles has plagued Indonesia for decades, although the land acquisition law No.2/2012 enacted in 2012 included legal mechanisms designed to resolve some past land ownership issues.  In addition, companies find Indonesia to have a poor track record on the legal enforcement of contracts, and civil disputes are sometimes criminalized.  Government Regulation No. 79/2010 opened the door for the government to remove recoverable costs from production sharing contracts.  Indonesia has also required mining companies to renegotiate their contracts of work to include higher royalties, more divestment to local partners, more local content, and domestic processing of mineral ore.

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

Laws and Regulations on Foreign Direct Investment

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

Competition and Anti-Trust Laws

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

Expropriation and Compensation

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

Dispute Settlement

ICSID Convention and New York Convention

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

Investor-State Dispute Settlement

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

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

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

International Commercial Arbitration and Foreign Courts

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

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

Bankruptcy Regulations

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

Investment Incentives

Indonesia seeks to facilitate investment through fiscal incentives, non-fiscal incentives, and other benefits. Fiscal incentives are in the form of tax holidays, tax allowances, and exemptions of import duties for capital goods and raw materials for investment. As part of the Economic Policy Package XVI, Indonesia issued a modified tax holiday scheme in November 2018 through Ministry of Finance (MOF) Regulation 150/2018, which revokes MOF Regulation 35/2018.  This regulation is intended to attract more direct investment in pioneer industries and simplify the application process through the OSS. The period of the tax holiday is extended up to 20 years; the minimum investment threshold is IDR 100 billion (USD 6.6 million), a significant reduction from the previous regulation at IDR 500 billion (USD 33 million). In addition to the tax holiday, depending on the investment amount, this regulation also provides either 25 or 50 percent income tax reduction for the two years after the end of the tax holiday. The following table explains the parameters of the new scheme:

Based on BKPM Regulation 1/2019 as amended by BKPM Regulation 8/2019, the coverage of pioneer sectors was expanded to the digital economy, agricultural, plantation, and forestry, bringing the total to eighteen industries:

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

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

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

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

On March 31, 2020, Indonesia issued Government Regulation in Lieu of Law No. 1 of 2020 on State Financial Policy and the Stability of Financial Systems for the Handling of the Coronavirus Disease 2019 Pandemic (Perppu 1/2020). Among its provisions are plans to regulate electronic based trading activity (e-trading) and to charge value-added taxes (VAT) on taxable intangible goods and services from foreign e-commerce parties and other highly-digitalized businesses. Income tax will also be imposed upon foreign e-commerce parties that are judged to meet a “significant economic presence” threshhold, based on consolidated gross circulation of a business group, total sales value, or active Indonesian users. The regulation also introduces an electronic transaction tax (ETT) that will be imposed on foreign entities that are subject to income tax obligations under the aformentioned threshhold but would not otherwise be subject to corporate income tax in Indonesia in the absence of a permanent establishment, where taxing such transactions is prohibited by bilateral tax treaties.  Industry representatives have expressed concern that such provisions seek to circumvent bilateral tax treaties intended to avoid double taxation, including the tax treaty between Indonesia and the United States.  They have also noted a lack of clarity over the Perppu’s implementation and concerns over administrative sanctions and the high cost to comply with new measures.  The new regulation will also also cut the corporate income tax rate, lowering it to 22 percent for 2020 and 2021, and to 20 percent for 2022. In addition, a company can claim a further 3 percent reduction if it is publicly listed, with a total number of shares traded on an Indonesian stock exchange of at least 40 percent.

The government provides the facility of Government-Borne Import Duty (Bea Masuk Ditanggung Pemerintah /BMDTP) with zero percent import duty to improve industrial competitiveness and public goods procurement in high value added, labor intensive, and high growth sectors. MOF Regulation 12/2020 provides zero import duty for imported raw materials in 36 sectors including plastics, cosmetics, polyester, resins, other chemical materials, machinery for agriculture, electricity, toys, vehicle components including for electric vehicles, telecommunications, fertilizers, and pharmaceuticals until December 2020.

To cope with soaring demand and to improve domestic production of medical devices and supplies amid the COVID-19 pandemic, the government through BKPM Regulation 86/2020 streamlined licensing requirement for manufacturers of pharmaceuticals and medical devices. The Ministry of Health also accelerated product registration and certification for medical devices and household health supplies. Moreover, the Ministry of Trade issued Regulation 28/2020 to relax import requirements for certain medical-related products.

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

Indonesia’s vast natural resources have attracted significant foreign investment over the last century and continues to offer significant prospects. However, some companies report that a variety of government regulations have made doing business in the resources sector increasingly difficult, and Indonesia now ranks 64th of 76 jurisdictions in the Fraser Institute’s 2019 Mining Policy Perception Index. In 2012, Indonesia banned the export of raw minerals, dramatically increased the divestment requirements for foreign mining companies, and required major mining companies to renegotiate their contracts of work with the government. A ban on the export of raw minerals went into effect in January 2014. However, in July 2014, the government issued regulations that allowed, until January 2017, the temporary export of copper and several other mineral concentrates with export duties and other conditions imposed. When the full export ban came back into effect in January 2017, the government again issued new regulations that allowed exports of copper concentrate and other specified minerals, but imposed more onerous requirements. Of note for foreign investors, provisions of the regulations require that to be able to export non-smelted mineral ores, companies with contracts of work must convert to mining business licenses—and thus be subject to prevailing regulations—and must commit to build smelters within the next five years. Also, foreign-owned mining companies must gradually divest 51 percent of shares to Indonesian interests over ten years, with the price of divested shares determined based on a “fair market value” determination that does not take into account existing reserves. In January 2020, the government banned the export of  nickel ore for all mining companies, foreign and domestic, in the hopes of encouraging construction of domestic nickel smelters. The 2009 mining law devolved the authority to issue mining licenses to local governments, who have responded by issuing more than 10,000 licenses, many of which have been reported to overlap or be unclearly mapped. In the oil and gas sector, Indonesia’s Constitutional Court disbanded the upstream regulator in 2012, injecting confusion and more uncertainty into the natural resources sector. Until a new oil and gas law is enacted, upstream activities are supervised by the Special Working Unit on Upstream Oil and Gas (SKK Migas).

During President Jokowi’s first term, the Indonesian government invested more than  USD 350 billion in infrastructure to connect Indonesia’s more than 17,000 islands. The investments included toll roads, seaports, airports, power generation, telecommunications, and upgrades to Indonesia’s social infrastructure, such as, clean water and sanitation, and housing projects.  President Jokowi has emphasized that he will continue this infrastructure program during his second five-year term, aiming to increase Indonesia’s infrastructure stock from 43 percent of GDP in 2019 to 50 percent in 2024.

Despite high-level attention from Indonesian policymakers, many U.S. companies and investors report that the current institutional arrangement for infrastructure development still suffers from functional overlap, lack of capacity for public-private partnership (PPP) projects in regional governments, lack of solid value-for-money methodologies, crowding out of the private sector by state-owned enterprises (SOEs), legal uncertainty, lack of a solid land-acquisition framework, long-term operational risks for the private sector, unwillingness from stakeholders to be the first ones to test a new policy approach, corruption, and a relatively small Indonesian private sector. As a result of these challenges, the World Bank estimates that Indonesia faces a USD 1.5 trillion infrastructure gap in comparison to other emerging market economies.

Foreign Trade Zones/Free Trade/ Trade Facilitation

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

Indonesia also has numerous Special Economic Zones (SEZs), regulated under Law No. 39/2009, Government Regulation No. 1/2020 on SEZ management, and Government Regulation No. 12/2020 on SEZ facilities. These benefits include a reduction of corporate income taxes for a period of years (depending on the size of the investment), income tax allowances, luxury tax, customs duty and excise, and expedited or simplified administrative processes for import/export, expatriate employment, immigration, and licensing. As of  February 2020, Indonesia has identified fifteen SEZs in manufacturing and tourism centers that are operational or under construction. Eleven SEZs are operational (though development is sometimes limited) at: 1) Sei Mangkei, North Sumatera; 2) Tanjung Lesung, Banten; 3) Palu, Central Sulawesi; 4) Mandalika, West Nusa Tenggara; 5) Arun Lhokseumawe, Aceh; 6) Galang Batang, Bintan, Riau Islands; 7) Tanjung Kelayang, Pulau Bangka, Bangka Belitung Islands; 8) Bitung, North Sulawesi; 9) Morotai, North Maluku; 10) Maloy Batuta Trans Kalimantan, East Kalimantan; and 11) Sorong, Papua. Four more SEZs are under construction: Tanjung Api-Api, South Sumatera; Singhasari, East Java; Kendal, Central Java; and Likupang, North Sulawesi. In 2016, the government began the process of transitioning Batam from an FTZ to SEZ in order to provide further investment incentives. The Indonesian government announced in December 2018 that it plans to transition management of the Batam FTZ to the local government, creating a single regulatory authority on the island. The conversion to an SEZ is still ongoing  and will not affect the status of the neighboring FTZs on Bintan and Karimun islands.

Indonesian law also provides for several other types of zones that enjoy special tax and administrative treatment.  Among these are Industrial Zones/Industrial Estates (Kawasan  Industri), bonded stockpiling areas (Tempat Penimbunan Berikat), and Integrated Economic Development Zones (Kawasan Pengembangan Ekonomi Terpadu).  Indonesia is home to 103 industrial estates that host thousands of industrial and manufacturing companies.  Ministry of Finance Regulation No. 105/2016 provides several different tax and customs facilities available to companies operating out of an industrial estate, including corporate income tax reductions, tax allowances, VAT exemptions, and import duty exemptions depending on the type of industrial estate.  Bonded stockpile areas include bonded warehouses, bonded zones, bonded exhibition spaces, duty free shops, bonded auction places, bonded recycling areas, and bonded logistics centers. Companies operating in these areas enjoy concessions in the form of exemption from certain import taxes, luxury goods taxes, and value added taxes, based on a variety of criteria for each type of location. Most recently, bonded logistics centers (BLCs) were introduced to allow for larger stockpiles, longer temporary storage (up to three years), and a greater number of activities in a single area. The Ministry of Finance issued Regulation 28/2018, providing additional guidance on the types of BLCs and shortening approval for BLC applications. By October 2019, Indonesia had designated 106 BLCs in 159 locations, with plans to designate more in eastern Indonesia.  In 2018, Ministry of Finance and the Directorate General for Customs and Excise (DGCE) issued regulations (MOF Regulation No. 131/2018 and DGCE Regulation No. 19/2018) to streamline the licensing process for bonded zones.  Together the two regulations are intended to reduce processing times and the number of licenses required to open a bonded zone.

Shipments from FTZs and SEZs to other places in the Indonesia customs area are treated similarly to exports and are subject to taxes and duties.  Under MOF Regulation 120/2013, bonded zones have a domestic sales quota of 50 percent of the preceding realization amount on export, sales to other bonded zones, sales to free trade zones, and sales to other economic areas (unless otherwise authorized by the Indonesian government).  Sales to other special economic areas are only allowed for further processing to become capital goods, and to companies which have a license from the economic area organizer for the goods relevant to their business.

Performance and Data Localization Requirements

Indonesia expects foreign investors to contribute to the training and development of Indonesian nationals, allowing the transfer of skills and technology required for their effective participation in the management of foreign companies. Generally, a company can hire foreigners only for positions that the government has deemed open to non-Indonesians. Employers must have training programs aimed at replacing foreign workers with Indonesians. If a direct investment enterprise wants to employ foreigners, the enterprise should submit an Expatriate Placement Plan (RPTKA) to the Ministry of Manpower.

Indonesia recently made significant changes to its foreign worker regulations. Under Presidential Regulation No. 20/2018, issued in March 2018, the Ministry of Manpower now has two days to approve a complete RPTKA application, and an RPTKA is not required for commissioners or executives. An RPTKA’s validity is now based on the duration of a worker’s contract (previously it was valid for a maximum of five years). The new regulation no longer requires expatriate workers to go through the intermediate step of obtaining a Foreign Worker Permit (IMTA). Instead, expatriates can use an endorsed RPTKA to apply with the immigration office in their place of domicile for a Limited Stay Visa or Semi-Permanent Residence Visa (VITAS/VBS). Expatriates receive a Limited Stay Permit (KITAS) and a blue book, valid for up to two years and renewable for up to two extensions without leaving the country. Regulation No. 20/2018 also abolished the requirement for all expatriates to receive a technical recommendation from a relevant ministry. However, ministries may still establish technical competencies or qualifications for certain jobs, or prohibit the use of foreign worker for specific positions, by informing and obtaining approval from the Ministry of Manpower. Foreign workers who plan to work longer than six months in Indonesia must apply for employee social security and/or insurance.

Regulation No. 20/2018 provides for short-term working permits (maximum six months) for activities such as conducting audits, quality control, inspections, and installation of machinery and electrical equipment. Ministry of Manpower issued Regulation No.10/2018 to implement Regulation 20/2018, revoking its Regulation No. 16/2015 and No. 35/2015. Regulation 10/2018 provides additional details about the types of businesses that can employ foreign workers, sets requirements to obtain health insurance for expatriate employees, requires companies to appoint local “companion” employees for the transfer of technology and skill development, and requires employers to “facilitate” Indonesian language training for foreign workers. Any expatriate who holds a work and residence permit must contribute USD 1,200 per year to a fund for local manpower training at regional manpower offices. The Ministry of Manpower issued Decree 228/2019 to widen the number of jobs open for foreign workers across 18 sectors, ranging from construction, transportation, education, telecommunication, and professionals. Foreign workers  have to obtain approval from Manpower Minister or designated officials for applying positions not listed in the decree. Some U.S. firms report difficulty in renewing KITASs for their foreign executives. In February 2017, the Ministry of Energy and Natural resources abolished regulations specific to the oil and gas industry, bringing that sector in line with rules set by the Ministry of Manpower.

With the passage of a defense law in 2012 and subsequent implementing regulations in 2014, Indonesia established a policy that imposes offset requirements for procurements from foreign defense suppliers. Current laws authorize Indonesian end users to procure defense articles from foreign suppliers if those articles cannot be produced within Indonesia, subject to Indonesian local content and offset policy requirements. On that basis, U.S. defense equipment suppliers are competing for contracts with local partners. The 2014 implementing regulations still require substantial clarification regarding how offsets and local content are determined. According to the legislation and subsequent implementing regulations, an initial 35 percent of any foreign defense procurement or contract must include local content, and this 35 percent local content threshold will increase by 10 percent every five years following the 2014 release of the implementing regulations until a local content requirement of 85 percent is achieved. The law also requires a variety of offsets such as counter-trade agreements, transfer of technology agreements, or a variety of other mechanisms, all of which are negotiated on a per-transaction basis. The implementing regulations also refer to a “multiplier factor” that can be applied to increase a given offset valuation depending on “the impact on the development of the national economy.” Decisions regarding multiplier values, authorized local content, and other key aspects of the new law are in the hands of the Defense Industry Policy Committee (KKIP), an entity comprising Indonesian interagency representatives and defense industry leadership. KKIP leadership indicates that they still determine multiplier values on a case-by-case basis, but have said that once they conclude an industry-wide gap analysis study, they will publish a standardized multiplier value schedule. According to government officials, rules for offsets and local content apply to major new acquisitions only, and do not apply to routine or recurring procurements such as those required for maintenance and sustainment.

Indonesia notified the WTO of its compliance with Trade-Related Investment Measures (TRIMS) on August 26, 1998. The 2007 Investment Law states that Indonesia shall provide the same treatment to both domestic and foreign investors originating from any country. Nevertheless, the government pursues policies to promote local manufacturing that could be inconsistent with TRIMS requirements, such as linking import approvals to investment pledges or requiring local content targets in some sectors.

In October 10, 2019, Indonesia issued Government Regulation No. 71 (GR71) to replace Regulation No. 82/2012 which classifies electronic system operators (ESO) into two categories: public and private. Public ESOs are either a state institution or an institution assigned by a state institution but not a financial sector regulator or supervision authority. Private ESOs are individuals, businesses and communities that operate electronic system. Public ESOs are required to manage, process, and store their data in Indonesia, unless the storing technology is not available locally.  Private ESOs have the option to choose where they will manage, process, and store their data. However, if private ESOs choose to process data outside of Indonesia, they are required to provide access to their systems and data for government supervision and law enforcement purposes. For private financial sector ESOs, GR71 provides  that such firms are “further regulated” by Indonesia’s financial sector supervisory authorities with regards to the private sector’s ESO systems, data processing, and data storage.

In March 2020, the Ministry of Communication and Information Technology (MCIT) published a proposed draft implementing regulation of GR 71 for private ESOs. Article 6 of the draft requires private ESOs to obtain approval from MCIT before they can manage, process, and store their data outside of Indonesia. This provision has been widely criticized by foreign firms and is more restrictive than the original government regulation (GR71) which allows offshore data storage. Post continues to monitor this issue.

Additionally, pursuant to GR71, the Financial Services Authority (OJK) issued Regulation 13/2020, an amendment to Regulation 38/2016, which allows banks to operate their electronic data processing systems and disaster recovery centers outside of Indonesia, provided that the system receives approval from OJK.  Furthermore, OJK will evaluate whether the arrangement for offshore data could diminish its supervisory efficiency, negatively affect the bank’s performance, and if the data center complies with Indonesia’s laws and regulations. The regulation became effective March 31, 2020.

Real Property

The Basic Agrarian Law of 1960, the predominant body of law governing land rights, recognizes the right of private ownership and provides varying degrees of land rights for Indonesian citizens, foreign nationals, Indonesian corporations, foreign corporations, and other legal entities. Indonesia’s 1945 Constitution states that all natural resources are owned by the government for the benefit of the people. This principle was augmented by the passage of a land acquisition bill in 2011 that enshrined the concept of eminent domain and established mechanisms for fair market value compensation and appeals. The National Land Agency registers property under Regulation No. 24/1997, though the Ministry of Forestry administers all ”forest land.” Registration is sometimes complicated by local government requirements and claims, as a result of decentralization. Registration is also not conclusive evidence of ownership, but rather strong evidence of such. Government Regulation No.103/2015 on house ownership by foreigners domiciled in Indonesia allows foreigners to have a property in Indonesia with the status of a “right to use” for a maximum of 30 years, with extensions available for up to 20 additional years.

As part of President Jokowi’s second-term economic reform agenda, the Indonesian government has introduced an omnibus bill on job creation that aims to reduce uncertainty around the roles of the central and local governments, including around spatial planning and environmental and social impact assessments (AMDALs).

Intellectual Property Rights

In the U.S. Trade Representative’s (USTR) Special 301 Report released on April 29, 2020, Indonesia remains on the priority watch list due to the  lack of adequate and effective IP protection and enforcement. Indonesia’s patent law continues to raise serious concerns, including with respect to patentability criteria and compulsory licensing. Further, counterfeiting and piracy continue to be pervasive, IP enforcement remains weak, and there are continued market access restrictions for IP-intensive industries. According to U.S. stakeholders, Indonesia’s failure to effectively protect intellectual property and enforce IP rights laws has resulted in high levels of physical and online piracy. Local industry associations have reported large amounts of pirated films, music, and software in circulation in Indonesia in recent years, causing potentially billions of dollars in losses.  Indonesian physical markets, such as Mangga Dua Market, and online markets Tokopedia, Bukalapak, were included in USTR’s Notorious Markets List in 2019.

Indonesia improved market access by amending a troubling provision within the 2016 Patent Law related to compulsory licenses (CLs). Ministry of Law and Human Right (MLHR) Regulation 30/2019 aims to provide more clarity on the criteria for CLs, including provisions on the non-transferability of CLs to third parties, specific purposes, and duration. The provisions also clarify conditions where CLs can be granted based on determination of “detriment to society”, including insufficient supply and unfordable prices of patented products. The new regulation incorporates Regulation 15/2018’s renewable exemption for patent holders to delay local manufacturing requirements. While industry contacts viewed this regulation as an improvement, they still have concerns that this regulation may undermine the overall level of protection that patent holders receive by registering their patents in Indonesia.

MLHR’s Director General of Intellectual Property (DGIP)  said the GOI will further amend the 2016 Patent Law through the pending omnibus bill and a future Patent Law amendment. The job creation omnibus bill would remove a requirement under Article 20 to produce a patented product in Indonesia within 36 months of the grant of a patent. Previously, MLHR allowed a five-year exemption from local production requirements under Regulation 15/2018. The Patent Law amendment will contain revisions to Article 4 on second use and Article 82 on compulsory licensing. The 2016 Patent Law contains several other concerning provisions, including a restrictive definition of “invention” that potentially imposes an additional “meaningful benefit” requirement for patents on new forms of existing compounds, an expansive national interest test for proposed patent licenses, and disclosure of genetic information and traditional knowledge to promote access and benefit sharing.  Observers expect the omnibus bill to be passed in 2020.  Aside from the Article 20 revision in the omnibus bill, there is no concrete timeline for the Patent Law amendment. DGIP reports it is currently drafting guidelines for patent examiners on pharmacy, computer, and biotechnology patents that will be released in 2020.

DGIP has relaxed its more aggressive efforts to collect patent annuity fees by offering extensions to the deadline.  On August 16, 2018, DGIP issued a circular letter warning stakeholders that it may refuse to accept new patent applications from rights holders that have not paid patent annuity fee debts. The letter gave rights holders until February 16, 2019, to settle unpaid patent annuity payments. On February 17, 2019, DGIP issued another circular letter on its website extending the deadline to August 17, 2019. DGIP has since announced a further extension to settle any unpaid annuities to July 31, 2020. However, in order to benefit from the latest extension, companies were required to send a “commitment letter” to DGIP by January 31, 2020 indicating their intention to pay the outstanding annuities.  The U.S. government continues to monitor implementation of this policy with DGIP and industry stakeholders.

Indonesia deposited its instrument of accession to the Madrid Protocol with the World Intellectual Property Organization (WIPO) in October 2017 and issued implementing regulations in June 2018. Under the new rules, applicants desiring international mark protection under the Madrid Protocol are required to first register their application with DGIP , and must be Indonesian citizens, domiciled in Indonesia, or have clear industrial or commercial interests in Indonesia. Although the Trademark Law of 2016 expanded recognition of non-traditional marks, Indonesia still does not recognize certification marks. In response to stakeholder concerns over a lack of consistency in treatment of international well-known trademarks, the Supreme Court issued Circular Letter 1/2017, which advised Indonesian judges to recognize cancellation claims for well-known international trademarks with no time limit stipulation.

Following the issuance of Ministry of Finance (MOF) Regulation No.40/2018, on December 10, 2019, the Supreme Court ruled on MOF Regulation No. 6/2019, which further granted DGCE the legal authority to hold shipments believed to contain imitation goods for up to two days, pending inspection. Under Regulation No.6/2019, rights holders are notified by DGCE (through the recordation system) when an incoming shipment is suspected of containing infringing products. If the inspection reveals an infringement, the rights holder has four days to file a court injunction to request a suspension of the shipment. Rights holders are required to provide a refundable monetary guarantee of IDR 100 million (approximately USD 6,600) when they file a claim with the court. Rights holders can apply for a 10-day (extendable for an additional 10 days) temporary suspension of the shipment until the completion of a commercial court review.  Once the commercial court examines the evidence, the court can make a ruling that same day whether to maintain the temporary hold or to cancel the judgement.  If the court sides with the rights holder, then the guarantee money will be returned to the applicant. Despite  business stakeholder concerns, the GOI retained a requirement that only companies with offices domiciled in Indonesia may use the recordation system.

In 2015, DGIP and KOMINFO jointly released implementing regulations under the Copyright Law to provide for rights holders to report websites that offer IP-infringing products and sets forth procedures for blocking IP-infringing sites. Also in 2015, Indonesia’s Creative Economy Agency (BEKRAF) launched an anti-piracy task force with film and music industry stakeholders. BEKRAF reported that the task force remained focused on coordinating the review of complaints from industry about infringing websites in 2018.  MCIT reported that it blocked 1,946 infringing websites in 2019, a significant increase from the previous  year’s 442 cases. IndoXXI and LayarIndo21, two of the largest online pirated entertainment providers,  reportedly closed in early January. After the IndoXXI shutdown was announced, Video Coalition of Indonesia (VCI) found 200 new infringing websites with similar content. A YouGov survey published by the Asia Video Industry Association (AVIA) revealed that 63 percent of Indonesians access infringing websites for entertainment purposes. MCIT senior officials stated the Ministry is working with the Indonesia National Police Cybercrime Unit and industry groups, including AVIA, to determine and identify the source host, but admitted MCIT does not have the capability to track down the perpetrators and bring criminal charges,

DGIP reports that its directorate of investigation has increased staffing to 187 investigators, including 40 nationwide investigators and 147 staff certified to act as local investigators in 33 provinces when needed for a pending case, and saw the number of investigations double from 30 in 2018 to 47 in 2019. Trademark, Patent, and Copyright legislation requires a rights-holder complaint for investigations, and DGIP and BPOM investigators lack the authority to make arrests so must rely on police cooperation for any enforcement action.

Resources for Rights Holders

Additional information regarding treaty obligations and points of contact at local IP offices, can be found at the World Intellectual Property Organization (WIPO) country profile website http://www.wipo.int/directory/en/ .For a list of local lawyers, see: http://jakarta.usembassy.gov/us-service/attorneys.html.

Capital Markets and Portfolio Investment

The Indonesia Stock Exchange (IDX) index has 668 listed companies as of December 2019 with a daily trading volume of USD 650 million and market capitalization of USD 521 billion. Over the past five years, there has been a 34 percent increase of the number listed companies, but the IDX is dominated by its top 20 listed companies, which represent 59.26 percent of the market cap. There were 50 initial public offerings in 2019 – seven fewer than 2018. As of January 2020, domestic entities conducted more than 67.97 percent  of total IDX stock trades.

In November 2018, IDX introduced T+2 settlement, with sellers now receiving proceeds within two days instead of the previous standard of three days (T+3). In 2011, the IDX launched the Indonesian Sharia Stock Index (ISSI), its first index of sharia-compliant companies, primarily to attract greater investment from Middle East companies and investors. This was followed in 2017 by the IDX’s introduction the first online sharia stock trading platform. As of December 2019, the ISSI is composed of 429 stocks that are a part of IDX’s Jakarta Composite Index (JCI), with a total market cap of USD 267 billion.

Government treasury bonds are the most liquid bonds offered by Indonesia. Corporate bonds are less liquid due to less public knowledge of the product. The government also issues sukuk (Islamic treasury notes) treasury bills as part of its effort to diversify Islamic debt instruments and increase their liquidity. Indonesia’s sovereign debt as of December 2019 was rated as BBB- by Standard and Poor, BBB by Fitch Ratings and Baa2 by Moody’s.

OJK began overseeing capital markets and non-banking institutions in 2013, replacing the Capital Market and Financial Institution Supervisory Board. In 2014, OJK also assumed BI’s supervisory role over commercial banks. Foreigners have access to the Indonesian capital markets and are a major source of portfolio investment (including 38.57 percent of government securities). Indonesia respects International Monetary Fund (IMF) Article VIII by refraining from restrictions on payments and transfers for current international transactions. Foreign ownership of Indonesian companies may be limited in certain industries or sectors, such as those outlined in the DNI.

Money and Banking System

Although there is some concern regarding the operations of the many small and medium sized family-owned banks, the banking system is generally considered sound, with banks enjoying some of the widest net interest margins in the region. As of August 2019, the 10 top banks had IDR 5,210 trillion (USD 372 billion) in total assets. Loans grew 6.08 percent in 2019 compared to 11.5 percent in2018. Gross non-performing loans in December 2019 remained at 2.53 percent from 2.4 percent the previous year. For 2020, the Financial Services Authority (OJK) project annual credit growth at 12-14 percent and deposit growth around 10-12 percent for Indonesia’s banking industry.

OJK Regulation No.56/03/2016 limits bank ownership to no more than 40 percent by any single shareholder, applicable to foreign and domestic shareholders. This does not apply to foreign bank branches in Indonesia. Foreign banks may establish branches if the foreign bank is ranked among the top 200 global banks by assets.  A special operating license is required from OJK in order to establish a foreign branch. The OJK granted an exception in 2015 for foreign banks buying two small banks and merging them. To establish a representative office, a foreign bank must be ranked in the top 300 global banks by assets. In 2017, HSBC, which previously registered as a foreign branch, changed its legal status to a Limited Liability Company and merged with a local bank subsidiary which it had purchased in 2008.

On March 16, OJK  issued OJK Regulation Number 12/POJK.03/2020 on commercial bank consolidation. The regulation aims to strengthen the structure, and competitiveness of the national banking industry by increasing bank capital and the encouraging consolidation of banks in Indonesia. This regulation generally consists of two main regulations concerning bank consolidation policies, as well as  increasing minimum core capital for commercial banks and increasing Capital Equivalency Maintained Assets for foreign banks with branch offices by least IDR 3 trillion, by December 31, 2022.

In 2015, OJK eased rules for foreigners to open a bank account in Indonesia. Foreigners can open a bank account with a balance between USD 2,000-50,000 with just their passport. For accounts greater than USD 50,000, foreigners must show a supporting document such as a reference letter from a bank in the foreigner’s country of origin, a local domicile address, a spousal identity document, copies of a contract for a local residence, and/or credit/debit statements.

Growing digitalization of banking services, spurred on by innovative payment technologies in the financial technology (fintech) sector, complements the conventional banking sector. Peer-to-peer (P2P) lending companies recorded a triple-digit increase in 2008 and e-payment services have grown more than six-fold since 2012. Indonesian policymakers are hopeful that these fintech services can reach underserved or unbanked populations and micro-, small-, and medium-sized enterprises (MSMEs), with estimates that in 2020, fintech lending will hit IDR 223 trillion (USD 13.61 billion) in loan disbursements.

Foreign Exchange and Remittances

Foreign Exchange

The rupiah (IDR), the local currency, is freely convertible. Currently, banks must report all foreign exchange transactions and foreign obligations to the central bank, Bank Indonesia (BI). With respect to the physical movement of currency, any person taking rupiah bank notes into or out of Indonesia in the amount of IDR 100 million (approximately USD 6,600) or more, or the equivalent in another currency, must report the amount to DGCE. The limit for any person or entity to bring foreign currency bank notes into or out of Indonesia is the equivalent of IDR 1 billion (USD 66,000).

Banks on their own behalf or for customers may conduct derivative transactions related to derivatives of foreign currency rates, interest rates, and/or a combination thereof. BI requires borrowers to conduct their foreign currency borrowing through domestic banks registered with BI. The regulations apply to borrowing in cash, non-revolving loan agreements, and debt securities.

Under the 2007 Investment Law, Indonesia gives assurance to investors relating to the transfer and repatriation of funds, in foreign currency, on:

• capital, profit, interest, dividends and other income;
• funds required for (i) purchasing raw material, intermediate goods or final goods, and (ii) replacing capital goods for continuation of business operations;
• additional funds required for investment;
• funds for debt payment;
• royalties;
• income of foreign individuals working on the investment;
• earnings from the sale or liquidation of the invested company;
• compensation for losses; and
• compensation for expropriation.

U.S. firms report no difficulties in obtaining foreign exchange.

BI began in 2012 to require exporters to repatriate their export earnings through domestic banks within three months of the date of the export declaration form. Once repatriated, there are currently no restrictions on re-transferring export earnings abroad. Some companies report this requirement is not enforced.

In 2015, the government announced a regulation requiring the use of the rupiah in domestic transactions. While import and export transactions can still use foreign currency, importers’ transactions with their Indonesian distributors must now use rupiah, which has impacted some U.S. business operations. The central bank may grant a company permission to receive payment in foreign currency upon application, and where the company has invested in a strategic industry.

Remittance Policies

The government places no restrictions or time limitations on investment remittances. However, certain reporting requirements exist. Banks should adopt Know Your Customer (KYC) principles to carefully identify customers’ profile to match transactions. Carrying rupiah bank notes of more than IDR 100 million (approximately USD 6,600) in cash out of Indonesia requires prior approval from BI, as well as verifying the funds with Indonesian Customs upon arrival. Indonesia does not engage in currency manipulation.

As of 2015, Indonesia is no longer subject to the intergovernmental Financial Action Task Force (FATF) monitoring process under its on-going global Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) compliance process. It continues to work with the Asia/Pacific Group on Money Laundering (APG) to further strengthen its AML/CTF regime. In 2018, Indonesia was granted observer status by FATF, a necessary milestone toward becoming a full FATF member.

Sovereign Wealth Funds

As of mid-2020, Indonesia is still preparing to establish a sovereign wealth fund, despite macroeconomic and budgetary pressures from the pandemic response. When established, it is expected the fund will operate as a state-owned investment fund that will aim to attract foreign capital, including from foreign sovereign wealth funds, and invest that capital in long-term Indonesian assets. According to Indonesian government officials, the fund will consist of a master portfolio with sector-specific sub-funds, such as infrastructure, oil and gas, health, tourism, and digital technologies. The sovereign wealth fund will be authorized by the planned passage of the omnibus bill on job creation, which includes 14 articles to set up the fund and facilitate greater cooperation with foreign partners. This cooperation includes authorizing the fund to be set up in foreign jurisdictions and allowing foreigners as general partners of the fund.

In 2015, the Finance Ministry authorized one of those SOEs, PT Sarana Multi Infrastruktur (SMI) to manage the assets of the Pusat Investasi Pemerintah (PIP), or Government Investment Center (which had previously been seen as a potential sovereign wealth fund). Indonesia does not participate in the IMF’s Working Group on Sovereign Wealth Funds.

Indonesia had 114 state-owned enterprises (SOEs) and 28 subsidiaries divided into 12 sectors as of December 2019, 10 of which contributed more than 85 percent of total SOE profit. Of the 114 SOEs, 17 are listed on the Indonesian stock exchange. In addition, 14 are special purpose entities under the SOE Ministry (BUMN), with one SOE, the Indonesian Infrastructure Guarantee Fund, under the Ministry of Finance. Since mid-2016, the Indonesian government has been publicizing plans to consolidate SOEs into six holding companies based on sector of operations. In November 2017, Indonesia announced the creation of a mining holding company, PT Inalum, the first of the six planned SOE-holding companies.

Since his appointment by President Jokowi in November 2019, Minister of SOEs Erick Thohir  has underscored the need to reform SOEs in line with President Jokowi’s second-term economic agenda. Thohir has noted the need to liquidate underperforming SOEs, ensure that SOEs improve their efficiency by focusing on core business operations, and introduce better corporate governance principles. Thohir has spoken publicly about his intent to push SOEs to undertake initial public offerings (IPOs) on the IDX.

Information regarding the SOEs can be found at the SOE Ministry website (http://www.bumn.go.id/ ) (Indonesian language only).

There are also an unknown number of SOEs owned by regional or local governments. SOEs are present in almost all sectors/industries including banking (finance), tourism (travel), agriculture, forestry, mining, construction, fishing, energy, and telecommunications (information and communications).

In the third quarter of 2019 (the most recent data available), SOEs have contributed USD 22 billion of tax payments, non-tax payments, and dividends to the Indonesian state. SOEs also contributed a profit of USD 131 billion, with total assets of 626 billion, liabilties of USD 429 billion, and equities of USD 196 billion.

Indonesia is not a party to the WTO’s Government Procurement Agreement. Private enterprises can compete with SOEs under the same terms and conditions with respect to access to markets, credit, and other business operations. However, in reality, many sectors report that SOEs receive strong preference for government projects. SOEs purchase some goods and services from private sector and foreign firms. SOEs publish an annual report and are audited by the Supreme Audit Agency (BPK), the Financial and Development Supervisory Agency (BPKP), and external and internal auditors.

Privatization Program

While some state-owned enterprises have offered shares on the stock market, Indonesia does not have an active privatization program.

Indonesian businesses are required to undertake responsible business conduct (RBC) activities under Law 40/2007 concerning Limited Liability Companies. In addition, sectoral laws and regulations have further specific provisions on RBC. Indonesian companies tend to focus on corporate social responsibility (CSR) programs offering community and economic development, and educational projects and programs. This is at least in part caused by the fact that such projects are often required as part of the environmental impact permits (AMDAL) of resource extraction companies, which undergo a good deal of domestic and international scrutiny of their operations. Because a large proportion of resource extraction activity occurs in remote and rural areas where government services are reported to be limited or absent, these companies face very high community expectations to provide such services themselves. Despite significant investments – especially by large multinational firms – in CSR projects, businesses have noted that there is limited general awareness of those projects, even among government regulators and officials.

The government does not have an overarching strategy to encourage or enforce RBC, but regulates each area through the relevant laws (environment, labor, corruption, etc.). Some companies report that these laws  are not always enforced evenly. In 2017, the National Commission on Human Rights launched a National Action Plan on Business and Human Rights in Indonesia, based on the UN Guiding Principles on Business and Human Rights.

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

Indonesia does not adhere to the OECD Guidelines for Multinational Enterprises, and the government is not known to have encouraged adherence to those guidelines. Many companies claim that the government does not encourage adherence to the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas or any other supply chain management due diligence guidance. Indonesia does participate in the Extractive Industries Transparency Initiative (EITI). Indonesia was suspended by the EITI Board due to a missed deadline for its first EITI report, but the suspension was lifted following publication of its 2012-2013 EITI Report in 2015.

President Jokowi was elected in 2014 on a strong good-governance platform. However, corruption remains a serious problem according to some U.S. companies. The Indonesian government has issued detailed directions on combating corruption in targeted ministries and agencies, and the 2018 release of the updated and streamlined National Anti-Corruption Strategy mandates corruption prevention efforts across the government in three focus areas (licenses, state finances, and law enforcement reform). The Corruption Eradication Commission (KPK) was established in 2002 as the lead government agency to investigate and prosecute corruption.  KPK is one of the most trusted and respected institutions in Indonesia. The KPK has taken steps to encourage companies to establish effective internal controls, ethics, and compliance programs to detect and prevent bribery of public officials. By law, the KPK is authorized to conduct investigations, file indictments, and prosecute corruption cases involving law enforcement officers, government executives, or other parties connected to corrupt acts committed by those entities; attracting the “attention and the dismay” of the general public; and/or involving a loss to the state of at least IDR 1 billion (approximately USD 66,000).  The government began prosecuting companies who engage in public corruption under new corporate criminal liability guidance issued in a 2016 Supreme Court regulation, with the first conviction of a corporate entity in January 2019.  Presidential decree No. 13/2018 issued in March 2018 clarifies the definition of beneficial ownership and outlines annual reporting requirements and sanctions for non-compliance.

Indonesia’s ranking in Transparency International’s Corruption Perceptions Index in 2019 improved to 85 out of 180 countries surveyed, compared to 89 out of 180 countries in 2018.  Indonesia’s score of public corruption in the country, according to Transparency International, improved to 40 in 2019 (scale of 0/very corrupt to 100/very clean).  At the beginning of President Jokowi’s term in 2014, Indonesia’s score was  34. Indonesia ranks 4^th of the 10 ASEAN countries.

Nonetheless, according to certain reports, corruption remains pervasive despite laws to combat it. Some have noted that KPK leadership, along with the commission’s investigators and prosecutors, are sometimes harassed, intimidated, or attacked due to their anticorruption work. In early 2019, a Molotov cocktail and bomb components were placed outside the homes of two KPK commissioners, and in 2017 unidentified assailants committed an acid attack against a senior KPK investigator. Police have not identified the perpetrators of either attack. The Indonesian National Police and Attorney General’s Office also investigate and prosecute corruption cases; however, neither have the same organizational capacity or track-record of the KPK. Giving or accepting a bribe is a criminal act, with possible fines ranging from USD 3,850 to USD 77,000 and imprisonment up to a maximum of 20 years or life imprisonment, depending on the severity of the charge.

On September 2019, the Indonesia House of Representatives (DPR) passed Law No. 19/2019 on the Corruption Eradication Commission (KPK) which revised the KPK’s original charter. This revised law introduced several changes relating to the authority and supervision of the KPK, including KPK’s status as a state agency under the authority of the executive branch (it was previously an independent body outside of the judicial, legislative, or executive branches) and establishment of a Supervisory Council to oversee certain KPK activities.  The new law also changed the KPK’s status as a separate law enforcement authority and mandated the KPK to provide performance review reports to the President, the DPR RI, and the supervisory board.  Finally, the KPK’s previous independent authority to terminate corruption investigations and prosecutions, as well as authorize wiretaps, searches, arrests, and asset seizures, has now been transferred to the Supervisory Council.  Many observers view these changes as limiting KPK’s ability to pursue corruption investigations without political interference.

Indonesia ratified the UN Convention against Corruption in September 2006. Indonesia has not yet acceded to the OECD Anti-Bribery Convention, but attends meetings of the OECD Anti-Corruption Working Group. In 2014, Indonesia chaired the Open Government Partnership, a multilateral platform to promote transparency, empower citizens, fight corruption, and strengthen governance. Several civil society organizations function as vocal and competent corruption watchdogs, including Transparency International Indonesia and Indonesia Corruption Watch.

Resources to Report Corruption

Komisi Pemberantasan Korupsi (Anti-Corruption Commission)
Jln. Kuningan Persada Kav 4, Setiabudi
Jakarta Selatan 12950
Email: informasi@kpk.go.id

Indonesia Corruption Watch
Jl. Kalibata Timur IV/D No. 6 Jakarta Selatan 12740
Tel: +6221.7901885 or +6221.7994015
Email: info@antikorupsi.org

As in other democracies, politically motivated demonstrations occasionally occur throughout Indonesia, but are not a major or ongoing concern for most foreign investors.

Since the large-scale Bali bombings in 2002 that killed over 200 people, Indonesian authorities have aggressively and successfully continued to pursue terrorist cells throughout the country, disrupting multiple aspirational plots. Despite these successes, violent extremist networks and terrorist cells remain intact and have the capacity to become operational and conduct attacks with little or no warning, as do lone wolf-style ISIS sympathizers.

According to the industry, foreign investors in Papua face certain unique challenges. Indonesian security forces occasionally conduct operations against the Free Papua Movement, a small armed separatist group that is most active in the central highlands region. Low-intensity communal, tribal, and political conflict also exists in Papua and has caused deaths and injuries. Anti-government protests have resulted in deaths and injuries, and violence has been committed against employees and contractors of a U.S. company there, including the death of a New Zealand citizen in an attack on March 30, 2020. Additionally, racially-motivated attacks against ethnic Papuans living in East Java province led to violence in Papua and West Papua in late 2019, including riots in Wamena, Papua that left dozens dead and thousands more displaced.

Travelers to Indonesia can visit the U.S. Department of State travel advisory website for the latest information and travel resources: https://travel.state.gov/content/travel/en/international-travel/International-Travel-Country-Information-Pages/Indonesia.html.

Companies have reported that the Indonesian labor market faces a number of structural barriers, including skills shortages and lagging productivity, restrictions on the use of contract workers, and reduced gaps between minimum wages and average wages. Recent significant increases in the minimum wage for many provinces have made unskilled and semi-skilled labor more costly. In the bellwether Jakarta area, the minimum wage was raised again from IDR 3.6 million (USD 256.6) per month in 2018 to IDR 3.94 million (USD 260) per month in 2019. Unions staged largely peaceful protests across Indonesia in 2018 demanding the government increase the minimum wage, decrease the price for basic needs, and stop companies from outsourcing and employing foreign workers. Under the new wage setting policy adopted as part of the 2018 economic stimulus package, annual minimum wage increases will be indexed directly to inflation and GDP growth. Previously, minimum wage adjustments were subject to negotiations between local governments, industry, and unions, and the changes varied widely from year to year and from region to region.

As only about 7.6 percent of the workforce is unionized, the benefits of union advocacy (including increases in minimum wage) do not always filter down to the rest of the workforce. While restrictions on the use of contract workers remain in place, continued labor protests focusing on this issue suggest that government enforcement continues to be lax. Until the onset of the COVID-19 pandemic, unemployment has remained steady at 4.38 percent. Unemployment tends to be higher than the national average among young people.

Indonesian labor is relatively low-cost by world standards, but inadequate skills training and complicated labor laws combine to make Indonesia’s competitiveness lag behind other Asian competitors. Investors frequently cite high severance payments to dismissed employees, restrictions on outsourcing and contract workers, and limitations on expatriate workers as significant obstacles to new investment in Indonesia.

Employers also note that the skills provided by the education system is lower than that of neighboring countries, and successive Labor Ministers have listed improved vocational training as a top priority. Labor contracts are relatively straightforward to negotiate but are subject to renegotiation, despite the existence of written agreements. Local courts often side with citizens in labor disputes, contracts notwithstanding. On the other hand, some foreign investors view Indonesia’s labor regulatory framework, respect for freedom of association, and the right to unionize as an advantage to investing in the country. Expert local human resources advice is essential for U.S. companies doing business in Indonesia, even those only opening representative offices.

Minimum wages vary throughout the country as provincial governors set an annual minimum wage floor and district heads have the authority to set a higher rate. Indonesia’s highly fractured and historically weak labor movement has gained strength in recent years, evidenced by significant increases in the minimum wage. As noted above, recent changes to the minimum wage setting system may make the process less dependent on political factors and more aligned with actual changes in inflation and GDP growth. Labor unions are independent of the government. The law, with some restrictions, protects the rights of workers to join independent unions, conduct legal strikes, and bargain collectively. Indonesia has ratified all eight of the core ILO conventions underpinning internationally accepted labor norms. The Ministry of Manpower maintains an inspectorate to monitor labor norms, but enforcement is stronger in the formal than in the informal sector. A revised Social Security Law, which took effect in 2014, requires all formal sector workers to participate. Subject to a wage ceiling, employers must contribute an amount equal to 4 percent of workers’ salaries to this plan. In 2015, Indonesia established the Social Security Organizing Body of Employment (BPJS-Employment), a national agency to support workers in the event of work accident, death, retirement, or old age.

The government has proposed an omnibus bill on labor reforms intended to attract investors, boost economic growth and create jobs.  The bill covers foreign workers, wages, work hours, redundancy and social security.

A proposed revision to Indonesia’s 2003 labor law may establish more stringent restrictions on outsourcing, currently used by many firms to circumvent some formal-sector job benefits.

Additional information on child labor, trafficking in persons, and human rights in Indonesia can be found online through the following references:

• Child Labor Report: https://www.dol.gov/agencies/ilab/resources/reports/child-labor/indonesia .
• Trafficking in Persons Report: https://www.state.gov/reports/2019-trafficking-in-persons-report/indonesia/
• Human Rights Report: https://www.state.gov/reports/2018-country-reports-on-human-rights-practices/

The U.S. International Development Finance Corporation (DFC) and its predecessor, the Overseas Private Investment Corporation (OPIC), have invested USD 2.35 billion across 116 projects in Indonesia since 1974, including in the power generation, financial services, and agricultural sectors. The DFC’s current portfolio is USD 123.8 million across five projects in Indonesia. The bulk of its exposure is in the DFC-financed UPC Renewables Sidrap Bayu wind power plant in South Sulawesi, where a USD 120 million investment supported the construction of Indonesia’s first commercial wind farm. The project demonstrates DFC’s commitment to help eliminate blackouts and diversify Indonesia’s energy supply. On March 12, 2020, DFC approved a USD 190 million loan to Trans Pacific Networks (TPN) to support the world’s longest telecommunications cable. The cable will directly connect Singapore, Indonesia, and the United States and have the capability to serve several markets in Southeast Asia and the Pacific.

Indonesia is one of the DFC’s priority markets and the DFC remains interested in projects in the transportation, energy, and digital economy sectors. In January 2020, DFC CEO Adam Boehler visited Indonesia as part of his first overseas visit since the DFC’s formal launch. His visit followed other senior visits by DFC officials to identify projects for DFC support, including the first-ever, DFC-led, U.S.-Australia-Japan trilateral infrastructure business development mission in August 2019.

Indonesia has joined the Multilateral Investment Guarantee Agency (MIGA). MIGA, a part of the World Bank Group, is an investment guarantee agency to insure investors and lenders against losses relating to currency transfer restrictions, expropriation, war and civil disturbance, and breach of contract. In 2018, MIGA provided a guarantee loan to Indonesian state-owned financial institutions and financed a hydroelectric power plant.

*Indonesia Statistic Agency, GDP from the host country website is converted into USD with the exchange rate 14,156 for 2019

*Indonesia Investment Coordinating Board (BKPM), January 2020

There is a discrepancy between U.S. FDI recorded by BKPM and BEA due to differing methodologies. While BEA recorded transactions in balance of payments, BKPM relies on company realization reports. BKPM also excludes investments in oil and gas, non-bank financial institutions, and insurance.

Source:  IMF Coordinated Direct Investment Survey for inward and outward investment data.

Source: IMF Coordinated Portfolio Investment Survey, 2018. Sources of portfolio investment are not tax havens.
The Bank of Indonesia published comparable data.

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

Policies Towards Foreign Direct Investment

Israel is open to foreign investment and the government actively encourages and supports the inflow of foreign capital.

The Israeli Ministry of Economy and Industry’s ‘Invest in Israel’ office serves as the government’s investment promotion agency facilitating foreign investment. ‘Invest in Israel’ offers a wide range of services including guidance on Israeli laws, regulation, taxes, incentives, and costs, and facilitation of business connections with peer companies and industry leaders for new investors. ‘Invest in Israel’ also organizes familiarization tours for potential investors and employs a team of advisors for each region of the world.

Limits on Foreign Control and Right to Private Ownership and Establishment

The Israeli legal system protects the rights of both foreign and domestic entities to establish and own business enterprises, as well as the right to engage in remunerative activity. Private enterprises are free to establish, acquire, and dispose of interests in business enterprises. As part of ongoing privatization efforts, the Israeli government encourages foreign investment in privatizing government-owned entities.

Israel’s policies aim to equalize competition between private and public enterprises, although the existence of monopolies and oligopolies in several sectors stifles competition. In the case of designated monopolies, defined as entities that supply more than 50 percent of the market, the government controls prices.

Israel established a centralized investment screening (approval) mechanism for certain inbound foreign investments in October 2019. Investments in regulated industries (e.g., banking and insurance) require approval by the relevant regulator. Investments in certain sectors may require a government license. Other regulations may apply, usually on a national treatment basis.

Other Investment Policy Reviews

The World Trade Organization (WTO) conducted its fifth and latest trade policy review of Israel in July 2018. In the past three years, the Israeli government has not conducted any investment policy reviews through the Organization for Economic Cooperation and Development (OECD) or the United Nations Conference on Trade and Development (UNCTAD). The OECD concluded an Economic Survey of Israel in March 2018.

The 2018 OECD Economic Survey of Israel can be found at http://www.mof.gov.il/Releases/SiteAssets/Pages/OECD18/2018-oecd-economic-survey-Israel.pdf 

Business Facilitation

The Israeli government is fairly open and receptive to companies wishing to register businesses in Israel. Israel ranked 28th in the “Starting a Business” category of the World Bank’s 2020 Doing Business Report, rising seventeen places from its 2019 ranking. Israel continues to institute reforms to make it easier to do business in Israel, but some challenges remain.

The business registration process in Israel is relatively clear and straightforward. Four procedures are required to register a standard private limited company and take 12 days to complete, on average, according to the Ministry of Finance. The foreign investor must obtain company registration documents through a recognized attorney with the Ministry of Justice and obtain a tax identification number for company taxation and for value added taxes (VAT) from the Ministry of Finance. The cost to register a company averages around USD 1,000 depending on attorney and legal fees.

The Israeli Ministry of Economy and Industry’s “Invest in Israel” website provides useful information for companies interested in starting a business or investing in Israel. The website is http://www.investinisrael.gov.il/Pages/default.aspx .

Outward Investment

Transparency of the Regulatory System

Israel promotes open governance and has joined the International Open Government Partnership. The government’s policy is to pursue the goals of transparency and active reporting to the public, public participation, and accountability.

Israel’s regulatory system is transparent. Ministries and regulatory agencies give notice of proposed regulations to the public on a government web site: http://www.knesset.gov.il. The texts of proposed regulations are also published (in Hebrew) on this web site. The government requests comments from the public about proposed regulations.

Israel is a signatory to the WTO Agreement on Government Procurement (GPA), which covers most Israeli government entities and government-owned corporations. Most of the country’s open international public tenders are published in the local press. U.S. companies have recently won a limited number of government tenders, notably in the energy and communications sectors. However, government-owned corporations make extensive use of selective tendering procedures. In addition, the lack of transparency in the public procurement process discourages U.S. companies from participating in major projects and disadvantages those that choose to compete. Enforcement of the public procurement laws and regulations is not consistent.

Israel is a member of UNCTAD’s international network of transparent investment procedures. (http://unctad.org/en/pages/home.aspx ). Foreign and national investors can find detailed information on administrative procedures applicable to investment and income generating operations including the number of steps, name and contact details of the entities and persons in charge of procedures, required documents and conditions, costs, processing time, and legal basis justifying the procedures.

International Regulatory Considerations

Israel is not a member of any major economic bloc but maintains strong economic relations with other economic blocs.

Israeli regulatory bodies in the Ministry of Economy (Standards Institute of Israel), Ministry of Health (Food Control Services), and the Ministry of Agriculture (Veterinary Services and the Plant Protection Service) often adopt standards developed by European standards organizations. Israel’s adoption of European standards rather than international standards results in the market exclusion of certain U.S. products and added costs for U.S. exports to Israel.

Israel became a member of the WTO in 1995. The Ministry of Economy and Industry’s Standardization Administration is responsible for notifying the WTO Committee on Technical Barriers to Trade, and regularly does so.

Legal System and Judicial Independence

Israel has a written and consistently applied commercial law based on the British Companies Act of 1948, as amended. The judiciary is independent, but businesses complain about the length of time required to obtain judgments. The Supreme Court is an appellate court that also functions as the High Court of Justice. Israel does not employ a jury system. Israel established other tribunals to regulate specific issues and disputes in a specific area of law, including labor courts, antitrust issues, and intellectual property related issues.

Laws and Regulations on Foreign Direct Investment

There are few restrictions on foreign investors, except for parts of defense or other industries closed to outside investors on national security grounds. Foreign investors are welcome to participate in Israel’s privatization program.

Israeli courts exercise authority in cases within the jurisdiction of Israel. However, if an agreement between involved parties contains an exclusively foreign jurisdiction, the Israeli courts will generally decline to exercise their authority.

Israel’s Ministry of Economy sponsors the web site “Invest in Israel” at www.investinisrael.gov.il

The Investment Promotion Center of the Ministry of Economy seeks to encourage investment in Israel. The Center stresses Israel’s high marks in innovation, entrepreneurship, and Israel’s creative, skilled, and ambitious workforce. The Center also promotes Israel’s strong ties to the United States and Europe.

Competition and Anti-Trust Laws

Israel adopted its comprehensive competition law in 1988. Israel created the Israel Competition Authority (originally called the Israel Antitrust Authority) in 1994 to enforce the competition law.

Expropriation and Compensation

There have been no expropriations of U.S.-owned businesses in Israel in the recent past. Israeli law requires adequate payment, with interest from the day of expropriation until final payment, in cases of expropriation.

Dispute Settlement

ICSID Convention and New York Convention

Israel is a member of the International Center for the Settlement of Investment Disputes (ICSID) of the World Bank and the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards. Israel ratified the New York Convention on Recognition and Enforcement of Foreign Arbitral Awards of 1958 in 1959.

Investor-State Dispute Settlement

The Israeli government accepts binding international arbitration of investment disputes between foreign investors and the state. Israel’s Arbitration Law of 1968 governs both domestic and international arbitration proceedings in the country. The Israeli Knesset amended the law most recently in 2008. There are no known extrajudicial actions against foreign investors.

International Commercial Arbitration and Foreign Courts

Israel formally institutionalized mediation in 1992 with the amendment of the Courts Law of 1984. The amendment granted courts the authority to refer civil disputes to mediation or arbitration with party consent. The Israeli courts tend to uphold and enforce arbitration agreements. Israel’s Arbitration Law predates the United Nations Commission on International Trade Law.

Bankruptcy Regulations

Israeli Bankruptcy Law is based on several layers, some rooted in Common Law, when Palestine was under the British mandate in 1917-1948. Bankruptcy Law in Israel is mostly based on British law enacted in Palestine in 1936 during the British mandate.

Bankruptcy proceedings are based on the bankruptcy ordinance (1980), which replaced the mandatory ordinance enacted in 1936. Therefore, the bankruptcy law in Israel resembles the British law as it was more or less in 1936. Israel ranks 29th in the World Bank’s 2020 Doing Business Report’s “resolving insolvency” category.

Investment Incentives

The State of Israel encourages both local and foreign investment by offering a wide range of incentives and benefits to investors in industry, tourism, and real estate. Israel’s Ministry of Economy places a priority on investments in hi-tech companies and R&D activities.

Most investment incentives available to Israeli citizens are also available to foreign investors. Israel’s Encouragement of Capital Investments Law, 5719-1959, outlines Israel’s investment incentive programs. The Israel Investment Center (IIC) coordinates the country’s investment incentive programs.

For complete information, potential investors should contact:

Investment Promotion Center
Ministry of Economy
5 Bank of Israel Street,
Jerusalem 91036
Tel: +972-2-666-2607
Website: www.investinisrael.gov.il
E-Mail: investinisrael@economy.gov.il

Israel Investment Center
Ministry of Economy
5 Bank of Israel Street,
Jerusalem 91036 490 http://economy.gov.il/English/About/Units/Pages/IsraelInvestmentCenter.aspx
Tel: +972-2-666-2828
Fax: +972-2-666-2905

Foreign Trade Zones/Free Ports/Trade Facilitation

Israel has bilateral Qualifying Industrial Zone (QIZ) Agreements with Egypt and Jordan. The QIZ initiative allows Egypt and Jordan to export products to the United States duty-free, as long as these products contain inputs from Israel (8 percent in the Israel-Jordan QIZ agreement, 10.5 percent in the Israel-Egypt QIZ agreement). Products manufactured in QIZs must comply with strict rules of origin. More information is available at the Israeli Ministry of Economy’s Foreign Trade Administration website: http://economy.gov.il/English/InternationalAffairs/ForeignTradeAdministration/Pages/RegionalCooperation.aspx

Israel has one free trade zone, the Red Sea port city of Eilat. More information on the Eilat Free Zone is available at: http://economy.gov.il/English/Industry/DevelopmentZoneIndustryPromotion/ZoneIndustryInfo/Pages/EilatNShachoret.aspx

Performance and Data Localization Requirements

There are no universal performance requirements on investments, but “offset” requirements are often included in sales contracts with the government. In some sectors, there is a requirement that Israelis own a percentage of a company. Israel’s visa and residency requirements are transparent. The Israeli government does not impose preferential policies on exports by foreign investors.

Real Property

Israel has a modern legal system based on British common law that provides effective means for enforcing property and contractual rights. Courts are independent. Israeli civil procedures provide that judgments of foreign courts may be accepted and enforced by local courts. The Israeli judicial system recognizes and enforces secured interests in property. A reliable system of recording such secured interests exists. The Israeli Land Administration, which manages land in Israel on behalf of the government, registers property transactions. Registering or obtaining land rights is a cumbersome process and Israel currently ranks 75th in “Registering Property” according to the World Bank’s 2020 Doing Business Report.

Intellectual Property Rights

The Intellectual Property Law Division and the Israel Patent Office (ILPO), both within the Ministry of Justice, are the principal government authorities overseeing the legal protection and enforcement of intellectual property rights (IPR) in Israel. IPR protection in Israel has undergone many changes in recent decades as the Israeli economy has rapidly transformed into a knowledge-based economy.

In recent years, Israel revised its IPR legal framework several times to comply with newly signed international treaties. Israel took stronger, more comprehensive steps towards protecting IPR, and the government acknowledges that IPR theft costs rights holders millions of dollars per year, reducing tax revenues and slowing economic growth.

The United States removed Israel from the United States Trade Representative (USTR) Special 301 Report in 2014 after Israel passed patent legislation that satisfied the remaining commitments Israel made in a Memorandum of Understanding with the United States in 2010 concerning several longstanding issues regarding Israel’s IPR regime for pharmaceutical products. Israel has not been included in the Special 301 Report or the Notorious Markets List since.

Israel’s Knesset approved Amendment No. 5 to Israel’s Copyright Law of 2007 on January 1, 2019. The amendment aims to establish measures to combat copyright infringement on the internet while preserving the balance among copyright owners, internet users, and the free flow of information and free speech.

In July 2017, the Israeli Knesset passed the New Designs Bill, replacing Israel’s existing but obsolete ordinance governing industrial design. The bill, which came into force in August 2018, brings Israel into compliance with The Hague System for International Registration of Industrial designs.

Nevertheless, the United States remains concerned with the limitations of Israel’s copyright legislation, particularly related to digital copyright matters and with Israel’s interpretation of its commitment to protect data derived from pharmaceutical testing conducted in anticipation of the future marketing of biological products, also known as biologics.

While Israel has instituted several legislative improvements in recent years, the United States continues to urge Israel to strengthen and improve its IPR enforcement regime. Israel lacks specialized courts, common in other countries with advanced IPR regimes. General civil or administrative courts in Israel typically adjudicate IPR cases.

IPR theft, including trade secret misappropriation, can be common and relatively sophisticated in Israel. The European Commission “closely monitors” IP enforcement in Israel. The EC cites inadequate protection of innovative pharmaceutical products and end-user software piracy as the main issues with IPR enforcement in Israel.

Israel is a member of the WTO and the World Intellectual Property Organization (WIPO). It is a signatory to the Berne Convention for the Protection of Literary and Artistic Works, the Universal Copyright Convention, the Paris Convention for the Protection of Industrial Property, and the Patent Cooperation Treaty.

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/ 

Resources for Rights Holders

Mr. Peter Mehravari
Intellectual Property Attaché for the Middle East & North Africa
U.S. Embassy Kuwait
Tel: +965 2259 1455
Email: Peter.Mehravari@trade.gov

Capital Markets and Portfolio Investment

The Israeli government is supportive of foreign portfolio investment. The Tel Aviv Stock Exchange (TASE) is Israel’s only public stock exchange.

Financial institutions in Israel allocate credit on market terms. For many years, banks issued credit to only a handful of individuals and corporate entities, some of whom held controlling interests in banks. However, in recent years, banks significantly reduced their exposure to large borrowers following the introduction of stronger regulatory restrictions on preferential lending practices.

The primary profit center for Israeli banks is consumer-banking fees. Various credit instruments are available to the private sector and foreign investors can receive credit on the local market. Legal, regulatory, and accounting systems are transparent and conform to international norms, although the prevalence of inflation-adjusted accounting means there are differences from U.S. accounting principles.

In the case of publicly traded firms where ownership is widely dispersed, the practice of “cross-shareholding” and “stable shareholder” arrangements to prevent mergers and acquisitions is common, but not directed particularly at preventing potential foreign investment. Israel has no laws or regulations regarding the adoption by private firms of articles of incorporation or association that limit or prohibit foreign investment, participation, or control.

Money and Banking System

The Bank of Israel (BOI) is Israel’s Central Bank and regulates all banking activity and monetary policy. In general, Israel has a healthy banking system that offers most of the same services as the U.S. banking system. Fees for normal banking transactions are significantly higher in Israel than in the United States and some services do not meet U.S. standards. There are 12 commercial banks and four foreign banks operating in Israel, according to the BOI. Five major banks, led by Bank Hapoalim and Bank Leumi, the two largest banks, dominate Israel’s banking sector. Bank Hapoalim and Bank Leumi control nearly 60 percent of Israel’s credit market. The State of Israel holds 6 percent of Bank Leumi’s shares. All of Israel’s other banks are privatized.

Foreign Exchange and Remittances

Foreign Exchange

Israel completed its foreign exchange liberalization process on January 1, 2003, when it removed the last restrictions on the freedom of institutional investors to invest abroad. The Israeli shekel is a freely convertible currency and there are no foreign currency controls. The BOI maintains the option to intervene in foreign currency trading in the event of movements in the exchange rate not in line with fundamental economic conditions, or if the BOI assesses the foreign exchange market is not functioning appropriately. Israeli citizens can invest without restriction in foreign markets. Foreign investors can open shekel accounts that allow them to invest freely in Israeli companies and securities. These shekel accounts are fully convertible into foreign exchange. Israel’s foreign exchange reserves totaled USD 133.5 billion at the end of April 2020.

Transfers of currency are protected by Article VII of the International Monetary Fund (IMF) Articles of Agreement: http://www.imf.org/External/Pubs/FT/AA/index.htm#art7

Remittance Policies

Most foreign currency transactions must be carried out through an authorized dealer. An authorized dealer is a banking institution licensed to arrange, inter alia, foreign currency transactions for its clients. The authorized dealer must report large foreign exchange transactions to the Controller of Foreign Currency. There are no limitations or significant delays in the remittance of profits, debt service, or capital gains.

Sovereign Wealth Funds

Israel passed legislation to establish the Israel Citizens’ Wealth Fund, a sovereign wealth fund managed by the BOI, in 2014 to offset the effect of natural gas production on the exchange rate. The original date for beginning the fund’s operations was 2018, but has been postponed until late 2021. The law establishing the fund states that it will begin operating a month after the state’s tax revenues from natural gas exceed USD 280 million (1 billion New Israeli Shekels).

Israel established the Government Companies Authority (GCA) following the passage of the Government Companies Law. The GCA is an auxiliary unit of the Ministry of Finance. It is the administrative agency for state-owned companies in charge of supervision, privatization, and implementation of structural changes. The Israeli state only provides support for commercial SOEs in exceptional cases. The GCA leads the recruitment process for SOE board members. Board appointments are subject to the approval of a committee, which confirms whether candidates meet the minimum board member criteria set forth by law.

The GCA oversees some 100 companies, including commercial and noncommercial companies, government subsidiaries, and companies under mixed government-private ownership. Among these companies are some of the biggest and most complex in the Israeli economy, such as the Israel Electric Corporation, Israel Aerospace Industries, Rafael Advanced Defense Systems, Israel Postal Company, Mekorot Israel National Water Company, Israel Natural Gas Lines, the Ashdod, Haifa, and Eilat Port Companies, Israel Railways, Petroleum and Energy Infrastructures and the Israel National Roads Company. The GCA does not publish a publicly available list of SOEs.

Israel is party to the Government Procurement Agreement (GPA) of the World Trade Organization.

Privatization Program

In late 2014, Israel’s cabinet approved a privatization plan allowing the government to issue minority stakes of up to 49 percent in state-owned companies on the Tel Aviv Stock Exchange over a three-year period, a plan estimated to increase government revenue by USD 4.1 billion. The plan aimed to sell stakes in Israel’s electric company, water provider, railway, post office and some defense-related contractors. The GCA will likely auction minority stakes in a public bidding process without formal restrictions on the participation of foreign investors. Restrictions on foreign investors could be possible in the case of companies deemed to be of strategic significance.

Israel’s interministerial privatization committee approved plans in January 2020 to sell off the Port of Haifa , Israel’s largest shipping hub. The incoming owner will be required to invest approximately USD 280 million (1 billion NIS) in the port, including the cost of upgrading infrastructure and financing the layoff of an estimated 200 workers. That same committee voted to enable private investment in Israel Post in an effort to sell up to 40 percent of the government’s shares in Israel Post.

There is awareness of responsible business conduct among enterprises and civil society in Israel. Israel adheres to the OECD Guidelines for Multinational Enterprises and a National Contact Point is operating in the Foreign Trade Administration. Israel is not a member of the Extractive Industries Transparency Initiative.

Israel’s National Contact Point sits in the Responsible Business Conduct unit in the OECD Department of the Foreign Trade Administration in the Ministry of Economy and Industry. An advisory committee, including representatives from the Ministries of Economy, Finance, Foreign Affairs, Justice, and the Environment, assist the National Contact Point. The National Contact Point also works in cooperation with the Manufacturer’s Association of Israel, workers’ organizations, and civil society to promote awareness of the guidelines.

Bribery and other forms of corruption are illegal under several Israeli laws and Civil Service regulations. Israel became a signatory to the OECD Bribery convention in November 2008 and a full member of the OECD in May 2010. Israel ranks 35 out of 180 countries in Transparency International’s 2019 Corruption Perceptions Index, dropping one place from its 2018 ranking. Several Israeli NGOs focus on public sector ethics in Israel and Transparency International has a local chapter.

Israel is a signatory of the OECD Convention on Combatting Bribery of Foreign Public Officials in International Business Transactions.

The Israeli National Police, state comptroller, Attorney General, and Accountant General are responsible for combating official corruption. These entities operate effectively and independently and are sufficiently resourced. NGOs that focus on anticorruption efforts operate freely without government interference.

The international NGO Transparency International closely monitors corruption in Israel.

Resources to Report Corruption

Ministry of Justice
Office of the Director General
29 Salah a-Din Street Jerusalem
02-6466533, 02-6466534, 02-6466535
mancal@justice.gov.il

Transparency International Israel
Ms. Ifat Zamir
Tel Aviv University, Faculty of Management +972 3 640 9176
+972 3 640 9176
ifat@ti-israel.org

For the latest safety and security information regarding Israel and the current travel advisory level, see the Travel Advisory for Israel, the West Bank, and Gaza (https://travel.state.gov/content/travel/en/traveladvisories/traveladvisories/israel-west-bank-and-gaza-travel-advisory.html).

The security situation remains complex in Israel and the West Bank, and can change quickly depending on the political environment, recent events, and geographic location. Terrorist groups and lone-wolf terrorists continue plotting possible attacks in Israel, the West Bank, and Gaza. Terrorists may attack with little or no warning, targeting tourist locations, transportation hubs, markets or shopping malls, and local government facilities. Violence can occur in Jerusalem and the West Bank without warning. Terror attacks in Jerusalem and the West Bank have resulted in the deaths and injury of U.S. citizens and others. Hamas, a U.S. government-designated foreign terrorist organization, controls security in Gaza. The security environment within Gaza and on its borders is dangerous and volatile.

The most recent Central Bureau of Statistics data from the first quarter of 2020 indicate there are 4.1 million people active in the Israeli labor force. According to OECD data, 48 percent of Israelis aged between 25 and34 years have a tertiary education. Many university students specialize in fields with high industrial R&D potential, including engineering, computer science, mathematics, physical sciences, and medicine. According to the Investment Promotion Center, there are more than 145 scientists out of every 10,000 workers in Israel, one of the highest rates in the world. The rapid growth of Israel’s high-tech sector in the late 1990s increased the demand for workers with specialized skills.

The unemployment rate among 25-64 year-olds was 3.5 percent at the end of the first quarter of 2020, according to the Israeli Central Bureau of Statistics.

According to Israel’s Population and Immigration Authority, at the end of 2019 there were 295,100 non-Israelis employed in Israel.

The national labor federation, the Histadrut, organizes about 17 percent of all Israeli workers. Collective bargaining negotiations in the public sector take place between the Histadrut and representatives from the Ministry of Finance. The number of strikes has declined significantly as the public sector has gotten smaller. However, strikes remain a common and viable negotiating vehicle in many difficult wage negotiations.

Israel strictly observes the Friday afternoon to Saturday afternoon Jewish Sabbath and special permits must be obtained from the government authorizing Sabbath employment. At the age of 18, most Israelis are required to perform 2-3 years of national service in the military or in select civilian institutions. Until their mid-40s, Israeli males are required to perform about a month of military reserve duty annually, during which time they receive compensation from national insurance companies.

* Source for Host Country Data:

Israel’s Central Bureau of Statistics released final 2018 FDI data on March 23, 2020. https://www.cbs.gov.il/en/mediarelease/Pages/2020/Foreign-Direct-Investment-in-Israel-and-Direct-Investment-Abroad-by-Industries-and-Countries-2016-2018.aspx 

https://www.cbs.gov.il/en/mediarelease/Pages/2020/Foreign-Direct-Investment-in-Israel-and-Direct-Investment-Abroad-by-Industries-and-Countries-2016-2018.aspx 

Russ Headlee
Economic Officer
U.S. Embassy Jerusalem – Tel Aviv Branch Office
HeadleeRC@state.gov

Policies Towards Foreign Direct Investment

Kazakhstan has attracted significant foreign investment since independence.  According to official statistics, as of January 1, 2020, the total stock of foreign direct investment (by the directional principle) in Kazakhstan totaled USD 161.2 billion, primarily in the oil and gas sector.  International financial institutions consider Kazakhstan to be an attractive destination for their operations, and international firms have established regional headquarters in Kazakhstan.

In June 2017 Kazakhstan joined the OECD Declaration on International Investment and Multinational Enterprises and became an associate member of the OECD Investment Committee.

In its Strategic Plan of Development for the current period (through 2025), the government stated that raising the living standards of Kazakhstan’s citizens to the level of OECD countries is one of the plan’s strategic goals.

In August 2017 the government adopted a new 2018-2022 National Investment Strategy, developed in cooperation with the World Bank, which outlined new coordinating measures on investment climate improvements, privatization plans, and economic diversification policies.  The strategy aims to increase annual FDI inflows as a percentage of GDP from 13.2 percent in 2018 to 19 percent in 2022.

The government of Kazakhstan has incrementally improved the business climate for foreign investors, and national legislation does not discriminate against foreign investors.  Corruption, lack of rule of law and excessive bureaucracy, however, do remain serious obstacles to foreign investment.

Over the last couple of years, the government has undertaken a number of structural changes aimed at improving how the government attracts foreign investment.  In April 2019 the Prime Minister announced the creation of the Coordination Council for Attracting Foreign Investment, which the Prime Minister will chair.  He will also act as Investment Ombudsman.  In December 2018 the Investment Committee was transferred to the Ministry of Foreign Affairs, which is now in charge of attracting and facilitating activities of foreign investors.  The Investment Committee at the Ministry of Foreign Affairs takes responsibility for investment climate policy issues and works with potential and current investors, while the Ministry of National Economy interacts on investment climate matters with international organizations like the OECD, WTO, and the United Nations Conference on Trade and Development (UNCTAD).  Each regional municipality designates a representative to work with investors, and Kazakhstani foreign diplomatic missions are charged with attracting foreign investments.  Specially designated front offices in Kazakhstan’s overseas embassies promote Kazakhstan as a destination for foreign investment.  In addition, the Astana International Financial Center (AIFC, see details in Section 3) operates as a regional investment hub, with tax, legal, and other benefits.  In 2019, the government founded Kazakhstan’s Direct Investment Fund, which is located at the AIFC and expected to attract private investments for diversifying Kazakhstan’s economy.  The state company KazakhInvest is also located in the AIFC and offers investors a single-window for government services.

The government maintains a dialogue with foreign investors through the Foreign Investors’ Council chaired by the President, as well as through the Council for Improving the Investment Climate chaired by the Prime Minister.

The COVID-19 pandemic and unprecedented low oil prices changed the country’s economic development plans.  In March 2020, the government approved a USD 13.7 billion stimulus package, mostly oriented at  income smoothing, supporting local businesses and implementing an import-substitution policy.

Limits on Foreign Control and Right to Private Ownership and Establishment

By law, foreign and domestic private firms may establish and own business enterprises.

While no sectors of the economy are legally closed to investors, restrictions on foreign ownership exist, including a 20 percent ceiling on foreign ownership of media outlets, a 49 percent limit on domestic and international air transportation services, and a 49 percent limit on telecommunication services.  The December 2017 Code on Subsoil and Subsoil Use (the Code) mandates the share of the national company Kazatomprom be no less than 51 percent in new uranium producing joint ventures.

As a result of its WTO accession, Kazakhstan formally removed this limit for telecommunication companies, except for the country’s main telecommunications operator, KazakhTeleCom.  Still, to acquire more than 49 percent of shares in a telecommunication company, foreign investors must obtain a government waiver.  No constraints limit the participation of foreign capital in the banking and insurance sectors.  Starting from January 2020 the restriction on opening branches of foreign banks and insurance companies was lifted in compliance with the country’s WTO commitments.  In addition, foreign citizens and companies are restricted from participating in private security businesses.  The law limits the participation of offshore companies in banks and insurance companies and prohibits foreign ownership of pension funds and agricultural land.

Foreign investors have complained about the irregular application of laws and regulations and interpret such behavior as efforts to extract bribes.  The enforcement process, widely viewed as opaque and arbitrary, is not publicly transparent.  Some investors report harassment by the tax authorities via unannounced audits, inspections, and other methods.  The authorities have used criminal charges in civil disputes as a pressure tactic.

Foreign Investment in the Energy & Mining Industries

Despite substantial investment in Kazakhstan’s energy sector, companies remain concerned about the risk of the government legislating or otherwise advocating for preferences for domestic companies, and creating mechanisms for government intervention in foreign companies’ operations, particularly in procurement decisions.  Recent developments range from a major reduction to a full annulment of work permits for some categories of foreign workforce.  (For more details, please see Part 5,  Performance and Data Localization Requirements.)

In April 2008 Kazakhstan introduced a customs duty on crude oil and gas condensate exports.  In general, oil-related revenue in Kazakhstan goes to the National Fund, a sovereign wealth fund that is financed by direct taxes paid by petroleum industry companies, other fees paid by the oil industry, revenues from privatization of mining and manufacturing assets and from the disposal of agricultural land.  In contrast, the customs duty on crude oil and gas condensate exports is an indirect tax that goes to the government’s budget.  Companies that pay taxes on mineral and crude oil exports are exempt from that export duty.  The government adopted a 2016 resolution that pegged the export customs duty to global oil prices – as the global oil price drops and approaches USD 25 per barrel, the duty rate approaches zero.

The Code defines “strategic deposits and areas” and restricts the government’s preemptive right to acquire exploration and production contracts to these areas, which helps to reduce significantly the approvals required for non-strategic objects.  The government approves and publishes the list of strategic deposits on its website.  The list has not changed since its approval on June 28, 2018: http://www.government.kz/ru/postanovleniya/postanovleniya-pravitelstva-rk-za-iyun-2018-goda/1015356-ob-utverzhdenii-perechnya-strategicheskikh-uchastkov-nedr.html.

The Code entitles the government to terminate a contract unilaterally “if actions of a subsoil user with a strategic deposit result in changes to Kazakhstan’s economic interests in a manner that threatens national security.”  The Article does not define “economic interests.”  The Code, if properly implemented, appears to be a step forward in improving the investment climate, including the streamlining of procedures to obtain exploration licenses and to convert exploration licenses into production licenses.  The Code, however, appears to retain burdensome government oversight over mining companies’ operations.

The Ministry of Energy announced in April 2018 that Kazakhstan is ready to launch a CO2 emissions trading system.  It is unclear, however, when actual quota trading will begin.  In January 2018, the government adopted a National Allocation Plan for 2018-2020, and in February 2018 the Ministry of Energy announced the creation of an online CO2 emissions reporting and monitoring system.  The system is not operational, and it is likely to be launched after the new Environmental Code is passed into law; the draft Code is currently in the lower chamber of parliament.  Some companies have expressed concern that Kazakhstan’s trading system will suffer from insufficient liquidity, particularly as power consumption and oil and commodity production levels increase.  The successor of the Energy Ministry for environmental issues, the Ministry of Ecology, Geology, and Natural Resources, started drafting the 2050 National Low Carbon Development Strategy in October 2019.

Other Investment Policy Reviews

Kazakhstan announced in 2011 its desire to join the Organization for Economic Co-operation and Development.  To meet OECD requirements, the government will need to continue to reform its institutions and amend its investment legislation.  The OECD presented its second Investment Policy Review of Kazakhstan in June 2017, available at:  https://www.oecd.org/countries/kazakhstan/oecd-investment-policy-reviews-kazakhstan-2017-9789264269606-en.htm 

The OECD review recommended Kazakhstan undertake corporate governance reforms at state-owned enterprises (SOEs), implement a more efficient tax system, further liberalize its trade policy, and introduce responsible business conduct principles and standards.  OECD also said it is carefully monitoring the country’s privatization program that aims to decrease the SOE share in the economy to 15 percent of GDP by 2020.

In 2019 the OECD and the government launched a two-year project on improving the legal environment for business in Kazakhstan.

Business Facilitation

The 2020 World Bank’s Doing Business Report ranked Kazakhstan 25 out of 190 countries in the “Ease of Doing Business” category, and 22 out of 190 in the “Starting a Business” category.  The report noted Kazakhstan made starting a business easier by registering companies for value added tax at the time of incorporation.  The report noted Kazakhstan’s progress in the categories of dealing with construction permits, registering property, getting credit, and resolving insolvency.  Online registration of any business is possible through the website https://egov.kz/cms/en 

In addition to a standard package of documents required for local businesses, non-residents should submit electronic copies of their IDs and any certification of their companies from the country of origin.  Both documents should be translated and notarized.  Foreign investors also have access to a “single window” service, which simplifies many business procedures.  Investors may learn more about these services here: https://invest.gov.kz/invest-guide/business-starting/registration/ .

According to the World Bank, it takes four procedures and five days to establish a foreign-owned limited liability company (LLC) in Almaty.  This is faster than the average for Eastern Europe and Central Asia and OECD high income countries.  A foreign-owned company registered in Kazakhstan is considered a domestic company for Kazakhstan currency regulation purposes.  Under the Law on Currency Regulation and Currency Control, residents may open bank accounts in foreign currency in Kazakhstani banks without any restrictions.

In 2019-2020, the government undertook some measures facilitating business operations for investors.  The General Prosecutor’s Office adopted an order in January 2020 that would decriminalize the tax errors of prompt taxpayers.  In July 2019 the government adopted the Road Map for further attraction of foreign investments.  In order to facilitate the work of foreign investors, the government recommended using the law of the Astana International Financial Center (AIFC) as the applicable law for investment contracts with Kazakhstan and planned other measures to showcase the AIFC as an investment hub, including tax preferences, liberalization of visa and migration rules, and the creation of additional international transportation and media links.

Outward Investment

The government neither incentivizes nor restricts outward investment.

The United States-Kazakhstan Bilateral Investment Treaty came into force in 1994, and the United States-Kazakhstan Treaty on the Avoidance of Double Taxation came into force in 1996.

Since independence, Kazakhstan has signed treaties on the avoidance of double taxation with 53 countries at: http://kgd.gov.kz/ru/content/konvencii-ob-izbezhanii-dvoynogo-nalogooblozheniya-i-predotvrashchenii-ukloneniya-ot , and bilateral investment protection agreements with 47 at: http://www.mfa.kz/ru/content-view/soglasenia-o-poosrenii-i-vzaimnoj-zasite-investicij-2 

Kazakhstan is also party to the Eurasian Economic Union Mutual Investment Protection Agreement, which came into force in 2016.  Some foreign investors allege Kazakhstani tax authorities are reluctant to refer double taxation questions to the appropriate resolution bodies. Among other tax issues that concern  U.S. investors is the criminalization of tax errors and VAT refund issues.

Eurasian Economic Integration and WTO

Kazakhstan joined the WTO in November 2015.  Kazakhstan entered into a Customs Union with Russia and Belarus on July 1, 2010 and was a founding member of the Eurasian Economic Union (EAEU) created on May 29, 2014 among Armenia, Belarus, Kazakhstan, Kyrgyz Republic, and Russia.  The EAEU is governed by the Eurasian Economic Commission, a supra-national body headquartered in Moscow, and is expected to integrate further the economies of its member states, and to provide for the free movement of services, capital, and labor within their common territory.

Kazakhstan’s trade policy has been heavily influenced by EAEU regulations.  While Kazakhstan asserts the EAEU agreements comply with WTO standards, since joining the Customs Union Kazakhstan doubled its average import tariff and introduced annual tariff-rate quotas (TRQs) on poultry, beef, and pork.  Per its WTO commitments, Kazakhstan will lower 3,512 import tariff rates to an average of 6.1 percent by December 2020. As a part of this commitment, Kazakhstan applies a lower-than-EAEU tariff rate on food products, automobiles, airplanes, railway wagons, lumber, alcoholic beverages, pharmaceuticals, freezers, and jewelry. After December 2020, Kazakhstan will have a three-year break prior to starting tariff adjustment negotiations with its EAEU partners.

Kazakhstan is a signatory to the Free Trade Agreement with CIS countries, and as a member of the EAEU, is party to the EAEU-Vietnam Free Trade Agreement and the Interim Agreement on formation of a free trade zone with Iran.

Transparency of the Regulatory System

Kazakhstani law sets out basic principles for fostering competition on a non-discriminatory basis.  Kazakhstan is a unitary state, and national legislation accepted by the Parliament and President are equally effective for all regions of the country.  The government, ministries, and local executive administrations in the regions (“Akimats”) issue regulations and executive acts in compliance and pursuance of laws.  Kazakhstan is a member of the EAEU, and decrees of the Eurasian Economic Commission are mandatory and have preemptive force over national legislation.  Publicly-listed companies indicate that they adhere to international financial reporting standards, but accounting and valuation practices are not always consistent with international best practices.

The government consults on some draft legislation with experts and the business community; draft bills are available for public comment at www.egov.kz  under the Open Government section, however, the comment period is only ten days, and the process occurs without broad notifications.  Some bills are excluded from public comment, and the legal and regulatory process, including with respect to foreign investment, remains opaque.  All laws and decrees of the President and the government are available in Kazakh and Russian on the website of the Ministry of Justice: http://adilet.zan.kz/rus .

Implementation and interpretation of commercial legislation is reported to sometimes create confusion among foreign and domestic businesses alike.  In 2016, the Ministry of Health and Social Development introduced new rules on attracting foreign labor, some of which (including a Kazakh language requirement) created significant problems for foreign investors.  After active intervention by the international investment community through the Prime Minister’s Council for Improving the Investment Climate, the government canceled the most onerous rules.

The non-transparent application of laws remains a major obstacle to expanded trade and investment.  Foreign investors complain of inconsistent standards and corruption.  Although the central government has enacted many progressive laws, local authorities may interpret rules in arbitrary ways for the sake of their own interests.

Many foreign companies say they must defend investments from frequent decrees and legislative changes, most of which do not “grandfather in” existing investments.  Penalties are often assessed for periods prior to the change in policy.  For example, foreign companies report that local and national authorities arbitrarily impose high environmental fines, saying the fines are assessed to generate revenue for local and national authorities rather than for environmental protection.  Government officials have acknowledged the system of environmental fines requires reform.  In response, the government submitted a draft of a new Environmental Code (Eco Code) to Parliament, where it is currently under review in the lower chamber.  Oil companies complain that the emission payment rates for pollutants when emitted from gas flaring are at least 20 times higher than when the same pollutants are emitted from other stationary sources.  In February 2020, the Ecology Minister reported that fines for unauthorized emissions of hazardous substances would be raised tenfold.

In 2015, President Nazarbayev announced five presidential reforms and the implementation of the “100 Steps” Modernization program.  The program calls for the formation of a results-oriented public administration system, a new system of audit and performance evaluation for government agencies, and introduction of an open government system with better public access to information held by state bodies.  Initial implementation of this plan has already improved accountability.  For example, in addition to the Audit Committee that monitors government agencies’ performance, ministers and regional governors now hold annual meetings with local communities.

President Tokayev, elected in June 2019, has affirmed his commitment to the reforms initiated by former President Nazarbayev.

Public financial reporting, including debt obligations, explicit liabilities, are published by the Ministry of Finance on their site: http://www.minfin.gov.kz/ .  However, authorities have indicated that contingent liabilities, such as exposures to state-owned enterprises, their cross -holdings, and exposures to banks, are not fully captured there.

International Regulatory Considerations

Kazakhstan is part of the Eurasian Economic Union, and EAEU regulations and decisions supersede the national regulatory system.  In its economic policy Kazakhstan declares its adherence to both WTO and OECD standards.  Kazakhstan became a member of the WTO in 2015.  It notifies the WTO Committee on Technical Barriers to Trade about drafts of national technical regulations (although lapses have been noted).  Kazakhstan ratified the WTO Trade Facilitation Agreement (TFA) in May 2016, notified its Category A requirements in March 2016, and requested a five-year transition period for its Category B and C requirements.  Early in 2018, the government established an intra-agency Trade Facilitation Committee to implement its TFA commitments.  By the end of 2018, Kazakhstan notified the WTO Trade Facilitation Committee that it has fulfilled its implementation commitments for Category A at 57 percent, for Category B at 19 percent, and for Category C at 24 percent.

Legal System and Judicial Independence

Kazakhstan’s Civil Code establishes general commercial and contract law principles.  Under the constitution, the judicial system is independent of the executive branch, although the government interferes in judiciary matters.  According to Freedom House’s Nations in Transit report for 2018, the executive branch dominates de facto the judicial branch.  Allegedly, pervasive corruption of the courts and the influence of the ruling elites results in low public expectations and trust in the justice system.  Judicial outcomes are perceived as subject to political influence and interference.  Regulations or enforcement actions can be appealed and adjudicated in the national court system.  Monetary judgments are assessed in the domestic currency.

Parties of commercial contracts, including foreign investors, can seek dispute settlement in Kazakhstan’s courts or international arbitration, and Kazakhstani courts will enforce arbitration clauses in contracts.  Any court of original jurisdiction can consider disputes between private firms as well as bankruptcy cases.

The Astana International Financial Center, which opened in July 2018, includes its own arbitration center and court based on British Common Law and is independent of the Kazakhstani judiciary.  The court is led by former Chief Justice of England and Wales, Lord Harry Woolf, and several other Commonwealth judges have been appointed.  The government advises foreign investors to use the capacities of the AIFC arbitration center and the AIFC court more actively.  Provisions on using the AIFC law as applicable law are recommended for model investment contracts between a foreign investor and the government.

Laws and Regulations on Foreign Direct Investment

The following legislation affects foreign investment in Kazakhstan: the Entrepreneurial Code; the Civil Code; the Tax Code; the Customs Code of the Eurasian Economic Union; the Customs Code of Kazakhstan; the Law on Government Procurement; and the Law on Currency Regulation and Currency Control.  These laws provide for non-expropriation, currency convertibility, guarantees of legal stability, transparent government procurement, and incentives for priority sectors.  Inconsistent implementation of these laws and regulations at all levels of the government, combined with a tendency for courts to favor the government, have been reported to create significant obstacles to business in Kazakhstan.

The Entrepreneurial Code outlines basic principles of doing business in Kazakhstan and the government’s relations with entrepreneurs.  The Code reinstates a single investment regime for domestic and foreign investors, in principal, codifies non-discrimination for foreign investors.  The Code contains incentives and preferences for government-determined priority sectors, providing customs duty exemptions and in-kind grants detailed in Part 4, Industrial Policies.  The Code also provides for dispute settlement through negotiation, use of Kazakhstan’s judicial process, and international arbitration.  U.S. investors have expressed concern about the Code’s narrow definition of investment disputes and its lack of clear provisions for access to international arbitration.  The government’s single window for foreign investors, providing information to potential investors, business registration, and links to relevant legislation, can be found here: https://invest.gov.kz/invest-guide/ 

A revised Law on Currency Regulation and Currency Control, which came into force July 1, 2019, expands the monitoring of transactions in foreign currency and facilitates the process of de-dollarization.  In particular, the law will treat branches of foreign companies in Kazakhstan as residents and will enable the National Bank of Kazakhstan (NBK) to enhance control over cross-border transactions.  The NBK approved a list of companies that will keep their non-resident status; the majority of these companies are from extractive industries (see also Part 6, Financial Sector).

The legal and regulatory framework offered by the AIFC to businesses registering on that territory differs substantially from that of Kazakhstan, although the Center is quite new, and experience is limited.  A more detailed analysis of the legal and regulatory implications of operating within AIFC can be found here: https://aifc.kz/annual-report/  and http://www.ftseglobalmarkets.com/news/astana-international-financial-center-can-it-become-a-regional-finance-hub.html 

Competition and Anti-Trust Laws

The Entrepreneurial Code regulates competition-related issues such as cartel agreements and unfair competition.  The Committees for Regulating Natural Monopolies and Protection of Competition under the Ministry of National Economy are responsible for reviewing transactions for competition-related concerns.

Expropriation and Compensation

The bilateral investment treaty between the United States and Kazakhstan requires the government to provide compensation in the event of expropriation.  The Entrepreneurial Code allows the state to nationalize or requisition property in emergency cases, but fails to provide clear criteria for expropriation or require prompt and adequate compensation at fair market value.

Post is aware of cases when owners of developed businesses had to sell their businesses to companies affiliated with high-ranking and powerful individuals.

Dispute Settlement

ICSID Convention and New York Convention

Kazakhstan has been a member of the International Center for the Settlement of Investment Disputes (ICSID) since December 2001 and ratified the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards in 1995.  By law, any international award rendered by the ICSID, a tribunal applying the rules of the UN Commission on International Trade Law Arbitration, Stockholm Chamber of Commerce, London Court of International Arbitration, or Arbitration Commission at the Kazakhstan Chamber of Commerce and Industry is enforceable in Kazakhstan.

Investor-State Dispute Settlement

The government is a signatory to bilateral investment agreements with 47 countries and 1 multilateral investment agreement with EAEU partners.  These agreements recognize international arbitration of investment disputes.  The United States and Kazakhstan signed a Bilateral Investment Treaty in 1994.

In July 2017, a U.S. investor initiated arbitration proceedings against Kazakhstan under the BIT, accusing the government of indirectly expropriating its ownership stake to explore and develop three hydrocarbon fields.

Kazakhstan does recognize arbitral awards by law.  Four cases against Kazakhstan have been under review by ICSID as of March 2, 2020.  In October 2018, ICSID ordered Kazakhstan to compensate a foreign company for USD 30 million in investments in oil transshipment and storage facilities.  In 2015, this company appealed to ICSID for Kazakhstan’s breach of its bilateral investment treaty and Energy Charter Treaty.  In March 2016, a foreign gold explorer and producer sought compensation for breaches of its BIT and the 1994 Foreign Investment Law of Kazakhstan.  The Entrepreneurial Code defines an investment dispute as “a dispute ensuing from the contractual obligations between investors and state bodies in connection with investment activities of the investor,” and states such disputes may be settled by negotiation, litigation or international arbitration.

Investment disputes between the government and investors fall to the Nur-Sultan City Court; disputes between the government and large investors fall under the competence of a special investment panel at the Supreme Court of Kazakhstan.  The Supreme Court is currently preparing changes to regulation so that any disputes between the government and investors, including large ones, will be in hands of the Nur-Sultan City Court, while the Supreme Court will be a cassational instance.  A number of investment disputes involving foreign companies have arisen in the past several years linked to alleged violations of environmental regulations, tax laws, transfer pricing laws, and investment clauses.  Some disputes relate to alleged illegal extensions of exploration schedules by subsurface users, as production-sharing agreements with the government usually make costs incurred during this period fully reimbursable.  Some disputes involve hundreds of millions of dollars.  Problems arise in the enforcement of judgments, and ample opportunity exists for influencing judicial outcomes given the relative lack of judicial independence.

To encourage foreign investment, the government has developed dispute resolution mechanisms aimed at enabling aggrieved investors to seek redress without requiring them to litigate their claims.  The government established an Investment Ombudsman in 2013, billed as being able to resolve foreign investors’ grievances by intervening in inter-governmental disagreements that affect investors.

Kazakhstani law provides for government compensation for violations of contracts guaranteed by the government.  Yet, where the government has merely approved or confirmed a foreign contract, the government’s responsibility is limited to the performance of administrative acts necessary to facilitate an investment activity (e.g., the issuance of a license or granting of a land plot).  The resolution of disputes arising from such cases may require litigation or arbitration.

International Commercial Arbitration and Foreign Courts

The Law on Mediation offers alternative (non-litigated) dispute resolutions for two private parties.  The Law on Arbitration defines rules and principles of domestic arbitration.  As of April 2020, Kazakhstan had 17 local arbitration bodies unified under the Arbitration Chamber of Kazakhstan.  Please see: https://palata.org/about/ .  The government noted that the Law on Arbitration brought the national arbitration legislation into compliance with the United Nations Commission on International Trade Law (UNCITRAL) Model Law, the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, and the European Convention on International Commercial Arbitration.  Judgements of foreign arbitrations are recognized and enforceable under local courts.  Local courts recognize and enforce court rulings of CIS countries.  Judgement of other foreign state courts are recognized and enforceable by local courts when Kazakhstan has a bilateral agreement on mutual judicial assistance with the respective country or applies a principle of reciprocity.

When SOEs are involved in investment disputes, domestic courts usually find in the SOE’s favor.  By law, investment disputes with private commercial entities, employees, or SOEs are in the jurisdiction of local courts.  According to the European Bank for Reconstruction and Development’s 2014 Judicial Decision Assessment, judges in local courts lacked experience with commercial law and tended to apply general principles of laws and Civil Code provisions with which they are more familiar, rather than the relevant provisions of commercial legislation.

Even when investment disputes are resolved in accordance with contractual conditions, the resolution process can be slow and require considerable time and resources.  Many investors therefore elect to handle investment disputes privately, in an extrajudicial way.  In February 2018, a U.S. company initiated arbitration against the Kazakhstani government for failure to pay approximately USD 75 million for the return of two hydropower plants, operated under a 20-year concession agreement.  In April 2018 the government responded by denying liability and seeking over USD 480 million in counterclaims.  The final evidentiary hearing took place July 22-26, 2019.  As of June, 2020, the parties continue to await the arbitrator’s decision.

Bankruptcy Regulations

Kazakhstan’s 2014 Bankruptcy and Rehabilitation Law (The Bankruptcy Law) protects the rights of creditors during insolvency proceedings, including access to information about the debtor, the right to vote against reorganization plans, and the right to challenge bankruptcy commissions’ decisions affecting their rights.  Bankruptcy is not criminalized, unless the court determines the bankruptcy premeditated.  The Bankruptcy Law improves the insolvency process by permitting accelerated business reorganization proceedings, extending the period for rehabilitation or reorganization, and expanding the powers of (and making more stringent the qualification requirements to become) insolvency administrators.  The law also eases bureaucratic requirements for bankruptcy filings, gives creditors a greater say in continuing operations, introduces a time limit for adopting rehabilitation or reorganization plans, and adds court supervision requirements.  Amendments to the law accepted in 2019 introduced a number of changes.  Among them are a more specific definition of premeditated bankruptcy, the requirement to prove sustained insolvency when filing a bankruptcy claim, the potential for individual entrepreneurs to apply for a rehabilitation procedure to reinstate their solvency, and an option to be liquidated without filing bankruptcy in the absence of income, property, and business operations.

Investment Incentives

The government’s primary industrial development strategies, such as the Concepts for Industrial and Innovative Development  2020-2025 and the National Investment Strategy for 2018-2022, aim to diversify the economy from its overdependence on extractive industries.  The Entrepreneurial Code and Tax Code provide tax preferences, customs duty exemptions, investment subsidies, and in-kind grants as incentives for foreign and domestic investment in priority sectors.  Priority sectors include agriculture, metallurgy, extraction of metallic ore, chemical and petrochemical industry, oil processing, food production, machine manufacturing, and renewable energy.  Firms in priority sectors receive tax and customs duty waivers, in-kind grants, investment subsidies, and simplified procedures for work permits.  The government’s preference system applies to new and existing enterprises.  The duration and scope of preferences depends on the priority sector and the size of investment.  All information on priority sectors and preferences is available at: https://invest.gov.kz/doing-business-here/regulated-sectors/ .

The Investment Committee at the Ministry of Foreign Affairs makes decisions on each incentive on a case-by-case basis.  The law also allows the government to rescind incentives, collect back payments, and revoke an investor’s operating license if an investor fails to fulfill contractual obligations.

Potential investors can apply for preferences through the government’s single window portal; these are special offices for serving investors, located in the capital and at district service centers in every region of Kazakhstan.  Submission for investment preferences requires a number of documents, including a comprehensive state appraisal of a proposed investment project.  More information is available here:  https://invest.gov.kz/invest-guide/  and at https://irm.invest.gov.kz/en/support/ 

A governmental guarantee or joint government financing are normally used for large infrastructure projects.

To facilitate the work of foreign investors, especially in targeted, non-extractive industries, the government has approved visa-free travel for citizens of 73 countries, including the United States, Germany, Japan, United Arab Emirates, France, Italy, and Spain.  Residents of these countries may stay in Kazakhstan without visas for up to 30 days.  The government has temporary suspended these rules due to the COVID-19 pandemic.

Since January 2019, foreigners may obtain business, tourist, and medical treatment visas to Kazakhstan online at: www.vmp.gov.kz . Electronic tourist visas are available for citizens of 117 counties; business and medical treatment visas can be issued electronically for citizens of 23 countries.  This system is applicable only for visitors who have letters of invitation and enter Kazakhstan through the Nur-Sultan or Almaty airports.  Businesses registered in the AIFC have a relaxed entry visa regime, allowing them to obtain entry visas upon arrival at the airport and to obtain five-year visas for employees.

Starting from 2020, the government introduced a more liberal regime for visa regulation violations.  Now, foreign visitors are permitted to only pay administrative fines for first and second violations.  The government is currently considering a bill on changes to tax legislation and further improvement of the investment climate.  The bill is expected to introduce new measures to facilitate business activity, including expanded access to investment tax credits, lowered thresholds for tax preferences for investments in the textile industry,  measures designed to stimulate public-private partnership development, and procedures for non-resident foreign investors to register businesses in Kazakhstan remotely.

Foreign Trade Zones/Free Ports/Trade Facilitation

The Law on Special Economic Zones allows foreign companies to establish enterprises in special economic zones (SEZs), simplifies permit procedures for foreign labor, and establishes a special customs zone regime not governed by Eurasian Economic Union rules.  A system of tax preferences exists for foreign and domestic enterprises engaged in prescribed economic activities in Kazakhstan’s thirteen SEZs.  In April 2019, President Tokayev signed amendments which extend the rights of SEZ managing companies and set up a single center to coordinate the activities of all SEZs and industrial zones in Kazakhstan.

Performance and Data Localization Requirements

The government requires businesses to employ local labor and use domestic content, though the country’s WTO accession commitments provide for abolition of most local content requirements over time.  In 2015, Kazakhstan adopted legislative amendments to alter existing local content requirements to meet accession requirements.  Pursuant to these amendments, subsoil use contracts concluded after January 1, 2015 no longer contain local content requirements, and any local content requirements in contracts signed before 2015 will phase out on January 1, 2021.

Kazakhstan’s WTO accession terms require that Kazakhstan relax limits on foreign nationals by increasing the “quota” for foreign nationals to 50 percent (from 30 percent for company executives and from 10 percent for engineering and technical personnel) by January 1, 2021.

Despite these commitments, the government, particularly at the regional level, continues to advocate for international businesses to increase their use of local content.  The USD 36.8 billion investment into the Tengiz oilfield by Tengizchevroil includes an agreement that 32 percent of total investment will be used to procure local content.  The Ministry of Energy announced in March 2017 that foreign companies providing services for the oil and gas sector would need to create joint ventures with local companies to continue to receive contracts at the country’s largest oilfields.  Although these recommendations are not legally binding, companies report feeling obliged to abide by them.  Some companies reported these forced joint ventures or consortia led to the creation of domestic monopolies, rather than to the stimulation of a healthy domestic market of oil service providers.  For example, the Ministry of Energy and the Karachaganak Petroleum Operating Consortium reportedly agreed that a Kazakhstani design research company would carry out at least 50 percent of the design work at the Karachaganak expansion project.

The government regulates foreign labor at the macro and micro levels.  Foreign workers must obtain work permits, which have historically been difficult and expensive to obtain.  Amendments to the Expatriate Workforce Quota and Work Permit Rules: (a) eliminate special conditions for obtaining a work permit for foreign labor (e.g. requirements to train local personnel or create additional vacancies); (b) eliminate the requirement that companies conduct a search for candidates on the internal market prior to applying for a work permit; (c) reduce the timeframe for issuance or denial of work permit from 15 to 7 days; (d) eliminate the required permission of local authorities for the appointment of CEOs and deputies of Kazakhstani legal entities that are 100 percent owned by foreign companies; and (e) expand the list of individuals requiring no permission from local authorities (including non-Kazakhstani citizens working in national holding companies as heads of structural divisions and non-Kazakhstani citizens who are members of the board of directors of national holding companies).

The Ministry of Energy, Ministry of Industry and Infrastructure Development, and Sovereign Welfare Fund Samruk-Kazyna monitor firms compliance with local content obligations, and there are various enforcement tools for companies that do not meet performance requirements.

Following the June 2019 violence at Chevron-operated Tengiz oilfield that reportedly resulted from discontent with wage discrepancy between local and foreign workers with similar qualifications, the Ministry of Labor and Social Protection has sought to revisit the definition of administrative liability and administrative violation to make state control over employers with foreign workers more effective.

The foreign labor quota approved by the government for 2020 reduced the number of work permits for employees of category 3 (specialists) by 37 percent and for category 4 (qualified workers) by 23 percent.  The largest decreases are in administration; real estate; wholesale and retail; construction; professional, scientific and technological activities; and accommodation and catering.  To replace the gap in the foreign workforce, the government is introducing an obligation to replace foreign workers with skilled Kazakhstani labor.

Foreign investors may in theory participate in government and quasi-government procurement tenders, however, they should have production facilities in Kazakhstan and should go through a process of being recognized as a pre-qualified bidder.  In 2019, the government enacted new procurement rules by which only pre-qualified suppliers will be allowed to bid for government contracts.  A key requirement for being recognized as pre-qualified bidder is that the company’s product should be made in Kazakhstan and be added to a register of trusted products.  While this requirement is applied to some selected sectors at the government procurement (e.g. construction, IT, textile), it has been practiced since 2016 for procurement at quasi-sovereign companies under the National Welfare Fund Samruk-Kazyna.

In addition, the National Chamber of Entrepreneurs Atameken introduced in 2018 an industrial certificate which serves as an extra (and costly) tool to prove a company’s financial and production capabilities to participate in tenders.  The industrial certificate also acts as an indirect confirmation of a company’s status as a local producer.  Thus, a foreign investor who plans to bid for government and quasi-government contracts should obtain an industrial certificate.

In 2019, the government introduced significant recycling fees on the importation of combines and tractors.  Although major Western brands were granted a waiver for the fees, the government is expected to revisit the exception.  The government has suggested that foreign producers start local production of their equipment and become eligible for preferential treatment.

Real Property

Private entities, both foreign and domestic, have the right to establish and own business enterprises, buy and sell business interests, and engage in all forms of commercial activity.

Secured interests in property (fixed and non-fixed) are recognized under the Civil Code and the Land Code.  All property and lease rights for real estate must be registered with the Ministry of Justice through its local service centers.  According to the World Bank’s Doing Business Report, Kazakhstan ranks 24 out of 190 countries in ease of registering property.

Under Kazakhstan’s constitution, land and other natural resources may be owned or leased by Kazakhstani citizens.  The Land Code: (a) allows citizens and Kazakhstani companies to own agricultural and urban land, including commercial and non-commercial buildings, complexes, and dwellings; (b) permits foreigners to own land to build industrial and non-industrial facilities, including dwellings, with the exception of land located in border zones; (c) authorizes the government to monitor proper use of leased agricultural lands, the results of which may affect the status of land-lease contracts; (d) forbids private ownership of: land used for national defense and national security purposes, specially protected nature reserves, forests, reservoirs, glaciers, swamps, designated public areas within urban or rural settlements, except land plots occupied by private building and premises, main railways and public roads, land reserved for future national parks, subsoil use and power facilities, and social infrastructure.  The government maintains the land inventory and constantly updates its electronic data base, though the inventory data is not exhaustive.  The government has also set up rules for withdrawing land plots that have been improperly or never used.

In 2015, the government proposed Land Code amendments that would allow foreigners to rent agricultural lands for up to 25 years.  Mass protests in the spring of 2016 led the government to introduce a moratorium on these provisions until December 31, 2021.  The moratorium is also effective on other related articles of the Land Code that regulate private ownership rights on agricultural lands.

Intellectual Property Rights

The legal structure for intellectual property rights (IPR) protection is relatively strong; however, enforcement needs further improvement.  Kazakhstan was not  included in the United States Trade Representative (USTR)  Special 301 Report or the  Notorious Markets List.  To facilitate its accession to the World Trade Organization (WTO) and attract foreign investment, Kazakhstan continues to improve its legal regime for protecting IPR.  The Civil Code and various laws protect U.S. IPR.  Kazakhstan has ratified 18 of the 24 treaties endorsed by the World Intellectual Property Organization (WIPO): http://www.wipo.int/members/en/details.jsp?country_id=97 .

The Criminal Code sets out punishments for violations of copyright, rights for inventions, useful models, industrial patterns, select inventions, and integrated circuits topographies.  The law authorizes the government to target internet piracy and shut down websites unlawfully sharing copyrighted material, provided that rights holders had registered their copyrighted material with Kazakhstan’s IPR Committee.  Despite these efforts, U.S. companies and associated business groups have alleged that 73 percent of software used in Kazakhstan is pirated, including in government ministries, and have criticized the government’s enforcement efforts.

To comply with OECD IPR standards, in 2018 Kazakhstan accepted amendments to its IPR legislation that would streamline IPR registration and enforcement.  The law set up a more convenient, one-tier system of IPR registration and provided rights holders the opportunity for pre-trial dispute settlement through the Appeals Council at the Ministry of Justice.  In addition, the law included IPR protection as one of the government procurement principles that should be strictly followed by government organizations.  The Ministry of Justice is working with the World Bank on developing new IPR legislation based on OECD norms, including patent protection of IT products.

Kazakhstani authorities conduct nationwide campaigns called “Counterfeit”, “Hi-Tech” and “Anti-Fraud” that are aimed at detecting and ceasing IPR infringements and increasing public awareness about IP issues.  The Ministry of Justice and law enforcement agencies regularly report the results of their inspections.  In 2019, they conducted 276 inspections and initiated 236 cases on violations of trade mark use, resulting in USD 32,900 in penalties.  In addition, authorities reportedly seized over 44,000 units of counterfeit goods worth around USD 52,570.  Customs officials seized counterfeited goods at border crossing worth around USD 14.4 million.  IPR violations are prosecuted regularly. The Ministry of Internal Affairs reported 31 criminal copyright violations in 2019.  Of these 31 cases, three cases were closed, five were resolved by the conciliation of parties, and the rest remain in litigation.

Although Kazakhstan continues to make progress to comply with WTO requirements and OECD standards, foreign companies complain about inadequate IPR protection.  Judges, customs officials, and police officers also lack IPR expertise, which exacerbates weak IPR enforcement.

Capital Markets and Portfolio Investment

Kazakhstan maintains a stable macroeconomic framework, although weak banks inhibit the financial sector’s development (described further in next section), valuation and accounting practices are inconsistent, and large state-owned enterprises that dominate the economy face challenges in preparing complete financial reporting.  Capital markets remain underdeveloped and illiquid, with small equity and debt markets dominated by state-owned companies and lacking in retail investors.  Most domestic borrowers obtain credit from Kazakhstani banks, although foreign investors often find margins and collateral requirements onerous, and it is usually cheaper and easier for foreign investors to use retained earnings or borrow from their home country. The government actively seeks to attract foreign direct investment, including portfolio investment.  Foreign clients may only trade via local brokerage companies or after registering at the Kazakhstan Stock Exchange (KASE) or at the AIFC.

KASE, in operation since 1993, trades a variety of instruments, including equities and funds, corporate bonds, sovereign debt, foreign currencies, repurchase agreements (REPO) and derivatives, with 200 listed companies in total.  Most of KASE’s trading is comprised of money market (87 percent) and foreign exchange (10 percent).  As of March 31, 2020, stock market capitalization was USD 37.3 billion, while the corporate bond market was USD 31 billion. The Single Accumulating Pension Fund, the key source of the country’s local currency liquidity, accumulated $26.1 billion as of March 31, 2020.

In 2018, the government launched the Astana International Financial Center (AIFC), a regional financial hub modeled after the Dubai International Financial Center.  The AIFC has its own stock exchange (AIX), regulator, and court (see Part 4).  The AIFC has partnered with the Shanghai Stock Exchange, NASDAQ, Goldman Sachs International, the Silk Road Fund, and others.  AIX currently has 53 listings, including 24 traded on its platform.

Kazakhstan is bound by Article 8 of the International Monetary Fund’s Articles of Agreement, adopted in 1996, which prohibits government restrictions on currency conversions or the repatriation of investment profits.  Money transfers associated with foreign investments, whether inside or outside of the country, are unrestricted; however, Kazakhstan’s currency legislation requires that a currency contract must be presented to the servicing bank if the transfer exceeds USD 10,000.  Money transfers over USD 50,000 require the servicing bank to notify the transaction to the authorities, so the transferring bank may require the transferring parties, whether resident or non-resident, to provide information for that notification.

Money and Banking System

Kazakhstan has 27 commercial banks.  As of March 1, 2019, the five largest banks (Halyk Bank, Sberbank-Kazakhstan, Forte Bank, Kaspi Bank and Bank CenterCredit) held assets of approximately USD 43.6 billion, accounting for 62.2 percent of the total banking sector.

Kazakhstan’s banking system remains impaired by legacy non-performing loans, poor risk management, weak corporate governance practices at some banks and significant related-party exposures.  Over the past several years the government has undertaken a number of measures to strengthen the sector, including capital injections, enhanced oversight, and expanded regulatory authorities.  In 2019, the NBK initiated an asset quality review (AQR) of 14 major banks jointly holding 87 percent of banking assets as of April 1, 2019.  According to NBK officials, the AQR showed sufficient capitalization on average across the 14 banks and set out individual corrective measure plans for each of the banks to improve risk management.  As of March 2020, the ratio of non-performing loans to banking assets was 8.9 percent, down from 31.2 percent in January 2014.  The COVID-19 pandemic and the fall in global oil prices may pose additional risks to Kazakhstan’s banking sector.

Kazakhstan has a central bank system, led by the National Bank of Kazakhstan (NBK).  In January 2020, parliament established the Agency for Regulation and Development after Financial Market (ARDFM), which assumed the NBK’s role as main financial regulator overseeing banks, insurance companies, stock market, microcredit organizations, debt collection agencies, and credit bureaus.  The National Bank of Kazakhstan (NBK) retains its core central bank functions as well as management of the country’s sovereign wealth fund and pension system assets.  The NBK and ARDFM as its successor is committed to move gradually to Basel III regulatory standard.  As of May 2020, Basel III methodology applies to capital and liquidity calculation with required regulatory ratios gradually changing to match the standard.

Currently foreign banks are allowed to operate in the country only through their local subsidiaries.  Starting December 16, 2020, as a part of Kazakhstan’s WTO commitments, foreign banks will be allowed to operate via branches subject to compliance with regulatory norms prescribed by the NBK and ARDFM.

Foreigners may open bank accounts in local banks if they have a local tax registration number.

Foreign Exchange and Remittances

Foreign Exchange

There are no restrictions or limitations placed on foreign investors in converting, transferring, or repatriating funds associated with an investment (e.g. remittances of investment capital, earnings, loan or lease payments, or royalties).  Funds associated with any form of investment may be freely converted into any world currency, though local markets may be limited to major world currencies.

As of July 2019, foreign company branches are treated as residents, except for branches of foreign banks and insurance companies or non-financial organizations treated as non-residents based on previously made special agreements with Kazakhstan.  Foreign banks and insurance companies’ branches will be treated as residents from December 2020.  With some exceptions, foreign currency transactions between residents are forbidden.  There are no restrictions on foreign currency operations between residents and non-residents, unless specified otherwise by local foreign currency legislation.  Companies registered with AIFC are not subject to currency and settlement restrictions.

Kazakhstan abandoned its currency peg in favor of a free-floating exchange rate and inflation-targeting monetary regime in August 2015, although the National Bank admits to intervening in foreign exchange markets to combat excess volatility.  Kazakhstan maintains sufficient international reserves according to the IMF.  As of March 2020, international reserves at the National Bank, including foreign currency and gold, and National Fund assets totaled USD 87.4 billion.

Remittance Policies

The U.S. Mission in Kazakhstan is not aware of any concerns about remittance policies or the availability of foreign exchange conversion for the remittance of profits.  Local currency legislation permits non-residents to freely receive and transfer dividends, interest and other income on deposits, securities, loans, and other currency transactions with residents.  However, such remittances would be subject to the reporting requirements described in the “Capital Markets and Portfolio Investment” Section above.  There are no time limitations on remittances; and timelines to remit investment returns depend on internal procedures of the servicing bank. Residents seeking to transfer property or money to a non-resident in excess of USD 500,000 are required to register the contract with the NBK.

Sovereign Wealth Funds

The National Fund of the Republic of Kazakhstan was established to support the country’s social and economic development via accumulation of financial and other assets, as well as to reduce the country’s dependence on oil sector and external shocks.  The Fund’s assets are generated from direct taxes and other payments from oil companies, public property privatization, sale of public farm lands, and investment income.  The government, through the Ministry of Finance, controls the National Fund, while the NBK acts as National Fund’s trustee and asset manager. The NBK selects external asset managers from internationally-recognized investment companies or banks to oversee a part of the National Fund’s assets.  Information about external asset managers and assets they manage is confidential.  As of March 2020, the National Fund’s assets were USD 57 billion or around 37 percent of GDP.

The government receives regular transfers from the National Fund for general state budget support, as well as special purpose transfers ordered by the President.  The National Fund is required to retain a minimum balance of no less than 30 percent of GDP.

Kazakhstan is not a member of the IMF-hosted International Working Group of Sovereign Wealth Funds.

According to the Ministry of Finance, as of January 1, 2020, the government owns 3,661 state-owned enterprises (SOEs), including all forms of SOEs from small veterinary inspection offices, departments on anti-monopoly policy or hospitals in regions to large national companies,  controlling energy, transport,  agricultural finance and product development.

In 2019, President Tokayev introduced a moratorium on establishing new parastatal companies that will be effective until the end of 2021.  A bill on improving the business climate approved  by the Majilis, the lower Chamber of Parliament, in April 2020 makes it more difficult to establish new parastatal companies.  Despite these positive developments, the share of SOEs in the economy is still large.  According to the 2017 OECD Investment Policy Review, SOE assets amount to USD 48-64 billion, approximately 30-40 percent of GDP; their net income was approximately USD 2 billion.  The preferential status of parastatal companies remains unchanged; parastatals enjoy greater access to subsidies and government support.

The lists of SOEs is available at: http://www.minfin.gov.kz/irj/portal/anonymous?NavigationTarget=ROLES://portal_content/mf/kz.ecc.roles/kz.ecc.anonymous/kz.ecc.anonymous/kz.ecc.anonym_activities/activities/statistics_fldr 

The National Welfare Fund Samruk-Kazyna (SK) is Kazakhstan’s largest national holding company, and manages key SOEs in the oil and gas, energy, mining, transportation, and communication sectors.  At the end of 2018, SK had 317 subsidiaries and employed around 300,000 people.  By some estimates, SK controls around half of Kazakhstan’s economy, and is the nation’s largest buyer of goods and services.  In 2018, SK reported USD 74.3 billion in assets and USD 3.3 billion in consolidated net profit.  Created in 2008, SK’s official purpose is to facilitate economic diversification and to increase effective corporate governance.  In 2018, First President Nazarbayev approved SK’s new strategy, which declared the effective management of its companies, restructuring and diversification of assets and investment projects, and compliance with the principles of sustainable development as its priority goals.  To follow this new strategy, early in 2020, SK removed the Prime Minister from the Board and elected four independent directors, one of which became the Chairman of the Board.  Kazakhstani government participation in the Board is limited to three individuals: the Aide to the President, the Minister of National Economy and the CEO of Samruk-Kazyna.  SK Portfolio companies are required to have corporate governance standards and independent boards.  Despite these moves, the government maintains significant influence in SK.  First President Nazarbayev is the life-long Chairman of the Managing Council of SK, and can make decisions on SK activity.  SK has special rights not afforded to other companies, such as the ability to conclude large transactions among members of its holding companies without public notification.  SK has the pre-emptive right to buy strategic facilities and bankrupt assets, and is exempt from government procurement procedures.  Critically, the government can transfer state-owned property to SK, easing the transfer of state property to private owners.  More information is available at http://sk.kz/ .

In addition to SK, the government created the national managing holding company Baiterek in 2013 to provide financial and investment support to non-extractive industries, drive economic diversification, and improve corporate governance in government subsidiaries.  Baiterek is comprised of the Development Bank of Kazakhstan, the Investment Fund of Kazakhstan, the Housing and Construction Savings Bank, the National Mortgage Company, the National Agency for Technological Development, the Distressed Asset Fund, and other financial and development institutions.  Unlike SK, the Prime Minister remains the Chairman of the Board, assisted by several cabinet ministers and independent directors.  In 2019, Baiterek had USD 13.8 billion in assets and earned USD 104.5 million in net profit.  At the end of 2018, Baiterek held a 48 percent share of the country’s market of long-term crediting of the non-extractive sectors.   Please see https://www.baiterek.gov.kz/en 

Other SOEs include KazAgro, which manages state agricultural holdings such as the state wheat purchasing agent National Food Contract Corporation, farm equipment subsidy provider KazAgroFinance, and the Agrarian Credit Corporation, an agricultural insurance company (http://www.kazagro.kz/ ).  The national holding company Zerde is charged with creating modern information and communication infrastructure, using new technologies, and stimulating investments in the communication sector (http://zerde.gov.kz/ ).

Officially, private enterprises compete with public enterprises under the same terms and conditions.  In some cases, SOEs enjoy better access to natural resources, credit, and licenses than private entities.

In its 2017 Investment Review, the OECD recommended Kazakhstani authorities identify new ways to ensure that all corporate governance standards applicable to private companies apply to SOEs.  Samruk-Kazyna adopted a new Corporate Governance Code in 2015.  The Code, which applies to all SK subsidiaries, specified the role of the government as ultimate shareholder, underlined the role of the Board of directors and risk management, and called for transparency and accountability.

Privatization Program

As part of its overall plan to reduce the share of Kazakhstan’s SOEs to the OECD average of 15 percent of the economy, the government is conducting a large-scale privatization campaign.  By law and in practice, foreign investors may participate in privatization projects.  The public bidding process is established in law.  Government reports on this campaign are available at: https://privatization.gosreestr.kz/ 

As of April 2020, 499 out of 873 organizations planned for privatization have been sold for 315.8 billion tenge, or USD 734.5 million. The government sells small, state-owned and municipal enterprises through electronic auctions.

SK plans to offer institutional investors non-controlling shares in following national companies via initial public offerings (IPOs), secondary public offerings (SPO) and sale to strategic investors:  state oil company KazMunayGas, uranium mining company KazAtomProm, national airline Air Astana,  national telecom operator Kazakhtelecom, railway operator Kazakhstan Temir Zholy, KazPost, and Samruk–Energy, Tau-Ken Samruk, and Qazaq Air.  Samruk-Kazyna sold 15 percent of its stake in KazAtomProm in a dual-listed IPO on the London Exchange and the Astana International Stock Exchange in 2018.  Information on privatization of SK assets is available here: https://sk.kz/investors/privatization/information-on-assets-and-facilities/?lang=en 

Entrepreneurs, the government, and non-governmental organizations are aware of the expectations of responsible business conduct (RBC).  Kazakhstan continues to make steady progress toward meeting the OECD Guidelines for International Investment and Multinational Enterprises, and the government promotes the concept of RBC.  The OECD National Point of Contact is the Ministry of National Economy.

A legal framework for RBC was introduced in 2015.  The Entrepreneurial Code has a special section on social responsibility, which is defined as a voluntary contribution for the development of social, environmental, and other spheres.  The Code says that the state creates conditions for RBC but specifies that it cannot force entrepreneurs to perform socially responsible actions.  The Code considers donations to charity one of the key forms of social responsibility and envisions a tax deduction for charitable giving, though no such rule exists.

In April 2015, the National Tripartite Commission on Social Partnership and Regulation of Social and Labor Relations adopted the National Concept on Social Corporate Responsibility, developed by the National Chamber of Entrepreneurs “Atameken” and the corporate fund Eurasia-Central Asia.  The non-binding document covers human rights, environmental protection, consumer interests, RBC, corporate governance, and community development.

First President Nazarbayev has repeatedly asked foreign investors and local businesses to implement corporate social responsibility (CSR) projects, to provide occupational safety, pay salaries on time, and invest in human capital.  The president presents annual awards for achievements in CSR.  Foreign investors report that local government officials regularly pressure them to provide social investments to achieve local political objectives.  Local officials attempt to exert as much control as possible over the selection and allocation of funding for such projects.

The government has signed on to the Extractive Industries Transparency Initiative (EITI).  Kazakhstan produces EITI reports disclosing revenues from the extraction of its natural resources.  Companies disclose what they pay in taxes and other payments, and the government discloses revenue received; these two sets of figures are then compared and reconciled.  Starting in August 2019, the EITI Board has been reviewing whether Kazakhstan has made meaningful progress in implementing EITI standards since its first validation in 2017.  The EITI Board is particularly concerned with disclosure of information by state-owned companies, such as KazMunayGas and its subsidiaries, oil supplies, revenues of Kazakhstan Temir Zholy from transportation of mineral resources, and free access of NGOs to EITI process in Kazakhstan.

Starting in 2019, members of EITI, including Kazakhstan, are required to disclose subsoil use contracts, signed after January 1, 2021.  In June 2019, the Ministry of Industry and Infrastructure Development disclosed for the first time beneficial ownership data on its website.  The data include names of beneficial owners and their level of ownership under new licenses only.

Kazakhstan’s rating in Transparency International’s (TI) 2019 Corruption Perceptions Index is 34/100, ranking Kazakhstan 113 out of 180 countries rated – a relatively weak score, but the best in Central Asia.  According to the report, corruption remains a serious challenge for Kazakhstan, amplified by the instability of the economy.  In its March 2019 report on the fourth round of monitoring under the Istanbul Action Plan, OECD stated a lack of progress on 9 of 29 recommendations, including: implementation of a holistic anti-corruption policy in the private sector, ensuring independence of the anti-corruption agency, detailed integrity rules for political officials, independence of the judiciary and judges, mandatory anti-corruption screening of all draft laws, bringing the Law on Access to Information in line with international standards, effective and dissuasive liability of legal entities for corruption crimes; and ensuring the effectiveness of investigative and prosecutorial practices to combat corruption crimes.

The 2015-2025 Anti-Corruption Strategy focuses on measures to prevent the conditions that foster corruption, rather than fighting the consequences of corruption.  The Criminal Code imposes tough criminal liability and punishment for corruption, eliminates suspension of sentences for corruption-related crimes, and introduces a lifetime ban on employment in the civil service with mandatory forfeiture of title, rank, grade and state awards.  The Law on Countering Corruption introduces broader definitions of corruption and risks, anticorruption monitoring and analysis, and stronger financial accountability measures.  The Law on Government Procurement prohibits companies, the managers of which are directly related to decision makers of contracting government agencies, from participation in tenders.  The Law on Countering Corruption states that private companies should undertake measures to prevent corruption, while business associations can develop codes of conduct for specific industries.

The Agency for Countering Corruption presents its report on countering corruption annually. Kazakhstan ratified the UN Convention against Corruption in 2008.  It has been a participant of the Istanbul Anti-Corruption Action Plan of the OECD Anti-Corruption Network since 2004, the International Association of Anti-Corruption Agencies since 2009, and the International Counter-Corruption Council of CIS member-states since 2013.  Kazakhstan became a member of the Group of States against Corruption (GRECO) in January 2020.  The government and local business entities are aware of the legal restrictions placed on business abroad, such as the Foreign Corrupt Practices Act and the UK Bribery Act.

Despite provisions in laws, however, corruption allegations are noted in nearly all sectors, including extractive industries, infrastructure projects, state procurements, and the banking sector.  The International Finance Corporation’s Enterprise Survey that gathers responses from thousands of small and medium-sized enterprises in each of more than 100 countries, finds that respondents indicate corruption as the most severe obstacle to doing business in Kazakhstan.  For more information, please see: http://www.enterprisesurveys.org/data/exploreeconomies/2013/kazakhstan#corruption 

Transparency International Kazakhstan conducted a survey in 2019 to assess the corruption perception of 1,824 representatives of small businesses and individual entrepreneurs.  A total of 76.1 percent of respondents reported that they can develop their business without corruption.

The legal framework controlling corruption has been eased and loopholes exist.  In 2018 the president signed into law a set of criminal legislation amendments  mitigating punishment for acts of corruption by officials, including decriminalizing official inaction, hindrance to business activity, and falsification of documents; significantly reducing the amounts of fines for taking bribes; and reinstituting a statute of limitation for corruption crimes.  The largest loophole surrounds the first president and his family.  The Law on the First President of the Republic of Kazakhstan—Leader of the Nation establishes blanket immunity for First President Nazarbayev and members of his family from arrest, detention, search or interrogation.  Journalists and advocates for fiscal transparency are reported to have faced frequent harassment, administrative pressure, and there are reports of disappearances and unaccounted deaths.

Resources to Report Corruption

Under the Law On Countering Corruption, all government, quasi-government entities, and officials are responsible for countering corruption.  Along with the Anti-Corruption Agency, prosecutors, national security agencies, police, tax inspectors, military police, and border guard service members are responsible for the detection, termination, disclosure, investigation, and prevention of corruption crimes, and for holding the perpetrators liable within their competence.

Transparency International maintains a national chapter in Kazakhstan.

Contact at the government agency responsible for combating corruption:

Alik Shpekbayev
Chairman
Agency for Civil Service Affairs and Countering Corruption
37 Seyfullin Street, Astana
+7 (7172) 909002
a.shpekbaev@kyzmet.gov.kz

Contact at a “watchdog” organization:

Olga Shiyan
Executive Director
Civic Foundation “Transparency Kazakhstan”
Office 308/2
89 Dosmuhamedov str,
Business Center Caspi
Almaty 050012
+7 (727) 292 0970; +7 771 589 4507
oshiyantikaz@gmail.com

There have been no reported incidents of politically-motivated violence against foreign investment projects, and although small-scale protests do occur, large-scale civil disturbances are infrequent.  In June 2016, individuals described by the government as Salafist militants attacked a gun shop and a military unit, killing 8 and injuring 37 people in the Aktobe region of northwestern Kazakhstan.

Kazakhstan generally enjoys good relations with its neighbors. Although the presidential transition in neighboring Uzbekistan has opened the door to greater regional cooperation, including on border issues, Kazakhstan continues to exercise vigilance against possible penetration of its borders by extremist groups.  The government also remains concerned about the potential return of foreign terrorist fighters from Syria and Iraq.

After close to three decades, President Nursultan Nazarbayev resigned as president March 20, 2019, and was succeeded by Kassym-Jomart Tokayev, the former Senate Chairman and next in line of constitutional succession.  On April 9, 2019, President Tokayev announced that Kazakhstan would hold early presidential elections June 9, 2019.

In the June 9 election, the first without First President Nazarbayev, President Tokayev was elected to a full term with 71 percent of the vote.  The Organization for Security and Cooperation in Europe (OSCE) published a preliminary assessment of the election June 10, noting in its press release that “a lack of regard for fundamental rights, including detentions of peaceful protestors, and widespread voting irregularities on election day, showed scant respect for democratic standards.”  In the March 2016 election for the Mazhilis (lower house of Parliament), Kazakhstan’s largest party, Nur-Otan, received 82 percent of the vote, while the business-friendly Ak Zhol party and the Communist People’s party each received 7 percent.  All three parties supported Nazarbayev and his policies.  The OSCE similarly critiqued the March 2016 election for its lack of adherence to OSCE standards for democratic elections.

The July 2017 EBRD Kazakhstan Diagnostic Paper singles out skills mismatches across sectors as the fifth most important constraint that is holding back private sector growth in Kazakhstan.  The gaps create real operational challenges such as high recruitment and training costs, lower productivity and constraints on innovation and new product development, according to the EBRD.  The existing skills mismatches are not a result of lack of access in education, but rather failure to acquire job-relevant skills and competencies, the EBRD report reads.  The 2019 OECD report on Monitoring Skills Development through Occupational Standards in Kazakhstan echoes the EBRD findings – despite improvements in educational attainment and labor market participation, Kazakhstan faces challenges with respect to skill relevance and availability, especially among large and middle-sized companies.  Strengthening vocational education and training is critical, because skilled manual workers, with medium and high qualifications, represent 40 percent of the total workforce need, according to the OECD.

Many large investors rely on foreign workers and engineers to fill the void.  Kazakhstan approved a quota for 29,300 foreign workers for 2020.  As of February 1, 2020, Labor Ministry had issued 19,100 work permits.  Chinese workers received over 27 percent of all permits, with the rest going to foreign workers from Turkey, U.K., India, Uzbekistan, and others.

The Kazakhstani government has made it a priority to ensure that Kazakhstani citizens are well represented in foreign enterprise workforces.  In 2009, the government instituted a comprehensive policy for local content, particularly for companies in extractive industries.  The government is particularly keen to see Kazakhstanis hired into the managerial and executive ranks of foreign enterprises.  In November 2015, the government amended the legislation on migration and employment that resulted in new rules for foreign labor starting January 2017 (please see details in Part 5, Performance and Data Localization Requirements).  U.S. companies are advised to contact Kazakhstan-based law and accounting firms and the U.S. Commercial Service in Almaty for current information on work permits.  AIFC-registered entities may employ a foreign workforce without any work permits.

Kazakhstan joined the International Labor Organization (ILO) in 1993, and has ratified 24 out of 189 ILO conventions, including eight fundamental conventions pertaining to minimum employment age, prohibition on the use of forced labor and the worst forms of child labor, and prohibition on discrimination in employment, as well as conventions on equal pay and collective bargaining.  In March 2019, Kazakhstan’s Federation of Trade Unions proposed that the Kazakhstani government join five more ILO technical conventions on social security (minimum standards), minimum wage fixing, collective bargaining, part-time work, and safety and health in agriculture, but the country has not ratified any new ILO conventions since then.

In September 2017, the ILO expressed concern over Kazakhstan’s compliance with the Freedom of Association and Protection of the Right to Organize Convention and the Right to Organize and Collective Bargaining Convention by calling on the government to amend the relevant legislation in order to: (1) enable workers to form and join trade unions of their own choosing, (2) allow labor unions to benefit from joint projects with international organizations, and (3) allow financial assistance to labor unions from international organizations.  The Constitution and National Labor Code guarantee basic workers’ rights, including occupational safety and health, the right to organize, and the right to strike.  Amendments to the Labor Code since July 2018 leave many labor-related issues, including dismissals and layoffs, to the discretion of employers.  It imposes tighter collective bargaining restrictions on employees involved in labor disputes.  According to the Ministry of Labor and Social Protection, 33.4 percent of all working enterprises have collective agreements.  Kazakhstan’s three independent labor unions – the Federation of Trade Unions of the Republic of Kazakhstan (FTU), Commonwealth of Trade Unions of Kazakhstan Amanat, and Kazakhstan Confederation of Labor (KCL) – had over three million members, or 40 percent of Kazakhstan’s workforce, as of March 1, 2020.

Article 46 of the Labor Code gives the employer the right to change work conditions due to fluctuating market conditions with proper and timely notifications to employees.  Article 52 of the Labor Code gives the employer the right to cancel an employment contract in case of a decline in production that may lead to the deterioration of economic and financial conditions of the company.  Article 131 of the Labor Code allows for severance of payment of average monthly wages for two months in case of layoffs for economic reasons.  The Ministry of Labor and Social Protection is responsible for offering alternative job openings within state programs of the so-called Employment Road Map, alternative professional training, or temporary jobs to workers laid off for economic reasons.  The 2017-2021 Productive Employment and Mass Entrepreneurship National Program, run by the Ministry of Labor and Social Protection, aims at connecting workers with permanent jobs.  The program provides micro-loans and grants, and equips workers with basic entrepreneurial skills.

Chapter 15 of the Labor Code describes a mechanism for resolution of individual labor disputes via direct negotiations with an employer, mediation commission, and court.  Chapter 16 of the Labor Code identifies a mechanism for resolution of collective labor disputes via direct negotiations with an employer, mediation commission, labor arbitration, and court.

Labor unrest presents a risk where unemployment is high and where the bargaining power of limited skilled labor is relatively high, but authorities have been quick to intervene with controls and mitigating measures.  In June 2019, a violence broke out at the Chevron-operated Tengiz oilfield, in which large mobs of Kazakh men attacked dozens of their colleagues from countries like Jordan and the United Arab Emirates.  The unrest had ostensibly been triggered by an interpersonal conflict, though it was widely acknowledged that festering resentment about pay and working conditions underlaid the violence.  Another conflict that took place on August 12, 2019, in the Zhairem settlement of the Karaganda region reportedly had similar grounds — fifty Zhairem residents trespassed the site of the Zhairem enrichment plant, owned by KazZinc (i.e. Glencore International AG), and started a brawl with Turkish workers.  The altercation resulted in the minor injuries of six Turkish workers.  The regional police brought charges for hooliganism and property theft against seven Zhairem residents.

In September 2019, several strikes over living standards hit the Chinese-run companies in the Mangystau region.  At least 165 workers of Mobil Service Group Ltd that provides transportation services for Oil Construction Company LLP in the Kalamkas field and Karazhanbasmunai JSC in the Karazhanbas field in the Mangystau region went on strike on September 20, 2019 to demand a 100 percent increase of wages and to complain about getting paid up to ten times less than their western and Chinese colleagues.  The labor dispute was resolved after MSG management agreed to raise wages by 50 percent.

Approximately 24 workers of the Sinopec-run Karakudykmunay and Buzachi Operating companies went on strike on September 23, 2019, demanding a 100 percent wage increase.  Over 150 workers wrote letters to the company’s management and to the ruling Nur Otan party prior to the strike.  Another strike over low wages reportedly took place at Buzachi Operating on October 31, 2019, which was later dismissed by the company’s management, stating that it was a regular staff meeting.

On September 30, 2019, a local newspaper published on its website a video message  (https://www.lada.kz/aktau_news/society/73745-rabochie-esche-odnoy-kompanii-v-mangistau-trebovali-povysheniya-zarabotnoy-platy.html ) to President Tokayev allegedly recorded by Emir Oil workers, requesting a 50 percent increase in wages.  Kazakh-Malaysian oil company, Emir Oil Ltd, dismissed this information, stating that the company had been negotiating with workers and gradually implementing a pay increase since March 2019.

Security workers of KMG-Security, a subsidiary of KazMunayGas National Company (KMG NC), held a strike demanding a wage increase and improved working conditions in the oil town of Zhanaozen in the Mangystau region on January 27, 2020.  Their requests have been addressed by KMG NC.  The government is particularly sensitive to any signs of unrest in Zhanaozen, after a seven-month strike of oil workers in the town culminated in riots that killed 15 and injured over 100 in December 2011.

Workers’ rights to strike are limited by several conditions.  It may take over 40 days to initiate the strike in accordance with the law, representatives of labor unions report.  Workers can strike if all arbitration measures defined by law have been exhausted.  Strike votes must be taken in a meeting where at least half of workers are present, and strikers are required to give five days’ notice to their employer, include a list of complaints, and tell the employer the proposed date, time and place of the strike.  Courts have the power to declare a strike illegal at the request of an employer or the General Prosecutor’s office.  Employers may fire striking workers after a court declares a strike illegal.  The Criminal Code enables the government to target labor organizers whose strikes are deemed illegal.

The Labor Union Law generally restricts workers’ freedom of association.  Under the law, any local (and potentially independent) labor union must be affiliated with larger unions, and the right to freely establish and join independent organizations without prior authorization is restricted.  On the basis of this law, in 2016 authorities did not allow the registration of one independent labor union and ordered its liquidation.  In 2018, the U.S. government initiated a review of Kazakhstan’s compliance with the Generalized System of Preferences following a petition by the AFL-CIO, based on the country’s alleged failure to afford internationally-recognized workers’ rights.  The AFL-CIO petition highlights the Law on Unions and also raises concerns about the use of Article 404 of the Criminal Code, which appears to prohibit unregistered organizations.  The amendments were signed into law by President Tokayev on May 4, 2020.  The law removes the requirement of affiliation with a large labor union for local labor unions.  Other changes include softening restrictions on strikes.  Workers employed in the railway, transport and communications, civil aviation, healthcare, and public utilities sectors may strike, if they maintain minimum services for the population, that is, provided there is no harm caused to other people.  The law also reduces the penalty for calls to continue strikes declared illegal by a court.  If such calls do not result in a material violation of rights and interests of other people, they will be classified as criminal misconduct, and penalty will be limited to fines or hours of community service.  The previous law classified such calls as criminal offences, and the penalties included restriction on freedom of movement or imprisonment.

Please see details at the Human Rights Report at: https://www.state.gov/reports/2019-country-reports-on-human-rights-practices/.

The official unemployment rate in Kazakhstan has regularly been near five percent in recent years.  In 2019, Kazakhstan’s unemployment rate stood at 4.8 percent, and youth unemployment rate was 3.7 percent.

The Overseas Private Investment Corporation (OPIC) and the government of Kazakhstan signed an Investment Incentive Agreement in 1992, and OPIC has been active in Kazakhstan since 1994.  In January 2018, OPIC signed a Memorandum of Understanding with KazakhInvest JSC to support U.S. investment in Kazakhstan and improve collaboration between the two countries.  The U.S. Development Finance Corporation (DFC), the successor of OPIC, seeks commercially viable projects in Kazakhstan’s private sector and offers a full range of investment insurance and debt/equity stakes.  Kazakhstan is also a member of the Multilateral Investment Guarantee Agency, which is part of the World Bank Group and provides political risk insurance for foreign investments in developing countries.

*The Statistic Committee and The National Bank of Kazakhstan

Economic Section at the U.S. Embassy in Nur-Sultan
3, Qoshkarbayev Str., Astana
+7 7172 70 21 00
InvestmentClimateKZ@state.gov
Country/Economy resources: American Chamber of Commerce (AmCham) in Kazakhstan www.amcham.kz 

Policies Towards Foreign Direct Investment

Historically, the Malaysian government has welcomed FDI as an integral component of its economic development. Over the last decade, the gradual liberalization of the economy and influx of FDI has led to the creation of new jobs and businesses and fueled Malaysia’s export-oriented growth strategy.  The Malaysian economy is highly dependent on trade.  According to World Bank data, the value of Malaysia’s imports and exports of goods and services as a share of GDP held steady at roughly 130 percent in 2018, more than double the global average.

In October 2019, the government introduced measures in its 2020 budget designed to streamline and further incentivize foreign investment, with special emphasis on investments being redirected from China as a result of shifting global supply chains.  The Malaysian government established the China Special Channel for the purpose of attracting these investments, an initiative being managed by InvestKL, an investment promotion agency under the Ministry of International Trade and Industry.  The government also established the National Committee on Investment, an investment approval body jointly chaired by the Minister of Finance and the Minister of International Trade and Industry, to expedite the regulatory process with respect to approving new investments.

Prior to the government transition in March, the previous government had announced plans to overhaul its existing incentive framework, including a revamp of the Promotion of Investments

Act of 1986 and incentives under the Income Tax Act of 1967.  It is unclear whether the new government will continue with this plan.

Malaysia has various national, regional, and municipal investment promotion agencies, including the Malaysian Investment Development Authority (MIDA) and InvestKL.  These agencies can assist with business strategy consultations, area familiarization, talent management programs, networking, and other post-investment services.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign and domestic private entities can establish and own business enterprises and engage in all forms of remunerative activity, with some exceptions.  Although Malaysia has taken steps to liberalize policies concerning foreign investment, there continue to exist requirements for local equity participation within specific sectors.  In 2009, Malaysia repealed Foreign Investment Committee (FIC) guidelines that limited transactions for acquisitions of interests, mergers, and takeovers of local companies by foreign parties.  However, certain business sectors, including logistics, industrial training, and distributive trade, are required to limit foreign equity participation when applying for operating licenses, permits and approvals.  Due to residual economic policies, this limitation most commonly manifests as a 70-30 equity split between foreign investors (maximum 70 percent) and Bumiputera (i.e., ethnic Malays and indigenous peoples) entities (minimum 30 percent).

Foreign investment in services, whether in sectors with no foreign equity caps or controlled sub-sectors, remain subject to review and approval by ministries and agencies with jurisdiction over the relevant sectors.  A key function of this review and approval process is to determine whether proposed investments meet the government’s qualifications for the various incentives in place to promote economic development goals.  The Ministerial Functions Act grants relevant ministries broad discretionary powers over the approval of investment projects.  Investors in industries targeted by the Malaysian government can often negotiate favorable terms with the ministries or agencies responsible for regulating that industry.  This can include assistance in navigating a complex web of regulations and policies, some of which can be waived on a case-by-case basis.  Foreign investors in non-targeted industries tend to receive less government assistance in obtaining the necessary approvals from various regulatory bodies and therefore can face greater bureaucratic obstacles.

Finance

Malaysia’s 2011-2020 Financial Sector Blueprint has produced partial liberalization within the financial services sector; however, it does not contain specific market-opening commitments or timelines.  For example, the services liberalization program that started in 2009 raised the limit of foreign ownership in insurance companies to 70 percent.  However, Bank Negara Malaysia, Malaysia’s central bank, would allow a greater foreign ownership stake if the investment is determined to facilitate the consolidation of the industry.  The latest Blueprint helped to codify the case-by-case approach.  Under the Financial Services Act passed in late 2012, issuance of new licenses will be guided by prudential criteria and the “best interests of Malaysia,” which may include consideration of the financial strength, business record, experience, character and integrity of the prospective foreign investor, soundness and feasibility of the business plan for the institution in Malaysia, transparency and complexity of the group structure, and the extent of supervision of the foreign investor in its home country.  In determining the “best interests of Malaysia,” BNM may consider the contribution of the investment in promoting new high value-added economic activities, addressing demand for financial services where there are gaps, enhancing trade and investment linkages, and providing high-skilled employment opportunities.  BNM, however, has never defined criteria for the “best interests of Malaysia” test, and no firms have qualified.

While there has been no policy change in terms of the 70 percent foreign ownership cap for insurance companies, the government did agree to let one foreign owned insurer maintain a 100 percent equity stake after that firm made a contribution to a health insurance scheme aimed at providing health coverage to lower income Malaysians.

BNM currently allows foreign banks to open four additional branches throughout Malaysia, subject to restrictions, which include designating where the branches can be set up (i.e., in market centers, semi-urban areas and non-urban areas).  The policies do not allow foreign banks to set up new branches within 1.5 km of an existing local bank.  BNM also has conditioned foreign banks’ ability to offer certain services on commitments to undertake certain back office activities in Malaysia.

Information & Communication

In 2012, Malaysia authorized up to 100 percent foreign equity participation among application service providers, network service providers, and network facilities providers.  An exception to this is national telecommunications firm Telekom Malaysia, which has an aggregate foreign share cap of 30 percent, or five percent for individual investors.

Manufacturing Industries

Malaysia permits up to 100 percent foreign equity participation for new manufacturing investments by licensed manufacturers.  However, foreign companies can face difficulties obtaining a manufacturing license and often resort to incorporating a local subsidiary for this purpose.

Oil and Gas

Under the terms of the Petroleum Development Act of 1974, the upstream oil and gas industry is controlled by Petroleum Nasional Berhad (PETRONAS), a wholly state-owned company and the sole entity with legal title to Malaysian crude oil and gas deposits.  Foreign participation tends to take the form of production sharing contracts (PSCs).  PETRONAS regularly requires its PSC partners to work with Malaysian firms for many tenders.  Non-Malaysian firms are permitted to participate in oil services in partnership with local firms and are restricted to a 49 percent equity stake if the foreign party is the principal shareholder.  PETRONAS sets the terms of upstream projects with foreign participation on a case-by-case basis.

Other Investment Policy Reviews

Malaysia’s most recent Organization for Economic Cooperation and Development (OECD) investment review occurred in 2013.  Although the review underscored the generally positive direction of economic reforms and efforts at liberalization, the recommendations emphasized the need for greater service sector liberalization, stronger intellectual property protections, enhanced guidance and support from Malaysia’s Investment Development Authority (MIDA), and continued corporate governance reforms.

Malaysia also conducted a WTO Trade Policy Review in February 2018, which incorporated a general overview of the country’s investment policies.  The WTO’s review noted the Malaysian government’s action to institute incentives to encourage investment as well as a number of agencies to guide prospective investors.  Beyond attracting investment, Malaysia had made measurable progress on reforms to facilitate increased commercial activity. Among the new trade and investment-related laws that entered into force during the review period were: the Companies Act, which introduced provisions to simplify the procedures to start a company, to reduce the cost of doing business, as well as to reform corporate insolvency mechanisms; the introduction of the goods and services tax (GST) to replace the sales tax; the Malaysian Aviation Commission Act, pursuant to which the Malaysian Aviation Commission was established; and various amendments to the Food Regulations.  Since the WTO Trade Policy Review, however, the new government has already eliminated the GST, and has revived the Sales and Services Tax, which was implemented on September 1, 2018.

http://www.oecd.org/investment/countryreviews.htm 

https://www.wto.org/english/tratop_e/tpr_e/tp466_e.htm 

Business Facilitation

The principal law governing foreign investors’ entry and practice in the Malaysian economy is the Companies Act of 2016 (CA), which entered into force on January 31, 2017 and replaced the Companies Act of 1965.  Incorporation requirements under the new CA have been further simplified and are the same for domestic and foreign sole proprietorships, partnerships, as well as privately held and publicly traded corporations. According to the World Bank’s Doing Business Report 2019, Malaysia streamlined the process of obtaining a building permit and made it faster to obtain construction permits; eliminated the site visit requirement for new commercial electricity connections, making getting electricity easier for businesses; implemented an online single window platform to carry out property searches and simplified the property transfer process; and introduced electronic forms and enhanced risk-based inspection system for cross-border trade and improved the infrastructure and port operation system at Port Klang, the largest port in Malaysia, thereby facilitating international trade; and made resolving insolvency easier by introducing the reorganization procedure.  These changes led to a significant improvement of Malaysia’s ranking per the Doing Business Report, from 24 to 15 in one year.

In addition to registering with the Companies Commission of Malaysia, business entities must file: 1) Memorandum and Articles of Association (i.e., company charter); 2) a Declaration of Compliance (i.e., compliance with provisions of the Companies Act); and 3) a Statutory Declaration (i.e., no bankruptcies, no convictions).  The registration and business establishment process takes two weeks to complete, on average. The new government repealed GST and installed a new sales and services tax (SST), which began implementation on September 1, 2018.

Beyond these requirements, foreign investors must obtain licenses.  Under the Industrial Coordination Act of 1975, an investor seeking to engage in manufacturing will need a license if the business claims capital of RM2.5 million (approximately USD 641,000) or employs at least 75 full-time staff.  The Malaysian Government’s guidelines for approving manufacturing investments, and by extension, manufacturing licenses, are generally based on capital-to-employee ratios. Projects below a threshold of RM55,000 (approximately USD 14,100) of capital per employee are deemed labor-intensive and will generally not qualify.  Manufacturing investors seeking to expand or diversify their operations need to apply through MIDA.

Manufacturing investors whose companies have annual revenue below RM50 million (approximately USD12.8 million) or with fewer than 200 full-time employees meet the definition of small and medium size enterprises (SMEs) and will generally be eligible for government SME incentives.  Companies in the services or other sectors that have revenue below RM20 million (approximately USD5.1 million) or fewer than 75 full-time employees also meet the SME definition.

[Reference]

• http://www.mida.gov.my/home/getting-started/posts/  – The Malaysian Investment Development Authority’s starting point for prospective foreign investors. Select the “General Guidelines and Facilities” tab.
• http://www.ssm.com.my/en  – The Malaysian Companies Commission homepage for registering sole proprietorships, partnerships, and companies.
• http://www.mdec.my/  – The Malaysia Digital Economy Corporation (MDEC) is responsible for governing the Multimedia Super Corridor (MSC), the initiative to attract investment in information and communications technologies.
• http://www.skmm.gov.my/Sectors/Broadcasting.aspx  – The Malaysian Communications and Multimedia Commission’s page for requirements in the communications sector.
• http://www.moh.gov.my/english.php/pages/view/160  – The Ministry of Health’s FAQs on liberalization of medical services.
• http://www.doingbusiness.org/content/dam/doingBusiness/country/m/malaysia/MYS.pdf 
• http://iab.worldbank.org 
• http://ger.co/how-it-works/information-portals 

Outward Investment

While the Malaysian government does not promote or incentivize outward investment, a number of Government-Linked companies, pension funds, and investment companies do have investments overseas.  These companies include the sovereign wealth fund of the Government of Malaysia, Khazanah Nasional Berhad; KWAP, Malaysia’s largest public services pension fund; and the Employees’ Provident Fund of Malaysia.  Government owned oil and gas firm Petronas also has investments in several regions outside Asia.

As a member of ASEAN, Malaysia is a party to trade agreements with Australia and New Zealand; China; India; Japan; and the Republic of Korea. During the review period, the ASEAN-India Agreement was expanded to cover trade in services. Malaysia also has bilateral FTAs with Australia; Chile; India; Japan; New Zealand; Pakistan; and Turkey.

Reference: https://www.wto.org/english/tratop_e/tpr_e/s366_sum_e.pdf 

Malaysia has bilateral investment treaties with 36 countries, but not yet with the United States.  Malaysia does have bilateral “investment guarantee agreements” with over 70 economies, including the United States. The Government reports that 65 of Malaysia’s existing investment agreements contain Investor State Dispute Settlement (ISDS) provisions.  Malaysia has double taxation treaties with over 70 countries, though the double taxation agreement with the U.S. currently is limited to air and sea transportation.

Transparency of the Regulatory System

In July 2013, the Malaysian government accelerated its efforts to modernize the regulatory processes in the country by releasing the National Policy on Development and Implementation of Regulations (NPDIR), a roadmap to achieving Good Regulatory Practice (GRP).  Under the NPDIR, the federal government formalized a comprehensive approach to improve the efficiency and transparency of the country’s regulatory framework.  The benefits to the private sector thus far have included a streamlining of project approval requirements and fees (to the point that Malaysia ranked 2nd in the World Bank’s 2020 Doing Business report on ease of “dealing with construction permits”), a greater role in the lawmaking process, and improved standardization and transparency in all phases of regulatory proceedings.  The main components of the policy are: 1) the requirement of a Regulatory Impact Assessment (RIA) (a cost-benefit analysis of all newly proposed regulations) with each new piece of regulation; and 2) the formalization of a public consultation process to take the views of stakeholders into account while formulating new legislation.  Under the NPDIR, the government has committed to reviewing all new regulations every five years to determine which ones need to be adjusted or eliminated.

In furtherance of the NPDIR, the Malaysian government published four circulars in 2013 and 2014 to explain the methodology and implementation of their new strategy.  These four documents laid out a clear framework toward increasing accountability, standardization, and transparency, as well as explaining enforcement and compliance mechanisms to be established.  Throughout its various agencies, the government of Malaysia has taken steps to actualize these circulars.  Ministries and agencies use their respective websites to publish the text and or summaries of proposed regulations prior to enactment, albeit with varying levels of consistency.  Further, Malaysia’s procurement principles include adherence to open and fair competition, public accountability, transparency, and value for money.

Despite these efforts to foster inclusion, fairness, and transparency, considerable room for improvement exists.  The Malaysian government’s 2018 Report on Modernization (sic) of Regulations emphasized the need to “Establish an accountability mechanism for the implementation of regulatory reviews by the government.”  Many foreign investors echo this lack of accountability and criticize the opacity in the government decision-making process.  One major area of concern for foreign investors remains government procurement policy, as non-Malaysian companies claim to have lost bids against Bumiputera-owned (ethnic Malay) companies despite offering better products at lower costs.  Such results are due to the government’s preference policy to facilitate greater Bumiputera participation in the private sector.  This preference policy is manifested through set-aside contracts for Bumiputera suppliers and contractors, and through the use of preferential price margins to increase the competitiveness of Bumiputera bidders.

Malaysia has a three-tiered system of legislation: federal-level (Parliament), State-level, and local-level.   Federal and state-level legislation derive their authority from the Malaysian Constitution, specifically Articles 73-79.  Parliament has the exclusive power to make laws over matters including trade, commerce and industry, and financial matters.  Parliament can delegate its authority to administrative agencies, states, and local bodies through Acts.  States have the power to make laws concerning land, local government, and Islamic courts.  Local legislative bodies derive their authority from Acts promulgated by Parliament, most notably the Local Government Act of 1976.  Local authorities have the ability to issue by-laws concerning local taxation and land use.  For foreign investors, the Parliament is the most relevant legislating body, as it governs issues related to trade, and because Article 75 of the Constitution states that in a conflict of laws between state and federal-level legislatures, the federal laws win out.

It is also important to note the role of the administrative state in the promulgation of new laws and regulations in Malaysia.  Pursuant to the Interpretation Act of 1948 and 1967,

“Any proclamation, rule, regulation, order, notification, bye-law, or other instrument made under any Act, Enactment, Ordinance or other lawful authority and having legislative effect.”  Thus, the various ministries and agencies can be delegated lawmaking authority by an Act of a legislature with the legal right to make laws.

The Malaysian government’s strides toward improving transparency are evident in its embrace of internationally accepted standards in various highly regulated fields, including auditing, accounting, and law.  In that vein, the Malaysian Accounting Standards Board (MASB) introduced the Malaysian Financial Reporting Standards (MFRS) framework, which came into effect on January 1, 2012.  The MFRS framework is fully compliant with the International Financial Reporting Standards (IFRS) framework; this compliance serves to enhance the credibility and transparency of financial reporting in Malaysia.  According to the World Economic Forum’s 2019 Global Competitiveness Report (the “WEF 2019 Report”), Malaysia ranks 29th out of 141 countries in terms of its strength of auditing and accounting standards.

Specifically regarding auditing, the Malaysian Institute of Accountants (MIA) has the authority to set standards.  The MIA’s Auditing and Assurance Standards Board (AASB) reviews standards and technical pronouncements issued by the International Auditing and Assurance Standards Board (IAASB), which sets International Standards on Auditing (ISAs) that have been adopted in more than 110 jurisdictions.

Publicly listed companies in Malaysia must comply with standard international reporting requirements.  The IFRS framework converged with the Malaysian auditing framework in 2012, compelling compliance by Malaysian publicly listed companies.  The IFRS framework has obtained force of law through Section 7 of the Financial Reporting Act (FRA) of 1997, which allows the MASB to issue approved accounting standards for application in Malaysia.  The FRA requires that financial statements prepared or lodged with the Central Bank, Securities Commission, or Registrar of Companies are required to comply with the standards issued by MASB.  Thus, the MASB’s adoption of the IFRS framework is legally binding.

In theory, pieces of legislation are to be made available for public comment through a multi-stage system of rulemaking.  The Malaysia Productivity Corporation (MPC) published the Guideline on Public Consultation Procedures in 2014 (the “Guideline”), which expanded upon information contained in the Best Practice Regulation Handbook of 2013 in furtherance of GRP.  The Guideline clarifies the roles of government and stakeholders in the consultation process and provides the guiding principles for Malaysia’s public consultation approach.  Additionally, the Guideline provides robust examples of the information that should be included in consultation papers, furnishes information on enforcement, and details the timeline of the consultation process.  As it pertains to foreign investment, the consultation procedures apply to investment laws and regulations, which usually fall under the purview of the Malaysian Securities Commission (SC), the Bursa Malaysia, or the Malaysian Central Bank.  The SC, for example, keeps public consultation papers on its website, easily accessible by stakeholders.  These papers generally contain the rationale for the proposed regulations, as well as potential impacts, and provide a list of questions for stakeholders to explain their views to regulators.

The public is also engaged in the public consultation process through the increased role of PEMUDAH (the Special Task Force to Facilitate Business), which was founded in 2007 to serve as a bridge between government, businesses, and civil society organizations.  PEMUDAH promotes the understanding of regulatory requirements that impact economic activities, by addressing unfair treatment resulting from inconsistencies in enforcement and implementation.  PEMUDAH plays an advocacy role in various points in the regulatory implementation process; it provides recommendations from the private sector to regulators before new regulations are implemented, and monitors enactment of existing pieces of regulation.

Despite the relative robustness of the Guideline, and despite the significant steps forward Malaysia has taken to reduce the regulatory burden on industry, obstacles remain.  There are frequent inconsistencies between different ministries in their implementation of the public consultation procedures, as well as in their respective interpretations of how regulations are to be applied.  Adding to the difficulty is the complicated relationship between state-level and federal-level legislation, which can overlap on a range of issues and lead to inefficiencies for investors.

There is a non-governmental website that publishes Malaysian bills and amendments from 2013 onward: https://www.cljlaw.com/?page=latestmybill&year=2019.  The site publishes the full text of the documents.  However, to the best of our knowledge, no such government-run clearinghouse of historical regulatory action exists.  However, Malaysia took a large step forward on this front in 2019, as in association with the World Bank, the MPC created a website that contains all ongoing pieces of legislation and allows public comment thereon.  The website, called the Uniform Public Consultation Portal (http://upc.mpc.gov.my/csp/sys/bi/%25cspapp.bi.index.cls?home=1), does not appear to contain legislation that was completed or implemented before 2019, but is a positive move toward standardizing and emphasizing the public consultation process.  The website is user-friendly and allows searching by due date, implementing agency, and phase of consultation.

Malaysia has a multi-faceted approach to ensuring governmental compliance with regulatory requirements.  The most important enforcement mechanism is access to judicial review.  The WEF 2019 Report lists Malaysia as the 12th ranked country in efficiency of the legal framework in challenging regulations.  Through ease in accessing administrative and judicial courts, aggrieved parties in Malaysia are able to compel action by the regulator.  Additionally, PEMUDAH (the Malaysian government’s Special Task Force to Facilitate Business) serves as an advocacy role during the various phases of the consultation process to ensure that the private sector’s voice is being heard.

Throughout the administrative state, various avenues exist through which aggrieved parties may seek recourse.  Different governmental organisms have their own enforcement mechanisms to handle specific issues they face.  For instance, the Central Bank has a dedicated “Complaints Unit,” which deals with consumer complaints against banking institutions.  The Bank lists enforcement options as “a public or private reprimand; an order to comply; an administrative and civic penalty; restitution to customer; or prosecution.  By contrast, the Inland Revenue Board of Malaysia (tax agency) has a an organism called the Special Commissioners of Income Tax, to which taxpayers may file appeals concerning judgments and new regulations.  The Malaysian Companies Commission (which regulates laws relating to companies registered in Malaysia) is also engaged in enforcement proceedings, as is the Malaysian Securities Commission.  On matters of procurement, aggrieved bidders may complain to the Public Complaints Bureau, the Malaysian Anti-Corruption Commission, the Malaysian Competition Commission, or the National Audit Department.

In addition to the various agency-led enforcement mechanisms, aggrieved parties may also go through administrative courts.  The rulings of these courts have force of law pursuant to various Acts of Parliament, and Malaysia has taken measures to increase their efficacy in order to improve its reputation as an international business hub.  The decisions of these administrative courts are subject to judicial review on grounds of illegality, irrationality, and procedural impropriety.

Reference:

• http://rulemaking.worldbank.org/  provides data for 185 economies on whether governments publish or consult with public about proposed regulations.

International Regulatory Considerations

Malaysia is one of 10 Member States that constitute the Association of Southeast Asian Nations (ASEAN).  On December 31, 2015, the ASEAN Economic Community formally came into existence. ASEAN’s economic policy leaders meet regularly to discuss promoting greater economic integration within the 10-country bloc.  Although already robust, Member States have prioritized steps to facilitate a greater flow of goods, services, and capital.  No regional regulatory system is in place.  As a member of the WTO, Malaysia provides notification of all draft technical regulations to the Committee on Technical Barriers to Trade.

Legal System and Judicial Independence

Malaysia’s legal system consists of written laws, such as the federal and state constitutions and laws passed by Parliament and state legislatures, and unwritten laws derived from court cases and local customs. The Contract Law of 1950 still guides the enforcement of contracts and resolution of disputes.  States generally control property laws for residences, although the Malaysian government has recently adopted measures, including high capital gains taxes, to prevent the real estate market from overheating.  Nevertheless, through such programs as the Multimedia Super Corridor, Free Commercial Zones, and Free Industrial Zones, the federal government has substantial reach into a range of geographic areas as a means of encouraging foreign investment and facilitating ownership of commercial and industrial property.

In 2007 the judiciary introduced dedicated intellectual property (IP) courts that consist of 15 “Sessions Courts” that sit in each state, and six ‘High Courts’ that sit in certain states (i.e. Kuala Lumpur, Johor, Perak, Selangor, Sabah and Sarawak).  Malaysia launched the IP courts to deter the use of IP-infringing activity to fund criminal activity and to demonstrate a commitment to IP development in support of the country’s goal to achieve high-income status. These lower courts hear criminal cases, and have the jurisdiction to impose fines for IP infringing acts.  There is no limit to the fines that they can impose. The higher courts are designated for civil cases to provide damages incurred by rights holders once the damages have been quantified post-trial. High courts have the authority to issue injunctions (i.e., to order an immediate cessation of infringing activity) and to award monetary damages.

Labor Courts, which the Ministry of Human Resources describes as “a quasi-judicial system that serves as an alternative to civil claims,” provide a means for workers to seek payment of wages and other financial benefits in arrears.  Proceedings are generally informal but conducted in accordance with civil court principles. The High Court has upheld decisions which Labor Courts have rendered.

Certain foreign judgments are enforceable in Malaysia by virtue of the Reciprocal Enforcement of Judgments Act 1958 (REJA).  However, before a foreign judgment can be enforceable, it has to be registered. The registration of foreign judgments is only possible if the judgment was given by a Superior Court from a country listed in the First Schedule of the REJA: the United Kingdom, Hong Kong Special Administrative Region of the People’s Republic of China, Singapore, New Zealand, Republic of Sri Lanka, India, and Brunei.  If the judgment is not from a country listed in the First Schedule to the REJA, the only method of enforcement at common law is by securing a Malaysian judgment. This involves suing on the judgment in the local Courts as an action in debt.

To register a foreign judgment under the REJA, the judgment creditor has to apply for the same within six years after the date of the foreign judgment. Any foreign judgment coming under the REJA shall be registered unless it has been wholly satisfied, or it could not be enforced by execution in the country of the original Court.

Post is not aware of instances in which political figures or government authorities have interfered in judiciary proceedings involving commercial matters.

Laws and Regulations on Foreign Direct Investment

The Government of Malaysia established the Malaysia Investment Development Authority (MIDA) to attract foreign investment and to serve as a focal point for legal and regulatory questions.  Organized as part of the Ministry of International Trade and Industry (MITI), MIDA serves as a guide to foreign investors interested in the manufacturing sector and in many services sectors.  Regional bodies providing support to investors include: Invest Kuala Lumpur, Invest Penang, Invest Selangor, the Sabah Economic Development and Investment Authority (SEDIA), and the Sarawak Economic Development Corporation, among others.

As noted, the Ministerial Functions Act authorizes government ministries to oversee investments under their jurisdiction.  Prospective investors in the services sector will need to follow requirements set by the relevant Malaysian Government ministry or agency over the sector in question.

Competition and Anti-Trust Laws

On April 21, 2010, the Parliament of Malaysia approved two bills, the Competition Commission Act 2010 and the Competition Act 2010.  The Acts took effect January 1, 2012. The Competition Act prohibits cartels and abuses of a dominant market position but does not create any pre-transaction review of mergers or acquisitions.  Violations are punishable by fines, as well as imprisonment for individual violations. Malaysia’s Competition Commission has responsibility for determining whether a company’s “conduct” constitutes an abuse of dominant market position or otherwise distorts or restricts competition.  As a matter of law, the Competition Commission does not have separate standards for foreign and domestic companies. Commission membership consists of senior officials from the Ministry of International Trade and Industry (MITI), the Ministry of Domestic Trade, Cooperatives, and Consumerism (MDTCC), the Ministry of Finance, and, on a rotating basis, representatives from academia and the private sector.

In addition to the Competition Commission, the Acts established a Competition Appeals Tribunal (CAT) to hear all appeals of Commission decisions.  In the largest case to date, the Commission imposed a fine of RM10 million on Malaysia Airlines and Air Asia in September 2013 for colluding to divide shares of the air transport services market.  The airlines filed an appeal in March 2014. In February 2016, the CAT ruled in favor of the airlines in its first-ever decision and ordered the penalty to be set aside and refunded to both airlines.

Expropriation and Compensation

The Embassy is not aware of any cases of uncompensated expropriation of U.S.-held assets, or confiscatory tax collection practices, by the Malaysian government. The government’s stated policy is that all investors, both foreign and domestic, are entitled to fair compensation in the event that their private property is required for public purposes. Should the investor and the government disagree on the amount of compensation, the issue is then referred to the Malaysian judicial system.

Dispute Settlement

ICSID Convention and New York Convention

Malaysia signed the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID) on October 22, 1965, coming into force on October 14, 1966.  In addition, it is a contracting state of the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards since November 5, 1985.

Malaysia adopted the following measures to make the two conventions effective in its territory:

The Convention on the Settlement of Investment Disputes Act, 1966. (Act of Parliament 14 of 1966); the Notification on entry into force of the Convention on the Settlement of Investment Disputes Act, 1966. (Notification No. 96 of March 10, 1966); and the Arbitration (Amendment) Act, 1980. (Act A 478 of 1980).

Although the domestic legal system is accessible to foreign investors, filing a case generally requires any non-Malaysian citizen to make a large deposit before pursuing a case in the Malaysian courts.  Post is unaware of any U.S. investors’ recent complaints of political interference in any judicial proceedings.

References:

• https://icsid.worldbank.org/en/Pages/about/MembershipStateDetails.aspx?state=ST86 
• http://www.newyorkconvention.org/countries 

Investor-State Dispute Settlement

Malaysia’s investment agreements contain provisions allowing for international arbitration of investment disputes.  Malaysia does not have a Bilateral Investment Treaty with the United States.

Post has little data concerning the Malaysian Government’s general handling of investment disputes.  In 2004, a U.S. investor filed a case against the directors of the firm, who constituted the majority shareholders.  The case involves allegations by the U.S. investor of embezzlement by the other directors, and its resolution is unknown.

The Malaysian government has been involved in three ICSID cases — in 1994, 1999, and 2005.  The first case was settled out of court. The second, filed under the Malaysia-Belgo-Luxembourg Investment Guarantee Agreement (IGA), was concluded in 2000 in Malaysia’s favor.  The 2005 case, filed under the Malaysia-UK Bilateral Investment Treaty, was concluded in 2007 in favor of the investor. However, the judgment against Malaysia was ultimately dismissed on jurisdictional grounds, namely that ICSID was not the appropriate forum to settle the dispute because the transaction in question was not deemed an investment since it did not materially contribute to Malaysia’s development.  Nevertheless, Malaysian courts recognize arbitral awards issued against the government. There is no history of extrajudicial action against foreign investors.

International Commercial Arbitration and Foreign Courts

Malaysia’s Arbitration Act of 2005 applies to both international and domestic arbitration. Although its provisions largely reflect those of the UN Commission on International Trade Law (UNCITRAL) Model Law, there are some notable differences, including the requirement that parties in domestic arbitration must choose Malaysian law as the applicable law.  Although an arbitration agreement may be concluded by email or fax, it must be in writing: Malaysia does not recognize oral agreements or conduct as constituting binding arbitration agreements.

Many firms choose to include mandatory arbitration clauses in their contracts.  The government actively promotes use of the Kuala Lumpur Regional Center for Arbitration (http://www.rcakl.org.my), established under the auspices of the Asian-African Legal Consultative Committee to offer international arbitration, mediation, and conciliation for trade disputes.  The KLRCA is the only recognized center for arbitration in Malaysia. Arbitration held in a foreign jurisdiction under the rules of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States 1965 or under the United Nations Commission on International trade Law Arbitration Rules 1976 and the Rules of the Regional Centre for Arbitration at Kuala Lumpur can be enforceable in Malaysia.

Bankruptcy Regulations

Malaysia’s Department of Insolvency (MDI) is the lead agency implementing the Insolvency Act of 1967, previously known as the Bankruptcy Act of 1967.  On October 6, 2017, the Bankruptcy Bill 2016 came into force, changing the name of the previous Act, and amending certain terms and conditions. The most significant changes in the amendment include — (1) a social guarantor can no longer be made bankrupt; (2) there is now a stricter requirement for personal service for bankruptcy notice and petition; (3) introduction of the voluntary arrangement as an alternative to bankruptcy; (4) a higher bankruptcy threshold from RM30,000 to RM50,000; (5) introduction of the automatic discharge of bankruptcy; (6) no objection to four categories of bankruptcy for applying a discharge under section 33A (discharge of bankrupt by Certificate of Director General of Insolvency); (7) introduction of single bankruptcy order as a result of the abolishment of the current two-tier order system, i.e. receiving and adjudication orders; (8) creation of the Insolvency Assistance fund.

The distribution of proceeds from the liquidation of a bankrupt company’s assets generally adheres to the “priority matters and persons” identified by the Companies Act of 2016.  After the bankruptcy process legal costs are covered, recipients of proceeds are: employees, secured creditors (i.e., creditors of real assets), unsecured creditors (i.e., creditors of financial instruments), and shareholders.  Bankruptcy is not criminalized in Malaysia. The country ranks 46th on the World Bank Group’s Doing Business Rankings for Ease of Resolving Insolvency.

• http://www.mdi.gov.my/index.php/57-announcements/1182-announcement-on-the-enforcement-date-of-insolvency-act-1967 
• http://www.ssm.com.my/sites/default/files/companies_act_2016/aktabi_20160915_companiesact2016act777_0.pdf 
• http://www.doingbusiness.org/data/exploreeconomies/malaysia 

Investment Incentives

The Malaysian Government has codified the incentives available for investments in qualifying projects in target sectors and regions.  Tax holidays, financing, and special deductions are among the measures generally available for domestic as well as foreign investors in the following sectors and geographic areas: information and communications technologies (ICT); biotechnology; halal products (e.g., food, cosmetics, pharmaceuticals); oil and gas storage and trading; Islamic finance; Kuala Lumpur; Labuan Island (off Eastern Malaysia); East Coast of Peninsular Malaysia; Sabah and Sarawak (Eastern Malaysia); Northern Corridor.

The lists of application procedures and incentives available to investors in these sectors and regions can be found at: http://www.mida.gov.my/home/invest-in-malaysia/posts/ .

Foreign Trade Zones/Free Ports/Trade Facilitation

The Free Zone Act of 1990 authorized the Minister of Finance to designate any suitable area as either a Free Industrial Zone (FIZ), where manufacturing and assembly takes place, or a Free Commercial Zone (FCZ), generally for warehousing commercial stock.  The Minister of Finance may appoint any federal, state, or local government agency or entity as an authority to administer, maintain and operate any free trade zone.  Currently there are 13 FIZs and 12 FCZs in Malaysia.  In June 2006, the Port Klang Free Zone opened as the nation’s first fully integrated FIZ and FCZ, although the project has been dogged by corruption allegations related to the land acquisition for the site.  The government launched a prosecution in 2009 of the former Transport Minister involved in the land purchase process, though he was later acquitted in October 2013.

The Digital Free Trade Zone (DFTZ) is an initiative by the Malaysian Government, implemented through MDEC, launched in November 2017 with the participation of China’s Alibaba.  DFTZ aims to facilitate seamless cross-border trading and eCommerce and enable Malaysian SMEs to export their goods internationally. According to the Malaysian government, the DFTZ consists of an eFulfilment Hub to help Malaysian SMEs export their goods with the help of leading fulfilment service providers; and an eServices Platform to efficiently manage cargo clearance and other processes needed for cross-border trade.

For more information, please visit https://mydftz.com 

Raw materials, products and equipment may be imported duty-free into these zones with minimum customs formalities. Companies that export not less than 80 percent of their output and depend on imported goods, raw materials, and components may be located in these FZs.  Ports, shipping and maritime-related services play an important role in Malaysia since 90 percent of its international trade by volume is seaborne.  Malaysia is also a major transshipment center.

Goods sold into the Malaysian economy by companies within the FZs must pay import duties.  If a company wants to enjoy Common External Preferential Tariff (CEPT) rates within the ASEAN Free Trade Area, 40 percent of a product’s content must be ASEAN-sourced.  In addition to the FZs, Malaysia permits the establishment of licensed manufacturing warehouses outside of free zones, which give companies greater freedom of location while allowing them to enjoy privileges similar to firms operating in an FZ. Companies operating in these zones require approval/license for each activity. The time needed to obtain licenses depends on the type of approval and ranges from two to eight weeks.

Performance and Data Localization Requirements

Fiscal incentives granted to both foreign and domestic investors historically have been subject to performance requirements, usually in the form of export targets, local content requirements and technology transfer requirements.  Performance requirements are usually written into the individual manufacturing licenses of local and foreign investors.

The Malaysian government extends a full tax exemption incentive of fifteen years for firms with “Pioneer Status” (companies promoting products or activities in industries or parts of Malaysia to which the government places a high priority), and ten years for companies with “Investment Tax Allowance” status (those on which the government places a priority, but not as high as Pioneer Status).  However, the government appears to have some flexibility with respect to the expiry of these periods, and some firms reportedly have had their pioneer status renewed. Government priorities generally include the levels of value-added, technology used, and industrial linkages.  If a firm (foreign or domestic) fails to meet the terms of its license, it risks losing any tax benefits it may have been awarded.  Potentially, a firm could lose its manufacturing license.  The New Economic Model stated that in the long term, the government intends gradually to eliminate most of the fiscal incentives now offered to foreign and domestic manufacturing investors.  More information on specific incentives for various sectors can be found at www.mida.gov.my.

Malaysia also seeks to attract foreign investment in the information technology industry, particularly in the Multimedia Super Corridor (MSC), a government scheme to foster the growth of research, development, and other high technology activities in Malaysia.  However, since July 1, 2018, the Government decided to put on hold the granting of MSC Malaysia Status and its incentives, including extension of income tax exemption period, or adding new MSC Malaysia Qualifying Activities in order to review and amend Malaysia’s tax incentives.  While the MSC Malaysia Status Services Incentive was published on December 31, 2018, the MSC Malaysia Status IP Incentive policy is still under review.  For further details on incentives, see www.mdec.my.  The Malaysia Digital Economy Corporation (MDEC) approves all applications for MSC status.  For more information please visit: https://www.mdec.my/msc-malaysia .

In the services sector, the government’s stated goal is to attract foreign investment in regional distribution centers, international procurement centers, operational headquarter research and development, university and graduate education, integrated market and logistics support services, cold chain facilities, central utility facilities, industrial training, and environmental management.  To date, Malaysia has had some success in attracting regional distribution centers, global shared services offices, and local campuses of foreign universities.  For example, GE and Honeywell maintain regional offices for ASEAN in Malaysia.  In 2016, McDermott moved its regional headquarters to Malaysia and Boston Scientific broke ground on a medical device manufacturing facility.

Malaysia seeks to attract foreign investment in biotechnology but sends a mixed message on agricultural and food biotechnology.  On July 8, 2010, the Malaysian Ministry of Health posted amendments to the Food Regulations 1985 [P.U. (A) 437/1985] that require strict mandatory labeling of food and food ingredients obtained through modern biotechnology.  The amendments also included a requirement that no person shall import, prepare, or advertise for sale, or sell any food or food ingredients obtained through modern biotechnology without the prior written approval of the Director.  There is no ‘threshold’ level on the labeling requirement.  Labeling of “GMO Free” or “Non-GMO” is not permitted.  The labeling requirements only apply to foods and food ingredients obtained through modern biotechnology but not to food produced with GMO feed.  The labeling regulation was supposed to go into force in 2014, but remains to date with no date announced.  A copy of the law and regulations respectively can be found at: http://www.biosafety.nre.gov.my/BiosafetyAct2007.html , and http://www.biosafety.nre.gov.my/BIOSAFETY percent20REGULATIONS percent202010.pdf .

Malaysia has not implemented measures amounting to “forced localization” for data storage.  Bank Negara Malaysia has amended its recent Outsourcing Guidelines to remove the original data localization requirement and shared that it will similarly remove the data localization elements in its upcoming Risk Management in Technology framework.  The government has provided inducements to attract foreign and domestic investors to the Multimedia Super Corridor but does not mandate use of onshore providers.  Companies in the information and communications technology sector are not required to hand over source code.

Real Property

Land administration is shared among federal, state, and local government.  State governments have their own rules about land ownership, including foreign ownership.  Malaysian law affords strong protections to real property owners. Real property titles are recorded in public records and attorneys review transfer documentation to ensure efficacy of a title transfer.  There is no title insurance available in Malaysia. Malaysian courts protect property ownership rights.  Foreign investors are allowed to borrow using real property as collateral.  Foreign and domestic lenders are able to record mortgages with competent authorities and execute foreclosure in the event of loan default.  Malaysia ranks 29th (ranked 42nd in 2018) in ease of registering property according to the Doing Business 2019 report, right behind Finland and ahead of Hungary, thanks to changes it made to its registration procedures.

[Reference]

http://www.doingbusiness.org/rankings 

Intellectual Property Rights

In December 2011, the Malaysian Parliament passed amendments to the copyright law designed to bring the country into compliance with the WIPO Copyright Treaty and the WIPO Performance and Phonogram Treaty, define Internet Service Provider (ISP) liabilities, and prohibit unauthorized recording of motion pictures in theaters.  Malaysia subsequently acceded to the WIPO Copyright Treaty and the WIPO Performance and Phonogram Treaty in September 2012.  In addition, the Ministry of Domestic Trade, Cooperatives, and Consumerism (MDTCC) took steps to enhance Malaysia’s enforcement regime, including active cooperation with rights holders on matters pertaining to IPR enforcement, ongoing training of prosecutors for specialized IPR courts, and the 2013 reestablishment of a Special Anti-Piracy Taskforce.  On December 27, 2019, Malaysia’s new Trademarks Act came into force bringing Malaysia’s trademark protections in line with the Madrid Protocol for international registration of trademarks, allowing U.S. trademark holders to more easily register their trademarks within Malaysia.

The government, acting through the Property Association of Malaysia (MyIPO), is currently preparing an overhaul of the 1976 Trade Marks Act and revisions to the 1983 Patents Act and 1987 Copyright Act in an effort to bring the country’s IP rules in line with its adoption of the Doha Declaration on Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement. While some amendments are expected to bring it in closer adherence to global standards under proposed compulsory license provisions, Malaysian private enterprises would be able to export products produced under a compulsory license to foreign markets that also have compulsory licenses in place.

In response to trends of rising internet piracy, the interagency Special Anti-Piracy Task Force established a Special Internet Forensics Unit (SIFU) within MDTCC. The SIFU team’s responsibilities include monitoring for sites suspected of being, or known as, purveyors of infringing content.  This organization follows MDTCC’s practice of launching investigations based on information and complaints from legitimate host sites and content providers. Capacity building remains a priority for the SIFU.  Coordination with the Malaysian Communications and Multimedia Commission (MCMC), which has responsibility for overall regulation of internet content, has been improving according to many rights holders in Malaysia.  The Malaysian Communications and Multimedia Commission (MCMC) is proactively combatting illegal streaming sites which provide content that breaches copyrights and is taking action against owners of non-certified Android TV boxes that are used to stream illegal content.

Despite Malaysia’s success in improving IPR enforcement, key issues remain. There is relatively widespread availability of pirated and counterfeit products in Malaysia and there are concerns that the Royal Malaysian Customs Department (RMC) is not always effectively identifying counterfeit goods in transit.  According to U.S. Customs and Border Protection (CBP)’s statistics, Malaysia ranked as the ninth largest source country for IPR seizures. Although the $4,647,447 USD worth of items seized during fiscal year 2018 was a significant increase from the previous reporting year, it still only represents a small fraction of total seized counterfeit goods.  Limited interagency cooperation and a lack a knowledge of IPR laws among RMC officers remain impediments to effective enforcement.  The MTDCC’s Enforcement Division effectively targeted counterfeit alcohol, tobacco, and other products sold domestically; however, cases are not always brought to prosecution effectively.

The September 2017 authorization of a compulsory license for U.S. pharmaceutical Gilead Sciences’ sofosbuvir, a medicine used to treat the hepatitis C virus infection, has raised serious concerns among rights holders due to the lack of transparency and due process. While the compulsory license is set to expire in October 2020, the government has not taken proactive steps to end the compulsory license following the expiration of its tender with the foreign company producing Malaysia’s sofosbuvir medication.

USTR conducted an Out-of-Cycle Review of Malaysia in 2019 to consider the extent to which Malaysia is providing adequate and effective IP protection and enforcement, including with respect to patents. During this review, the United States and Malaysia have held numerous consultations to resolve outstanding issues. In 2020, USTR extended the out of cycle review until November 2020.

The United States continues to encourage Malaysia to accede to the WIPO Budapest Treaty on the International Recognition of the Deposit of Microorganisms for the Purposes of Patent Procedure.  Additionally, the United States urges Malaysia to provide effective protection against unfair commercial use and unauthorized disclosure of test or other data generated to obtain marketing approval for pharmaceutical products, and an effective system to address patent issues expeditiously in connection with applications to market pharmaceutical products.

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

Capital Markets and Portfolio Investment

Foreigners may trade in securities and derivatives.  Malaysia houses one of Asia’s largest corporate bond markets and is the largest sukuk (Islamic bond) market in East Asia.  Both domestic and foreign companies regularly access capital in Malaysia’s bond market.  Malaysia provides tax incentives for foreign companies issuing Islamic bonds and financial instruments in Malaysia.

Malaysia’s stock market (Bursa Malaysia) is open to foreign investment and foreign corporation issuing shares.  However, foreign issuers remain subject to Bumiputera ownership requirements of 12.5 percent if the majority of their operations are in Malaysia.  Listing requirements for foreign companies are similar to that of local companies, although foreign companies must also obtain approval of regulatory authorities of foreign jurisdiction where the company was incorporated and valuation of assets that are standards applied in Malaysia or International Valuation Standards and register with the Registrar of Companies under the Companies Act 1965 or 2016.

Malaysia has taken steps to promote good corporate governance by listed companies.  Publicly listed companies must submit quarterly reports that include a balance sheet and income statement within two months of each financial quarter’s end and audited annual accounts for public scrutiny within four months of each year’s end.  An individual may hold up to 25 corporate directorships.  All public and private company directors are required to attend classes on corporate rules and regulations.

Legislation also regulates equity buybacks, mandates book entry of all securities transfers, and requires that all owners of securities accounts be identified.  A Central Depository System (CDS) for stocks and bonds established in 1991 makes physical possession of certificates unnecessary. All shares traded on the Bursa Malaysia must be deposited in the CDS.  Short selling of stocks is prohibited.

Money and Banking System

International investors generally regard Malaysia’s banking sector as dynamic and well regulated.  Although privately owned banks are competitive with state-owned banks, the state-owned banks dominate the market.  The five largest banks – Maybank, CIMB, Public Bank, RHB, and AmBank – account for an estimated 75 percent of banking sector loans.  According to the World Bank, total banking sector lending for 2017 was 140.27 percent of GDP, and 1.5 percent of the Malaysian banking sector’s loans were non-performing for 2017.

Bank Negara prohibits hostile takeovers of banks, but the Securities Commission has established non-discriminatory rules and disclosure requirements for hostile takeovers of publicly traded companies.

Foreign Exchange and Remittances

Foreign Exchange

In December 2016, the central bank, began implementing new foreign exchange management requirements.  Under the policy, exporters are required to convert 75 percent of their export earnings into Malaysian ringgit.  The goal of this policy was to deepen the market for the currency, with the goal of reducing exchange rate volatility.  The policy remains in place, with the Central Bank giving case-by-case exceptions.  All domestic trade in goods and services must be transacted in ringgit only, with no optional settlement in foreign currency.  The Central Bank has demonstrated little flexibility with respect to the ratio of earnings that exporters hold in ringgit.  Post is unaware of any instances where the requirement for exporters to hold their earnings in ringgit has impeded their ability to remit profits to headquarters.

Remittance Policies

Malaysia imposes few investment remittances rules on resident companies.  Incorporated and individual U.S. investors have not raised concerns about their ability to transfer dividend payments, loan payments, royalties or other fees to home offices or U.S.-based accounts.  Tax advisory firms and consultancies have not flagged payments as a significant concern among U.S. or foreign investors in Malaysia.  Foreign exchange administration policies place no foreign currency asset limits on firms that have no ringgit-denominated debt.  Companies that fund their purchases of foreign exchange assets with either onshore or offshore foreign exchange holdings, whether or not such companies have ringgit-denominated debt, face no limits in making remittances.  However, a company with ringgit-denominated debt will need approval from the Central Bank for conversions of RM50 million or more into foreign exchange assets in a calendar year.

The Treasury Department has not identified Malaysia as a currency manipulator.

Sovereign Wealth Funds

The Malaysian Government established government-linked investment companies (GLICs) as vehicles to harness revenue from commodity-based industries and promote growth in strategic development areas.  Khazanah is the largest of the GLICs, and the company holds equity in a range of domestic firms as well as investments outside Malaysia.  The other GLICs – Armed Forces Retirement Fund (LTAT), National Capital (PNB), Employees Provident Fund (EPF), Pilgrimage Fund (Tabung Haji), Public Employees Retirement Fund (KWAP) – execute similar investments but are structured as savings vehicles for Malaysians.  Khazanah follows the Santiago Principles and participates in the International Forum on Sovereign Wealth Funds.

Khazanah was incorporated in 1993 under the Companies Act of 1965 as a public limited company with a charter to promote growth in strategic industries and national initiatives.  As of December 31, 2018, Khazanah reported a 21 percent drop in its net worth and a decline in its “realizable” assets to RM136 billion (from USUSD 39.3 billion to USUSD 32.9 billion).  Khazanah also recorded a pre-tax loss of RM6.27 billion (USUSD 1.52 billion) compared to a pre-tax profit of RM2.89 billion (USUSD 723 million) the previous year.  The sectors comprising its major holdings include telecommunications and media, airports, banking, real estate, health care, and the national energy utility.  According to its Annual Review 2019 presentation, in 2018, Khazanah’s mandate and objectives were refreshed, and the company will now pursue its two distinct objectives (commercial vs. strategic) through a dual-fund investment structure: (1) an intergenerational wealth fund to meet its commercial objectives (which will include public and private assets); and (2) a strategic fund to meet its strategic objective (which will include strategic assets and developmental ones).

• https://www.khazanah.com.my/khazanah/files/60/60f2c749-314c-4a89-831a-c28bd45024e6.pdf 
• https://www.khazanah.com.my/getmedia/806f3b69-9bb5-452d-a3fa-ce7e77e612b4/Khazanah-Annual-Review-2019-Presentation-Deck-5-Mar-2019_2.aspx 

State-owned enterprises which in Malaysia are called government-linked companies (GLCs), play a very significant role in the Malaysian economy.  Such enterprises have been used to spearhead infrastructure and industrial projects.  A 2017 analysis by the University of Malaya estimated that the government owns approximately 42 percent of the value of firms listed on the Bursa Malaysia through its seven Government-Linked Investment Corporations (GLICs), including a majority stake in a number of companies.  Only a minority portion of stock is available for trading for some of the largest publicly listed local companies.  Khazanah, often considered the government’s sovereign wealth fund, owns stakes in companies competing in many of the country’s major industries including aerospace, construction, energy, finance, information & communication, and marine technologies.  The Prime Minister  chairs Khazanah’s Board of Directors.  PETRONAS, the state-owned oil and gas company, is Malaysia’s only Fortune Global 500 firm.

As part of its Government Linked Companies (GLC) Transformation Program, the Malaysian Government embarked on a two-pronged strategy to reduce its shares across a range of companies and to make those companies more competitive through improved corporate governance.  The Transformation Program pushes for more independent and professionalized board membership, but the OECD noted in 2018 that in practice shareholder oversight is lax an government officials exert influence over corporate boards.

Among the notable divestments of recent years, Khazanah offloaded its stake in the national car company Proton to DRB-Hicom Bhd in 2012.  In 2013, Khazanah divested its holdings in telecommunications services giant Time Engineering Bhd.  Khazanah’s annual report for 2017 noted only that the fund had completed 12 divestments that produced a gain of RM 2.5 billion (USD 625 million).  In 2018, Khazanah partially divested its shares in IHH Healthcare Berhad, saw two successful IPOs, and issued USUSD 321 million in exchangeable sukuk.  However, significant losses at domestic companies including at Axiata, Telekom Malaysia, Tenaga Nasional, IHH Healthcare Berhad, CIMB Bank, and Malaysia Airports led to the pre-tax loss of USD  1.52 billion the company experienced in 2018.  In April 2019, Khazanah sold 1.5 percent of its stake in Tenaga Nasional on Bursa Malaysia, after which Khazanah still owned 27.27 percent of the national electric company.  In its most recent annual review, Khazanah noted a 607% increase in divestment revenue from the prior year with total divestments for 2019 of RM 9.9 billion (USD 2.25 billion).

Reference: https://www.khazanah.com.my/Media-Downloads/Downloads 

GLCs with publicly traded shares must produce audited financial statements every year.  These SOEs must also submit filings related to changes in the organization’s management.  The SOEs that do not offer publicly traded shares are required to submit annual reports to the Companies Commission.  The requirement for publicly reporting the financial standing and scope of activities of SOEs has increased their transparency.  It is also consistent with the OECD’s guideline for Transparency and Disclosure.  Moreover, many SOEs prioritize operations that maximize their earnings.

The close relationships SOEs have with senior government officials, however, blur the line between strictly commercial activity pursued for its own sake and activity that has been directed to advance a policy interest.  For example, Petroliam Nasional Berhad (PETRONAS) is both an SOE in the oil and gas sector and the regulator of the industry.  Malaysia Airlines (MAS), in which the government previously held 70 percent but now holds 100 percent, required periodic infusions of resources from the government to maintain the large numbers of company’s staff and senior executives.  As of April, 2020, the government’s sovereign wealth fund, Khazanah, has shortlisted 4 of 9 bids to acquire the airline.

The Ministry of Finance holds significant minority stakes in five companies including a 50% stake in the financial guarantee insurer Danajamin Nasional Berhad.  The government also holds a golden share in 32 companies from key industries such as aerospace, marine technology, energy industries and ports.  The Ministry of Finance maintains a list of 70 companies directly controlled by the Minister of Finance Incorporated, known as MOF Inc, the largest Government Linked Investment Company (GLIC).  The seven GLICs in Malaysia are also listed.  However, a comprehensive list of the more than 200 GLCs that are controlled by these seven investment companies is not readily available.

https://www1.treasury.gov.my/index.php/en/contactus/faqs/gic.html 

With formal and informal ties between board members and government, Malaysian SOEs (GLCs) may have access to capital and financial protection from bankruptcy as well as reduced pressure to deliver profits to government shareholders.  The legal framework establishing GLCs under Malaysian law specifically seeks economic opportunity for Bumiputera entrepreneurs. There is some empirical evidence, published by the Asian Development Bank, that SOEs crowd out private investment in Malaysia.

Malaysia participates in OECD corporate governance engagements and continues to work on full adherence to the OECD Guidelines on Corporate Governance for SOEs through its Government Linked Companies (GLC) Transformation Program.  The National Resource Governance Institute’s Resource Governance Index rates Malaysia as weak on governance of its oil and gas sector; however, Malaysia also ranks as 27^th among 89 rated countries, in the top third.

Privatization Program

In several key sectors, including transportation, agriculture, utilities, financial services, manufacturing, and construction, Government Linked Corporations (GLCs) continue to dominate the market.  However, the Malaysian Government remains publicly committed to the continued, eventual privatization, though it has not set a timeline for the process and faces substantial political pressure to preserve the roles of the GLCs.  The Malaysian Government established the Public-Private Partnership Unit (UKAS) in 2009 to provide guidance and administrative support to businesses interested in privatization projects as well as large-scale government procurement projects.  UKAS, which used to be a part of the Office of the Prime Minister, is now under the Ministry of Finance.  UKAS oversees transactions ranging from contracts and concessions to sales and transfers of ownership from the public sector to the private sector.

Foreign investors may participate in privatization programs, but foreign ownership is limited to 25 percent of the privatized entity’s equity.  The National Development Policy confers preferential treatment to the Bumiputera, which are entitled to at least 30 percent of the privatized entity’s equity.

The privatization process is formally subject to public bidding.  However, the lack of transparency has led to criticism that the government’s decisions tend to favor individuals and businesses with close ties to high-ranking officials.

The development of RBC programs in Malaysia has transformed from a government-led initiative into a concept embraced by the private sector.  Through the efforts of the Bursa Malaysia and other governmental bodies, awareness of corporate responsibility now exists across wide swathes of the private sector in Malaysia.

The government initially viewed RBC through the lens of Corporate Social Responsibility (CSR) and philanthropic activities.  In 2006, the Malaysian Securities Commission published a CSR framework for all publicly listed companies (PLCs), which are required to disclose their CSR programs in their annual financial reports.  In 2007, the Women, Family and Community Ministry launched the Prime Minister’s CSR Awards to encourage the spread of CSR programs, and to honor those companies whose commitment to CSR had made a difference in their respective communities.

In 2011, the Malaysian government began to take a more holistic approach to RBC, using it as a way to facilitate change in Malaysian society.  That year the government launched the 1Malaysia Training Plan (SL1M), an employment incentive program that allows businesses to double the permitted tax deduction for expenses incurred in hiring and training graduates from rural areas and low-income families.  The Business Council for Sustainable Development Malaysia (BCSDM) (formerly known as the Board for Corporate Sustainability and Responsibility Malaysia) also supplanted the Institute for Corporate Responsibility Malaysia as the focal point for the country’s RBC programs.  This was an important development on the road to meeting international norms, as BCSDM is the local affiliate of the World Business Council for Sustainable Development, and aims to meet the World Bank’s Sustainable Development Goals.  Additionally, BCSDM has laid out its own Vision 2050 plan, which aims to facilitate an improvement in global living standards through the implementation of a series of environmentally responsible steps.

In the arena of Environmental, Social, and Governance (ESG) issues related to RBC, Bursa Malaysia has been the main catalyst in the drive to enhance corporate accountability.  In 2014, Bursa Malaysia launched the FTSE4Good Bursa Malaysia Index, which is composed of companies selected from the top 200 Malaysian stocks in the FTSE Bursa Malaysia EMAS Index.  These companies are screened in accordance with transparent and defined ESG criteria, and the index provides an avenue for investors to make ESG-focused investments and increase ESG exposure in their investment portfolios, thereby putting indirect pressure on companies to behave more responsibly.

In a subsequent step in 2015, Bursa Malaysia launched a Sustainability Framework, which was comprised of amendments to the Listing Requirement (which all PLCs must meet), and the publication of a Sustainability Reporting Guide Toolkit.  As part of their new responsibilities, PLCs were required to disclose sustainability statements in their annual reports, incorporating ESG issues related to their respective businesses.  In 2018 Bursa Malaysia launched a 2nd edition of the Sustainability Reporting Guidelines, which include recommendations for PLCs regarding how to integrate sustainability into their businesses, and how to conduct more extensive reporting on material Economic, Environmental, and Social (EES) risks and opportunities.

Various governmental entities have enacted measures to encourage RBC.  In 2015, SUHAKAM, the Malaysian Human Rights Commission, published a framework for a national plan of action on business and human rights (BHR Framework).  The goal of the BHR Framework was to facilitate the adoption and implementation of the UN Guiding Principles on Business and Human Rights by both state and non-state actors in Malaysia.  Subsequent to the creation of the BHR Framework, Parliament passed an amended Companies Act in 2016, which included the optional disclosure of a business review, containing information about: (i) environmental matters, including the impact of the company’s business on the environment; (ii) the company’s employees; and (iii) social and community issues.   In the wake of the Companies Act 2016, The Companies Commission of Malaysia similarly sought to push RBC, by developing a best practices circular that promotes adherence to international sustainability reporting standards.  This circular endorses specific international standards such as the Global Reporting Initiative (GRI) framework and the UN Guiding Principles on Business and Human Rights.

The push toward effectuating RBC by the government has not only involved human rights, but has also addressed environmental concerns.  The Ministry of Energy, Science, Technology, Environment & Climate Change (MESTECC) has published multiple roadmaps to that end, including: Green Technology Master Plan Malaysia 2017-2030; Malaysia’s Roadmap towards Zero Single-use Plastics 2018-2030; and National Energy Efficiency Master Plan.  Despite the efforts across multiple ministries to emphasize RBC, there is nothing in Malaysia’s official procurement policy that mentions it as a factor in government contracting.

In September 2019, U.S. Customs and Border Protection (CBP) issued a Withhold Release Order (WRO), thereby suspending imports of medical gloves from WRP Asia Pacific, a Malaysian manufacturer, citing widespread reports of the company’s use of forced labor to produce the gloves.  This came on the heels of a December 2018 report by The Guardian accusing WRP and another Malaysian glove manufacturer, Top Glove, of “forced labor, forced overtime, debt bondage, withheld wages and passport confiscation.”  Malaysia is the world’s largest exporter of medical gloves, and the U.S. is its largest export market, so the response from the Malaysian government to the WRO was prompt.   Soon after the WRO, then-Human Resources Minister M. Kulasegaran vowed to include a chapter on forced labor in the amended  Employment Act  to protect workers’ rights; however, the amendment to the Employment Act has not come before parliament.  Irrespective of the internal steps that the Malaysian government may have taken to codify protection of workers, CBP provided feedback to WRP to adjust its manufacturing and labor practices to ensure they are compliant with U.S. and international labor standards.  In March 2020, CBP revoked the WRO on WRP-produced rubber gloves, citing information “showing the company is no longer producing the rubber gloves under forced labor conditions.”

A 2019 chemical dumping incident paints a blurry picture regarding Malaysia’s ability to effectively and fairly enforce domestic laws on environmental protection.  In the state of Johor in March 2019, a lorry dumped a mixture of toxic chemicals into the Kim Kim River, causing the hospitalization of almost 3,000 individuals.  The overwhelming majority of those hospitalized did not get sick after the initial dumping, but rather days later aided by strong winds.  The authorities did not immediately remove the chemicals from the river due to the costliness of the procedure, leading to a political backlash.  The state government took straightforward legal steps against the responsible parties, and completed its investigation in a thorough and impartial manner.  The Johor government charged the driver of the lorry under the Environmental Quality Act 1974, and charged the owners of the factory responsible for the dumping pursuant to the Environment Quality Regulations (Scheduled Wastes) 2005 and Environmental Quality Regulations (Clean Air) Regulations 2014.

The Malaysian Securities Commission leads issues regarding corporate governance and shareholder protection.  In furtherance of its goal of safeguarding investors, in 2017 the SC released an updated version of the Malaysian Code of Corporate Governance (MCCG).  This -document includes principles on board leadership and effectiveness, audit and risk management, integrity in corporate reporting, and meaningful relationships with stakeholders.  The SC publishes an annual report called the CG Monitor to ascertain which of their suggested best practices in the MCCG are being implemented.  The CG Monitor evaluates issues ranging from executive compensation standards to the quality of disclosures made by PLCs.  The SC also issues policy papers on a range of related issues, including rules on takeovers, mergers, and acquisitions, with an eye on protecting shareholders.

Bursa Malaysia is similarly interested in ensuring shareholder protection, and has a dedicated chapter in its Listing Requirements to corporate governance.  This chapter lays out in detail the requirements for listed companies concerning board composition, rights of directors, and auditing practices.  The Listing Requirements circle back to the MCCG, and require that the board of PLCs disclose which of the best practices annunciated in the MCCG the company is following.

Promotion of RBC in Malaysia has been increasing due to pressure from institutional investors and government-linked investment funds.  In 2014, the Minority Shareholders Watch Group (an independent research organization on corporate governance matters, originally funded by four state-owned investment funds) (MSWG) and the SC worked together to draft the Malaysian Code for Institutional Investors (MCII).  The MCII includes six principles of effective stewardship by institutional investors, as well as guidance to facilitate implementation.   Furthermore, the MCII encourages institutional investors to invest responsibly by taking stock of the RBC and corporate governance standards of the company.  As a response to the MCII, the Institutional Investor Council (IIC) was formed in 2015.  The IIC is an industry-led initiative that represents the common interests of institutional investors in Malaysia, and promotes good governance (including ESG considerations) to PLCs.

The interest in RBC and good governance has taken hold not only in industry, but in governmental funds as well.  The government of Malaysia’s strategic investment fund (Khazanah Nasional Berhad), the government pension fund (KWAP), and the Employees Provident Fund (EPF) are signatories to the UN-supported Principles for Responsible Investment (PRI).  As signatories, they are required to carry out PRI principles, including taking ESG into consideration during the due diligence phase before making a potential investment, and ensuring that ESG best practices are met in companies in which they invest.

Post is not aware of any governmental interference in the efforts of regulators, business associations, and investors to improve responsible business practices amongst Malaysian corporations.

The Malaysian government established the Malaysian Anti-Corruption Commission (MACC) in 2008 and the Whistleblower Protection Act in 2010 and considers bribery a criminal act.  Malaysia’s anti-corruption law prohibits bribery of foreign public officials, permits the prosecution of Malaysians for offense committed overseas, prohibits bribes from being deducted from taxes, and provides for the seizure of property.

The MACC conducts investigations, but prosecutorial discretion remains with the Attorney General’s Chambers (AGC).  There is no systematic requirement for public officials to disclose their assets and the Whistleblower Protection Act does not provide protection for those who disclose allegations to the media.

The former Pakatan Harapan government prioritized anti-corruption efforts in its campaign manifesto.  After taking office in May 2018, it established Royal Commissions of Inquiry into alleged corruption at the Federal Land Development Authority (FELDA), the Council of Trust for the People (MARA), and the Hajj Pilgrims Fund (Tabung Haji), all government or government-linked agencies.  On May 21, 2018 the MACC established a 1MDB taskforce, including the police and central bank.  The government subsequently charged former Prime Minister Najib with 42 counts of money laundering, criminal breach of trust, and abuse of power for his alleged involvement in the 1MDB corruption scandal.  The current Prime Minister Muhyiddin has said to the media that his Perikatan Nasional (PN) government will continue to implement the National Anti-Corruption Plan (NACP) put in place by the previous Pakatan Harapan (PH) coalition government.  It remains to be seen how robustly this plan will be implemented.

Resources to Report Corruption

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

Datuk Seri Azam Baki -Chief Commissioner
Malaysia Anti-Corruption Commission
Block D6, Complex D, Pusat Pentadbiran
Kerajaan Persekutuan, Peti Surat 6000
62007 Putrajaya
+6-1800-88-6000
Email: info@sprm.gov.my

Contact at a “watchdog” organization:

Cynthia Gabriel, Director
The Center to Combat Corruption and Cronyism (C4)
C Four Consultancies Sdn Bhd
A-2-10, 8 Avenue
Jalan Sg Jernih 8/1, Seksyen 8, 46050 Petaling Jaya
Selangor, Malaysia
Email: info@c4center.org

There have been no significant incidents of political violence since the 1969 national elections.  The May 9, 2018 national election led to the first transition of power between coalitions since independence and was peaceful.  The Pakatan Harapan administration collapsed on February 24, 2020 and was replaced by the Perikatan Nasional coalition led by Muhyiddin Yassin.  In April 2012, the Peaceful Assembly Act took effect, which outlaws street protests and places other significant restrictions on public assemblies.  Following the July 2014 Israeli incursion into Gaza, several Malaysian non-governmental entities organized a boycott of McDonald’s.  Over a several week period, protestors picketed at several McDonalds restaurants, at times taunting and harassing employees.  Periodically, Malaysian groups will organize modest protests against U.S. government policies, usually involving demonstrations outside the U.S. embassy.  To date, these have remained peaceful and localized, with a strong police presence.  Likewise, several non-governmental organizations have organized mass rallies in major cities in peninsular and East Malaysia related to domestic policies that have been peaceful.

Malaysia’s two million documented and 3.9 to 5.5 million undocumented foreign workers make up over 30 percent of the country’s workforce.  The previous government pledged to reduce Malaysia’s reliance on foreign labor while bringing the nation’s laws up to international standards, and had taken steps toward reforming a foreign worker recruitment process plagued by allegations of corruption and debt bondage before being replaced by Prime Minister Muhyiddin’s government in March.

Malaysia’s shortage of skilled labor is the most frequently mentioned impediment to economic growth cited in numerous studies.  Malaysia has an acute shortage of highly qualified professionals, scientists, and academics.  U.S. firms operating in Malaysia have echoed this sentiment, noting that the shortage of skilled labor has resulted in more on-the-job training for new hires.

The Malaysian labor market, traditionally accustomed to operating at or near full employment, has been heavily impacted by the prolonged shutdown as part of the government’s response to the global pandemic.  The unemployment rate reached five percent in April 2020, Malaysia’s highest in over 30 years, with economic observers predicting it will climb higher during the year.

Malaysia is a member of the International Labor Organization (ILO).  Labor relations in Malaysia are generally non-confrontational.  While  a system of government controls strongly discourages strikes and restricts the formation of unions, the new government has created a National Labor Advisory Council – comprised of the Malaysian Trade Unions Congress and Malaysian Employer’s Federation – to increase labor participation in unions.  The government amended its Trade Unions Act and Industrial Relations Act in July 2019 to increase freedom of association in Malaysia.  Some labor disputes are settled through negotiation or arbitration by an industrial court.  Malaysian authorities have pledged to move forward with amendments to the country’s labor laws as a means of boosting the economy’s overall competitiveness and combatting forced labor conditions.  The previous government prohibited outsourcing companies, improved oversight of employment agencies, and brought the Employment Act, Children and Young Persons Act, and Occupational Safety and Health Act in line with ILO principles.

Although national unions are currently proscribed due to sovereignty issues within Malaysia, there are a number of territorial federations of unions (the three territories being Peninsular Malaysia, Sabah and Sarawak).  The government has prevented some trade unions, such as those in the electronics and textile sectors, from forming territorial federations.  Instead of allowing a federation for all of Peninsular Malaysia, the electronics sector is limited to forming four regional federations of unions, while the textile sector is limited to state-based federations of unions, for those states which have a textile industry.  Proposed changes to the Trade Unions Act should address this issue and allow unions to form.  Employers and employees share the costs of the Social Security Organization (SOSCO), which covers an estimated 12.9 million workers and has been expanded to cover foreign workers.  No systematic welfare programs or government unemployment benefits exist; however, the Employee Provident Fund, which employers and employees are required to contribute to, provides retirement benefits for workers in the private sector.  Civil servants receive pensions upon retirement.

The regulation of employment in Malaysia, specifically as it affects the hiring and redundancy of workers, remains a notable impediment to employing workers in Malaysia.  The high cost of terminating employees, even in cases of wrongdoing, is a source of complaint for domestic and foreign employers.  The former prime minister formed an Independent Committee on Foreign Workers to study foreign worker policies.  The Committee submitted 40 recommendations for streamlining the hiring of foreign workers and protecting employees from debt bondage and forced labor conditions.  It is unclear whether or how the new government will act on these recommendations.

Executives at U.S. companies operating in Malaysia have reported that the government monitors the ethnic balance among employees and enforces an ethnic quota system for hiring in certain areas.  Race-based preferences in hiring and promotion are widespread in government, government-owned universities, and government-linked corporations.

The former government increased and standardized the minimum wage across the country to RM 1100 (USD 275), a raise from RM 1,000 (USD 250) in Peninsular Malaysia and RM 920 (USD 230) in East Malaysia.

In 2018, the Department of Labor’s Trafficking Victims Protection Reauthorization Act (TVPRA) listing of goods produced with child labor and forced labor included Malaysian palm oil (forced and child labor), electronics (forced labor), and garments (forced labor).  Senior officials across the Malaysian interagency have taken this listing seriously and have been working with the private sector and civil society to address concerns relating to the recruitment, hiring, and management of foreign workers in all sectors of the Malaysian economy, including palm oil and electronics.

Malaysia has a limited investment guarantee agreement with the United States under the U.S. Overseas Private Investment Corporation (OPIC), the predecessor agency to the U.S. International Development Finance Corporation (DFC), for which it has qualified since 1959.  Few investors have sought OPIC insurance in Malaysia.

Embassy Kuala Lumpur Economic Section
376 Jalan Tun Razak / 50400 Kuala Lumpur Malaysia
+6-03-2168-5153
Email: KualaLumpurEcon@state.gov

Policies Towards Foreign Direct Investment

Pakistan seeks greater foreign direct investment in order to boost its economic growth, particularly in the energy, agriculture, information and communications technology, and industrial sectors.  Since 1997, Pakistan has established and maintained a largely open investment regime.  Pakistan introduced an Investment Policy in 2013 that further liberalized investment policies in most sectors to attract foreign investment, and signed an economic co-operation agreement with China, the China Pakistan Economic Corridor (CPEC), in April 2015.  CPEC Phase I, which concluded in late 2019, focused primarily on infrastructure and energy production.  Foreign investors continue to advocate for Pakistan to improve legal protections for foreign investments, protect intellectual property rights, and establish clear and consistent policies for upholding contractual obligations and settlement of tax disputes.

Incentives introduced through the 2015-18 Strategic Trade Policy Framework (STPF) and Export Enhancement Packages (EEP) remain in place.  These incentives are largely industry-specific and include tax breaks, tax refunds, tariff reductions, the provision of dedicated infrastructure, and investor facilitation services.  A new STPF policy has been approved by the Prime Minister but must be submitted to the Economic Coordination Committee and then the cabinet for final approval.  The new STPF reportedly envisages incentivizing 26 non-traditional sectors to boost exports and plans to improve the tax refund process.

The Foreign Private Investment Promotion and Protection Act, 1976, and the Furtherance and Protection of Economic Reforms Act, 1992, provide legal protection for foreign investors and investment in Pakistan.  The Foreign Private Investment Promotion and Protection Act stipulates that foreign investments will not be subject to higher income taxes than similar investments made by Pakistani citizens.  All sectors and activities are open for foreign investment unless specifically prohibited or restricted for reasons of national security and public safety.  Specified restricted industries include arms and ammunitions; high explosives; radioactive substances; securities, currency and mint; and consumable alcohol.  There are no restrictions or mechanisms that specifically exclude U.S. investors.

The specialized investment promotion agency of Pakistan is the Board of Investment (BOI).   BOI is responsible for the promotion of investment, facilitating local and foreign investor implementation of projects, and enhancing Pakistan’s international competitiveness.  BOI assists companies and investors who intend to invest in Pakistan and facilitates the implementation and operation of their projects.  BOI is not a one-stop shop for investors, however.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreigners, except Indian and Israeli citizens/businesses, can establish and own, operate, and dispose of interests in most types of businesses in Pakistan, except those involved in arms and ammunitions; high explosives; radioactive substances; securities, currency and mint; and consumable alcohol.  There are no restrictions or mechanisms that specifically exclude U.S. investors.  There are no laws or regulations authorizing private firms to adopt articles of incorporation discriminating against foreign investment.  The 2013 Investment Policy eliminated minimum initial capital investment requirements across sectors so that no minimum investment requirement or upper limit on the share of foreign equity is allowed, with the exception of investments in the airline, banking, agriculture, and media sectors.  Foreign investors in the services sector may retain 100 percent equity, subject to obtaining permission, a no objection certificate, or license from the concerned agency, as well as fulfilling the requirements of the respective sectoral policy.  In the education, health, and infrastructure sectors, 100 percent foreign ownership is allowed, while in the agricultural sector, the threshold is 60 percent, with an exception for corporate agriculture farming, where 100 percent ownership is allowed.  Small-scale mining valued at less than PKR 300 million (roughly USD 2.6 million) is restricted to Pakistani investors.

Foreign banks can establish locally incorporated subsidiaries and branches, provided they have USD 5 billion in paid-up capital or belong to one of the regional organizations or associations to which Pakistan is a member (e.g., Economic Cooperation Organization (ECO) or the South Asian Association for Regional Cooperation (SAARC)).  Absent these requirements, foreign banks are limited to a 49-percent maximum equity stake in locally incorporated subsidiaries.

There are no restrictions on payments of royalties and technical fees for the manufacturing sector, but there are restrictions on other sectors, including a USD 100,000 limit on initial franchise investments and a cap on subsequent royalty payments of 5 percent of net sales for five years.  Royalties and technical payments are subject to remittance restrictions listed in Chapter 14, section 12 of the SBP Foreign Exchange Manual (http://www.sbp.org.pk/fe_manual/index.htm).

Pakistan maintains investment screening mechanisms for inbound foreign investment.  The BOI is the lead organization for such screening.  Pakistan blocks foreign investments if the screening process determines the investment could negatively affect Pakistan’s national security.

Other Investment Policy Reviews

Pakistan has not undergone any third-party investment policy reviews over the last three years.

Business Facilitation

The government works with the World Bank to improve Pakistan’s business climate.  The government has simplified pre-registration and registration facilities and automated land records to simplify property registration, eased requirements for obtaining construction permits and utilities, introduced online/electronic tax payments, and facilitated cross-border trade by improving electronic submissions and processing of trade documents.  Starting a business in Pakistan normally involves 5 procedures and takes at least 16.5 days.  Pakistan ranked 108 out of 190 countries in the World Bank Doing Business 2020 report’s “Starting a Business” category.  Pakistan ranked 28 out of 190 for protecting minority investors.

The Securities and Exchange Commission of Pakistan (SECP) manages company registration, which is available to both foreign and domestic companies.  Companies first provide a company name and pay the requisite registration fee to the SECP.  They then supply documentation on the proposed business, including information on corporate offices, location of company headquarters, and a copy of the company charter.  Both foreign and domestic companies must apply for national tax numbers with the Federal Board of Revenue (FBR) to facilitate payment of income and sales taxes.  Industrial or commercial establishments with five or more employees must register with Pakistan’s Federal Employees Old-Age Benefits Institution (EOBI) for social security purposes.  Depending on the location, registration with provincial governments may be required.  The SECP website (www.secp.gov.pk) offers a Virtual One Stop Shop (OSS) where companies can register with the SECP, FBR, and EOBI simultaneously.  The OSS is also available for foreign investors.

Outward Investment

Pakistan does not promote or incentivize outward investment.  Although the cumbersome government approval process can discourage potential investors, larger Pakistani corporations have made major investments in the United States in recent years.

Pakistan has signed Bilateral Investment Treaties (BITs) with 49 countries, with only 27 entered into force.  U.S.-Pakistan Bilateral Investment Treaty (BIT) negotiations began in 2004 and the text closed in 2012; however, the agreement has not been signed.  Pakistan has a Trade and Investment Framework Agreement (TIFA) in place with the United States.  Pakistan has free or preferential trade agreements with China, Malaysia, Sri Lanka, Iran, Mauritius, and Indonesia.  It is also a signatory of the South Asian Free Trade Agreement (SAFTA) and the Afghanistan Pakistan Transit Trade Agreement (APTTA).  Pakistan is negotiating free trade agreements with Turkey and Thailand.

A U.S.-Pakistan bilateral tax treaty was signed in 1959.  Pakistan has double taxation agreements with 63 other countries.  A multilateral tax treaty between the SAARC countries (Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka) came into force in 2011 and provides additional provisions for the administration of taxes.  In 2018, Pakistan updated its tax treaty with Switzerland.  Pakistan relies heavily on multinational corporations for a significant portion of its tax collections.  Foreign investors in Pakistan regularly report that both federal and provincial tax regulations are difficult to navigate and tax assessments are non-transparent.  Since 2013, the government has requested advance tax payments from companies, complicating businesses’ operations as the government intentionally delays tax refunds.  The World Bank’s Doing Business 2020 report notes that companies pay 34 different taxes, compared to an average of 26.8 in other South Asian countries.  On average, calculating these payments requires that businesses spend over 283 hours per year.

In 2016, Pakistan signed the OECD’s Multilateral Convention on Mutual Administrative Assistance in Tax Matters.  The Convention will help Pakistan exchange banking details with the other 80 signatory countries to locate untaxed money in foreign banks.  Pakistan is a member of the Base Erosion and Profit Shifting (BEPS) framework and will automatically exchange country-by-country reporting as required by the BEPS package

Transparency of the Regulatory System

Most draft legislation is made available for public comment but there is no centralized body to collect public responses.  The relevant authority gathers public comments, if deemed necessary; otherwise legislation is directly submitted to the legislative branch.  For business and investment laws and regulations, the Ministry of Commerce relies on stakeholder feedback from local chambers and associations – such as the American Business Council and Overseas Investors Chamber of Commerce and Industry (OICCI) – rather than publishing regulations online for public review.

Prior to implementation, non-government actors and private sector associations can provide feedback to the government on different laws and policies, but authorities are not bound to collect nor implement their suggestions.  Respective regulatory authorities conduct in-house post-implementation reviews for regulations in consultation with relevant stakeholders.  However, these assessments are not made publicly available.  Since the 2010 introduction of the 18th amendment to Pakistan’s constitution, foreign companies must address provincial, and sometimes local, government laws in addition to national law.  Foreign businesses complain about the inconsistencies in laws and policies from different regulatory authorities.  There are no rules or regulations in place that discriminate specifically against U.S. investors, however.

The SECP is the main regulatory body for foreign companies in Pakistan, but it is not the sole regulator.  Company financial transactions are regulated by the SBP, labor by the Social Welfare or EOBI, and specialized functions in the energy sector are overseen by bodies such as the National Electric Power Regulatory Authority, the Oil and Gas Regulatory Authority, and Alternate Energy Development Board.  Each body is overseen by autonomous management but all are required to go through the Ministry of Law and Justice before submitting their policies and laws to parliament or, in some cases, the executive branch; parliament or the Prime Minister is the final authority for any operational or policy related legal changes.

The SECP is empowered to notify accounting standards to companies in Pakistan, however, execution and implementation of the notifications is poor.  Pakistan has adopted most, though not all, International Financial Reporting Standards.  Though most of Pakistan’s legal, regulatory, and accounting systems are transparent and consistent with international norms, execution and implementation is inefficient and opaque.

The government publishes limited debt obligations in the budget document in two broad categories: capital receipts and public debt, which are published in the “Explanatory Memorandum on Federal Receipts.”  These documents are available at http://www.finance.gov.pk, http://www.fbr.gov.pk, and http://www.sbp.org.pk/edocata.  The government does not publicly disclose the terms of bilateral debt obligations.

International Regulatory Considerations

Pakistan is a member of the South Asian Association for Regional Cooperation (SAARC), the Central Asia Regional Economic Cooperation (CAREC), and Economic Cooperation Organization (ECO).   However, there is no regional cooperation between Pakistan and other member nations on regulatory development or implementation.  Pakistan has been a World Trade Organization (WTO) member since January 1, 1995, and provides most favored nation (MFN) treatment to all member states, except India and Israel.  In October 2015, Pakistan ratified the WTO’s Trade Facilitation Agreement (TFA).  Pakistan is one of 23 WTO countries negotiating the Trade in Services Agreement.  Pakistan notifies all draft technical regulations to the WTO Committee on Technical Barriers to Trade, albeit at times with significant delays.

Legal System and Judicial Independence

Most international norms and standards incorporated in Pakistan’s regulatory system, including commercial matters, are influenced by British law.  Laws governing domestic or personal matters are strongly influenced by Islamic Sharia Law.  Regulations may be appealed within the court system and enforcement actions may also be appealed through the courts.  The Supreme Court is Pakistan’s highest court and has jurisdiction over the provincial courts, referrals from the federal government, and cases involving disputes among provinces or between a province and the federal government.  Decisions by the courts of the superior judiciary (the Supreme Court, the Federal Sharia Court, and five High Courts (Lahore High Court, Sindh High Court, Balochistan High Court, Islamabad High Court, and Peshawar High Court) have national standing.  The lower courts are composed of civil and criminal district courts, as well as various specialized courts, including courts devoted to banking, intellectual property, customs and excise, tax law, environmental law, consumer protection, insurance, and cases of corruption.  Pakistan’s judiciary is influenced by the government and other stakeholders.  The lower judiciary is influenced by the executive branch and seen as lacking competence and fairness.  It currently faces a significant backlog of unresolved cases.

Pakistan has a written contractual/commercial law with the Contract Act of 1872 as the main source for regulating Pakistani contracts.  British legal decisions, where relevant, are also cited in courts.  While Pakistan’s legal code and economic policy do not discriminate against foreign investments, enforcement of contracts remains problematic due to a weak and inefficient judiciary.

Laws and Regulations on Foreign Direct Investment

Pakistan’s investment and corporate laws permit wholly-owned subsidiaries with 100 percent foreign equity in all sectors of the economy, subject to obtaining relevant permissions.  In the education, health, and infrastructure sectors, 100 percent foreign ownership is allowed.  In the agricultural sector, the threshold is 60 percent, with an exception for corporate agriculture farming, where 100 percent ownership is allowed.

A majority of foreign companies operating in Pakistan are “private limited companies,” which are incorporated with a minimum of two shareholders and two directors registered with the SECP.  While there are no regulatory requirements on the residency status of company directors, the chief executive must reside in Pakistan to conduct day-to-day operations.  If the chief executive is not a Pakistani national, she or he is required to obtain a multiple-entry work visa.  Companies operating in Pakistan are statutorily required to retain full-time audit services and legal representation.  Companies must also register any changes to the name, address, directors, shareholders, CEO, auditors/lawyers, and other pertinent details to the SECP within 15 days of the change.  To address long process delays, in 2013, the SECP introduced the issuance of a provisional “Certificate of Incorporation” prior to the final issuance of a “No Objection Certificate” (NOC).  The Certificate includes a provision noting that company shares will be transferred to another shareholder if the foreign shareholder(s) and/or director(s) fails to obtain a NOC.

There is no “single window” website for investment which provides relevant laws, rules and reporting requirements for investors.

Competition and Anti-Trust Laws

Established in 2007, the Competition Commission of Pakistan (CCP) ensures private and public sector organizations are not involved in any anti-competitive or monopolistic practices.  Complaints regarding anti-competition practices can be lodged with CCP, which conducts the investigation and is legally empowered to award penalties; complaints are reviewable by the CCP appellate tribunal in Islamabad and the Supreme Court of Pakistan.  The CCP appellate tribunal is required to issue decisions on any anti-competition practice within six months from the date in which it becomes aware of the practice.

Expropriation and Compensation

Two Acts, the Protection of Economic Reforms Act 1992 and the Foreign Private Investment Promotion and Protection Act 1976, protect foreign investment in Pakistan from expropriation, while the 2013 Investment Policy reinforced the government’s commitment to protect foreign investor interests.  Pakistan does not have a strong history of expropriation.

Dispute Settlement

ICSID Convention and New York Convention

Pakistan is a member of the International Center for the Settlement of Investment Disputes (ICSID).  Pakistan ratified the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention) in 2011 under its “Recognition and Enforcement (Arbitration Agreements and Foreign Arbitral Awards) Act.

Investor-State Dispute Settlement

In 2008, the Pakistani government instituted a Rental Power Plant (RPP) plan to help alleviate the chronic power shortages throughout the country.  Walters Power International Limited was a participant in three RPP plants and brought power generation equipment into Pakistan to service these plants.  Subsequently, in 2010, the Supreme Court of Pakistan nullified all RPP contracts due to widespread corruption in cash advances made to RPP operators.  Walters Power International Limited settled with the Pakistan National Accountability Bureau (NAB) and the Central Power Generation Company Limited by returning advance payments plus interest.  In mid-2012, NAB formally acknowledged that settlement with the Walters Power International Limited had been made, which under Pakistani law released Walters Power International Limited from any further liability, criminal or civil, and should have permitted re-export of equipment.  However, the Government of Pakistan (a) has refused to allow the equipment to be exported so that some salvage value could be obtained, and (b) prevented the plant from operating despite a critical need for power in the country during the disputed period.  Despite repeated efforts by Walters Power International Limited, NAB has declined to instruct the appropriate parties to issue a Notice of Clearance to Pakistan Customs to allow the re-export of the equipment.  Walters Power International Limited alleges that the unreasonable delay in permitting re-export of equipment following settlement constitutes expropriation.  The case is still pending with NAB.

International Commercial Arbitration and Foreign Courts

Arbitration and special judicial tribunals do exist as alternative dispute resolution (ADR) mechanisms for settling disputes between two private parties.  Pakistan’s Arbitration Act of 1940 provides guidance for arbitration in commercial disputes, but cases typically take years to resolve.  To mitigate such risks, most foreign investors include contract provisions that provide for international arbitration.  Pakistan’s judicial system also allows for specialized tribunals as a means of alternative dispute resolution.  Special tribunals are able to address taxation, banking, labor, and IPR enforcement disputes.  However, foreign investors lament the lack of clear, transparent, and timely investment dispute mechanisms.  Protracted arbitration cases are a major concern.  Pakistani courts have not upheld some international arbitration awards.

In 2019 the International Center for Settlement of Investment Disputes awarded a consortium of foreign companies which had invested in the “Reko Diq” mining project USD 5.84 billion in damages for Pakistan’s breach of contract.  The government is currently in discussions with the consortium to arrive at an out-of-arbitration settlement.

Bankruptcy Regulations

Pakistan does not have a single, comprehensive bankruptcy law.  Foreclosures are governed under the Companies Act 2017 and administered by the SECP, while the Banking Companies Ordinance of 1962 governs liquidations of banks and financial institutions.  Court-appointed liquidators auction bankrupt companies’ property and organize the actual bankruptcy process, which can take years to complete.  On average, Pakistan requires 2.6 years to resolve insolvency issues and has a recovery rate of 42.8 percent.  Pakistan was ranked 58 of 190 for ease of “resolving insolvency” rankings in the World Bank’s Doing Business 2020 report.

The Companies Act 2017 regulates mergers and acquisitions.  Mergers are allowed between international companies, as well as between international and local companies.  In 2012, the government enacted legislation for friendly and hostile takeovers.  The law requires companies to disclose any concentration of share ownership over 25 percent.

Pakistan has no dedicated credit monitoring authority.  However, SBP has authority to monitor and investigate the quality of the credit commercial banks extend.

Investment Incentives

The government’s investment policy provides both domestic and foreign investors the same incentives, concessions, and facilities for industrial development.  Though some incentives are included in the federal budget, the government relies on Statutory Regulatory Orders (SROs) – ad hoc arrangements implemented through executive order – for industry specific taxes or incentives.  The government does not offer research and development incentives.  Nonetheless, certain technology-focused industries, including information technology and solar energy, benefit from a wide range of fiscal incentives.  Pakistan currently does not provide any formal investment incentives such as grants, tax credits or deferrals, access to subsidized loans, or reduced cost of land to individual foreign investors.

In general, the government does not issue guarantees or jointly finance foreign direct investment projects.  The government made an exception for CPEC-related projects and provided sovereign guarantees for the investment and returns, along with joint financing for specific projects.

Foreign Trade Zones/Free Ports/Trade Facilitation

Providing unique fiscal and institutional incentives exclusively for export-oriented industries, the government established the first Export Processing Zone (EPZ) in Karachi in 1989.  Subsequently, EPZs were established in Risalpur, Gujranwala, Sialkot, Saindak, Gwadar, Reko Diq, and Duddar; today, only Karachi, Risalpur, Sialkot, and Saindak remain operational.  EPZs offer investors tax and duty exemptions on equipment, machinery, and materials (including components, spare parts, and packing material); indefinite loss carry-forward; and access to the EPZ Authority (EPZA) “Single Window,” which facilitates import and export authorizations.

The 2012 Special Economic Zones Act, amended in 2016, allows both domestically focused and export-oriented enterprises to establish companies and public-private partnerships within SEZs.  According to the country’s 2013 Investment Policy, manufacturers introducing new technologies that are unavailable in Pakistan receive the same incentives available to companies operating in Pakistan’s SEZs.

Pakistan has a total of 23 designated special economic zones (SEZs); 10 of these were recently established by the government.  All potential investors in SEZs are provided with a  basket of incentives, including a ten-year tax holiday, one-time waiver of import duties on plant materials and machinery, and streamlined utilities connections.  Despite offering substantial financial, investor service, and infrastructure benefits to reduce the cost of doing business, Pakistan’s SEZs have struggled to attract investment due to lack of basic infrastructure.  None of the identified SEZs are fully developed, but they have attracted some investment and are available to any company, domestic or foreign.  KP’s Peshawar Economic Zone Office, in an attempt to attract additional foreign investor interest, opened an Industrial Facilitation Center to provide potential investors with timely services and a one-stop shop for existing and new foreign investors.  Pakistan intends to establish nine SEZs under CPEC’s second phase, which is focused on promoting Pakistan’s industrial growth and exports.  The government plans to open the first CPEC SEZs in Rashakai, Khyber Pakhtunkhwa (KP); Faisalabad, Punjab; and Dhabeji, Sindh in 2020.  Most CPEC SEZs remain in nascent stages of development and currently lack basic infrastructure.

Apart from SEZ-related incentives, the government offers special incentives for Export-Oriented Units (EOUs) – a stand-alone industrial entity exporting 100 percent of its production.  EOU incentives include duty and tax exemptions for imported machinery and raw materials, as well as the duty-free import of vehicles.  EOUs are allowed to operate anywhere in the country.  Pakistan provides the same investment opportunities to foreign investors and local investors.

Performance and Data Localization Requirements

Foreign business officials have struggled to get business visas for travel to Pakistan.  When permitted, business people typically receive single-entry visas with short-duration validity.  Technical and managerial personnel working in sectors that are open to foreign investment are typically not required to obtain special work permits.  In 2019 Pakistan announced updates to its visa and no objection certification (NOC) policies to attract foreign tourists and businesspeople; however, the new visa policies do not apply to U.S. passport holders.  The new NOC policy implemented in May 2019 permits visitor travel throughout Pakistan, though travel near Pakistan’s borders still requires a NOC.

Foreign investors are allowed to sign technical agreements with local investors without disclosing proprietary information.  Foreign investors are not required to use domestic content in goods or technology or hire Pakistani nationals, either as laborers or as representatives on the company’s board of directors.  Likewise, there are no specific performance requirements for foreign entities operating in the country.  Similarly, there are no special performance requirements on the basis of origin of the investment.  However, onerous requirements exist for foreign citizen board members of Pakistani companies, including additional documents required by the SECP as well as obtaining security clearance from the Ministry of Interior.  Such requirements discourage foreign nationals from becoming board members of  Pakistani companies.

Companies operating in Pakistan have not registered complaints with the embassy regarding encryption issues.  Officially, accreditation from the Electronic Certification Accreditation Council (under the Ministry of Information Technology) is required for entities using encryption and cryptography services, though it is not consistently enforced.  The Pakistan Telecommunication Authority (PTA) initially demanded unfettered access to Research in Motion’s BlackBerry customer information, but the issue was resolved in 2016 when the company agreed to assist law enforcement agencies in the investigation of criminal activities.  PTA and SBP prohibit telecom and financial companies from transferring customer data overseas.  Other data, including emails, can be legally transmitted and stored outside the country.  Recent draft regulations requiring social media companies to maintain local servers in Pakistan received significant criticism in the press and from service providers.  The government subsequently allowed for additional comment and revisions to draft data protection legislation; the comment and revision process remains ongoing.

Real Property

Though Pakistan’s legal system supports the enforcement of property rights and both local and foreign owner interests, it offers incomplete protection for the acquisition and disposition of property rights.  With the exception of the agricultural sector, where foreign ownership is limited to 60 percent, no specific regulations regarding land lease or acquisition by foreign or non-resident investors exists.  Corporate farming by foreign-controlled companies is permitted if the subsidiaries are incorporated in Pakistan.  There are no limits on the size of corporate farmland holdings, and foreign companies can lease farmland for up to 50 years, with renewal options.

The 1979 Industrial Property Order safeguards industrial property in Pakistan against government use of eminent domain with insufficient compensation for both foreign and domestic investors.  The 1976 Foreign Private Investment Promotion and Protection Act guarantees the remittance of profits earned through the sale or appreciation in value of property.

Though protection for legal purchasers of land are provided, even if unoccupied, clarity of land titles remains a challenge.  Improvements to land titling have been made by the Punjab, Sindh, and Khyber Pakhtunkhwa provincial governments dedicating significant resources to digitizing land records.

Intellectual Property Rights

The Government of Pakistan has identified intellectual property rights (IPR) protection as a key economic reform and has taken concrete steps over the last two decades to strengthen its intellectual property (IP) regime.  In 2005, Pakistan created the Intellectual Property Office (IPO) to consolidate government control over trademarks, patents, and copyrights.  IPO’s mission also includes coordinating and monitoring the enforcement and protection of IPR through law enforcement agencies.  Enforcement agencies include the local police, the Federal Investigation Agency (FIA), customs officials at the FBR, the CCP, the SECP, the Drug Regulatory Authority of Pakistan (DRAP), and the Print and Electronic Media Regulatory Authority (PEMRA).  Although the creation of IPO consolidated policy-making institutions, confusion surrounding enforcement agencies’ roles still constrains performance on IPR enforcement, leaving IP rights holders struggling to identify the right forum to address IPR infringement.  Although IPO established 10  enforcement coordination committees to improve IPR enforcement, and has signed an MOU with the FBR to share information, the agency labors to coordinate disparate bodies under current laws.  IPO has been in discussions with CCP and SECP for more than a year on data sharing and enforcement MOUs that  remain unsigned. Weak penalties and the agencies’ redundancies allow counterfeiters to evade punishment.

IPO as an institution has historically suffered from leadership turnover, limited resources, and a lack of government attention.  Since 2016, the Government of Pakistan has taken steps to improve the IPO’s effectiveness, starting with bringing IPO under the administrative responsibility of the Ministry of Commerce.  The IPO Act 2012 stipulates a three-year term, 14-person policy board with at least five seats dedicated to the private sector.  Section 8(2) of the IPO Act also stipulates, “the board shall meet not less than two times in a calendar year.”  No board meeting was held in 2018 due to the political transition which occurred that year, but two board meetings were held in 2019.  IPO is severely under-resourced in human capital, currently working at only 52 percent of its approved staffing.  New hiring rules await final approval from the Ministry of Law.  IPO aims to start recruiting new staff in the first half of 2020.

IPO is also charged with increasing public awareness of IPR through collaboration with the private sector.  In 2019, in collaboration with various academic institutions and chambers of commerce, IPO conducted over 100 public awareness sessions.  Academics and private attorneys have noted that the creation of the IPO has improved public awareness, albeit slowly.  While difficult to quantify, contacts have also observed increased local demand for IPR protections, including from small businesses and startups.  Private and public sector contacts highlight that the educational system is a “missing link” in IPR awareness and enforcement.  Pakistani educational institutions, including law schools, have rarely included IPR issues in their curricula and do not have a culture of commercializing innovations.  However, the International Islamic University now includes an IPR-specific course in its curriculum and Lahore University of Management Sciences has content-specific courses as part of their MBA program.  IPO officials have expressed interest in collaborating with Pakistani universities to increase IPR awareness.  IPO is working with the Higher Education Commission to offer IPR curricula at other universities but has achieved limited traction.  In collaboration with the World Intellectual Property Organization (WIPO), Technology Innovation Support Centers have been established at 47 different universities in Pakistan.

In 2016, Pakistan established three specialized IP tribunals – in Karachi covering Sindh and Balochistan, in Lahore covering Punjab, and in Islamabad covering Islamabad and Khyber Pakhtunkhwa.  IPO plans to create two more tribunals, with the proposal awaiting approval from the Ministry of Law.  These tribunals have not been a priority in terms of assigning judges.  They have experienced high turnover, and the assigned judges do not receive any specialized technical training in IP law.

Pakistan’s IPR legal framework remains inadequate as well.  Pakistan’s IP legal framework consists of 40-year-old subordinate IP laws on copyright, patents, and trademarks alongside the 2012 IPO Act.  The IPO Act provides the overall legal basis for IP licensing and enforcement while subordinate laws apply to specific IP fields, but inconsistencies in the laws make IP enforcement difficult.  Since 2000, Pakistan has made piecemeal updates to IPR laws in an unsuccessful attempt to bring consistency to IPR treatment within the legal system.  With the help of Mission Pakistan, CLDP, and the U.S. Patent and Trademark Office (USPTO), IPO is in the process of updating Pakistan’s IPR laws to minimize inconsistencies and improve enforcement.

The U.S. Mission in Pakistan, with the support of the United States Trade Representative (USTR), the Department of Commerce, and USPTO, has been engaged with the Government of Pakistan over several years seeking resolution of long-standing software licensing and IPR infringements committed by offices within the Government of Pakistan which undermine Pakistan’s credibility with respect to IPR enforcement.

Pakistan is currently on the USTR Special 301 Report Watch List  Pakistan is not included in the Notorious Markets List.

Pakistan does not track and report on its seizures of counterfeit goods.

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

Capital Markets and Portfolio Investment

Foreign portfolio investment halted its decline and increased in the last three months of 2019 and into early 2020 as investor confidence increased due to improvement in Pakistan’s current account deficit, relatively high interest rates, and the initiation of Pakistan’s most recent IMF program, according to the SBP.  Prior to the COVID-19 pandemic, indicators had pointed to improved inflows of foreign investment.  The full impact of COVID-19 on foreign portfolio investment remains to be seen.

Pakistan’s three stock exchanges (Lahore, Islamabad, and Karachi) merged to form the Pakistan Stock Exchange (PSE) in January 2016.  As a member of the Federation of Euro-Asian Stock Exchanges and the South Asian Federation of Exchanges, PSE is also an affiliated member of the World Federation of Exchanges and the International Organization of Securities Commissions.  Per the Foreign Exchange Regulations, foreign investors can invest in shares and securities listed on the PSE and can repatriate profits, dividends, or disinvestment proceeds.  The investor must open a Special Convertible Rupee Account with any bank in Pakistan in order to make portfolio investments.  In 2017, the government modified the capital gains tax and imposed 15 percent on stocks held for less than 12 months, 12.5 percent on stocks held for more than 12 but less than 24 months, and 7.5 percent on stocks held for more than 24 months. The 2012 Capital Gains Tax Ordinance appointed the National Clearing Company of Pakistan Limited to compute, determine, collect, and deposit the capital gains tax.

The free flow of financial resources for domestic and foreign investors is supported by financial sector policies, with the SBP and SECP providing regulatory oversight of financial and capital markets.  Interest rates depend on the reverse repo rate (also called the policy rate).  Interest rates reached a high of 13.25 percent in July 2019 but by May 2020 had decreased to eight percent.

Pakistan has adopted and adheres to international accounting and reporting standards – including IMF Article VIII, with comprehensive disclosure requirements for companies and financial sector entities.

Foreign-controlled manufacturing, semi-manufacturing (i.e. goods that require additional processing before marketing), and non-manufacturing concerns are allowed to borrow from the domestic banking system without regulated limits.  Banks are required to ensure that total exposure to any domestic or foreign entity should not exceed 25 percent of banks’ equity with effect from December 2013.  Foreign-controlled (minimum 51 percent equity stake) semi-manufacturing concerns (i.e., those producing goods that require additional processing for consumer marketing) are permitted to borrow up to 75 percent of paid-up capital, including reserves.  For non-manufacturing concerns, local borrowing caps are set at 50 percent of paid-up capital. While there are no restrictions on private sector access to credit instruments, few alternative instruments are available beyond commercial bank lending.  Pakistan’s domestic corporate bond, commercial paper and derivative markets remain in the early stages of development.

Money and Banking System

The State Bank of Pakistan (SBP) is the central bank of Pakistan.

According to the most recent statistics published by the SBP, only 23 percent of the adult population uses formal banking channels to conduct financial transactions while 24 percent are informally served by the banking sector; women are financially excluded at higher rates than men.  The remaining 53 percent of the adult population do not utilize formal financial services.

Pakistan’s financial sector has been recognized by international banks and lenders for performing well in recent years.  According to the latest review of the banking sector conducted by SBP in December 2018, improving asset quality, stable liquidity, robust solvency and slow pick-up in private sector advances were noted.  The asset base of the banking sector expanded by 11.7 percent during 2019.  The five largest banks, one of which is state-owned, control 50.4 percent of all banking sector assets.  The risk profile of the banking sector remained satisfactory and moderation in profitability and asset quality improved as non-performing loans as a percentage of total loans (infection ratio) was recorded at 8.6 percent at the end of December 2019.  In 2019, total assets of the banking industry were estimated at USD 140.1 billion.  As of December 2019, net non-performing bank loans totaled approximately USD 900.3 million – 1.7 percent of net total loans.

The penetration of foreign banks in Pakistan is low, having minimal contribution to the local banking industry and the overall economy.  According to a study conducted by the World Bank Group in 2018, the share of foreign bank assets to GDP stood at 3.5 percent while private credit by deposit to GDP stood at 15.4 percent.  Foreign banks operating in Pakistan include Standard Chartered Bank, Deutsche Bank, Samba Bank, Industrial and Commercial Bank of China, Bank of Tokyo, and the newly established Bank of China.  International banks are primarily involved in two types of international activities: cross-border flows, and foreign participation in domestic banking systems through brick-and-mortar operations.  SBP requires that foreign banks hold at minimum $300 million in capital reserves at their Pakistan flagship location, and maintain at least an eight percent capital adequacy ratio.  In addition, foreign banks are required to maintain the following minimum capital requirements, which vary based on the number of branches they are operating:

1 to 5 branches: USD 28 million in assigned capital;

6 to 50 branches: USD 56 million in assigned capital;

Over 50 branches: USD 94 million in assigned capital.

Foreigners require proof of residency – a work visa, company sponsorship letter, and valid passport – to establish a bank account in Pakistan.  There are no other restrictions to prevent foreigners from opening and operating a bank account.

Foreign Exchange and Remittances

Foreign Exchange

As a prior action of its July 2019 IMF program, Pakistan agreed to a flexible market-determined exchange rate.  The SBP regulates the exchange rate and monitors foreign exchange transactions in the open market, with interventions limited to safeguarding financial stability and preventing disorderly market conditions.  Other government entities can influence SBP decisions through their membership on the SBP’s board; the Finance Secretary and the Board of Investment Chair currently sit on the board.

Banks are required to report and justify outflows of foreign currency.  Travelers leaving or entering Pakistan are allowed to physically carry a maximum of $10,000 in cash.  While cross-border payments of interest, profits, dividends, and royalties are allowed without submitting prior notification, banks are required to report loan information so SBP can verify remittances against repayment schedules.  Although no formal policy bars profit repatriation, U.S. companies have faced delays in profit repatriation due to unclear policies and coordination between the SBP, the Ministry of Finance and other government entities.  Mission Pakistan has provided advocacy for U.S. companies which have struggled to repatriate their profits.  Exchange companies are permitted to buy and sell foreign currency for individuals, banks, and other exchange companies, and can also sell foreign currency to incorporated companies to facilitate the remittance of royalty, franchise, and technical fees.

There is no clear policy on convertibility of funds associated with investment in other global currencies.  The SBP opts for an ad-hoc approach on a case-by-case basis.

Remittance Policies

The 2001 Income Tax Ordinance of Pakistan exempts taxes on any amount of foreign currency remitted from outside Pakistan through normal banking channels.  Remittance of full capital, profits, and dividends over USD 5 million are permitted while dividends are tax-exempt.  No limits exist for dividends, remittance of profits, debt service, capital, capital gains, returns on intellectual property, or payment for imported equipment in Pakistani law.  However, large transactions that have the potential to influence Pakistan’s foreign exchange reserves require approval from the government’s Economic Coordination Committee.  Similarly, banks are required to account for outflows of foreign currency.  Investor remittances must be registered with the SBP within 30 days of execution and can only be made against a valid contract or agreement.

Sovereign Wealth Funds

Pakistan does not have its own sovereign wealth fund (SWF) and no specific exemptions for foreign SWFs exist in Pakistan’s tax law.  Foreign SWFs are taxed like any other non-resident person unless specific concessions have been granted under an applicable tax treaty to which Pakistan is a signatory.

The second round of the Government of Pakistan’s extensive 15-year privatization campaign came to an abrupt halt after 2006 when the Supreme Court reversed a proposed deal for the privatization of Pakistan Steel Mills, setting a precedent for future offerings.  As a result, large and inefficient state-owned enterprises (SOEs) retain monopolistic powers in a few key sectors, requiring the government to provide annual subsidies to cover SOE losses.  There are 197 SOEs in the power, oil and gas, banking and finance, insurance, and transportation sectors.  Some are profitable; others are loss-making.  They provide stable employment and other benefits for more than 420,000 workers.  According to the IMF, in 2019, Pakistan’s total debts and liabilities for SOEs exceeded USD 7 billion, or 2.3 percent of GDP – a 22 percent increase since 2016, but roughly the same since 2017.  Some SOEs have governing boards, but they are not effective.

Three of the country’s largest SOEs include:  Pakistan Railways (PR), Pakistan International Airlines (PIA), and Pakistan Steel Mills (PSM).  According to the IMF, the total debt of SOEs now amounts to 2.3 percent of GDP – just over USD 7 billion in 2019.  The IMF required audits of PIA and PSM by December 2019 as part of Pakistan’s IMF Extended Fund Facility.  PR is the only provider of rail services in Pakistan and the largest public sector employer with approximately 90,000 employees.  PR has received commitments for USD 8.2 billion in CPEC loans and grants to modernize its mail rail lines.  PR relies on monthly government subsidies of approximately USD 2.8 million to cover its ongoing obligations.  In 2019, government payments to PR totaled approximately USD 248 million.  In 2019, the Government of Pakistan extended bailout packages worth USD 89 million to PIA.  Established to avoid importing foreign steel, PSM has accumulated losses of approximately USD 3.77 billion per annum.  The company loses USD 5 million a week, and has not produced steel since June 2015, when the national gas company cut its power supplies due to over USD 340 million in outstanding bills.

SOEs competing in the domestic market receive non-market based advantages from the host government.  Two examples include PIA and PSM, which operate at a loss but continue to receive financial bailout packages from the government.  Post is not aware of any negative impact to U.S firms in this regard.

The Securities and Exchange Commission of Pakistan (SECP) introduced corporate social responsibility (CSR) voluntary guidelines in 2013.  Adherence to the OECD guidelines is not known.

Privatization Program

Terms to purchase public shares of SOEs and financial institutions for both foreign and local investors are the same.  The government announced plans to carry out a privatization program but postponed plans due to significant political resistance.  Even though the government is still publicly committed to privatizing its national airline (PIA), the process has been stalled since early 2016 when three labor union members were killed during a violent protest in response to the government’s decision to convert PIA into a limited company, a decision which would have allowed shares to be transferred to a non-government entity and pave the way for privatization.  A bill passed by the legislature requires that the government retain 51 percent equity in the airline in the event it is privatized, reducing the attractiveness of the company to potential investors.  The Privatization Commission claims the privatization process to be transparent, easy to understand, and non-discriminatory.  The privatization process is a 17-step process available on the Commission’s website under this link http://privatisation.gov.pk/?page_id=88 .

The following links provides details of the Government of Pakistan’s privatized transactions over the past 18 years since 1991:.  http://privatisation.gov.pk/?page_id=125 

There is no unified set of standards defining responsible business conduct in Pakistan.  Though large companies, especially multi-national corporations, have an awareness of RBC standards, there is a lack of wider awareness.  The Pakistani government has not established standards or strategic documents specifically defining RBC standards and goals.  The Ministry of Human Rights published its most recent “Action Plan for Human Rights” in May 2017.  Although it does not specifically address RBC or business and human rights, one of its six thematic areas of focus is implementation of international and UN treaties.  Pakistan is signatory to nearly all International Labor Organization (ILO) conventions.

International organization, civil society, and labor union contacts all note that there is a lack of adequate implementation and enforcement of labor laws.  Some NGOs, worker organizations, and business associations are working to promote RBC, but not on a wide scale.

Pakistan does not have domestic measures requiring supply chain due diligence for companies sourcing minerals originating from conflict-affected areas and does not participate in the Extractive Industries Transparency Initiative (EITI) and/or the Voluntary Principles on Security and Human Rights.

Pakistan ranked 120 out of 180 countries on Transparency International’s 2019 Corruption Perceptions Index.  The organization noted that corruption problems persist due to the lack of accountability and enforcement of penalties, followed by the lack of merit-based promotion, and relatively low salaries.

Bribes are criminal acts punishable by law but are widely perceived to exist at all levels of government.  Although high courts are widely viewed as more credible, lower courts are often considered corrupt, inefficient, and subject to pressure from prominent wealthy, religious, and political figures.  Political involvement in judicial appointments increases the government’s influence over the court system.

The National Accountability Bureau (NAB), Pakistan’s anti-corruption organization, suffers from insufficient funding and staffing and is viewed by political opposition as a tool for score-settling by the government in power.  Like NAB, the CCP’s mandate also includes anti-corruption authorities, but its effectiveness is also hindered by resource constraints.

Resources to Report Corruption 

Justice (R) Javed Iqbal
Chairman
National Accountability Bureau
Ataturk Avenue, G-5/2, Islamabad
+92-51-111-622-622
chairman@nab.gov.pk

Sohail Muzaffar
Chairman
Transparency International
5-C, 2nd Floor, Khayaban-e-Ittehad, Phase VII, D.H.A., Karachi
+92-21-35390408-9
ti.pakistan@gmail.com

Despite improvements to the security situation in recent years, the presence of foreign and domestic terrorist groups within Pakistan continues to pose some threat to U.S. interests and citizens.  Terrorist groups commit occasional attacks in Pakistan, though the number of such attacks has declined steadily over the last decade.  Terrorists have in the past targeted transportation hubs, markets, shopping malls, military installations, airports, universities, tourist locations, schools, hospitals, places of worship, and government facilities.  Many multinational companies operating in Pakistan employ private security and risk management firms to mitigate the significant threats to their business operations.  There are greater security resources and infrastructure in the major cities, particularly Islamabad, and security forces in these areas may be more readily able to respond to an emergency compared to other areas of the country.

The BOI, in collaboration with Provincial Investment Promotion Agencies, has coordinated airport-to-airport security and secure lodging for foreign investors.  To inquire about this service, investors can contact the BOI for additional information.

Post is not aware of any damage to projects and/or installations. Abductions/kidnappings of foreigners for ransom remains a concern.

While security challenges exist in Pakistan, the country has not grown increasingly politicized or insecure in the past year.

Pakistan has a complex system of labor laws.  According to the 18th Amendment to the Constitution, jurisdiction over labor matters is managed by the provinces.  Each province is in the process of developing its own labor law regime, and the provinces are at different stages of labor law development.

In the Islamabad Capital Territory and provinces of Punjab, Khyber Pakhtunkhwa and Baluchistan, the minimum wage for unskilled workers is PKR 17,500 per month (USD 109).  In Sindh, it is PKR 17,000 per month (USD 106).  Legal protections for laborers are uneven across provinces, and implementation of labor laws is weak nationwide.  Lahore inspectorates have inadequate resources, which lead to inadequate frequency and quality of labor inspections.  Some labor courts are reportedly corrupt and biased in favor of employers.  On January 23, 2019 the Punjab Provincial Assembly passed the Punjab Domestic Workers Act 2019.  The law prohibits the employment of children under age 15 as domestic workers, and stipulates that children between 15 and 18 may only perform part-time, non-hazardous household work.  The law also mandates a series of protections and benefits, including limits to the number of hours worked weekly, and paid sick and holiday leave.  On January 25, 2017 the Sindh Provincial Assembly passed the Sindh Prohibition of Employment of Children Act, 2017.   In August 2019, the Balochistan Assembly adopted a resolution to eradicate child labor in coal mines.

The Senate passed the Domestic Workers (Employment Rights) Act in March 2016 (http://www.senate.gov.pk/uploads/documents/1390294147_766.pdf), but the bill has not progressed in the National Assembly.  An amendment to the federal Employment of Children Act, 1991, which would raise the minimum age of employment to sixteen, has been pending in the National Assembly since January 2016.

According to Pakistan’s most recent labor force survey (conducted 2017-2018), the civilian workforce consists of approximately 65.5 million workers.  Women are extremely under-represented in the formal labor force.  The survey estimated overall labor participation at approximately 45 percent, with male participation at 68 percent and females at 20 percent.  The largest percentage of the labor force works in the agricultural sector (38.5 percent), followed by the services (37.84 percent), and industry/manufacturing (16 percent) sectors.  Although the official unemployment rate hovered at roughly 6 percent, pre-COVID-19, the figure is likely significantly higher.  Additionally, there are as-yet no reliable unemployment statistics since the COVID-19 outbreak.  In 2018, the UN Population Fund estimated that 29 percent of Pakistan’s population was between the ages of 10 and 24 and according to 2017-18 labor force survey estimates unemployment for 15 to 24 year old was 10.5 percent.

Pakistan is a labor exporter, particularly to Gulf Cooperation Council (GCC) countries.  According to Pakistan’s Bureau of Emigration and Overseas Employment’s 2018 “Export of Manpower Analysis,” the bureau had registered more than 11.11 million Pakistanis going abroad for employment since 1971, with more than 96 percent traveling to GCC countries.  Pakistanis working overseas sent more than USD 19 billion in remittances each year since 2015.

Pakistani government sector contacts say their workforce is insufficiently skilled.  Federal and provincial government initiatives such as the National Vocational and Technical Training Commission and the Punjab government’s Technical Education and Vocational Training Authority aim to increase the employability of the Pakistani workforce.  However, the ILO’s 2016-2020 Pakistan Decent Work Country Program notes that, “Neither a comprehensive national policy nor coherent provincial policies for skills and entrepreneurship development are being applied.”  The ILO report notes that “a small fraction of vulnerable workers are covered by social security in one form or another, while access to comprehensive social protection systems is also limited.”  The ILO’s 2014 Decent Work Country Profile states that in 2013, only 9.4 percent of the economically active population – excluding public sector employees – were contributing to formal social security systems such as old age, survivors’, and disability pensions.

Freedom of association is guaranteed under article 17 of Pakistan’s constitution.  However, the ILO indicates that the Pakistani state and employers have used “disabling legislation and repressive tactics” to make union formation and collective bargaining “extremely difficult.”  The Pakistan Institute of Labour Education and Research in its 2015 “Status of Labour Rights in Pakistan” noted that according to non-official data, there were 949 registered trade unions with a total membership of 1,865,141 – approximately four percent of the total estimated labor force.  Provincial labor departments are responsible for managing trade union and industrial labor disputes.  Each province has its own industrial relations legislation, and each has labor courts to adjudicate disputes.  Recent strikes have been spearheaded by public sector workers, such as teachers and public health workers.

The ILO’s 2016-2020 Pakistan Decent Work Country Program states that “exploitative labour practices in the form of child and bonded labour remain pervasive…” and notes “the absence of reliable and comprehensive data to accurately assess the situation of hazardous child labour, worst forms of child labour, or forced labour.”  The report also identifies weak compliance with, and enforcement of, labor laws and regulations as contributing to poor working conditions – including unhealthy and unsafe workplaces –and the erosion of worker rights.

Pakistan is a GSP beneficiary, which requires labor standards to be upheld.

The Development Finance Corporation is active in Pakistan and has provided financing or insurance for projects totaling USD 597.6 million (since 2010), including investments in microfinance and hospital care in rural Pakistan.  An Investment Incentive Agreement was signed between the United States and Pakistan in 1997.

https://www.dfc.gov/sites/default/files/2019-08/bl_pakistan_islamic_republic_of_11-18-1997.pdf 

https://www.state.gov/pakistan-12903-investment-incentive-agreement/

* Source for Host Country Data: All host country statistical data used from State Bank of Pakistan which publishes data on a monthly basis.

Source:  IMF Coordinated Direct Investment Survey (CDIS) http://data.imf.org/CDIS

Source:  IMF Coordinated Portfolio Investment Survey (CPIS) http://cpis.imf.org

Michael Boven
Trade and Investment Officer
U.S. Embassy Islamabad
+92-51-2015668
BovenMD@state.gov

Policies Towards Foreign Direct Investment

The Ministry of Economic Development (MED) is responsible for overseeing investment policy in Russia.  The Russian Direct Investment Fund (RDIF) was established in 2011 to facilitate FDI in Russia and has already attracted over $40 billion of foreign capital into the Russian economy through long-term strategic partnerships.  In 2013, Russia’s Agency for Strategic Initiatives (ASI) launched an “Invest in Russian Regions” project to promote FDI on a regional basis.  Since 2014, ASI has released an annual ranking of Russia’s regions in terms of the relative competitiveness of their investment climates, and provides potential investors with information about regions most open to foreign investment.  In 2019, 69 Russian regions improved their Regional Investment Climate Index scores (https://asi.ru/investclimate/rating).  The Foreign Investment Advisory Council (FIAC), established in 1994, is chaired by the prime minister and currently includes 53 international company members and four companies as observers.  The FIAC allows select foreign investors to directly present their views on improving the investment climate in Russia and advises the government on regulatory policy.

Russia’s basic legal framework governing investment includes 1) Law 160-FZ, July 9, 1999, “On Foreign Investment in the Russian Federation;” 2) Law No. 39-FZ,  February 25, 1999, “On Investment Activity in the Russian Federation in the Form of Capital Investment;” 3) Law No. 57-FZ, April 29, 2008, “Foreign Investments in Companies Having Strategic Importance for State Security and Defense;” and 4) the Law of the RSFSR No. 1488-1, June 26, 1991, “On Investment Activity in the Russian Soviet Federative Socialist Republic (RSFSR).”  This framework of laws nominally attempts to guarantee equal rights for foreign and local investors in Russia.  However, exemptions are permitted when it is deemed necessary to protect the Russian constitution, morality, health, human rights, national security, or defense, and to promote its socioeconomic development.  Foreign investors may freely use the profits obtained from Russia-based investments for any purpose, provided they do not violate Russian law.

Limits on Foreign Control and Right to Private Ownership and Establishment

Russian law places two primary restrictions on land ownership by foreigners.  The first is on the foreign ownership of land located in border areas or other sensitive territories in terms of national security.  The second restricts foreign ownership of agricultural land, restricting foreign individuals and companies, persons without citizenship, and agricultural companies more than 50-percent foreign-owned from owning land.  These entities may, however, hold agricultural land through leasehold rights.  As an alternative to agricultural land ownership, foreign companies typically lease land for up to 49 years, the maximum term allowed.

A law “On Mass Media,” took effect in 2015 which restricts foreign ownership of any Russian media company to 20 percent (the previous law applied a 50 percent limit to Russia’s broadcast sector).   In December 2018, the State Duma approved in its first reading a draft bill introducing new restrictions on online news aggregation services.  If adopted, foreign companies, including international organizations and individuals, would be limited to a maximum of 20 percent ownership in Russian news aggregator websites.  The second, final hearing was planned for February 2019 but was postponed.  To date, this proposed law has not been passed.

U.S. stakeholders have raised concerns about similar limits on FDI in the mining and mineral extraction sectors, and describe the licensing regime as non-transparent and unpredictable.

Russia’s Commission on Control of Foreign Investment (Commission) was established in 2008 to monitor foreign investment in strategic sectors in accordance with the SSL.  Between 2008 and 2019, the Commission received 621 applications for foreign investment, 282 of which were reviewed, according to the Federal Antimonopoly Service (FAS).  Of those 282, the Commission granted preliminary approval for 259 (92 percent approval rate) and rejected 23 (https://fas.gov.ru/news/29330).  International organizations, foreign states, and the companies they control are treated as distinct entities under the Commission. They are subject to restrictions applicable to a single foreign entity if they participate in a strategic business.

Other Investment Policy Reviews

The WTO conducted Russia’s first Trade Policy Review (TPR) in September 2016.  Dates are still pending for the next Russia TPR.  (Related reports are available at https://www.wto.org/english/tratop_e/tpr_e/tp445_e.htm ).

The United Nations Conference on Trade and Development (UNCTAD) issues an annual World Investment Report covering different investment policy topics.  In 2019, the focus of this report was on special economic zones (https://unctad.org/en/Pages/Publications/WorldInvestmentReports.aspx ).  UNCTAD also issues an investment policy monitor (https://investmentpolicyhub.unctad.org/IPM ).

Business Facilitation

The Federal Tax Service (FTS) operates Russia’s business registration website: www.nalog.ru .  Per law (Article 13 of Law 129-FZ of 2001), a company must register with a local FTS office, and the registration process typically takes no more than three days.  Foreign companies may be required to notarize the originals of incorporation documents included in the application package.  To establish a business in Russia, a company must register with FTS and pay a registration fee of RUB 4,000.  Since January 1, 2019, the registration fee is waived for online submission of incorporation documents.

In 2020, Russia moved up three notches to the 28th position in the World Bank’s Doing Business 2020 Index.  The ranking acknowledged several reforms that helped Russia improve its position.  Russia has improved the process for establishing connection to electricity by setting new deadlines and establishing specialized departments for connection.  Russia has also strengthened minority investor protections by requiring greater corporate transparency, and facilitated the payment of taxes by reducing the tax authority review period of applications for VAT cash refunds, as well as enhancing the software used for tax and payroll preparation.

Outward Investment

The Russian government does not restrict Russian investors from investing abroad.  Since 2015, Russia’s “De-offshorization Law” (376-FZ) requires that Russian tax residents disclose to the government their overseas assets, potentially subjecting these assets to Russian taxes.

While there are no restrictions on the distribution of profits to a nonresident entity, some foreign currency control restrictions apply to Russian residents (both companies and individuals) and to foreign currency transactions.  As of January 1, 2018, all Russian citizens and foreign holders of Russian residence permits are considered Russian “currency control residents.”  These “residents” are required to notify the tax authorities when a foreign bank account is opened, changed, or closed and when funds are moved in a foreign bank account.  Individuals who have spent less than 183 days in Russia during the reporting period are exempt from the reporting requirements and restrictions using foreign bank accounts.  On January 1, 2020, Russia abolished all currency control restrictions on payments of funds by non-residents to bank accounts of Russian residents opened with banks in OECD or FATF member states.  This is provided that such states participate in the automatic exchange of financial account information with Russia.  As a result, from 2020 onward, Russian residents will be able to freely use declared personal foreign accounts for savings and investment in a wide range of financial products.

Russia is party to 64 bilateral investment treaties (BITs) in force and six trade and investment agreements with investment provisions .  (A full list is available here: http://investmentpolicyhub.unctad.org/IIA).  The United States and Russia signed a bilateral investment treaty (BIT) in 1992, but it was never ratified by Russia and is not in force today. As such, investors from the two countries must rely on domestic courts and have no recourse to international arbitration unless specifically written into contracts.

Russia is a founding member of the Eurasian Economic Union (EAEU), which includes Armenia, Belarus, Kazakhstan, and Kyrgyzstan.  The EAEU has concluded a number of free trade agreements (FTAs), beginning with Vietnam in 2016.  The EAEU signed an interim three-year FTA with Iran in May 2018 that came into effect in 2019 and reduced or eliminated tariffs on goods accounting for roughly 50 percent of trade between the parties.  In May 2018, the EAEU and China signed an agreement on trade and economic cooperation.  The EAEU signed an FTA with Singapore on October 1, 2019, that reduces tariffs on 90 percent of goods exported by Singapore , expanding to 97 percent over 10 years.  In October 2019, the EAEU signed an FTA with Serbia.  Currently, the EAEU is negotiating FTAs with India, Israel, and Egypt (http://www.eurasiancommission.org/ru/nae/news/Pages/10-03-2020-3.aspx ).

The U.S.-Russia Income Tax Convention, in effect since 1994, was designed to address the issue of double taxation and tax evasion.  The treaty is available at https://www.irs.gov/pub/irs-trty/russia.pdf.  Russia is party to 82 double taxation treaties (http://minfin.ru/ru/document/?id_4=117045 ).

Transparency of the Regulatory System

While the Russian government at all levels offers moderately transparent policies, actual implementation is inconsistent.    Draft bills and regulations are made available for public comment in accordance with disclosure rules set forth in Government Resolution 851 of 2012.

Key regulatory actions are published on a centralized web site that also maintains existing and proposed regulatory documents: www.pravo.gov.ru .  (Draft regulatory laws are published on the web site: www.regulation.gov.ru .  Draft laws can also be found on the State Duma’s legal database: http://asozd.duma.gov.ru/ ).

Accounting procedures are generally transparent and consistent.  Documents compliant with Generally Accepted Accounting Principles (GAAP), however, are usually provided only by businesses that interface with foreign markets or borrow from foreign lenders.  Reports prepared in accordance with the International Financial Reporting Standards (IFRS) are required for the consolidated financial statements of all entities who meet the following criteria: entities whose securities are listed on stock exchanges; banks and other credit institutions, insurance companies (except those with activities limited to obligatory medical insurance); non-governmental pension funds; management companies of investment and pension funds; and clearing houses.

Additionally, certain state-owned enterprises are required to prepare consolidated IFRS financial statements by separate decrees of the Russian government.  Russian Accounting Standards, which are largely based on international best practices, otherwise apply.

International Regulatory Considerations

As a member of the EAEU, Russia has delegated certain decision-making authority to the EAEU’s supranational executive body, the Eurasian Economic Commission (EEC).  In particular, the EEC has the lead on concluding trade agreements with third countries, customs tariffs (on imports), and technical regulations.  EAEU agreements and EEC decisions establish basic principles that are implemented by the member states at the national level through domestic laws, regulations, and other measures involving goods.  The EAEU Treaty establishes the priority of WTO rules in the EAEU legal framework.  Authority to set sanitary and phytosanitary standards (SPS), however, remains at the individual country level.

U.S. companies cite SPS technical regulations and related product-testing and certification requirements as major obstacles to U.S. exports of industrial and agricultural goods to Russia. Russian authorities require evidence of product testing and certification as key elements of the approval process for a variety of products, and, in many cases, there are no mutual recognition arrangements in place; only an entity registered and residing in Russia can apply for the necessary documentation for product approvals.  Consequently, opportunities for testing and certification performed by competent bodies outside Russia are limited.  Manufacturers of telecommunications equipment, oil and gas equipment, construction materials and equipment, and pharmaceuticals and medical devices have reported serious difficulties in obtaining product approvals within Russia.  Technical barriers to trade (TBT) issues have also arisen with alcoholic beverages, pharmaceuticals, and medical devices.

Russia joined the WTO in 2012.  Although Russia has notified the WTO of numerous SPS technical regulations, it appears to be taking a narrow view regarding the types of measures that require notification that  may not reflect the full set of technical regulations under the WTO TBT Agreement.  Russia submitted 16 SPS notifications in 2019.  (A full list of notifications is available at: http://www.epingalert.org/en).

Legal System and Judicial Independence

U.S. Embassy Moscow advises any foreign company operating in Russia to have competent legal counsel and create a comprehensive plan on steps to take in case the police carry out an unexpected raid.  Russian authorities have exhibited a pattern of transforming civil cases into criminal matters, resulting in significantly more severe penalties.  In short, unfounded lawsuits or arbitrary enforcement actions remain an ever-present possibility for any company operating in Russia.

Critics contend that Russian courts, in general, lack independent authority and, in criminal cases, have a bias towards conviction.  In practice, the presumption of innocence tends to be ignored by Russian courts, and less than one-half of one percent of criminal cases end in acquittal. In cases that are appealed when the lower court decision resulted in a conviction, less than one percent are overturned.  In contrast, when the lower court decision is “not guilty,” 37 percent of the appeals result in a finding of guilt.

Russia law is based on a system of legal code; the Civil Code of Russia governs contracts.  Specialized commercial courts (also called “Arbitrage Courts”) handle a wide variety of commercial disputes.  Russia was ranked by the World Bank’s 2020 Doing Business Index as 21st in contract enforcement.

Commercial courts are required by law to decide business disputes efficiently, and many cases are decided based on written evidence, with little or no live testimony by witnesses.  The courts’ workload is dominated by relatively simple cases involving the collection of debts and firms’ disputes with the taxation and customs authorities, pension funds, and other state organs. Tax-paying firms often prevail in their disputes with the government in court.  As with some international arbitral procedures, the weakness in the Russian arbitration system lies in the enforcement of decisions, and few firms voluntarily pay judgments against them.

A specialized court for intellectual property rights (IPR) disputes was established in 2013.  The IPR Court hears matters pertaining to the review of decisions made by the Russian Federal Service for Intellectual Property (Rospatent) and determines issues of IPR ownership, authorship, and the cancellation of trademark registrations.  It also serves as the court of second appeal for IPR infringement cases decided in commercial courts and courts of appeal.

Laws and Regulations on Foreign Direct Investment

The 1991 Investment Code and 1999 Law on Foreign Investment (160-FZ) guarantee that foreign investors enjoy rights equal to those of Russian investors, although some industries have limits on foreign ownership.  Russia’s Special Investment Contract program, launched in 2015, aims to increase investment in Russia by offering tax incentives and simplified procedures for dealings with the government.  In addition, a law on public-private-partnerships (224-FZ) took effect January 1, 2016.  The legislation allows an investor to acquire ownership rights over a property.  The SSL regulates foreign investments in “strategic” companies.  Amendments to Federal Law No. 160-FZ “On Foreign Investments in the Russian Federation” and Russia’s SSL, signed into law in May 2018, liberalized access of foreign investments to strategic sectors of the Russian economy and made the strategic clearance process clearer and more convenient.  The new approach is more investor-friendly, since applying a stricter regime can now potentially be avoided by providing the required beneficiary and controlling person information.  In addition, the amendments expressly envisage a right for the Federal Anti-monopoly Service (FAS) to issue official clarifications on the nature and application of the SSL that may facilitate law enforcement.

Competition and Anti-Trust Laws

FAS implements antimonopoly laws and is responsible for overseeing matters related to the protection of competition.  Russia’s fourth anti-monopoly legislative package, which took effect January 2016, introduced a number of changes to Russia’s antimonopoly laws.  Changes included limiting the criteria under which an entity could be considered “dominant,” broadening the scope of transactions subject to FAS approval, and reducing government control over transactions involving natural monopolies.  Over the past several years, FAS has opened a number of cases involving American companies.  In February 2019, FAS submitted its fifth anti-monopoly legislative package, which is devoted to regulating the digital economy, to the Cabinet.  It includes provisions on introducing new definitions of “trustee” and a definition of “price algorithms,” empowering FAS to impose provisions of non-discriminated access to data as a remedy.  It also introduced data ownership as a set of criteria for market analysis.  The legislative package is still undergoing an interagency approval process and will be submitted to the State Duma once it is approved by the Cabinet.

FAS has also claimed the authority to regulate IP, arguing that monopoly rights conferred by ownership of IP should not extend to the “circulation of goods,” a point supported by the Russian Supreme Court.

Expropriation and Compensation

The 1991 Investment Code prohibits the nationalization of foreign investments, except following legislative action and when such action is deemed to be in the public interest.  In such instances, the investor must be adequately and promptly compensated for the seizure of property.  Acts of nationalization may be appealed to Russian courts.  At the sub-federal level, expropriation has occasionally been a problem, as well as local government interference and a lack of ability to enforce court rulings protecting investors.

Despite legislation prohibiting the nationalization of foreign investments, investors in Russia – particularly minority-share investors in domestically-owned energy companies – are encouraged to exercise caution.  Russia has a history of indirectly expropriating companies through “creeping” and informal means, often related to domestic political disputes.  Foreign investors can also be pressured into selling their Russia-based assets at below-market prices.  Foreign investors, particularly minority investors, have little legal recourse in such instances.

Dispute Settlement

ICSID Convention and New York Convention

Russia is party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.  While Russia does not have specific legislation providing for enforcement of the New York Convention, Article 15 of the Constitution specifies that “the universally recognized norms of international law and international treaties and agreements of the Russian Federation shall be a component part of [Russia’s] legal system.  If an international treaty or agreement of the Russian Federation fixes other rules than those envisaged by law, the rules of the international agreement shall be applied.”  Russia is a signatory but not a party and has never ratified the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID).

Investor-State Dispute Settlement

According to available information, at least 14 investment disputes have involved an American and the Russian government since 2006.  Some attorneys refer international clients who have investment or trade disputes in Russia to international arbitration.  A 1997 Russian law confirms New York Convention obligations by recognizing foreign arbitration awards for enforcement in Russia..  Russian law was amended in 2015 to give the Russian Constitutional Court authority to disregard verdicts by international bodies if it determines the ruling contradicts the Russian constitution.

International Commercial Arbitration and Foreign Courts

In addition to the court system, Russian law recognizes alternative dispute resolution (ADR) mechanisms, i.e. domestic arbitration, international arbitration, and mediation.  Civil and commercial disputes may be referred to either domestic or international commercial arbitration. Institutional arbitration is more common in Russia than ad hoc arbitration.  Arbitral awards can be enforced in Russia pursuant to international treaties, such as the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, the 1958 New York Convention, and the 1961 European Convention on International Commercial Arbitration, as well as domestic legislation.  Mediation mechanisms were established by the Law on Alternative Dispute Resolution Procedure with Participation of the Intermediary in January 2011.  Mediation is an informal extrajudicial dispute resolution method whereby a mediator seeks mutually acceptable resolution.  However, mediation is not yet widely used in Russia.

Beginning in 2016, arbitral institutions were required to obtain the status of a “permanent arbitral institution” (PAI) in order to arbitrate disputes involving shares in Russian companies.  The requirement ostensibly combats the problem of dubious arbitral institutions set up by corporations to administer disputes in which they themselves are involved.  The PAI requirement applies to foreign arbitral institutions as well.  Until recently there were only four arbitral institutions – all of them Russian – which had been conferred the status of PAI.  In April 2019, however, the Hong Kong International Arbitration Centre became the first foreign arbitral tribunal to obtain PAI status.  In June 2019, the Vienna International Arbitration Center became the second foreign institution licensed to administer arbitrations in Russia.  The International Court of Arbitration of the International Chamber of Commerce, the London Court of International Arbitration, and the Arbitration Institute of the Stockholm Chamber of Commerce continue to be selected for administering international arbitrations seated in Russia, despite the fact that none of these have PAI status.  Nonetheless, to date arbitral awards rendered by tribunals constituted under the rules of these institutions can be recognized and enforced in Russia.

Bankruptcy Regulations

Russia established a law providing for enterprises bankruptcy in the early 1990s.  A law on personal bankruptcy came into force in 2015.  Russia’s ranking in the World Bank’s Doing Business 2020 Index for “Resolving Insolvency” is 57 out of 190 economies.  Article 9 of the Law on Insolvency requires an insolvent firm to petition the court of arbitration to declare the company bankrupt within one month of failing to pay the bank’s claims.  The court then convenes a meeting of creditors, who petition the court for liquidation or reorganization.  In accordance with Article 51 of the Law on Insolvency, a bankruptcy case must be considered within seven months of the day the petition was received by the arbitral court.

Liquidation proceedings by law are limited to six months and can be extended by six more months (art. 124 of the Law on Insolvency).  Therefore, the time dictated by law is 19 months.  However, in practice, liquidation proceedings are extended several times and for longer periods.  The total cost of insolvency proceedings is approximately nine percent of the value of the estate.

In July 2017, amendments to the Law on Insolvency expanded the list of persons who may be held vicariously liable for a bankrupted entity’s debts and clarified the grounds for such liability. According to the new rules, in addition to the CEO, the following can also be held vicariously liable for a bankrupt company’s debts: top managers, including the CFO and COO, accountants, liquidators, and other persons who controlled or had significant influence over the bankrupted entity’s actions by kin or position or could force the bankrupted entity to enter into unprofitable transactions.  In addition, persons who profited from the illegal actions by management may also be subject to liability through court action.  The amendments clarified that shareholders owning less than 10 percent in the bankrupt company shall not be deemed controlling unless they are proven to have played a role in the company’s bankruptcy.  The amendments also expanded the list of people who may be subject to secondary liability and the grounds for recognizing fault for a company’s bankruptcy.

Amendments to the Law on Insolvency approved in December 2019 gave greater protection, in the context of insolvency of a Russian counterparty, to collateral arrangements, close-out netting in respect of over-the-counter derivative transactions, repurchases, and certain other “financial” transactions documented under eligible master agreements.

Investment Incentives

The government also introduced Special Investment Contracts (SPICs) as an alternative incentive program in 2015.  In 2017 the government changed the rules for concluding SPICs to increase investment in Russia by offering tax incentives and simplified procedures for government interactions.  These contracts allow foreign companies in Russia access to import substitution programs, including certain subsidies, if they establish local production.  In principle, these contracts may aid in expediting customs procedures.  However, in practice, reports suggest companies that sign such contracts find their business hampered by policies biased in favor of local producers.

In August 2019, the Russian government created “SPIC-2,” which aimed to increase long-term private investment in high-technology projects and introduce advanced technology for local content in manufacturing products.  The Ministry of Industry and Trade also extended the maximum SPIC term to 20 years, depending on the amount of investment.  The key criteria for evaluating bids are speed of introducing technology, the volume of manufacturing, and the level of technology in local manufacturing processes.

Since 2005, Russia’s industrial investment incentive regime has granted tax breaks and other government incentives to foreign companies in certain sectors in exchange for producing locally. As part of its WTO Protocol, Russia agreed to eliminate the elements of this regime that are inconsistent with the Trade-Related Investment Measures (TRIMS) Agreement by July 2018.  The TRIMS Agreement requires elimination of measures such as those that require or provide benefits for the use of domestically produced goods (local content requirements) or that restrict a firm’s imports to an amount related to its exports or related to the amount of foreign exchange a firm earns (trade balancing requirements).  Russia notified the WTO that it had terminated these automotive investment incentive programs as of July 1, 2018.  In 2019, the Ministry of Industry and Trade introduced a new points-based system to estimate vehicle local content levels to determine original equipment manufacturer (OEM)’s eligibility for Russian state support.  The government provides state support only to OEMs whose finished vehicles are deemed to be of Russian origin, which will depend upon them scoring at least 2,000 points under the new system to get some assistance and 6,000 point to enjoy a full range of support measures.  Points will be awarded for localizing the supply of certain components.  Locally-sourced engines or transmissions used in vehicle assembly, for instance, are worth 40 points.  OEMs running a research and development business in Russia score an additional 20 points, and a further 20 points are granted to those using locally-sourced aluminum or electronic systems in their vehicles.

Foreign Trade Zones/Free Ports/Trade Facilitation

Russia continues to promote the use of high-tech parks, special economic zones (SEZs), and industrial clusters, which offer additional tax and infrastructure incentives to attract investment. “Resident companies” can receive a broad range of benefits, including exemption from profit tax, value-added tax, property tax, and import duties and partial exemption from social fund payments.  Russia currently has 23 SEZs (http://www.russez.ru/oez/ ).  A Russian Accounts Chamber (RAC) investigation of SEZs in February 2020 found they have had no measurable impact on the Russian economy, despite RUB 136 billion ($1.8 billion) investment from the federal government from 2006 to 2018.  In 2015, the Russian government created a separate but similar program – “Territories of Advanced Development” – with preferential tax treatment and simplified government procedures in Siberia, Kaliningrad, and the Russian Far East.  In May 2016, President Putin stopped work on ten existing SEZ’s and suspended the creation of any new SEZs, pending better coordination with this new entity.

Performance and Data Localization Requirements

Russian law generally does not impose performance requirements, and they are not widely included as part of private contracts in Russia.  Some have appeared, however, in the agreements of large multinational companies investing in natural resources and in production-sharing legislation.  There are no formal requirements for offsets in foreign investments.  Since approval for investments in Russia can depend on relationships with government officials and on a firm’s demonstration of its commitment to the Russian market, these conditions may result in offsets.

In certain sectors, the Russian government has pressed for localization and increased local content.  For example, in a bid to boost high-tech manufacturing in the renewable energy sector, Russia guarantees a 12 percent profit over 15 years for windfarms using turbines with at least 65 percent local content.  Russia is additionally considering local content requirements for industries that have high percentages of government procurement, such as medical devices and pharmaceuticals.  Russia is not a signatory to the WTO’s Government Procurement Agreement. Consequently, restrictions on public procurement have been a major avenue for Russia to implement localization requirements without running afoul of international commitments.

The Central Bank of Russia (CBR) has imposed caps on the percentage of foreign employees in foreign banks’ subsidiaries.  Russian employees in a subsidiary of a foreign bank should make up at least 75 percent of the staff.  If the executive of the subsidiary is a non-resident of Russia, at least 50 percent of the bank’s managing body should be Russian citizens.

Russia’s data storage law (the “Yarovaya law”) took effect on July 1, 2018, requiring providers to store data in “full volume” beginning October 1, 2018.  The law requires domestic telecoms and internet service providers (ISPs) to store all customers’ voice calls and texts for six months; ISPs must store data traffic for one month.  The Yarovaya law initially required longer retention with a shorter implementation window, which companies criticized as costly and unworkable.  Until recently, there were no special liabilities for violations of the data localization requirement.  In December, President Putin signed into law legislative amendments establishing significant fines ranging from RUB 1 million ($13,400) to RUB 18 million ($241,000) for legal entities and from RUB 100,000 ($1,340) to RUB 800,000 ($10,700) for company CEOs.

Real Property

Russia ranks12th in the 2020 World Bank Doing Business Indexfor registering property, which analyzes the “steps, time and cost involved in registering property, assuming a standardized case of an entrepreneur who wants to purchase land and a building that is already registered and free of title dispute,” as well as the “the quality of the land administration system.”

The Russian Constitution, along with a 1993 presidential decree, gives Russian citizens the right to own, inherit, lease, mortgage, and sell real property.  The state owns the majority of Russian land, although the structures on the land are typically privately owned.  Mortgage legislation enacted in 2004 facilitates the process for lenders to evict homeowners who do not stay current in their mortgage payments.

Intellectual Property Rights

Russia remained on the U.S. Trade Representative (USTR) Special 301 Priority Watch List in 2020 and had several illicit streaming websites and online markets reported in the 2019 Notorious Markets List.  Particular areas of concern include copyright infringement, trademark counterfeiting/hard goods piracy, and non-transparent royalty collection procedures.  Stakeholders reported in 2019 that enforcement of intellectual property rights (IPR) continued to decline overall from 2018 following a reduction in resources for enforcement personnel.  In December 2019, for the first time in Russia, the owner of several illegal streaming sites received a two-year suspended criminal sentence for violating Russia’s IPR protection legislation.  This case has set an important precedent for enforcing IPR laws in Russia.

Online piracy continues to pose a significant problem in Russia.  Russia has not honored its commitments to protect IPR, including commitments made to the United States as part of its WTO accession.  Nevertheless, there are indications that the Russian internet piracy market is declining.  According to Group-IB, the online pirated movie market declined by 27 percent year-on-year in 2019, while legal streaming services increased by 44.3 percent.  Despite Russia’s 2018 ban on virtual private networks (VPNs), the ban has not been fully enforced.  Since 2017, search engines, including Google and Yandex, have been required to block IPR-infringing websites and “mirror” sites as determined by federal communications watchdog Roskomnadzor.  As a result of increased scrutiny, internet companies Yandex, Mail.Ru Group, Rambler, and Rutube signed an anti-piracy memorandum with several domestic right holders, which is valid through the end of 2021.

Modest progress has been made in the area of customs IPR enforcement since the Federal Customs Service (FCS) can now confiscate imported goods that violate IPR.  From January to September 2018, the FCS seized 14.4 million counterfeit goods, compared with 10.1 million in the same period in 2017.  In 2019, the FTS seized 11 million counterfeited goods in the same period.  The FCS prevented infringement and damages to copyright holders amounting to RUB 5.9 billion ($79 million) between January and September in 2019, compared with RUB 4.5 billion ($60.3 million) in 2018.

Capital Markets and Portfolio Investment

Russia is open to portfolio investment and has no restrictions on foreign investments. Russia’s two main stock exchanges – the Russian Trading System (RTS) and the Moscow Interbank Currency Exchange (MICEX) – merged in December 2011.  The MICEX-RTS bourse conducted an initial public offering on February 15, 2013, auctioning an 11.82 percent share.

The Russian Law on the Securities Market includes definitions of corporate bonds, mutual funds, options, futures, and forwards.  Companies offering public shares are required to disclose specific information during the placement process as well as on a quarterly basis.  In addition, the law defines the responsibilities of financial consultants assisting companies with stock offerings and holds them liable for the accuracy of the data presented to shareholders. In general, the Russian government respects IMF Article VIII, which it accepted in 1996.  Credit in Russia is allocated generally on market terms, and the private sector has access to a variety of credit instruments.  Foreign investors can get credit on the Russian market, but interest rate differentials tend to prompt investors from developed economies to borrow on their own domestic markets when investing in Russia.

Money and Banking System

Banks make up a large share of Russia’s financial system.  Although Russia had 396 licensed banks as of March 1, 2020, state-owned banks, particularly Sberbank and VTB Group, dominate the sector.  The three largest banks are state-controlled (with private Alfa Bank ranked fourth); and held 51.4 percent of all bank assets in Russia as of March 1, 2020.  The role of the state in the banking sector continues to distort the competitive environment, impeding Russia’s financial sector development.  At the beginning of 2019, the aggregate assets of the banking sector amounted to 91.4 percent of GDP, and aggregate capital was 9.9 percent of GDP.  Russian banks reportedly operate on short time horizons, limiting capital available for long-term investments.  Overall, a share of non-performing loans (NPLs) to total gross loans reached 5.5 percent as of January 1, 2019.  Foreign banks are allowed to establish subsidiaries, but not branches, within Russia and must register as a Russian business entity.

Foreign Exchange and Remittances

Foreign Exchange

While the ruble is the only legal tender in Russia, companies and individuals generally face no significant difficulty in obtaining foreign currency from authorized banks.  The CBR retains the right to impose restrictions on the purchase of foreign currency, including the requirement that the transaction be completed through a special account, according to Russia’s currency control laws.  The CBR does not require security deposits on foreign exchange purchases.  Otherwise, there are no barriers to remitting investment returns abroad, including dividends, interest, and returns of capital, apart from the fact that reporting requirements exist and failure to report in a timely fashion will result in fines.

Currency controls also exist on all transactions that require customs clearance, which, in Russia, applies to both import and export transactions and certain loans.  As of March 1, 2018, the CBR no longer requires a “transaction passport” (i.e. a document with the authorized bank through which a business receives and services a transaction) when concluding import and export contracts.  The CBR also simplified the procedure to record import and export contracts, reducing the number of documents required for bank authorization. The new instruction is an example of liberalization of the settlement procedure for foreign trade transactions in Russia.  In 2016, the CBR tightened regulations for cash currency exchanges: a client must provide his full name, passport details, registration place, date of birth, and taxpayer number, if the transaction value exceeds RUB 15,000 (approximately $200).  In July 2016, this amount was increased to RUB 40,000 (approximately $535).  The declared purpose of this regulation is to combat money laundering and terrorist financing.

Remittance Policies

The CBR retains the right to impose restrictions on the purchase of foreign currency, including the requirement that the transaction be completed through a special account, according to Russia’s currency control laws.  The CBR does not require security deposits on foreign exchange purchases.  To navigate these requirements, investors should seek legal expert advice at the time of making an investment.  Banking contacts confirm that investors have not had issues with remittances or with repatriation of dividends.

Sovereign Wealth Funds

In 2018, Russia combined its two sovereign wealth funds to form the National Welfare Fund (NWF).  These funds have a combined holding of $123.4 billion as of April 2020.  The Ministry of Finance oversees the fund’s assets, while the CBR acts as the operational manager.  Russia’s Accounts Chamber regularly audits the NWF, and the results are reported to the State Duma.  The NWF is maintained in foreign currencies, and is included in Russia’s foreign currency reserves, which amounted to $563.4 billion as of March 31, 2020.

Russian state-owned enterprise (SOE)s are subdivided into four main categories:

1) unitary enterprises (federal or municipal, fully owned by the government), of which there are 692 owned by the federal government as of January 1, 2020;

2) other state-owned enterprises where government holds a stake, of which there are 1,079 joint-stock companies owned by the federal government as of January 1, 2019 – such as Sberbank, the biggest Russian retail bank (over 50 percent is owned by the government);

3) natural monopolies, such as Russian Railways; and

4) state corporations (usually a giant conglomerate of companies) such as Rostec and Vnesheconombank (VEB), of which there are currently six.

The number of federal government-owned “unitary enterprises” declined by 44 percent from 1,247 in 2017, according to the Federal Agency for State Property Management, while the number of joint-stock companies with state participation declined by 33.6 percent in the same period.

SOE procurement rules are non-transparent and use informal pressure by government officials to discriminate against foreign goods and services.  Sole-source procurement by Russia’s SOEs increased to 45.5 percent in 2018, or to 37.7 percent in value terms, according to a study by the non-state National Procurement Transparency Rating analytical center.  The current Russian government policy of import substitution mandates numerous requirements for localization of production of certain types of machinery, equipment, and goods.

Privatization Program

The Russian government and its SOEs dominate the economy.  In January 2020, the Russian government published a new privatization plan for 2020-22 that identified 86 federal unitary state enterprises, 186 joint-stock companies, and 13 limited liability companies for privatization over a three-year period.  The plan specifies that market conditions will determine the terms of privatization, but the government estimates the plan could generate RUB 3.6 billion ($48.2 million) per year for the federal budget.  The plan would also reduce the state’s share in VTB, one of Russia’s largest banks, from over 60 percent to 50 percent plus one share and in Sovkomflot, a large shipping company, to 75 percent plus one share within three years.  Other large SOEs might be privatized on an ad hoc basis, depending on market conditions.

The Russian government still maintains a list of 136 SOEs with “national significance” that are either wholly or partially owned by the Russian state and whose privatization is permitted only with a special governmental decree, including Aeroflot, Rosneftegaz, Transneft, Russian Railways, and VTB.  While the total number of SOEs has declined significantly in recent years, mostly large SOEs remain in state hands and “large scale” privatization, intended to help shore up the federal budget and spur economic recovery, is not keeping up with implementation plans.  The government has attributed the slow pace of privatization of large SOEs to low share prices, which would yield insufficient revenue for government coffers.   As a result, the total privatization revenues received in 2018 reached only RUB 2.44 billion ($32 million), down 58 percent compared to 2017.

In 2019, privatization revenues (excluding large SOEs) reached RUB 2.2 billion ($29.5 million), down 40.5 percent compared to the official target of RUB 5.6 billion ($75.0 million).  The government expects that “small-scale privatization” (excluding privatization of large SOEs) will bring up to RUB 3.6 billion ($48.2 million) to the federal budget annually in 2020-2022.

While not standard practice, Russian companies are beginning to show an increased level of interest in their reputation as good corporate citizens. When seeking to acquire companies in Western countries or raise capital on international financial markets, Russian companies face international competition and scrutiny, including with respect to corporate social responsibility (CSR) standards. As a result, most large Russian companies currently have a CSR policy in place, or are developing one, despite the lack of pressure from Russian consumers and shareholders to do so. CSR policies of Russian firms are usually published on corporate websites and detailed in annual reports but do not involve a comprehensive “due diligence” approach of risk mitigation that the OECD Guidelines for Multinational Enterprises promotes. Most companies choose to create their own non-government organization (NGO) or advocacy outreach rather than contribute to an already existing organization. The Russian government is a powerful stakeholder in the development of certain companies’ CSR agendas. Some companies view CSR as merely financial support of social causes and choose to support local health, educational, and social welfare organizations favored by the government. One association, the Russian Union of Industrialists and Entrepreneurs (RSPP), developed a Social Charter of Russian Business in 2004, which 269 Russian companies and organizations have joined as of April 1, 2020.

According to a study conducted by Skolkovo Business School, together with UBS Bank, corporate contributions to charitable causes in Russia reached an estimated RUB 220 billion ($2.9 billion) in 2017.  RSPP reported that as many as 185 major Russian companies published 1,038 corporate non-financial reports between 2000 and 2019, including on social responsibility initiatives.

Despite some government efforts to combat it, the level of corruption in Russia remains high. Transparency International’s 2019 Corruption Perception Index (CPI) ranked Russia 137 out of 180, which was one notch below its 2018 rank.

Roughly 24 percent of entrepreneurs surveyed by the Russian Chamber of Commerce in October and November 2019 said they constantly faced corruption.  Businesses mainly experienced corruption during applications for permits (35.3 percent), during inspections (22.1 percent), and in the procurement processes (38.7 percent).  The areas of government spending that ranked highest in corruption were public procurement, media, national defense, and public utilities.

In March 2020, Russia’s new Prosecutor General Igor Krasnov reported RUB 21 billion ($281 million) were recovered in the course of anticorruption investigations in 2019.  In December 2019, Procurator General’s Office Spokesperson Svetlana Petrenko reported approximately over 7,000 corruption convictions in 2019, including of 752 law enforcement officers, 181 Federal Penitentiary Service (FPS) officers, 81 federal bailiffs, and 476 municipal officials.

Until recently, one of the peculiarities of Russian enforcement practice was that companies were prosecuted almost exclusively for small and mid-scale bribery.  Several 2019 cases indicate that Russian enforcement actions, finally, may extend to more severe offenses as well.  To date, ten convictions of companies for large- or extra large-scale bribery with penalty payments of RUB 20 million ($268,000) or more have been disclosed in 2019 – compared to only four cases in the whole of 2018.  In July 2019, Russian Standard Bank, which is among Russia’s 200 largest companies according to Forbes Russia, had to pay a penalty of RUB 26.5 million ($355,000) for bribing bailiffs in Crimea in order to speed up enforcement proceedings against defaulted debtors.

Still, there is no efficient protection for whistleblowers in Russia.  In June 2019, the legislative initiative aimed at the protection of whistleblowers in corruption cases ultimately failed.  The draft law, which had been adopted at the first reading in December 2017, provided for comprehensive rights of whistleblowers and responsibilities of employers and law enforcement authorities.  Since August 2018, Russian authorities have been authorized to pay whistleblowers rewards which may exceed RUB 3 million ($40,000).  However, rewards alone will hardly suffice to incentivize whistleblowing.

Russia adopted a law in 2012 requiring individuals holding public office, state officials, municipal officials, and employees of state organizations to submit information on the funds spent by them and members of their families (spouses and underage children) to acquire certain types of property, including real estate, securities, stock, and vehicles.  The law also required public servants to disclose the source of the funds for these purchases and to confirm the legality of the acquisitions.

In July 2018, President Putin signed a two-year plan to combat corruption.  The plan required public consultation for federal procurement projects worth more than RUB 50 million ($670,000) and municipal procurement projects worth more than RUB 5 million ($67,000).  The government also expanded the list of property that can be confiscated if the owners fail to prove it was acquired using lawful income.  The government maintains an online registry of officials charged with corruption-related offences, with individuals being listed for a period of five years.

The Constitutional Court has given clear guidance to law enforcement on asset confiscation due to the illicit enrichment of officials.  Russia has ratified the UN Convention against Corruption, but its ratification did not include article 20, which deals with illicit enrichment.  The Council of Europe’s Group of States against Corruption (GRECO) reported in 2019 that Russia had implemented only 10 out of 22 recommendations: eight concern members of the parliament, nine concern judges, and five concern prosecutors , according to a draft report by the office of the Prosecutor General of the Russian Federation that was submitted to the State Duma.

U.S. companies, regardless of size, are encouraged to assess the business climate in the relevant market in which they will be operating or investing and to have effective compliance programs or measures to prevent and detect corruption, including foreign bribery.  U.S. individuals and firms operating or investing in Russia should take time to become familiar with the relevant anticorruption laws of both Russia and the United States in order to comply fully with them.  They should also seek the advice of legal counsel when appropriate.

Resources to Report Corruption

Andrey Avetisyan Ambassador at Large for International Anti-Corruption Cooperation
Ministry of Foreign Affairs
32/34 Smolenskaya-Sennaya pl, Moscow, Russia
+7 499 244-16-06

Anton Pominov
Director General
Transparency International – Russia
Rozhdestvenskiy Bulvar, 10, Moscow
Email: Info@transparency.org.ru

Individuals and companies that wish to report instances of bribery or corruption that affect their operations and request the assistance of the United States government with respect to issues relating to corruption may call the Department of Commerce’s Russia Corruption Reporting hotline at (202) 482-7945, or submit the form provided at http://tcc.export.gov/Report_a_Barrier/reportatradebarrier_russia.asp .

Russia continues to restrict the fundamental freedoms of expression, assembly, and association by cracking down on political opposition, independent media, and civil society.  Since July 2012, Russia has passed a series of laws giving the government the authority to label NGOs as “foreign agents” if they receive foreign funding, greatly restricting the activities of these organizations.  To date, more than 150 NGOs have been labelled foreign agents.  A law enacted in May 2015 authorizes the government to designate a foreign organization as “undesirable” if it is deemed to pose a threat to national security or national interests.  As of April 2020, 22 foreign organizations were included on this list.  (https://minjust.ru/ru/activity/nko/unwanted )

According to the Russian Supreme Court, 7,763 individuals were convicted of economic crimes in 2019; the Russian business community alleges many of these cases stemmed from commercial disputes.  Potential investors should be aware of the risk of commercial disputes being criminalized.  Chechnya, Ingushetia, Dagestan, and neighboring regions in the northern Caucasus have a high risk of violence and kidnapping.

Public protests continue to occur intermittently in Moscow and other cities.  In July and August 2019 in Moscow, large protests took place to voice frustration with the banning of opposition candidates from running in September municipal elections.  Some protests were marred by police brutality and indiscriminate arrests of participants and innocent bystanders.  In April, the Russian government imposed self-isolation orders in an effort to stop the spread of the COVID-19 pandemic. Protesters could not gather in person but did so virtually through on-line platforms, demanding the government provide social assistance or lift restrictions.

The Russian labor market remains fragmented, characterized by limited labor mobility across regions and substantial differences in wages and employment conditions.  Earning inequalities are significant, enforcement of labor standards remains relatively weak, and collective bargaining is underdeveloped.  Employers regularly complain about shortages of qualified skilled labor.  This phenomenon is due, in part, to weak linkages between the education system and the labor market and a shortage of highly skilled labor.  In 2019, the minimum wage in Russia was linked to the official “subsistence” level.  As of April 2020, this  was RUB 12,130 ($162).

The 2002 Labor Code governs labor standards in Russia.  Normal labor inspections identify labor abuses and enforce health and safety standards .  The government generally complies with ILO conventions protecting worker rights, though enforcement is often insufficient, as labor inspectors are over-stretched.  Employers are required to make severance payments when laying off employees in light of worsening market conditions.

The U.S. International Development Finance Corporation (DFC) (previously U.S. Overseas Private Investment Corporation (OPIC)) suspended consideration of any new financing and insurance transactions in Russia after Russia’s 2014 annexation of Crimea.  OPIC previously provided loans, loan guarantees (financing), and investment insurance against political risks to U.S. companies investing in Russia.

The RDIF was established in 2011 as a state-backed private equity fund to operate with long term financial and strategic investors and offer co-financing for foreign investments directed at the modernization of the Russian economy.  RDIF participates in projects estimated from $50 to $500 million, with a share in the project not exceeding 50 percent.  To date, RDIF has invested and committed RUB 1.7 trillion ($22.8 billion).  Of this amount, RDIF itself invested RUB 170 billion ($2.3 billion), while co-investors, partners, and banks provided RUB 1.6 trillion ($21.4 billion).  (Note:  Unless otherwise indicated, the RUB-USD-exchange rate is set at the closing May 5, 2020, rate of RUB 74.65 to the USD throughout the report.)  RDIF has attracted long-term foreign capital investments totaling more than $40 billion in the energy, energy saving technologies, telecommunications, and healthcare sectors.  The RDIF invests predominantly in Russia, but up to 20 percent of RDIF’s capital may be invested outside of the country provided that these projects are beneficial to the Russian economy.

* Source for Host Country Data: FDI data – Central Bank of Russia (CBR); GDP data – Rosstat (GDP) (Russia’s GDP was RUB 104,630 billion in 2018, according to Rosstat.  The yearly average RUB-USD-exchange rate in 2018, according to the CBR, was RUB 62.7078 to the USD).

Embassy of the United States of America
Economic Section
Bolshoy Deviatinsky Pereulok No. 8
Moscow 121099, Russian Federation
+7 (495) 728-5000 (Economic Section)
Email: MoscowECONESTHAmericans@state.gov

Policies Towards Foreign Direct Investment

Singapore maintains a heavily trade-dependent economy characterized by an open investment regime, with some licensing restrictions in the financial services, professional services, and media sectors. The World Bank’s Doing Business 2020 report ranked Singapore as the world’s second-easiest country in which to do business. The 2019 Global Competitiveness Report ranks Singapore as the most competitive economy globally. The 2004 USSFTA expanded U.S. market access in goods, services, investment, and government procurement, enhanced intellectual property protection, and provided for cooperation in promoting labor rights and the environment.

The government is committed to maintaining a free market, but it also actively plans Singapore’s economic development, including through a network of state wholly-owned and majority-owned enterprises (SOEs). As of February 2019, the top three Singapore-listed SOEs accounted for 13.1 percent of total capitalization of the Singapore Exchange (SGX). Some observers have criticized the dominant role of SOEs in the domestic economy, arguing that they have displaced or suppressed private sector entrepreneurship and investment.

Singapore’s legal framework and public policies are generally favorable toward foreign investors. Foreign investors are not required to enter into joint ventures or cede management control to local interests, and local and foreign investors are subject to the same basic laws. Apart from regulatory requirements in some sectors (reference Limits on National Treatment and Other Restrictions), eligibility for various incentive schemes depends on investment proposals meeting the criteria set by relevant government agencies. Singapore places no restrictions on reinvestment or repatriation of earnings or capital. The judicial system, which includes international arbitration and mediation centers and a commercial court, upholds the sanctity of contracts, and decisions are generally considered to be transparent and effectively enforced.

Singapore’s Economic Development Board (EDB) is the lead promotion agency that facilitates foreign investment into Singapore (https:www.edb.gov.sg ). EDB undertakes investment promotion and industry development and works with foreign and local businesses by providing information and facilitating introductions and access to government incentives for local and international investments. The government maintains close engagement with investors through the EDB, which provides feedback to other government agencies, such as the recently launched Infrastructure Asia, to ensure that infrastructure and public services remain efficient and cost-competitive.

Exceptions to Singapore’s general openness to foreign investment exist in sectors considered critical to national security, including telecommunications, broadcasting, the domestic news media, financial services, legal and accounting services, ports and airports, and property ownership. Under Singapore law, articles of incorporation may include shareholding limits that restrict ownership in corporations by foreign persons.

Telecommunications

Since 2000, the Singapore telecommunications market has been fully liberalized. This move has allowed foreign and domestic companies seeking to provide facilities-based (e.g. fixed line or mobile networks) or services-based (e.g. local and international calls and data services over leased networks) telecommunications services to apply for licenses to operate and deploy telecommunication systems and services. Singapore Telecommunications (Singtel) –majority owned by Temasek, a state-owned investment company with the Singapore Minister for Finance as its sole shareholder – faces competition in all market segments. However, its main competitors, M1 and StarHub, are also SOEs. In December 2018, Australian telco TPG Telecom launched a free 12-month service, including unlimited data and free local TPG-to-TPG calls. Approximately thirty mobile virtual network operator services (MVNOs) have also entered the market. The three established Singapore telecommunications competitors are expected to strengthen their partnerships with the MVNOs in a defensive move against TPG’s entry.

As of February 2020, Singapore has 70 facilities-based operators and 251 services-based (individual) operators offering telecommunications services. Since 2007, Singtel has been exempted from dominant licensee obligations for the residential and commercial portions of the retail international telephone services. Singtel is also exempted from dominant licensee obligations for wholesale international telephone services, international managed data, international IP transit, leased satellite bandwidth (VSAT, DVB-IP, satellite TV Downlink, and Satellite IPLC), terrestrial international private leased circuit, and backhaul services. The Info-communications Media Development Authority (IMDA) granted Singtel’s exemption after assessing that the market for these services had effective competition. Singapore’s IMDA operates as both the regulatory agency and the investment promotion agency for the country’s telecommunications sector. IMDA conducts public consultations on major policy reviews and provides decisions on policy changes to relevant companies.

To facilitate 5G technology and service trials, IMDA has waived frequency fees for companies interested in conducting 5G trials for equipment testing, research, and assessment of commercial potential. In 2019, IMDA issued a subsequent 5G Call for Proposal to provide for two nationwide 5G networks and smaller, specialized 5G networks. IMDA announced April 29 that Singtel, Singapore’s largest mobile network operator (MNO), and a separate joint venture between StarHub and M1, were awarded rights to build two 5G networks that are expected to provide 5G coverage to more than half the country by the end of 2022, with the goal of full coverage by the end of 2025. These three companies, along with Singapore’s only other MNO, TPG Telecom, are also now permitted to launch smaller, specialized 5G networks to support specialized applications, such as manufacturing and port operations. Singapore’s government did not hold a traditional spectrum auction, instead charging a moderate, flat fee to operate the networks, and evaluating proposals from the MNOs based on their ability to provide effective coverage, meet regulatory requirements, invest significant financial resources, and address cybersecurity and network resilience concerns. The announcement emphasized the importance of the winning MNOs using multiple vendors, to ensure security and resilience. Singapore has committed to being one of the first countries to make 5G services broadly available, and its tightly managed 5G-rollout process continues apace, despite COVID-19. The government views this as a necessity for a country that prides itself on innovation and has pushed Singapore’s MNOs to move forward with 5G, even as these private firms worry that the commercial potential does not yet justify the extensive upfront investment necessary to develop new networks.

Media

The local free-to-air broadcasting, cable, and newspaper sectors are effectively closed to foreign firms. Section 44 of the Broadcasting Act restricts foreign equity ownership of companies broadcasting in Singapore to 49 percent or less, although the Act does allow for exceptions. Individuals cannot hold shares that would make up more than five percent of the total votes in a broadcasting company without the government’s prior approval. The Newspaper and Printing Presses Act (NPPA) restricts equity ownership (local or foreign) of newspaper companies to less than five percent per shareholder and requires that directors be Singapore citizens. Newspaper companies must issue two classes of shares, ordinary and management, with the latter available only to Singapore citizens or corporations approved by the government. Holders of management shares have an effective veto over selected board decisions.

Singapore regulates content across all major media outlets. The government controls the distribution, importation, and sale of any newspaper and has curtailed or banned the circulation of some foreign publications. Singapore’s leaders have also brought defamation suits against foreign publishers, which have resulted in the foreign publishers issuing apologies and paying damages. Several dozen publications remain prohibited under the Undesirable Publications Act, which restricts the import, sale, and circulation of publications that the government considers contrary to public interest. Examples include pornographic magazines, publications by banned religious groups, and publications containing extremist religious views. Following a routine review in 2015, the formerly named Media Development Authority lifted a ban on 240 publications, ranging from decades-old anti-colonial and communist material to adult interest content.

Singaporeans generally face few restrictions on the internet. However, the IMDA has blocked various websites containing objectionable material, such as pornography and racist and religious hatred sites. Online news websites that report regularly on Singapore and have a significant reach are individually licensed, which requires adherence to requirements to remove prohibited content within 24 hours of notification from IMDA. Some view this regulation as a way to censor online critics of the government.

In April 2019, the government introduced legislation in Parliament to counter “deliberate online falsehoods.” The legislation, called the Protection from Online Falsehoods and Manipulation Act (POFMA) entered into force on October 2, 2019, requires online platforms to run carry correction notifications alongside statements that government ministers classify as factually false or misleading, and which they deem likely to threaten national security, diminish public confidence in the government, incite feelings of ill will between people, or influence an election “online falsehoods.” Non-compliance is punishable by fines and/or imprisonment and the government can use stricter measures such as disabling access to end-users in Singapore and forcing online platforms to disallow persons in question from using its services in Singapore. U.S. social media companies have reported being the target of the majority of POFMA cases so far. U.S. media and social media sites continue to operate in Singapore, but a few major players have ceased running political ads after the government announced that it would impose penalties on sites or individuals that spread “misinformation,” as determined by the government.

Pay-Television

Mediacorp TV is the only free-to-air TV broadcaster and is 100 percent owned by the government via Temasek Holdings (Temasek). Local pay-TV providers are StarHub and Singtel, which are both partially owned by Temasek or its subsidiaries. Local free-to-air radio broadcasters are Mediacorp Radio Singapore, which is also owned by Temasek Holdings, SPH Radio, owned by the publicly-held Singapore Press Holdings, and So Drama! Entertainment, owned by the Singapore Ministry of Defense. BBC World Services is the only foreign free-to-air radio broadcaster in Singapore.

To rectify the high degree of content fragmentation in the Singapore pay-TV market, and shift the focus of competition from an exclusivity-centric strategy to other aspects such as service differentiation and competitive packaging, the MDA implemented cross-carriage measures in 2011 requiring pay-TV companies designated by MDA to be Receiving Qualified Licensees (RQL) – currently Singtel and StarHub – to cross-carry content subject to exclusive carriage provisions. Correspondingly, Supplying Qualified Licensees (SQLs) with an exclusive contract for a channel are required to carry that content on other RQL pay-TV companies. In February 2019, the IMDA proposed to continue the current cross-carriage measures. The Motion Picture Association of America (MPAA) has expressed concern that this measure restricts copyright exclusivity. Content providers consider the measures an unnecessary interference in a competitive market that denies content holders the ability to negotiate freely in the marketplace, and an interference with their ability to manage and protect their intellectual property. More common content is now available across the different pay-TV platforms, and the operators are beginning to differentiate themselves by originating their own content, offering subscribed content online via PCs and tablet computers, and delivering content via fiber networks.

Streaming services have entered the market, which MPAA has found leads to a significant reduction in intellectual property infringements. StarHub and Singtel have both partnered with multiple content providers, including U.S. companies, to provide streaming content in Singapore and around the region.

Banking and Finance

The Monetary Authority of Singapore (MAS) regulates all banking activities as provided for under the Banking Act. Singapore maintains legal distinctions between foreign and local banks and the type of license (i.e. full service, wholesale, and offshore banks) held by foreign commercial banks. As of May 2020, 29 foreign full-service licensees and 99 wholesale banks operated in Singapore. An additional 24 merchant banks are licensed to conduct corporate finance, investment banking, and other fee-based activities. Offshore and wholesale banks are not allowed to operate Singapore dollar retail banking activities. Only Full Banks and “Qualifying Full Banks” (QFBs) can operate Singapore dollar retail banking activities but are subject to restrictions on the number of places of business, ATMs, and ATM networks. Additional QFB licenses may be granted to a subset of full banks, which provide greater branching privileges and greater access to the retail market than other full banks. As of May 2020, there are 9 banks operating QFB licenses.

Except in retail banking, Singapore laws do not distinguish operationally between foreign and domestic banks. Currently, all banks in Singapore are required to maintain a Domestic Banking Unit (DBU) and an Asian Currency Unit (ACU), separating international and domestic banking operations from each other. Transactions in Singapore dollars can be booked only in the DBU whereas transactions in foreign currency are typically booked in the ACU. The ACU is an accounting unit that the banks use to book all their foreign currency transactions conducted in the Asian Dollar Market (ADM). This enables additional prudential requirements to be imposed on banks’ domestic businesses in Singapore, while also avoiding undue restrictions on the offshore activities of banks. Following public consultations, MAS initiated a 30-month implementation timeline from February 2017 for the removal of the DBU-ACU divide, which align revisions made to MAS 610 (Submission of Statistics and Returns).

The government initiated a banking liberalization program in 1999 to ease restrictions on foreign banks and has supplemented this with phased-in provisions under the USSFTA, including removal of a 40 percent ceiling on foreign ownership of local banks and a 20 percent aggregate foreign shareholding limit on finance companies. The Minister in charge of the Monetary Authority of Singapore must approve the merger or takeover of a local bank or financial holding company, as well as the acquisition of voting shares in such institutions above specific thresholds of 5 , 12, or 20 percent of shareholdings.

Although Singapore’s government has lifted the formal ceilings on foreign ownership of local banks and finance companies, the approval of controllers of local banks ensures that this control rests with individuals or groups whose interests are aligned with the long-term interests of the Singapore economy and Singapore’s national interests. Of the 29 full-service licenses granted to foreign banks, three have gone to U.S. banks. U.S. financial institutions enjoy phased-in benefits under the USSFTA. Since 2006, U.S.-licensed full-service banks that are also QFBs, which is only one as of May 2020, have been able to operate at an unlimited number of locations (branches or off-premises ATMs).. U.S. and foreign full-service banks with QFB status can freely relocate existing branches and share ATMs among themselves. They can also provide electronic funds transfer and point-of-sale debit services and accept services related to Singapore’s compulsory pension fund. In 2007, Singapore lifted the quota on new licenses for U.S. wholesale banks.

Locally and non-locally incorporated subsidiaries of U.S. full-service banks with QFB status can apply for access to local ATM networks. However, no U.S. bank has come to a commercial agreement to gain such access. Despite liberalization, U.S. and other foreign banks in the domestic retail-banking sector still face barriers. Under the enhanced QFB program launched in 2012, MAS requires QFBs it deems systemically significant to incorporate locally. If those locally incorporated entities are deemed “significantly rooted” in Singapore, with a majority of Singaporean or permanent resident members, Singapore may grant approval for an additional 25 places of business, of which up to ten may be branches. Local retail banks do not face similar constraints on customer service locations or access to the local ATM network. As noted above, U.S. banks are not subject to quotas on service locations under the terms of the USSFTA. Holders of credit cards issued locally by U.S. banks incorporated in Singapore cannot access their accounts through the local ATM networks. They are also unable to access their accounts for cash withdrawals, transfers, or bill payments at ATMs operated by banks other than those operated by their own bank or at foreign banks’ shared ATM network. Nevertheless, full-service foreign banks have made significant inroads in other retail banking areas, with substantial market share in products like credit cards and personal and housing loans.

In January 2019, MAS announced the passage of the Payment Services Bill after soliciting public feedback for design of the bill. The bill requires more payment services such as digital payment tokens, dealing in virtual currency and merchant acquisition, to be licensed and regulated by MAS. In order to reduce the risk of misuse for illicit purposes, it also limits the amount of funds that can be held in or transferred out of a personal payment account (e.g. mobile wallets) in a year. Regulations are tailored to the type of activity preformed and addresses issues related to terrorism financing, money laundering, and cyber risks. To expand the banking industry, MAS has procured bids for digital online bank licenses, which are set to be announced in June 2020 and begin operation in the middle of 2021.

Singapore has no trading restrictions on foreign-owned stockbrokers. There is no cap on the aggregate investment by foreigners regarding the paid-up capital of dealers that are members of the SGX. Direct registration of foreign mutual funds is allowed provided MAS approves the prospectus and the fund. The USSFTA has relaxed conditions foreign asset managers must meet in order to offer products under the government-managed compulsory pension fund (Central Provident Fund Investment Scheme).

Legal Services

The Legal Services Regulatory Authority (LSRA) under the Ministry of Law oversees the regulation, licensing, and compliance of all law practice entities and the registration of foreign lawyers in Singapore. Foreign law firms with a licensed Foreign Law Practice (FLP) may offer the full range of legal services in foreign law and international law but cannot practice Singapore law except in the context of international commercial arbitration. U.S. and foreign attorneys are allowed to represent parties in arbitration without the need for a Singapore attorney to be present. To offer Singapore law, FLPs require either a Qualifying Foreign Law Practice (QFLP) license, a Joint Law Venture (JLV) with a Singapore Law Practice (SLP), or a Formal Law Alliance (FLA) with a SLP. The vast majority of Singapore’s 130 foreign law firms operate FLPs, while QFLPs and JLVs each number in the single digits.

The QFLP licenses allow foreign law firms to practice in permitted areas of Singapore law, which excludes constitutional and administrative law, conveyancing, criminal law, family law, succession law, and trust law. As of May 2020, there are nine QFLPs in Singapore, including five U.S. firms. In January 2019, the Ministry of Law announced the deferral to 2020 of the decision to renew the licenses of five QFLPs, which were set to expire in 2019 so that the government can better assess their contribution to Singapore along with the other four firms whose licenses were also extended to 2020. Decisions on the renewal considers the firms’ quantitative and qualitative performance such as the value of work that the Singapore office will generate, the extent to which the Singapore office will function as the firm’s headquarter for the region, the firm’s contributions to Singapore, and the firm’s proposal for the new license period.

A JLV is a collaboration between a Foreign Law Practice and Singapore Law Practice, which may be constituted as a partnership or company. The Director of Legal Services in the LSRA will consider all the relevant circumstances including the proposed structure and its overall suitability to achieve the objectives for which Joint law Ventures are permitted to be established. There is no clear indication on the percentage of shares that each JLV partner may hold in the JLV.

Law degrees from designated U.S., British, Australian, and New Zealand universities are recognized for purposes of admission to practice law in Singapore. Under the USSFTA, Singapore recognizes law degrees from Harvard University, Columbia University, New York University, and the University of Michigan. Singapore will admit to the Singapore Bar law school graduates of those designated universities who are Singapore citizens or permanent residents, and ranked among the top 70 percent of their graduating class or have obtained lower-second class honors (under the British system).

Engineering and Architectural Services

Engineering and architectural firms can be 100 percent foreign-owned. Engineers and architects are required to register with the Professional Engineers Board and the Board of Architects, respectively, to practice in Singapore. All applicants (both local and foreign) must have at least four years of practical experience in engineering, of which two are acquired in Singapore. Alternatively, students can attend two years of practical training in architectural works, and pass written and/or oral examinations set by the respective Board.

Accounting and Tax Services

The major international accounting firms operate in Singapore. Registration as a public accountant under the Accountants Act is required to provide public accountancy services (i.e. the audit and reporting on financial statements and other acts that are required by any written law to be done by a public accountant) in Singapore, although registration as a public accountant is not required to provide other accountancy services, such as accounting, tax, and corporate advisory work. All accounting entities that provide public accountancy services must be approved under the Accountants Act and their supply of public accountancy services in Singapore must be under the control and management of partners or directors who are public accountants ordinarily resident in Singapore. In addition, if the accounting entity firm has two partners or directors, at least one of them must be a public accountant. If the business entity has more than two accounting partners or directors, two-thirds of the partners or directors must be public accountants.

Energy

Singapore further liberalized its gas market with the amendment of the Gas Act and implementation of a Gas Network Code in 2008, which were designed to give gas retailers and importers direct access to the onshore gas pipeline infrastructure. However, key parts of the local gas market, such as town gas retailing and gas transportation through pipelines remain controlled by incumbent Singaporean firms. Singapore has sought to grow its supply of Liquefied Natural Gas (LNG), and BG Singapore Gas Marketing Pte Ltd (acquired by Royal Dutch Shell in February 2016) was appointed in 2008 as the first aggregator with an exclusive franchise to import LNG to be sold in its re-gasified form in Singapore. In October 2017, Shell Eastern Trading Pte Ltd and Pavilion Gase Pte Ltd were awarded import licenses to market up to 1 Million Tonnes Per Annum (Mtpa) or for three years, whichever occurs first. This also marked the conclusion of the first exclusive franchise awarded to BG Singapore Gas Marketing Pte Ltd.

Beginning in November 2018 and concluding in May 2019, Singapore rolled out the launch of an Open Electricity Market (OEM). Previously, Singapore Power was the only electricity retailer. As of October 2019, 40 percent of resident consumers had switched to a new electricity retailer and are saving between 20 and 30 percent on their monthly bills. To participate in the Open Electricity Market licensed retailers must satisfy additional credit, technical, and financial requirements set by EMA in order to sell electricity to households and small businesses. There are two types of electricity retailers: Market Participant Retailers (MPRs) and Non-Market Participant Retailers (NMPRs). MPRs have to be registered with the Energy Market Company (EMC) to purchase electricity from the National Electricity Market of Singapore (NEMS) to sell to contestable consumers. NMPRs need not register with EMC to participate in the NEMS since they will purchase electricity indirectly from the NEMS through the Market Support Services Licensee (MSSL). As of April 2020, there were 12 retailers in the market, including foreign and local entities.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign and local entities may readily establish, operate, and dispose of their own enterprises in Singapore subject to certain requirements. A foreigner who wants to incorporate a company in Singapore is required to appoint a local resident director; foreigners may continue to reside outside of Singapore. Foreigners who wish to incorporate a company and be present in Singapore to manage its operations are strongly advised to seek approval from the Ministry of Manpower (MOM) before incorporation. Except for representative offices (where foreign firms maintain a local representative but do not conduct commercial transactions in Singapore) there are no restrictions on carrying out remunerative activities. As of October 2017, foreign companies may seek to transfer their place of registration and be registered as companies limited by shares in Singapore under Part XA (Transfer of Registration) of the Companies Act (https://sso.agc.gov.sg/Act/CoA1967). Such transferred foreign companies are subject to the same requirements as locally-incorporated companies.

All businesses in Singapore must be registered with the Accounting and Corporate Regulatory Authority (ACRA). Foreign investors can operate their businesses in one of the following forms: sole proprietorship, partnership, limited partnership, limited liability partnership, incorporated company, foreign company branch or representative office. Stricter disclosure requirements were passed in March 2017 requiring foreign company branches registered in Singapore to maintain public registers of their members. All companies incorporated in Singapore, foreign companies, and limited liability partnerships registered in Singapore are also required to maintain beneficial ownership in the form of a register of controllers (generally individuals or legal entities with more than 25 percent interest or control of the companies and foreign companies) aimed at preventing money laundering.

While there is currently no cross-sectional screening process for foreign investments, investors are required to seek approval from specific sector regulators for investments into certain firms. These sectors include energy, telecommunications, broadcasting, the domestic news media, financial services, legal services, public accounting services, ports and airports, and property ownership. Under Singapore law, Articles of Incorporation may include shareholding limits that restrict ownership in corporations by foreign persons.

Singapore does not maintain a formalized investment screening mechanism for inbound foreign investment. There are no reports of U.S. investors being especially disadvantaged or singled out relative to other foreign investors.

Other Investment Policy Reviews

Singapore underwent a trade policy review with the World Trade Organization (WTO) in July 2016. No major policy recommendations were raised. This was the country’s only policy review in the past four years, with another WTO review expected later in 2020. (https://www.wto.org/english/tratop_e/tpr_e/tp443_e.htmhttps://www.wto.org/english/tratop_e/tpr_e/tp443_e.htm )

The OECD and United Nations Industrial Development Organization (UNIDO) released a joint report in February 2019 on the ASEAN-OECD Investment Program. The Program aims to foster dialogue and experience sharing between OECD countries and Southeast Asian economies on issues relating to the business and investment climate. It is implemented through regional policy dialogue, country investment policy reviews, and training seminars. (https://www.oecd.org/industry/inv/mne/seasia.htm)

The OECD released a Transfer Pricing Country Profile for Singapore in June 2018. The country profiles focus on countries’ domestic legislation regarding key transfer pricing principles, including the arm’s length principle, transfer pricing methods, comparability analysis, intangible property, intra-group services, cost contribution agreements, transfer pricing documentation, administrative approaches to avoiding and resolving disputes, safe harbors and other implementation measures. (https://www.oecd.org/tax/transfer-pricing/transfer-pricing-country-profile-singapore.pdf)

The OECD released a peer review report in March 2018 on Singapore’s implementation of internationally agreed tax standards under Action Plan 14 of the base erosion and profit shifting (BEPS) project. Action 14 strengthens the effectiveness and efficiency of the mutual agreement procedure, a cross-border tax dispute resolution mechanism. (http://www.oecd.org/corruption-integrity/reports/singapore-2018-peer-review-report-transparency-exchange-information-aci.html)

The UNCTAD has not conducted an IPR of Singapore.

Business Facilitation

Singapore’s online business registration process is clear and efficient and allows foreign companies to register branches. All businesses must be registered with the Accounting & Corporate Regulatory Authority (ACRA) through Bizfile, its online registration and information retrieval portal (https://www.bizfile.gov.sg/), including any individual, firm or corporation that carries out business for a foreign company. Applications are typically processed immediately after the application fee is paid, but may take between 14 to 60 days, if the application is referred to another agency for approval or review. The process of establishing a foreign-owned limited liability company in Singapore is among the fastest of the countries surveyed by IAB.

ACRA (www.acra.gov.sg ) provides a single window for business registration. Additional regulatory approvals (e.g. licensing or visa requirements) are obtained via individual applications to the respective Ministries or Statutory Boards. Further information and business support on registering a branch of a foreign company is available through the EDB (https://www.edb.gov.sg/en/how-we-help/setting-up.html ) and GuideMeSingapore, a corporate services firm Hawskford (https://www.guidemesingapore.com/).

Foreign companies may lease or buy privately or publicly held land in Singapore, though there are some restrictions on foreign ownership of property. Foreign companies are free to open and maintain bank accounts in foreign currency. There is no minimum paid-in capital requirement, but at least one subscriber share must be issued for valid consideration at incorporation.

At GER (ger.co), Singapore’s online business registration process scores 7/10 in Online Single Windows (https://www.bizfile.gov.sg/).

Business facilitation processes provide for fair and equal treatment of women and minorities, and there are no mechanisms that provide special assistance to women and minorities.

Outward Investment

Singapore places no restrictions on domestic investors investing abroad. The government promotes outward investment through Enterprise Singapore, a statutory board under the Ministry of Trade and Industry (MTI). It provides market information, business contacts, and financial assistance and grants for internationalizing companies. While it has a global reach and runs overseas centers in major cities across the world, a large share of its overseas centers are located in major trading and investment partners and regional markets like China, India, and ASEAN.

Transparency of the Regulatory System

The government establishes clear rules that foster competition. The USSFTA enhances transparency by requiring regulatory authorities to consult with interested parties before issuing regulations, and to provide advance notice and comment periods for proposed rules, as well as to publish all regulations. Singapore’s legal, regulatory, and accounting systems are transparent and consistent with international norms.

Rule-making authority is vested in the Parliament to pass laws that determine the regulatory scope, purpose, rights and powers of the regulator and the legal framework for the industry. Regulatory authority is vested in government ministries or in statutory boards, which are organizations that have been given autonomy to perform an operational function by legal statutes passed as Acts in parliament, and report to a specific Ministry. Local laws give regulatory bodies wide discretion to modify regulations and impose new conditions, but in practice agencies use this positively to adapt incentives or other services on a case-by-case basis to meet the needs of foreign as well as domestic companies. Acts of Parliament also confer certain powers on a Minister or other similar persons or authorities to make rules or regulations in order to put the Act into practice; these rules are known as subsidiary legislation.

National-level regulations are the most relevant for foreign businesses. Singapore, being a city-state, has no local or state regulatory layers.

Before a ministry instructs the Attorney-General’s Chambers (AGC) to draft a new bill or make an amendment to a bill, the ministry has to seek in-principle approval from the Cabinet for the proposed bill. The Legislation Division of AGC advises and helps vet or draft bills in conjunction with policymakers from relevant ministries. Public and private consultations are often requested for proposed draft legislative amendments. Thereafter, the Cabinet’s approval is required before the bill can be introduced in Parliament.  All Bills passed by Parliament (with some exceptions) must be forwarded to the Presidential Council for Minority Rights (PCMR) for scrutiny, and thereafter presented to the President for assent. Only after the President has assented to the Bill does the Bill become law (i.e. an Act of Parliament).

While ministries or regulatory agencies do conduct internal impact assessments of proposed regulations, there are no criteria used for determining which proposed regulations are subjected to an impact assessment, and there are no specific regulatory impact assessment guidelines. There is no independent agency tasked with reviewing and monitoring regulatory impact assessments and distributing findings to the public. The Ministry of Finance publishes a biennial Singapore Public Sector Outcomes Review (http://www.mof.gov.sg/Resources/Singapore-Public-Sector-Outcomes-Review-SPOR). It focuses on broad outcomes and indicators rather than policy evaluation. Results of scientific studies or quantitative analysis conducted in review of policies and regulations are not made publicly available.

Industry self-regulation occurs in several areas, including advertising and corporate governance. Advertising Standards Authority of Singapore  (ASAS), an advisory council under the Consumers Association of Singapore, administers the Singapore Code of Advertising Practice, which focuses on ensuring that advertisements are legal, decent, and truthful. Listed companies are required under the Singapore Exchange (SGX) Listing Rules to describe in their annual reports their corporate governance practices with specific reference to the principles and provisions of the Code. Listed companies must comply with the principles of the Code, and, if their practices vary from any provisions of the Code, they must note the reason for the variation and explain how the practices they have adopted are consistent with the intent of the relevant principle. The SGX plays the role of a self-regulatory organization (SRO) in listings, market surveillance, and member supervision to uphold the integrity of the market and ensure participants’ adherence to trading and clearing rules. There have been no reports of discriminatory practices aimed at foreign investors.

Singapore’s legal and accounting procedures are transparent and consistent with international norms and rank similar to the U.S. in international comparisons (http://worldjusticeproject.org/rule-of-law-index ). The prescribed accounting standards for Singapore-incorporated companies applying to be or are listed in the public market, Singapore Exchange, are known as Singapore Financial Reporting Standards (SFRS(I)), which areidentical to those of the International Accounting Standards Board (IASB). Non-listed Singapore-incorporated companies can voluntarily apply for SFRS(I). Otherwise, they are required to comply with Singapore Financial Reporting Standards (SFRS), which are also aligned with those of IASB. For the use of foreign accounting standards, the companies are required to seek approval of the Accounting and Corporate Regulatory Authority (ACRA).

For foreign companies with primary listings on the Singapore Exchange, the SGX Listing Rules allow the use of alternative standards such as International Financial Reporting Standards (IFRS) or the U.S. Generally Accepted Accounting Principles (U.S. GAAP). Accounts prepared in accordance with IFRS or U.S. GAAP need not be reconciled to SFRS(1). Companies with secondary listings on the Singapore Exchange need only reconcile their accounts to SFRS(I), IFRS, or U.S. GAAP.

Notices of proposed legislation to be considered by Parliament are published, including the text of the laws, the dates of the readings, and whether or not the laws eventually pass. The government has established a centralized Internet portal (www.reach.gov.sg ) to solicit feedback on selected draft legislation and regulations, a process that is being used with increasing frequency. There is no stipulated consultative period. Results of consultations are usually consolidated and published on relevant websites. As noted in the “Openness to Foreign Investment” section, some U.S. companies, in particular in the telecommunications and media sectors, are concerned about the government’s lack of transparency in its regulatory and rule-making process. However, many U.S. firms report they have opportunities to weigh in on pending legislation that affects their industries. These mechanisms also apply to investment laws and regulations.

The Parliament of Singapore website (https://www.parliament.gov.sg/parliamentary-business/bills-introduced ) publishes a database of all Bills introduced, read, and passed in Parliament in chronological order as of 2006. The contents are the actual draft texts of the proposed legislation/legislative amendments. All statutes are also publicly available in the Singapore Statutes Online website (https://sso.agc.gov.sg ). However, there is no centralized online location where key regulatory actions are published. Regulatory actions are published separately on websites of Statutory Boards.

Enforcement of regulatory offences is governed by both Acts of Parliament and subsidiary legislation. Enforcement powers of government statutory bodies are typically enshrined in the Act of Parliament constituting that statutory body. There is accountability to Parliament for enforcement action through Question Time, where Members of Parliament may raise questions with the Ministers on their respective Ministries’ responsibilities.

Singapore’s judicial system and courts serve as the oversight mechanism in respect of executive action (such as the enforcement of regulatory offences) and dispense justice based on law. The Supreme Court, which is made up of the Court of Appeal and the High Court, hears both civil and criminal matters. The Chief Justice heads the Judiciary. The President appoints the Chief Justice, the Judges of Appeal and the Judges of the High Court if she, acting at her discretion, concurs with the advice of the Prime Minister.

No systemic regulatory reforms or enforcement reforms relevant to foreign investors have been announced. The Monetary Authority of Singapore focuses enforcement efforts on timely disclosure of corporate information, business conduct of financial advisors, compliance with anti-money laundering/combatting the financing of terrorism requirements, deterring stock market abuse, and insider trading.. In March 2019, MAS published its inaugural Enforcement Report detailing enforcement measures and publishes recent enforcement actions on its website (https://www.mas.gov.sg/regulation/enforcement/enforcement-actions ).

International Regulatory Considerations

Singapore was the 2018 chair of the Association of Southeast Asian Nations (ASEAN). ASEAN is working towards the 2025 ASEAN Economic Community (AEC) Blueprint aimed at achieving a single market and production base, with a free flow of goods, services, and investment within the region. While ASEAN is working towards regulatory harmonization, there are no regional regulatory systems in place; instead, ASEAN agreements and regulations are enacted through each ASEAN Member State’s domestic regulatory system. While Singapore has expressed interest in driving intra-regional trade, the dynamics of ASEAN economies are convergent.

The WTO’s 2016 trade policy review notes that Singapore’s guiding principle for standardization is to align national standards with international standards, and Singapore is an elected member of the International Organization of Standardization (ISO) and International Electrotechnical Commission (IEC) Councils. Singapore encourages the direct use of international standards whenever possible. Singapore Standards (SS) are developed when there is no appropriate international standard equivalent, or when there is a need to customize standards to meet domestic requirements. At the end of 2015, Singapore had a stock of 553 SS, about 40 percent of which were references to international standards. Enterprise Singapore, the Singapore Food Agency, and the Ministry of Trade and Industry are the three national enquiry points under the TBT Agreement. There are no known reports of omissions in reporting to TBT.

A non-exhaustive list of major international norms and standards referenced or incorporated into the country’s regulatory systems include Base Erosion and Profit Shifting (BEPS) project, Common Reporting Standards (CRS), Basel III, EU Dual-Use Export Control Regulation, Exchange of Information on Request, 27 International Labor Organization (ILO) conventions on labor rights and governance, UN conventions, and WTO agreements.

Singapore is signatory to the Trade Facilitation Agreement (TFA). The WTO reports that Singapore has fully implemented the TFA (https://www.tfadatabase.org/members/singapore ).

Legal System and Judicial Independence

Singapore’s legal system has its roots in English common law and practice and is enforced by courts of law. The current judicial process is procedurally competent, fair, and reliable. In the 2020 Rule of Law Index by World Justice Project , it is ranked overall 12th in the world, 1st on order and security, 3rd on regulatory enforcement, 3rd in absence of corruption, 6th on civil and criminal justice, 29th on constraints on government powers, 26th on open government, and 32nd on fundamental rights. Singapore’s legal procedures are ranked 1st in the world in the World Bank’s 2020 Ease of Doing Business sub-indicator on contract enforcement which measures speed, cost, and quality of judicial processes to resolve a commercial dispute. The judicial system remains independent of the executive branch and the executive does not interfere in judiciary matters.

Laws and Regulations on Foreign Direct Investment

Singapore strives to promote an efficient, business-friendly regulatory environment. Tax, labor, banking and finance, industrial health and safety, arbitration, wage, and training rules and regulations are formulated and reviewed with the interests of both foreign investors and local enterprises in mind. Starting in 2005, a Rules Review Panel, comprising senior civil servants, began overseeing a review of all rules and regulations; this process will be repeated every five years. A Pro-Enterprise Panel  of high-level public sector and private sector representatives examines feedback from businesses on regulatory issues and provides recommendations to the government.

The Cybersecurity Act, which came into force in August 2018, establishes a comprehensive regulatory framework for cybersecurity. The Act provides the Commissioner of Cyber Security with powers to investigate, prevent, and assess the potential impact of cyber security incidents and threats in Singapore. These can include requiring persons and organizations to provide requested information, requiring the owner of a computer system to take any action to assist with cyber investigations, directing organizations to remediate cyber incidents, and, if safeguards have been met, authorizing officers to enter premises, and installing software and take possession of computer systems to prevent serious cyber-attacks in the event of severe threat. The Act also establishes a framework for the designation and regulation of Critical Information Infrastructure (CII). Requirements for CII owners include a mandatory incident reporting regime, regular audits and risk assessments, and participation in national cyber security stress tests. In addition, the Act will establish a regulatory regime for cyber security service providers and required licensing for penetration testing and managed security operations center (SOC) monitoring services. U.S. business chambers have expressed concern about the effects of licensing and regularly burdens on compliance costs, insufficient checks and balances on the investigatory powers of the authorities, and the absence of a multidirectional cyber threat sharing framework that includes protections from liability. Under the law, additional measures, such as the Cybersecurity Labelling Scheme, continue to be introduced. Authorities stress that, “in view of the need to strike a good balance between industry development and cybersecurity needs, the licensing framework will take a light-touch approach.”

Competition and Anti-Trust Laws

The Competition and Consumer Commission of Singapore (CCCS) is a statutory board under the Ministry of Trade and Industry (MTI) and is tasked with administering and enforcing the Competition Act. The Act contains provisions on anti-competitive agreements, decisions, and practices; abuse of dominance; enforcement and appeals process; and mergers and acquisitions. The Competition Act was enacted in 2004 in accordance with U.S-Singapore FTA commitments, which contains specific conduct guarantees to ensure that Singapore’s GLCs will operate on a commercial and non-discriminatory basis towards U.S. firms. GLCs with substantial revenues or assets are also subject to enhanced transparency requirements under the FTA. A 2018 addition to the Act gives the CCCS additional administrative power to protect consumers against unfair trade practices.

The most recent infringement decision  issued by CCCS occurred in January 2019 when three competing hotel operators, including a major British hospitality company, exchanged “commercially sensitive” information. The operators were fined a total financial penalty of $1.1 million for conduct potentially resulting in reduced competitive pressure on the market. No other cases tied to commercial behavior in 2019 or the first quarter of 2020 have received penalties from CCCS.

Expropriation and Compensation

Singapore has not expropriated foreign owned property and has no laws that force foreign investors to transfer ownership to local interests. Singapore has signed investment promotion and protection agreements with a wide range of countries. These agreements mutually protect nationals or companies of either country against certain non-commercial risks, such as expropriation and nationalization and remain in effect unless otherwise terminated. The USSFTA contains strong investor protection provisions relating to expropriation of private property and the need to follow due process; provisions are in place for an owner to receive compensation based on fair market value. No disputes are pending.

Dispute Settlement

ICSID Convention and New York Convention

Singapore is party to the Convention on the Settlement of Investment Disputes (ICSID Convention) and the convention on the Recognition and Enforcement of Foreign Arbitration Awards (1958 New York Convention). Singapore passed an Arbitration (International Investment Disputes) Act to implement the ICSID Convention in 1968. Singapore acceded to the 1958 New York Convention in August 1986 and gives effect to it via the International Arbitration Act (IAA). The 1958 New York Convention is annexed to the IAA as the Second Schedule. Singapore is bound to recognize awards made in any other country that is a signatory to the 1958 New York Convention. (http://www.lexology.com/library/detail.aspx?g=3f833e8e-722a-4fca-8393-f35e59ed1440 )

Domestic arbitration in Singapore is governed by the Arbitration Act (Cap 10). The Arbitration Act was enacted to align the laws applicable to domestic arbitration with the Model Law.

Singapore is also a party to the United Nations Convention on International Settlement Agreements Resulting from Mediation, further referred to as the “Convention.” This Convention provides a process for parties to enforce or invoke an international commercial mediated settlement agreement once the conditions and requirements of the Convention are met. Singapore has put in place domestic legislation – the Singapore Convention on Mediation Bill 2020, which was passed in Parliament on 4 February 2020. On 25 February 2020, Singapore and Fiji were the first two countries to deposit their respective instruments of ratification of the Convention at the United Nations Headquarters. The Convention will enter into force six months after the third State deposits its instrument of ratification, acceptance and approval or accession.

Investor-State Dispute Settlement

After Singapore’s accession to the New York Convention of 1958 on August 21, 1986, it re-enacted most of its provisions in Part III of the IAA. By acceding to this Convention, Singapore is bound to recognize awards made in any other country that is a signatory to the Convention. Singapore is a member of the Commonwealth of Nations and, under the Reciprocal Enforcement of Commonwealth Judgments Act (RECJA), recognizes judgments made in the United Kingdom, as well as jurisdictions that are part of the Commonwealth and with which Singapore has reciprocal arrangements for the recognition and enforcement of judgments. The Act lists the countries with which such arrangements exist, and of the 53 countries that are members of the Commonwealth, nine have been listed. (https://sso.agc.gov.sg/SL/RECJA1921-N1?DocDate=19990701) Singapore also has reciprocal recognition of foreign judgements with Hong Kong Special Administrative Region of the People’s Republic of China.

Singapore is party to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention). Singapore passed an Arbitration (International Investment Disputes) Act to implement the ICSID Convention in 1968. ICSID Convention has an enforcement mechanism for arbitration awards rendered pursuant to ICSID rules that is separate from the 1958 arbitration awards rendered pursuant to ICSID rules that is separate from the 1958 New York Convention. Investor-State dispute settlement provisions in Singapore’s trade agreements, including the USSFTA, refer to ICSIID rules as one of the possible options for resolving disputes. Investor-State arbitration under rules other than ICSID’s would result in an arbitration award that may be enforced using the 1958 New York Convention.

Singapore has had no investment disputes with U.S. persons or other foreign investors in the past ten years that have proceeded to litigation. Any disputes settled by arbitration/mediation would remain confidential. There have been no claims made by U.S. investors under the USSFTA. There is no history of extrajudicial action against foreign investors. The government is investing in establishing Singapore as a global mediation hub.

International Commercial Arbitration and Foreign Courts

Dispute resolution (DR) institutions include the Singapore International Arbitration Centre (SIAC), Singapore International Mediation Centre (SIMC), Singapore International Commercial Court (SICC), and the Singapore Chamber of Maritime Arbitration (SCMA). Singapore’s extensive dispute resolution institutions and integrated dispute resolution facilities at Maxwell Chambers have contributed to its development as a regional hub for alternative disputes mechanisms. The SIAC is the major arbitral institution and its increasing caseload reflects Singapore’s policy of encouraging the use of alternative modes of dispute resolution, including arbitration.

Arbitral awards in Singapore, for either domestic or international arbitration, are legally binding and enforceable in Singapore domestic courts, as well as in jurisdictions that have ratified the 1958 New York Convention.

The International Arbitration Act (IAA) regulates international arbitrations in Singapore. Domestic arbitrations are regulated by the Arbitration Act (AA). The IAA is heavily based on the United Nations Commission on International Trade Law (UNCITRAL) Model Law, with a few significant differences. For example, arbitration agreements must be in writing. This requirement is deemed to be satisfied if the content is recorded in any form, including electronic communication, regardless of whether the arbitration agreement was concluded orally, by conduct, or by other means (e.g. an arbitration clause in a contract or a separate agreement can be incorporated into a contract by reference). The AA is also primarily based on the UNCITRAL Model Law. There have been no reported complaints about the partiality or transparency of court processes in investment and commercial disputes.

Bankruptcy Regulations

Singapore has bankruptcy laws allowing both debtors and creditors to file a bankruptcy claim. Singapore ranks number 27 for resolving insolvency in the World Bank’s 2020 Doing Business Index. While Singapore performed well in recovery rate and time of recovery following bankruptcies, the country did not score well on cost of proceedings or insolvency frameworks.. In particular, the insolvency framework does not require approval by the creditors for sale of substantial assets of the debtor or approval by the creditors for selection or appointment of the insolvency representative.

Singapore has made several reforms to enhance corporate rescue and restructuring processes, including features from Chapter 11 of the U.S. Bankruptcy Code. Amendments to the Companies Act, which came into force in May 2017, include additional disclosure requirements by debtors, rescue financing provisions, provisions to facilitate the approval of pre-packaged restructurings, increased debtor protections, and cram-down provisions that will allow a scheme to be approved by the court even if a class of creditors oppose the scheme, provided the dissenting class of creditors are not unfairly prejudiced by the scheme.

In October 2018, the Insolvency, Restructuring and Dissolution Act was passed, but the expected effective date of the bill has been delayed from the first half of 2019 into 2020.. It updates the insolvency legislation and introduces a significant number of new provisions, particularly with respect to corporate insolvency. It mandates licensing, qualifications, standards, and disciplinary measures for insolvency practitioners. It also includes standalone voidable transaction provisions for corporate insolvency and, a new wrongful trading provision. The Act allows ‘out of court’ commencement of judicial management, permits judicial managers to assign the proceeds of certain insolvency related claims, restricts the operation of contractual ‘ipso facto clauses’ upon the commencement of certain restructuring and insolvency procedures, and modifies the operation of the scheme of arrangement cross class ‘cram down’ power. Authorities continue to seek public consultations of subsidiary legislation to be drafted under the Act.

Two MAS-recognized consumer credit bureaus operate in Singapore: the Credit Bureau (Singapore) Pte Ltd and Experian Credit Bureau Singapore Pte Ltd. U.S. industry advocates enhancements to Singapore’s credit bureau system, in particular, adoption of an open admission system for all lenders, including non-banks. Bankruptcy is not criminalized in Singapore. https://www.acra.gov.sg/CA_2017/ 

Investment Incentives

Singapore’s Economic Development Board (EDB) is the lead investment promotion agency facilitating foreign investment into Singapore (https://www.edb.gov.sg ). EDB undertakes investment promotion and industry development, and works with international businesses, both foreign and local, by providing information, connection to partners, and access to government incentives for their investments. The Agency for Science, Technology, and Research (A*STAR) is Singapore’s lead public sector agency focused on economic-oriented research to advance scientific discovery and innovative technology. (https://www.a-star.edu.sg ) The National Research Foundation (NRF) provides competitive grants for applied research through an integrated grant management system, (https://researchgrant.gov.sg/pages/index.aspx ). Various government agencies (including Intellectual Property Office of Singapore (IPOS), NRF, and EDB,) provide venture capital co-funding for startups and commercialization of intellectual property.

Foreign Trade Zones/Free Ports/Trade Facilitation

Singapore has nine free-trade zones (FTZs) in five geographical areas operated by three FTZ authorities. The FTZs may be used for storage and repackaging of import and export cargo, and goods transiting Singapore for subsequent re-export. Manufacturing is not carried out within the zones. Foreign and local firms have equal access to the FTZ facilities.

Performance and Data Localization Requirements

Performance requirements are applied uniformly and systematically to both domestic and foreign investors. Singapore has no forced localization policy requiring domestic content in goods or technology. The government does not require investors to purchase from local sources or specify a percentage of output for export. There are no rules forcing the transfer of technology. There are no requirements for foreign IT providers to turn over source code and/or provide access to encryption. The industry regulator is the Info-communications Media Development Authority (IMDA), a statutory board under the Ministry of Communications and Information (MCI).

In May 2020, Singapore will tighten requirements for hiring foreign workers, including raising minimum salary thresholds and additional enforcement of penalties for employers not giving “fair consideration” to local applicants before hiring foreign workers.

Personal data matters are independently overseen by the Personal Data Protection Commission, which administers and enforces the Personal Data Protection Act (PDPA) of 2012. The PDPA governs the collection, use, and disclosure of personal data by the private sector and covers both electronic and non-electronic data.

Singapore is currently reviewing the PDPA to ensure that it keeps pace with the evolving needs of businesses and individuals in a digital economy such as introducing an enhanced framework for the collection, use, and disclosure of personal data and a mandatory data breach notification regime.

Singapore does not have a data localization policy. Singapore participates in various regional and international frameworks that promote interoperability and harmonization of rules to facilitate cross-border data flows. The ASEAN Framework on Digital Data Governance (FDFG) is one example. Under DFDFG, Singapore will focus on developing model contractual clauses and certification for cross border data flows within the ASEAN region. Another is Singapore’s participation in the APEC Cross-Border Privacy Rules (CBPR) and Privacy Recognition for Processors (PRP) systems, to facilitate data transfers for certified organizations across APEC economies.

Real Property

Property rights and interests are enforced in Singapore. Residents have access to mortgages and liens, with reliable recording of properties. In the 2020 World Bank Doing Business Report, Singapore ranks first in the world in enforcing contracts and number 21st in registering property.

Foreigners are not allowed to purchase public housing (HDB) in Singapore, and prior approval from the Singapore Land Authority is required to purchase landed residential property and residential land for development. Foreigners can purchase non-landed, private sector housing (e.g. condominiums or any unit within a building) without the need to obtain prior approval. However, they are not allowed to acquire all the apartments or units in a development without prior approval. These restrictions also apply to foreign companies.

There are no restrictions on foreign ownership of industrial and commercial real estate. Since July 2018, foreigners who purchase homes in Singapore are required to pay an additional effective 20 percent tax on top of standard buyer’s taxes.. However, U.S. citizens are accorded national treatment under the FTA, meaning only second and subsequent purchases of residential property will be subject to 12 and 15 percent ABSD, equivalent to Singaporean citizens.

The availability of covered bond legislation under MAS Notice 648 has provided an incentive for Singapore financial institutions to issue covered bonds. Under Notice 648, only a bank incorporated in Singapore may issue covered bonds. The three main Singapore banks: DBS, OCBC, and UOB, all have in place covered bond programs, with the issues offered to private investors. The banking industry has made suggestions to allow the use of covered bonds in repo transactions with the central bank and to increase the encumbrance limit, currently at four percent. (http://www.mas.gov.sg/regulations/notices/notice-648 ))

Intellectual Property Rights

Singapore maintains one of the strongest intellectual property rights (IPR) regimes in Asia. The Chief Executive of the Intellectual Property Office of Singapore was elected director-Director General of the World Intellectual Property Organization (WIPO) in April 2020. However, some concerns remain in certain areas such as business software piracy, online piracy, and enforcement.

Effective from January 1, 2020, all patent applications must be fully examined by the Intellectual Property Office of Singapore (IPOS) to ensure that any foreign-granted patents fully satisfy Singapore’s patentability criteria. The Registered Designs (Amendment) Act broadens the scope of registered designs to include virtual designs and color as a design feature, and will stipulate the default owner of designs to be the designer of a commissioned design, rather than the commissioning party.

The USSFTA ensures that government agencies will not grant regulatory approvals to patent- infringing products, but Singapore does allow parallel imports. Under the Patents Act, with regards to pharmaceutical products, the patent owner has the right to bring an action to stop an importer of “grey market goods” from importing the patent owner’s patented product, provided that the product has not previously been sold or distributed in Singapore, the importation results in a breach of contract between the proprietor of the patent and any person licensed by the proprietor of the patent to distribute the product outside Singapore and the importer has knowledge of such.

The USSFTA ensures protection of test data and trade secrets submitted to the government for regulatory approval purposes. Disclosure of such information is prohibited. Such data may not be used for approval of the same or similar products without the consent of the party who submitted the data for a period of five years from the date of approval of the pharmaceutical product and ten years from the date of approval of an agricultural chemical. Singapore has no specific legislation concerning protection of trade secrets. Instead, it protects investors’ commercially valuable proprietary information under common law by the Law of Confidence as well as legislation such as the Penal Code (e.g. theft) and the Computer Misuse Act (e.g., unauthorized access to a computer system to download information). U.S. industry has expressed concern that this provision is inadequate.

Singapore is a member of the WTO and a party to the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). It is a signatory to other international intellectual property rights agreements, including the Paris Convention, the Berne Convention, the Patent Cooperation Treaty, the Madrid Protocol, and the Budapest Treaty. WIPO Secretariat opened a regional office in Singapore in 2005 (http://www.wipo.int/about-wipo/en/offices/singapore/ ). Amendments to the Trademark Act, which were passed in January 2007, fulfill Singapore’s obligations in WIPO’s revised Singapore Treaty on the Law of Trademarks.

Singapore ranked 11th out of 53 in the world in the 2020 U.S. Chamber of Commerce’s International IP Index. The index noted that Singapore’s key strengths include an advanced national IP framework and efforts to accelerate research, patent examination, and grants. The index also lauded Singapore as a global leader in patent protection and online copyright enforcement. Despite a decrease in estimated software piracy from 35 percent in 2009 to 27 percent in 2020, the Index noted that piracy levels remain high for a developed, high-income country. Lack of transparency and data on customs seizures of IP-infringing goods is also noted as a key area of weakness.

Singapore does not publicly report the statistics on seizures of counterfeit goods, and does not rate highly on enforcement of physical counterfeit goods, online sales of counterfeit goods or digital online piracy, according to the 2018 U.S. Chamber of Commerce’s International IP Index. Singapore is not listed in USTR’s 2020 Special 301 Report, but some Singapore-based online retailers are named in USTR’s2019 Review of Notorious Markets. For additional information about national laws and points of contact at local IP offices, see WIPO’s country profiles at http://www.wipo.int/directory/en/.

Capital Markets and Portfolio Investment

The government takes a favorable stance towards foreign portfolio investment and fixed asset investments. While it welcomes capital market investments, the government has introduced macro-prudential policies aimed at reducing foreign speculative inflows in the real estate sector since 2009. The government promotes Singapore’s position as an asset and wealth management center, and assets under management grew 5.4 percent in 2018 to US$2.4 trillion (S$3.4 trillion)– the latest year for which the Monetary Authority of Singapore conducted a survey.

The Government of Singapore facilitates the free flow of financial resources into product and factor markets, and the Singapore Exchange (SGX) is Singapore’s stock market. An effective regulatory system exists to encourage and facilitate portfolio investment. Credit is allocated on market terms and foreign investors can access credit, U.S. dollars, Singapore dollars (SGD), and other foreign currencies on the local market. The private sector has access to a variety of credit instruments through banks operating in Singapore. The government respects IMF Article VIII by refraining from restrictions on payments and transfers for current international transactions.

Money and Banking System

Singapore’s banking system is sound and well regulated by the Monetary Authority of Singapore (MAS), and it serves as a financial hub for the region. Banks have a very high domestic penetration rate, and according to World Bank Financial Inclusion indicators, over 97 percent of persons held a financial account in 2017. (latest year available). Local Singapore banks saw net profits rise 27 percent in the last quarter of 2019. Banks are statutorily prohibited from engaging in non-financial business. Banks can hold 10 percent or less in non-financial companies as an “equity portfolio investment.” At the end of 2019, the non-performing loans ratio (NPL ratio) of the three local banks remained at an averaged 1.5 percent since the last quarter of 2018. The World Bank records Singapore’s banking sector overall NPL ratio at 1.3 in 2018.

Foreign banks require licenses to operate in the country. The tiered licenses, for Merchant, Offshore, Wholesale, Full Banks and Qualifying Full Banks (QFBs) subject banks to further prudential safeguards in return for offering a greater range of services. U.S. financial institutions enjoy phased-in benefits under the USSFTA. Since 2006, U.S.-licensed full service banks that are also QFBs have been able to operate at an unlimited number of locations (branches or off-premises ATMs) versus 25 for non-U.S. full service foreign banks with QFB status.

Under the OECD Common Reporting Standards (CRS), which has been in effect since January 2017, Singapore-based Financial Institutions (SGFIs) – depository institutions such as banks, specified insurance companies, investment entities, and custodial institutions – are required to establish the tax residency status of all their account holders, collect and retain CRS information for all non-Singapore tax residents in the case of new accounts and report to tax authorities the financial account information of account holders who are tax residents of jurisdictions with which Singapore has a Competent Authority Agreement (CAA) to exchange the information. As of December 2019, Singapore has established more than 80 exchange relationships, include one with the United States established in September 2018.

U.S. financial regulations do not restrict foreign banks’ ability to hold accounts for U.S. citizens. U.S. Citizens are encouraged to alert the nearest U.S. Embassy of any practices they encounter with regard to the provision of financial services.

Fintech investments in Singapore rose from $365 million in 2018 to $861 million in 2019. To strengthen Singapore’s position as a global Fintech hub, MAS has created a dedicated Fintech Office as a one-stop virtual entity for all FinTech-related matters to enable FinTech experimentation and promote an open-API (Application Programming Interfaces) in the financial industry. Investment in payments start-ups accounted for about 40 percent of all funds. Singapore has over 50 innovation labs established by global financial institutions and technology companies.

MAS also aims to be a regional leader in the implementation of blockchain technologies to position Singapore as a financial technology center. MAS and the Association of Banks in Singapore are prototyping the use of Distributed Ledger Technology (DLT) for inter-bank clearing and settlement of payments and securities. Two phases have been completed, including a proof-of-concept project for inter-bank payments and software prototypes for decentralized inter-bank payment and settlements. The next two phases will focus on DLT interoperability, including Delivery-versus-Payment (DvP) settlement of payments and securities, and cross-border payments. A fifth phase will then explore the business value of a blockchain-based multi-currency payments network, such as in enabling business opportunities that would benefit or make viable greater cost efficiencies compared to existing systems. (https://www.mas.gov.sg/schemes-and-initiatives/Project-Ubin ).

Alternative financial services include retail and corporate non-bank lending via finance companies, co-operative societies, and pawnshops; and burgeoning financial technology-based services across a wide range of sectors: crowdfunding, Initial Coin Offerings, payment services and remittance, which remains a small but growing sector. In January 2020, the Payment Services Bill went into effect, which will require all cryptocurrency service providers to be licensed with the intent to provide more user protection. Smaller payment firms will receive a different classifications from larger institutions and will be less heavily regulated. Key infrastructures supporting Singapore’s financial market include interbank (MEP), Foreign exchange (CLS, CAPS), retail (SGDCCS, USDCCS, CTS, IBG, ATM, FAST, NETS, EFTPOS), securities (MEPS+-SGS, CDP, SGX-DC) and derivatives settlements (SGX-DC, APS)(https://www.mas.gov.sg/regulation/payments/payment-systems )

Foreign Exchange and Remittances

Foreign Exchange

The USSFTA commits Singapore to the free transfer of capital, unimpeded by regulatory restrictions. Singapore places no restrictions on reinvestment or repatriation of earnings and capital, and maintains no significant restrictions on remittances, foreign exchange transactions and capital movements.

Singapore’s monetary policy has been centered on the management of the exchange rate since 1981, with the stated primary objective of promoting medium term price stability as a sound basis for sustainable economic growth. As described by MAS, there are three main features of the exchange rate system in Singapore. MAS operates a managed float regime for the Singapore dollar with the trade-weighted exchange rate allowed to fluctuate within a policy band. The Singapore dollar is managed against a basket of currencies of its major trading partners. The exchange rate policy band is periodically reviewed to ensure that it remains consistent with the underlying fundamentals of the economy.

Remittance Policies

There are no time or amount limitations on remittances. No significant changes to investment remittance was implemented or announced over the past year. Local and foreign banks may impose their own limitations on daily remittances.

Sovereign Wealth Funds

The Government of Singapore has three key investment entities. GIC Private Limited (GIC) is the sovereign wealth fund in Singapore that manages the government’s substantial investments, fiscal, and foreign reserves, with the stated objective to achieve long-term returns and preserve the international purchasing power of the reserves. Temasek is a holding company wholly owned by the Singapore Minister for Finance. Under the Singapore Minister for Finance (Incorporation) Act, the Minister for Finance is a corporate body. The MAS, as the central bank of Singapore, manages the Official Foreign Reserves, and a significant proportion of its portfolio is invested in liquid financial market instruments.

GIC does not publish the size of the funds under management, but some industry observers estimate its managed assets may exceed $400 billion. GIC does not invest domestically, but manages Singapore’s international investments, which are generally passive (non-controlling) investments in publicly traded entities. The United States is its top investment destination, accounting for 32 percent of GIC’s portfolio as of March 2019, while Asia ex-Japan accounts for 20 percent, the Eurozone 12 percent, Japan 12 percent, and UK 6 percent. Investments in the United States are diversified and include industrial and commercial properties, student housing, power transmission companies, and financial, retail and business services. Although not required by law, GIC has published an annual report since 2008.

Temasek began as a holding company for Singapore’s state-owned enterprises, now GLCs, but has since branched out to other asset classes and often holds significant stake in companies. As of March 2019, Temasek’s portfolio value reached $222 billion, and its asset exposure to Singapore is 26 percent; 40 percent in the rest of Asia, and 15 percent in North America. As set out in the Temasek Charter, Temasek delivers sustainable value over the long term for its stakeholders. Temasek has published a Temasek Review annually since 2004. The statements only provides consolidated financial statements, which aggregate all of Temasek and its subsidiaries into a single financial report. A major international audit firm audits Temasek Group’s annual statutory financial statements. GIC and Temasek uphold the Santiago Principles for sovereign investments. GIC is a member of the International Forum of Sovereign Wealth Funds.

Other investing entities of government funds include EDB Investments Pte Ltd, Singapore’s Housing Development Board, and other government statutory boards with funding decisions driven by goals emanating from the central government

Singapore has an extensive network of full and partial SOEs that held under the umbrella of Temasek Holdings, a holding company with the Singapore Minister for Finance as its sole shareholder. Singapore SOEs play a substantial role in Singapore’s domestic economy, especially in strategically important sectors including telecommunications, media, healthcare, public transportation, defense, port, gas, electricity grid, and airport operations. In addition, the SOEs are also present in many other sectors of the economy, including banking, subway, airline, consumer/lifestyle, commodities trading, oil and gas engineering, postal services, infrastructure, and real estate.

The Government of Singapore emphasizes that government-linked entities operate on an equal basis with both local and foreign businesses without exception. There is no published list of SOEs.

Temasek’s annual report notes that its portfolio companies are guided and managed by their respective boards and management, and Temasek does not direct their business decisions or operations. However, as a substantial shareholder, corporate governance within GLCs typically are guided or influenced by policies developed by Temasek. There are differences in corporate governance disclosures and practices across the GLCs, and GLC boards are allowed to determine their own governance practices, with Temasek advisors occasionally meeting with the companies to make recommendations. GLC board seats are not specifically allocated to government officials, although it “leverages on its networks to suggest qualified individuals for consideration by the respective boards”, and leaders formerly from the armed forces or civil service are often represented on boards and fill senior management positions. Temasek exercises its shareholder rights to influence the strategic directions of its companies but does not get involved in the day-to-day business and commercial decisions of its firms and subsidiaries.

GLCs operate on a commercial basis and compete on an equal basis with private businesses, both local and foreign. Singapore officials highlight that the government does not interfere with the operations of GLCs or grant them special privileges, preferential treatment or hidden subsidies, asserting that GLCs are subject to the same regulatory regime and discipline of the market as private sector companies. Observers, however, have been critical of cases where GLCs have entered into new lines of business or where government agencies have “corporatized” certain government functions, in both circumstances entering into competition with already-existing private businesses. Some private sector companies have said they encountered unfair business practices and opaque bidding processes that appeared to favor incumbent, government-linked firms. In addition, they note that the GLC’s institutional relationships with the government give them natural advantages in terms of access to cheaper funding and opportunities to shape the economic policy agenda in ways that benefit their companies.

The USSFTA contains specific conduct guarantees to ensure that GLCs will operate on a commercial and non-discriminatory basis towards U.S. firms. GLCs with substantial revenues or assets are also subject to enhanced transparency requirements under the USSFTA. In accordance with its USSFTA commitments, Singapore enacted the Competition Act in 2004 and established the Competition Commission of Singapore in January 2005. The Act contains provisions on anti-competitive agreements, decisions, and practices, abuse of dominance, enforcement and appeals process, and mergers and acquisitions.

Privatization Program

The government has privatized GLCs in multiple sectors and has not publicly announced further privatization plans, but is likely to retain controlling stakes in strategically important sectors, including telecommunications, media, public transportation, defense, port, gas, electricity grid, and airport operations. The Energy Market Authority (EMA) is extending the liberalization of the retail market from commercial and industrial consumers with an average monthly electricity consumption of at least 2,000 kWh to households and smaller businesses. The Electricity Act and the Code of Conduct for Retail Electricity Licensees govern licensing and standards for electricity retail companies.

The awareness and implementation of corporate social responsibility (CSR) in Singapore has been increasing since the formation of the Global Compact Network Singapore (GCNS) under the United Nations Global Compact (UNGC) network, with the goals of encouraging companies to adopt sustainability principles related to human and labor rights, environmental conservation, and anti-corruption. GCNS facilitates exchanges, conducts research, and provides training in Singapore to build capacity in areas including sustainability reporting, supply chain management, ISO 26000, and measuring and reporting carbon emissions.

KPMG’s 2017 Corporate Responsibility Reporting survey showed that 84 percent of the largest companies in Singapore are fulfilling their corporate responsibility and sustainability reporting responsibilities, which is higher than the global average at 72 percent. KPMG’s survey also noted that climate and environment risks are not adequately recognized or addressed by Singapore companies. Only 17 percent of Singapore companies have set carbon-reduction targets, lower than the global rate of 50 percent. The Government of Singapore notes that in 2018 as part of the Year of Climate Action, the Ministry of Environment and Water Resources received more than 500 pledges from companies that have made public commitments toward taking climate action. A 2019 World Wide Fund for Nature (WWF) survey showed a lack of transparency by Singapore companies in disclosing palm oil sources. However, awareness is growing and the Southeast Asia Alliance for Sustainable Palm Oil (Saspo) has received additional pledges in 2018 by companies to adhere to standards for palm oil sourcing set by the Roundtable for Sustainable Palm Oil (RSPO). A group of F&B, retail and hospitality companies announced in January 2019 what the WWF calls “the most impactful business response to-date on plastics.” The pact, initiated by WWF and supported by Singapore’s National Environment Agency, is a commitment to significantly reduce plastic production and usage by 2030.

In June 2016, the Singapore Exchange (SGX) introduced mandatory, comply-or-explain, sustainability reporting requirements for all listed companies, including material environmental, social and governance practices, from the financial year ending December 31, 2017 onwards. The Singapore Environmental Council (SEC) operates a green labeling scheme, which endorses environmentally friendly products, numbering over 3,000 from 2729 countries. The Association of Banks in Singapore (ABS) has issued voluntary guidelines to banks in Singapore last updated in Jule 2018 encouraging them to adopt sustainable lending practices, including the integration of environmental, social and governance (ESG) principles into their lending and business practices. Singapore-based banks is listed in a 2018 Market Forces report as major lenders in regional coal financing.

Singapore has not developed a National Action Plan on business and human rights, but promotes responsible business practices, and encourages foreign and local enterprises to follow generally accepted CSR principles. The government does not explicitly factor responsible business conduct (RBC) policies into its procurement decisions.

The host government effectively and fairly enforces domestic laws with regard to human rights, labor rights, consumer protection, environmental protections, and other laws/regulations intended to protect individuals from adverse business impacts. The private sector’s impact on migrant workers and their rights, and domestic migrant workers in particular (due to the latter’s exemption from the Employment Act which stipulates the rights of workers), remains an area of advocacy by civil society groups. The government has taken incremental steps to improve the channels of redress and enforcement of migrant workers’ rights; however, key concerns about legislative protections remain unaddressed for domestic migrant workers. The government generally encourages businesses to comply with international standards. However, there are no specific mentions of the host government encouraging adherence to the OECD Due Diligence Guidance, or supply chain due diligence measures.

The Companies Act principally governs companies in Singapore. Key areas of corporate governance covered under the act include separation of ownership from management, fiduciary duties of directors, shareholder remedies, and capital maintenance rules. Limited liability partnerships are governed by the Limited Liability Partnerships Act. Certain provisions in other statutes such as the Securities and Futures Act are also relevant to listed companies. Listed companies are required under the Singapore Exchange Listing Rules to describe in their annual reports their corporate governance practices with specific reference to the principles and provisions of the Code of Corporate Governance (“Code”). Listed companies must comply with the principles of the Code and if their practices vary from any provision in the Code, they must explain the variation and demonstrate the variation is consistent with the relevant principle. The revised Code of Corporate Governance will impact Annual Reports covering financial years from January 1, 2019 onward. The revised code encourages board renewal, strengthens director independence, increases transparency of remuneration practices, enhances board diversity, and encourages communication with all stakeholders. MAS also established an independent Corporate Governance Advisory Committee (CGAC) to advocated good corporate governance practices in February 2019. The CGAC monitors companies’ implementation of the code and advises regulators on corporate governance issues.

There are independent NGOs promoting and monitoring responsible business conduct (RBC). Those monitoring or advocating around RBC are generally able to do their work freely within most areas. However, labor unions are tightly controlled and legal rights to strike are granted with restrictions under the Trade Disputes Act.

Singapore has no oil, gas, or mineral resources and is not a member of the Extractive Industries Transparency Initiative (EITI). A small sector in Singapore processes rare minerals and complies with responsible supply chains and conflict mineral principles. Under the Anti-Money Laundering and Countering Financing of Terrorism (AML/CFT) framework, it is a requirement for Corporate Service Providers to develop and implement internal policies, procedures and controls to comply with Financial Action Task Force (FATF) recommendations on combating of money laundering and terrorism financing.

Singapore actively enforces its strong anti-corruption laws, and corruption is not cited as a concern for foreign investors. Transparency International’s 2019 Corruption Perception Index ranks Singapore 4th 4th of 180175 countries globally, the highest ranking Asian country. The Prevention of Corruption Act (PCA), and the Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) Act provide the legal basis for government action by the Corrupt Practices Investigation Bureau (CPIB), which is the only agency authorized under the PCA to investigate corruption offences and other related offences. These laws cover acts of corruption within Singapore as well as those committed by Singaporeans abroad. When cases of corruption are uncovered, whether in the public or private sector, the government deals with them firmly, swiftly, and publicly. The anti-corruption laws extend to family members of officials, and to political parties. The CPIB is effective and non-discriminatory. Singapore is generally perceived to be one of the least corrupt countries in Asia and the world, and corruption is not identified as an obstacle to FDI in Singapore. In its 2018 annual review of corruption, Asia, Political, and Economic Risk Consultancy rated Singapore the least corrupt country in the Asian-Pacific Region and praised Singapore authority’s response to a high-level corruption case involving Keppel Offshore & Marine, in which GLC Temasek Holdings holds a 20 percent stake. Singapore is a signatory to the UN Anticorruption Convention, but not the OECD Anti-Bribery Convention.

Resources to Report Corruption

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

Corrupt Practices Investigation Bureau
2 Lengkok Bahru, Singapore 159047
+65 6270 0141
 info@cpib.gov.sg

Contact at a “watchdog” organization:

Transparency International
Alt-Moabit 96
10559 Berlin, Germany
+49 30 3438 200

Singapore’s political environment is stable and there is no history of incidents involving politically motivated damage to foreign investments in Singapore. The ruling People’s Action Party (PAP) has dominated Singapore’s parliamentary government since 1959 and currently controls 83 of the 89 regularly contested parliamentary seats. Singapore opposition parties, which currently hold six regularly contested parliamentary seats and three additional seats reserved to the opposition by the constitution, do not usually espouse views that are radically different from the mainstream of Singapore political opinion.

As of June 20192018, Singapore’s labor market totaled 3.7 million workers; this includes about 1.4 million foreigners, of whom about 684 percent are basic skilled or semi-skilled workers. The labor market continues to be tight, with overall unemployment rate averaging in the 2.4 percent the first quarter of 2020. Budget 2020 announced in February and two subsequent supplementary budgets announced in March and April, provides for substantial wage and training support for all firms during the COVID-19 outbreak. In sectors, such as travel and tourism, the government offered temporary employment or training for workers placed on unpaid leave. 2018. Local labor laws allow for relatively free hiring and firing practices. Either party can terminate employment by giving the other party the required notice. The Ministry of Manpower (MOM) must approve employment of foreigners.

Since 2011, the government has introduced policy measures to support productivity increases coupled with reduced dependence on foreign labor. In Budget 2019, MOM announced a decrease in the foreign worker quota ceiling from 40 percent to 38 percent on January 1, 2020 and to 35 percent on January 1, 2021. The quota reduction does not apply to those on Employment Passes which are high skilled workers making above $33,100 per year. In Budget 2020, the foreign worker quota was cut further in the for mid-skilled (“S Pass”) workers in construction, marine shipyards, and the process sectors from 20 to 18 percent by January 1, 2021. The quota will be further reduced to 15 percent on January 1, 2023. Singapore’s labor force did not significantly change in size in 2019 and is expected to face significant demographic headwinds from an aging population and low birth rates, alongside restrictions on foreign workers. Singapore’s local workforce growth is slowing, heading for stagnation over the next ten years. In November 2018, the IMDA announced a new program to support and scale start-ups in Singapore.

To address concerns over an aging and shrinking workforce, MOM has expanded its training and grant programs to more than 15. In Budget 2019, MOM raised the work-life grant budget from $22.2 million to $73.8 million. Additional individual and company subsidies for existing and new programs were included in the Budget 2020 and the supplementary March and April budgets. An example of an existing program is SkillsFuture, a government initiative managed by SkillsFuture Singapore (SSG), a statutory board under the Ministry of Education, designed to provide all Singaporeans with enhanced opportunities and skills-capacity building. SSG also administers the Singapore Workforce Skills Qualifications (WSQ), a national credential system that trains, develops, assesses and certifies skills and competencies for the workforce.

All foreigners must have a valid work pass before they can start work in Singapore, with Employment Pass (for professionals, managers and executives), S Pass (for mid-level skilled staff), and Work Permits (for semi-skilled workers), among the most widely issued. Workers need to have a job with minimum fixed monthly salary and acceptable qualifications to be eligible for the Employment Pass and S Pass. In March 2020, MOM announced that the minimum salaries will be raised as of May 1, 2021. The minimum monthly salary eligibility thresholds for S Pass holders will be raised from $919 to $990 and for Employment Pass holders from $2334 to $2546., 2020. The government further regulates the inflow of foreign workers through the Foreign Worker Levy (FWL) and the Dependency Ratio Ceiling (DRC). The DRC is the maximum permitted ratio of foreign workers to the total workforce that a company can hire, and serves as a quota on the hiring of foreign workers. The DRC varies across sectors. Employers of S Pass and Work Permit holders are required to pay a monthly FWL to the government. The FWL varies according to the skills, qualifications and experience of their employees. The FWL is set on a sector-by-sector basis and is subject to annual revisions. FWLs have been progressively increased for most sectors since 2012.

MOM requires employers to consider Singaporeans before hiring skilled professional foreigners. The Fair Consideration Framework (FCF), implemented in August 2014, affects employers who apply for Employment Passes (EP), the work pass for foreign professionals working in professional, manager, and executive (PME) posts. Companies have noted inconsistent and increasingly burdensome documentation requirements and excessive qualification criteria to approve EP applications. Under the rules, firms making new EP applications must first advertise the job vacancy in a new jobs bank administered by Workforce Singapore (WSG), www.mycareersfugure.sg, ) for at least 14 days. The jobs bank is free for use by companies and job seekers and the job advertisement must be open to all, including Singaporeans. Employers are encouraged to keep records of their interview process as proof that they have done due diligence in trying to look for a Singaporean worker. If an EP is still needed, the employer will have to make a statutory declaration that a job advertisement on www.careersfuture.sg had been made. Smaller firms with 10 or fewer employees and jobs, which pay a fixed monthly salary of $10,609 or more, are exempt from the requirements, which were newly tightened and took effect from July 2018. The minimum fixed salary will be raised to $14,145 on May 1, 2021.

Consistent with Singapore’s WTO obligations, intra-corporate transfers (ICT) are allowed for managers, executives, and specialists who had worked for at least one year in the firm before being posted to Singapore. ICT would still be required to meet all EP criteria, but the requirement for an advertisement on www.careersfuture.sg would be waived. In April 2016, MOM outlined measures to refine the work pass applications process, looking not only at the qualifications of individuals, but at company-related factors. Companies found not to have a “healthy Singaporean core, lacking a demonstrated commitment to developing a Singaporean core, and not found to be “relevant” to Singapore’s economy and society, will be labeled “triple weak” and put on a watch list. Companies unable to demonstrate progress may have work pass privileges suspended after a period of scrutiny. Since 2016, MOM has placed approximately 600 companies on the FCF Watchlist. The Tripartite Alliance for Fair and Progressive Employment Practices have worked with 260 companies to be successfully removed from the watchlist.

The Employment Act covers all employees under a contract of service, and under the act, employees who have served the company for at least two years are eligible for retrenchment benefits, and the amount of compensation depends on the contract of service or what is agreed collectively. Employers have to abide by notice periods in the employment contract before termination, and stipulated minimum periods in the Employment Act in the absence of a notice period previously agreed upon, or provide salary in lieu of notice. Dismissal on grounds of wrongful conduct by the employee is differentiated from retrenchments in the labor laws, and is exempted from the above requirements. Employers must notify MOM of retrenchments within five working days after they notify the affected employees to enable the relevant agencies to help affected employees find alternative employment and/or identify relevant training to enhance employability. Singapore does not provide unemployment benefits, but provides training and job matching services to retrenched workers.

Labor laws are not waived in order to attract or retain investment in Singapore. There are no additional or different labor law provisions in free trade zones.

Collective bargaining is a normal part of labor-management relations in all sectors. As of 2018 about 20 percent of the workforce is unionized. Foreign workers constituted approximately 15 percent of union members. Almost all unions are affiliated with the National Trades Union Congress (NTUC), the sole national federation of trade unions in Singapore, which has a close relationship with the PAP ruling party and the government. The current NTUC Secretary General is also a Minister in the Prime Minister’s Office. Given that nearly all unions are NTUC affiliates, the NTUC has almost exclusive authority to exercise collective bargaining power on behalf of employees. Union members may not reject collective agreements negotiated between their union representatives and an employer. Although transfers and layoffs are excluded from the scope of collective bargaining, employers consult with unions on both problems, and the Taskforce for Responsible Retrenchment and Employment Facilitation issues guidelines calling for early notification to unions of layoffs. Data on coverage of collective bargaining agreements is not publicly available. The Industrial Relations Act (IRA) regulates collective bargaining. The Industrial Arbitration Courts must certify any collective bargaining agreement before it is deemed in effect and can deny certification on public interest grounds. Additionally, the IRA restricts the scope of issues over which workers may bargain, excluding bargaining on hiring, transfer, promotion, dismissal, or reinstatement of workers.

Most labor disagreements are resolved through conciliation and mediation by MOM. Since April 2017 the Tripartite Alliance for Dispute Management (TADM) under MOM provides advisory and mediation services, including mediation for salary and employment disputes. Where the conciliation process is not successful, the disputing parties may submit their dispute to the IAC for arbitration. Depending on the nature of the dispute, the Court may be constituted either by the President of the IAC and a member of the Employer and Employee Panels, or by the President alone. The Employment Claims Tribunals (ECT) was established under the Employment Claims Act (2016). To bring a claim before the ECT, parties must first register their claims at the TADM for mediation. Mediation at TADM is compulsory. Only disputes which remain unresolved after mediation at TADM may be referred to the ECT.

The ECT hears statutory salary-related claims, contractual salary-related claims, dismissal claims from employees, and claims for salary in lieu of notice of termination by all employers. There will be a limit of $21,200 on claims for cases with TADM mediation, and $14,100 for all other claims. In March 2019, MOM announced that 85 percent of salary claims had been resolved by TADM between April 2017 and December 2018. Salary-related disputes that are not resolved by mediation are covered by the Employment Claims Tribunals under the State Courts.

Industrial disputes may also submit their case be referred to the tripartite Industrial Arbitration Court (IAC). The IAC composed has two panels: an employee panel and a management panel. For a majority of dispute hearings, a Court is constituted comprising the President of the IAC and a member each from the employee and employer panels’ representatives and chaired by a judge. In some situations, the law provides for compulsory arbitration. The court must certify collective agreements before they go into effect. The court may refuse certification at its discretion on the ground of public interest.

The legal framework in Singapore provides for some restrictions in the registration of trade unions, labor union autonomy and administration, the right to strike, who may serve as union officers or employees, and collective bargaining. Under the Trade Union Act (TUA), every trade union must register with the Registrar of Trade Unions, which has broad discretion to grant, deny, or cancel union registration. The TUA limits the objectives for which unions can spend their funds, including for contributions to a political party or for political purposes, and allows the Registrar to inspect accounts and funds “at any reasonable time.” Legal rights to strike are granted with restrictions under TUA. The law requires more than 50 percent of affected unionized workers to vote in favor of a strike by secret ballot, as opposed to 51 percent of those participating in the vote. Strikes cannot be conducted for any reason apart from a dispute in the trade or industry in which the strikers are employed, and it is illegal to conduct a strike if it is “designed or calculated to coerce the government either directly or by inflicting hardship on the community.” Workers in “essential services” are required to give 14 days’ notice to an employer before conducting a strike. Although workers, other than those employed in the three essential services of water, gas and electricity, may strike, no workers did so since 1986 with the exception of a strike by bus drivers in 2012. The TUA bars non-citizens from serving as union officers or employees, unless prior written approval is received from the Minister for Manpower.

The Employment Act, which prohibits all forms of forced or compulsory labor and the Prevention of Human Trafficking Act (PHTA), strengthens labor trafficking victim protection, and governs labor protections. Other acts protecting the rights of workers include the Occupational Safety and Health Act and Employment of Foreign Manpower Act. Labor laws set the standard legal workweek at 44 hours, with one rest day each week, and establish a framework for workplaces to comply with occupational safety and health standards, with regular inspections designed to enforce the standards. MOM effectively enforces laws and regulations establishing working conditions and comprehensive occupational safety and health (OSH) laws, and implements enforcement procedures and promoted educational and training programs to reduce the frequency of job-related accidents. Changes to the Employment Act took effect on April 1, 2019, including for extension of core provisions to managers and executives, increasing the monthly salary cap, transferring adjudication of wrongful dismissal claims from MOM to the ECT, and increasing flexibility in compensating employees working during public holidays (for more detail see https://www.mom.gov.sg/employment-practices/employment-act  ). All workers, except for public servants, domestic workers and seafarers are covered by the Employment Act, and additional time-based provisions for more vulnerable employees.

Singapore has no across the board minimum wage law, although there are some exceptions in certain low skill industries. Generally, the government follows a policy of allowing free market forces to determine wage levels. In specific sectors where wages have stagnated and market practices such as outsourcing reduce incentive to upskill workers and limit their bargaining power, the government has implemented Progressive Wage Models to uplift wages. These are currently implementing in the cleaning, security, elevator maintenance, and landscape sectors. The National Wage Council (NWC), a tripartite body comprising representatives from the government, employers and unions, recommends non-binding wage adjustments on an annual basis. The NWC recommendations apply to all employees in both domestic and foreign firms, and across the private and public sectors. While the NWC wage guidelines are not mandatory, they are published under the Employment Act and form the basis of wage negotiations between unions and management. The NWC recommendations apply to all employees in both domestic and foreign law firms, and across the public and private sectors. The level of implementation is generally higher among unionized companies compared to non-unionized companies.

MOM is responsible for combating labor trafficking and improving working conditions for workers, and generally enforces anti-trafficking legislation, although some workers in low-wage and unskilled sectors are vulnerable to labor exploitation and abuse. PHTA sets out harsh penalties (including up to nine strokes of the cane and 15 years’ imprisonment) for those found guilty of trafficking, including forced labor, or abetting such activities. The government developed a mechanism for referral of forced labor, among other trafficking-in-persons activities, to the interagency taskforce, co-chaired by the Ministry of Home Affairs and the Ministry of Manpower. Some observers note that the country’s employer sponsorship system made legal migrant workers vulnerable to forced labor, because they cannot change employers without the consent of the current employer. MOM effectively enforces laws and regulations pertaining to child labor. Penalties for employers that violated child labor laws were subject to fines and/or imprisonment, depending on the violation. Government officials assert that child labor is not a significant issue. The incidence of children in formal employment is low, and almost no abuses are reported.

The U.S.-Singapore Free Trade Agreement came into effect on January 1, 2004 and includes a chapter on labor protections. The chapter contains a statement of shared commitment by each party that the principles and rights set forth in Article 17.7 of the ILO Declaration on Fundamental Principles and Rights at Work and its Follow-up are recognized and protected by domestic law, and each party shall strive to ensure it does not derogate protections afforded in domestic labor law as an encouragement for trade or investment purposes. The chapter includes the establishment of a labor cooperation mechanism, which promotes the exchange of information on ways to improve labor law and practice, and the advancement of effective implementation of the principles reflected in the ILO Declaration on Fundamental Principles and Rights at Work and its Follow-up.

See the U.S. State Department Human Rights Report as well as the U.S. State Department’s Trafficking in Persons Report https://www.state.gov/reports-bureau-of-democracy-human-rights-and-labor/country-reports-on-human-rights-practices/ and https://www.state.gov/wp-content/uploads/2019/06/2019-Trafficking-in-Persons-Report.pdf [16 MB]

https://www.state.gov/wp-content/uploads/2019/06/2019-Trafficking-in-Persons-Report.pdf [16 MB]

Under the 1966 Investment Guarantee Agreement with Singapore, the Overseas Private Investment Corporation (OPIC) offers insurance to U.S. investors in Singapore against currency inconvertibility, expropriation, and losses arising from war. Singapore became a member of the Multilateral Investment Guarantee Agency (MIGA) in 1998. In March 2019, Singapore and the United States signed a MOU aimed at strengthening collaboration between the infrastructure agency of Singapore, Infrastructure Asia, and OPIC. Under the agreement, both countries will work together on information sharing, deal facilitation, structuring and capacity building initiatives in sectors of mutual interest such as energy, natural resource management, water, waste, transportation, and urban development. The aim is to enhance Singapore-based and U.S. companies’ access to project opportunities, while building on Singapore’s role as an infrastructure hub in Asia.

Singapore’s domestic public infrastructure projects are funded primarily via Singapore government reserves or capital markets, reducing the scope for direct project financing subsidies by foreign governments.

* Source for Host Country Data

*CDIS data not available. Outward 2018 FDI taken from www.singstat.gov.sg .

Table 4: Sources of Portfolio Investment
Data not available.

Martha Tipton
Economic Specialist
U.S. Embassy
27 Napier Road
Singapore 258508
+65 9069-8592
Tiptonm@state.gov

Transparency of the Regulatory System

Generally, Thai regulations are readily available to the public. Foreign investors have, on occasion, expressed frustration that draft regulations are not made public until they are finalized. Comments stakeholders submit on draft regulations are not always taken into consideration. Non-governmental organizations report, however, the Thai government actively consults them on policy, especially in the health sector and on intellectual property issues. In other areas, such as digital and cybersecurity laws, the Thai government has taken stakeholders’ comments into account and amended draft laws accordingly.

U.S. businesses have repeatedly expressed concerns about Thailand’s customs regime. Complaints center on lack of transparency, the significant discretionary authority exercised by Customs Department officials, and a system of giving rewards to officials and non-officials for seized goods based on a percentage of their sales price. Specifically, the U.S. government and private sector have expressed concern about inconsistent application of Thailand’s transaction valuation methodology and the Customs Department’s repeated use of arbitrary values. Thailand’s latest Customs Act, which entered into force on November 13, 2017, is a moderate step forward. The Act removed the Customs Department Director General’s discretion to increase the Customs value of imports. It also reduced the percentage of remuneration awarded to officials and non-officials from 55 percent to 40 percent of the sale price of seized goods (or of the fine amount). While a welcome development, reduction of this remuneration is insufficient to remove the personal incentives given Customs officials to seize goods nor to address the conflicts of interest the system entails.

Consistent and predictable enforcement of government regulations remains problematic. In 2017, the Thai government launched a “regulatory guillotine” initiative to cut down on red tape, licenses, and permits. The policy focused on reducing and amending outdated regulations in order to improve Thailand’s ranking on the World Bank “Ease of Doing Business” report. The regulatory guillotine project has helped improve Thailand’s ranking and is still underway.

Gratuity payments to civil servants responsible for regulatory oversight and enforcement remain a common practice. Firms that refuse to make such payments can be placed at a competitive disadvantage to other firms that do engage in such practices.

The Royal Thai Government Gazette (www.ratchakitcha.soc.go.th ) is Thailand’s public journal of the country’s centralized online location of laws, as well as regulation notifications.

International Regulatory Considerations

Thailand is a member of the World Trade Organization (WTO) and notifies most draft technical regulations to the Technical Barriers to Trade (TBT) Committee and the Sanitary and Phytosanitary Measures Committee. However, Thailand does not always follow WTO and other international standard-setting norms or guidance, butprefers to set its own standards in many cases. In October 2015, the country ratified the WTO Trade Facilitation Agreement, which came into effect in February 2017.

Legal System and Judicial Independence

Thailand has a civil code, commercial code, and a bankruptcy law. Thailand has an independent judiciary that is generally effective in enforcing property and contractual rights. The legal process is slow in practice, and litigants or third parties sometimes influence judgments through extra-legal means. Monetary judgments are calculated at the market exchange rate. Decisions of foreign courts are not accepted or enforceable in Thai courts. Disputes such as the enforcement of property or contract rights have generally been resolved in Thai courts.

There are three levels to the judicial system in Thailand: The Court of First Instance, which handles most matters at inception; the Court of Appeals; and the Supreme Court. There are also specialized courts, such as the Labor Court, Family Court, Tax Court, the Central Intellectual Property and International Trade Court, and the Bankruptcy Court.

The Specialized Appeal Court handles appeals from specialized courts. The Supreme Court has discretion whether to take a case that has been decided by the Specialized Appeal Court. If the Supreme Court decides not to take up a case, the Specialized Appeal Court decision stands.

Laws and Regulations on Foreign Direct Investment

The Foreign Business Act (described in detail above) governs most investment activity by non-Thai nationals. Other key laws governing foreign investment are the Alien Employment Act (1978) and the Investment Promotion Act (1977). However, as explained above, many U.S. businesses enjoy investment benefits through the U.S.-Thailand Treaty of Amity and Economic Relations (often referred to as the ‘Treaty of Amity’), which was established to promote friendly relations between the two nations. Pursuant to the Treaty, American nationals are entitled to certain exceptions to the FBA restrictions.

Pertaining to the services sector, the 2007 Financial Institutions Business Act unified the legal framework and strengthened the Bank of Thailand’s (the country’s central bank) supervisory and enforcement powers. The Act allows the Bank of Thailand to raise foreign ownership limits for existing local banks from 25 percent to 49 percent on a case-by-case basis. The Minister of Finance can authorize foreign ownership exceeding 49 percent if recommended by the central bank. Details are available at https://www.bot.or.th/English/AboutBOT/LawsAndRegulations/SiteAssets/Law_E24_Institution_Sep2011.pdf .

Apart from acquiring shares of existing (traditional) local banks, foreign banks can enter the Thai banking system by obtaining new licenses. The Ministry of Finance issues such licenses, following a consultation process with the Bank of Thailand. The Thai central bank is currently studying new licenses for digital-only banks, a tool meant to enhance financial inclusion and keep pace with consumer needs in the digital age. Digital-only banks can operate at a lower cost and offer different services than traditional banks.

The 2008 Life Insurance Act and the 2008 Non-Life Insurance Act apply a 25 percent cap on foreign ownership of insurance companies. Foreign boards of directors’ membership is also limited to 25 percent. However, in January 2016 the Office of the Insurance Commission (OIC), the primary insurance industry regulator, notified that Thai life or non-life insurance companies wishing to exceed these limits may apply to the OIC for approval. Any foreign national wishing to hold more than 10 percent of the voting shares in an insurance company must seek OIC approval. With approval, a foreign national can acquire up to 49 percent of the voting shares. Finally, the Finance Minister, with OIC’s positive recommendation, has discretion to permit greater than 49 percent foreign ownership and/or a majority of foreign directors, when the operation of the insurance company may cause loss to insured parties or to the public.

The Board of Investment offers qualified investors several benefits and provides information to facilitate a smoother investment process in Thailand. Information on the BOI’s “One Start One Stop” investment center can be found at http://osos.boi.go.th . A physical office is located on the 18th floor of Chamchuri Square on Rama 4/Phayathai Road in Bangkok.

Competition and Anti-Trust Laws

Thailand updated the Trade Competition Act on October 5, 2017. The updated Act covers all business activities, except: state-owned enterprises exempted by law or cabinet resolution; specific activities related to national security, public benefit, common interest and public utility; cooperatives, agricultural and cooperative groups; government agencies; and other enterprises exempted by the law. The Act broadens the definition of a business operator to include affiliates and group companies, and broadens the liability of directors and management, subjecting them to criminal and administrative sanctions if their actions (or omissions) resulted in violations. The Act also provides details about penalties in cases involving administrative court or criminal court actions. The amended Act has been noted as an improvement over the prior legislation and a step towards Thailand’s adoption of international standards in this area.

The Office of Trade Competition Commission (OTCC) is an independent agency and the main enforcer of the Trade Competition Act B.E. 2560 (2018). The OTCC is comprised of seven members nominated by a selection committee and endorsed by the Cabinet. The Commission has the following responsibilities: advises the government on issuance of relevant regulations; ensures fair and free trade practices; investigates cases and complaints of unfair trade; and pursues criminal and disciplinary actions against those found guilty of unfair trade practices stipulated in the law. The law focuses on the following areas: unlawful exercise of market dominance; mergers or collusion that could lead to monopoly; unfair competition and restricting competition; and unfair trade practices.

The government has authority to control the price of specific products and services under the Price of Goods and Services Act. The MOC’s Department of Internal Trade administers the law and interacts with affected companies. The Committee on Prices of Goods and Services makes final decisions on products to add or remove from price controls. As of October 2019, the MOC decreased the number of controlled commodities and services to 52 from 54 the previous year. Examples of controlled products include automotive tires, agricultural fertilizer, and sugar. Raising prices of controlled products and services is prohibited without obtaining the Committee’s approval. The government uses its controlling stakes in major suppliers of products and services, such as Thai Airways and PTT Public Company Limited (the national petroleum company), to influence prices in the market.

Expropriation and Compensation

Thai laws provide guarantees regarding protection from expropriation without compensation and non-discrimination for some, but not all, investors. Thailand’s Constitution provides protection from expropriation without fair compensation and requires the government to pass a specific, tailored expropriation law if the expropriation is required for the purpose of public utilities, national defense, acquisition of national resources, or for other public interests. The Investment Promotion Act also guarantees the government shall not nationalize the operations and assets of BOI-promoted investors.

The Expropriation of Immovable Property Act (EIP), most recently amended in 2019, applies to all property owners, whether foreign or domestic nationals. The Act provides a framework and clear procedures for expropriation; sets forth detailed provision and measures for compensation of land owners, lessees and other persons that may be affected by an expropriation; and recognizes the right to appeal decisions to Thai courts. The 2019 EIP requires the government to return land that was expropriated but has not been used back to the original property owners. However, the EIP and Investment Promotion Act do not protect against indirect expropriation and do not distinguish between compensable and non-compensable forms of indirect expropriation.

Thailand has a well-established system for land rights that is generally upheld in practice, but the legislation governing land tenure still significantly restricts foreigners’ rights to acquire land.

Dispute Settlement

ICSID Convention and New York Convention

Thailand is a signatory to the New York Convention, which means that investors can enforce arbitral awards in any other signatory country. Thailand signed the Convention on the Settlement of Investment Disputes in 1985 but has not ratified it. Therefore, most foreign investors covered under Thailand’s treaties with investor-state dispute settlement (ISDS) provisions that are limited to ICSID arbitration have not been able to bring ISDS claims against Thailand under these treaties.

Investor-State Dispute Settlement

Thailand is party to bilateral investment treaties with 46 nations. Two treaties — with the Netherlands and United States (Treaty of Amity) — do not include binding dispute resolution provisions. This means that investors covered under these treaties are unable to pursue international arbitration proceedings against the Thai government without first obtaining the government’s consent. There have been two notable cases of investor-state disputes in the last fifteen years, neither of which involved U.S. companies. The first case involved a concession agreement for a construction project filed under the Germany-Thailand bilateral investment treaty. In the second case, Thailand is engaged in a dispute over the government’s invocation of special powers to shut down a gold mine in early 2017.

International Commercial Arbitration and Foreign Courts

Thailand’s Arbitration Act of 2002, modeled in part after the UNCITRAL Model Law, governs domestic and international arbitration proceedings. The Act states that “in cases where an arbitral award was made in a foreign country, the award shall be enforced by the competent court only if it is subject to an international convention, treaty, or agreement to which Thailand is a party.” Any arbitral award between parties subject to the New York Convention should thus be enforced. The following organizations provide arbitration services in Thailand: the Thai Arbitration Institute of the Alternative Dispute Resolution Office; Office of the Judiciary; and the Office of the Arbitration Tribunal of the Board of Trade of Thailand. In addition, the semi-public Thai Arbitration Center offers mediation and arbitration for civil and commercial disputes. An amendment to the Arbitration Act that allows foreign arbitrators to take part in cases involving foreign parties came into force on April 15, 2019. Under very limited circumstances, a court can set aside an arbitration award.

Bankruptcy Regulations

Thailand’s bankruptcy law is modeled after that of the United States. The law authorizes restructuring proceedings that require trained judges who specialize in bankruptcy matters to preside. According to the law, bankruptcy is defined as a state in which courts permit the distribution of assets belonging to a debtor among the creditors within the parameters of the law. Thailand’s bankruptcy law allows for corporate restructuring similar to U.S. Chapter 11 and does not criminalize bankruptcy. The law also distinguishes between secured and unsecured claims, with the former prioritized. While bankruptcy is under consideration, creditors can request the following ex parte applications from the Bankruptcy Court: an examination by the receiver of all the debtor’s assets and/or that the debtor attend questioning on the existence of assets; a requirement that the debtor provide satisfactory security to the court; and immediate seizure of the debtor’s assets and/or evidence in order to prevent the loss or destruction of such items.

The law stipulates that all applications for repayment must be made within one month after the Bankruptcy Court publishes the appointment of an official receiver. If a creditor eligible for repayment does not apply within this period, the creditor forfeits his/her right to receive payment or the court may cancel the order to reorganize the business. If any person opposes a filing, the receiver shall investigate the matter and approve, partially approve, or dismiss the application. Any objections to the orders issued by the receiver may be filed with the court within 14 days after learning of the issued order.

Within bankruptcy proceedings, it is also possible to undertake a “composition” in order to avoid a long and protracted process. A composition takes place when a debtor expresses in writing a desire to settle his/her debts, either partially or in any other manner, within seven days of submitting an explanation of matters related to the bankruptcy or during a time period prescribed by the receiver. After the proposal for a composition has been submitted, the receiver calls for a meeting among creditors to consider whether or not to accept the proposal. If the proposal is accepted, the court will approve the composition in order to legally execute the proposal; however, it will only do so if the proposal includes clear provisions for the repayment of debts.

The National Credit Bureau of Thailand (NCB) provides the financial services industry with information on consumers and businesses. The NCB is required to provide the financial services sector with payment history information from utility companies, retailers and merchants, and trade creditors.

Investment Incentives

The Board of Investment:

The Board of Investment offers investment incentives to qualified domestic and foreign investors. To upgrade the country’s technological capacity, the BOI presently gives more weight to applications in high-tech, innovative, and sustainable industries. These include digital technology, “smart agriculture” and biotechnology, aviation and logistics, automation and robotics, medical and wellness tourism, and other high-value services.

The most significant privileges offered by the BOI for promoted projects include: corporate income tax exemptions; tariff reductions or exemptions on imports of machinery used in the investment; tariff-free treatment on imported raw materials used in production for export.

• corporate income tax exemptions; tariff reductions or exemptions on imports of machinery used in the investment; tariff-free treatment on imported raw materials used in production for export.
• permission to own land; permission to bring foreign experts; and visa and work permit facilitation.

Investment projects with a significant R&D, innovation, or human resource development component may be eligible for additional grants and incentives. Moreover, grants are provided to support targeted technology development under the Competitive Enhancement Act. BOI offers a one-stop service to expedite multiple business processes for investors.

For additional information, contact the Office of Board of Investment on 555 Vibhavadi-Rangsit Road, Chatuchak, Bangkok 10900 and telephone at +662-553-8111 or website at www.boi.go.th.

Office of the Eastern Economic Corridor:

Thailand’s flagship investment zone, the “Eastern Economic Corridor (EEC),” spans the provinces of Chachoengsao, Chonburi, and Rayong (5,129 square miles). The EEC leverages the developed infrastructure networks of the adjacent Eastern Seaboard industrial area, Thailand’s primary investment destination for more than 30 years. The Thai government foresees the EEC as a primary investment and infrastructure hub in ASEAN and a gateway to east and south Asia. Among the EEC development projects are: smart cities; an innovation district (EECi); a digital park (EECd); an aerotropolis (EEC-A); a medical hub (EECmd); and other state-of-the-art facilities. The EEC is targeting twelve key industries:

• Next-generation automotive
• Intelligent electronics
• Advanced agriculture and biotechnology
• Food processing
• Tourism
• Advance robotics and automation
• Integrated aviation industry
• Medical hub and total healthcare services
• Biofuels and biochemicals
• Digital technology
• Defense industry
• Human resource development

The EEC Act authorized investment incentives and privileges. Investors can obtain long-term land leases of 99 years (with an initial lease of up to 50 years and a renewal of up to 49 years). The EEC Act shortens the public-private partnership approval process to approximately nine months.

The BOI works in cooperation with the EEC Office. BOI offers corporate income tax exemptions of up to 13 years for strategic projects in the EEC area. Foreign executives and experts who work in targeted industries in the EEC are subject to a maximum personal income tax rate of 17 percent.

For additional information, contact the Eastern Economic Corridor Office at 25th floor, CAT Tower, 72 Soi Wat Maungkhae, Charoenkrung Road, Bangrak, Bangkok 10500, telephone at +662-033-8000 and website at https://eng.eeco.or.th/en.

Foreign Trade Zones/Free Ports/Trade Facilitation

The Industrial Estate Authority of Thailand (IEAT), a state-enterprise under the Ministry of Industry, develops suitable locations to accommodate industrial properties. IEAT has an established network of industrial estates in Thailand, including Laem Chabang Industrial Estate in Chonburi Province and Map Ta Phut Industrial Estate in Rayong Province in Thailand’s eastern seaboard region, a common location for foreign-owned factories due to its proximity to seaport facilities and Bangkok. Foreign-owned firms generally have the same investment opportunities in the industrial zones as Thai entities. While the IEAT Act requires that in the case of foreign-owned firms, the IEAT Committee must consider and approve the amount of space/land bought or leased in industrial estates, in practice, there is no record of disapproval for requested land. Private developers are heavily involved in the development of these estates.

The IEAT currently operates 14 estates, plus 45 more in conjunction with the private sector, in 16 provinces nationwide. Private-sector developers independently operate over 50 industrial estates, most of which have received promotion privileges from the Board of Investment. Amata Industrial Estate and WHA Industrial Development are Thailand’s leading private industrial estate developers. Most major foreign manufacturing investors, including U.S. manufacturers, are located in these two companies’ industrial estates and in the eastern seaboard region.

The IEAT has established 12 special IEAT “free trade zones” reserved for industries manufacturing exclusively for export. Businesses may import raw materials into, and export finished products from, these zones free of duty (including value added tax). These zones are located within industrial estates and many have customs facilities to speed processing. The free trade zones are located in Chonburi, Lampun, Pichit, Songkhla, Samut Prakarn, Bangkok (at Lad Krabang), Ayuddhya, and Chachoengsao. In addition to these zones, factory owners may apply for permission to establish a bonded warehouse within their premises to which raw materials, used exclusively in the production of products for export, may be imported duty-free.

The Thai government also established Special Economic Zones (SEZs) in ten provinces bordering neighboring countries: Tak, Nong Khai, Mukdahan, Sa Kaeo, Trad, Narathiwat, Chiang Rai, Nakhon Phanom, Songkhla, and Kanchanaburi. Business sectors and industries that can benefit from tax and non-tax incentives offered in the SEZs include logistics; warehouses near border areas; distribution; services; labor-intensive factories; and manufacturers using raw materials from neighboring countries. These SEZs support Thai government goals for closer economic ties with neighboring countries and allow investors to tap into abundant migrant labor; however, these SEZs have proven less attractive to overseas investors due to their remote locations far from Bangkok and other major cities.

In 2019, Thai Customs implemented three measures to improve trade and customs processing efficiency: Pre-Arrival Processing (PAP); an “e-Bill Payment” electronic payment system; and an e-Customs system that waives the use of paper customs declaration copies. The measures comply with the World Trade Organizations (WTO) Trade Facilitation Agreement (TFA), adopted in February 2016, which requires WTO members to adopt procedures for pre-arrival processing for imports and to authorize electronic submission of customs documents, where appropriate. The measures have also improved Thailand’s ranking in the World Bank’s “Doing Business: Trading Across Borders 2020” index.

Performance and Data Localization Requirements

The Thai government does not have specific laws or policies regarding performance or data localization requirements. Foreign investors are not required to use domestic content in goods or technology, but the Thai government has encouraged such an approach through domestic preferences in government procurement proceedings.

There are currently no requirements for foreign IT providers to localize their data, turn over source code, or provide access to surveillance. However, the Thai government in 2019 passed new laws and regulations on cybersecurity and personal data protection that have raised concerns about Thai authorities’ broad power to potentially demand confidential and sensitive information. IT operators and analysts have expressed concern with private companies’ legal protections, ability to appeal, or ability to limit such access. IT providers have expressed concern that the new laws might place unreasonable burdens on them and have introduced new uncertainties in the technology sector. As of March 2020, the government is still in the process of considering and implementing regulations to enforce laws on Cyber Security and Personal Data Protection.

Thailand has implemented a requirement that all debit transactions processed by a domestic debit card network must use a proprietary chip.

Real Property

Property rights are guaranteed by the Constitution. While the government provides fair compensation in instances of expropriation, Thai policy generally does not permit foreigners to own land. There have been instances, however, of granting such permission to foreigners under certain laws or ministerial regulations for residential, business, or religious purposes. Foreign ownership of condominiums and buildings is permitted under certain laws. Foreigners can freely lease land. Relevant articles of the Civil and Commercial Codes do not distinguish between foreign and Thai nationals in the exercise of lease rights. Secured interests in property, such as mortgage and pledge, are recognized and enforced. Unoccupied property legally owned by foreigners or Thais may be subject to adverse possession by squatters who stay on that property for at least 10 years.

IP Enforcement

The National Committee on Intellectual Property Policy sets Thailand’s overall Intellectual Property (IP) policy. The National Committee is chaired by the Prime Minister with two Deputy Prime Ministers as vice chairs. Eighteen heads of government agencies serve as Committee members. In 2017, this Committee approved a 20-year IP Roadmap to reform the country’s IP system.

The Department of Intellectual Property (DIP) is responsible for IP-related administration, including registration and recording of IP rights and coordination of IP enforcement activities. DIP also acts as the secretary of the National Committee on Intellectual Property Policy.

Patents and Trademarks

Thailand is a member of the Patent Cooperation Treaty (PCT). Thailand’s patent regime generally provides protection for most new inventions. The process of patent examination through issuance of patents takes on average six to eight years. The patenting process may take longer for certain technology sectors such as pharmaceuticals and biotechnology. In order to address the long patent pendency and backlogs, DIP hired 91 patent and trademark examiners in recent years. While the patent backlogs decreased from prior years in 2018, volumes increased again in 2019. As of September 2019, approximately 19,000 patent applications were pending examination, according to DIP.

The Thai government is in the process of preparing two amendments to the Patent Act. The first amendment, which concerns streamlining of the patent examination process, is pending review by the Council of the State as of April 2020. This amendment is expected to be adopted by the Parliament by the end of 2020. A second amendment to the Patent Act will authorize Thailand’s accession to the “Hague Agreement Concerning the International Registration of Industrial Designs.” The draft of this second amendment is expected to be submitted to the Council of State after the Council completes its review of the first amendment.

Thailand protects trademarks, traditional marks, and sound marks. As a member of the “Protocol Relating to the Madrid Agreement Concerning the International Registration of Marks” (Madrid Protocol). Thailand allows trademark owners to apply for trademark registrations in Thailand directly at DIP or through international applications under the Madrid Protocol. DIP historically takes 10 to 14 months to register a trademark. More than 46,000 trademark applications were pending examination at the end of 2019.

Copyrights

As Thailand is a member of the “Bern Convention,” copyright works are protected automatically. However, copyright owners may record their works with DIP to establish proof of ownership. Thailand joined the Marrakesh Treaty to Facilitate Access to Published Works for Persons Who Are Blind, Visually Impaired or Otherwise Print Disabled in January 2019. The Guidelines on Use of Copyright Works for the Benefits of Disabled Persons is available on the DIP website, Thai language only (http://www.ipthailand.go.th/th/dip-law-2/item/notificatioofmoc_disableperson2019.html).

In addition, Thailand is in the process of a two-phase amendment of the Copyright Act. The first phase will enhance protections of copyrights in the digital environment and prepare Thailand for accession to the WIPO Copyright Treaty. The second phase will prepare Thailand for accession to the WIPO Performances and Phonograms Treaty. The first-phase draft is undergoing a legal review by the Council of State, after which it will be submitted to the Parliament. The second amendment remains in the drafting process.

DIP recently adopted a new system of voluntary registration of copyright (collective management) agents to curb illegal activities of rogue agents. To register, an agent must meet certain qualifications and undergo prescribed training. The roster of registered agents along with associated licensed copyrights is available on the DIP website. The Thai government amended the Computer Crime Act in 2017 to add IPR infringement as a predicate offense under the Act’s Section 20. This enables IP rights-holders to file requests to either DIP or the Ministry of Digital Economy and Society for removal of online IPR-infringing content from computer systems or for disabling access.

Geographical Indications

Thailand’s Geographical Indications (GI) Act has been in force since April 2004. Thailand protects GIs, which identify goods by their specific geographical origins. The geographical origins identified by a GI must be directly attributable to the reputation, qualities, or characteristics of the good. In Thailand, a registered trademark does not prevent a similar geographical name to be registered as a GI.

Intellectual Property Rights

In 2017, Thailand was placed on the USTR Special 301 Watch List. Thailand has one physical market, Patpong Market in Bangkok, listed in the USTR’s 2019Review of Notorious Markets.

Thailand has taken the following steps recently to improve IP enforcement: provided ex-officio authority for border enforcement officials to inspect in-transit goods; set enforcement benchmarks; published monthly enforcement statistics online; and stepped up efforts to investigate IP cases. Thailand’s Central Intellectual Property and International Trade Court (CIPIT) is the first instance of a court having jurisdiction over both civil and criminal intellectual property cases and civil international trade cases for all of Thailand. The Court of Appeal for Specialized Cases hears appeals from the CIPIT, including administrative appeals from DIP that already received a first instance decision from the CIPIT.

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

Capital Markets and Portfolio Investment

The Thai government maintains a regulatory framework that broadly encourages and facilitates portfolio investment. The Stock Exchange of Thailand, the country’s national stock market, was established under the Securities Exchange of Thailand Act B.E. 2535 in 1992. There is sufficient liquidity in the markets to allow investors to enter and exit sizeable positions. Government policies generally do not restrict the free flow of financial resources to support product and factor markets. The Bank of Thailand, the country’s central bank, has respected IMF Article VIII by refraining from restrictions on payments and transfers for current international transactions.

Credit is generally allocated on market terms rather than by “direct lending.” Foreign investors are not restricted from borrowing on the local market. In theory, the private sector has access to a wide variety of credit instruments, ranging from fixed term lending to overdraft protection to bills of exchange and bonds. However, the private debt market is not well developed. Most corporate financing, whether for short-term working capital needs, trade financing, or project financing, requires borrowing from commercial banks or other financial institutions.

Money and Banking System

Thailand’s banking sector, with 15 domestic commercial banks, is sound and well-capitalized. As of December 2019, the non-performing loan rate was low (around 2.98 percent industry wide). The ratio of capital funds/risk-weighted assets (capital adequacy) was high (19.61 percent). Thailand’s largest commercial bank is Bangkok Bank, with assets totaling USD 100 billion as of December 2019. The combined assets of the five largest commercial banks totaled USD 450 billion, or 69.39 percent of the total assets of the Thai banking system, at the end of 2019.

In general, Thai commercial banks provide the following services: accepting deposits from the public; granting credit; buying and selling foreign currencies; and buying and selling bills of exchange (including discounting or re-discounting, accepting, and guaranteeing bills of exchange). Commercial banks also provide credit guarantees, payment, remittance and financial instruments for risk management. Such instruments include interest-rate derivatives and foreign-exchange derivatives. Additional business to support capital market development, such as debt and equity instruments, is allowed. A commercial bank may also provide other services, such as bank assurance and e-banking.

Thailand’s central bank is the Bank of Thailand (BOT), which is headed by a Governor appointed for a five-year term. The BOT serves the following functions: prints and issues banknotes and other security documents; promotes monetary stability and formulates monetary policies; manages the BOT’s assets; provides banking facilities to the government; acts as the registrar of government bonds; provides banking facilities for financial institutions; establishes or supports the payment system; supervises financial institutions manages the country’s foreign exchange rate under the foreign exchange system; and determines the makeup of assets in the foreign exchange reserve.

Apart from the 15 domestic commercial banks, there are currently 11 registered foreign bank branches, including three American banks (Citibank, Bank of America, and JP Morgan Chase), and four foreign bank subsidiaries operating in Thailand. To set up a bank branch or a subsidiary in Thailand, a foreign commercial bank must obtain approval from the Ministry of Finance and the BOT. Foreign commercial bank branches are limited to three service points (branches/ATMs) and foreign commercial bank subsidiaries are limited to 40 service points (branches and off-premise ATMs) per subsidiary. Newly established foreign bank branches are required to have minimum capital funds of 125 million baht (USD 4.03 million at end of 2019 exchange rates) invested in government or state enterprise securities, or directly deposited with the Bank of Thailand. The number of expatriate management personnel is limited to six people at full branches, although Thai authorities frequently grant exceptions on a case-by-case basis.

Non-residents can open and maintain foreign currency accounts without deposit and withdrawal ceilings. Non-residents can also open and maintain Thai baht accounts; however, in an effort to curb speculation, in July 2019 the Bank of Thailand capped non-resident Thai baht deposits to 200 million baht across all domestic bank accounts. Any deposit in Thai baht must be derived from conversion of foreign currencies, receipt of payment for goods and services, or capital transfers. Withdrawals are freely permitted. Since mid-2017, the BOT has allowed commercial banks and payment service providers to introduce new financial services technologies under its “Regulatory Sandbox” guidelines. Recently introduced technologies under this scheme include standardized QR codes for payments, blockchain funds transfers, electronic letters of guarantee, and biometrics.

Thailand’s alternative financial services include cooperatives, micro-saving groups, the state village funds, and informal money lenders. The latter provide basic but expensive financial services to households, mostly in rural areas. These alternative financial services, with the exception of informal money lenders, are regulated by the government.

Foreign Exchange and Remittances

Foreign Exchange

There are no limitations placed on foreign investors for converting, transferring, or repatriating funds associated with an investment; however, supporting documentation is required. Any person who brings Thai baht currency or foreign currency in or out of Thailand in an aggregate amount exceeding USD 15,000 or the equivalent must declare the currency at a Customs checkpoint. Investment funds are allowed to be freely converted into any currency.

The exchange rate is generally determined by market fundamentals but is carefully scrutinized by the BOT under a managed float system. During periods of excessive capital inflows/outflows (i.e., exchange rate speculation), the central bank has stepped in to prevent extreme movements in the currency and to reduce the duration and extent of the exchange rate’s deviation from a targeted equilibrium.

Remittance Policies

Thailand imposes no limitations on the inflow or outflow of funds for remittances of profits or revenue for direct and portfolio investments. There are no time limitations on remittances.

Sovereign Wealth Funds

Thailand does not have a sovereign wealth fund and the Bank of Thailand is not pursuing the creation of such a fund. However, the International Monetary Fund has urged Thailand to create a sovereign wealth fund due to its large accumulated foreign exchange reserves (USD 224.3 billion as of December 2019).

Thailand’s 56 state-owned enterprises (SOEs) have total assets of USD 422 billion and a combined net income of USD 8.3 billion (end of 2018 figures, latest available). They employ around 270,000 people, or 0.7 percent of the Thai labor force. Thailand’s SOEs operate primarily in-service delivery, in particular in the energy, telecommunications, transportation, and financial sectors. More information about SOEs is available at the website of the State Enterprise Policy Office (SEPO) under the Ministry of Finance at www.sepo.go.th .

A 15-member State Enterprises Policy Commission, or “superboard,” oversees operations of the country’s 56 SOEs. In May 2019, the Development of Supervision and Management of State-Owned Enterprise Act B.E. 2562 (2019) went into effect. The law aims to reform SOEs and ensure transparent management decisions. The Thai government generally defines SOEs as special agencies established by law for a particular purpose that are 100 percent owned by the government (through the Ministry of Finance as a primary shareholder). The government recognizes a second category of “limited liability companies/public companies” in which the government owns 50 percent or more of the shares. Of the 56 total SOEs, 43 are wholly-owned and 13 are majority-owned. Twelve of these companies are classed as limited liability companies. Five are publicly listed on the Stock Exchange of Thailand: Thai Airways International Public Company Limited; Airports of Thailand Public Company Limited; PTT Public Company Limited; MCOT Public Company Limited; and Krung Thai Bank Public Company Limited. By regulation, at least one-third of SOE boards must be comprised of independent directors.

Private enterprises can compete with SOEs under the same terms and conditions with respect to market share, products/services, and incentives in most sectors, but there are some exceptions, such as fixed-line operations in the telecommunications sector.

While SEPO officials aspire to adhere to the OECD Guidelines on Corporate Governance for SOEsno level playing field exists between SOEs and private sector enterprises, which are often disadvantaged in competing with Thai SOEs for contracts.

Generally, SOE senior management reports directly to a line minister and to SEPO. Corporate board seats are typically allocated to senior government officials or politically-affiliated individuals. Privatization Program

The 1999 State Enterprise Corporatization Act provides a framework for conversion of SOEs into stock companies. Corporatization is viewed as an intermediate step toward eventual privatization. (Note: “corporatization” describes the process by which an SOE adjusts its internal structure to resemble a publicly-traded enterprise; “privatization” denotes that a majority of the SOE’s shares is sold to the public; and “partial privatization” refers to a situation in which less than half of a company’s shares are sold to the public.) Foreign investors are allowed to participate in privatizations, but restrictions are applied in certain sectors, as regulated by the FBA and the Act on Standards Qualifications for Directors and Employees of State Enterprises of 1975, as amended. However, privatizations have been on hold since 2006 largely due to strong opposition from labor unions.

A 15-member State Enterprises Policy Commission, or “superboard,” oversees operations of the country’s 56 SOEs. In May 2019, the Development of Supervision and Management of State-Owned Enterprise Act B.E. 2562 (2019) went into effect. The law aims to reform SOEs and ensure transparent management decisions; however, privatization is not part of this process.

The Thai government has committed to implement the UN Guiding Principles on Business and Human Rights (UNGP).

On October 29, 2019, Thailand’s Cabinet adopted the country’s first National Action Plan on Business and Human Rights (NAP on BHR). The NAP aims to prevent adverse effects of business operations on human rights. Regional consultations and discussions with various stakeholders during the drafting process of the NAP (2016-2019) identified four priority areas: 1) labor; 2) community, land, natural resource and environment; 3) human rights defenders; and 4) cross border investment and multinational enterprises.

The Ministry of Industry has joined the National Human Rights Committee, the Ministry of Justice, the Ministry of Foreign Affairs, the Ministry of Commerce, the Federation of Thai Industries, the Thai Bankers Association, the Thai Chamber of Commerce, and the Global Computing Network of Thailand in signing a memorandum of cooperation to advance implementation of the UNGP.

In May 2019, Thailand’s capital market regulator, the Securities and Exchange Commission (SEC), and the National Human Rights Commission of Thailand signed an MO]U to uphold UNGP principles. The Ministry of Industry’s Department of Industrial Works encourages the private sector to implement its Corporate Social Responsibility (CSR-DIW) standards to achieve ISO 26000 standards (an international standard on CSR). I

There are several local NGOs that promote and monitor responsible business conduct. Most such NGOs operate without hindrance, though a few have experienced intimidation as a result of their work. International NGOs continue to call on the Thai government and Thai companies to act more responsibly with respect to human and labor rights.

Transparency International’s Corruption Perceptions Index ranked Thailand 101st out of 180 countries with a score of 36 out of 100 in 2019. According to some studies, a cultural propensity to forgive bribes as a normal part of doing business and to equate cash payments with finders’ fees or consultants’ charges, coupled with the relatively low salaries of civil servants, encourages officials to accept gifts and illegal inducements. U.S. executives with experience in Thailand often advise new-to-market companies that it is far easier to avoid corrupt transactions from the beginning than to stop such practices once a company has been identified as willing to operate in this fashion. American firms that comply with the strict guidelines of the Foreign Corrupt Practices Act (FCPA) are able to compete successfully in Thailand. U.S. businessmen say that publicly affirming the need to comply with the FCPA helps to shield their companies from pressure to pay bribes.

Thailand has a legal framework and a range of institutions to counter corruption. The Organic Law to Counter Corruption criminalizes corrupt practices of public officials and corporations, including active and passive bribery of public officials. The anti-corruption laws extend to family members of officials and to political parties.

Thai procurement regulations prohibit collusion amongst bidders. If an examination confirms allegations or suspicions of collusion among bidders, the names of those applicants must be removed from the list of competitors.

Thailand adopted its first national government procurement law in December 2016. Based on UNCITRAL model laws and the WTO Agreement on Government Procurement, the law applies to all government agencies, local authorities, and state-owned enterprises, and aims to improve transparency. Officials who violate the law are subject to 1-10 years imprisonment and/or a fine from Thai baht 20,000 (approximately USD 615) to Thai baht 200,000 (approximately USD 6,150).

Since 2010, the Thai Institute of Directors has built an anti-corruption coalition of Thailand’s largest businesses. Coalition members sign a Collective Action Against Corruption Declaration and pledge to take tangible, measurable steps to reduce corruption-related risks identified by third party certification. The Center for International Private Enterprise equipped the Thai Institute of Directors and its coalition partners with an array of tools for training and collective action.

Established in 2011, the Anti-Corruption Organization of Thailand (ACT) aims to encourage the government to create laws to combat corruption. ACT has 54 member organizations drawn from the private, public, and academic sectors. Their signature program is the “integrity pact.” Drafted by ACT and the Finance Ministry and based on a tool promoted by Transparency International, the pact forbids bribes from signatory members in bidding for government contacts. Member agencies and companies must adhere to strict transparency rules by disclosing and making easily available to the public all relevant bidding information, such as the terms of reference and the cost of the project.

Thailand is a party to the UN Anti-Corruption Convention, but not the OECD Anti-Bribery Convention.

Thailand’s Witness Protection Act offers protection (to include police protection) to witnesses, including NGO employees, who are eligible for special protection measures in anti-corruption cases.

Resources to Report Corruption

Contact at government agency or agencies responsible for combating corruption:

International Affairs Strategy Specialist
Office of the National Anti-Corruption Commission
361 Nonthaburi Road, Thasaai District, Amphur Muang Nonthaburi 11000, Thailand
Tel: +662-528-4800
Email: TACC@nacc.go.th

Contact at “watchdog” organization:

Dr. Mana Nimitmongkol
Secretary General
Anti-Corruption Organization of Thailand (ACT)
44 Srijulsup Tower, 16th floor, Phatumwan, Bangkok 10330
Tel: +662-613-8863
Email: mana2020@yahoo.com

On March 24, 2019, Thailand held its first national election since the 2014 military coup that ousted democratically elected Prime Minister Yingluck Shinawatra. On June 5, the newly-seated Parliament elected coup leader General Prayut Chan-o-cha to continue in his role as Prime Minister.

Violence related to an ongoing ethno-nationalist insurgency in Thailand’s southernmost provinces has claimed more than 7,000 lives since 2004. Although the number of deaths and violent incidents has decreased year-over-year, efforts to end the insurgency have so far been unsuccessful. The government is currently engaged in confidence-building measures with the leading insurgent group. Almost all attacks have occurred in the three southernmost provinces of the country.

In 2019, 38.18 million people were in Thailand’s formal labor pool, comprising 57 percent of the total population. Thailand’s official unemployment rates stood at 1.0 percent at the end of 2019, slightly less than 1.1 percent the previous year. Unemployment among youth (15-24 years old) is around 5.2 percent, while the rate is only 0.5 percent for adults over 25 years old. Well over half the labor force (54.3 percent) earns income in the informal sector, including through self-employment and family labor, which limits their access to social welfare programs. (Note: These statistics do not take into account the impact of the coronavirus pandemic, the long-term impact of which on the Thai labor force is difficult to ascertain. End note.)

The Thai government is actively seeking to address shortages of both skilled and unskilled workers through education reform and various worker-training incentive programs. Low birth rates, an aging population, and a skills mismatch, are exacerbating labor shortages in many sectors. Despite provision of 15 years of free universal education, Thailand continues to suffer from a skills mismatch that impedes innovation and economic growth. Thailand has a shortage of high-skill workers such as researchers, engineers, and managers, as well as technicians and vocational workers.

Regional income inequality and labor shortages, particularly in labor-intensive manufacturing, construction, hospitality and service sectors, have attracted millions of migrant workers, mostly from neighboring Burma, Cambodia, and Laos. In 2019, the International Organization for Migration estimated Thailand hosted 4.9 million migrant workers, or 13 percent of country’s labor force. Although an increasing number of migrant laborers are documented, many continue to work illegally. As of 2019, approximately 3.8 million formerly undocumented migrant workers had been regularized.

Employers may dismiss workers provided the employer pays severance. Where an employer temporarily suspends business, in part or in whole, the employer must pay the employee at least 75 percent of his or her daily wages throughout the suspension period.

Among wage and salary workers, 3.5 percent are unionized and only 34 out of 77 provinces have labor unions. Thai law allows private-sector workers to form and join trade unions of their choosing without prior authorization, to bargain collectively, and to conduct legal strikes, although these rights come with some restrictions. Noncitizen migrant workers, whether registered or undocumented, do not have the right to form unions or serve as union officials. Migrants can join unions organized and led by Thai citizens.

In 2019 the government issued a new regulation to ensure that seasonal employees in agriculture, fishing, forestry, and husbandry businesses have access to the government’s accident compensation fund. Additional information on migrant workers issues and rights can be found in the U.S. Trafficking in Persons Report, as well as the Labor Rights chapter of the U.S. Human Rights report.

Under an agreement with the Thai government, the U.S. International Development Finance Corporation (DFC, formerly the Overseas Private Investment Corporation) can provide equity investments, debt financing, partial credit guarantees, political risk insurance, grants and private equity capital to support U.S. and other investors and their investments. DFC also can provide debt financing, in the form of direct loans and loan guarantees, of up to USD one billion per project for business investments, preferably with U.S. private sector participation, covering sectors as diverse as tourism, transportation, manufacturing, franchising, power, infrastructure, and others. DFC political risk insurance is also available for currency inconvertibility, expropriation, and political violence for U.S. and other investments including equity, loans and loan guarantees, technical assistance, leases, and consigned inventory or equipment. Grants, a new tool for DFC, are available for projects that are already reasonably developed but need additional, limited funding and specific work — for example technical, environmental and social-risk (E&S) screening, or legal advice — in order to be bankable and eligible for DFC financing or insurance. In addition, DFC supports twelve private equity funds that are eligible to invest in projects in Thailand. In all cases, DFC support is available only where sufficient or appropriate investment support is unavailable from local or other private sector financial institutions.

http://data.imf.org/regular.aspx?key=60587804 

U.S. Embassy Bangkok
Economic Section
BangkokEconSection@state.gov

Policies Towards Foreign Direct Investment  

Turkey acknowledges that it needs to attract significant new foreign direct investment (FDI) to meet its ambitious development goals.  As a result, Turkey has one of the most liberal legal regimes for FDI among Organization for Economic Cooperation and Development (OECD) members.  According to the Central Bank of Turkey’s balance of payments data, Turkey attracted a total of USD 5.6 billion of FDI in 2019, almost USD 1 billion down from USD 6.7 billion in 2018.  This figure is the lowest FDI figure for Turkey in the last 15 years.  In order to attract more FDI, Turkey needs to improve enforcement of international trade rules, ensure the transparency and timely execution of judicial awards, increase engagement with foreign investors on policy issues, and pursue policies to promote strong, sustainable, and balanced growth.  It also needs to take other political measures to increase stability and predictability for investors.  A stable banking sector, tight fiscal controls, efforts to reduce the size of the informal economy, increased labor market flexibility, improved labor skills, and continued privatization of state-owned enterprises would, if pursued, have the potential to improve the investment environment in Turkey.

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

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

Limits on Foreign Control and Right to Private Ownership and Establishment  

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

Other Investment Policy Reviews 

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

Business Facilitation  

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

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

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

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

Outward Investment

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

Transparency of the Regulatory System

The Government of Turkey (GOT) has adopted policies and laws that, in principle, should foster competition and transparency.  The GOT makes its budgetary spending reports available online.  Copies of draft bills are generally made available to the public by posting them to the websites of the relevant ministry, Parliament, or Official Gazette.  Foreign companies in several sectors, however, claim that regulations are applied in a nontransparent manner.  In particular, public tender decisions and regulatory updates can be opaque and politically driven.

Accounting, legal, and regulatory procedures appear to be consistent with international norms, including standards set forth by the International Financial Reporting Standards (IFRS), the EU, and the OECD.  Publicly traded companies adhere to international accounting standards and are audited by well-respected international firms.

International Regulatory Considerations

Turkey is a candidate for EU membership, however, the accession process has stalled, with the opening of new chapters put on hold.  Some, though not all, Turkish regulations have been harmonized with the EU, and the country has adopted many European regulatory norms and standards. Turkey is a member of the WTO, though it does not notify all draft technical regulations to the WTO Committee on Technical Barriers to Trade (TBT).

Legal System and Judicial Independence

Turkey’s legal system is based on civil law, provides means for enforcing property and contractual rights, and there are written commercial and bankruptcy laws.  Turkey’s court system, however, is overburdened, which sometimes results in slow decisions and judges lacking sufficient time to consider complex issues.  Judgments of foreign courts, under certain circumstances, need to be upheld by local courts before they are accepted and enforced.  Recent developments reinforce the Turkish judicial system’s need to undertake significant reforms to adopt fair, democratic, and unbiased standards. The government is currently implementing the first round of judicial reforms approved in 2019.  Some critics have observed indications the judiciary remains subject to influence, particularly from the executive branch, and faces a number of challenges that limit judicial independence.

Laws and Regulations on Foreign Direct Investment

Turkey’s investment legislation is simple and complies with international standards, offering equal treatment for all investors.  The New Turkish Commercial Code No. 6102 (“New TCC”) was published in the Official Gazette on February 14, 2011.  The backbone of the investment legislation is made up of the Encouragement of Investments and Employment Law No. 5084, Foreign Direct Investments Law No. 4875, international treaties and various laws and related sub-regulations on the promotion of sectorial investments.  Regulations related to mergers and acquisitions include: a) Turkish Code of Obligations: Article 202 and Article 203, b) Turkish Commercial Code: Articles 134-158, c) Execution and Bankruptcy Law: Article 280, d) Law on the Procedures for the Collection of Public Receivables: Article 30, and e) Law on Competition: Article 7.  The government’s primary website for investors is http://www.invest.gov.tr/en-US/Pages/Home.aspx .

Competition and Anti-Trust Laws

The Competition Authority is the sole authority on competition issues in Turkey and handles private sector transactions.  Public institutions are exempt from its authority.  The Constitutional Court can overrule the Competition Authority’s finding of innocence in a competition case.  There have been some cases of Turkish courts blocking foreign company operations on the basis of anti-competitive claims, with a few investigations into foreign companies initiated.  Such cases can take over a year to resolve, during which time the companies can be prohibited from doing business in Turkey, which benefits their (local) competitors.

Expropriation and Compensation

Under the U.S.-Turkey Bilateral Investment Treaty (BIT), expropriation can only occur in accordance with due process of law, can only be for a public purpose, and must be non-discriminatory.  Compensation must be prompt, adequate, and effective.  The GOT occasionally expropriates private real property for public works or for state industrial projects.  The GOT agency expropriating the property negotiates the purchase price.  If the owners of the property do not agree with the proposed price, they are able to challenge the expropriation in court and ask for additional compensation.  There are no known outstanding expropriation or nationalization cases for U.S. firms.  Although there is not a pattern of discrimination against U.S. firms, the GOT has aggressively targeted businesses, banks, media outlets, and mining and energy companies with alleged ties to the so-called “Fethullah Terrorist Organization (FETO)” and/or the July 2016 attempted coup, including the expropriation of over 1,100 private companies worth more than USD 11 billion.

Dispute Settlement

ICSID Convention and New York Convention

Turkey is a member of the International Centre for the Settlement of Investment Disputes (ICSID) and is a signatory to the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards.    Foreign arbitral awards will be enforced if the country of origin of the award is a New York Convention state, if the dispute is commercial under Turkish law, and as long as none of the grounds under Article V of the New York Convention are proved by the opposing party.

Investor-State Dispute Settlement

U.S. investors generally have full access to Turkey’s local courts and the ability to take the government directly to international binding arbitration if a breach of the U.S.-Turkey Bilateral Investment Treaty has occurred.

International Commercial Arbitration and Foreign Courts

Turkey adopted the International Arbitration Law, based on the UNCITRAL model law, in 2001.  Local courts accept binding international arbitration of investment disputes between foreign investors and the state.  In practice, however, Turkish courts have sometimes failed to uphold international arbitration awards involving private companies and have favored Turkish firms.  There are two main arbitration bodies in Turkey: the Union of Chambers and Commodity Exchanges of Turkey (www.tobb.org.tr ) and the Istanbul Chamber of Commerce Arbitration and Mediation Center (www.itotam.com/en ).  Most commercial disputes can be settled through arbitration, including disputes regarding public services.  Parties decide the arbitration procedure, set the arbitration rules, and select the language of the proceedings.  The Istanbul Arbitration Center was established in October 2015 as an independent, neutral, and impartial institution to mediate both domestic and international disputes through fast track arbitration, emergency arbitrator, and appointments for ad hoc procedures.  Its decisions are binding and subject to international enforcement. (www.istac.org.tr/en ).

As of January 2019, some commercial disputes may be subject to mandatory mediation; if the parties are unable to resolve the dispute through mediation, the case moves to a trial.

Bankruptcy Regulations

Turkey criminalizes bankruptcy and has a bankruptcy law based on the Execution and Bankruptcy Code No. 2004 (the “EBL”), published in the Official Gazette on June 19, 1932 and numbered 2128.  The World Bank’s 2019 Doing Business Index gave Turkey a rank of 120 out of 190 countries for ease of resolving insolvency, listing an average of 5 years to unwind a business, and averaging 10.5 cents on the dollar: See: http://www.doingbusiness.org/data/exploretopics/resolving-insolvency )

Investment Incentives

Turkey’s regional incentives program divides the country into one of six different zones, providing the following benefits to investors: corporate tax reduction; customs duty exemption; value added tax (VAT) exemption and VAT refund; employer’s share social security premium support; income tax withholding allowance; land allocation; and interest rate support for investment loans.  The program was launched in 2012; more detailed information can be found at the Presidency of the Republic of Turkey Investment Office website: http://www.invest.gov.tr/en-US/investmentguide/investorsguide/Pages/Incentives.aspx  .

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

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

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

Foreign Trade Zones/Free Ports/Trade Facilitation

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

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

Performance and Data Localization Requirements  

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

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

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

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

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

Real Property

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

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

Intellectual Property Rights

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

However, while legislative frameworks are improving, IPR enforcement remains lackluster.  Turkey remains on USTR’s Special 301 Watch List for 2020.   Concerns remain about policies requiring local production of pharmaceuticals, inadequate protection of test data, and a lack of transparency in national pricing and reimbursement.  IPR enforcement suffers from a lack of awareness and training among judges and officers, as well as a lack of prioritization relative to terrorism and other concerns.  Law enforcement officers do not have ex-officio authority to seize and destroy counterfeit goods, which are prevalent in the local markets.  Software piracy is also high.  The Istanbul Grand Bazaar in Turkey is included in USTR´s 2019 Notorious Markets List.

Additionally, the practice of issuing search-and-seizure warrants varies considerably.  IPR courts and specialized IPR judges only exist in major cities.  Outside these areas, an application for a search warrant must be filed at a regular criminal court (Court of Peace) and/or with a regular prosecutor.  The Courts of Peace are very reluctant to issue search warrants.  Although, by law, “reasonable doubt” is adequate grounds for issuing a search-and-seizure order, judges often set additional requirements, including supporting documentation, photographs, and even witness testimony, which risk exposing companies’ intelligence sources.  In some regions, Courts of Peace judges rarely grant search warrants, for example in popular tourist destinations.  Overall, according to some investors, it is difficult to protect IPR and general enforcement is deteriorating.  For additional information about treaty obligations and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en .

Capital Markets and Portfolio Investment

The Turkish Government encourages and offers an effective regulatory system to facilitate portfolio investment.  Since the start of 2020, a currency crisis that has been exacerbated by the COVID-19 pandemic, and high levels of dollarization have raised liquidity concerns among some commentators. Existing policies facilitate the free flow of financial resources into product and factor markets.  The government respects IMF Article VIII by refraining from restrictions on payments and transfers for current international transactions.  Credit is generally allocated on market terms, though the GOT has increased low- and no-interest loans for certain parties, and pressured state-owned, and even private banks to increase their lending, especially for stimulating economic growth and public projects.  Foreign investors are able to get credit on the local market.  The private sector has access to a variety of credit instruments.

The Turkish banking sector, a central bank system, remains relatively healthy. The estimated total assets of the country’s largest banks are as follows: Ziraat Bankasi A.S. – USD 109.43 billion, Is Bankasi – USD 78.81 billion, Halk Bankasi – USD 76.94, Garanti – USD 72.14 billion, Turkiye Vakiflar Bankasi – USD 70.54 billion, Yapi ve Kredi Bankasi – USD 69.23 billion, Akbank – USD 65.19 billion. (Conversion rate: 5.94 TL/1 USD). According to the Turkish Banking Regulation and Supervision Agency (BDDK), the share of non-performing loans in the sector was approximately 5.35 percent at the end of 2019.  The only requirements for a foreigner to open a bank account in Turkey are a passport copy and either an identification number from the Ministry of Foreign Affairs or a Turkish Tax identification number.

The Turkish Government adopted a framework Capital Markets Law in 2012, aimed at bringing greater corporate accountability, protection of minority-shareholders, and financial statement transparency.

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

Foreign Exchange and Remittances

Foreign Exchange

Turkish law guarantees the free transfer of profits, fees, and royalties, and repatriation of capital.  This guarantee is reflected in Turkey’s 1990 Bilateral Investment Treaty (BIT) with the United States, which mandates unrestricted and prompt transfer in a freely-usable currency at a legal market-clearing rate for all investment-related funds.  There is little difficulty in obtaining foreign exchange in Turkey, and there are no foreign-exchange restrictions, though in 2019, the GOT continued to encourage businesses to conduct trade in lira.  An amendment to the Decision on the Protection of the Value of the Turkish Currency was made with Presidential Decree No. 85 in September 2018 wherein the GOT tightened restrictions on Turkey-based businesses conducting numerous types of transactions using foreign currencies or indexed to foreign currencies.  The Turkish Ministry of Treasury and Finance may grant exceptions, however.  Funds associated with any form of investment can be freely converted into any world currency.  The exchange rate is heavily managed by the Central Bank of the Republic of Turkey.  Turkish banking regulations and informal government instructions to Turkish banks limit the supply of Turkish lira to the London overnight swaps market.

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

As of early 2020 Turkey is facing an ongoing currency crisis that has been exacerbated by the COVID-19 pandemic.  It is not possible to predict what measures the government of Turkey will institute to resolve this crisis, nor what effects these measures would have on foreign exchange.

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

Remittance Policies

In Turkey, there have been no recent changes or plans to change investment remittance policies, and indeed the GOT in 2018 actively encouraged the repatriation of funds.  The GOT announced “Assets Peace” in May 2018 which incentivized citizens to bring assets to Turkey in the form of money, gold, or foreign currency by eliminating any tax burden on the repatriated assets. The Assets Peace has been extended until June 30, 2020.  There are also no time limitations on remittances.  Waiting periods for dividends, return on investment, interest and principal on private foreign debt, lease payments, royalties, and management fees do not exceed 60 days.  There are no limitations on the inflow or outflow of funds for remittances of profits or revenue.

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

Turkey enacted Law 7244 on Commuting the Effects of New Coronavirus (COVID-19) Outbreak on Economic and Social Life and Amending Certain Laws on April 17, 2020. The Law temporarily restricts the distribution of corporate dividends until September 30, 2020.  According to the law, companies may distribute only 25% of the net profit gained in the fiscal year 2019, cannot  distribute previous years’ profits, and cannot grant boards of directors the right to distribute advance dividends. President of the Republic of Turkey is authorized to extend or shorten the term for three months.

Sovereign Wealth Funds

The GOT announced the creation of a sovereign wealth fund (SWF) in August 2016.  Unlike traditional sovereign wealth funds, the controversial fund consists of shares of state-owned enterprises (SOEs) and is designed to serve as collateral for raising foreign financing.  However, the SWF has not launched any major projects since its inception.  In September 2018, the President became the Chair of the SWF.  Several leading SOEs, such as natural gas distributor BOTAS, Turkish Airlines, and Ziraat Bank have been transferred to the SWF.  Critics worry management of the fund is opaque and politicized.  The fund’s 2018 audit has not yet been submitted to Parliament, and firms within the fund’s portfolio appear to have increased their debt loads substantially since 2016.  International ratings agencies consider the fund a quasi-sovereign.  The fund was already exempt from many provisions of domestic commercial law and new legislation adopted April 16 granted it further exemptions from the Capital Markets Law and Turkish Commercial Code, while also allowing it to take ownership of distressed firms in strategic sectors.  As part of its response to the COVID-19 pandemic, Turkey recently allowed the SWF to take equity positions in private companies in distress.

As of 2019, the sectors with active State-owned enterprises (SOEs) include mining, banking, telecom, and transportation.  The full list can be found here: https://www.hmb.gov.tr/kamu-sermayeli-kurulus-ve-isletme-raporlari .  Allegations of unfair practices by SOEs are minimal, and the U.S. Mission is not aware of any ongoing complaints by U.S. firms.  Turkey is not a party to the World Trade Organization’s Government Procurement Agreement.  Turkey is a member of the OECD Working Party on State Ownership and Privatization Practices, and OECD’s compliance regulations and new laws enacted in 2012 by the Turkish Competitive Authority closely govern SOE operations.