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Argentina

Executive Summary

Argentina presents investment and trade opportunities, particularly in infrastructure, health, agriculture, information technology, energy, and mining; however, soaring debt and a failure to implement critical structural reforms have prevented the country from maximizing its  economic potential, though the country has taken steps to diminish bureaucratic procedures. Market reactions to the 2019 Argentine presidential elections deepened the country’s economic crisis, stalling reform efforts and leading to a rollback of some market-driven growth policies and the imposition of capital and export controls.  In late 2019, the government reprofiled some of the country’s local law debt payments. Argentina’s economy contracted for the second year in a row in 2019, as unemployment and poverty grew and annual inflation rose to 53.8 percent.

Following a victory in the October 2019 general election, President Alberto Fernandez took office on December 10, 2019. His economic agenda at the beginning of 2020 focused on restructuring the country’s sovereign debt and providing support to vulnerable sectors. The Fernandez administration increased taxes on foreign trade, further tightened capital controls, and pulled back from former President Mauricio Macri’s fiscal austerity measures, expanding fiscal expenditures. Citing a need to preserve Argentina’s diminishing foreign exchange reserves and raise government revenues for social programs, the Fernandez administration passed a sweeping “economic emergency” law that included a 30 percent tax on purchases of foreign currency and all individual expenses incurred abroad, whether in person or online.

The country began a nationwide quarantine on March 20 to combat the COVID-19 pandemic, shortly after the first case was confirmed on March 3. As of early May, the government anticipated a 6.5 percent drop in real Gross Domestic Product (GDP) growth for 2020, though the full economic  impact will largely depend on how long quarantine restrictions last and whether the government reaches agreement with its private bondholders to avoid a sovereign default. The Argentine government issued a series of economic relief measures to mitigate the economic impact of the quarantine, primarily focusing on informal workers that account for approximately 40 percent of the labor force. The government’s self-declared insolvency has sharply limited its access to credit, obligating it to finance the pandemic-related stimulus measures by monetary issuance, which may hamper its efforts to restrain inflation and maintain a stable exchange rate. As a result of the crisis, industry and unions are analyzing changes to labor agreements and requesting government tax reforms.  U.S. companies frequently point to a high and unpredictable tax burden and rigid labor laws, which make responding to changing macroeconomic conditions more difficult, as obstacles to further investment in Argentina.  In April, the government reprofiled foreign currency local law debt.  In early May, the Minister of Economy announced the government has sought to restructure its debt to private creditors by May 22 and to reschedule its Paris Club debt.  The Minister also stated the government intends to seek a new program with the International Monetary Fund (IMF), to which it owes $44 billion from a Standby arrangement the government signed in 2018.

In 2019, Argentina fell two places in the Competitiveness Ranking of the World Economic Forum (WEF), which measures how productively a country uses its available resources, to 83 out of 141 countries, and 12 out of the 20 countries in the Latin American and Caribbean region.  As a MERCOSUR member, Argentina signed a free trade and investment agreement with the EU in June 2019. Argentina has not ratified the agreement yet. In May, Argentina proposed slowing the pace and adjusting the negotiating parameters of MERCOSUR’s ongoing trade liberalization talks with South Korea, Canada, and other partners to help protect vulnerable populations and account for the impact of the ongoing COVID-19 pandemic.  Argentina ratified the WTO Trade Facilitation Agreement on January 22, 2018. Argentina and the United States continue to expand bilateral commercial and economic cooperation, specifically through the Trade and Investment Framework Agreement (TIFA), the Commercial Dialogue, and under the Growth in the Americas initiative, in order to improve and facilitate public-private ties and communication on trade, investment, energy, and infrastructure issues, including market access and intellectual property rights. More than 300 U.S. companies operate in Argentina, and the United States continues to be the top investor in Argentina with more than USD $15 billion (stock) of foreign direct investment as of 2018.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2019 66 of 183 http://www.transparency.org/
research/cpi/overview
World Bank’s Doing Business Report 2019 126 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2019 73 of 129 https://www.globalinnovationindex.org/
analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2018 15,196 https://www.bea.gov/data/
economic-accounts/international/
World Bank GNI per capita 2018 12,390 http://data.worldbank.org/
indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

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

Some of the former Macri administration’s efforts to improve the investment climate had included reforms to simplify bureaucratic procedures in an effort to provide more transparency, reduce costs, and diminish economic distortions by adopting good regulatory practices.  Many of the planned public-private partnership projects for public infrastructure were delayed or canceled due to Argentina’s macroeconomic difficulties, as well as allegations of corruption in public works projects during the 2003-2015 period.  The Macri administration also had expanded economic and commercial cooperation with key partners, including Chile, Brazil, Japan, South Korea, Spain, Canada, and the United States, and deepened its engagement in international fora such as the G-20, the WTO, and the OECD.

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

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

The agency’s web portal provides information on available services (https://www.inversionycomercio.org.ar/es/home  ) Many of the 24 provinces also have their own provincial investment and trade promotion offices.

Limits on Foreign Control and Right to Private Ownership and Establishment

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

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

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

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

Other Investment Policy Reviews

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

Business Facilitation

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

The Ministry of Production eased bureaucratic hurdles for foreign trade through the creation of a Single Window for Foreign Trade (“VUCE” for its Spanish acronym) in 2016. The VUCE centralizes the administration of all required paperwork for the import, export, and transit of goods (e.g., certificates, permits, licenses, and other authorizations and documents). The Argentine government has not fully implemented the VUCE for use across the country. Argentina subjects imports to automatic or non-automatic licenses that are managed through the Comprehensive Import Monitoring System (SIMI, or Sistema Integral de Monitoreo de Importaciones), established in December 2015 by the National Tax Agency (AFIP by its Spanish acronym) through Resolutions 5/2015 and 3823/2015. The SIMI system requires importers to submit detailed information electronically about goods to be imported into Argentina. Once the information is submitted, the relevant Argentine government agencies can review the application through the VUCE and make any observations or request additional information. The list of products subject to non-automatic licensing has been modified several times since the beginning of the SIMI system. In January 2020, the government moved 300 tariff lines from the automatic import licensing system to the non-automatic import licensing system.

The Argentine Congress approved an Entrepreneurs’ Law in March 2017, which allows for the creation of a simplified joint-stock company (SAS, or Sociedad por Acciones Simplifacada) online within 24 hours of registration. Detailed information on how to register a SAS is available at: https://www.argentina.gob.ar/produccion/crear-una-empresaAs  of April 2019, the online business registration process is only available for companies located in Buenos Aires.

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

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

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

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

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

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

Outward Investment

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

3. Legal Regime

Transparency of the Regulatory System

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

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

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

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

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

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

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

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

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

Some ministries and agencies developed their own processes for public consultation by publishing drafts on their websites, directly distributing the draft to interested stakeholders for feedback, or holding public hearings. In 2016 the Ministry of Justice and Human Rights launched the digital platform Justicia2020 (https://www.justicia2020.gob.ar/ ), to foster public involvement in the Judiciary reform process projected by 2020. Once the draft of a bill is introduced into the Argentine Congress, the full text of the bill and its status can be viewed online at the Chamber of Deputies website (http://www.diputados.gov.ar/ ), and that of the Senate (http://www.senado.gov.ar/ ).  The Fernandez government has begun developing its own justice sector reform proposals.

In November 2017, the Government of Argentina launched a new website to communicate how the government spends public funds in a user-friendly format (https://www.argentina.gob.ar/economia/transparencia/presupuesto ). The Argentine government also made an effort to improve citizens’ understanding of the budget, through the citizen’s budget “Presupuesto Ciudadano” website (https://www.minhacienda.gob.ar/onp/presupuesto_ciudadano/ ). The initiative aligns with the Global Initiative for Fiscal Transparency (GIFT) and UN Resolution 67/218 on promoting transparency, participation, and accountability in fiscal policy.

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

International Regulatory Considerations

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

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

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

Legal System and Judicial Independence

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

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

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

Laws and Regulations on Foreign Direct Investment

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

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

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

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

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

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

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

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

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

Competition and Anti-Trust Laws

The National Commission for the Defense of Competition and the Secretariat of Domestic Trade, both within the Ministry of Productive Development, have enforcement authority of the Competition Law (Law 25,156). The law aims to promote a culture of competition in all sectors of the national economy. In May 2018, the Argentine Congress approved a new Defense of Competition Law (Law 27,442). The new law incorporates anti-competitive conduct regulations and a leniency program to facilitate cartel investigation. The full text of the law can be viewed at: http://servicios.infoleg.gob.ar/infolegInternet/verNorma.do?id=310241 .

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

In March 2020, the Government of Argentina enacted the Supermarket Shelves Law (Law 27,545) that states that any single manufacturer and its associated brands cannot occupy more than 30 percent of a retailer’s shelf space devoted to any one product category.  The law’s proponents claim it will allow more space for SME-produced products, encourage competition, and reduce shortages. U.S. companies have expressed doubts about the law and how it will be applied in practice.

Expropriation and Compensation

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

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

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

Dispute Settlement

ICSID Convention and New York Convention

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

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

Investor-State Dispute Settlement

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

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

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

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

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

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

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

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

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

International Commercial Arbitration and Foreign Courts

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

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

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

Bankruptcy Regulations

Argentina’s bankruptcy law was codified in 1995 in Law 24,522. The full text can be found at: http://www.infoleg.gov.ar/infolegInternet/anexos/25000-29999/25379/texact.htm . Under the law, debtors are generally able to begin insolvency proceedings when they are no longer able to pay their debts as they mature. Debtors may file for both liquidation and reorganization. Creditors may file for insolvency of the debtor for liquidation only. The insolvency framework does not require approval by the creditors for the selection or appointment of the insolvency representative or for the sale of substantial assets of the debtor. The insolvency framework does not provide rights to the creditor to request information from the insolvency representative but the creditor has the right to object to decisions by the debtor to accept or reject creditors’ claims. Bankruptcy is not criminalized; however, convictions for fraudulent bankruptcy can carry two to six years of prison time.

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

The World Bank’s 2019 Doing Business Report ranked Argentina 111 among 190 countries for the effectiveness of its insolvency law. This is a drop of 10 places from its ranking of 101 in 2018. The report notes that it takes an average of 2.4 years and 16.5 percent of the estate to resolve bankruptcy in Argentina.

4. Industrial Policies

Investment Incentives

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

The Argentine government offers a number of investment prom otion programs at the federal, provincial, and municipal levels to attract investment to specific economic sectors such as capital assets and infrastructure, innovation and technological development, and energy, with no discrimination between national or foreign-owned enterprises. Some of the investment promotion programs require investments within a specific region or locality, industry, or economic activity. Some programs offer refunds on Value-Added Tax (VAT) or other tax incentives for local production of capital goods. The Investment and International Trade Promotion Agency provides cost-free assessment and information to investors to facilitate operations in the country. Argentina’s investment promotion programs and regimes can be found at: https://www.inversionycomercio.org.ar/es/inversores  http://www.inversionycomercio.org.ar/uploads/banco/archivos/1566396570-Agosto_2019-(VF).pdf , and https://www.argentina.gob.ar/produccion .

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

Due to the Covid-19 pandemic, the Ministry of Productive Development launched several financial assistance programs for small and medium-sized enterprises (SMEs) affected by the pandemic.

More information can be found at: https://www.argentina.gob.ar/produccion/medidas-pymes-covid .

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

Foreign Trade Zones/Free Ports/Trade Facilitation

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

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

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

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

Performance and Data Localization Requirements

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

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

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

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

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

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

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

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

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

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

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

5. Protection of Property Rights

Real Property

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

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

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

Intellectual Property Rights

The Government of Argentina adheres to some treaties and international agreements on intellectual property (IP) and belongs to the World Intellectual Property Organization and the World Trade Organization. The Argentine Congress ratified the Uruguay Round agreements, including the provisions on intellectual property, in Law 24425 on January 5, 1995.

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

Argentina continues to present long-standing and well-known challenges to intellectual property (IP)-intensive industries, including those from the United States.  A key deficiency in the legal framework for patents is the unduly broad limitations on patent eligible subject matter.  Pursuant to a highly problematic 2012 Joint Resolution establishing guidelines for the examination of patents, Argentina rejects patent applications for categories of pharmaceutical inventions that are eligible for patentability in other jurisdictions, including in the United States.  Additionally, to be patentable, Argentina requires that processes for the manufacture of active compounds disclosed in a specification be reproducible and applicable on an industrial scale.  Stakeholders assert that Resolution 283/2015, introduced in September 2015, also limits the ability to patent biotechnological innovations based on living matter and natural substances.  These measures have interfered with the ability of companies investing in Argentina to protect their IP and may be inconsistent with international norms.  Another ongoing challenge to the innovative agricultural chemical and pharmaceutical sectors is inadequate protection against the unfair commercial use, as well as unauthorized disclosure, of undisclosed test or other data generated to obtain marketing approval for products in those sectors.  Finally, Argentina struggles with a substantial backlog of patent applications resulting in long delays for innovators seeking patent protection in the market.  Government-wide hiring restrictions that remain in place, going back to a hiring freeze in 2018, have resulted in a limited number of patent examiners.  The United States encourages Argentina to extend the National Institute of Industrial Property’s (INPI) participation in the Patent Prosecution Highway with the U.S. Patent and Trademark Office, which expired in March.

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

Argentina made limited progress in IP protection and enforcement in a year that saw a presidential transition.  INPI began accepting electronic filing of patent, trademark, and industrial designs applications in 2018 and is working toward transitioning to an all-electronic filing system by 2020.  Argentina continued to improve procedures for trademarks, with INPI reducing the time for a trademark opposition from an average of 3.5 years to one year.  On trademarks, the law provides for a fast track option that reduces the time to register a trademark to four months.  The United States welcomes and continues to monitor this change.  To further improve patent protection in Argentina, including for small and medium-sized enterprises, the United States urges Argentina to ratify the Patent Cooperation Treaty.  The United States encourages Argentina to provide transparency and procedural fairness to all interested parties in connection with potential recognition or protection of geographical indications, including in connection with trade agreement negotiations.

Argentina’s efforts to combat counterfeiting continue, but without systemic measures, illegal activity persists.  There have been reports of a resurgence of markets selling counterfeit and pirated goods, including at La Salada, the largest of these types of markets.  The United States encourages Argentina to create a national IP enforcement strategy to build on its successes and move to a sustainable, long-lasting initiative.  The United States also encourages legislative proposals to this effect, along the lines of prior bills introduced in Congress to provide for landlord liability and stronger enforcement on the sale of infringing goods at outdoor marketplaces such as La Salada, and to amend the trademark law to increase criminal penalties for counterfeiting carried out by criminal networks.  Argentina formally created the Federal Committee to Fight Against Contraband, Falsification of Trademarks, and Designations, formalizing the work on trademark counterfeiting under the National Anti-Piracy Initiative launched in 2017.  The United States encourages Argentina to expand this initiative to online piracy.  Revisions to the criminal code that had been submitted to Congress, including certain criminal sanctions for circumventing technological protection measures, have stalled.  The creation of a federal specialized IP prosecutor’s office and a well-trained enforcement unit could potentially help combat online piracy as well as prevent lengthy legal cases with contradictory rulings.  In June 2019, Argentina and the United States held a bilateral meeting under the Innovation and Creativity Forum for Economic Development, part of the U.S.-Argentina Trade and Investment Framework Agreement, to continue discussions and collaboration on IP topics of mutual interest.  The United States intends to monitor all the outstanding issues for progress and urges Argentina to continue its efforts to create a more attractive environment for investment and innovation.

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

6. Financial Sector

Capital Markets and Portfolio Investment

While Argentina’s economic recession began in 2018, a new financial crisis emerged in August 2019 following the unexpected landslide victory of the opposition presidential candidate Alberto Fernandez, foreshadowing his likely victory in the general election.  In order to slow the outflow of dollars from its reserves, the Argentine Central Bank introduced tight capital controls prohibiting transfers and payments that are likely in conflict with IMF Article VIII in September 2019 and tightened them thereafter.  The Argentine government also implemented price controls and trade restrictions.  In December 2019, the new government passed an economic emergency law that created new taxes, increased export duties, and delegated broad powers to the Executive Branch, with the objectives of increasing social spending for the most vulnerable populations and negotiating revised terms for Argentina’s sovereign debt. All these measures have deteriorated the investment climate for local and foreign investors.

In April 2020, the government issued a decree postponing debt payments (both interest and principal) of dollar-denominated debt issued under local law until December 31, 2020. Following this measure, rating agencies downgraded Argentina’s country risk to selective, or restrictive, default.  The IMF characterized Argentina’s debt situation as “unsustainable” in a February 2020 statement.  On April 15, the government presented a formal offer to creditors and continued engaging in negotiations to avoid a default.

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

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

Money and Banking System

Argentina has a relatively sound banking sector based on diversified revenues, well-contained operating costs, and a high liquidity level. The main challenge for banks is to rebuild long-term assets and liabilities. Due to adverse international and domestic conditions, the economy has been in recession since 2018 with high inflation and interest rates. Credit to the private sector in local currency (for both corporations and individuals) decreased 18 percent in real terms in 2019. The anticipated deep recession combined with risks of accelerating inflation have raised concerns regarding the ability of banks to maintain healthy balances. The largest bank is the Banco de la Nacion Argentina. Non-performing private sector loans constitute less than six percent of banks’ portfolios. Private banks have total assets of approximately ARS 4,100 billion (USD $69 billion). Total financial system assets are approximately ARS 6,700 billion (USD $112 billion). The Central Bank of Argentina acts as the country’s financial agent and is the main regulatory body for the banking system.

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

The Central Bank has enacted a resolution recognizing cryptocurrencies and requiring that they comply with local banking and tax laws. No implementing regulations have been adopted. Block chain developers report that several companies in the financial services sector are exploring or considering using block chain-based programs externally and are using some such programs internally. One Argentine NGO, through funding from the Inter-American Development Bank (IDB), is developing block chain-based banking applications to assist low income populations.

Foreign Exchange and Remittances

Foreign Exchange

Beginning in September 2019, the Argentine Central Bank issued a series of decrees and norms regulating access to foreign exchange markets.  This series of measures that began with Decree 609/2019 imposes numerous restrictions.

Regarding individuals’ ability to purchase dollars, as of October 28, 2019 and pursuant to Communication A6815/2019, Argentine individuals may purchase no more than $200 per month on a rolling monthly basis if the purchase is done through the banking system, or $100 per month if the purchase is made in cash.  Purchases above that amount require BCRA approval.   In December 2019, the government imposed a 30 percent tax (known as the Impuesto para una Argentina Inclusiva y Solidaria, “PAIS”) on the purchase of foreign currency. The tax also applies to international online purchases from Argentina, paid with credit or debit cards.

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

Bank customers—whether individuals or companies—can freely withdraw the balances from their dollar accounts.  Companies and individuals will need to obtain prior clearance from the Central Bank before transferring funds abroad (including dividend payments or other distributions abroad, or to pay for services rendered to a company by foreign affiliates).  In the case of individuals, if transfers are made from their own foreign currency accounts in Argentina to their own accounts abroad, they do not need to obtain Central Bank approval.

Beginning in September 2019, exporters of goods are required to transfer proceeds to Argentina and settle in pesos.  Exporters must settle according to the following terms: exporters with affiliates (irrespective of the type of good exported) and exporters of certain goods (including cereals, seeds, minerals, and precious metals, among others) must convert their foreign currency proceeds to pesos within 15 days after the issuance of the permit for shipment; other exporters have 180 days to settle in pesos.  Irrespective of these deadlines, the obligation to transfer the funds to Argentina and settle in pesos must be complied with within five business days from the actual collection.  Argentine residents are required to transfer to Argentina and settle in pesos the proceeds from services exports rendered to non-Argentine residents that are paid in foreign currency either in Argentina or abroad, within five business days from collection thereof.

Payment of imports of goods and services from third parties requires Central Bank approval if the company needs to purchase foreign currency.  Payment of imports of goods and services from affiliates for an amount exceeding $2 million per month are subject to prior approval to purchase that foreign currency from the Central Bank.

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

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

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

In June 2018, the International Monetary Fund (IMF) and Argentina announced a Standby Arrangement agreement (SBA).  Three months after agreeing to a $50 billion SBA, Argentina and the IMF announced in September 2018 a set of revisions, including an increase in the line of credit by $7.1 billion.  This also front-loads the disbursement of funds and brings the program total to $57 billion. In July 2019, the IMF approved its fourth review allowing the government to withdraw about $5.4 billion, bringing total disbursements since June 2018 to approximately $44.1 billion. The Fernandez administration stated that it does not plan to request further disbursements from its current IMF program and will seek a new IMF program.

Remittance Policies

In response to the economic crisis in Argentina, the government introduced capital controls in September 2019.  Under these restrictions, companies in Argentina (including local affiliates of foreign parent companies) must obtain prior approval from the Central Bank to access the foreign exchange market to purchase foreign currency and to transfer funds abroad for the payment of dividends and profits, services and imports in excess of USD 2 million per month.  In January 2020, the Central Bank amended the regime for the payment of dividends abroad to non-residents. The new regime allows companies to access the foreign exchange market to transfer profits and dividends abroad without prior authorization of the BCRA, provided the following conditions are met:

(1) Profits and dividends have to be declared in closed and audited financial statements.

(1) Profits and dividends have to be declared in closed and audited financial statements.   (2)The dividends in foreign currency should not exceed the amount of dividends determined by the shareholders’ meeting in local currency.

(2)The dividends in foreign currency should not exceed the amount of dividends determined by the shareholders’ meeting in local currency.   (3)The total amount of dividends to be transferred cannot exceed 30 percent of the amount of new capital contributions made by non-residents into local companies since January 2020.

(3)The total amount of dividends to be transferred cannot exceed 30 percent of the amount of new capital contributions made by non-residents into local companies since January 2020.   (4) The resident entity must be in compliance with the last due filing of the Central Bank Survey of External Assets and Liabilities.

(4) The resident entity must be in compliance with the last due filing of the Central Bank Survey of External Assets and Liabilities.

Sovereign Wealth Funds

The Argentine government does not maintain a Sovereign Wealth Fund.

7. State-Owned Enterprises

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

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

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

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

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

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

Privatization Program

The current administration has not developed a privatization program.

8. Responsible Business Conduct

There is an increasing awareness of corporate social responsibility (CSR) and responsible business conduct (RBC) among both producers and consumers in Argentina. RBC and CSR practices are welcomed by beneficiary communities throughout Argentina. There are many institutes that promote RBC and CSR in Argentina, the most prominent being the Argentine Institute for Business Social Responsibility (http://www.iarse.org/ ), which has been working in the country for more than 17 years and includes among its members many of the most important companies in Argentina.

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

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

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

In February 2019, the Argentine government joined the Extractive Industries Transparency Initiative (EITI).

9. Corruption

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

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

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

Official corruption remains a serious challenge in Argentina. In its March 2017 report, the OECD expressed concern about Argentina’s enforcement of foreign bribery laws, inefficiencies in the judicial system, politicization and perceived lack of independence at the Attorney General’s Office, and lack of training and awareness for judges and prosecutors. According to the World Bank’s worldwide governance indicators, corruption remains an area of concern in Argentina. In the latest Transparency International Corruption Perceptions Index (CPI) that ranks countries and territories by their perceived levels of corruption, Argentina ranked 66 out of 180 countries in 2019, an improvement of 19 places versus 2018. Allegations of corruption in provincial as well as federal courts remained frequent. Few Argentine companies have implemented anti-foreign bribery measures beyond limited codes of ethics.

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

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

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

Resources to Report Corruption

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

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

10. Political and Security Environment

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

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

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

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

11. Labor Policies and Practices

Argentine workers are among the most highly-educated and skilled in Latin America. Foreign investors often cite Argentina’s skilled workforce as a key factor in their decision to invest in Argentina. Argentina has relatively high social security, health, and other labor taxes, however, and high labor costs are among foreign investors’ most often cited operational challenges. The unemployment rate was 8.9 percent in the fourth quarter of 2019, according to official statistics. The government estimated unemployment for workers below 29 years old as roughly double the national rate. Analysts estimate one-third of Argentina’s salaried workforce was employed informally. Though difficult to measure, analysts believe including self-employed informal workers in the estimate would drive the overall rate of informality to 40 percent of the labor force.

Labor laws are comparatively protective of workers in Argentina, and investors cite labor-related litigation as an important factor increasing labor costs in Argentina. There are no special laws or exemptions from regular labor laws in the Foreign Trade Zones. Organized labor plays an important role in labor-management relations and in Argentine politics. Under Argentine law, the Ministry of Labor recognizes one union per sector per geographic unit (e.g., nationwide, a single province, or a major city) with the right to negotiate a collective bargaining agreement for that sector and geographic area. Roughly 40 percent of Argentina’s formal workforce is unionized. The Ministry of Labor ratifies collective bargaining agreements. Collective bargaining agreements cover workers in a given sector and geographic area whether they are union members or not, so roughly 70 percent of the workforce was covered by an agreement. While negotiations between unions and industry are generally independent, the Ministry of Labor often serves as a mediator. Argentine law also offers recourse to mediation and arbitration of labor disputes.

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

During 2017, the government helped employers and workers agree on adjustments to collective bargaining agreements covering private sector oil and gas sector workers in Neuquen Province for unconventional hydrocarbon exploration and production. The changes were aimed at reducing certain labor costs and incentivizing greater productivity. Employers and unions reached similar agreements in the construction and automotive sectors.

The Fernandez government does not intend to pursue a broad labor reform bill, preferring instead to allow firms and workers to negotiate any adjustments to labor conditions through the collective bargaining process.  The Ministry of Labor has indicated interest in proposing a “gig economy” bill (ley de plataformas) that would extend basic labor rights to, e.g., delivery workers coordinated through information technology applications.   Labor-related demonstrations in Argentina occurred periodically in 2019. Reasons for strikes include job losses, high taxes, loss of purchasing power, and wage negotiations. Labor demonstrations may involve tens of thousands of protestors. Recent demonstrations have essentially closed sections of the city for a few hours. Demonstrations by airline employees caused significant flight delays or cancellations in recent months as well.

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

The minimum age for employment is 16. Children between the ages of 16 and 18 may work in a limited number of job categories and for limited hours if they have completed compulsory schooling, which normally ends at age 18. The law requires employers to provide adequate care for workers’ children during work hours to discourage child labor. The Department of Labor’s 2018 Worst Form of Child Labor for Argentina can be accessed here:  https://www.dol.gov/agencies/ilab/resources/reports/child-labor/argentina 

The Department of State’s 2018 Human Rights Report for Argentina can be accessed here:  https://www.state.gov/reports/2018-country-reports-on-human-rights-practices/argentina/

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

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

12. U.S. International Development Finance Corporation (DFC) and Other Investment Insurance Programs

The Argentine government signed a comprehensive agreement with the Overseas Private Investment Corporation (OPIC) in 1989. The agreement allows OPIC, now the U.S. International Development Finance Corporation (DFC), to insure U.S. investments against risks resulting from expropriation, inconvertibility, war, or other conflicts affecting public order. In 2018, OPIC and the Government of Argentina signed six letters of interest.  Five additional award letters were signed in 2019 to advance key projects in support of Argentina’s economic growth.  The agreements support the infrastructure, energy, and transportation sectors.    Argentina is also a member of the World Bank’s Multilateral Investment Guarantee Agency (MIGA).

Argentina is also a member of the World Bank’s Multilateral Investment Guarantee Agency (MIGA).

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source* USG or international statistical source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) N/A N/A 2019 $432,241 www.worldbank.org/en/country 
Foreign Direct Investment Host Country Statistical source USG or international statistical source USG or international Source of data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) N/A N/A 2018 $15,196 BEA data available at
https://www.bea.gov/international/
direct-investment-and-multinational-
enterprises-comprehensive-data
 
Host country’s FDI in the United States ($M USD, stock positions) N/A N/A 2018 $901 BEA data available at
https://www.bea.gov/international/
direct-investment-and-multinational-
enterprises-comprehensive-data
 
Total inbound stock of FDI as % host GDP N/A N/A 2018 14% UNCTAD data available at
https://unctad.org/en/Pages/DIAE/
World%20Investment%20Report/
Country-Fact-Sheets.aspx
 
Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward 72,572 100% Total Outward 28,686 100%
United States 20,906 29% Uruguay 15,894 55%
Spain 11,954 16% United States 6,209 22%
The Netherlands 6.805 9% Mexico 1,405 5%
Brazil 4,059 6% Brazil 1,113 4%
Uruguay 3,916 5% Chile 754 3%
“0” reflects amounts rounded to +/- USD 500,000.

Table 4: Sources of Portfolio Investment
Data not available.

14. Contact for More Information

Economic Section
U.S. Embassy Buenos Aires
Avenida Colombia 4300
(C1425GMN)
Buenos Aires, Argentina
+54-11-5777-4747
ECONBA@state.gov

Australia

Executive Summary

Australia is generally welcoming to foreign investment, which is widely considered to be an essential contributor to Australia’s economic growth and productivity.  The United States is by far the largest source of foreign direct investment (FDI) for Australia.  According to the U.S. Bureau of Economic Analysis, the stock of U.S. FDI totaled USD 163 billion in January 2019.

Mining and resources attract, by far, the largest share of FDI from the United States.  Real estate investment is the second largest recipient of FDI from the United States, although it remains much smaller than mining investment in absolute terms.  The Australia-United States Free Trade Agreement, which entered into force in 2005, establishes higher thresholds for screening U.S. investment for most classes of direct investment.

While welcoming toward FDI, Australia does apply a “national interest” test to qualifying investment through its Foreign Investment Review Board screening process.  Various changes to Australia’s foreign investment rules, primarily aimed at strengthening national security, have been made in recent years.  The Security of Critical Infrastructure Act 2018 and  the related Telecommunications Sector Security Reforms were both introduced in 2018 with the aim of increasing the security of critical infrastructure and protecting against foreign investments deemed to not be in Australia’s interests.  In March 2020 the Australian government announced all foreign direct investment would be reviewed for a six-month period, the government’s assumed timing for the COVID-19 crisis.  Despite the increased focus on foreign investment screening, the rejection rate for proposed investments has remained low and there have been no cases of investment from the United States having been rejected in recent years.

In response to a perceived lack of fairness, the Australian government tightened anti-tax avoidance legislation targeting multi-national corporations with operations in multiple tax jurisdictions.  While some laws have been complementary to international efforts to address tax avoidance schemes and the use of low-tax countries or tax havens, Australia has also gone further than the international community in some areas.

Australia has a strong legal system grounded in procedural fairness, judicial precedent, and the independence of the judiciary.  Property rights are well established and enforceable.  The establishment of government regulations typically requires consultation with impacted stakeholders and requires approval by a central regulatory oversight body before progressing to the legislative phase.  Anti-bribery and anti-corruption laws exist, and Australia performs well in measures of transparency.  Australia’s business environment is generally conducive to foreign companies operating in the country, and the country ranks 14th overall in the World Bank’s Ease of Doing Business Index.

The Australian government is strongly focused on boosting economic productivity, particularly through increased use of digital and other emerging technologies.  It recently released a Digital Economy Strategy, a Blockchain Roadmap, and a Critical Minerals Strategy, and has launched the new Australian Space Agency, among other initiatives.  U.S. involvement and investment in these fields is welcomed.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2019 12 of 180 http://www.transparency.org/
research/cpi/overview
World Bank’s Doing Business Report 2019 14 of 190 http://www.doingbusiness.org/
en/rankings
Global Innovation Index 2019 22 of 129 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country (historical stock positions) 2018 USD 163 billion https://apps.bea.gov/international/
factsheet
World Bank GNI per capita 2018 USD 53,230 http://data.worldbank.org/indicator/
NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

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

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

Limits on Foreign Control and Right to Private Ownership and Establishment

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

Other than the screening process described in Section 4, there are few limits or restrictions on foreign investment in Australia.  Foreign purchases of agricultural land greater than AUD15 million (USD 9 million) are subject to screening.  This threshold applies to the cumulative value of agricultural land owned by the foreign investor, including the proposed purchase.  The agricultural land screening threshold does not, however, affect investments made under the Australia-United States Free Trade Agreement (AUSFTA).  The current threshold remains AUD 1.154 billion (USD 690 million) for U.S. non-government investors.  Investments made by U.S. non-government investors are subject to inclusion on the foreign ownership register of agricultural land and to Australian Tax Office (ATO) information gathering activities on new foreign investment.

The Foreign Investment Review Board (FIRB), which advises Australia’s Treasurer, may impose conditions when approving foreign investments.  These conditions can be diverse and may include:  retention of a minimum proportion of Australian directors; certain requirements on business activities, such as the requirement not to divest certain assets; and certain taxation requirements.  Such conditions are in keeping with Australia’s policy of ensuring foreign investments are in the national interest.

Other Investment Policy Reviews

Australia has not conducted an investment policy review in the last three years through either the OECD or UNCTAD system.  The WTO reviewed Australia’s trade policies and practices in 2019, and the final report can be found at https://www.wto.org/english/tratop_e/tpr_e/tp496_e.htm .

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

Business Facilitation

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

In registering a business, individuals and entities are required to register as a company with ASIC, which then gives the company an Australian Company Number, registers the company, and issues a Certificate of Registration.  According to the World Bank “Starting a Business” indicator, registering a business in Australia takes 2 days, and Australia ranks 7th globally on this indicator.

Outward Investment

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

3. Legal Regime

Transparency of the Regulatory System

The Australian Government utilizes transparent policies and effective laws to foster national competition and is consultative in its policy making process.  The government generally allows for public comment of draft legislation and publishes legislation once it enters into force.  Details of the Australian government’s approach to regulation and regulatory impact analysis can be found on the Department of Prime Minister and Cabinet’s website: https://www.pmc.gov.au/regulation 

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

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

The Australian Government has recognized the impost of regulations and has undertaken a range of initiatives to reduce red tape.  This has included specific red tape reduction targets for government agencies and various deregulatory groups within government agencies.  In 2019, the Australian Government established a Deregulation Taskforce within its Treasury Department, stating its goal was to “drive improvements to the design, administration and effectiveness of the stock of government regulation to ensure it is fit for purpose.”

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

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

International Regulatory Considerations

Australia is a member of the WTO, G20, OECD, and the Asia-Pacific Economic Cooperation (APEC), and became the first Association of Southeast Nations (ASEAN) Dialogue Partner in 1974.  While not a regional economic block, Australia’s free trade agreement with New Zealand provides for a high level of integration between the two economies with the ultimate goal of a single economic market.  Details of Australia’s involvement in these international organizations can be found on the Department of Foreign Affairs and Trade’s website:      https://www.dfat.gov.au/trade/organisations/Pages/wto-g20-oecd-apec 

Legal System and Judicial Independence

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

Laws and Regulations on Foreign Direct Investment

Information regarding investing in Australia can be found in Austrade’s “Guide to Investing” at http://www.austrade.gov.au/International/Invest/Investor-guide .  The guide is designed to help international investors and businesses navigate investing and operating in Australia.

Foreign investment in Australia is regulated by the Foreign Acquisitions and Takeovers Act 1975 and Australia’s Foreign Investment Policy.  The Foreign Investment Review Board (FIRB) is a non-statutory body, comprising independent board members advised by a division within the Treasury Department, established to advise the Treasurer on Australia’s foreign investment policy and its administration.  The FIRB screens potential foreign investments in Australia above threshold values, and based on advice from the FIRB, the Treasurer may deny or place conditions on the approval of particular investments above that threshold on national interest grounds.  In March 2020 the Treasurer announced thresholds would be reduced to zero for a six-month period covering the COVID-19 crisis.  In effect, this meant that all foreign investment would be screened over this period.

The Australian Government applies a “national interest” consideration in reviewing foreign investment applications.  Further information on foreign investment screening, including screening thresholds for certain sectors and countries, can be found at FIRB’s website: https://firb.gov.au/ .  Under the AUSFTA agreement, all U.S. greenfield investments are exempt from FIRB screening.

Australia has recently taken steps to increase the analysis of national security implications of foreign investment in certain sectors.  In January 2017, the Australian Government established the Critical Infrastructure Centre (CIC) to better manage the risks to Australia’s critical infrastructure assets.  A key role of the CIC is to advise the FIRB on risks associated with foreign investment in infrastructure assets, particularly telecommunications, electricity, water, and port assets.  While the CIC’s role in the foreign investment process signals the Government’s focus on these assets, its role is limited to providing advice to the Government; the approval framework itself was not changed when the CIC was established.   Further changes to investments in electricity assets and agricultural land were announced in early 2018.  Under these changes, electricity infrastructure is now formally viewed as “critical infrastructure”, and foreign purchases will face additional scrutiny and conditions, while agricultural land is now required to be “marketed widely” to Australian buyers before being sold to a foreign buyer. There have been no formal changes to rules governing foreign investments in data-intensive companies, however, the FIRB has publicly indicated it is paying close attention to such transactions, including in healthcare and data centers.

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

Competition and Anti-Trust Laws

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

Expropriation and Compensation

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

Dispute Settlement

ICSID Convention and New York Convention

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

Investor-State Dispute Settlement

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

International Commercial Arbitration and Foreign Courts

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

Bankruptcy Regulations

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

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

Australia ranks 20th globally on the World Bank’s Doing Business Report “resolving insolvency” measure.

4. Industrial Policies

Investment Incentives

The Commonwealth Government and state and territory governments provide a range of measures to assist investors with setting up and running a business and undertaking investment.  Types of assistance available vary by location, industry, and the nature of the business activity.  Austrade provides coordinated government assistance to attracting FDI and is intended to serve as the national point-of-contact for investment inquiries.  State and territory governments similarly offer a suite of financial and non-financial incentives.

The Commonwealth Government also provides incentives for companies engaging in research and development (R&D) and delivers a tax offset for expenditure on eligible R&D activities undertaken during the year.  R&D activities conducted overseas are also eligible under certain circumstances, and the program is jointly administered by AusIndustry (Government agency) and the Australian Taxation Office (ATO).  The Australian Government typically does not offer guarantees on, or jointly finance projects with, foreign investors.

Foreign Trade Zones/Free Ports/Trade Facilitation

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

Performance and Data Localization Requirements

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

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

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

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

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

5. Protection of Property Rights

Real Property

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

Intellectual Property Rights

Australia generally provides strong intellectual property rights (IPR) protection and enforcement through legislation that, among other things, criminalizes copyright piracy and trademark counterfeiting.  Australia is not listed in USTR’s Special 301 Report and no Australian physical or online markets are identified in USTR’s 2019 Notorious Markets List.

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

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

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

Under the AUSFTA, Australia must notify the holder of a pharmaceutical patent of a request for marketing approval by a third party for a product claimed by that patent.  U.S. and Australian pharmaceutical companies have raised concerns that unnecessary delays in this notification process restrict their options for action against third parties that would infringe their patents if granted marketing approval by the Australian Therapeutic Goods Administration (TGA).  In March 2020 the government announced changes to the notification process whereby generic product owners must notify the patent holder of an intent to market a new product at the point they lodge an application for evaluation with the TGA.  This significantly brings forward the notification point as generic owners were previously not required to notify a patent owner until after the evaluation had been completed.

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

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

6. Financial Sector

Capital Markets and Portfolio Investment

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

Money and Banking System

Australia’s banking system is robust, highly evolved, and international in focus.  Bank profitability is strong and has been supported by further improvements in asset performance. Total assets of Australian banks is USD 3.0 trillion and the sector has delivered an average annual return on equity of just over 11 percent.

According to Australia’s central bank, the Reserve Bank of Australia (RBA), the ratio of non-performing assets to total loans was just under one percent at the end of 2018, having remained at around that level for the last five years after falling from highs of nearly two percent following the Global Financial Crisis.  The RBA is responsible for monitoring and reporting on the stability of the financial sector, while the Australian Prudential Regulatory Authority (APRA) monitors individual institutions.  The RBA is also responsible for monitoring and regulating payments systems in Australia.

Further details on the size and performance of Australia’s banking sector are available on the websites of the Australian Prudential Regulatory Authority (APRA) and the RBA:

https://www.apra.gov.au/statistics 
https://www.rba.gov.au/chart-pack/banking-indicators.html 

Foreign banks are allowed to operate as a branch or a subsidiary in Australia.  Australia has generally taken an open approach to allowing foreign companies to operate in the financial sector, largely to ensure sufficient competition in an otherwise small domestic market.

Foreign Exchange and Remittances

Foreign Exchange

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

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

Remittance Policies

Australia does not limit investment remittances.

Sovereign Wealth Funds

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

The Future Fund’s investment mandate is to achieve a long-term return of at least inflation plus 4-5 percent per annum.  As of December 2019, the Fund’s portfolio consists of:  29 percent global equities, 7 percent Australian equities, 28 percent private equity (including 7 percent in infrastructure), and the remaining 36 percent in debt, cash, and alternative investments.

In addition to the Future Fund, the Australian Government manages five other specific-purpose funds:  the Disability Care Australia Fund, the Medical Research Future Fund, the Emergency Response Fund, the Future Drought Fund, and the Aboriginal and Torres Strait Islander Land and Sea Future Fund.  In total, these five funds have assets of AUD 44 billion (USD 27 billion), while the main Future Fund has assets of AUD 168 billion (USD 104 billion) as of December 31, 2019.

Further details of these funds are available at:  https://www.futurefund.gov.au/ 

7. State-Owned Enterprises

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

Privatization Program

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

8. Responsible Business Conduct

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

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

9. Corruption

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

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

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

Under Australian law, it is an offense to bribe a foreign public official, even if a bribe may be seen to be customary, necessary, or required.  The maximum penalty for an individual is 10 years imprisonment and/or a fine of AUD 2.1 million (approximately USD 1.3 million).  For a corporate entity, the maximum penalty is the greatest of:  1) AUD 21 million (approximately USD 13.0 million); 2) three times the value of the benefits obtained; or 3) 10 percent of the previous 12-month turnover of the company concerned.

The legislation covering bribery of foreign officials is the Criminal Code Act 1995.  In 2019, the Commonwealth Government introduced an amendment to the Act that would expand the list of activities considered foreign bribery, but the amendment has not been legislated at the time of publishing.  Information on the amendment can be found at the following link: https://www.aph.gov.au/Parliamentary_Business/Bills_Legislation/Bills_Search_Results/Result?bId=s1246 

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

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

UN Anticorruption Convention, OECD Convention on Combatting Bribery

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

Resources to Report Corruption

Western Australia – Corruption and Crime Commission
86 St Georges Terrace
Perth, Western Australia
Tel. +61 8 9215 4888
https://www.ccc.wa.gov.au/

Queensland – Corruption and Crime Commission
Level 2, North Tower Green Square
515 St Pauls Terrace
Fortitude Valley, Queensland
Tel. +61 7 3360 6060
https://www.ccc.qld.gov.au/

Victoria – Independent Broad-based Anti-corruption Commission
Level 1, North Tower, 459 Collins Street
Melbourne, Victoria
Tel. +61 1300 735 135
https://ibac.vic.gov.au

New South Wales – Independent Commission against Corruption
Level 7, 255 Elizabeth Street
Sydney NSW 2000
Tel. +61 2 8281 5999
https://www.icac.nsw.gov.au/

South Australia – Independent Commission against Corruption
Level 1, 55 Currie Street
Adelaide, South Australia
Tel. +61 8 8463 5173
https://icac.sa.gov.au

10. Political and Security Environment

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

11. Labor Policies and Practices

Australia’s unemployment rate has hovered between 5.0-5.3 percent for the last year, sitting at 5.1 percent in March 2020.   The impact of COVID-19 is expected to see this rise sharply, although the government has implemented large stimulus packages targeted to keeping businesses operating and employees in work.  Average weekly earnings for full time workers in Australia were AUD 1,659 (approximately USD 1,030) as of November 2019.  The minimum wage is set annually and is significantly higher than that of the United States (approximately twice the U.S. minimum wage).  Overall wage growth has been low in recent years, growing only slightly above the rate of inflation.

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

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

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

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

There were 135 industrial disputes nationwide in 2019, down from 158 in 2018.  Total working days lost to disputes in 2019 fell 40 percent to 64,000 days.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source* USG or international statistical source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount  
Host Country Gross Domestic Product (GDP) 2019 USD 1.18 trillion 2018 USD 1.43 trillion www.worldbank.org/en/country 
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country (stock positions) 2018 USD 133 billion 2018 USD 163 billion https://www.bea.gov/international/
direct-investment-and-multinational-
enterprises-comprehensive-data
 
Host country’s FDI in the United States (stock positions) 2018 USD 75 billion 2018 USD 66 billion https://www.bea.gov/international/
direct-investment-and-multinational-
enterprises-comprehensive-data
 
Total inbound stock of FDI as % host GDP 2018 51% 2018 48% https://unctad.org/en/Pages/DIAE/
World%20Investment%20Report/
Country-Fact-Sheets.aspx
 
 

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

Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward 682,865 100% Total Outward 490,986 100%
USA 151,247 22% USA 85,161 22%
Japan 74,743 11% UK 83,749 14%
UK 69,696 10% New Zealand 39,808 11%
Netherlands 34,769 6% Canada 23,866 3%
China 28,306 5% Papua New Guinea 17,248 3%
“0” reflects amounts rounded to +/- USD 500,000.
Table 4: Sources of Portfolio Investment
Portfolio Investment Assets
Top Five Partners (Millions, current US Dollars)
Total Equity Securities Total Debt Securities
All Countries 808,049 100% All Countries 503,254 100% All Countries 290,608 100%
United States 331,582 42% United States 237,697 47% United States 93,886 32%
United Kingdom 68,034 9% United Kingdom 37,575 7% United Kingdom 30,460 10%
Japan 40,307 5% Japan 24,267 5% Germany 20,360 7%
Cayman Islands 40,425 5% France 19,287 4% Japan 16,040 6%
Canada 30,068 4% Switzerland 10,085 2% Netherlands 12,930 4%

14. Contact for More Information

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

Austria

Executive Summary

Austria offers a stable and attractive climate for foreign investors, including a well-developed market economy that welcomes foreign direct investment, particularly in technology and R&D. The most popular investment destinations in recent years have been the automotive, pharmaceuticals, and financial sectors.   The country benefits from a skilled labor force, and a high standard of living, with its capital Vienna consistently placing at the top of global quality-of-life rankings.

With more than 50 percent of its GDP derived from exports, Austria’s economy is closely tied to other EU economies; Germany is its largest trading partner, followed by the United States.  The economy features a large service sector and an advanced industrial sector specialized in high-quality component parts, especially for vehicles.  The country’s location between Western European industrialized nations and growth markets in Central, Eastern, and Southeastern Europe (CESEE) has led to a high degree of economic, social, and political integration with fellow European Union (EU) member states and the CESEE.

In October 2019 a new digital services tax was signed into law, effective on January 1, 2020.    This 5% tax on advertising revenues targets companies with global revenues exceeding €750 million ($848 million) and revenues within Austria of at least 25 million euros, with a carve-out for Austria’s national broadcaster (ORF), which would otherwise be taxed.

Austria also maintains a relatively high overall tax burden and a complex regulatory system with extensive bureaucracy.

Some 300 U.S. companies have investments in Austria, many of whom have expanded over time.  U.S. Foreign Direct Investment into Austria totaled approximately EUR 10.5 billion (USD 11.8 billion) at the end of 2019, according to the Austrian National Bank, and U.S. companies support over 17,000 jobs in Austria.

Following solid GDP growth of 1.6% in 2019, leading forecasters anticipate a 7-7.1% decrease in 2020 GDP due to COVID-19.  The economy is predicted to make a strong recovery in 2021, ranging from 4.3-5.6% GDP growth.

Austria’s government took quick, decisive measures to combat the spread of COVID-19, closing much of the retail sector and mandating a strict stay-at-home policy on March 16, 2020. As a result of their success in reducing infection rates, Austria was one of the first western countries to reopen their economy in stages starting April 14, 2020.   Because the country is highly dependent on both foreign trade and tourism, recovery will ultimately depend on the impact of the virus on global travel, international supply chains, and economic recovery in Austria’s largest export markets.

Austria offers a wide array of investment incentives to attract industry and jobs in high-tech, R&D, and economically disadvantaged regions.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2019 12 of 180 http://www.transparency.org/
research/cpi/overview
World Bank’s Doing Business Report 2020 27 of 190 http://www.doingbusiness.org/
en/rankings
Global Innovation Index 2019 21 of 129 https://www.globalinnovationindex.org/
analysis-indicator
U.S. FDI in partner country ($B USD, historical stock positions) 2019 USD 8.58 http://apps.bea.gov/international/
factsheet/
World Bank GNI per capita 2018 USD 49,310 http://data.worldbank.org/indicator/
NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

The Austrian government welcomes foreign direct investment, particularly when such investments have the potential to create new jobs, support advanced technology fields, promote capital-intensive industries, and enhance links to research and development.

There are no specific legal, practical or market access restrictions on foreign investment.  American investors have not complained of discriminatory laws against foreign investors.  However, in October 2019 a new digital services tax was signed into law, effective on January 1, 2020.  This 5% tax on advertising revenues targets companies with global revenues exceeding €750 million ($848 million) provided at least €25 million ($28 million) of that sum comes from Austria, with a carve-out for Austria’s national broadcaster (ORF) which would otherwise be taxed.  Government officials claim the tax is intended to level the playing field.

The corporate tax rate, a 25 percent flat tax, is above the EU average, and the government has indicated plans to reduce this rate to 21 percent within the current parliamentary term which runs through 2024. U.S. citizens and investors have occasionally reported that it is difficult to establish and maintain banking services since the U.S.-Austria Foreign Account Tax Compliance Act (FATCA) bilateral agreement went into force in 2014, as some Austrian banks have been reluctant to take on this reporting burden.

Potential investors should be aware of Austria’s lengthy environmental impact assessments in their investment decision-making.  The mining and transportation sectors are also more heavily regulated than in other economies.  The requirement that over 50 percent of energy providers must be publicly owned limits foreign investments in the energy sector.  Strict liability and co-existence regulations regarding crop contamination in the agriculture sector virtually outlaw the cultivation, marketing, or distribution of genetically-modified crops.

Austria’s national investment promotion organization, the Austrian Business Agency (ABA), is a useful first point of contact for foreign companies interested in establishing operations in Austria.  It provides comprehensive information about Austria as a business location, identifies suitable sites for greenfield investments, and consults in setting up a company.  ABA provides these services free of charge.

The Austrian Economic Chamber (WKO) and the American Chamber of Commerce in Austria (Amcham) are also good resources for foreign investors.  Both conduct annual polls of their members to measure their satisfaction with the business climate, thus providing early warning to the government of problems identified by investors.

Limits on Foreign Control and Right to Private Ownership and Establishment

In principle there is generally no limitation on establishing and owning a business in Austria. However, a local managing director must be appointed to any newly established enterprise.  For non-EU citizens to establish and own a business, the Austrian Foreigner’s Law mandates a residence permit that includes the right to run a business.  Many Austrian trades are regulated, and the right to run a business in regulated trade sectors is only granted when certain preconditions are met, such as certificates of competence, and recognition of foreign education.

The requirement that over 50 percent of energy providers must be publicly owned limits foreign investments in the energy sector.  Strict liability and co-existence regulations regarding crop contamination in the agriculture sector virtually outlaw the cultivation, marketing, or distribution of genetically-modified crops.

Austria maintains a national security investment screening process to review potential foreign acquisitions of 25 percent or more of a company deemed essential to national security or which is involved in the provision of public services such as energy, water, telecommunications, and educational services.  The government plans to reduce the threshold for review to ten percent and expand covered sectors through adoption of a new investment-screening law in 2020. The current screening process has seldom been used since its introduction in 2012. The EU Regulation establishing a framework for the coordination of members’ national security screening of foreign direct investments into the Union entered into force in April 2019.  It creates a cooperation mechanism through which EU countries and the European Commission will exchange information and raise concerns related to specific investments which could potentially threaten the national security of EU countries.

Non-EU/EEA citizens need authorization from administrative authorities of the respective Austrian province to acquire land.  Provincial regulations vary, but in general there must be a public (economic, social, cultural) interest for the acquisition to be authorized.  Often, the applicant must guarantee that he does not want to build a vacation home on the land in order to receive the required authorization.

Other Investment Policy Reviews

Not applicable.

Business Facilitation

While the World Bank Doing Business Index ranked Austria as the 27th  in 2020  (www.doingbusiness.org), starting a business takes time and requires many procedural steps (Austria ranks 127 in this category ).  The average time to set up a company in Austria is 21 days, compared to just 9.2 days in other  high income countries.  In order to register a new company or open a subsidiary in Austria, a company must first be listed on the Austrian Companies Register at a local court.  The next step is to seek confirmation of registration from the Austrian Economic Chamber (WKO) establishing that the company is really a new business.  The investor must then notarize the “declaration of establishment,” deposit a minimum capital requirement with an Austrian bank, register with the tax office, register with the district trade authority, register employees for social security, and register with the municipality where the business will be located.  Membership in the WKO is mandatory for all businesses in Austria.

For sole proprietorships, it is possible under certain conditions to use an online registration process via government websites (in German language only) to either found or register a company:

https://www.usp.gv.at/Portal.Node/usp/public/content/gruendung/egruendung/269403.html:  or www.gisa.gv.at/online-gewerbeanmeldung. It is advisable to seek information from ABA or the WKO before applying to register a firm.

Austria’s national investment promotion organization, the Austrian Business Agency (ABA), is a useful first point of contact for foreign companies interested in establishing operations in Austria.  It provides comprehensive information about Austria as a business location, identifies suitable sites for greenfield investments, and consults in setting up a company.  ABA provides these services free of charge.  The website of the ABA contains further details and contact information and is intended to serve as a first point of contact for foreign investors in Austria: https://investinaustria.at/en/starting-business/. 

Outward Investment

With more than 50 percent of its GDP derived from exports, the Austrian government encourages outward investment.  Advantage Austria, the “Austrian Foreign Trade Service” is a special section of the WKO that promotes Austrian exports and also supports Austrian companies establishing an overseas presence. Advantage Austria operates six offices in the United States (Washington, DC, New York, Chicago, Atlanta, Los Angeles, and San Francisco.)  It also has trade offices in 26 European, 19 Asian, 7 other North- and South American, 6 African countries, and Australia.

https://www.wko.at/service/aussenwirtschaft/aussenwirtschaftscenter.html#heading_aussenwirtschaftscenter  The Ministry for Digital and Economic Affairs and the WKO run a joint program called “Go International,” providing services to Austrian companies that are considering investing for the first time in foreign countries. The program provides grants for market access costs and provides “soft subsidies,” such as counseling, legal advice, and marketing support.

2. Bilateral Investment Agreements and Taxation Treaties

There is currently no bilateral investment treaty  BIT)between the United States and Austria. Austria has BITs in force with: Albania, Algeria, Argentina, Armenia, Azerbaijan, Bangladesh, Belarus, Belize, Bosnia and Herzegovina, Bulgaria, Chile, China, Croatia, Cuba, Czech Republic, Egypt, Estonia, Ethiopia, Georgia, Guatemala, Hong Kong, Hungary, , Iran Jordan, Kazakhstan, Republic of Korea, Kuwait, Latvia, Lebanon, Libya, Lithuania, North Macedonia, Malaysia, Malta, Mexico, Moldova, Mongolia, Montenegro, Morocco, Namibia, Oman, Paraguay, Philippines, Poland , Romania, Russia, Saudi Arabia, Serbia, , Slovakia, Slovenia, Tajikistan, Tunisia, Turkey, Ukraine, United Arab Emirates, Uzbekistan, Vietnam, and Yemen. BITs with Cambodia, Kyrgyzstan, Nigeria, and Zimbabwe have been signed, but have not yet entered into force.

On March 16, 2018, the European Court of Justice determined that arbitration clauses in Member State BITs are incompatible with EU law; subsequently, Austria agreed with the European  Commission to terminate its 12  intra-EU BITS (as did the partner Member States), but negotiations on the date of termination are ongoing with these Member States.

Austria and the United States are parties to a bilateral double taxation treaty covering income and corporate taxes, which went into effect in January 1998. A separate bilateral double taxation treaty (covering estates, inheritances, gifts and generation-skipping transfers) has been in effect since 1982 (amended in 1999).  Austria and the United States signed an intergovernmental agreement in accordance with the Foreign Account Tax Compliance Act (FATCA)  in 2014, covering U.S. citizen bank account holders in Austria.  Austria has 90 additional double taxation treaties in force with other countries. Two other Austrian agreements, with Switzerland and Liechtenstein, on cooperation in the areas of taxation and financial markets (which entered into force in January and April 2013 respectively) cover the treatment of anonymous accounts from Austrian citizens in those countries.

3. Legal Regime

Transparency of the Regulatory System

Austria’s legal, regulatory, and accounting systems are transparent and consistent with international norms.

Federal ministries generally publish draft laws and regulations, including investment laws, for public comment prior to their adoption by Austria’s cabinet and/or Parliament.  Relevant stakeholders such as the “Social Partners” (Economic Chamber, Agricultural Chamber, Labor Chamber, and Trade Union Association), the Federation of Industries, and research institutions are invited to provide comments and suggestions for improvement, which may be taken into account before adoption of laws. These comments are publicly available. Austria’s nine provinces can also adopt laws relevant to investments; their review processes are generally less extensive, but local laws are less important for investments than federal laws. The judicial system is independent from the executive branch, helping ensure the government follows administrative processes. The government’s compliance with administrative processes is monitored by the courts, primarily the Court of Auditors. Individuals can file proceedings against the government in Austria’s courts, if the government did not act in accordance with the law. Similarly, the public prosecution service can file cases against the government.

Draft legislation by ministries (“Ministerialentwürfe”) and resulting government draft laws and parliamentary initiatives (“Regierungsvorlagen und Gesetzesinitiativen”) can be accessed through the website of the Austrian Parliament:  https://www.parlament.gv.at/PAKT/  (all in German).  The parliament also publishes a history of all law-making processes. All final Austrian laws can be accessed through a government database, partly in English: https://www.ris.bka.gv.at/defaultEn.aspx.  

The effectiveness of regulations is not reviewed as a regular process, only on an as-needed basis. Austrian regulations governing accounting provide U.S. investors with internationally standardized financial information.  In line with EU regulations, listed companies must prepare their consolidated financial statements according to the International Financial Reporting Standards (IAS/IFRS) system.

Public finances are transparent and easily accessible, through the Finance Ministry’s website, Austria’s Central Bank, and a variety or various economic research institutes.  With the possible exception of the newly-implemented digital advertising tax, Austria has no legal restrictions, formally or informally, that discriminate against foreign investors.

International Regulatory Considerations

Austria is a member of the EU.  As such, its laws must comply with EU legislation and the country is therefore subject to European Court of Justice (ECJ) jurisdiction.  Austria is a member of the OECD and adheres to all instruments, including the Codes of Liberalization and Declaration on International Investment, including extending national treatment to all investors.  Austria is also a WTO member and largely follows WTO requirements. Austria has ratified the Trade Facilitation Agreement (TFA) but has not taken specific actions to implement it.

Legal System and Judicial Independence

The Austrian legal system is based on Roman law.  The constitution establishes a hierarchy, according to which each legislative act (law, regulation, decision, and fines) must have its legal basis in a higher legislative instrument.  The full text of each legislative act is available online for reference. All final Austrian laws can be accessed through a government data base, partly in English: https://www.ris.bka.gv.at/defaultEn.aspx .

Commercial matters fall within the competence of ordinary regional courts except in Vienna, which has a specialized Commercial Court.  The Commercial Court also has nationwide competence for trademark, design, model, and patent matters. There is no special treatment of foreign investors, and the executive branch does not interfere in judicial matters.

The legal system provides an effective means for protecting property and contractual rights of nationals and foreigners.  Sensitive cases must be reported to the Minister of Justice, which can issue instructions for addressing them. Austria’s civil courts enforce property and contractual rights and do not discriminate against foreign investors. Austria allows for court decisions to be appealed, first to a Regional Court and in the last instance, to the Supreme Court.

Laws and Regulations on Foreign Direct Investment

Austria has restrictions on investments into industries designated as high risk to national security, critical infrastructure, or public service.  The government must approve any foreign acquisition of a 25 percent or higher stake in any of these industries. A new law, seeking to lower this threshold to 10 percent and expand the affected sectors is most likely to be adopted and take effect in 2020.

 

There is no discrimination against foreign investors, but businesses are required to follow numerous local regulations.  Although there is no requirement for participation by Austrian citizens in ownership or management of a foreign firm, at least one manager must meet Austrian residency and other legal requirements. The “Law to Support Investments in Municipalities” (published in the Federal Law Gazette, 74/2017, available in German only on the federal legal information system www.ris.bka.gv.at), allows federal funding of up to 25 percent of the total investment amount of a project if it will “modernize” a municipality.

The Austrian Business Agency serves as a central contact point for companies looking to invest in Austria.  It does not serve as a one-stop-shop but can help answer any questions potential investors may have (https://investinaustria.at/en/ )

Competition and Anti-Trust Laws

Austria’s Anti-Trust Act (ATA) is in line with European Union anti-trust regulations, which take precedence over national regulations in cases concerning Austria and other EU member states.  The Austrian Anti-Trust Act prohibits cartels, anticompetitive practices, and the abuse of a dominant market position. The independent Federal Competition Authority (FCA) and the Federal Antitrust Prosecutor (FAP) are responsible for administering anti-trust laws.  The FCA can conduct investigations and request information from firms. The FAP is subject to instructions issued by the Justice Ministry and can bring actions before Austria’s Cartel Court. Additionally, the Commission on Competition may issue expert opinions on competition policy and give recommendations on notified mergers.  The most recent amendment to the ATA was in 2017. This amendment facilitated enforcing private damage claims, strengthened merger control, and enabled appeals against verdicts from the Cartel Court.

Companies must inform the FCA of mergers and acquisitions (M&A).  Special M&A regulations apply to media enterprises, such as a lower threshold above which the ATA applies, and the requirement that media diversity must be maintained.  A cartel court is competent to rule on referrals from the FCA or the FCP. For violations of anti-trust regulations, the cartel court can impose fines of up to the equivalent of 10 percent of a company’s annual worldwide sales.  The independent energy regulator E-Control separately examines antitrust concerns in the energy sector but must also submit cases to the cartel court.

Austria’s Takeover Law applies to friendly and hostile takeovers of corporations headquartered in Austria and listed on the Vienna Stock Exchange.  The law protects investors against unfair practices, since any shareholder obtaining a controlling stake in a corporation (30 percent or more in direct or indirect control of a company’s voting shares) must offer to buy out smaller shareholders at a defined fair market price.  The law also includes provisions for shareholders who passively obtain a controlling stake in a company. The law prohibits defensive action to frustrate bids. The Shareholder Exclusion Act allows a primary shareholder with at least 90 percent of capital stock to force out minority shareholders.  An independent takeover commission at the Vienna Stock Exchange oversees compliance with these laws. Austrian courts have also held that shareholders owe a duty of loyalty to each other and must consider the interests of fellow shareholders in good faith.

Expropriation and Compensation

According to the European Convention on Human Rights and the Austrian Civil Code, property ownership is guaranteed in Austria.  Expropriation of private property in Austria is rare and may be undertaken by federal or provincial government authorities only based on special legal authorization “in the public interest” in such instances as land use planning, and infrastructure project preparations.  The government can initiate such a procedure only in the absence of any other alternatives for satisfying the public interest; when the action is exclusively in the public interest; and when the owner receives just compensation.  For example, in 2017-18, the government expropriated Hitler’s birth house in order to prevent it from becoming a place of pilgrimage for neo-Nazis, paying the former owner €1.5 million (USD 1.8 million) in compensation. The expropriation process is non-discriminatory toward foreigners, including U.S. firms.

Dispute Settlement

ICSID Convention and New York Convention

Austria is a member of both the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID) and the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, meaning local courts must enforce foreign arbitration awards in Austria. There is no specific domestic legislation in this regard, but local courts must enforce arbitration decisions where the affected companies have their business locations.

Investor-State Dispute Settlement

Austria is a member of the UN Commission on International Trade Law (UNCITRAL). Its arbitration law largely conforms to the UNCITRAL model law. The main divergence is that an award may only be set aside if the arbitral procedure is not in accordance with Austrian public policy.

In 2015, the Austrian government was sued, for the first and only known instance, by the offshore parent company of the Austrian Meinl Bank, Far East.  The case was  dismissed in November 2017.

International Commercial Arbitration and Foreign Courts

The Vienna International Arbitral Center of the Austrian Federal Economic Chamber acts as Austria’s main arbitration institution, handling both national and international cases.  Legislation is based on the UNCITRAL model law (see above).  Austrian courts are consistent in applying the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

Bankruptcy Regulations

The Austrian Insolvency Act contains provisions for business reorganization and bankruptcy proceedings.  Reorganization requires a restructuring plan and the debtor to be able to cover costs or advance some of the costs up to a maximum of €4,000 (USD 4,520).  The plan must offer creditors at least 20 percent of what is owed, payable within two years of the date the debtor’s obligation is determined. The plan must be approved by a majority of all creditors and a majority of creditors holding at least 50 percent of all claims.

If the restructuring plan is not accepted, a bankruptcy proceeding is begun. Bankruptcy proceedings take place in court upon application of the debtor or a creditor; the court appoints a receiver for winding down the business and distributing proceeds to the creditors. Bankruptcy is not criminalized, provided the affected person performed all his documentation and reporting obligations on time and in accordance with the law.

Austria’s major commercial association for the protection of creditors in cases of bankruptcy is the “KSV 1870 Group”, www.ksv.at, which also carries out credit assessments of all companies located in Austria. Other European-wide credit bureaus, particularly “CRIF” and “Bisnode”, also monitor the Austrian market.

4. Industrial Policies

Investment Incentives

Financial incentives and business subsidies provided by Austrian federal, state, and local governments to promote investments are equally available to domestic and foreign investors and include tax incentives, preferential loans, loan guarantees, and grants.  Most incentives are targeted to investments that meet specified criteria, including job-creation, use of cutting-edge technology, improving regional infrastructure, strengthening SMEs, revitalization of a community, and promoting startups.  Tax allowances for advanced employee training and R&D expenditures are also available, as are financing options for start-ups and cash grants.  The Austrian Labor Market Service (AMS) offers grants for job creation and personnel development training.

Austria offers financial and tax incentives within EU regional co-funding schemes to firms undertaking projects in economically underdeveloped and rural areas. In the 2014-2020 funding period, roughly EUR 536 million (USD 638 million) from the European Regional Development Fund (ERDF) is available to Austria for strengthening investments in growth and jobs.

Austria’s Wirtschaftsservice (AWS) is the governmental institution that provides financial incentives for businesses.  In April 2020, the government established a EUR 100 million (USD 112 million) COVID-19 assistance package for startups, where it matches one-to-one private (also foreign) investments in Austrian startups, and a EUR 50 million  (USD 56 million) venture capital fund (also open for foreign investors), where it guarantees 50% of the fund’s investment.

Additional information on targeted investment incentives is available at https://www.aws.at/en/ . More detailed information on investment incentives in English language is available on the ABA website (see chapter 2) at http://investinaustria.at/en/ 

Various government agencies in Austria offer incentives for research and development (R&D) activities (up to 50 percent of the investment amount).  The incentives are also available for foreign-owned enterprises.  The agencies providing incentives include: The Austrian Research Promotion Agency (FFG) (https://www.ffg.at/en ); the Austrian Science Fund (FWF), which is the country’s central body for the promotion of basic research (https://www.fwf.ac.at/en/  ); and AWS (above). The latter also provides guarantees of up to €25 million over 5 to 10 years for investments in Austria, with a focus on small and medium-sized companies.

Foreign investors in Austria can also benefit from government support measures designed for companies affected by COVID-19, including:  a hardship fund for sole proprietorships; a COVID-19 assistance fund which provides EUR 15 billion (USD$16.8 billion) in loan guarantees; banking measures to increase liquidity; and a short-time work (kurzarbeit) program which allows staff working hours to be reduced by up to 90%, with the government paying up to 90% of the salary cost. More information can be found here: https://investinaustria.at/en/blog/2020/03/covid-19-support-measures-companies.php#vier 

Foreign Trade Zones/Free Ports/Trade Facilitation

Not applicable.

Performance and Data Localization Requirements

If investors want to employ foreign workers from outside the EU in Austria, they need to apply for a work permit with the Austrian Labor Service (AMS).  The AMS only grants that permission if there is no comparable person in the pool of registered unemployed persons in Austria.  This does not apply to senior management positions, researchers, highly qualified personnel, and a limited set of other categories.

Austria offers several non-immigrant business visa classifications, including intra-company transfers/rotational workers, and employees on temporary duty.  Recruitment of long-term, overseas specialists or those with managerial duties is governed by a points-based immigration scheme to attract skilled workers and specialists in individual sectors (points are available for qualification, education, age, and language skills).  This Red-White-Red card (RWR) model allows firms to react flexibly to rising demand for talent in different occupations.  It is available to highly qualified individuals, qualified specialists/craftsmen in certain understaffed professions (such as qualified labor and registered nurses), and key personnel/professionals.  Applicants must have an offer of employment to apply for the RWR.  Highly qualified individuals holding U.S. citizenship may apply locally in Austria or opt to find a potential employer from abroad and have the company apply in Austria on their behalf.

Austrian immigration law requires those applying for residency permits in some categories to take German language courses and exams.   There is a specific visa category under the RWR model for founders of start-up enterprises to support Austria’s push to expand its innovation economy.

A less bureaucratic alternative is the EU Blue Card, which entitles applicants to a fixed-term stay of 24 months and employment is tied to a specific employer. However, there is a threshold of a gross annual income of at least one and a half times the average gross annual income for full-time employees (in 2020: at least EUR 63,672 (USD 71,313); annual salary plus special payments).

While there is no requirement for foreign IT providers to turn over source code and/or provide access to encryption, EU and Austrian data protection stipulations apply.  The EU General Data Protection Regulation (GDPR) as adopted by Austria in 2018, places restrictions on companies’ ability to store and use customer data.  It also requires specific user consent, in order for companies to send out promotional materials (previously, implied consent was sufficient). Transmission of customer or business-related data is therefore subject to EU GDPR regulations.  Austria’s Data Protection Authority is in charge of enforcing all GDPR-related matters, which include GDPR rules on data storage. In October 2019, the DPA imposed a fine of EUR 18 million (USD 20.2 million) on Austria’s postal service for illegal use of customer data, which included collecting and selling data on party affiliations.  The postal service was ordered to delete the data concerned.

The Austrian government may impose performance requirements when foreign investors seek financial or other assistance from the government, although there are no performance requirements to apply for tax incentives.  There is no requirement that Austrian nationals hold shares in foreign investments or for technology transfer, and no requirement for foreign investors to use domestic content in the production of goods or technology.

5. Protection of Property Rights

Real Property

The Austrian legal system protects secured interests in property.  The land registry is a reliable system for recording interests in property, and access to the registry is public.  For any real estate agreement to be effective, owners must register with the land registry.  Mortgages and liens must also be registered.  As a rule, property for sale must be unencumbered.  In case of rededication of land, approval of the land transfer commission or the office of the state governor is required.  Non-EU/EEA citizens need authorization from administrative authorities of the respective Austrian province to acquire land.  Provincial regulations vary, but in general there must be a public (economic, social, cultural) interest for the acquisition to be authorized.  Often, the applicant must guarantee that he does not want to build a vacation home on the land in order to receive the required authorization.

Intellectual Property Rights

Austria has a strong legal structure to protect intellectual property rights (IPR), including patent and trademark laws, a law protecting industrial designs and models, and a copyright law.  Austria is a member of the World Intellectual Property Organization (WIPO) and party to several IP treaties, including the Berne Convention, the Paris Convention, the Patent Cooperation Treaty (PCT), the WIPO Copyright Treaty, and the WIPO Performances and Phonograms Treaty.  Austria also participates in the Patent Prosecution Highway (PPH) program with the United States Patent and Trademark Office (USPTO), which allows filing of streamlined applications for inventions determined to be patentable in other participating countries.

Austria’s Copyright Act grants authors exclusive rights to publish, distribute, copy, adapt, translate, and broadcast their work.  The law also regulates copyrights of digital media (restrictions on private copies), works on the Internet, protection of computer programs, and related damage compensation.  Infringement proceedings, however, can be time-consuming and costly.  Austrian Internet providers must prevent access to illegal music and streaming platforms once they are made aware of a copyright violation.  They must also block workaround websites from these platforms.

Austria also has a law against trade in counterfeit goods.  In 2019, Austrian customs authorities confiscated pirated goods worth EUR 16.1 million (USD 18.0 million), which is a six-fold increase from the previous year.

Austria is not listed in USTR’s Special 301 Report, but its trade secrets regime has historically been a concern for some U.S. businesses.  Austrian and U.S. companies have voiced specific concerns about both the scope of protection and the difficulty of adjudicating breaches.  Following years of steady U.S. government advocacy, and because Austria was required to implement the 2016 EU Directive on Trade Secrets, the country improved its trade secrets regime through the Law Against Unfair Competition which entered into force in February 2019.  The most relevant change in the law is a requirement for safeguarding the confidentiality of trade secrets and other business confidential information in court procedures.  The new law also defines injunctive relief and claims for damages in case of breach of trade secrets.  The 2020 government program includes a plan to  improve prosecutions of   trade secrets theft and to tackle industrial espionage.

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/ .

6. Financial Sector

Capital Markets and Portfolio Investment

Austria has sophisticated financial markets that allow foreign investors access without restrictions. The government welcomes foreign portfolio investment.  The Austrian National Bank (OeNB) regulates portfolio investments effectively.

Austria has a national stock exchange that currently includes 62 companies on its regulated market and several others on its multilateral trading facility (MTF).  The Austrian Traded Index (ATX) is a price index consisting of the 20 largest stocks on the market and forms the most important index of Austria’s stock market.  The size of the companies listed on the ATX is roughly equivalent to those listed on the MDAX in Germany.  The market capitalization of Austrian listed companies is relatively small compared to the country’s western European counterparts, accounting for 31% of Austria’s GDP, compared to 54% in Germany or 150% in the United States.

Unlike the other market segments in the stock exchange, the Direct Market and Direct Market Plus segments, targeted at SMEs and young, developing companies, are subject only to the Vienna Stock Exchange’s general terms of business, not more stringent EU regulations. These segments also have lower reporting requirements but also greater risk for investors, as prices are more likely to fluctuate, due to the respective companies’ low level of market capitalization.

Austria has robust financing for product markets, but the free flow of resources into factor markets (capital, raw materials) could be improved. Overall, financing is primarily available through banks and government-sponsored funding organizations with very little private venture capital in existence. The Austrian government is aware of this issue but has taken few tangible steps to improve the availability of private venture capital.

Austria is fully compliant with IMF Article VIII, all financial instruments are available, and there are no restrictions on payments.  Credit is available to foreign investors at market-determined rates.  Austria’s financial system ranked 30th in the 2019 World Economic Forum’s Global Competitiveness Report, out of 141 countries examined.

Money and Banking System

Due to U.S. government financial reporting requirements, Austrian banks are very cautious in committing the time and expense required to accept U.S. clients and U.S. investors without established U.S. corporate headquarters.

Austria has one of the densest banking networks in Europe with almost 4,000 branch offices registered in 2019.  The banking system is highly developed, with worldwide correspondent banks and representative offices and branches in the United States and other major financial centers.  Large Austrian banks also have extensive networks in Central and Southeast European (CESEE) countries and the countries of the former Soviet Union.  Total assets of the banking sector amounted to EUR 1.02 trillion (USD 1.1 trillion) in 2019 approximately 2.5 times the country’s GDP.  Approximately EUR 400 million of these are held by Austria’s two largest banks, Erste Group and Raiffeisen Bank International (RBI). The Austrian banking sector is considered to be one of the most stable in the world.  Austria’s banking sector is managed and overseen by the Austrian National Bank (OeNB) and the Financial Market Authority (FMA).  Four Austrian banks with assets in excess of EUR 30 billion (USD 34 billion) are subject to the Eurozone’s Single Supervisory Mechanism (SSM), as is Sberbank Europe AG, a Russian bank subsidiary headquartered in Austria, due to its significant cross-border assets, as well as Volksbank Wien AG, due to its importance for the economy.  All other Austrian banks continue to be subject to the country’s dual-oversight bank supervision system with roles for the OeNB and the FMA, both of which are also responsible for policing irregularities on the stock exchange and for supervising insurance companies, securities markets, and pension funds.  Foreign banks are allowed to establish operations in the country with no legal restrictions that place them at a disadvantage compared to local banks.

Foreign Exchange and Remittances

Foreign Exchange

Austria has no restrictions on cross-border capital transactions, including the repatriation of profits and proceeds from the sale of an investment, for non-residents and residents.  The Euro, a freely convertible currency and the only legal tender in Austria and 18 other Euro-zone member states, shields investors from exchange rate risks within the Euro-zone.

Remittance Policies

Not applicable.

Sovereign Wealth Funds

Austria has no sovereign wealth funds.

7. State-Owned Enterprises

Austria has two major wholly state-owned enterprises (SOEs):  The OeBB (Austrian Federal Railways) and Asfinag (highway financing, building, maintenance, and administration).  Other government industry holding companies are bundled in the government holding company OeBAG (http://www.oebag.gv.at )

The government has direct representation in the supervisory boards of its companies (commensurate with its ownership stake) and OeBAG has the authority to buy and sell company shares, as well as purchase minority stakes in strategically relevant companies.  Such purchases are subject to approval from an audit committee consisting of government-nominated independent economic experts.

OeBAG holds a 53 percent stake in the Post Office, 51 percent in energy company Verbund, 33 percent in the gambling group Casinos Austria, 31.5 percent in the energy company OMV, 28 percent in the Telekom Austria Group, and a few other minor ventures.  Local governments own the majority of utilities, Vienna International Airport, and more than half of Austria’s 264 hospitals and clinics.

Private enterprises in Austria can generally compete with public enterprises under the same terms and conditions with respect to market access, credit, and other such business operations as licenses and supplies. While most SOEs must finance themselves under terms similar to private enterprises, some large SOEs (such as OeBB) benefit from state-subsidized pension systems.  As a member of the EU, Austria is also a party to the Government Procurement Agreement (GPA) of the WTO, which indirectly also covers the SOEs (since they are entities monitored by the Austrian Court of Auditors).

The five major OeBAG companies (Postal Service, Verbund AG, Casinos Austria, OMV, Telekom Austria), are listed on the Vienna stock exchange. In these cases, senior management does not directly report to a minister, but to an oversight board.  However, the government often appoints management and board members, who usually have strong political affiliations.

Austrian laws require advance approval by the Austrian Ministry for Digital and Economic Affairs for foreign acquisitions of a relevant stake ) in enterprises in certain strategic industries (with sales over EUR 700,000, USD 784.000 per year), comprising a wide range of sectors (see Chapter 1).

Privatization Program

The government has not privatized any public enterprises since 2007.  Austrian public opinion is skeptical regarding further privatization and there are no indications of any government privatizations on the horizon. In prior privatizations, foreign and domestic investors received equal treatment.  Despite a historical government preference for maintaining blocking minority rights for domestic shareholders, foreign investors have successfully gained full control of enterprises in several strategic sectors of the Austrian economy, including in telecommunications, banking, steel, and infrastructure.  In March 2020, the government chose not to intervene when the Czech Sazka group increased its stake in the partially state-owned gambling group Casinos Austria to a majority share.

8. Responsible Business Conduct

Austrian Responsible Business Conduct (RBC)/Corporate Social Responsibility (CSR) standards are laid out in the Austrian Corporate Governance Codex, which is based on the EU Commission’s 2011 “Strategy for Corporate Social Responsibility.”  The Austrian Standards Institute’s ONR 192500 acts as the main guidance for CSR and is based on the EU Commission’s published Strategy, which is also compliant with UN guidelines.  Major Austrian companies follow generally accepted CSR principles and publish a CSR chapter in their annual reports; many also provide information on their health, safety, security, and environmental activities.

Austria adheres to the Organization for Economic Cooperation and Development (OECD) Guidelines for Multinational Enterprises and has established a National Contact Point to field concerns about any companies not conforming to these Guidelines.  In such an instance, the NCP may facilitate mediation between the parties to resolve any relevant dispute.

The Ministry for Labor, Social Affairs, Health, and Consumer Protection is represented in national and international CSR-relevant associations and supports CSR initiatives while working closely together with the Austrian Standards Institute.

The Austrian export credit agency promotes information on CSR issues, principles and standards, including the OECD Guidelines, on its website.

https://www.oekb.at/en/oekb-group/our-claim/corporate-governance.html 

https://www.bmdw.gv.at/en/Topics/International/OECD-Guidelines-for-Multinational-Enterprises-and-the-Austrian-NCP/Peer-Review-of-the-Austrian-National-Contact-Point.html 

Mario Micelli
Austrian NCP for the OECD Guidelines for Multinational Enterprises
Federal Ministry for Digital and Economic Affairs
E-Mail: NCP-Austria@bmdw.gv.at
Telephone: (+43) 1 711 00-805240 or 805050
Fax: (+43) 1 711 00-8045050
http://www.oecd-leitsaetze.at/ 

9. Corruption

Austria is a member of the Council of Europe’s Group of States against Corruption (GRECO) and also ratified the UN Convention against Corruption (UNCAC) and the OECD Anti-Bribery Convention.  As part of the UNCAC ratification process, Austria has implemented a national anti-corruption strategy.  Central elements of the strategy are promoting transparency in public sector decisions and raising awareness of corruption.  Corruption generally is not a major issue in Austria, which ranked 12th (out of 180 countries) in Transparency International’s latest Corruption Perceptions Index.

Bribery of public officials, their family members and political parties, is prohibited under the Austrian Criminal Code, and investors do not report corruption as significantly affecting business in Austria. However, the 2017 Ibiza scandal in which then-Vice Chancellor Heinz Christian Strache and Freedom Party FPOe chairman Johann Gudenus were filmed discussing the provision of government contracts in exchange for favors and party donations shook the public’s belief in the integrity of the political system.  This was compounded by further revelations in 2019 that the FPOe had promised gambling licenses to Casinos Austria in exchange for placing a party loyalist on the company’s executive board.  When this was made public, it led to a vote of no-confidence for the government, the resignation of the Chancellor and his cabinet, and snap elections.  It also led to public questioning of the process of appointment of candidates to high-ranking positions in state-owned enterprises, but so far there has been no change to the law.

Bribing members of Parliament is considered a criminal offense, and accepting a bribe is a punishable offense with the sentence varying depending on the amount of the bribe. The 2018 Austrian Federal Contracts Act implements EU guidelines prohibiting participating in public procurement contracts if there is a potential conflict of interest and requires measures to be put in place to detect and prevent such conflicts of interest. This required public authorities to set up compliance management systems or amend their existing structures accordingly. Virtually all Austrian companies have internal codes of conduct governing bribery and potential conflicts of interest.

Corruption provisions in Austria’s Criminal Code cover managers of Austrian public enterprises, civil servants, and other officials (with functions in legislation, administration, or justice on behalf of Austria, in a foreign country, or an international organization), representatives of public companies, members of parliament, government members, and mayors.  The term “corruption” includes the following in the Austrian interpretation:  active and passive bribery; illicit intervention; and abuse of office.  Corruption can sometimes include a private manager’s fraud, embezzlement, or breach of trust.

Criminal penalties for corruption include imprisonment ranging from six months to ten years , depending on the severity of the offence.  Jurisdiction for corruption investigations rests with the Austrian Federal Bureau of Anti-Corruption and covers corruption taking place both within and outside the country.  The Lobbying Act of 2013 introduced binding rules of conduct for lobbying.  It requires domestic and foreign organizations to register with the Austrian Ministry of Justice.  Financing of political parties requires disclosure of donations exceeding EUR 2,500 (USD 2,800).  No donor is allowed to give more than EUR 7,500 (USD 8,400) and total donations to one political party may not exceed EUR 750,000 (USD 840,000) in a single year. Foreigners are prohibited from making donations to political parties.  Private companies are subject to the Austrian Act on Corporate Criminal Liability, which makes companies liable for active and passive criminal offences.  Penalties include fines up to EUR 1.8 million (USD 2.0 million).

To date, U.S. companies have not reported any instances of corruption inhibiting FDI.

Resources to Report Corruption

Contacts at government agencies responsible for combating corruption:

Wirtschafts- und Korruptionsstaatsanwaltschaft  (Central Public Prosecution for Business Offenses and Corruption)
Dampfschiffstraße 4
1030 Vienna, Austria
Phone:  +43-(0)1-52 1 52 0
E-Mail: wksta.leitung@justiz.gv.at

BAK – Bundesamt zur Korruptionsprävention und Korruptionsbekämpfung  (Federal Agency for Preventing and Fighting Corruption)
Ministry of the Interior
Herrengasse 7
1010 Vienna, Austria
Phone:   +43-(0)1-531 26 – 6800
E-Mail: BMI-III-BAK-SPOC@bak.gv.at

Contact at “watchdog” organization:

Transparency International – Austrian Chapter
Berggasse 7
1090 Vienna, Austria
Phone:  +43-(0)1-960 760
E-Mail: office@ti-austria.at

10. Political and Security Environment

There have been no incidents of politically motivated damage to foreign businesses.  Civil disturbances are rare and the overall security environment in the country is considered to be safe.

11. Labor Policies and Practices

Austria has a well-educated and productive labor force of  4.1 million, of whom 3.6 million are employees and 500,000 are self-employed or farmers.  In line with EU regulations, the free movement of labor from all member states is allowed, except for Croatia, which joined the EU in July 2013 and is subject to a transition period until June 30, 2020.

The COVID-19 crisis has led to a spike in unemployment. The Economic Research Institute (WIFO) forecasts an unemployment rate of 5.5% by the end of 2020 (compared to 4.5% in 2019) and a gradual recovery in 2021.  Foreigners account for almost one-fifth of Austria’s labor force; around 800,000 foreign workers are employed in Austria.  Migrant workers come largely from the CEE region, but there are also many workers who arrived during the Syrian refugee crisis who have entered the labor market.  Migrant workers often occupy lower-paying jobs and make up a large percentage of workers in the tourism and healthcare sectors.

Youth unemployment is not a major problem. Austria has a successful dual-education apprenticeship system that combines on-the-job training with classroom instruction in vocational schools.  It includes guaranteed placement by the Public Employment Service for those 15-24 year-olds who cannot find an apprenticeship.  Austria has a well-balanced labor market but, like many of its neighbors, suffers from a shortage of skilled IT personnel, particularly in the banking and financial sector.

Social insurance is compulsory in Austria and is comprised of health insurance, old-age pension insurance, unemployment insurance, and accident insurance.  Employers and employees contribute a percentage of total monthly earnings to a compulsory social insurance fund.  Austrian laws closely regulate terms of employment, including working hours, minimum vacation time, holidays, maternity leave, statutory separation notice, severance pay, dismissal, and an option for part-time work for parents with children under the age of seven.  Problematic areas include increased deficits in the pension and health insurance systems, the shortage of healthcare personnel to care for the increasing number of elderly, and escalating costs for retirement and long-term care.  Additionally, the closure of borders due to the COVID-19 crisis has led to an acute shortage of personnel in the home healthcare sector, most of whom are from Eastern Europe. Due to its generous social welfare system, Austria has a high rate of employer non-wage labor costs, amounting to approximately 30% of gross wages. Labor laws are commonly adhered to and strictly enforced.

Labor-management relations are relatively harmonious in Austria, which traditionally enjoys a low incidence of industrial unrest. Strikes are uncommon with only two notable incidents over the past decade (2011, 2018).  Additionally, all employees are automatically members of the Austrian Labor Chamber.

Collective bargaining revolves mainly around wages and fringe benefits.  Approximately 90 percent of the labor force works under a collective bargaining agreement.  In 2017, Austria implemented a national minimum wage of EUR 1,500 (approx. USD 1,700) per month, with monthly wages paid 14 times per year.  This equates to an hourly wage of EUR 10.09 (approx. USD 11.50), placing Austria in the upper tier among European countries with a minimum wage, ahead of France, Germany and the UK.

Austrian law stipulates a 40-hour workweek, but collective bargaining agreements also allow for a workweek of 38 or 38.5 hours per week.  Firms may increase the maximum regular hours from 40 to 60 per week in special cases, with no more than 12 hours in a single day.  Responsibility for agreements on flextime or reduced workweeks is at the company level.  Overtime is paid at an additional 50 percent of the employee’s salary and, in some cases, such as work on public holidays, 100 percent.  Austrian employees are generally entitled to five weeks of paid vacation (and an additional week after 25 years in the workforce); the rate of absence due to illness/injury averages 13 workdays annually.

12. U.S. International Development Finance Corporation (DFC) and Other Investment Insurance Programs

DFC programs are not available for Austria.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source* USG or international statistical source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount  
Host Country Gross Domestic Product (GDP) ($M USD) 2019 $446,345 2018 $455,286 https://data.worldbank.org/country/
austria?view=chart
 
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($B USD, stock positions) 2019 $11.81 2018 $8.58 BEA data available at
https://www.bea.gov/international/
direct-investment-and-multinational-
enterprises-comprehensive-data
 
Host country’s FDI in the United States ($B USD, stock positions) 2019 $14.02 2018 $12.64 BEA data available at
https://www.bea.gov/international/
direct-investment-and-multinational-
enterprises-comprehensive-data
 
Total inbound stock of FDI as % host GDP 2019 $45.9 2018 45.7% UNCTAD data available at
https://unctad.org/en/Pages/DIAE/
World%20Investment%20Report/
Country-Fact-Sheets.aspx
 
  

* Source for Host Country Data:
*Statistics Austria (GDP) https://www.statistik.at/web_de/statistiken/wirtschaft/volkswirtschaftliche_gesamtrechnungen/index.html 
*Austrian National Bank (Investments) https://www.oenb.at/en/Statistics/Standardized-Tables/external-sector/foreign-direct-investment.html 

Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward 246,083 100% Total Outward 280,254 100%
Germany 58,170 24% Germany 34,852 12%
Netherlands 32,269 13% Netherlands 33,556 12%
Russia 26,508 11% Luxembourg 15,546 6%
Luxembourg 22,447 9% Country #4 14,773 5%
United Arab Emirates 11,884 5% Country #5 13,458 5%
“0” reflects amounts rounded to +/- USD 500,000.

Austria’s inward investment figures show significant lower numbers for the Netherlands and Luxembourg. Special Purpose Entities (SPEs) may be used to avoid corporate taxes.

 Table 4: Sources of Portfolio Investment
Portfolio Investment Assets
Top Five Partners (Millions, current US Dollars)
Total Equity Securities Total Debt Securities
All Countries 358,953 100% All Countries 147,308 100% All Countries 211,644 100%
Luxembourg 61,627 17% Luxembourg 52,919 36% Germany 25,594 12%
Germany 53,733 15% Germany 28,139 19% France 23,991 11%
United States 33,260 9% Ireland 16,270 11% United States 17,167 8%
France 30,787 9% United States 16,094 11% Netherlands 15,679 7%
Ireland 21,851 6% France 6,797 5% Spain 15,172 7%

14. Contact for More Information

Alexander Schratt
Economic Specialist
U.S. Embassy Vienna, Vienna 1090, Boltzmanngasse 16
+43 1 31339-2206
schrattax@state.gov

Belgium

Executive Summary

The COVID-19 pandemic negatively impacted the Belgian economy in 2020. The National Bank of Belgium has estimated that real GDP could contract by as much as 8% in 2020, and the impact on public finances could lead to a deficit of at least 7.5% of GDP, withthe national debt to increase to around 115% of GDP by the end of 2020. Belgium will rely on European Union financial support mechanisms and interventions by its regional governments to pull itself out of the economic crisis created by the global health pandemic.

Belgium holds a unique position as a logistical hub and gateway to Europe, which will be of critical importance to jump-start the economy. Since June 2015, the Belgian government has undertaken a series of measures to reduce the tax burden on labor and to increase Belgium’s economic competitiveness and attractiveness to foreign investment. A July 2017 decision to lower the corporate tax rate from 35 to 25 percent further improved the investment climate. Post-pandemic measures to attract investment are under review with national and regional authorities.

In January 2016, the European Commission ruled that Belgium had to reclaim more than USD 900 million from companies that had benefitted from “excess profit” rulings. The scheme had reduced the corporate tax base of the companies by between 50% and 90% to discount for excess profits that allegedly resulted from being part of a multinational group. However, in 2019 the EU General Court decided that the excess profit ruling was not a State-aid scheme. The Commission has appealed the judgment to the European Court of Justice; these proceedings are ongoing.

Belgium boasts an open market well connected to the major economies of the world. As a logistical gateway to Europe, host to major EU institutions, and a central location closely tied to the major European economies, Belgium is an attractive market and location for U.S. investors. Belgium is a highly developed, long-time economic partner of the United States that benefits from an extremely well-educated workforce, world-renowned research centers, and the infrastructure to support a broad range of economic activities. Brexit and pandemic recovery create uncertainties and it is difficult to predict what the impacts will be on the Belgian economy.

Belgium has a dynamic economy and attracts significant levels of investment in chemicals, petrochemicals, plastic and composites; environmental technologies; food processing and packaging; health technologies; information and communication; and textiles, apparel and sporting goods, among other sectors.

To fully realize Belgium’s employment potential, it will be critical to address the fragmentation of the labor market. Jobs growth was accelerating until the COVID-19 pandemic, driven by the cyclical recovery and the positive impact of past reforms. Large regional disparities in unemployment rates persist, and there is a significant skills mismatch in several key sectors. Temporary unemployment skyrocketed to 1.26 million workers in April, 2020, but it is uncertain how the pandemic will impact overall unemployment in 2020.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2019 17 of 180 http://www.transparency.org/
research/cpi/overview
World Bank’s Doing Business Report 2020 46 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2019 23 of 129 https://www.globalinnovationindex.org/
analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2018 $64,051 https://apps.bea.gov/international/factsheet/
factsheet.cfm?Area=302&UUID=c2df3295-91fa-4db0-9759-f145ca5c6e83
World Bank GNI per capita 2018 $45,910 http://data.worldbank.org/
indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Belgium has an open economy that is highly dependent on international trade. Since WWII, making Belgium attractive to foreign investors has been the cornerstone of successive Belgian governments’ foreign and commercial policy. Competence over policies that weigh on the attractiveness of Belgium as a destination for foreign direct investment (FDI) lie predominantly with the federal government, which is responsible for domestic competition policy, wage setting policies, labor law and most of the energy policy. Attracting FDI is, however, a responsibility of Belgium’s three regional governments. Flanders Investment and Trade (FIT), Wallonia Foreign Trade and Investment Agency (AWEX) and Brussels Invest and Export (BIE) are the three investment promotion agencies that are responsible for attracting FDI to Belgium. One of their most visible activities is the organization of the Royal Trade Missions, which are led by Princess Astrid, as well as the economic part of the state visits by King Philippe. Neither the federal government, nor the regional governments currently maintain an formal dialogue with investors.

There are no laws in place that discriminate against foreign investors. Belgian authorities are working on a national security investment screening mechanism, but due to Belgian institutional challenges, it will likely not be finalized until October 2020, the deadline set by the EU for such national security regulation to be fully implemented in all EU member states. In practice, this legislation will allow the European Commission to issue opinions when an investment poses a threat to the security or public order of more than one member state. Furthermore, the regulation sets certain requirements for member states that wish to maintain or adopt a screening mechanism at the national level. Member states will keep the last word on whether or not a specific investment should or should not be allowed in their territory.

Limits on Foreign Control and Right to Private Ownership and Establishment

There are currently no limits on foreign ownership or control in Belgium and there are no distinctions between Belgian and foreign companies when establishing or owning a business, or setting up a remunerative activity. The forthcoming investment screening mechanism may establish some limits based on national security.

Other Investment Policy Reviews

In July 2019 the OECD published an in-depth productivity review of Belgium: https://www.oecd.org/belgium/in-depth-productivity-review-of-belgium-88aefcd5-en.htm 

https://www.oecd.org/belgium/in-depth-productivity-review-of-belgium-88aefcd5-en.htm  Belgium was included in the WTO Trade Policy Review of the European Union which took place February 18-20, 2020: https://www.wto.org/english/tratop_e/tpr_e/tp495_e.htm 

Belgium was included in the WTO Trade Policy Review of the European Union which took place February 18-20, 2020: https://www.wto.org/english/tratop_e/tpr_e/tp495_e.htm 

Business Facilitation

In order to set up a business in Belgium, one must:

1. Deposit at least 20 % of the initial capital with a Belgian credit institution and obtain a standard certification confirming that the amount is held in a blocked capital account;

2. Deposit a financial plan with a notary, sign the deed of incorporation and the by-laws in the presence of a notary, who authenticates the documents and registers the deed of incorporation. The authentication act must be drawn up in either French, Dutch or German (Belgium’s three official languages);

3. Register with one of the Registers of legal entities, VAT and social security at a centralized company docket and obtain a company number.

In most cases, the business registration process can be completed within one week. https://www.business.belgium.be/en/setting_up_your_business

Based on the number of employees, the projected annual turnover and the shareholder class, a company will qualify as a small or medium-sized enterprise (SME) according to the meaning of the Promotion of Independent Enterprise Act of February 10, 1998. For a small or medium-sized enterprise, registration will only be possible once a certificate of competence has been obtained. The person in charge of the daily management of the company must prove his or her knowledge of business management, with diplomas and/or practical experience. In the Global Enterprise Register, Belgium currently scores 7 out of 10 for ease of setting up a limited liability company.

Business facilitation agencies provide for equitable treatment of women and under-represented minorities in the economy.

A company is expected to allow trade union delegations when employing 20 or more full-time equivalents (FTEs).

The three Belgian regions each have their own investment promotion agency, whose services are available to all foreign investors.

Outward Investment

Belgium does not actively promote outward investment. There are no restrictions for domestic investors to invest in certain countries, other than those that fall under UN or EU sanction regimes.

3. Legal Regime

Transparency of the Regulatory System

The Belgian government has adopted a generally transparent competition policy. The government has implemented tax, labor, health, safety, and other laws and policies to avoid distortions or impediments to the efficient mobilization and allocation of investment, comparable to those in other EU member states. Draft bills are never made available for public comment, but have to go through an independent court for vetting and consistency. Belgium publishes all its relevant legislation and administrative guidelines in an official Gazette, called Le Moniteur Belge (www.moniteur.be ).

Foreign and domestic investors in some sectors face stringent regulations designed to protect small- and medium-sized enterprises. Recognizing the need to streamline administrative procedures in many areas, in 2015 the federal government set up a special task force to simplify official procedures. It also agreed to streamline laws regarding the telecommunications sector into one comprehensive volume after new entrants in this sector had complained about a lack of transparency. Additionally the government strengthened its Competition Policy Authority with a number of academic experts and additional resources. Traditionally, scientific studies or quantitative analysis conducted on the impact of regulations are made publicly available for comment. However, not all stakeholder comments received by regulators are made public.

Accounting standards are regulated by the Belgian law of January 30, 2001, and balance sheet and profit and loss statements are in line with international accounting norms. Cash flow positions and reporting changes in non-borrowed capital formation are not required. However, contrary to IAS/IFRS standards, Belgian accounting rules do require an extensive annual policy report.

International Regulatory Considerations

Belgium is a founding member of the EU, whose directives and regulations are enforced. On May 25, 2018 Belgium implemented the General Data Protection Regulation (GDPR) (EU) 2016/679, an EU regulation on data protection and privacy for all individuals within the European Union.

Through the European Union, Belgium is a member of the WTO, and notifies all draft technical regulations to the WTO Committee on Technical Barriers to Trade (TBT). Belgium does not maintain any measures that are inconsistent with the Agreement on Trade-Related Investment Measures (TRIMs) obligations.

Legal System and Judicial Independence

Belgium’s (civil) legal system is independent of the government and is a means for resolving commercial disputes or protecting property rights. Belgium has a wide-ranging codified law system since 1830. There are specialized commercial courts which apply the existing commercial and contractual laws. As in many countries, the Belgian courts labor under a growing caseload and ongoing budget cuts causing backlogs and delays. There are several levels of appeal.

Laws and Regulations on Foreign Direct Investment

Partly owing to the fact that the Belgian Federal Government has been in caretaker status since December 2018, no significant legal or regulatory changes that might affect the business environment have occurred in the past two years.

Payments and transfers within Belgium and with foreign countries require no prior authorization. Transactions may be executed in euros as well as in other currencies.

Belgium has no debt-to-equity requirements. Dividends may be remitted freely except in cases in which distribution would reduce net assets to less than paid-up capital. No further withholding tax or other tax is due on repatriation of the original investment or on the profits of a branch, either during active operations or upon the closing of the branch.

There are three different regional Investment Authorities:

Flanders: www.flandersinvestmentandtrade.com

Wallonia; www.awex.be

Brussels: https://be.brussels/brussels 

Competition and Anti-Trust Laws

The contact address for competition-related concerns:

Federal Competition Authority
City Atrium, 6th floor
Vooruitgangsstraat 50
1210 Brussels
tel: +32 2 277 5272
fax: +32 2 277 5323
email: info@bma-abc.be

EU member states are responsible for competition and anti-trust regulations if there are cross-border dimensions. If cross-border effects are present, EU law applies and European institutions are competent.

There was no significant case(s) involving foreign investment.

Expropriation and Compensation

There are no outstanding expropriation or nationalization cases in Belgium with U.S. investors. There is no pattern of discrimination against foreign investment in Belgium.

When the Belgian government uses its eminent domain powers to acquire property compulsorily for a public purpose, current market value is paid to the property owners. Recourse to the courts is available if necessary. The only expropriations that occurred during the last decade were related to infrastructure projects such as port expansions, roads, and railroads.

Dispute Settlement

ICSID Convention and New York Convention

Belgium is a member of the International Centre for the Settlement of Investment Disputes (ICSID) and regularly includes provision for ICSID arbitration in investment agreements.

Investor-State Dispute Settlement

The government accepts binding international arbitration of disputes between foreign investors and the state. There have been no public investment disputes involving a U.S. citizen within the past 10 years. Local courts are expected to enforce foreign arbitral awards issued against the government. To date, there has been no evidence of extrajudicial action against foreign investors.

International Commercial Arbitration and Foreign Courts

Alternative Dispute Resolution is not mandatory by law and is therefore not commonly used in disputes, except for matters where the determination by an expert is sought, whether appointed by the parties in agreement or in accordance with a contractual clause or appointed by the court in the context of dispute resolution.

Belgium has no domestic arbitration bodies. Local courts recognize and enforce foreign arbitral awards. Judgments of foreign courts are recognized and enforceable under the local courts. There are no reports or complaints targeting Court proceedings involving State Owned Enterprises (SOEs) or alleged favoritism for them.

Bankruptcy Regulations

Belgian bankruptcy law is governed by the Bankruptcy Act of 1997 and is under the jurisdiction of the commercial courts. The commercial court appoints a judge-auditor to preside over the bankruptcy proceeding and whose primary task is to supervise the management and liquidation of the bankrupt estate, in particular with respect to the claims of the employees. Belgian bankruptcy law recognizes several classes of preferred or secured creditors. A person who has been declared bankrupt may subsequently start a new business unless the person is found guilty of certain criminal offences that are directly related to the bankruptcy. The Business Continuity Act of 2009 provides the possibility for companies in financial difficulty to enter into a judicial reorganization. These proceedings are to some extent similar to Chapter 11 as the aim is to facilitate business recovery. In the World Bank’s 2020 Doing Business Index, Belgium ranks number 9 (out of 190) for the ease of resolving insolvency.

4. Industrial Policies

Investment Incentives

Since the law of August 1980 on regional devolution in Belgium, investment incentives and subsidies have been the responsibility of Belgian’s three regions: Brussels, Flanders, and Wallonia. Nonetheless, most tax measures remain under the control of the federal government as do the parameters (social security, wage agreements) that govern general salary and benefit levels. In general, all regional and national incentives are available to foreign and domestic investors alike. The government does not have a practice of issuing guarantees or jointly financing foreign direct investment projects.

Belgian investment incentive programs at all levels of government are limited by EU regulations and are normally kept in line with those of the other EU member states. The European Commission has tended to discourage certain investment incentives in the belief that they distort the single market, impair structural change, and threaten EU convergence, as well as social and economic cohesion. In January 2016, the European Commission ordered Belgium to reclaim up to USD 900 million in tax breaks from 36 companies (12 of whom are U.S. companies) going as far back as 2004. The Belgian Government had given these breaks to companies through a series of one-off fiscal rulings. The scheme had reduced the corporate tax base of the companies by between 50% and 90% to discount for excess profits that allegedly resulted from being part of a multinational group. However, in a February 14, 2019 ruling, the EU General Court decided that the excess profit ruling was not a State-aid scheme. Observers note that the ruling is based on a procedural defect from the European Commission, and highlight that the General Court did not per se validate the excess profit ruling. Belgium legally challenged the EC decision and won, but the EC has appealed the ruling.

In their investment policies, the regional governments emphasize innovation promotion, research and development, energy savings, environmental protection, exports, and most of all, employment. The three regional agencies have staff specializing on specific regions of the world, including the United States, and have representation offices in different countries. In addition, the Finance Ministry established a foreign investment tax unit in 2000 to provide assistance and to make the tax administration more “user friendly” to foreign investors.

It is permitted for companies established in Belgium, foreign or domestic, to deduct from their taxable profits a percentage of their adjusted net assets linked to the rate of the Belgian long-term state bond. This permits companies to deduct the “notional” interest rate that would have been paid on their locally invested capital had it been borrowed at a rate of interest equal to the current rate the Belgian government pays on its 10-year bonds. This amount is deducted from profits, thus lowering nominal Belgian corporate taxes. Even though this system was made slightly less attractive in the recent past, it remains an important tool to stimulate investment in Belgium. More information about this system can be requested at:

More information about this system can be requested at:

Federal Public Service Finance –
Foreign Investment Cell
Parliament Corner, Wetstraat 24 B-1000 Brussel, België
Tel: 02 579 38 66 –
Fax: +32 257 951 12
e-mail: taxinvest@minfin.fed.be

Web: http://taxinvest.belgium.be 

Foreign Trade Zones/Free Ports/Trade Facilitation

There are no foreign trade zones or free ports as such in Belgium. However, the country utilizes the concept of customs warehouses. A customs warehouse is approved by the customs authorities where imported goods may be stored without payment of customs duties and VAT. Only non-EU goods can be placed under a customs warehouse regime. In principle, non-EU goods of any kind may be admitted, regardless of their nature, quantity, and country of origin or destination. Individuals and companies wishing to operate a customs warehouse must be established in the EU and obtain authorization from the customs authorities. Authorization may be obtained by filing a written request and by demonstrating an economic need for the warehouse.

Performance and Data Localization Requirements

Performance requirements in Belgium usually relate to the number of jobs created. There are no national requirement rules for senior management or board of directors. There are no known cases where export targets or local purchase requirements were imposed, with the exception of military offset programs, which were reintroduced under Prime Minister Verhofstadt in 2006. While the government reserves the right to reclaim incentives if the investor fails to meet his employment commitments, enforcement is rare. However, in 2012, with the announced closure of an automotive plant in Flanders, the Flanders regional government successfully reclaimed training subsidies that had been provided to the company.

There is currently no requirement for foreign IT providers to share source code and/or provide access to surveillance agencies. At this time, there is no forced localization, but the European Parliament is currently considering legislative steps in that direction.

5. Protection of Property Rights

Real Property

Property rights in Belgium are well protected by law, and the courts are independent and considered effective in enforcing property rights. Mortgages and liens exist through a reliable recording system operated by the Belgian notaries.

However, on the World Bank’s 2020 ranking on the ease for registering property, Belgium ranks only 139th out of a total of 190 countries.

Intellectual Property Rights

Belgium generally meets very high standards for the protection of intellectual property rights (IPR). The European Union (EU) has issued a number of directives to promote the protection and enforcement of IPR, which EU Member States are required to implement. National laws that do no conflict with those of the EU also apply. Belgium is a member of the World Trade Organization (WTO) and so party to the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). Belgium is also a member of the World Intellectual Property Organization (WIPO) and party to many of its treaties, including the Berne Convention, the Paris Convention, the WIPO Copyright Treaty, and the WIPO Performances and Phonograms Treaty.

IPR is administered by the Belgian Office of Intellectual Property (OPRI), which is part of the Directorate-General for Economic Regulation in the Ministry for Economic Affairs: https://economie.fgov.be/en/themes/intellectual-property/institutions-and-actors/belgian-office-intellectual.  This office manages and provides Belgian IPR titles, oversees public awareness campaigns, drafts legislation, and advises Belgian authorities with regard to national and international issues. The Belgian Ministry of Justice is responsible for enforcement of IPR. Belgium experiences a rate of commercial and digital infringement – particularly internet music piracy and illegal copying of software – similar to most EU Member States.

Belgium is not included on USTR’s Special 301 Report. For additional information about treaty obligations and points of contact at local IP offices, please see the WIPO’s country profiles at http://www.wipo.int/directory/en/ .

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

6. Financial Sector

Capital Markets and Portfolio Investment

Belgium has policies in place to facilitate the free flow of financial resources. Credit is allocated at market rates and is available to foreign and domestic investors without discrimination. Belgium is fully served by the international banking community and is implementing all relevant EU financial directives. At the same time, in 2020 Belgium ranks 67th out of 190 for “getting credit” on the World Bank’s “Doing Business” rankings, and in the bottom quintile among OECD high income countries.

Bruges established the world’s first stock market almost 600 years ago, and the Belgian bourse is well-established today. On Euronext, a company may increase its capital either by capitalizing reserves or by issuing new shares. An increase in capital requires a legal registration procedure, and new shares may be offered either to the public or to existing shareholders. A public notice is not required if the offer is to existing shareholders, who may subscribe to the new shares directly. An issue of bonds to the public is subject to the same requirements as a public issue of shares: the company’s capital must be entirely paid up, and existing shareholders must be given preferential subscription rights. Details on the shareholders of the Bel20 (benchmark stock market index of Euronext Brussels) can be found on http://www.gresea.be/Qui-sont-les-actionnaires-du-BEL-20 .

In 2016, the Belgian government passed legislation to improve entrepreneurial financing through crowdfunding and more flexible capital venture rules.

Money and Banking System

Because the Belgian economy is directed toward international trade, more than half of its banking activities involve foreign countries. Belgium’s major banks are represented in the financial and commercial centers of dozens of countries by subsidiaries, branch offices, and representative offices. The country does have a central bank, the National Bank of Belgium (NBB), whose governor is also a member of the Governing Council of the European Central Bank (ECB). Being a Eurozone member state, the NBB is part of the Euro system, meaning that it has transferred the sovereignty over monetary policy to the ECB.

Belgium is one of the countries with the highest number of banks per capita in the world. The banking system is considered sound but was hard hit by the financial crisis that began in the fall of 2008, when federal and regional governments had to step in with lending and guarantees for the three largest banks. Following a review of the 2008 financial crisis, the Belgian government decided in 2012 to shift the authority of bank supervision from the Financial Market Supervision Authority (FMSA) to the NBB. In 2017, supervision of systemically important Belgian banks shifted to the ECB. The country has not lost any correspondent banking relationships in the past three years, nor are there any correspondent banking relationships currently in jeopardy.

The developments since September 2008 have also resulted in a major de-risking of the Belgian banks’ balance sheets, on the back of a rising share of exposure to the public sector – albeit more concentrated on Belgium – and a gradual further expansion of the domestic mortgage loan portfolio. Since the introduction of the Single Supervisory Mechanism (SSM), the vast majority of the Belgian banking sector’s assets are held by banks that come under SSM supervision, including the “significant institutions” KBC Bank, Belfius Bank, Argenta, AXA Bank Europe, Bank of New-York Mellon and Bank Degroof/Petercam. Other banks governed by Belgian law – such as BNP Paribas Fortis and ING Belgium – are also subject to SSM supervision as they are subsidiaries of non-Belgian “significant institutions.”

In 2018, the banking sector conducted its business in a context of gradual economic recovery and persistently low interest rates. That situation had two effects: it put pressure on the sector’s profitability and caused a credit default problem in some European banks. The National Bank of Belgium designated eight Belgian banks as domestic systemically important institutions, and divided them into two groups according to their level of importance. A 1.5 % capital surcharge was imposed on the first group (BNP Paribas Fortis, KBC Group and Belfius Bank). The second group (AXA Bank Europe, Argenta, Euroclear and The Bank of New York Mellon) is required to hold a supplementary capital buffer of 0.75 %. These surcharges are being phased in over a three-year period.

Under pressure from the European Union, bank debt has decreased in volume overall, from close to 1.6 trillion euros in 2007 to just over 1 trillion euros in 2018, according to the National Bank of Belgium, particularly in the risky derivative markets.

It remains to be seen how the economic fallout of the COVID-19 crisis will impact banks in Belgium.

Belgian banks use modern, automated systems for domestic and international transactions. The Society for Worldwide Interbank Financial Telecommunications (SWIFT) is headquartered in Brussels. Euroclear, a clearing entity for transactions in stocks and other securities, is also located in Brussels.

Opening a bank account in the country is linked to residency status. The U.S. FATCA (Foreign Account Tax Compliance Act) requires Belgian banks to report information on U.S. account holders directly to the Belgian tax authorities, who then release the information to the IRS.

Some Belgian banks have already made great progress with blockchain technology: for instance, one Belgian bank offers a product called MyCar, a digital ecosystem that connects all the players in a car purchase with blockchain technology, creating a single, trusted source of confidence and a centralized workflow that reportedly makes it easier to buy a car.

With regard to cryptocurrencies, the National Bank of Belgium has no central authority overseeing the network.

Unlike most other EU countries, there are no cryptocurrency ATMs, and the NBB has repeatedly warned about potential adverse consequences of the use of cryptocurrencies for financial stability.

Belgium does not have a virtual assets exchange platform, but they intend to transpose the Fifth Anti-Money Laundering (AML) directive in June 2020 when the Financial Services and Markets Authority (FSMA) will be the supervisory authority.

Foreign Exchange and Remittances

Foreign Exchange

Payments and transfers within Belgium and with foreign countries require no prior authorization. Transactions may be executed in euros as well as in other currencies.

Remittance Policies

Dividends may be remitted freely except in cases in which distribution would reduce net assets to less than paid-up capital. No further withholding tax or other tax is due on repatriation of the original investment or on the profits of a branch, either during active operations or upon the closing of the branch.

Sovereign Wealth Funds

Belgium has a sovereign wealth fund (SWF) in the form of the Federal Holding and Investment Company, a quasi-independent entity created in 2004 and now mainly used as a vehicle to manage the banking assets which were taken on board during the 2008 banking crisis. The SWF has a board whose members reflect the composition of the governing coalition and are regularly audited by the “Cour des Comptes” or national auditor. At the end of 2019, its total assets amounted to € 2.35 billion. The majority of the funds are invested domestically. Its role is to allow public entities to recoup their investments and support Belgian banks. The SWF is required by law to publish an annual report and is subject to the same domestic and international accounting standards and rules. The SWF routinely fulfills all legal obligations. However, it is not a member of the International Forum of Sovereign Wealth Funds.

7. State-Owned Enterprises

Belgium has about (around) 80,000 employees working in SOEs, mainly in the railways, telecoms and general utility sectors. There are also several regional-owned enterprises where the regions often have a controlling majority: for a full listing on the companies located in Wallonia, see www.actionnariatwallon.be. There is no equivalent website for companies located in Flanders or in Brussels. Private enterprises are allowed to compete with SOEsunder the same terms and conditions, but since the EU started to liberalize network industries such as electricity, gas, water, telecoms and railways, there have been regular complaints in Belgium about unfair competition from the former state monopolists. Complaints have ranged from lower salaries (railways) to lower VAT rates (gas and electricity) to regulators with a conflict of interest (telecom). Although these complaints have now largely subsided, many of these former monopolies are now market leaders in their sector, due mainly to their ability to charge high access costs to legacy networks that were fully amortized years ago. However, former telecom monopolist Proximus still features on the EU’s list of companies receiving state aid.

Privatization Program

Belgium currently has no scheduled privatizations. There are ongoing discussions about the relative merits of a possible privatization of the state-owned bank Belfius and the government share in telecom operator Proximus, . There are no indications that foreign investors would be excluded from these eventual privatizations.

8. Responsible Business Conduct

The Belgian government encourages both foreign and local enterprises to follow generally accepted Corporate Social Responsibility principles such as the OECD Guidelines for Multinational Enterprises and the United Nations Guiding Principles on Business and Human Rights. The Belgian government also encourages adherence to the OECD Due Diligence guidance for responsible supply chains of minerals from conflict-affected areas.

When it comes to human rights, labor rights, consumer and environmental protection, or laws/regulations which would protect individuals from adverse business impacts, the Belgian government is generally considered to enforce domestic laws in a fair and effective manner.

There is a general awareness of corporate social responsibility among producers and consumers. Boards of directors are encouraged to pay attention to corporate social responsibility in the 2009 Belgian Code on corporate governance. This Code, also known as the ‘Code Buysse II’ was drafted by a group of independent corporate experts and stresses the importance of sound entrepreneurship, good corporate governance, an active board of directors and an advisory council. It deals with unlisted companies and is complementary to existing Belgian legislation. However, adherence to the Code Buysse II is not factored into public procurement decisions. For listed companies, far stricter guidelines apply, which are monitored by the Financial Services and Markets Authority.

drafted by a group of independent corporate experts and stresses the importance of sound entrepreneurship, good corporate governance, an active board of directors and an advisory council. It deals with unlisted companies and is complementary to existing Belgian legislation. However, adherence to the Code Buysse II is not factored into public procurement decisions. For listed companies, far stricter guidelines apply, which are monitored by the Financial Services and Markets Authority.

Belgium is part of the Extractive Industries Transparency Initiative.

9. Corruption

Belgian anti-bribery legislation was revised completely in March 1999, when the competence of Belgian courts was extended to extraterritorial bribery. Bribing foreign officials is a criminal offense in Belgium. Belgium has been a signatory to the OECD Anti-Bribery Convention since 1999, and is a participating member of the OECD Working Group on Bribery. In the Working Group’s Phase 3 review of Belgium in 2013 it called on Belgium to address the lack of resources available for fighting foreign bribery.

Under Article 3 of the Belgian criminal code, jurisdiction is established over offenses committed within Belgian territory by Belgian or foreign nationals. Act 99/808 added Article 10 related to the code of criminal procedure. This Article provides for jurisdiction in certain cases over persons (foreign as well as Belgian nationals) who commit bribery offenses outside the territory of Belgium. Various limitations apply, however. For example, if the bribe recipient exercises a public function in an EU member state, Belgian prosecution may not proceed without the formal consent of the other state.

Under the 1999 Belgian law, the definition of corruption was extended considerably. It is considered passive bribery if a government official or employer requests or accepts a benefit for him or herself or for somebody else in exchange for behaving in a certain way. Active bribery is defined as the proposal of a promise or benefit in exchange for undertaking a specific action. Until 1999, Belgian anti-corruption law did not cover attempts at passive bribery. The most controversial innovation of the 1999 law was the introduction of the concept of “private corruption,” or corruption among private individuals.

Corruption by public officials carries heavy fines and/or imprisonment between 5 (five) and 10 years. Private individuals face similar fines and slightly shorter prison terms (between six months and two years). The current law not only holds individuals accountable, but also the company for which they work. Contrary to earlier legislation, the 1999 law stipulates that payment of bribes to secure or maintain public procurement or administrative authorization through bribery in foreign countries is no longer tax deductible. Recent court cases in Belgium suggest that corruption is most serious in government procurement and public works contracting. American companies have not, however, identified corruption as a barrier to investment.

The responsibility for enforcing corruption laws is shared by the Ministry of Justice through investigating magistrates of the courts, and the Ministry of the Interior through the Belgian federal police, which has jurisdiction in all criminal cases. A special unit, the Central Service for

Combating Corruption, has been created for enforcement purposes but continues to lack the necessary staff. Belgium is also an active participant in the Global Forum on Asset Recovery.

The Belgian Employers Federation encourages its members to establish internal codes of conduct aimed at prohibiting bribery. To date, U.S. firms have not identified corruption as an obstacle to FDI.

UN Anticorruption Convention, OECD Convention on Combatting Bribery

Belgium has signed and ratified the UN Anticorruption Convention of 1998, and is also party to the OECD Convention on Combatting Bribery of Foreign Public Officials in International Business Transactions.

Office of the Federal Prosecutor of Belgium
Transparency International Belgium
Resources to Report Corruption
Wolstraat 66-1 – 1000 Brussels
T 02 55 777 64
F 02 55 777 94

Transparency Belgium
Nijverheidsstraat 10, 1000 Brussels
tel: +32 (0)2 893 2584
email: infoa@transparencybelgium.be

10. Political and Security Environment

Belgium is a peaceful, democratic nation comprised of federal, regional, and municipal political units: the Belgian federal government, the regional governments of Flanders, Wallonia, the Brussels capital region, and 581 communes (municipalities). Political divisions do exist between the Flemish and the Walloons, but they are addressed in democratic institutions and generally resolved through compromise. The Federal Council of Ministers, headed by the prime minister, remains in office as long as it retains the confidence of the lower house (Chamber of Representatives) of the bicameral parliament.

11. Labor Policies and Practices

The Belgian labor force is generally well trained, highly motivated and very productive. Workers have an excellent command of foreign languages, particularly in Flanders. There is a low unemployment rate among skilled workers, such as local managers. Enlargement of the EU in May 2004 and January 2007 facilitated the entry of skilled workers into Belgium from new member states. Non-EU nationals must apply for work permits before they can be employed. Minimum wages vary according to the age and responsibility level of the employee and are adjusted for the cost of living.

Belgian workers are highly unionized and usually enjoy good salaries and benefits. Belgian wage and social security contributions, along with those in Germany, are among the highest in Western Europe. For 2019, Belgium’s harmonized unemployment figure was 5.5 percent, below the EU28 average of 6.2 percent (OECD). High wage levels and pockets of high unemployment coexist, reflecting both strong productivity in new technology sector investments and weak skills of Belgium’s long-term unemployed, whose overall education level is significantly lower than that of the general population. There are also significant differences in regional unemployment levels: 2.9 percent in Flanders, against 7.2 percent in Wallonia and 11.8 percent in Brussels. As a consequence of high wage costs, employers have tended to invest more in capital than in labor. At the same time, a shortage exists of workers with training in computer hardware and software, automation and marketing, increasing wage pressures in these sectors.

Belgian’s comprehensive social security package is composed of five major elements: family allowance, unemployment insurance, retirement, medical benefits and a sick leave program that guarantees salary in event of illness. Currently, average employer payments to the social security system stand at 25 percent of salary while employee contributions comprise 13 percent. In addition, many private companies offer supplemental programs for medical benefits and retirement.

Belgian labor unions, while maintaining a national superstructure, are, in effect, divided along linguistic lines. The two main confederations, the Confederation of Christian Unions and the General Labor Federation of Belgium, maintain close relationships with the Christian Democratic and Socialist political parties, respectively. They exert a strong influence in the country, politically and socially. A national bargaining process covers inter-professional agreements that the trade union confederations negotiate biennially with the government and the employers’ associations. In addition to these negotiations, bargaining on wages and working conditions takes place in the various industrial sectors and at the plant level. About 51 percent of employees from the public service and private sector are labor union members. A cause for concern in labor negotiation tactics is isolated cases where union members in Wallonia have resorted to physically forcing management to stay in their offices until an agreement can be reached.

Firing a Belgian employee can be very expensive. An employee may be dismissed immediately for cause, such as embezzlement or other illegal activity, but when a reduction in force occurs, the procedure is far more complicated. In those instances where the employer and employee cannot agree on the amount of severance pay or indemnity, the case is referred to the labor courts for a decision. To avoid these complications, some firms include a “trial period” (of up to one year) in any employer-employee contract. Belgium is a strict adherent to ILO labor conventions.

Belgium was one of the first countries in the EU to harmonize its legislation with the EU Works Council Directive of December 1994. Its flexible approach to the consultation and information requirements specified in the Directive compares favorably with that of other EU member states.

In 2015, the Belgian government increased the retirement age from the current age of 65 to 66 as of 2027 and 67 as of 2030. Under the 2015 retirement plan, various schemes for early retirement before the age of 65 will be gradually phased out, and unemployment benefits will decrease over time as an incentive for the unemployed to regain employment.

Wage increases are negotiated by sector within the parameters set by automatic wage indexation and the 1996 Law on Competitiveness. The purpose of automatic wage indexation is to establish a bottom margin that protects employees against inflation: for every increase in consumer price index above 2 percent, wages must be increased by (at least) 2 percent as well. The top margin is determined by the competitiveness law, which requires the Central Economic Council (CCE) to study wage projections in neighboring countries and make a recommendation on the maximum margin that will ensure Belgian competitiveness. The CCE is made up of civil society organizations, primarily representatives from employer and employee organizations, and its mission is to promote a socio-economic compromise in Belgium by providing informed recommendations to the government. The CCE’s projected increases in neighboring countries have historically been higher than their real increases, however, and have caused Belgium’s wages to increase more rapidly than its neighbors. Since 2016 however, that wage gap has decreased substantially.

Belgian labor law provides for dispute settlement procedures, with the labor minister appointing an official as mediator between the employers and employee representatives.

12. U.S. International Development Finance Corporation (DFC) and Other Investment Insurance Programs

Belgium, as a high income country, does not qualify for DFC support.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source USG or international statistical source USG or International Source of Data: BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) N/A N/A 2018 $542.8 www.worldbank.org/en/country 
Foreign Direct Investment Host Country Statistical source USG or international statistical source USG or internationalSource of data: BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) N/A N/A 2018 $64,051 BEA data available at https://apps.bea.gov/international/factsheet/
factsheet.cfm?Area=302&UUID=c2df3295-91fa-4db0-9759-f145ca5c6e83
 
Host country’s FDI in the United States ($M USD, stock positions) N/A N/A 2018 $100.2 BEA data available at https://apps.bea.gov/international/factsheet/
factsheet.cfm?Area=302&UUID=c2df3295-91fa-4db0-9759-f145ca5c6e83
 
Total inbound stock of FDI as % host GDP N/A N/A 2018 98% UNCTAD data available at
https://unctad.org/en/Pages/DIAE/
World%20Investment%20Report/
Country-Fact-Sheets.aspx
 
Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data 2018
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward 537,832 100% Total Outward 594,141 100%
France 151,883 28% The Netherlands 199,187 34%
The Netherlands 133,447 25% Luxembourg 152,807 26%
Luxembourg 133,139 25% U.K. 79,235 13%
Switzerland 50,909 9% France 58,275 9%
Japan 18,954 4% Germany 14,902 3%
“0” reflects amounts rounded to +/- USD 500,000.
Table 4: Sources of Portfolio Investment
Portfolio Investment Assets
Top Five Partners (Millions, current US Dollars)
Total Equity Securities Total Debt Securities
Total 54,504,503 100% Total 29,142,053 100% Total 25,362,446 100%
United States 12,463,725 23% 8,861,990 30% 3,601,735 14%
Luxembourg 4,790,703 9% 2,229,956 8% 2,560,747 10%
Japan 4,492,701 8% 1,823,599 6% 2,669,103 11%
Germany 3,609,694 6% 1,304,519 4% 2,305,175 9%
U.K. 3,467,433 6% 2,009,115 7% 1,458,318 6%

14. Contact for More Information

Pieter-Jan Van Steenkiste
Economic Specialist
U.S. Embassy Brussels
Boulevard du Regent 25
1000 Bruxelles
0032-2-811-4000

Canada

Executive Summary

Canada and the United States have one of the largest and most comprehensive investment relationships in the world. U.S. investors are attracted to Canada’s strong economic fundamentals, its proximity to the U.S. market, its highly skilled work force, and abundant resources. As of 2018, the United States had a stock of USD 401 billion of foreign direct investment (FDI) in Canada. U.S. FDI stock in Canada represents 46 percent of Canada’s total investment. Canada’s FDI stock in the United States totaled US$511 billion.

The full impact of COVID-19 on Canada’s economy is yet to be seen. Private sector analysts predict Canada’s GDP will shrink between 1 and 6 percent in 2020. IMF’s April 2020 World Economic Outlook forecasts Canada’s annual GDP in 2020 will contract by 6.2 percent. A majority of small- and medium-sized enterprises are responding to steep declines in sales and mandated closures with layoffs, with more than 44 percent indicating on April 14 they might not survive should business restrictions remain in place until the end of May. Despite a rapidly changing business environment, borders and supply chains are functioning well.

U.S. FDI in Canada is subject to the provisions of the Investment Canada Act (ICA), the World Trade Organization (WTO), and the 1994 North American Free Trade Agreement (NAFTA). Chapter 11 of NAFTA contains provisions such as “national treatment” designed to protect cross-border investors and facilitate the settlement of investment disputes. NAFTA does not exempt U.S. investors from review under the ICA, which has guided foreign investment policy in Canada since its implementation in 1985. The ICA provides for review of large acquisitions by non-Canadian investors and includes the requirement that these investments be of “net benefit” to Canada. The ICA also has provisions for the review of investments on national security grounds. The Canadian government has blocked investments on only a few occasions.

The Canadian government announced April 18, 2020 enhanced scrutiny of certain foreign investments under the ICA, which will apply until the economy recovers from the effects of the COVID-19 pandemic. While all investments will continue to be examined on their own merits, the Government will scrutinize with particular attention foreign direct investments of any value in Canadian businesses that are related to public health or involved in the supply of critical goods and services to Canadians. The Government will also subject all foreign investments by state-owned investors, or investors with close ties to foreign governments, to enhanced scrutiny under the Investment Canada Act.

Canada, the United States, and Mexico signed a modernized and rebalanced NAFTA agreement – the United States-Mexico-Canada Agreement (USMCA) – November 30, 2018 and a protocol of amendment to the USMCA on December 10, 2019. President Trump signed legislation implementing the USMCA on January 29, 2020. The agreement will come into force after the completion of the domestic ratification processes by each individual member of the agreement, likely in 2020. The agreement updates NAFTA’s provisions with respect to investment protection rules and investor-state dispute settlement procedures to better reflect U.S. priorities related to foreign investment. All Parties to the agreement have agreed to treat investors and investments of the other Parties in accordance with the highest international standards, and consistent with U.S. law and practice, while safeguarding each Party’s sovereignty and promoting domestic investment.

Although foreign investment is a key component of Canada’s economic growth contributing 1.9 percent to GDP, restrictions remain in key sectors. Under the Telecommunications Act, Canada maintains a 46.7 percent limit on foreign ownership of voting shares for a Canadian telecom services provider. However, a 2012 amendment exempts foreign telecom carriers with less than 10 percent market share from ownership restrictions in an attempt to increase competition in the sector. In May 2018, Canada eased its foreign ownership restrictions in the aviation sector, which increased foreign ownership limits of Canadian commercial airlines to 49 percent from 25 percent. Investment in cultural industries also carries restrictions, including a provision under the ICA that foreign investment in book publishing and distribution must be compatible with Canada’s national cultural policies and be of “net benefit” to Canada. Canada is open to investment in the financial sector, but barriers remain in retail banking.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2019 12 of 180 http://www.transparency.org/
research/cpi/overview
World Bank’s Doing Business Report 2020 23 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2019 17 of 129 https://www.globalinnovationindex.org/
analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2018 $401,874 http://apps.bea.gov/international/factsheet/
World Bank GNI per capita 2018 $44,940 http://data.worldbank.org/
indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Canada and the United States have one of the largest and most comprehensive investment relationships in the world. U.S. investors are attracted to Canada’s strong economic fundamentals, its proximity to the U.S. market, its highly skilled work force, and abundant resources. As of 2018, the United States had a stock of US$401 billion of foreign direct investment (FDI) in Canada. U.S. FDI stock in Canada represents 46 percent of Canada’s total investment. Canada’s FDI stock in the United States totaled US$511 billion.

Canada, the United States, and Mexico signed a modernized and rebalanced NAFTA agreement – the United States-Mexico-Canada Agreement (USMCA) – on November 30, 2018 and a protocol of amendment to the USMCA on December 10, 2019. President Trump signed legislation implementing the USMCA on January 29, 2020. The agreement will come into force after the completion of the domestic ratification processes by each individual member of the agreement, likely in 2020. The agreement updates NAFTA’s provisions with respect to investment protection rules and investor-state dispute settlement procedures to better reflect U.S. priorities related to foreign investment. All Parties to the agreement have agreed to treat investors and investments of the other Parties in accordance with the highest international standards, and consistent with U.S. law and practice, while safeguarding each Party’s sovereignty and promoting domestic investment.

Invest in Canada is Canada’s investment attraction and promotion agency. It provides information and advice on doing business in Canada, strategic market intelligence on specific industries, site visits, as well as introductions to provincial, territorial, and local investment promotion agencies who can help companies access local opportunities, networks, and programs.

Limits on Foreign Control and Right to Private Ownership and Establishment

U.S. FDI in Canada is subject to the provisions of the Investment Canada Act (ICA), the World Trade Organization (WTO), and the 1994 North American Free Trade Agreement (NAFTA). Chapter 11 of NAFTA contains provisions such as “national treatment” designed to protect cross-border investors and facilitate the settlement of investment disputes. NAFTA does not exempt U.S. investors from review under the ICA, which has guided foreign investment policy in Canada since its implementation in 1985. The ICA provides for review of large acquisitions by non-Canadian investors and includes the requirement that these investments be of “net benefit” to Canada. The ICA also has provisions for the review of investments on national security grounds. The Canadian government has blocked investments on a few occasions.

The Canadian government announced April 18 enhanced scrutiny of certain foreign investments under the ICA, which will apply until the economy recovers from the effects of the COVID-19 pandemic. While all investments will continue to be examined on their own merits, the Government will scrutinize with particular attention foreign direct investments of any value in Canadian businesses that are related to public health or involved in the supply of critical goods and services to Canadians. The Government will also subject all foreign investments by state-owned investors, or investors with close ties to foreign governments, to enhanced scrutiny under the Investment Canada Act.

Although foreign investment is a key component of Canada’s economic growth contributing 1.9 percent to GDP, restrictions remain in key sectors. Under the Telecommunications Act, Canada maintains a 46.7 percent limit on foreign ownership of voting shares for a Canadian telecom services provider. However, a 2012 amendment exempts foreign telecom carriers with less than 10 percent market share from ownership restrictions in an attempt to increase competition in the sector. In May 2018, Canada eased its foreign ownership restrictions in the aviation sector, which increased foreign ownership limits of Canadian commercial airlines to 49 percent from 25 percent. Investment in cultural industries also carries restrictions, including a provision under the ICA that foreign investment in book publishing and distribution must be compatible with Canada’s national cultural policies and be of “net benefit” to Canada. Canada is open to investment in the financial sector, but barriers remain in retail banking.

Other Investment Policy Reviews

The World Trade Organization conducted a trade policy review of Canada in 2019. The report is available at: https://www.wto.org/english/tratop_e/tpr_e/tp489_e.htm .

Business Facilitation

Canada ranks third out of 190 countries in the World Bank’s Doing Business survey on starting a business. The Canadian government has a business registration page available at: https://www.canada.ca/en/services/business/start/register-with-gov.html?it=government/registering-your-business/&it=eng/page/2730/ . Corporations must incorporate either through the federal or provincial government, apply for a federal business number and corporation income tax account from the Canada Revenue Agency, register as an extra-provincial or extra-territorial corporation in all other Canadian jurisdictions where you plan to do business, and apply for any permits and licenses the business may need. In some cases, registration for these accounts is streamlined (a business can receive its business number, tax accounts, and provincial registrations as part of the incorporation process); however, this is not true for all provinces and territories.

Outward Investment

Canada’s trade diversification strategy promotes trade and investment opportunities, primarily through export promotion and negotiation of free trade agreements, which generally have investment chapters.

3. Legal Regime

Transparency of the Regulatory System

The transparency of Canada’s regulatory system is similar to that of the United States. The legal, regulatory, and accounting systems, including those related to debt obligations, are transparent and consistent with international norms. Proposed legislation is subject to parliamentary debate and public hearings, and regulations are issued in draft form for public comment prior to implementation in the Canada Gazette. While federal and/or provincial licenses or permits may be needed to engage in economic activities, regulation of these activities is generally for statistical or tax compliance reasons. Under the United States-Mexico-Canada Agreement (USMCA), parties agreed to make publicly available any written comments they receive, except to the extent necessary to protect confidential information or withhold personal identifying information or inappropriate content.

Canada and the United States announced the creation of the Canada-U.S. Regulatory Cooperation Council (RCC) on February 4, 2011. This regulatory cooperation does not encompass all regulatory activities within all agencies. Rather, the RCC focuses on areas where benefits can be realized by regulated parties, consumers, and/or regulators without sacrificing outcomes such as protecting public health, safety, and the environment. The initial RCC Joint Action Plan set out 29 initiatives where Canada and the United States sought greater regulatory alignment. A Memorandum of Understanding between the Treasury Board of Canada and the U.S. Office of Information and Regulatory Affairs, signed on June 4, 2018, reaffirmed the RCC as a vehicle for regulatory cooperation.

Canada publishes an annual budget and debt management report. According to the Ministry of Finance, the design and implementation of the domestic debt program are guided by the key principles of transparency, regularity, prudence, and liquidity.

International Regulatory Considerations

Canada is not part of a regional economic block and does not incorporate regional standards into its economic system. Through the new United States-Mexico-Canada Agreement (USMCA) the three countries agreed to a new chapter on Good Regulatory Practices that will promote transparency and accountability when developing and implementing regulations. Canada and the United States also work together through the RCC to reduce differences between their regulatory frameworks, making it easier for bilateral trade. Canada, with the United States and Mexico, is a member of the NAFTA. The Canada-EU Comprehensive and Economic Trade Agreement (CETA) also contains a chapter on regulatory cooperation that commits both sides to strengthen regulatory cooperation and facilitate discussions between regulatory authorities in the EU and Canada. The Comprehensive and Progressive Partnership for Trans-Pacific Partnership contains a chapter on regulatory coherence that aims to encourage members of the agreement to adopt widely accepted good regulatory practices, such as reviewing the effectiveness of existing regulatory practices and providing public notice of future regulatory measures.

Canada is a member of the WTO and notifies draft technical regulations to the WTO Committee on Technical Barriers to Trade (TBT). Canada is a signatory to the Trade Facilitation Agreement, which it ratified in December 2016.

Legal System and Judicial Independence

Canada’s legal system is based on English common law, except for Quebec, which follows civil law. Canada has both a federal parliament which makes laws for all of Canada and a legislature in each of the provinces and territories that deals with laws in their areas. When Parliament or a provincial or territorial legislature passes a statute, it takes the place of common law or precedents dealing with the same subject. The judicial branch of government is independent of the executive branch and the current judicial process is considered procedurally competent, fair, and reliable. The provinces administer justice in their jurisdictions. This includes organizing and maintaining the civil and criminal provincial courts and civil procedures in those courts.

Canada has both written commercial law and contractual law, and specialized commercial and civil courts. Canada’s Commercial Law Directorate provides advisory and litigation services to federal departments and agencies whose mandate includes a commercial component and has legal counsel in Montréal and Ottawa.

Parliament and provincial and territorial legislatures give government organizations the authority to make specific regulations. As of June 1, 2009, all consolidated Acts and regulations on the Justice Laws Website (http://laws-lois.justice.gc.ca/eng/) are “official,” meaning they can be used for evidentiary purposes.

Laws and Regulations on Foreign Direct Investment

Foreign investment policy in Canada has been guided by the Investment Canada Act (ICA) since 1985. The ICA liberalized policy on foreign investment by recognizing that investment is central to economic growth and key to technological advancement. The ICA provides for review of large acquisitions by non-Canadians and imposes a requirement that these investments be of “net benefit” to Canada. The ICA also contains provisions that permit the government to conduct a national security review of virtually any investment or acquisition. For the vast majority of small acquisitions and the establishment of new businesses, foreign investors need only to notify the Canadian government of their investments.

U.S. FDI in Canada is subject to provisions of the ICA, the WTO, and the NAFTA. Chapter 11 of the NAFTA ensures that regulation of U.S. investors in Canada and Canadian investors in the United States results in treatment no different than that extended to domestic investors within each country, i.e., “national treatment.” The concept of national treatment is also a feature of the USMCA. Both governments are free to regulate the ongoing operation of business enterprises in their respective jurisdictions provided that the governments accord national treatment to both U.S. and Canadian investors.

Competition and Anti-Trust Laws

Competition Bureau Canada is a law-enforcement agency that administers and enforces Canadian legislation that regulates competition, including the Competition Act, the Consumer Packaging and Labelling Act, the Textile Labelling Act and the Precious Metals Marking Act. The Competition Tribunal is a specialized tribunal that adjudicates antitrust cases related to competition.

Expropriation and Compensation

Canadian federal and provincial laws recognize both the right of the government to expropriate private property for a public purpose, and the obligation to pay compensation. The federal government has not nationalized any foreign firm since the nationalization of Axis property during World War II. Both the federal and provincial governments have assumed control of private firms, usually financially distressed, after reaching agreement with the former owners.

The USMCA, like NAFTA, requires that expropriation can only be used for a public purpose and must be done in a nondiscriminatory manner, with prompt, adequate, and effective compensation, and in accordance with due process of law.

Dispute Settlement

ICSID Convention and New York Convention

Canada ratified the International Centre for Settlement of Investment Disputes (ICSID) Convention on December 1, 2013 and is a signatory to the 1958 New York Convention, ratified on May 12, 1986. Canada signed the United Nations Convention on Transparency in Treaty-based Investor-State Arbitration (known as the Mauritius Convention on Transparency) in March 2015.

Investor-State Dispute Settlement

Canada accepts binding arbitration of investment disputes to which it is a party only when it has specifically agreed to do so through a bilateral or multilateral agreement, such as a Foreign Investment Protection Agreement. The provisions of Chapter 11 of the NAFTA guide the resolution of investment disputes between NAFTA persons and NAFTA member governments. The NAFTA encourages parties to settle disputes through consultation or negotiation. It also establishes special arbitration procedures for investment disputes separate from the NAFTA’s general dispute settlement provisions. Under the NAFTA, a narrow range of disputes dealing with government monopolies and expropriation between an investor from a NAFTA country and a NAFTA government may be settled, at the investor’s option, by binding international arbitration. An investor who seeks binding arbitration in a dispute with a NAFTA party gives up his right to seek redress through the court system of the NAFTA party, except for proceedings seeking nonmonetary damages. Canada does not have a history of extrajudicial action against foreign investors.

Over the history of the NAFTA, more than 25 disputes have been filed against the Government of Canada. For more information about cases filed under NAFTA Chapter 11, please visit https://www.international.gc.ca/trade-agreements-accords-commerciaux/topics-domaines/disp-diff/gov.aspx?lang=eng 

Upon entry into force of the USMCA, Investor State Dispute Settlement procedures that existed under NAFTA for the United States and Canada will be eliminated over a three-year period. Canadian and U.S. investors that believe their host country has violated USMCA will rely on the domestic courts and other dispute resolution mechanisms.

International Commercial Arbitration and Foreign Courts

Provinces primarily regulate arbitration within Canada. With the exception of Quebec, each province has legislation adopting the UNCITRAL Model Law. The Quebec Civil Code and Code of Civil Procedure are consistent with the UNCITRAL Model Law. The Canadian Supreme Court has ruled that arbitration agreements must be broadly interpreted and enforced. Canadian courts respect arbitral proceedings and have been willing to lend their enforcement powers to facilitate the effective conduct of arbitration proceedings, requiring witnesses to attend and give evidence and produce documents and other evidence to the arbitral tribunal.

Bankruptcy Regulations

Bankruptcy in Canada is governed by the Bankruptcy and Insolvency Act (BIA) and is not criminalized. Creditors must deliver claims to the trustee and the trustee must examine every proof of claim. The trustee may disallow, in whole or in part, any claim of right to a priority under the BIA. Generally, the test of proving the claim before the trustee in bankruptcy is very low and a claim is proved unless it is too “remote and speculative.” Provision is also made for dealing with cross-border insolvencies and the recognition of foreign proceedings. Canada was ranked number 13 for ease of “resolving insolvency” by the World Bank in 2020. Credit bureaus in Canada include Equifax Canada and TransUnion Canada.

4. Industrial Policies

Investment Incentives

Federal and provincial governments in Canada offer a wide array of investment incentives that municipalities are generally prohibited from offering. The incentives are designed to advance broader policy goals, such as boosting research and development or promoting regional economies. The funds are available to any qualified Canadian or foreign investor who agrees to use the monies for the stated purpose. For example, Export Development Canada can support inbound investment under certain specific conditions (e.g., investment must be export-focused; export contracts must be in hand or companies have a track record; there is a world or regional product mandate for the product to be produced). The government also announced the US$940 million Strategic Innovation Fund in 2017, which provides repayable or non-repayable contributions to firms of all sizes across Canada’s industrial and technology sectors in an effort to grow and expand those industries. One of the explicit goals of the program is to attract new investments to Canada.

The Liberal government invested US$730 million over five years, beginning in 2018, to support five business-led supercluster projects that have the potential to accelerate economic and investment growth in Canada. The superclusters are now operational, and feature projects in digital technologies, food production, advanced manufacturing, artificial intelligence in supply chain management, and ocean industries. There are 450 businesses, 60 post-secondary institutions, and 180 other partners involved in the supercluster projects. Several U.S. firms are participants.

Several provinces offer an array of incentive programs and services aimed at attracting foreign investment that lower corporate taxes and incentivize research and development. The Province of Quebec officially re-launched its “Plan Nord” (Northern Plan) in April 2015, a 20-year sustainable development investment initiative that is intended to harness the economic, mineral, energy, and tourism potential of Quebec’s northern territory. Quebec’s government created the “Société du Plan Nord” (Northern Plan Company) to attract investors and work with local communities to implement the plan. Thus far, Plan Nord has helped finance mining projects in northern Quebec and began building the necessary infrastructure to link remote mines with ports. The provincial government is actively seeking other foreign investors who desire to take advantage of these opportunities.

Provincial incentives tend to be more investor-specific and are conditioned on applying the funds to an investment in the granting province. For example, Ontario’s Jobs and Prosperity Fund provides US$2.5 billion from 2013 to 2023 to enhance productivity, bolster innovation, and grow Ontario’s exports. To qualify, companies must have substantive operations (generally three years) and at least US$7.5 million in eligible project costs. Alberta offers companies a 10 percent refundable provincial tax credit worth up to US$300,000 annually for scientific research and experimental development encouraging research and development in Alberta, as well as Alberta Innovation Vouchers worth US$11,000 to US$37,000 to help small early-stage technology and knowledge-driven businesses in Alberta get their ideas and products to market faster. Newfoundland and Labrador provide vouchers worth 75 percent of eligible project costs up to US$11,000 for R&D, performance testing, field trials, and other projects.

Provincial incentives may also be restricted to firms established in the province or that agree to establish a facility in the province. Government officials at both the federal and provincial levels expect investors who receive investment incentives to use them for the agreed purpose, but no enforcement mechanism exists.

Incentives for investment in cultural industries, at both the federal and provincial level, are generally available only to Canadian-controlled firms. Incentives may take the form of grants, loans, loan guarantees, venture capital, or tax credits. Provincial incentive programs for film production in Canada are available to foreign filmmakers.

Foreign Trade Zones/Free Ports/Trade Facilitation

Under the NAFTA, Canada operates as a free trade zone for products made in the United States. Most U.S. made goods enter Canada duty free.

Performance and Data Localization Requirements

As a general rule, foreign firms establishing themselves in Canada are not subject to local employment or forced localization requirements, although Canada has some requirements on local employment for boards of directors. Ordinarily, at least 25 percent of the directors of a corporation must be resident Canadians. If a corporation has fewer than four directors, however, at least one of them must be a resident Canadian. In addition, corporations operating in sectors subject to ownership restrictions (such as airlines and telecommunications) or corporations in certain cultural sectors (such as book retailing, video, or film distribution) must have a majority of resident Canadian directors.

Data localization is an evolving issue in Canada. Privacy rules in two Canadian provinces, British Columbia and Nova Scotia, mandate that personal information in the custody of a public body must be stored and accessed only in Canada unless one of a few limited exceptions applies. These laws prevent public bodies such as primary and secondary schools, universities, hospitals, government-owned utilities, and public agencies from using non-Canadian hosting services. The United States–Mexico–Canada Agreement (USMCA) will help ensure cross-border data flows between Canada and the United States remain open by prohibiting any member of the agreement from requiring the use or location of computing facilities in a particular jurisdiction as a condition of business.

The Canada Revenue Agency stipulates that tax records must be kept at a filer’s place of business or residence in Canada. Current regulations were written over 30 years ago and do not take into account current technical realities concerning data storage.

5. Protection of Property Rights

Real Property

Foreign investors have full and fair access to Canada’s legal system, with private property rights limited only by the rights of governments to establish monopolies and to expropriate for public purposes. Investors under NAFTA (and USMCA) have mechanisms available for dispute resolution regarding property expropriation by the Government of Canada. The recording system for mortgages and liens is reliable. Canada is ranked 18 out of 190 countries in 2020 in the World Bank’s “Ease of Registering Property” rankings. About 89 percent of Canada’s land area is Crown Land owned by federal (41 percent) or provincial (48 percent) governments; the remaining 11 percent is privately owned.

British Columbia began a 15 percent tax on foreign buyers of residential real estate in the Metro Vancouver area in August 2016. In early 2017, the province announced that foreign buyers with work permits would be exempt from the tax. In 2018, British Columbia increased this tax to 20 percent and expanded its geographical coverage to include several other metro areas, including that of the provincial capital Victoria. In 2018, British Columbia broadened taxation on foreign ownership in Metro Vancouver and enacted a 0.5 percent Speculation and Vacancy Tax, targeting foreign-owned homes left empty. In 2019, the Ministry of Finance increased the tax to 2.0 percent. The tax includes foreign owners and satellite families defined as those who earn a majority of their income outside of Canada. A group of homeowners is challenging the tax in the British Columbia Supreme Court. Canadian citizens and permanent residents pay 0.5 percent per year.

In April 2017, a 15 percent tax was instituted for non-resident buyers of residential property in the Greater Golden Horseshoe Area of Ontario, which includes most of southern Ontario including, but not limited to, such cities such as Toronto, Mississauga, and Hamilton.

A 2014 Supreme Court decision recognized the existence of aboriginal title on land in British Columbia, which has ramifications for aboriginal land claims across Canada. While stopping short of giving aboriginals a veto on projects, the decision gives them increased influence on the economic development of any land with a colorable (potentially valid) aboriginal title claim.

In terms of non-resident access to land, including farmland, Ontario, Newfoundland and Labrador, New Brunswick and Nova Scotia have no restrictions on foreign ownership of land. However, Prince Edward Island, Quebec, Manitoba, Alberta, and Saskatchewan maintain measures aimed at prohibiting or limiting land acquisition by foreigners. The acreage limits vary by province, from as low as five acres in Prince Edward Island to as high as 40 acres in Manitoba. In certain cases, provincial authorities may grant exemptions from these limits, for instance for investment projects. In British Columbia, Crown land cannot be acquired by foreigners, while there are no restrictions on acquisition of other land.

Intellectual Property Rights

Canada took significant steps to improve its intellectual property (IP) provisions by ratifying implementing legislation for the United States-Mexico-Canada Agreement (USMCA) in 2020. It is expected to issue accompanying regulations and Ministerial Statements that further fulfill its commitments under the agreement. Canada’s commitments under the USMCA will address areas where there have been longstanding concerns, including enforcement against counterfeits, inspection of goods in transit, transparency with respect to new geographical indicators, national treatment, copyright term, and patent term extensions for unreasonable patent office delay. Rights holders report that Canadian courts have established meaningful penalties against circumvention devices and services. Canada has also made positive progress in reforming proceedings before the Copyright Board related to tariff-setting procedures for the use of copyrighted works.

Commercial-scale online piracy is a significant issue in Canada where some notorious copyright-infringing websites are hosted or operated. Stream-ripping, the unauthorized converting of a file from a licensed streaming site into an unauthorized copy, is now a dominant method of music piracy, including in Canada, causing substantial economic harm to music creators and undermining legitimate online services. Industry stakeholders are also concerned with uneven application of new notice and notice regulations requiring Internet Service Providers (ISPs) to notify (and address) sites of trademark or copyright infringements. Canada’s ambiguous education-related exemption added to the 2012 copyright law has significantly damaged the market for educational publishers and authors. While Canadian courts have helped clarify this exception, confusion remains and the educational publishing sector reports lost revenue from licensing.

Canada is on the Watch List in USTR’s Special 301 Report to congress.

6. Financial Sector

Capital Markets and Portfolio Investment

Canada’s capital markets are open, accessible, and without onerous regulatory requirements. Foreign investors are able to get credit in the local market. Canada has several securities markets, the largest of which is the Toronto Stock Exchange, and there is sufficient liquidity in the markets to enter and exit sizeable positions. The World Economic Forum ranked Canada’s banking system as the second “most sound” in the world in 2018. Among other factors, Canadian banking stability is linked to high capitalization rates that are well above the norms set by the Bank for International Settlements. The Canadian government and Bank of Canada do not place restrictions on payments and transfers for current international transactions.

Money and Banking System

The Canadian banking industry is dominated by six major domestic banks, but includes a total of 36 domestic banks, 18 foreign bank subsidiaries, 28 full-service foreign bank branches and four foreign bank lending branches operating in Canada. The six largest banks manage close to US$4 trillion in assets. Many large international banks have a presence in Canada through a subsidiary, representative office, or branch of the parent bank. Ninety-nine percent of Canadians have an account with a financial institution.

Foreign financial firms interested in investing submit their applications to the Office of the Superintendent of Financial Institutions (OSFI) for approval by the Finance Minister. U.S. firms are present in all three sectors, but play secondary roles. U.S. and other foreign banks have long been able to establish banking subsidiaries in Canada, but no U.S. banks have retail banking operations in Canada. Several U.S. financial institutions have established branches in Canada, chiefly targeting commercial lending, investment banking, and niche markets such as credit card issuance. Foreigners may be able to open bank accounts in Canada with proper identification and would need to visit the financial institution in person.

The Bank of Canada is the nation’s central bank. Its principal role is “to promote the economic and financial welfare of Canada,” as defined in the Bank of Canada Act. The Bank’s four main areas of responsibility are monetary policy, promoting a safe, sound, and efficient financial system, issuing and distributing currency, and being the fiscal agent for Canada.

Foreign Exchange and Remittances

Foreign Exchange

The Canadian dollar is a free floating currency with no restrictions on its transfer or conversion.

Remittance Policies

The Canadian dollar is fully convertible and the central bank does not place time restrictions on remittances.

Sovereign Wealth Funds

Canada does not have a sovereign wealth fund, but the province of Alberta has the Heritage Savings Trust Fund established to manage the province’s share of petroleum royalties. The fund’s net financial assets were US$13.5 billion on December 31, 2019. It is invested in a globally diversified portfolio of public and private equity, fixed income, and real assets. The fund follows the voluntary code of good practices known as the “Santiago Principles” and participates in the IMF-hosted International Working Group of SWFs. Forty-eight percent of the Heritage Fund is currently held in equity investments, eight percent of which are Canadian equities.

7. State-Owned Enterprises

Canada has more than 30 state-owned enterprises (SOEs) at the federal level, with the majority of assets held by three federal crown corporations: Export Development Canada, Farm Credit Canada, and Business Development Bank of Canada. Canada also has more than 90 SOEs at the provincial level that contribute to a variety of sectors including finance; power, electricity and utilities; and transportation. The Treasury Board Secretariat provides an annual report to Parliament regarding the governance and performance of Canada’s federal crown corporations and other corporate interests.

The Canadian government lists SOEs as “Government Business Enterprises” (GBE). A list is available at http://www.osfi-bsif.gc.ca/Eng/fi-if/rtn-rlv/fr-rf/dti-id/Pages/GBE.aspx and includes both federal and provincial enterprises.

There are no restrictions on the ability of private enterprises to compete with SOEs. The functions of most Canadian crown corporations have limited appeal to the private sector. The activities of some SOEs such as VIA Rail and Canada Post do overlap with private enterprise. As such, they are subject to the rules of the Competition Act to prevent abuse of dominance and other anti-competitive practices. Foreign investors are also able to challenge SOEs under the NAFTA and WTO.

Privatization Program

Federal and provincial privatizations are considered on a case-by-case basis, and there are no overall limitations with regard to foreign ownership. As an example, the federal Ministry of Transport did not impose any limitations in the 1995 privatization of Canadian National Railway, whose majority shareholders are now U.S. persons.

8. Responsible Business Conduct

Canada encourages Canadian companies to observe the OECD Guidelines for Multinational Enterprises in their operations abroad and provides a National Contact Point for dealing with issues that arise in relation to Canadian companies. Canada defines responsible business conduct as Canadian companies doing business abroad responsibly in an economically, socially, and environmentally sustainable manner. On April 8, 2019, Canada announced the appointment of Sheri Meyerhoffer as Canadian Ombudsperson for Responsible Enterprise. She is mandated to review allegations of human rights abuses arising from the operations of Canadian companies abroad. Canada’s Corporate Social Responsibility strategy, “Doing Business the Canadian Way: A Strategy to Advance Corporate Social Responsibility in Canada’s Extractive Sector Abroad” is available on the Global Affairs Canada website: http://www.international.gc.ca/trade-agreements-accords-commerciaux/topics-domaines/other-autre/csr-strat-rse.aspx?lang=eng.

Despite the increased level of official attention paid to Responsible Business Conduct, the activities of Canadian mining companies abroad remain the subject of some critical attention and have prompted calls for the government to move beyond voluntary measures. Canada is a supporter of the Extractive Industries Transparency Initiative (EITI).

9. Corruption

On an international scale, corruption in Canada is low and similar to that found in the United States. In general, the type of due diligence that would be required in the United States to avoid corrupt practices would be appropriate in Canada. Canada is a party to the UN Convention Against Corruption. Canada is a party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, as well as the Inter-American Convention Against Corruption.

Canada’s Criminal Code prohibits corruption, bribery, influence peddling, extortion, and abuse of office. The 1998 Corruption of Foreign Public Officials Act prohibits individuals and businesses from bribing foreign government officials to obtain influence and prohibits destruction or falsification of books and records to conceal corrupt payments. The law has extended jurisdiction that permits Canadian courts to prosecute corruption committed by companies and individuals abroad. Canada’s anti-corruption legislation is vigorously enforced, and companies and officials guilty of violating Canadian law are being effectively investigated, prosecuted, and convicted of corruption-related crimes. In March 2014, Public Works and Government Services Canada (now Public Services and Procurement Canada, or PSPC) revised its Integrity Framework for government procurement to ban companies or their foreign affiliates for 10 years from winning government contracts if they have been convicted of corruption. In August 2015, the Canadian government revised the framework to allow suppliers to apply to have their ineligibility reduced to five years where the causes of conduct are addressed and no longer penalizes a supplier for the actions of an affiliate in which it had no involvement. PSPC has a Code of Conduct for Procurement, which counters conflict-of-interest in awarding contracts. Canadian firms operating abroad must declare whether they or an affiliate are under charge or have been convicted under Canada’s anti-corruption laws during the past five years in order to receive help from the Trade Commissioner Service. U.S. firms have not identified corruption as an obstacle to FDI in Canada.

Resources to Report Corruption

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

Mario Dion
Conflict of Interest and Ethics Commissioner (for appointed and elected officials, House of Commons)
Office of the Conflict of Interest and Ethics Commissioner
Parliament of Canada
66 Slater Street, 22nd Floor
Ottawa, Ontario (Mailing address)

Office of the Conflict of Interest and Ethics Commissioner
Parliament of Canada
Centre Block, P.O. Box 16
Ottawa, Ontario
K1A 0A6

Pierre Legault
Office of the Senate Ethics Officer (for appointed Senators)
Thomas D’Arcy McGee Building
Parliament of Canada
90 Sparks St., Room 526
Ottawa, ON K1P 5B4

10. Political and Security Environment

Political violence occurs in Canada to about the same extent as it does in the United States.

11. Labor Policies and Practices

The federal government and provincial/territorial governments share jurisdiction for labor regulation and standards. Federal employees and those employed in federally-regulated industries, including the railroad, airline, and banking sectors are covered under the federally administered Canada Labor Code. Employees in most other sectors come under provincial labor codes. As the laws vary somewhat from one jurisdiction to another, it is advisable to contact a federal or provincial labor office for specifics, such as minimum wage and benefit requirements.

Analysts note that Canada’s labor story varies significantly by province, with resource-dependent provinces affected more adversely than non-resource dependent provinces as a result of lower oil and other commodity prices. The impact of COVID-19 on the labor force is yet to be fully seen, but analysts have predicted unemployment rates around 10 percent or higher as a result of the pandemic. More than one million Canadians lost their jobs in March 2020 due largely to the outbreak, increasing Canada’s unemployment rate to 7.8 percent from 5.6 percent in February. The Canadian government created an emergency response benefit for workers who lost employment due to COVID-19 as well as wage subsidies and other support for employers.

Canada faces a labor shortage in skilled trades’ professions, such as carpenters, engineers, and electricians. Canada launched several initiatives including the Global Skills Visa, announced in November 2016, to address its skilled labor shortage, including through immigration reform, the inclusion of labor mobility provisions in free trade agreements, including the Canada-EU CETA agreement, and the Temporary Foreign Worker Program (TFWP).

The TFWP is jointly managed by Employment and Social Development Canada (ESDC) and Immigration, Refugees, and Citizenship Canada (IRCC). The International Mobility Program (IMP) primarily includes high skill/high wage professions and is not subject to a labor market impact assessment. The number of temporary foreign workers a business can employ is limited. For more information, see the TFWP website: http://www.cic.gc.ca/english/resources/publications/employers/temp-foreign-worker-program.asp 

Canadian labor unions are independent from the government. Canada has labor dispute mechanisms in place and unions practice collective bargaining. In Canada less than one in three employees belonged to a union or was covered by a collective agreement in 2015, the most recent year for which data is available. In 2015, there were 776 unions in Canada. Eight of those unions – five of which were national and three international – represented 100,000 or more workers each and comprised 45 percent of all unionized workers in Canada (https://www.canada.ca/en/employment-social-development/services/collective-bargaining-data/reports/union-coverage.html). In June 2017, Parliament repealed legislation public service unions had claimed contravened International Labor Organization conventions by limiting the number of persons who could strike.

In 2019, workers for Montreal-based CN rail walked off the job on November 19 over concerns about long hours, fatigue, and “dangerous working conditions.” The strike lasted for seven days from November 19 through November 26, during which the railroad operated at approximately 10 percent capacity. CN Rail carries about $189 billion worth of goods annually. Economists at Toronto-Dominion Bank predicted Canada’s gross domestic product would have lost as much as $1.65 billion if the strike had lasted four more days, until November 30. In the end, the one-week long strike clipped GDP by about 0.1 percent that month according to the Bank of Montreal. The Canadian government focused on finding a negotiated end to the strike amid calls to legislate the workers back to work.

12. U.S. International Development Finance Corporation (DFC) and Other Investment Insurance Programs

The DFC does not operate in Canada.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source* USG or international statistical source USG or International Source of Data: BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2018 $1,352,603 2018 $1,713,000 www.worldbank.org/en/country 
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data: BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2018 $313,069 2018 $401,874 BEA data available at
https://www.bea.gov/international/
direct-investment-and-multinational-
enterprises-comprehensive-data
 
Host country’s FDI in the United States ($M USD, stock positions) 2018 $458,746 2018 $511,176 BEA data available at
https://www.bea.gov/international/
direct-investment-and-multinational-
enterprises-comprehensive-data
 
Total inbound stock of FDI as % host GDP 2018 $676,064 2018 52.2% UNCTAD data available at
https://unctad.org/en/Pages/DIAE/
World%20Investment%20Report/
Country-Fact-Sheets.aspx
 

* Source for Host Country Data:

  • Host Country Source: Office of the Chief Economist, State of Trade 2019, Global Affairs Canada.
  • Host Country Source: Statistics Canada
  • Note: Data converted to U.S. dollars using yearly average currency conversions from IRS
Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward 642,572 100% Total Outward 936,122 100%
United States 297,670 46% United States 436,181 47%
Netherlands 78,224 12% United Kingdom 80,149 9%
Luxembourg 40,927 6% Luxembourg 66,028 7%
United Kingdom 36,913 6% Barbados 47,521 5%
Switzerland 33,830 5% Bermuda 34,460 4%
“0” reflects amounts rounded to +/- USD 500,000.
Table 4: Sources of Portfolio Investment
Portfolio Investment Assets
Top Five Partners (Millions, current US Dollars)
Total Equity Securities Total Debt Securities
All Countries 1,599,773 100% All Countries 1,200,859 100% All Countries 398,914 100%
United States 988,562 62% United States 717,341 60% United States 271,221 68%
United Kingdom 87,458 5% United Kingdom 68,708 6% United Kingdom 18,751 5%
Japan 62,038 4% Japan 55,151 5% Australia 10,087 3%
France 39,837 2% France 32,991 3% Germany 8,066 2%
Cayman Islands 33,899 2% Cayman Islands 29,510 2% Japan 6,887 2%

14. Contact for More Information

Economic Section
490 Sussex Drive, Ottawa, Ontario
613-688-5335
OttawaEconCounselor@state.gov

Chile

Executive Summary

As the seventh largest economy in the Western Hemisphere, Chile has historically enjoyed levels of stability and prosperity among the highest in the region. In October 2019, widespread civil unrest broke out in Chile in response to perceived systemic economic inequality. The unrest had a significant impact on Chile’s economy and some U.S. businesses operating in Chile. Pursuant to a political accord in response to the civil unrest, Chile plans to hold a plebiscite in October 2020 on whether or not to draft a new constitution. Chile’s solid macroeconomic policy framework has provided the fiscal space to respond to the economic effects of the social unrest and the COVID-19 pandemic through an economic stimulus package of about USD16.75 billion, which is expected to increase the fiscal deficit to 8 percent in 2020. Chile boasts one of the strongest sovereign bond ratings in Latin America. The country’s economy grew 1.1 percent in 2019, and the Chilean Central Bank forecasts Chile’s economic growth in 2020 will be in the range of -1.5 to -2.5 percent due to the impact of the COVID-19 pandemic.

Chile has successfully attracted Foreign Direct Investment (FDI) despite its relatively small domestic market. The country’s market-oriented policies have created significant opportunities for foreign investors to participate in the country’s economic growth. Chile has a sound legal framework and there is general respect for private property rights. Sectors that attract significant FDI include mining, finance/insurance, chemical manufacturing, and wholesale trade. Mineral, hydrocarbon, and fossil fuel deposits within Chilean territory are restricted from foreign ownership, but companies may enter into contracts with the government to extract these resources. Corruption exists in Chile but on a much smaller scale than in most Latin American countries, ranking of 26 out of 180 countries worldwide and second Latin America in Transparency International’s 2019 Corruption Perceptions Index.

Although Chile is an attractive destination for foreign investment, challenges remain. Legislative and constitutional reforms proposed in response to the social unrest and the pandemic have generated concern about the potential impact on investments in the energy, healthcare, insurance, and pension sectors. Despite a general respect for intellectual property (IP) rights, Chile has not fully complied with its IP obligations set forth in the U.S.-Chile FTA. Environmental permitting processes, indigenous consultation requirements, and cumbersome court proceedings have made large project approvals increasingly time consuming and unpredictable, especially in cases with political sensitivities. The current administration prioritizes attracting foreign investment and continues to implement measures to streamline the process.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2019 26 of 180 http://www.transparency.org/
research/cpi/overview
World Bank’s Doing Business Report 2020 59 of 190 http://www.doingbusiness.org/
en/rankings
Global Innovation Index 2019 51 of 129 https://www.globalinnovationindex.org/
analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2018 26,146 http://apps.bea.gov/international/
factsheet/
World Bank GNI per capita 2018 14,670 http://data.worldbank.org/indicator/
NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

For nearly four decades, promoting FDI has been an essential part of the Chilean government’s national development strategy. The country’s market-oriented economic policy creates significant opportunities for foreign investors to participate. Laws and practices are not discriminatory against foreign investors, who receive treatment similar to Chilean nationals. While Chile’s business climate is generally straightforward and transparent, the permitting process of infrastructure, mining, and energy projects has become increasingly contentious, especially regarding politically sensitive environmental impact assessments and indigenous consultations.

InvestChile is the government agency in charge of facilitating the entry and retention of FDI into Chile. It provides services related: to investment attraction (information about investment opportunities); pre-investment (sector-specific advisory services, including legal); landing (access to certificates, funds and networks), and after-care (including assistance for exporting and re-investment).

Regarding government-investor dialogue, in May 2018, the Ministry of Economy created the Sustainable Projects Management Office (GPS). This new agency provides support to investment projects, both domestic and foreign, serving as a first point of contact with the government and coordinating with different agencies in charge of evaluating investment projects.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign investors have access to all productive activities, except for the domestic maritime freight sector, in which there is a cap on foreign ownership of companies of 49 percent. Maritime transportation between Chilean ports is open since 2019 to foreign cruise vessels of more than 400 passengers capacity. Some international reciprocity restrictions exist for fishing.

Most enterprises in Chile may be 100 percent owned by foreigners. Chile only restricts the right to private ownership or establishment in what it defines as certain “strategic” sectors, such as nuclear energy and mining. The Constitution establishes the “absolute, exclusive, inalienable and permanent domain” of the Chilean state over all mineral, hydrocarbon, and fossil fuel deposits within Chilean territory. However, Chilean law allows the government to grant concession rights to individuals and companies for exploration and exploitation activities, and to assign contracts to private investors, without discrimination against foreign investors.

FDI is subject to pro forma screening by InvestChile. Businesses in general do not consider these screening mechanisms barriers to investment because approval procedures are expeditious and investments are usually approved.

Other Investment Policy Reviews

The World Trade Organization (WTO) has not conducted a Trade Policy Review for Chile since June 2015 (available here: https://www.wto.org/english/tratop_e/tpr_e/tp415_e.htm). The Organization for Economic Co-operation and Development (OECD) has not conducted an Investment Policy Review for Chile since 1997, and the country is not part of the countries covered to date by the United Nations Conference on Trade and Development’s (UNCTAD) Investment Policy Reviews.

Business Facilitation

The Chilean government took significant steps towards business facilitation during the last decade, including the use of digital means to start up a new company. On 7 June 2019, Chile’s Ministry of Economy launched the Unified System for Permits (SUPER), a new online platform intended to simplify and speed up the process of obtaining permits for investment projects. The platform aims at creating a single-window system, bringing together 182 license and permit procedures, previously spread across 29 different public institutions. The new online platform will allow users to access all required documentation, start online procedures, check application status and receive online updates on its progress.

According to the World Bank, Chile has one of the shortest and smoothest processes among Latin American and Caribbean countries -11 procedures and 29 days – to establish a foreign-owned limited liability company (LLC). Chile made starting a business easier in 2019 by enabling online registration of closed corporations. Drafting statutes of a company and obtaining an authorization number can be done online at the platform https://www.registrodeempresasysociedades.cl/. Electronic signature and invoicing allow foreign investors to register a company, obtain a tax payer ID number and get legal receipts, invoices, credit and debit notes, and accountant registries. A company needs typically to register with Chile’s Internal Revenue Service, obtain a business license from a municipality, and register either with the Institute of Occupational Safety (public) or with one of three private nonprofit entities that provide work-related accident insurance, which is mandatory for employers. In addition to the steps required of a domestic company, a foreign company establishing a subsidiary in Chile must authenticate the parent company’s documents abroad and register the incoming capital with the Central Bank. This procedure, established under Chapter XIV of the Foreign Exchange Regulations, requires a notice of conversion of foreign currency into Chilean pesos when the investment exceeds $10,000. The registration process at the Registry of Commerce of Santiago is available online.

Outward Investment

The Government of Chile does not have an active policy of promotion or incentives for outward investment, nor does it impose restrictions on it.

3. Legal Regime

Transparency of the Regulatory System

Chile’s legal, regulatory, and accounting systems are transparent and provide clear rules for competition and a level playing field for foreigners. They are consistent with international norms; however, environmental regulations –which include mandatory indigenous consultation required by the International Labor Organization’s Indigenous and Tribal Peoples Convention (ILO 169)- and other permitting processes have become lengthy and unpredictable, especially in politically sensitive cases.

Four institutions play key roles in the rule-making process in Chile: the General-Secretariat of the Presidency (SEGPRES), the Ministry of Finance, the Ministry of Economy, and the General Comptroller of the Republic. However, Chile does not have a regulatory oversight body in its institutional set up. Most regulations come from the national government; however, some, in particular those related to land use, are decided at the local level. Both levels get involved in environmental permits. Regulatory processes are managed by governmental entities. NGOs and private sector associations may participate in public hearings or comment periods. The OECD’s April 2016 “Regulatory Policy in Chile” report asserts that Chile took steps to improve its rule-making process, but still lags behind the OECD average in assessing the impact of regulations, consulting with outside parties on their design, and evaluating them over time.

In Chile, non-listed companies follow norms issued by the Accountants Professional Association, while publicly listed companies use the International Financial Reporting Standards (IFRS). Since January 1, 2018, IFRS 9 entered into force for companies in all sectors except for banking, in which IFRS 15 will be applied. IFRS 16 entered into force in 2019.

The legislation process in Chile allows for public hearings during discussion of draft bills in both chambers of Congress. Draft bills submitted by the Executive Branch to the Congress are readily available for public comment. Ministries and regulatory agencies are required by law to give notice of proposed regulations, but there is no formal requirement in Chile for consultation with the general public, conducting regulatory impact assessments of proposed regulations, requesting comments, or reporting results of consultations. For lower-level regulations or norms that do not need congressional approval, there are no formal provisions for public hearing or comment. As a result, Chilean regulators and rulemaking bodies normally consult with stakeholders, but in a less regular manner.

All decrees and laws are published in the Diario Oficial (National Gazette), but other types of regulations will not necessarily be found there. There are no other centralized online locations where regulations in Chile are published, similar to the Federal Register in the United States.

According to the OECD, compliance rates in Chile are generally high. The approach to enforcement remains punitive rather than preventive, and regulators still prefer to inspect rather than collaborate with regulated entities on fostering compliance. Each institution with regulation enforcement responsibilities has its own sanction procedures. Law 19.880 from 2003 establishes the principles for reversal and hierarchical recourse against decisions by the administration. An administrative act can be challenged by lodging an action in the ordinary courts of justice, or by administrative means with a petition to the Comptroller General of the Republic. Affected parties may also make a formal appeal to the Constitutional Court against a specific regulation.

Chile still lacks a comprehensive, “whole of government” regulatory reform program. The World Bank´s Global Indicators of Regulatory Governance project finds that Chile is one of the countries that have improved their regulatory governance framework since 2017.

Chile’s level of fiscal transparency is excellent. Information on the budget and debt obligations, including explicit and contingent liabilities, is easily accessible online.

International Regulatory Considerations

Chile does not share regulatory sovereignty with any regional economic bloc. However, several international norms or standards from multilateral organizations (UN, WIPO, ILO, among others) are referenced or incorporated into the country’s regulatory system. As a member of the WTO, the Chile notifies draft technical regulations to the WTO Committee on Technical Barriers to Trade (TBT).

Legal System and Judicial Independence

Chile’s legal system is based on civil law. Chile’s legal and regulatory framework provides for effective means for enforcing property and contractual rights.

Laws governing issues of interest to foreign investors are found in several statutes, including the Commercial Code of 1868, the Civil Code, the Labor Code, and the General Banking Act. Chile has specialized courts for dealing with tax and labor issues.

The judicial system in Chile is generally transparent and independent. The likelihood of government intervention in court cases is low. If a state-owned firm is involved in the dispute, the Government of Chile may become directly involved through the State Defense Council.

Regulations can be challenged before the court system, the National Comptroller, or the Constitutional Court, depending on the nature of the claim.

Laws and Regulations on Foreign Direct Investment

Law 20,848, of 2015, established a new framework for foreign investment in Chile and created the Agency for the Promotion of Foreign Investment (APIE), successor to the former Foreign Investment Committee and which also acts under the name of “InvestChile.” InvestChile’s website (https://investchile.gob.cl/) provides relevant laws, rules, procedures, and reporting requirements for investors. For more on FDI regulations and services for foreign investors see the section on Policies Towards Foreign Direct Investment.

Competition and Anti-Trust Laws

Chile’s anti-trust law prohibits mergers or acquisitions that would prevent free competition in the industry at issue. An investor may voluntarily seek a ruling by an Antitrust Court that a planned investment would not have competition implications. The National Economic Prosecutor (FNE) is a very active institution conducting investigations for competition-related cases and filing complaints before the Free Competition Tribunal (TDLC), which rules on those cases.

In February 2019, the TDLC fined supermarket chains Walmart, Cencosud, and SMU with USD 4.2 million, USD 5.1 million, and USD 3.1 million, respectively. The TDLC ruled in a collusion case introduced by the FNE in 2016 establishing that these retailers set up a minimum price accord in the market for fresh poultry meat.

In April 2019, the FNE asked the Supreme Court to reverse a decision from the TDLC on October 2018 authorizing alliances between the Chilean airline Latam with British Airways, Iberia, and American Airlines. The FNE considers that such alliance would allow the formation of a monopoly in the main air routes used by Chileans to travel to Europe and North America, significantly reducing competition in other routes. On May 25, the Supreme Court unanimously accepted the request from the FNE and prohibited the alliances.

In June 2019, the FNE approved without conditions IBM’s acquisition of Red Hat Inc., an IT company that provides IT solutions for corporate clients, on the grounds that, according to FNE’s risk analysis, this operation does not reduce substantially competition in the market.

In December 2019, the FNE asked the TDLC to issue fines of USD 70 million on three foreign companies – Denmark-based Biomar; Netherland-based Skretting, and Peru-based Salmofood – that provide salmon feed in Chile. The FNE alleged that these companies, together with U.S. based Ewos, established an agreement to fix salmon feed prices between 2003 and 2015. FNE asked the TDLC to exempt Ewos from fines due to its cooperation with authorities.

Expropriation and Compensation

Chilean law grants the government authority to expropriate property, including property of foreign investors, only on public interest or national interest grounds, on a non-discriminatory basis and in accordance with due process. The government has not nationalized a private firm since 1973. Expropriations of private land take place in a transparent manner, and typically only when the purpose is to build roads or other types of infrastructure. The law requires the payment of immediate compensation at fair market value, in addition to any applicable interest.

Dispute Settlement

ICSID Convention and New York Convention

Since 1991, Chile has been a member state to the International Centre for the Settlement of Investment Disputes (ICSID Convention). In 1975 Chile became a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention).

National arbitration law in Chile includes the Civil Procedure Code (Law Num. 1552, modified by Law Num. 20.217 of 2007), and the Law Num. 19.971 on International Commercial Arbitration.

Investor-State Dispute Settlement

Apart from the New York Convention, Chile is also a party to the Pan-American Convention on Private International Law (Bustamante Code) since 1934; the Inter-American Convention on International Commercial Arbitration (Panama Convention) since 1976; and the Washington Convention on the Settlement of Investment Disputes between States and Nationals of Other States since 1992.

The U.S.-Chile FTA, in force since 2004, includes an investment chapter that provides the right for investors to submit claims under the ICSID Convention; the United Nations Commission on International Trade Law (UNCITRAL) arbitration rules; or any other mutually agreed upon arbitral institution. So far, U.S. investors have filed no claims under the agreement.

Over the past 10 years, there were only two investment dispute cases brought by foreign investors against the state of Chile before the World Bank’s International Center for Settlement of Investment Disputes (ICSID) tribunal. The first relates to a Spanish-Chilean citizen regarding the expropriation of Chilean newspaper El Clarín in 1975 by Chile’s military regime. On September 13, 2016, ICSID issued a final ruling in favor of the Chilean state, rejecting the claimant’s request for financial compensation. However, the same person brought a new case in April 2017, related to the State’s actions following a 2008 judgment of the Santiago court in relation to the confiscation of the Goss printing press, as well as the alleged lack of remedy for the deprivation of their property rights in El Clarín. The amount of compensation claimed by the investor is USD 338.3 million. The case is now pending resolution.

The second case was brought in 2017 by Colombian firm Alsacia, which holds concession contracts as operators of Transantiago, the public transportation system in Santiago de Chile. The firm claims USD 347 million for Government actions in relation to Transantiago that allegedly created unfavorable operating conditions for the claimants’ subsidiaries and resulted in bankruptcy proceedings. The case is pending resolution.

Local courts respect and enforce foreign arbitration awards, and there is no history of extrajudicial action against foreign investors.

International Commercial Arbitration and Foreign Courts

Mediation and binding arbitration exist in Chile as alternative dispute resolution mechanisms. A suit may also be brought in court under expedited procedures involving the abrogation of constitutional rights. The U.S.-Chile FTA investment chapter encourages consultations or negotiations before recourse to dispute settlement mechanisms. If the parties fail to resolve the matter, the investor may submit a claim for arbitration. Provisions in Section C of the FTA ensure that the proceedings are transparent by requiring that all documents submitted to or issued by the tribunal be available to the public, and by stipulating that proceedings be public. The FTA investment chapter establishes clear and specific terms for making proceedings more efficient and avoiding frivolous claims. Chilean law is generally to be applied to all contracts. However, arbitral tribunals decide disputes in accordance with FTA obligations and applicable international law. The tribunal must also accept amicus curiae submissions.

In Chile, the Judiciary Code and the Code of Civil Procedure govern domestic arbitration. Local courts respect and enforce foreign arbitral awards and judgments of foreign courts. Chile has a dual arbitration system in terms of regulation, meaning that different bodies of law govern domestic and international arbitration. International commercial arbitration is governed by the International Commercial Arbitration Act that is modeled on the 1985 UNCITRAL Model Law on International Commercial Arbitration. In addition to this statute, there is also Decree Law Number 2349 that regulates International Contracts for the Public Sector and sets forth a specific legal framework for the State and its entities to submit their disputes to international arbitration.

No Chilean state-owned enterprises (SOEs) have been involved in investment disputes in recent decades.

Bankruptcy Regulations

Chile’s Insolvency Law from 1982 was updated in October 2014. The current law aims to clarify and simplify liquidation and reorganization procedures for businesses to prevent criminalizing bankruptcy. It also established the new Superintendence of Insolvency and created specialized insolvency courts. The new insolvency law requires creditors’ approval to select the insolvency representative and to sell debtors’ substantial assets. The creditor also has the right to object to decisions accepting or rejecting creditors’ claims. However, the creditor cannot request information from the insolvency representative. The creditor may file for insolvency of the debtor, but for liquidation purposes only. The creditors are divided into classes for the purposes of voting on the reorganization plan; each class votes separately, and creditors in the same class are treated equally.

4. Industrial Policies

Investment Incentives

The Chilean government generally does not subsidize foreign investment, nor does it issue guarantees or joint financing for FDI projects. There are, however, some incentives directed toward isolated geographical zones and to the information technology sector. These benefits relate to co-financing of feasibility studies as well as to incentives for the purchase of land in industrial zones, the hiring of local labor, and the facilitation of project financing. Other important incentives include accelerated depreciation accounting for tax purposes and legal guarantees for remitting profits and capital. Additionally, the Start-Up Chile program provides selected entrepreneurs with grants of up to USD 80,000, along with a Chilean work visa to develop a “startup” business in Chile over a period of 4 to 7 months. Chile has other special incentive programs aimed at promoting investment and employment in remote regions, as well as other areas that suffer development lags.

Foreign Trade Zones/Free Ports/Trade Facilitation

Chile has two free trade zones: one in the northern port city of Iquique (Tarapaca Region) and the other in the far south port city of Punta Arenas (Magallanes Region). Merchants and manufacturers in these zones are exempt from corporate income tax, value added taxes (VAT) – on operations and services that take place inside the free trade zone – and customs duties. The same exemptions also apply to manufacturers in the Chacalluta and Las Americas Industrial Park in Arica (Arica and Parinacota Region). Mining, fishing, and financial services are not eligible for free zone concessions. Foreign-owned firms have the same investment opportunities in these zones as Chilean firms. The process for setting up a subsidiary is the same inside as outside the zones, regardless of whether the company is domestic or foreign-owned. Zofri is the main FTZ located in Iquique.

Performance and Data Localization Requirements

Chile mandates that 85 percent of workers must be local employees. Exceptions are described in Section 11. The costs associated with migration regulations do not significantly inhibit the mobility of foreign investors and their employees.

Chile does not follow “forced localization.” A draft bill that is pending in Chile’s Congress could result in additional requirements (owner’s consent) for international data transfers in cases involving jurisdictions with data protection regimes below Chile’s standards. The bill, modeled after the European Union’s General Data Protection Regulation (GDPR) also proposes the creation of an independent Chilean Data Protection Agency that would be responsible for enforcing data protection standards.

Neither Chile’s Foreign Investment Promotion Agency nor the Central Bank applies performance requirements in their reviews of proposed investment projects. The investment chapter in the U.S.–Chile FTA establishes rules prohibiting performance requirements that apply to all investments, whether by a third party or domestic investors. The FTA investment chapter also regulates the use of mandatory performance requirements as a condition for receiving incentives and spells out certain exceptions. These include government procurement, qualifications for export and foreign aid programs, and non-discriminatory health, safety, and environmental requirements.

5. Protection of Property Rights

Real Property

Property rights and interests are recognized and generally enforced in Chile. Chile ranked 63 out of 190 economies in the “Registering Property” category of the World Bank’s 2020 Doing Business report. There is a recognized and generally reliable system for recording mortgages and other forms of liens.

There are no restrictions on foreign ownership of buildings and land, and no time limit on the property rights acquired by them. The only exception, based on national security grounds, is for land located in border territories, which may not be owned by nationals or firms from border countries, without prior authorization of the President of Chile. There are no restrictions to foreign and/or non-resident investors regarding land leases or acquisitions. In the Doing Business specific index for “quality of land administration” (which includes reliability of infrastructure, transparency of information, geographic coverage and land dispute resolution), Chile obtains a score of 14 out of 30.

Unoccupied properties can always be claimed by their legal owners and, as usurpation is criminalized, several kinds of eviction procedures are allowed by the law.

Intellectual Property Rights

According to the U.S. Chamber of Commerce’s International IP Index, Chile’s legal framework provides for fair and transparent use of compulsory licensing; extends necessary exclusive rights to copyright holders and maintains a voluntary notification system; and provides for civil and procedural remedies. However, IP protection challenges remain. Chile’s framework for trade secret protection has been deemed insufficient by private stakeholders. Pharmaceutical and agrochemical products suffer from relatively weak patenting procedures, the absence of an effective patent enforcement and resolution mechanism, and some gaps in regulation governing data protection.

Two important IP-related laws made progress in 2019 in the Chilean Congress and are pending passage. A draft bill submitted to Congress in October 2018 would reform Chile’s Industrial Property Law. The new IP bill aims to reduce timeframes, modernize procedures, and increase legal certainty for patents and trademarks registration. On April 9, 2019, the bill was passed by the Lower Chamber and sent to the Senate. Meanwhile, a reform bill on Chile’s pharmaceutical drugs law named “Ley de Fármacos II”, originated in the Senate but was extensively amended by the opposition-controlled Lower Chamber, and is currently at its final stage before passage. The pharmaceutical industry contends that the bill, in its current version, could put Chile in non-compliance with its international trade obligations. Their main IP concerns about the current version of the bill are related to: a labeling requirement by which a medication must include its International Nonproprietary Name (INN) in a size that occupies at least one-third of one of the main faces of its package, while limiting the size of the trademark to one-fifth of the space used by the product´s INN; a requirement that physicians prescribe a pharmaceutical product exclusively by INN, prohibiting them from using trademarks; a requirement that drugs may only be distributed if they are double registered under both generic and brand names; and a provision allowing the government to issue compulsory licenses permitting the sale of generics based on unspecified “economic or financial considerations.” The different provisions of the bill are currently being voted by a mixed committee of senators and deputies to reconcile their respective amendments.

The Intellectual Property Brigade (BRIDEPI) of the Chilean Investigative Police (PDI) reported that it seized 80,793 counterfeit products in 2019, worth a total of USD 11.3 million, and arrested 25 individuals on charges related to IPR infringement. Additionally, the National Customs Service reported that, as of December 27, it had seized more than 11.6 million counterfeit products in 2019 (an increase of 65 percent compared to 2018), worth a total of USD139.5 million (an increase of 35 percent compared to 2018.) Customs seized also 14 million smuggled cigarette boxes worth USD54.7 million in terms of tax evasion, as well as 5.05 million products (32 percent more than in 2018) that infringed health regulations, especially medical devices cosmetics, and toys.

Chile’s IPR enforcement remains, according to the WIPO report mentioned above, relatively lax, particularly in relation to piracy, copyright and patent protection, while prosecution of IP infringement is hindered by gaps in the legal framework and a lack of expertise in IP law among judges. Rights holders indicate a need for greater resources devoted to customs operations and a better-defined procedure for dealing with small packages containing infringing goods. The legal basis for detaining and seizing suspected transshipments is also insufficiently clear.

Chile has been included on the Special 301 Priority Watch List (PWL) since January 8, 2007 and remains on the 2019 Priority Watch List. In October 2018, Chile’s Congress successfully passed a law that criminalizes satellite piracy. However, other big challenges remain, related to longstanding IPR issues under the U.S.-Chile FTA: the implementation of measures against circumvention of technological protection; pending implementation of UPOV 91; the implementation of an effective patent linkage in connection with applications to market pharmaceutical products; adequate protection for undisclosed data generated to obtain marketing approval for pharmaceutical products; and amendments to Chile’s Internet Service Provider liability regime to permit effective action against Internet piracy.

Chile is not listed in the USTR’s Notorious Markets List. For additional information about national laws and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/.

6. Financial Sector

Capital Markets and Portfolio Investment

Chile’s authorities are committed to developing capital markets and keeping them open to foreign portfolio investors. Foreign firms offer services in Chile in areas such as financial information, data processing, financial advisory services, portfolio management, voluntary saving plans and pension funds. Under the U.S.-Chile FTA, Chile opened up significantly its insurance sector, with very limited exceptions. The Santiago Stock Exchange is Chile’s dominant stock exchange, and the third largest in Latin America. However, when compared to other OECD countries, it does not rank high in terms of market liquidity.

Existing policies facilitate the free flow of financial resources into Chile’s product and factor markets and adjustment to external shocks in a commodity-dependent economy. Chile has accepted the obligations of Article VIII (sections 2, 3 and 4) and maintains a free floating exchange rate system, free of restrictions on the making of payments and transfers for current international transactions. Credit is allocated on market terms and its various instruments are available to foreigners. The Central Bank reserves the right to restrict foreign investors’ access to internal credit if a credit shortage exists. To date, this authority has not been exercised.

Money and Banking System

Nearly one fourth of Chileans have a credit card from a bank and nearly one third have a non-bank credit card, but less than 20 percent have a checking account. However, financial inclusion is higher than banking penetration: a large number of lower-income Chilean residents have a CuentaRut, which is a commission-free card with an electronic account available for all, launched by the state-owned Banco Estado, also the largest provider of microcredit in Chile.

The Chilean banking system is healthy and competitive, and many Chilean banks already meet Basel III standards, which are part of a reform to the General Banking Law which was enacted in January 2019 (Basel III standards will be introduced gradually over the next several years). Capital adequacy ratio of the system is above 13 percent as of October 2019 and remains robust even when including discounts due to market and/or operational risks. Non-performing loans are below 2 percent when measured by the standard 90 days past due criterion.

The Chilean banking system’s total assets, as of March 2020, amounted to USD 386.6 billion, according to the Superintendence of Banks and Financial Institutions. The largest 6 banks account for 88 percent of the total banking system assets (Banco Santander-Chile, Banco de Credito e Inversiones, Banco de Chile, Banco Estado, Scotiabank Chile and Itaú-Corpbanca). Chile’s Central Bank conducts the country’s monetary policy, is constitutionally autonomous from the government, and is not subject to regulation by the Superintendence of Banks.

Foreign banks have an important presence in Chile, with 3 out of the 6 largest banks of the system. Out of 18 banks currently in Chile, 5 are foreign owned but legally established banks in Chile and 4 are branches of foreign banks. Both categories are subject to the requirements set out under the Chilean banking law. There are also 21 representative offices of foreign banks in Chile. There are no reports of correspondent banking relationships withdrawal in Chile.

In order to open a bank account in Chile, a foreigner must present his/her Chilean ID Card or passport, Chilean tax ID number, proof of address, proof of income/solvency, photo, and fingerprints.

Foreign Exchange and Remittances

Foreign Exchange

Law 20.848, which regulates FDI (described in section 1), prohibits arbitrary discrimination against foreign investors and guarantees access to the formal foreign exchange market, as well as the free remittance of capital and profits generated by investments. There are no other restrictions or limitations placed on foreign investors for the conversion, transfer or remittance of funds associated with an investment.

Investors, importers, and others are guaranteed access to foreign exchange in the official inter-bank currency market without restriction. The Central Bank of Chile (CBC) reserves the right to deny access to the inter-bank currency market for royalty payments in excess of five percent of sales. The same restriction applies to payments for the use of patents that exceed five percent of sales. In such cases, firms would have access to the informal market. The Chilean tax service reserves the right to prevent royalties of over five percent of sales from being counted as expenses for domestic tax purposes.

Chile has a free floating (flexible) exchange rate system. Exchange rates of foreign currencies are fully determined by the market. The CBC reserves the right to intervene under exceptional circumstances to correct significant deviations of the currency from its fundamentals. This authority was used in 2019 following an unusual 20.5 percent depreciation of the Chilean peso (CLP) after six weeks of civil unrest, an unprecedented circumstance that triggered a similarly unusual USD20 billion intervention (half of the CBC foreign currency reserves) announced on November 28. In the near term, this intervention successfully arrested the currency slide (between December 2-11, the CLP appreciated 10.2 percent against the U.S. dollar) but left the CBC with less room to respond to the subsequent impact of the COVID-19 pandemic on Chile’s currency.

Remittance Policies

Remittances of profits generated by investments are allowed at any time after tax obligations are fulfilled; remittances of capital can be made after one year following the date of entry into the country. In practice, this permanency requirement does not constitute a restriction for productive investment, because projects normally need more than one year to mature. Under the investment chapter of the U.S.–Chile FTA, the parties must allow free transfer and without delay of covered investments into and out of its territory. These include transfers of profits, royalties, sales proceeds, and other remittances related to the investment. However, for certain types of short-term capital flows this chapter allows Chile to impose transfer restrictions for up to 12 months as long as those restrictions do not substantially impede transfers. If restrictions are found to impede transfers substantially, damages accrue from the date of the initiation of the measure. In practice, these restrictions have not been applied in the last two decades.

Sovereign Wealth Funds

The Government of Chile maintains two sovereign wealth funds (SWFs) built with savings from years with fiscal surpluses. The Economic and Social Stabilization Fund (FEES) was established in 2007 and was valued at USD 12.3 billion as of March 2020. The purpose of the FEES is to fund public debt payments and temporary deficit spending, in order to keep a countercyclical fiscal policy. The Pensions Reserve Fund (FRP) was built up in 2006 and amounted to USD 9.9 billion as of March 2020. The purpose of the FRP is to anticipate future needs of payments to those eligible to receive pensions, but whose contributions to the private pension system fall below a minimum threshold.

Chile is a member of the International Working Group of Sovereign Wealth Funds (IWG) and adheres to the Santiago Principles.

Chile’s government policy is to invest SWFs entirely abroad into instruments denominated in foreign currencies, including sovereign bonds and related instruments, corporate and high-yield bonds, mortgage backed securities from U.S. agencies, and stocks.

7. State-Owned Enterprises

Chile had 28 state-owned enterprises (SOEs) in operation as of 2018. They are all commercial companies. Twenty-five SOEs are not listed and are fully owned by the government. The remaining three are majority government owned. Ten Chilean SOEs operate in the port management sector; seven in the services sector, three in the defense sector, three in the mining sector –including CODELCO, the world’s largest copper producer and; ENAP, an oil and gas company-, two in transportation, one in the water sector, one is a TV station, and one is a state-owned bank (Banco Estado). The state also holds a minority stake in four water companies as a result of a privatization process. In 2018, total assets of SOEs amounted to USD 72.5 billion, while their total net income was USD 255.8 million. SOEs employed 51,749 people in 2018.

Twenty SOEs in Chile fall under the supervision of the Public Enterprises System, a state holding in charge of overseeing SOE governance. The rest -including the largest SOEs such as CODELCO, ENAP and Banco Estado- have their own governance and report to government ministries. Allocation of seats on the boards of Chilean SOEs is determined by the SEP, as described above, or outlined by the laws that regulate them. In CODELCO’s corporate governance, there is a mix between seats appointed by recommendation from an independent high-level civil service committee, and seats allocated by political authorities in the government.

A list of SOEs made by the Budget Directorate, including their financial management information, is available in the following link: http://www.dipres.gob.cl/599/w3-propertyvalue-20890.html.

In general, Chilean SOEs work under hard budget constraints and compete under the same regulatory and tax frameworks as private firms. The exception is ENAP, which is the only company allowed to refine oil in Chile. As an OECD member, Chile adheres to the OECD Guidelines on Corporate Governance for SOEs.

Privatization Program

Chile does not have a privatization program in place.

8. Responsible Business Conduct

Awareness of the need to ensure corporate social responsibility has grown over the last two decades in Chile. However, NGOs and academics who monitor this issue believe that risk mapping and management practices still do not sufficiently incorporate its importance.

The government of Chile encourages foreign and local enterprises to follow generally accepted Responsible Business Conduct (RBC) principles and uses the United Nations’ Rio+20 Conference statements as its principal reference. Chile adhered in 1997 to the OECD Guidelines for Multinational Enterprises. It also recognizes the ILO Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy; the UN Guiding Principles on Business and Human Rights; the UN Global Compact’s Ten Principles and the ISO 26000 Guidance on Social Responsibility. The government established a National Contact Point (NCP) for OECD MNE guidelines located at the General Directorate for International Economic Relations, and recently created the Responsible Business Conduct Department, whose chief is also the NCP. In August 2017, Chile released its National Action Plan on Business and Human Rights based on the UN Guiding Principles. Separately, the Council on Social Responsibility for Sustainable Development, coordinated by Chile’s Ministry of Economy, is currently developing a National Policy on Social Responsibility.

Regarding procurement decisions, ChileCompra, the agency in charge of centralizing Chile’s public procurement, incorporates the existence of a Clean Production Certificate and an ISO 14001-2004 certificate on environmental management as part of its criteria to assign public purchases.

No high profile, controversial instances of corporate impact on human rights have occurred in Chile in recent years.

The Chilean government effectively and fairly enforces domestic labor, employment, consumer, and environmental protection laws. There are no dispute settlement cases against Chile related to the Labor and Environment Chapters of the Free Trade Agreements signed by Chile.

Regarding the protection of shareholders, the Superintendence of Securities and Insurance (SVS) has the responsibility of regulating and supervising all listed companies in Chile. Companies are generally required to have an audit committee, a directors committee, an anti-money laundering committee and an anti-terrorism finance committee. Laws do not require companies to have a nominating/corporate governance committee or a compensation committee. Compensation programs are typically established by the board of directors and/or the directors committee.

Independent NGOs in Chile promote and freely monitor RBC. Examples include NGO Accion RSE: http://www.accionrse.cl/, the Catholic University of Valparaiso’s Center for Social Responsibility and Sustainable Development VINCULAR: http://www.vincular.cl/, ProHumana Foundation and the Andres Bello University’s Center Vitrina Ambiental.

Chile is an OECD member, but is not participating actively in the implementation of the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Afflicted and High-Risk Areas.

Chile is not part of the Extractive Industries Transparency Initiative (EITI).

9. Corruption

Chile applies, in a non-discriminatory manner, various laws to combat corruption of public officials, including the 2009 Transparency Law that mandated disclosure of public information related to all areas of government and created an autonomous Transparency Council in charge of overseeing its application. Subsequent amendments expanded the number of public trust positions required to release financial disclosure, mandated disclosure in greater detail, and allowed for stronger penalties for noncompliance.

In March 2020, the Piñera administration proposed new legislation aimed at combatting corruption, as well as economic and electoral crimes. The four new pieces of legislation, part of the Piñera administration’s “anti-abuse agenda” launched in December 2019 in response to societal demands to increase penalties for white-collar crimes, seeks to strengthen enforcement and increase penalties for collusion among firms; increase penalties for insider trading; provide protections for whistleblowers seeking to expose state corruption; and expand the statute of limitations for electoral crimes.

Anti-corruption laws, and in particular mandatory asset disclosure, do extend to family members of officials. Political parties are subject to laws that limit campaign financing and require transparency in party governance and contributions to parties and campaigns.

Regarding government procurement, the website of ChileCompra (central public procurement agency) allows users to anonymously report irregularities in procurement. There is a decree that defines sanctions for public officials who do not adequately justify direct contracts.

The Corporate Criminal Liability Law provides that corporate entities can have their compliance programs certified. Chile’s Securities and Insurance Superintendence (SVS) authorizes a group of local firms to review companies’ compliance programs and certify them as sufficient. Certifying firms are listed on the SVS website.

Private companies have increasingly incorporated internal control measures, as well as ethics committees as part of their corporate governance, and compliance management sections. Additionally, Chile Transparente (Chilean branch of Transparency International) developed a Corruption Prevention System to provide assistance to private firms to facilitate their compliance with the Corporate Criminal Liability Law.

Chile signed and ratified the Organization of American States (OAS) Convention against Corruption. The country also ratified the UN Anticorruption Convention on September 13, 2006. Chile is also an active member of the Open Government Partnership (OGP) and, as an OECD member, adopted the OECD Anti-Bribery Convention.

NGO’s that investigate corruption operate in a free and adequately protected manner.

U.S. firms have not identified corruption as an obstacle to FDI.

Resources to Report Corruption

Andrea Ruiz Rojas
Director General
Consejo para la Transparencia
Morande 360 piso 7
T: (+56)-(2)-2495-2000
rferrada@consejotransparencia.cl
contacto@consejotransparencia.cl

Alberto Precht
Executive Director
Chile Transparente (Chile branch of Transparency International)
Perez Valenzuela 1687, piso 1, Providencia, Santiago, Chile
T: (+56)-(2)-2236-4507
chiletransparente@chiletransparente.cl

Renata Avila
Executive Director
Ciudadania Inteligente
Holanda 895, Providencia, Santiago, Chile
T: (+56)-(2)-2419-2770

Daniel Garcia
Executive Director
Espacio Publico
Santa Lucía 188, piso 7, Santiago, Chile
T: (+56)-(9)-6258-3871
contacto@espaciopublico.cl

Observatorio Anticorrupción (Run by Espacio Publico and Ciudadania Inteligente) https://observatorioanticorrupcion.cl/

Jeannette von Wolfersdorff
Executive Director
Observatorio Fiscal (focused on public spending)
Don Carlos 2983, Oficina 3, Las Condes, Santiago, Chile
T: (+56)-(2)-2457-2975
contacto@observatoriofiscal.cl

10. Political and Security Environment

In October 2019, widespread civil unrest broke out in Chile in response to perceived systemic economic inequality. The unrest had a significant impact on Chile’s economy and some U.S. businesses operating in Chile. Protesters targeted metro stations, police stations, banks, pharmacies, and installations associated with pension funds. Pursuant to a political accord in response to the civil unrest, Chile plans to hold a plebiscite in October 2020 on whether or not to draft a new constitution. If Chileans vote to draft a new constitution, the process to create and ratify it would take until at least mid-2022. Uncertainty over what changes could be made to Chile’s political and regulatory environment could negatively impact investor confidence. The coronavirus pandemic and government measures in response to it have led to a large reduction of vandalism and attacks on businesses.

Prior to 2019, there were generally few incidents of politically motivated attacks on investment projects or installations, with the exception of the southern Araucania region and its neighboring Arauco province in the southwest of Bio-Bio region. This area, home to nearly half a million indigenous inhabitants, has seen a growing trend of politically motivated violence. Land claims and conflicts with forestry companies are the main grievances underneath the radicalization of a relatively small number of indigenous Mapuche communities, which has led to the rise of organized groups that pursue their demands by violent means. Incidents include arson attacks on churches, farms, forestry plantations, and forestry contractors’ machinery and vehicles, as well as occupation of private lands, resulting in over a half-dozen deaths (including some by police forces), injuries, and damage to property. In 2018, the government announced special measures and policies towards the Araucania region. However, the indigenous issue has been further politicized due to anger among landowners, forestry transport contractors, and farmers affected by violence, as well as the illegal killing of a young Mapuche activist by special police forces in 2018 and the controversy over accusations of fraud by the police during the investigation of indigenous organized groups.

Since 2007, Chile has experienced a number of small-scale attacks with explosive and incendiary devices, targeting mostly banks, police stations, and public spaces throughout Santiago, including ATM’s, metro stations, universities and churches. Anarchist groups often claim responsibility for these acts, as they also have been involved in incidents during student and labor protests. In January 2017, an eco-terrorist group claimed responsibility for a parcel bomb that detonated at the home of the chairman of the board of Chilean state-owned mining giant CODELCO. The same group detonated bombs of similar characteristics during 2019 at a bus stop in downtown Santiago, causing five injuries, and at a police station in the Santiago metro area, wounding 8 police officers. They also sent letter bombs to a former Interior Minister and the president of the Metro at their offices, both of which were defused by police. One suspect was arrested in 2019 and the investigation of the crimes is ongoing at the time of this report.

On occasions, illegal activity by striking workers resulted in damage to corporate property or a disruption of operations. Some firms have publicly expressed concern that during a contentious strike, law enforcement has appeared to be reluctant to protect private property.

Chilean civil society is active and demonstrations occur frequently. Although the vast majority of demonstrations are peaceful, on occasion protestors have veered off pre-approved routes. This tendency has increased since widespread civil unrest began in October 2019. In a few instances, criminal elements have taken advantage of civil society protests to loot stores along the protest route and have clashed with the police. Demonstrations on March 29, the Day of the Young Combatant, and September 11, the anniversary of the 1973 coup against the government of President Salvador Allende, have in the past resulted in damage to property.

11. Labor Policies and Practices

Unemployment in Chile averaged 7.2 percent of the labor force during 2019, while the labor participation rate was 63.4 percent of the working age population. Immigrants account for 7.6 percent of the labor force. Chilean workers are adequately skilled and some sectors such as mining, agriculture, and fishing employ highly skilled workers. In general, there is an adequate availability of technicians and professionals. Recent estimates made by the National Institute of Statistics (INE) suggest informal employment in Chile constitutes 28.4 percent of the workforce.

Article 19 of the Labor Code stipulates that employers must hire Chileans at least for 85 percent of their staff, except in the case of firms with less than 25 employees. However, Article 20 of the Labor Code includes several provisions under which foreign employees can exceed 25 percent, independent of the size of the company.

In general, employees who have been working for at least one year are entitled to a statutory severance pay, upon dismissal without cause, equivalent to 30 days of the last monthly remuneration earned, for each year of service. The upper limit is 330 days (11 years of service) for workers with a contract in force for one year or more. The same amount is payable to a worker whose contract is terminated for economic reasons. Upon termination, regardless of the reason, domestic workers are entitled to an unemployment insurance benefit funded by the employee and employer contributions to an individual unemployment fund equivalent to three percent of the monthly remuneration. The employer’s contributions shall be paid for a maximum of 11 years by the same employer. Another fund made up of employer and government contributions is used for complementary unemployment payments when needed.

Labor and environmental laws are not waived in order to attract or retain investments.

Labor Directorate data indicates that 21.7 percent of Chilean workers belonged to a trade union as of October 2019. Information on the current number of active unions and collective bargaining agreements is not available. During the last quarter of 2016 (latest data available), 11,653 unions were active. In the same period, 347,142 workers (4.2 percent of Chilean workers) were covered by collective bargaining agreements. Collective bargaining coverage rates are higher in the financial, mining, and manufacturing sectors. Unions can form nationwide labor associations and can affiliate with international labor federations. Contracts are normally negotiated at the company level. Workers in public institutions do not have collective bargaining rights, but national public workers’ associations undertake annual negotiations with the government.

The Labor Directorate under the Ministry of Labor is responsible for enforcing labor laws and regulations. Both employers and workers may request labor mediation from the Labor Directorate, which is an alternate dispute resolution model aimed at facilitating communication and agreement between both parties.

According to a report from the Center for Social Conflict and Cohesion Studies (COES), during 2018, 269 legal strikes took place in sectors where collective bargaining is permitted (a smaller number in comparison to 2017 when there were 325 strikes). Labor Directorate data on the total number of workers who engaged in strikes during 2019 is still pending. As legal strikes in Chile have a restricted scope and duration, in general they do not present a risk for foreign investment.

Chile has and generally enforces laws and regulations in accordance with internationally recognized labor rights of: freedom of association and collective bargaining; the elimination of forced labor; child labor, including the minimum age for work; discrimination with respect to employment and occupation; and acceptable conditions of work related to minimum wage, occupational safety and health, and hours of work. The maximum number of labor hours allowed per week in Chile is 45. In March 2019, Chile raised its monthly minimum wage to CLP 301,000 – USD 444 – for all occupations, including domestic servants, more than twice the official poverty line. There is a special minimum wage of CLP 224,704 (USD 331) a month for workers age 65 and older and age 18 and younger. There are no gaps in compliance with international labor standards that may pose a reputational risk to investors.

Collective bargaining is not allowed in companies or organizations dependent upon the Defense Ministry or whose employees are prohibited from striking, such as in health care, law enforcement, and public utilities. Labor courts can require workers to resume work upon a determination that a strike causes serious risk to health, national security, the supply of goods or services to the population, or to the national economy.

The United States-Chile Free Trade Agreement (FTA) entered into force on January 1, 2004. The FTA requires the United States and Chile to maintain effective labor and environmental enforcement.

12. U.S. International Development Finance Corporation (DFC) and Other Investment Insurance Programs

Since 2013, Overseas Private Investment Corporation (OPIC) partnered with U.S. solar energy developers to finance five large-scale power facilities throughout the Atacama Desert in northern Chile. Other OPIC-financed projects in the country include the run-of-river hydropower project Alto Maipo, and the toll road Vespucio Norte Express.

An OPIC Bilateral Investment Agreement between Chile and the United States took effect in 1984. Chile is a party to the convention of the World Bank’s Multilateral Investment Guarantee Agency (MIGA).

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source* USG or international statistical source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2018 298,718 2018 298,238 www.worldbank.org/en/country
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country (USD million, stock positions) 2018 36,848 2018 26,146 BEA data available at
https://www.bea.gov/international/
direct-investment-and-multinational-
enterprises-comprehensive-data
Host country’s FDI in the United States (USD million, stock positions) 2018 13,224 2018 3,066 BEA data available at
https://www.bea.gov/international/
direct-investment-and-multinational-
enterprises-comprehensive-data
Total inbound stock of FDI as % host GDP 2018 92.4% 2018 90.3% UNCTAD data available at
https://unctad.org/en/Pages/DIAE/
World%20Investment%20Report/
Country-Fact-Sheets.aspx

* Source for Host Country Data: Central Bank of Chile, year-end data is published in March 31 of the following year.

Table 3: Sources and Destination of FDI

According to the IMF’s Coordinated Direct Investment Survey (CDIS), total stock of FDI in Chile in 2018 amounted to USD 251.9 billion, compared to USD 274.7 billion in 2017. The United States remains the main source of FDI to Chile with USD 36.1 billion, representing 14.3 percent of the total.

The following top sources (Spain, Canada, the Netherlands, and the UK) accounted for 39.2 percent of Chile’s inward FDI stock. Chile’s outward direct investment stock in 2018 remains concentrated in South America, where Panama, Brazil, and Peru together represented 33.4 percent of total Chilean outward FDI. The United States accounted for 10.5 percent of the total.

The data below is consistent with host country statistics. Although not included in the table below, tax havens are relevant sources of inward FDI to Chile, with the British Virgin Islands, Cayman Islands and Bermuda ranking sixth, seventh and eighth in inbound sources of FDI respectively, according to the Central Bank of Chile. The Cayman Islands and Luxembourg rank eighth and ninth, respectively, among Chile´s main outward FDI destinations.

Table 3: Sources and Destination of FDI
Direct Investment from/in Chile Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward 251,867 100% Total Outward 119,036 100%
United States 36,131 14.3% Panama 15,063 12.7%
Spain 35,985 14.3% Brazil 12,994 10.9%
Canada 30,888 12.3% United States 12,507 10.5%
The Netherlands 19,869 7.9% Peru 11,623 9.8%
United Kingdom 11,951 4.7% British Virgin Islands 8,787 7.4%
“0” reflects amounts rounded to +/- USD 500,000.

Table 4: Sources of Portfolio Investment

According to the IMF’s Coordinated Portfolio Investment Survey (CPIS), total stock of portfolio investment in Chile as of June 2019 amounted to USD 186.6 billion, of which USD 147.7 billion were equity and investment funds shares, and the rest were debt securities. Luxembourg (a tax haven) and the United States were the main sources of portfolio investment to Chile with US $57.9 billion and $56.9 billion, representing 31 percent and 30 percent of the total, respectively. Both countries also represent 68 percent of the total of equity investment. Ireland, the United Kingdom and Germany are the following top sources of equity portfolio investment to Chile, while the United States, Mexico and Japan are the top sources of debt securities investment.

Table 4: Sources of Portfolio Investment
Portfolio Investment Assets
Top Five Partners (Millions, current US Dollars)
Total Equity Securities Total Debt Securities
All Countries 186,654 100% All Countries 147,722 100% All Countries 38,932 100%
Luxembourg 57,888 31% Luxembourg 57,526 39% United States 14,626 38%
United States 56,880 30% United States 42,255 29% Mexico 4,723 12%
Ireland 14,422 8% Ireland 14,356 10% Japan 4,064 10%
United Kingdom 6,425 3% United Kingdom 5,366 4% Germany 38,932 5%
Germany 6,319 3% Germany 4,255 3% United Kingdom 1,551 4%

14. Contact for More Information

Alexis Gutiérrez
Economic Specialist
Avenida Andrés Bello 2800, Las Condes, Santiago, Chile
T: (+56)-(9)-4268 9005
gutierrezaj@state.gov

China

Executive Summary

The People’s Republic of China (PRC) is the top global Foreign Direct Investment (FDI) destination after the United States due to its large consumer base and integrated supply chains.  In 2019, China made some modest openings in the financial sector and passed key pieces of legislation, including a new Foreign Investment Law (FIL).  China remains, however, a relatively restrictive investment environment for foreign investors due to restrictions in key economic sectors.  Obstacles to investment include ownership caps and requirements to form joint venture partnerships with local Chinese firms, industrial policies such as Made in China 2025 (MIC 2025), as well as pressures on U.S. firms to transfer technology as a prerequisite to gaining market access.  These restrictions shield Chinese enterprises – especially state-owned enterprises (SOEs) and other enterprises deemed “national champions” – from competition with foreign companies.

The Chinese Communist Party (CCP) in 2019 marked the 70th anniversary of its rule, amidst a wave of Hong Kong protests and international concerns regarding forced labor camps in Xinjiang.  Since the CCP 19th Party Congress in 2017, CCP leadership has underscored Chairman Xi Jinping’s leadership and expanded the role of the party in all facets of Chinese life:  cultural, social, military, and economic.  An increasingly assertive CCP has caused concern among the foreign business community about the ability of future foreign investors to make decisions based on commercial and profit considerations, rather than CCP political dictates.

Key investment announcements and new developments in 2019 included:

  • On March 17, 2019, the National People’s Congress passed the new FIL that effectively replaced previous laws governing foreign investment.
  • On June 30, 2019, the National Development and Reform Commission (NDRC) and Ministry of Commerce (MOFCOM) jointly announced the release of China’s three “lists” to guide FDI.  Two “negative lists” identify the industries and economic sectors from which foreign investment is restricted or prohibited based on location, and the third list identifies sectors in which foreign investments are encouraged.  In 2019, some substantial openings were made in China’s financial services sector.
  • The State Council also approved the Regulation on Optimizing the Business Environment and Opinions on Further Improving the Utilization of Foreign Investment, which were intended to assuage foreign investors’ mounting concerns with the pace of economic reforms.

While Chinese pronouncements of greater market access and fair treatment of foreign investment are welcome, details and effective implementation are needed to improve the investment environment and restore investors’ confidence.  As China’s economic growth continues to slow, officially declining to 6.1% in 2019 – the slowest growth rate in nearly three decades – the CCP will need to deepen its economic reforms and implementation.  Moreover, the emergence of the Coronavirus (COVID-19) pandemic in Wuhan, China in December 2019, will place further strain on China’s economic growth and global supply chains.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
Transparency International’s Corruption Perceptions Index 2019 137 of 180 http://www.transparency.org/
research/cpi/overview
World Bank’s Doing Business Report 2019 31 of 190 http://www.doingbusiness.org/
en/rankings
Global Innovation Index 2019 14 of 126 https://www.globalinnovationindex.org/
analysis-indicator
U.S. FDI in partner country ($M USD, stock positions) 2018 USD116,518 https://apps.bea.gov/international/
factsheet/
World Bank GNI per capita 2018 USD9,460 http://data.worldbank.org/indicator/
NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

China continues to be one of the largest recipients of global FDI due to a relatively high economic growth rate and an expanding consumer base that demands diverse, high-quality products.  FDI has historically played an essential role in China’s economic development.  However, due to recent stagnant FDI growth and gaps in China’s domestic technology and labor capabilities, Chinese government officials have prioritized promoting relatively friendly FDI policies promising market access expansion and non-discriminatory, “national treatment” for foreign enterprises through general improvements to the business environment.  They also have made efforts to strengthen China’s regulatory framework to enhance broader market-based competition.

In 2019, China issued an updated nationwide “negative list” that made some modest openings to foreign investment, most notably in the financial sector, and promised future improvements to the investment climate through the implementation of China’s new FIL.  MOFCOM reported that FDI flows to China grew by 5.8 percent year-on-year in 2019, reaching USD137 billion.  In 2019, U.S. businesses expressed concern over China’s weak protection and enforcement of intellectual property rights (IPR); corruption; discriminatory and non-transparent anti-monopoly enforcement that forces foreign companies to license technology at below-market prices; excessive cyber security and personal data-related requirements; increased emphasis on the role of CCP cells in foreign enterprises, and an unreliable legal system lacking in both transparency and the rule of law.

China seeks to support inbound FDI through the “Invest in China” website, where MOFCOM publishes laws, statistics, and other relevant information about investing in China.  Further, each province has a provincial-level investment promotion agency that operates under the guidance of local-level commerce departments.  See:  MOFCOM’s Investment Promotion Website 

Limits on Foreign Control and Right to Private Ownership and Establishment

Entry into the Chinese market is regulated by the country’s “negative lists,” which identify the sectors in which foreign investment is restricted or prohibited, and a catalogue for encouraged foreign investment, which identifies the sectors the government encourages foreign investment to be allocated to.

  • The Special Administrative Measures for Foreign Investment Access (̈the “Nationwide Negative List”);
  • The Special Administrative Measures for Foreign Investment Access to Pilot Free Trade Zones (the “FTZ Negative List”) used in China’s 18 FTZs
  • The Industry Catalogue for Encouraged Foreign Investment (also known as the “FIC”).   The central government has used the FIC to encourage FDI inflows to key sectors – in particular semiconductors and other high-tech industries that would help China achieve MIC 2025 objectives.  The FIC is subdivided into a cross-sector nationwide catalogue and a separate catalogue for western and central regions, China’s least developed regions.

In addition to the above lists, MOFCOM and NDRC also release the annual Market Access Negative List  to guide investments.  This negative list – unlike the nationwide negative list that applies only to foreign investors – defines prohibitions and restrictions for all investors, foreign and domestic.  Launched in 2016, this negative list attempted to unify guidance on allowable investments previously found in piecemeal laws and regulations.  This list also highlights what economic sectors are only open to state-owned investors.

In restricted industries, foreign investors face equity caps or joint venture requirements to ensure control is maintained by a Chinese national and enterprise.  These requirements are often used to compel foreign investors to transfer technology in order to participate in China’s market.  Foreign companies have reported these dictates and decisions are often made behind closed doors and are thus difficult to attribute as official Chinese government policy.  Foreign investors report fearing government retaliation if they publicly raise instances of technology coercion.

Below are a few examples of industries where these sorts of investment restrictions apply:

  • Preschool, general high school, and higher education institutes require a Chinese partner.
  • Establishment of medical institutions also require a Chinese JV partner.

Examples of foreign investment sectors requiring Chinese control include:

  • Selective breeding and seed production for new varieties of wheat and corn.
  • Basic telecommunication services.
  • Radio and television listenership and viewership market research.

Examples of foreign investment equity caps include:

  • 50 percent in automobile manufacturing (except special and new energy vehicles);
  • 50 percent in value-added telecom services (except e-commerce domestic multiparty communications, storage and forwarding, call center services);
  • 50 percent in manufacturing of commercial and passenger vehicles.

The 2019 editions of the nationwide and FTZ negative lists and the FIC for foreign investment came into effect July 30, 2019.  The central government updated the Market Access Negative List in October 2019.  The 2019 foreign investment negative lists made minor modifications to some industries, reducing the number of restrictions and prohibitions from 48 to 40 in the nationwide negative list, and from 45 to 37 in China’s pilot FTZs.  Notable changes included openings in the oil and gas sector, telecommunications, and shipping of marine products.  On July 2, 2019, Premier Li Keqiang announced new openings in the financial sector, including lifting foreign equity caps for futures by January 2020, fund management by April, and securities by December.  While U.S. businesses welcomed market openings, many foreign investors remained underwhelmed and disappointed by Chinese government’s lack of ambition and refusal to provide more significant liberalization.  Foreign investors noted these announced measures occurred mainly in industries that domestic Chinese companies already dominate.

Other Investment Policy Reviews

China is not a member of the Organization for Economic Co-Operation and Development (OECD), but the OECD Council established a country program of dialogue and co-operation with China in October 1995.  The OECD completed its most recent investment policy review for China in 2008 and published an update in 2013.

China’s 2001 accession to the World Trade Organization (WTO) boosted China’s economic growth and advanced its legal and governmental reforms.  The WTO completed its most recent investment trade review for China in 2018, highlighting that China remains a major destination for FDI inflows, especially in real estate, leasing and business services, and wholesale and retail trade.

Business Facilitation

In 2019, China climbed more than 40 spots in the World Bank’s Ease of Doing Business Survey to 31st place out of 190 economies.  This was partly due to regulatory reforms that helped streamline some business processes, including improvements to addressing delays in construction permits and resolving insolvency.  This ranking does not account for major challenges U.S. businesses face in China like IPR violations and forced technology transfer.  Moreover, China’s ranking is based on data limited only to the business environments in Beijing and Shanghai.

Created in 2018, the State Administration for Market Regulation (SAMR) is now responsible for business registration processes.  The State Council established a new website in English, which is more user-friendly than SAMR’s website, to assist foreign investors looking to do business in China.  In December 2019, China also launched a Chinese-language nationwide government service platform on the State Council’s official website.  The platform connected 40 central government agencies with 31 provincial governments, providing information on licensing and project approvals by specific agencies.  The central government published the website under its “improving the business climate” reform agenda, claiming that the website consolidates information and offers cross-regional government online services.

Foreign companies still complain about continued challenges when setting up a business relative to their Chinese competitors.  Numerous companies offer consulting, legal, and accounting services for establishing wholly foreign-owned enterprises, partnership enterprises, joint ventures, and representative offices in China.  Investors should review their options carefully with an experienced advisor before choosing a corporate entity or investment vehicle.

Outward Investment

Since 2001, China has pursued a “going-out” investment policy.  At first, the Chinese government mainly encouraged SOEs to secure natural resources and facilitate market access for Chinese exports.  In recent years, China’s overseas investments have diversified with both state and private enterprises investing in nearly all industries and economic sectors.  While China remains a major global investor, total outbound direct investment (ODI) flows fell 8.2 percent year-on-year in 2019 to USD110.6 billion, according to MOFCOM data.

In order to suppress significant capital outflow pressure, the Chinese government created “encouraged,” “restricted,” and “prohibited” outbound investment categories in 2016 to guide Chinese investors, especially in Europe and the United States.  While the guidelines restricted Chinese outbound investment in sectors like property, hotels, cinemas, entertainment, and sports teams, they encouraged outbound investment in sectors that supported Chinese industrial policy by acquiring advanced manufacturing and high-tech assets.  Chinese firms involved in MIC 2025 targeted sectors often receive preferential government financing, subsidies, and access to an opaque network of investors to promote and provide incentives for outbound investment.  The guidance also encourages investments that promote China’s One Belt One Road (OBOR) initiative, which seeks to create connectivity and cooperation agreements between China and dozens of countries via infrastructure investment, construction projects, real estate, etc.

3. Legal Regime

Transparency of the Regulatory System

One of China’s WTO accession commitments was to establish an official journal dedicated to the publication of laws, regulations, and other measures pertaining to or affecting trade in goods, services, trade related aspects of intellectual property rights (TRIPS), and the control of foreign exchange.  Despite mandatory 30-day public comment periods, Chinese ministries continue to post only some draft administrative regulations and departmental rules online, often with a public comment period of less than 30 days.  U.S. businesses operating in China consistently cite arbitrary legal enforcement and the lack of regulatory transparency among the top challenges of doing business in China.  Government agencies often do not make available for public comment and proceed to publish “normative documents” (opinions, circulars, notices, etc.) or other quasi-legal measures to address situations where there is no explicit law or administrative regulation in place.  When Chinese officials claim an assessment or study was made for a law, the methodology of the study and the results are not made available to the public.  As a result, foreign investors face a regulatory system rife with inconsistencies.

In China’s state-dominated economic system, the relationships are often blurred between the CCP, the Chinese government, Chinese business (state- and private-owned), and other Chinese stakeholders.  Foreign-invested enterprises (FIEs) perceive that China prioritizes political goals, industrial policies, and a desire to protect social stability at the expense of foreign investors, fairness, and the rule of law.  The World Bank Global Indicators of Regulatory Governance gave China a composite score of 1.75 out 5 points, attributing China’s relatively low score to the futility of foreign companies appealing administrative authorities’ decisions to the domestic court system; not having easily accessible and updated laws and regulations; the lack of impact assessments conducted prior to issuing new laws; and other concerns about transparency.

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

International Regulatory Considerations

As part of its WTO accession agreement, China agreed to notify the WTO Committee on Technical Barriers to Trade (TBT) of all draft technical regulations.  However, China continues to issue draft technical regulations without proper notification to the TBT Committee.

Legal System and Judicial Independence

The Chinese legal system borrows heavily from continental European legal systems, but with “Chinese characteristics.”  The rules governing commercial activities are found in various laws, regulations, and judicial interpretations, including China’s civil law, contract law, partnership enterprises law, security law, insurance law, enterprises bankruptcy law, labor law, and several interpretations and regulations issued by the Supreme People’s Court (SPC).  While China does not have specialized commercial courts, it has created specialized courts and tribunals for the hearing of intellectual property disputes, including in Beijing, Guangzhou, and Shanghai.  In October 2018, the National People’s Congress approved the establishment of a national SPC appellate tribunal to hear civil and administrative appeals of technically complex intellectual property (IP) cases.

China’s constitution and various laws provide contradictory statements about court independence and the right of judges to exercise adjudicative power free from interference by administrative organs, public organizations, or powerful individuals.  In practice, regulators heavily influence courts, and the Chinese constitution establishes the supremacy of the “leadership of the communist party.”  U.S. companies often avoid challenging administrative decisions or bringing commercial disputes before local courts due to perceptions of futility or government retaliation.

Laws and Regulations on Foreign Direct Investment

China’s new investment law, the FIL, was passed on March 2019 and came into force on January 1, 2020, replacing China’s previous foreign investment framework.  The FIL provides a five-year transition period for foreign enterprises established under previous foreign investment laws, after which all foreign enterprises will be subject to the same domestic laws as Chinese companies, such as the Company Law and, where applicable, the Partnership Enterprise Law.  The FIL intends to abolish the case-by-case review and approval system on market access for foreign investment and standardize the regulatory regimes for foreign investment by including the negative list management system, a foreign investment information reporting system, and a foreign investment security review system all under one document.  The FIL also seeks to address common complaints from foreign business and government by explicitly banning forced technology transfers, promising better IPR protection, and establishing a complaint mechanism for investors to report administrative abuses.  However, foreign investors complain that the FIL and its implementing regulations lack substantive guidance, providing Chinese ministries and local officials significant regulatory discretion, including the ability to retaliate against foreign companies.

In addition to the FIL, in 2019, the State Council issued other substantive guidelines and administrative regulations, including:

System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (Notice 6);

  • Regulation on Optimizing the Business Environment (Order No. 722); and
  • Opinions on Further Improving the Utilization of Foreign Investment (Opinions 2019).

Other relevant legislation issued by government entities in 2019, include:

Draft legislation issued by other government entities in 2020:

  • Draft Amendments to the Anti-Monopoly Law;

In addition to central government laws and implementation guidelines, ministries and local regulators have issued over 1,000 rules and regulatory documents that directly affect foreign investments within their geographical areas.  While not comprehensive, a list of published and official Chinese laws and regulations is available at:  http://www.gov.cn/zhengce/ .

FDI Laws on Investment Approvals

Foreign investments in industries and economic sectors that are not explicitly restricted or prohibited on the foreign investment negative or market access lists do not require MOFCOM pre-approval.  However, investors have complained that in practice, investing in an industry not on the negative list does not guarantee a foreign investor “national treatment,” or treatment no less favorable than treatment accorded to a similarly-situated domestic investor.  Foreign investors must still comply with other steps and approvals like receiving land rights, business licenses, and other necessary permits.  When a foreign investment needs ratification from the NDRC or a local development and reform commission, that administrative body is in charge of assessing the project’s compliance with a panoply of Chinese laws and regulations.  In some cases, NDRC also solicits the opinions of relevant Chinese industrial regulators and consulting agencies acting on behalf of Chinese domestic firms, creating potential conflicts of interest disadvantageous to foreign firms.

Competition and Anti-Trust Laws

The Anti-Monopoly Bureau of the SAMR enforces China’s Anti-Monopoly Law (AML) and oversees competition issues at the central and provincial levels.  The agency reviews mergers and acquisitions, and investigates cartel and other anticompetitive agreements, abuse of a dominant market position, and abuse of administrative powers by government agencies.  SAMR issues new implementation guidelines and antitrust provisions to fill in gaps in the AML, address new trends in China’s market, and help foster transparency in AML enforcement.  Generally, SAMR has sought public comment on proposed measures and guidelines, although comment periods can be less than 30 days.  In 2019, the agency put into effect provisions on abuse of market dominance, prohibition of monopoly agreements, and restraint against abuse of administrative powers to restrict competition.  In January 2020, SAMR published draft amendments to the AML for comment, which included, among other changes, stepped-up fines for AML violations and expanded factors to consider abuse of market dominance by Internet companies.  (This is the first step in a lengthy process to amend the AML.)  SAMR also oversees the Fair Competition Review System (FCRS), which requires government agencies to conduct a review prior to issuing new and revising existing laws, regulations, and guidelines to ensure such measures do not inhibit competition.

While these are seen as positive measures, foreign businesses have complained that enforcement of competition policy is uneven in practice and tends to focus on foreign companies.   Foreign companies have expressed concern that the government uses AML enforcement as an extension of China’s industrial policies, particularly for companies operating in strategic sectors.  The AML explicitly protects the lawful operations of government monopolies in industries that affect the national economy or national security.   U.S. companies have expressed concerns that SAMR consults with other Chinese agencies when reviewing M&A transactions, allowing other agencies to raise concerns, including those not related to antitrust enforcement, in order to block, delay, or force transacting parties to comply with preconditions in order to receive approval.  Foreign companies have also complained that China’s enforcement of AML facilitated forced technology transfer or licensing to local competitors.

Expropriation and Compensation

Chinese law prohibits nationalization of FIEs, except under vaguely specified “special circumstances” where there is a national security or public interest need. Chinese law requires fair compensation for an expropriated foreign investment, but does not detail the method used to calculate the value of the foreign investment.  The Department of State is not aware of any cases since 1979 in which China has expropriated a U.S. investment, although the Department has notified Congress through the annual 527 Investment Dispute Report of several cases of concern.

Dispute Settlement

ICSID Convention and New York Convention

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

Investor-State Dispute Settlement  (ISDS)

Initially, China was disinclined to accept ISDS as a method to resolve investment disputes based on its suspicions of international law and international arbitration, as well as its emphasis on state sovereignty.  China’s early BITs, such as the 1982 China–Sweden BIT, only included state–state dispute settlement.  As China has become a capital exporter under its initiative of “Going Global” and infrastructure investments under the OBOR initiative, its views on ISDS have shifted to allow foreign investors with unobstructed access to international arbitration to resolve any investment dispute that cannot be amicably settled within six months.  Chinese investors did not use ISDS mechanisms until 2007, and the first known ISDS case against China was initiated in 2011 by Malaysian investors.  On July 19, 2019, China submitted its proposal on ISDS reform to the United Nations Commission on International Trade Law (UNCITRAL) Working Group III.  Under the proposal, China reaffirmed its commitment to ISDS as an important mechanism for resolving investor-state disputes under public international law.  However, it suggested various pathways for ISDS reform, including supporting the study of a permanent appellate body. including supporting the study of a permanent appellate body.

International Commercial Arbitration and Foreign Courts

Chinese officials typically urge private parties to resolve commercial disputes through informal conciliation.  If formal mediation is necessary, Chinese parties and the authorities typically prefer arbitration to litigation.  Many contract disputes require arbitration by the Beijing-based China International Economic and Trade Arbitration Commission (CIETAC).  Established by the State Council in 1956 under the auspices of the China Council for the Promotion of International Trade (CCPIT), CIETAC is China’s most widely utilized arbitral body for foreign-related disputes.  Some foreign parties have obtained favorable rulings from CIETAC, while others have questioned CIETAC’s fairness and effectiveness.  Besides CIETAC, there are also provincial and municipal arbitration commissions.  A foreign party may also seek arbitration in some instances from an offshore commission.  Foreign companies often encounter challenges in enforcing arbitration decisions issued by Chinese and foreign arbitration bodies.  In these instances, foreign investors may appeal to higher courts.  The Chinese government and judicial bodies do not maintain a public record of investment disputes.  The SPC maintains an annual count of the number of cases involving foreigners but does not provide details about the cases.  Rulings in some cases are open to the public.
In 2018, the SPC established the China International Commercial Court (CICC) to adjudicate international commercial cases, especially cases related to the OBOR initiative.  The first CICC was established in Shenzhen, followed by a second court in Xi’an.  The court held its first public hearing on May 2019, involving a Chinese company suing an Italian company, and issued its first ruling on March 2020, siding with the Chinese company.  Parties to a dispute before the CICC can only be represented by Chinese law-qualified lawyers, as foreign lawyers do not have a right of audience in Chinese courts.  Unlike other international courts, foreign judges are not permitted to be part of the proceedings.  Judgments of the CICC, given it is a part of the SPC, cannot be appealed from, but are subject to possible “retrial” under the Civil Procedure Law.  Local contacts and academics note that to-date, the CICC has not reviewed any OBOR or infrastructure related cases and question the CICC’s ability to provide “equal protection” to foreign investors.

China has bilateral agreements with 27 countries on the recognition and enforcement of foreign court judgments, but not with the United States.  However, under Chinese law, local courts must prioritize China’s laws and other regulatory measures above foreign court judgments.

Bankruptcy Regulations

China introduced formal bankruptcy laws in 2007, under the Enterprise Bankruptcy Law, which applied to all companies incorporated under Chinese laws and subject to Chinese regulations.  However, courts routinely rejected applications from struggling businesses and their creditors due to the lack of implementation guidelines and concerns over social unrest.  Local government-led negotiations resolved most corporate debt disputes, using asset liquidation as the main insolvency procedure.  Many insolvent Chinese companies survived on state subsidies and loans from state-owned banks, while others defaulted on their debts with minimal payments to creditors.  After a decade of heavy borrowing, China’s growth has slowed and forced the government to make needed bankruptcy reforms.  China now has more than 90 U.S.-style specialized bankruptcy courts.  In 2019, the government added new courts in Beijing, Shanghai and Shenzhen.  Court-appointed administrators—law firms and accounting firms that help verify claims, organize creditors’ meetings, and list and sell assets online as authorities look to handle more cases and process them faster.  China’s SPC recorded over 19,000 liquidation and bankruptcy cases in 2019, double the number of cases in 2017.  While Chinese authorities are taking steps to address mounting corporate debt and are gradually allowing some companies to fail, companies generally avoid pursing bankruptcy because of the potential for local government interference and fear of losing control over the bankruptcy outcome.  According to experts, Chinese courts not only lack the resources and capacity to handle bankruptcy cases, but bankruptcy administrators, clerks, and judges lack relevant experience.

4. Industrial Policies

Investment Incentives

To attract foreign investment, different provinces and municipalities offer preferential packages like a temporary reduction in taxes, resources and land use benefits, reduction in import or export duties, special treatment in obtaining basic infrastructure services, streamlined government approvals, research and development subsidies, and funding for initial startups.  Often, these packages stipulate that foreign investors must meet certain benchmarks for exports, local content, technology transfer, and other requirements.  The Chinese government incentivizes foreign investors to participate in initiatives like MIC 2025 that seek to transform China into an innovation-based economy.  Announced in 2015, China’s MIC 2025 roadmap has prioritized the following industries:  new-generation information technology, advanced numerical-control machine tools and robotics, aerospace equipment, maritime engineering equipment and vessels, advanced rail, new-energy vehicles, energy equipment, agricultural equipment, new materials, and biopharmaceuticals and medical equipment.  While mentions of MIC 2025 have all but disappeared from public discourse, a raft of policy announcements at the national and sub-national levels indicate China’s continued commitment to developing these sectors.  Foreign investment plays an important role in helping China move up the manufacturing value chain.  However, foreign investment remains closed off to many economic sectors that China deems sensitive due to broadly defined national or economic security concerns.

Foreign Trade Zones/Free Ports/Trade Facilitation

In 2013, the State Council announced the Shanghai pilot FTZ to provide open and high-standard trade and investment services to foreign companies.  China gradually scaled up its FTZ pilot program to 12 FTZs, launching an additional six FTZs in 2019.  China’s FTZs are in: Tianjin, Guangdong, Fujian, Chongqing, Hainan, Henan, Hubei, Liaoning, Shaanxi, Sichuan, Zhejiang, Jiangsu, Shandong, Hebei, Heilongjiang, Guanxi, and Yunnan provinces.  The goal of all of China’s FTZs is to provide a trial ground for trade and investment liberalization measures and to introduce service sector reforms, especially in financial services, that China expects to eventually introduce in other parts of the domestic economy.  The FTZs promise foreign investors “national treatment” for the market access phase of an investment in industries and sectors not listed on the FTZ negative list, or on the list of industries and economic sectors from which foreign investment is restricted or prohibited.  However, the 2019 FTZ negative list lacked substantive changes, and many foreign firms have reported that in practice, the degree of liberalization in the FTZs is comparable to opportunities in other parts of China.  The stated purpose of FTZs is also to integrate these areas more closely with the OBOR initiative.

Performance and Data Localization Requirements

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

Furthermore, China’s evolving cybersecurity and personal data protection regime includes onerous restrictions on firms that generate or process data in China, such as requirements for certain firms to store data in China.  Restrictions exist on the transfer of personal information of Chinese citizens outside of China.  These restrictions have prompted many firms to review how their networks manage data.  Foreign firms also fear that PRC laws call for the use of “secure and controllable,” “secure and trustworthy,” etc. technologies will curtail sales opportunities for foreign firms or pressure foreign companies to disclose source code and other proprietary intellectual property.  In October 2019, China adopted a Cryptography Law that includes restrictive requirements for commercial encryption products that “involve national security, the national economy and people’s lives, and public interest.”  This broad definition of commercial encryption products that must undergo a security assessment raises concerns that implementation will lead to unnecessary restrictions on foreign information and communications technology (ICT) products and services.  Further, prescriptive technology adoption requirements, often in the form of domestic standards that diverge from global norms, in effect give preference to domestic firms.  These requirements potentially jeopardize IP protection and overall competitiveness of foreign firms operating in China.

5. Protection of Property Rights

Real Property

The Chinese state owns all urban land, and only the state can issue long-term land leases to individuals and companies, including foreigners, subject to many restrictions.  Chinese property law stipulates that residential property rights renew automatically, while commercial and industrial grants renew if the renewal does not conflict with other public interest claims.  Several foreign investors have reported revocation of land use rights so that Chinese developers could pursue government-designated building projects.  Investors often complain about insufficient compensation in these cases.  In rural China, collectively owned land use rights are more complicated.  The registration system suffers from unclear ownership lines and disputed border claims, often at the expense of local farmers whom village leaders exclude in favor of “handshake deals” with commercial interests.  China’s Securities Law defines debtor and guarantor rights, including rights to mortgage certain types of property and other tangible assets, including long-term leases.  Chinese law does not prohibit foreigners from buying non-performing debt, but such debt must be acquired through state-owned asset management firms, and PRC officials often use bureaucratic hurdles to limit foreigners’ ability to liquidate assets.

Intellectual Property Rights

In 2019, China’s legislature promulgated multiple reforms to China’s IP protection and enforcement systems.  In January, the Guidelines on Interim and Preliminary Injunctions for Intellectual Property Disputes came into force. These SPC guidelines provide added clarity to the IP injunction process and offer additional procedural safeguards for trade secret cases.  In April, the Standing Committee of the National People’s Congress passed amendments to the Trademark Law, the Anti-Unfair Competition Law (AUCL), and the Administrative Licensing Law, among other legislation that increases the potential punitive penalty for willful infringement to up to five times the value of calculated damages.  China also amended the Administrative Licensing Law to provide administrative penalties for government officials who illegally disclose trade secrets or require the transfer of technology for the granting of administrative licenses.  Similarly, in March, China’s State Council revised several regulations that U.S. and EU enterprises and governments had criticized for discriminating against foreign technology and IP holders.  Finally, in November, the Amended Guidelines for Patent Examination came into effect.  This measure provides further procedural guidance and defines patentability requirements for stem cells and graphical user interfaces.

Despite the changes to China’s legal and regulatory IP regime, some aspects of China’s IP protection regime fall short of international best practices.  Ineffective enforcement of Chinese laws and regulations remains a significant obstacle for foreign investors trying to protect their IP, and counterfeit and pirated goods manufactured in China continue to pose a challenge.  U.S. rights holders continued to experience widespread infringement of patents, trademarks, copyrights, and trade secrets, as well as problems with competitors gaming China’s IP protection and enforcement systems.  In some sectors, Chinese law imposes requirements that U.S. firms develop their IP in China or transfer their IP to Chinese entities as a condition to accessing the Chinese market, or to obtain tax and other preferential benefits available to domestic companies.  Chinese policies can effectively require U.S. firms to localize research and development activities, making their IP much more susceptible to theft or illicit transfer.  These practices are documented in the 2019 Section 301 Report released by the Office of the U.S. Trade Representative (USTR).  The PRC also remained on the Priority Watch List in the 2020 USTR Special 301 Report, and several Chinese physical and online markets were listed in the 2019 USTR Review of Notorious Markets for Counterfeiting and Piracy.  Under the recently signed U.S.-China Phase One trade agreement, China is required to make a number of structural reforms to its IP regime, which will be captured in an IP action plan.

For detailed information on China’s environment for IPR protection and enforcement, please see the following reports:

6. Financial Sector

Capital Markets and Portfolio Investment

China’s leadership has stated that it seeks to build a modern, highly-developed, and multi-tiered capital market.  Since their founding over three decades ago, the Shanghai and Shenzhen Exchanges, combined, are ranked the second largest stock market in the world with over USD5 trillion in assets.  China’s bond market has similarly expanded significantly to become the third largest worldwide, totaling approximately USD13 trillion.  Direct investment by private equity and venture capital firms has increased significantly, but has faced setbacks due to China’s capital controls, which complicate the repatriation of returns.  In December 2019, the State Council and China’s banking and securities regulatory authorities issued a set of measures that would remove in 2020 foreign ownership caps in select segments of China’s financial sector.  Specifically, foreign investors can wholly own insurance and futures firms as of January 1, asset management companies as of April 1, and securities firms as of December 1, 2020.

China has been an IMF Article VIII member since 1996 and generally refrains from restrictions on payments and transfers for current international transactions.  However, the government has used administrative and preferential policies to encourage credit allocation towards national priorities, such as infrastructure investments.  As of 2019, over 40 sovereign entities and private sector firms, including Daimler and Standard Chartered HK, have since issued roughly USD48 billion in “Panda Bonds,” Chinese renminbi (RMB)-denominated debt issued by foreign entities in China.  China’s private sector can also access credit via bank loans, bond issuance, and wealth management and trust products.  However, the vast majority of bank credit is disbursed to state-owned firms, largely due to distortions in China’s banking sector that have incentivized lending to state-affiliated entities over their private sector counterparts.

The Monetary and Banking System

China’s monetary policy is run by the People’s Bank of China (PBOC), China’s central bank.  The PBOC has traditionally deployed various policy tools, such as open market operations, reserve requirement ratios, benchmark rates and medium-term lending facilities, to control credit growth.  The PBOC had previously also set quotas on how much banks could lend, but abandoned the practice in 1998.  As part of its efforts to shift towards a more market-based system, the PBOC announced in 2019 that it will reform its one-year loan prime rate (LPR), which will serve as an anchor reference for Chinese lenders.  The LPR is based on the interest rate for one-year loans that 18 banks offer their best customers.  Despite these measures to move towards more market-based lending, China’s financial regulators still influence the volume and destination of Chinese bank loans through “window guidance” – unofficial directives delivered verbally – as well as through mandated lending targets for key economic groups, such as small and medium sized enterprises.

The China Banking and Insurance Regulatory Commission (CBIRC) oversees China’s roughly 4,000 lending institutions.  At the end of the first quarter of 2019, Chinese banks’ total assets reached RMB 276 trillion (USD40 trillion).  China’s “Big Five” – Agricultural Bank of China, Bank of China, Bank of Communications, China Construction Bank, and Industrial and Commercial Bank of China – dominate the sector and are largely stable, but over the past year, China has experienced regional pockets of banking stress, especially among smaller lenders.  Reflecting the level of weakness among these banks, in November 2019, the PBOC announced that about one in 10 of China’s banks received a “fail” rating following an industry-wide review.  The assessment deemed 420 firms, all rural financial institutions, “extremely risky.”  The official rate of non-performing loans among China’s banks is relatively low: below two percent as of the end of 2019.  However, analysts believe the actual figure may be significantly higher.  Bank loans continue to provide the majority of credit options (reportedly around 66 percent in 2019) for Chinese companies, although other sources of capital, such as corporate bonds, equity financing, and private equity are quickly expanding their scope, reach, and sophistication in China.  In December 2019, the Coronavirus (COVID-19) pandemic emerged in Wuhan, China.  In response, the PBOC established a variety of programs to stimulate the economy, including a re-lending scheme of USD4.28 billion and a special credit line of USD50 billion for policy banks.  In addition, the Ministry of Industry and Information Technologies established a list of companies vital to COVID-19 efforts, which would be eligible to receive additional loans and subsidies from the Ministry of Finance.

As part of a broad campaign to reduce debt and financial risk, Chinese regulators over the last several years have implemented measures to rein in the rapid growth of China’s “shadow banking” sector, which includes wealth management and trust products.  These measures have achieved positive results: the share of trust loans, entrusted loans, and undiscounted bankers’ acceptances dropped a total of seven percent in 2019 as a share of total social financing (TSF) – a broad measure of available credit in China.  TSF’s share of corporate bonds jumped from a negative 2.31 percent in 2017 to 12.7 percent in 2019.  In October 2019, the CBIRC announced that foreign owned banks will be allowed to establish wholly-owned banks and branches in China.  However, analysts noted there are often licenses and other procedures that can drag out the process in this sector, which is already dominated by local players.  Nearly all of China’s major banks have correspondent banking relationships with foreign banks, including the Bank of China, which has correspondent banking relationships with more than 1,600 institutions in 179 countries and regions.  Foreigners are eligible to open a bank account in China, but are required to present a passport and/or Chinese government issued identification.

Foreign Exchange and Remittances

Foreign Exchange

While the central bank’s official position is that companies with proper documentation should be able to freely conduct business, in practice, companies have reported challenges and delays in obtaining approvals for foreign currency transactions by sub-national regulatory branches.  Chinese authorities instituted strict capital control measures in 2016, when China recorded a surge in capital flight that reduced its foreign currency reserves by about USD1 trillion, stabilizing to around USD3 trillion today.  China has since announced that it will gradually reduce those controls, but market analysts expect they would be re-imposed if capital outflows accelerate again.  Chinese foreign exchange rules cap the maximum amount of RMB individuals are allowed to convert into other currencies at approximately USD50,000 each year and restrict them from directly transferring RMB abroad without prior approval from the State Administration of Foreign Exchange (SAFE).  In 2017, authorities further restricted overseas currency withdrawals by banning sales of life insurance products and capping credit card withdrawals at USD5,000 per transaction.  SAFE has not reduced the USD50,000 quota, but during periods of higher than normal capital outflows, banks are reportedly instructed by SAFE to increase scrutiny over individuals’ requests for foreign currency and to require additional paperwork clarifying the intended use of the funds, with the express intent of slowing capital outflows.

China’s exchange rate regime is managed within a band that allows the currency to rise or fall by 2 percent per day from the “reference rate” set each morning.  In August 2019, the U.S. Treasury Department designated China a “currency manipulator,” given China’s large-scale interventions in the foreign exchange market.  Treasury removed this designation in January 2020.

Remittance Policies

According to China’s FIL, as of January 1, 2020, funds associated with any forms of investment, including investment, profits, capital gains, returns from asset disposal, IPR loyalties, compensation, and liquidation proceeds, may be freely converted into any world currency for remittance.  Under Chinese law, FIEs do not need pre-approval to open foreign exchange accounts and are allowed to retain income as foreign exchange or to convert it into RMB without quota requirements.  The remittance of profits and dividends by FIEs is not subject to time limitations, but FIEs need to submit a series of documents to designated banks for review and approval.  The review period is not fixed and is frequently completed within one or two working days of the submission of complete documents.  For remittance of interest and principal on private foreign debt, firms must submit an application form, a foreign debt agreement, and the notice on repayment of the principal and interest.  Banks will then check if the repayment volume is within the repayable principal.  There are no specific rules on the remittance of royalties and management fees.  In August 2018, SAFE raised the reserve requirement for foreign currency transactions from zero to 20 percent, significantly increasing the cost of foreign currency transactions.

Sovereign Wealth Funds

China officially has only one sovereign wealth fund (SWF), the China Investment Corporation (CIC), which was launched to help diversify China’s foreign exchange reserves.  Established in 2007 with USD200 billion in initial registered capital, CIC currently manages over USD940 billion in assets as of the close of 2018 and invests on a 10-year time horizon.  CIC has since evolved into three subsidiaries:

  • CIC International was established in September 2011 with a mandate to invest in and manage overseas assets.  It conducts public market equity and bond investments, hedge fund, multi-asset and real estate investments, private equity (including private credit) fund investments, co-investments, and minority investments as a financial investor.
  • CIC Capital was incorporated in January 2015 with a mandate to specialize in making direct investments to enhance CIC’s investment in long-term assets.
  • Central Huijin makes equity investments in Chinese state-owned financial institutions.

CIC publishes an annual report containing information on its structure, investments, and returns.  CIC invests in diverse sectors, including financial services, consumer products, information technology, high-end manufacturing, healthcare, energy, telecommunications, and utilities.  China also operates other funds that function in part like sovereign wealth funds, including:  China’s National Social Security Fund, with an estimated USD325 billion in assets; the China-Africa Development Fund (solely funded by the China Development Bank), with an estimated USD10 billion in assets; the SAFE Investment Company, with an estimated USD417.8 billion in assets; and China’s state-owned Silk Road Fund, established in December 2014 with USD40 billion in assets to foster investment in OBOR partner countries.  Chinese state-run funds do not report the percentage of their assets that are invested domestically.  However, Chinese state-run funds follow the voluntary code of good practices known as the Santiago Principles and participate in the IMF-hosted International Working Group on SWFs.  The Chinese government does not have any formal policies specifying that CIC invest funds consistent with industrial policies or in government-designated projects, although CIC is expected to pursue government objectives.  CIC generally adopts a “passive” role as a portfolio investor.

7. State-Owned Enterprises

China has approximately 150,000 wholly-owned SOEs, of which 50,000 are owned by the central government, and the remainder by local or provincial governments.  SOEs, both central and local, account for 30 to 40 percent of total gross domestic product (GDP) and about 20 percent of China’s total employment.  Non-financial SOE assets totaled roughly USD30 trillion.  SOEs can be found in all sectors of the economy, from tourism to heavy industries.  In addition to wholly-owned enterprises, state funds are spread throughout the economy, such that the state may also be the majority or largest shareholder in a nominally private enterprise.  China’s leading SOEs benefit from preferential government policies aimed at developing bigger and stronger “national champions.”  SOEs enjoy favored access to essential economic inputs (land, hydrocarbons, finance, telecoms, and electricity) and exercise considerable power in markets like steel and minerals.  SOEs have long enjoyed preferential access to credit and the ability to issue publicly traded equity and debt.  A comprehensive, published list of all Chinese SOEs does not exist.

PRC officials have indicated China intends to utilize OECD guidelines to improve the professionalism and independence of SOEs, including relying on Boards of Directors that are independent from political influence.  Other recent reforms have included salary caps, limits on employee benefits, and attempts to create stock incentive programs for managers who have produced mixed results.  However, analysts believe minor reforms will be ineffective if SOE administration and government policy remain intertwined, and Chinese officials have made minimal progress in fundamentally changing the regulation and business conduct of SOEs.  SOEs continue to hold dominant shares in their respective industries, regardless of whether they are strategic, which may further restrain private investment in the economy.  Among central SOEs managed by the State-owned Assets Supervision and Administration Commission (SASAC), senior management positions are mainly filled by senior CCP members who report directly to the CCP, and double as the company’s party secretary.  SOE executives outrank regulators in the CCP rank structure, which minimizes the effectiveness of regulators in implementing reforms.  The lack of management independence and the controlling ownership interest of the state make SOEs de facto arms of the government, subject to government direction and interference.  SOEs are rarely the defendant in legal disputes, and when they are, they almost always prevail.  U.S. companies often complain about the lack of transparency and objectivity in commercial disputes with SOEs.

Privatization Program

Since 2013, the PRC government has periodically announced reforms to SOEs that included selling SOE shares to outside investors or a mixed ownership model, in which private companies invest in SOEs and outside managers are hired.  The government has tried these approaches to improve SOE management structures, emphasize the use of financial benchmarks, and gradually infuse private capital into some sectors traditionally monopolized by SOEs like energy, telecommunications, and finance.  In practice, however, reforms have been gradual, as the PRC government has struggled to implement its SOE reform vision and often preferred to utilize a SOE consolidation approach.  Recently, Xi and other senior leaders have increasingly focused reform efforts on strengthening the role of the state as an investor or owner of capital, instead of the old SOE model in which the state was more directly involved in managing operations.

8. Responsible Business Conduct

General awareness of RBC standards (including environmental, social, and governance issues) is a relatively new concept to most Chinese companies, especially companies that exclusively operate in China’s domestic market.  Chinese laws that regulate business conduct use voluntary compliance, are often limited in scope, and are frequently cast aside when other economic priorities supersede RBC priorities.  In addition, China lacks mature and independent non-governmental organizations (NGOs), investment funds, worker unions, and other business associations that promote RBC, further contributing to the general lack of awareness in Chinese business practices.  The Foreign NGO Law remains a concern for U.S. organizations due to the restrictions on many NGO activities, including promotion of RBC and corporate social responsibility (CSR) best practices.  For U.S. investors looking to partner with a Chinese company or expand operations, finding partners that meet internationally recognized standards in areas like labor, environmental protection, worker safety, and manufacturing best practices can be a significant challenge.  However, the Chinese government has placed greater emphasis on protecting the environment and elevating sustainability as a key priority, resulting in more Chinese companies adding environmental concerns to their CSR initiatives.  As part of these efforts, Chinese ministries have signed several memoranda of understanding with international organizations such as the OECD to cooperate on RBC initiatives.  As a result, MOFCOM in 2016 launched the RBC Platform, which serves as the national contact point on RBC issues and supplies information to companies about RBC best practices in China.

9. Corruption

Since Xi’s rise to power in 2012, China has undergone an intensive and large-scale anti-corruption campaign, with investigations reaching into all sectors of the government, military, and economy.  Xi labeled endemic corruption an “existential threat” to the very survival of the CCP.  Since then, each CCP annual plenum has touched on judicial, administrative, and CCP discipline reforms needed to root out corruption.  In 2018, the CCP amended the constitution to enable the CCP’s Central Commission for Discipline Inspection (CCDI) to become a state organ, calling the new body the National Supervisory Commission-Central Commission for Discipline Inspection (NSC-CCDI). The NSC-CCDI wields the power to investigate any public official and those involved in corrupt officials’ dealings.  From 2012 to 2019, the NSC-CCDI claimed it investigated 2.78 million cases – more than the total of the preceding 10 years.  In 2019 alone, the NSC-CCDI investigated 619,000 cases and disciplined approximately 587,000 individuals, of whom 45 were officials at or above the provincial or ministerial level.  The PRC’s overseas fugitive-hunting campaign, called “Operation Skynet,” has led to the capture of more than 7,500 fugitives suspected of corruption who were living in other countries.  The PRC did not notify host countries of these operations.  In 2019 alone, NSC-CCDI reported apprehending 2,041 alleged fugitives suspected of official crimes, including 860 corrupt officials, as well as recovering about USD797.5 million in stolen money.

Anecdotal information suggests the PRC’s anti-corruption crackdown is inconsistently and discretionarily applied, raising concerns among foreign companies in China.  For example, to fight rampant commercial corruption in the medical/pharmaceutical sector, the PRC’s health authority issued “black lists” of firms and agents involved in commercial bribery, including several foreign companies.  Anecdotal information suggests many PRC officials responsible for approving foreign investment projects, as well as some routine business transactions, delayed approvals so as not to arouse corruption suspicions, making it increasingly difficult to conduct normal commercial activity.  While central government leadership has welcomed increased public participation in reporting suspected corruption at lower levels, direct criticism of central government leadership or policies remains off-limits and is seen as an existential threat to China’s political and social stability.

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

Resources to Report Corruption

The following government organization receives public reports of corruption:  Anti-Corruption Reporting Center of the CCP Central Commission for Discipline Inspection and the Ministry of Supervision, Telephone Number:  +86 10 12388.

10. Political and Security Environment

Foreign companies operating in China face a low risk of political violence.  However, protests in Hong Kong in 2019 exposed foreign investors to political risk due to Hong Kong’s role as an international hub for investment into and out of China.  The CCP also punished companies that expressed support for Hong Kong protesters — most notably, a Chinese boycott of the U.S. National Basketball Association after one team’s general manager expressed his personal view supporting the Hong Kong protesters.  In the past, the PRC government has also encouraged protests or boycotts of products from countries like the United States, South Korea, Japan, Norway, Canada, and the Philippines, in retaliation for unrelated policy decisions.  Examples of politically motivated economic retaliation against foreign firms include boycott campaigns against Korean retailer Lotte in 2016 and 2017 in retaliation for the South Korean government’s decision to deploy the Terminal High Altitude Area Defense (THAAD) to the Korean Peninsula; and the PRC’s retaliation against Canadian companies and citizens for Canada’s arrest of Huawei Chief Financial Officer Meng Wanzhou.

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

11. Labor Policies and Practices

For U.S. companies operating in China, finding, developing, and retaining domestic talent at the management and skilled technical staff levels remain challenging for foreign firms.  In addition, labor costs, including salaries along with other production inputs, continue to rise.  Foreign firms continue to cite air pollution concerns as a major hurdle in attracting and retaining qualified foreign talent.  Chinese labor law does not provide for freedom of association or protect the right to strike.  The PRC has not ratified the International Labor Organization conventions on freedom of association, collective bargaining, or forced labor, but it has ratified conventions prohibiting child labor and employment discrimination.  Foreign companies complain of difficulty navigating China’s labor and social insurance laws, including local implementation guidelines. Compounding the complexity, due to ineffective enforcement of labor contract laws, Chinese domestic employers often hire local employees without contracts, putting foreign firms at a disadvantage.  Without written contracts, workers struggle to prove employment, thus losing basic protections such as severance if terminated.  Moreover, in 2018 and 2019, there were multiple U.S. government, media, and NGO reports that persons detained in internment camps in Xinjiang were subjected to forced labor in violation of international labor law and standards.  In October 2019, CBP issued a Withhold Release Order barring importation into the United States of garments produced by Hetian Taida Apparel Co., Ltd. in Xinjiang, which were determined to be produced with prison or forced labor in violation of U.S. import laws.  The Commerce Department added 28 Chinese commercial and government entities to its Entity List for their complicity in human rights abuses.

The All China Federation of Trade Unions (ACFTU) is the only union recognized under the law.  Establishing independent trade unions is illegal.  The law allows for “collective bargaining,” but in practice, focuses solely on collective wage negotiations.  The Trade Union Law gives the ACFTU, a CCP organ chaired by a member of the Politburo, control over all union organizations and activities, including enterprise-level unions.  ACFTU enterprise unions require employers to pay mandatory fees, often through the local tax bureau, equaling a negotiated minimum of 0.5 percent to a standard two percent of total payroll.  While labor laws do not protect the right to strike, “spontaneous” worker protests and work stoppages regularly occur.  Official forums for mediation, arbitration, and other similar mechanisms of alternative dispute resolution often are ineffective in resolving labor disputes.  Even when an arbitration award or legal judgment is obtained, getting local authorities to enforce judgments is problematic.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S.  FDI in Host Country/Economy
Host Country Statistical source* USG or international statistical source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year   Amount Year Amount
Host Country Gross Domestic Product (GDP ($M USD) 2019*   $14,380,000 2018 $13,608,000 www.worldbank.org/en/country 
Foreign Direct Investment Host Country Statistical source* USG or international Source of data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S.  FDI in partner country ($M USD, stock positions) 2018(**)     $109,958 2018          $116,518 BEA data available at
https://www.bea.gov/international/
direct-investment-and-multinational-
enterprises-comprehensive-data
 
Host country’s FDI in the United States ($M USD, stock positions) 2018(**)      $39,557 2018          $39,473 BEA data available at
https://www.bea.gov/international/
direct-investment-and-multinational-
enterprises-comprehensive-data
 
Total Inbound Stock as a % of GDP 2018(**) 15.9% 2018 12.1% UNCTAD data available at
https://unctad.org.en/Pages/DIAE/
World%
 

20Investment%20Report/
Country-Fact-Sheets.aspx 
 

*China’s National Bureau of Statistics (converted at 6.8 RMB/USD estimate)
**China’s 2019 Yearbook (Annual Economic Data from China’s Economic Ministries:  MOFCOM, NBS, and Ministry of Finance)

Table 3:  Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward $2,814,067 100% Total Outward $1,982,270 100%
China, PR: Hong Kong $1,378,383 48.96% China, PR: Hong Kong $958,904 48.37%
British Virgin Islands $302,553 10.75% Cayman Islands $237,262 11.96%
Japan $166,817 6.13% British Virgin Islands $119,658 6.03%
Singapore $115,035 4.08% United States $67,038 3.38%
Germany $78,394 2.78% Singapore $35,970 1.81%
“0” reflects amounts rounded to +/- USD 500,000.

Source:  IMF Coordinated Direct Investment Survey (CDIS)

Table 4:  Sources of Portfolio Investment
Portfolio Investment Assets
Top Five Partners (Millions, US Dollars)
Total Equity Securities Total Debt Securities
All Countries $560,250 100% All Countries $303,4000 100% All Countries $256,849 100%
China, PR: Hong Kong $179,672 32.0% China, PR: Hong Kong $121,883 40.1% China, PR: Hong Kong $57,789 22.5%
Cayman Islands $47,917  8.5% Cayman Islands  $28,323  9.3% British Virgin Island  $38,230 14.8%
British Virgin Island $40,270  7.1% Luxembourg  $8,786  2.8% Cayman Islands  $19,594 7.6%
Luxembourg  $13,712  2.4% Japan  $7,012  2.3% Germany  $7,660 2.9%
Germany  $12,294  2.1% Ireland  $6,829  2.2% Singapore  $7,122 2.7%

14. Contact for More Information

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

Colombia

Executive Summary

With markedly improved security conditions, a market of 50 million people, an abundance of natural resources, and an educated and growing middle-class, Colombia continues to be an attractive destination for foreign investment in Latin America.  In the World Bank’s 2020 Doing Business Report, Colombia ranked 67 out of 190 countries in the “Ease of Doing Business” index.

In 2020, the Colombian economy will likely experience its first recession since 1999 after suffering the dual shocks of a long national quarantine to control the spread of the coronavirus and a related collapse of oil prices.  (Note: A summary of macroeconomic statistical updates due to the COVID-19 crisis is included at the end of this summary. End Note.)  However, due to strong macroeconomic institutions and relatively robust pre-coronavirus economy, Colombia is better positioned than many countries in the region to return to growth in 2021.

Colombia’s legal and regulatory systems are generally transparent and consistent with international norms.  The country has a comprehensive legal framework for business and foreign direct investment (FDI).  The U.S.-Colombia Trade Promotion Agreement (CTPA), which took effect on May 15, 2012, has strengthened bilateral trade and investment.  Through the CTPA and several international conventions and treaties, Colombia’s dispute settlement mechanisms have improved.  Weaknesses include protection of intellectual property rights (IPR), as Colombia has yet to implement certain IPR-related provisions of the CTPA.  Colombia was on the U.S. Trade Representative’s Special 301 Watch List in 2020.  The Organization for Economic Cooperation and Development (OECD) invited Colombia to join its ranks in 2018, and in April, 2020 the country became its 37th member.  With this comes the expectation Colombia will adhere to OECD norms and standards in economic operations.

The Colombian government has made a concerted effort to develop efficient capital markets, attract investment, and create jobs.  President Ivan Duque took office on August 7, 2018.  The administration made tax reform a priority, succeeding in lowering the tax obligation of some companies while extending income tax to a broader group of individuals, but has struggled to secure approval of other changes from the national congress.  Restrictions on foreign ownership in specific sectors still exist.  FDI increased 7.1 percent from 2017 to 2018, with a third of the 2018 inflow dedicated to the extractives sector.  Roughly half of the Colombian workforce in metropolitan areas is in the informal economy, a share that increases to four fifths in rural areas.  Unemployment registered at 12.6 percent in March, 2020 before rising sharply due to the COVID19 crisis.

Security in Colombia has improved significantly in recent years, with kidnappings down from 10 cases daily in 2000 to 88 cases for all of 2019.  Since the 2016 peace agreement between the government and the country’s largest terrorist organization, the Revolutionary Armed Forces of Colombia (FARC), Colombia has experienced a significant decrease in terrorist activity.  Negotiations between the National Liberation Army (ELN), another terrorist organization, and the government have stalled, and the ELN continues its attacks on energy infrastructure and security forces.  The ELN is one of several powerful narco-criminal operations that poses a threat to commercial activity and investment, especially in rural zones outside of government control.  Despite improved security conditions, coca production was at a record high in 2019.

Corruption remains a significant challenge in Colombia.  The World Economic Forum’s Global Competitiveness Index (2019) ranked Colombia 57 out of 141 countries.  The Colombian government continues to work on improving its business climate, but U.S. and other foreign investors have voiced complaints about non-tariff and bureaucratic barriers to trade and investment at the national, regional, and municipal levels.  Also of concern for investors has been ridged judicial interpretations of the right of indigenous communities to prior consultation (consulta previas) on projects within their territories, as well as a heavy reliance by the national competition and regulatory authority (SIC) on decrees to remedy perceived problems.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2019 96 of 180 http://www.transparency.org/
research/cpi/overview
World Bank’s Doing Business Report 2020 67 of 190 http://www.doingbusiness.org/
en/rankings
Global Innovation Index 2019 67 of 129 https://www.globalinnovationindex.org/
analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2018 $7,737 http://apps.bea.gov/international/
factsheet/
World Bank GNI per capita 2018 $6,180 http://data.worldbank.org/indicator/
NY.GNP.PCAP.CD
 COVID-19 Economic Consequences*
Measure Prior to COVID-19 With COVID-19
GDP Growth, World Bank Estimate, 2020 3.6% -2.0%
Fiscal Deficit as Percent of GDP, 2020 2.2% 4.9%
Unemployment, Fedesarrollo Estimate 10.5%
2019
16.3% – 20.5%
2020
Colombian Peso Valuation to U.S. Dollar Jan. 1, 2020
$1 = 3,287 peso
Apr. 23, 2020
$1 = 4,065 peso

* As of April, 2020

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

The Colombian government actively encourages foreign direct investment (FDI).  In the early 1990s, the country began economic liberalization reforms, which provided for national treatment of foreign investors, lifted controls on remittance of profits and capital, and allowed foreign investment in most sectors.  Colombia imposes the same investment restrictions on foreign investors that it does on national investors.  Generally, foreign investors may participate in the privatization of state-owned enterprises without restrictions.  All FDI involving the establishment of a commercial presence in Colombia requires registration with the Superintendence of Corporations (Superintendencia de Sociedades) and the local chamber of commerce.  All conditions being equal during tender processes, national offers are preferred over foreign offers.  Assuming equal conditions among foreign bidders, those with major Colombian national workforce resources, significant national capital, and/or better conditions to facilitate technology transfers are preferred.

ProColombia is the Colombian government entity that promotes international tourism, foreign investment, and non-traditional exports.  ProColombia assists foreign companies that wish to enter the Colombian market by addressing specific needs, such as identifying contacts in the public and private sectors, organizing visit agendas, and accompanying companies during visits to Colombia.  All services are free of charge and confidential.  Business process outsourcing, software and IT services, cosmetics, health services, automotive manufacturing, textiles, graphic communications, and electric energy are priority sectors.  ProColombia’s “Invest in Colombia” web portal offers detailed information about opportunities in agribusiness, manufacturing, and services in Colombia (www.investincolombia.com.co/sectors).

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign investment in the financial, hydrocarbon, and mining sectors is subject to special regimes, such as investment registration and concession agreements with the Colombian government, but is not restricted in the amount of foreign capital.  The following sectors require that foreign investors have a legal local representative and/or commercial presence in Colombia:  travel and tourism agency services; money order operators; customs brokerage; postal and courier services; merchandise warehousing; merchandise transportation under customs control; international cargo agents; public service companies, including sewage and water works, waste disposal, electricity, gas and fuel distribution, and public telephone services; insurance firms; legal services; and special air services, including aerial fire-fighting, sightseeing, and surveying.

According to the World Bank’s Investing Across Sectors indicators, among the 15 countries in Latin America and the Caribbean covered, Colombia is one of the economies most open to foreign equity ownership.  With the exception of TV broadcasting, all other sectors covered by the indicators are fully open to foreign capital participation.  Foreign ownership in TV broadcasting companies is limited to 40 percent.  Companies publishing newspapers can have up to 100 percent foreign capital investment; however, there is a requirement for the director or general manager to be a Colombian national.

According to the Colombian constitution and foreign investment regulations, foreign investment in Colombia receives the same treatment as an investment made by Colombian nationals.  Any investment made by a person who does not qualify as a resident of Colombia for foreign exchange purposes will qualify as foreign investment.  Foreign investment is permitted in all sectors, except in activities related to defense, national security, and toxic waste handling and disposal.  There are no performance requirements explicitly applicable to the entry and establishment of foreign investment in Colombia.

Foreign investors face specific exceptions and restrictions in the following sectors:

Media:  Only Colombian nationals or legally constituted entities may provide radio or subscription-based television services.  For National Open Television and Nationwide Private Television Operators, only Colombian nationals or legal entities may be granted concessions to provide television services.  Colombia’s national, regional, and municipal open-television channels must be provided at no extra cost to subscribers.  Foreign investment in national television is limited to a maximum of 40 percent ownership of the relevant operator.  Satellite television service providers are obliged to include within their basic programming the broadcast of government-designated public interest channels.  Newspapers published in Colombia covering domestic politics must be directed and managed by Colombian nationals.

Accounting, Auditing, and Data Processing:  To practice in Colombia, providers of accounting services must register with the Central Accountants Board; have uninterrupted domicile in Colombia for at least three years prior to registry; and provide proof of at least one year of accounting experience in Colombia.  No restrictions apply to services offered by consulting firms or individuals.  A legal commercial presence is required to provide data processing and information services in Colombia.

Banking:  Foreign investors may own 100 percent of financial institutions in Colombia, but are required to obtain approval from the Financial Superintendent before making a direct investment of ten percent or more in any one entity.  Portfolio investments used to acquire more than five percent of an entity also require authorization.  Foreign banks must establish a local commercial presence and comply with the same capital and other requirements as local financial institutions.  Foreign banks may establish a subsidiary or office in Colombia, but not a branch.  Every investment of foreign capital in portfolios must be through a Colombian administrator company, including brokerage firms, trust companies, and investment management companies.  All foreign investments must be registered with the central bank.

Fishing:  A foreign vessel may engage in fishing and related activities in Colombian territorial waters only through association with a Colombian company holding a valid fishing permit.  If a ship’s flag corresponds to a country with which Colombia has a complementary bilateral agreement, this agreement shall determine whether the association requirement applies for the process required to obtain a fishing license.  The costs of fishing permits are greater for foreign flag vessels.

Private Security and Surveillance Companies:  Companies constituted with foreign capital prior to February 11, 1994 cannot increase the share of foreign capital.  Those constituted after that date can only have Colombian nationals as shareholders.

Telecommunications:  Barriers to entry in telecommunications services include high license fees (USD 150 million for a long-distance license), commercial presence requirements, and economic needs tests.  While Colombia allows 100 percent foreign ownership of telecommunication providers, it prohibits “callback” services.

Transportation:  Foreign companies can only provide multimodal freight services within or from Colombian territory if they have a domiciled agent or representative legally responsible for its activities in Colombia.  International cabotage companies can provide cabotage services (i.e. between two points within Colombia) “only when there is no national capacity to provide the service,” according to Colombian law.  Colombia prohibits foreign ownership of commercial ships licensed in Colombia and restricts foreign ownership in national airlines or shipping companies to 40 percent.  FDI in the maritime sector is limited to 30 percent ownership of companies operating in the sector.  The owners of a concession providing port services must be legally constituted in Colombia and only Colombian ships may provide port services within Colombian maritime jurisdiction; however, vessels with foreign flags may provide those services if there are no capable Colombian-flag vessels.

Other Investment Policy Reviews

In the past three years, the government has not undergone any third-party investment policy reviews (IPRs) through a multilateral organization such as the OECD, WTO, or UNCTAD.

Business Facilitation

New businesses must register with the chamber of commerce of the city in which the company will reside.  Applicants also register using the Colombian tax authority’s portal at www.dian.gov.co to obtain a taxpayer ID (RUT).  Business founders must visit DIAN offices to obtain an electronic signature for company legal representatives. Also obtained through DIAN – in person or online – is an authorization for company invoices.  In 2019, Colombia made starting a business a step easier by lifting a requirement of opening a local bank account to obtain invoice authorization.  Companies must submit a unified electronic form to self-assess and pay social security and payroll contributions to the Governmental Learning Service (Servicio Nacional de Aprendizaje, or SENA), the Colombian Family Welfare Institute (Instituto Colombiano de Bienestar Familiar, or ICBF), and the Family Compensation Fund (Caja de Compensación Familiar).  After that, companies must register employees for public health coverage, affiliate the company to a public or private pension fund, affiliate the company and employees to an administrator of professional risks, and affiliate employees with a severance fund.

According to the World Bank 2020 “Doing Business” report, recent reforms made easier starting a business, trading across borders, and resolving insolvency.  While improving in the indexes, Colombia’s ranking to other countries still fell two positions to 67 due to greater improvements in some other countries.  According to the report, starting a company in Colombia requires seven procedures and takes an average of 10 days.  Information on starting a company can be found at http://www.ccb.org.co/en/Creating-a-company/Company-start-up/Step-by-step-company-creation ; https://investincolombia.com.co/how-to-invest.html ; and http://www.dian.gov.co .

Outward Investment

Colombia does not incentivize outward investment nor does it restrict domestic investors from investing abroad.

3. Legal Regime

Transparency of the Regulatory System

The Colombian legal and regulatory systems are generally transparent and consistent with international norms.  The commercial code and other laws cover broad areas, including banking and credit, bankruptcy/reorganization, business establishment/conduct, commercial contracts, credit, corporate organization, fiduciary obligations, insurance, industrial property, and real property law.  The civil code contains provisions relating to contracts, mortgages, liens, notary functions, and registries.  There are no identified private-sector associations or non-governmental organizations leading informal regulatory processes.  The ministries generally consult with relevant actors, both foreign and national, when drafting regulations.  Proposed laws are typically published as drafts for public comment.

Enforcement mechanisms exist, but historically the judicial system has not taken an active role in adjudicating commercial cases.  The Constitution establishes the principle of free competition as a national right for all citizens and provides the judiciary with administrative and financial independence from the executive branch.  Colombia has transitioned to an oral accusatory system to make criminal investigations and trials more efficient.  The new system separates the investigative functions assigned to the Office of the Attorney General from trial functions.  Lack of coordination among government entities as well as insufficient resources complicate timely resolution of cases.

Colombia is a member of UNCTAD’s international network of transparent investment procedures (see http://www.businessfacilitation.org  and Colombia’s website http://colombia.eregulations.org ).  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 people in charge of procedures, required documents and conditions, costs, processing time, and legal bases justifying the procedures.

Information on Colombia’s public finances and debt obligations is readily available and is published in a timely manner.

International Regulatory Considerations

OECD countries agreed on May 25, 2018, to invite Colombia as the 37th member of the Organization.  With Law 1950 of January 8, 2019, President Duque ratified accession to the OECD and Colombia became the 37th member of the Organization on April 28, 2020.  Colombia is part of the World Trade Organization (WTO).  The government generally notifies all draft technical regulations to the WTO Committee on Technical Barriers to Trade.  In December 2017, the legislature ratified the WTO Trade Facilitation Agreement (TFA).  The TFA is now also pending Constitutional Court review before Colombia can deposit its letter of acceptance with the WTO.  Regionally, Colombia is a member of organizations such as the Inter-American Development Bank (IADB), the Andean Community of Nations (CAN), the Union of South American Nations (UNASUR), and the Pacific Alliance.

Legal System and Judicial Independence

Colombia has a comprehensive legal system.  Colombia’s judicial system defines the legal rights of commercial entities, reviews regulatory enforcement procedures, and adjudicates contract disputes in the business community.  The judicial framework includes the Council of State, the Constitutional Court, the Supreme Court of Justice, and various departmental and district courts, which collectively are overseen administratively by the Superior Judicial Council.  The 1991 Constitution provided the judiciary with greater administrative and financial independence from the executive branch.  Colombia has a commercial code and other laws covering broad areas, including banking and credit, bankruptcy/reorganization, business establishment/conduct, commercial contracts, credit, corporate organization, fiduciary obligations, insurance, industrial property, and real property law.  Regulations and enforcement actions are appealable through the different stages of legal court processes in Colombia.

Laws and Regulations on Foreign Direct Investment

Colombia has a comprehensive legal framework for business and FDI that incorporates binding norms resulting from its membership in the Andean Community of Nations as well as other free trade agreements and bilateral investment treaties.  Colombia’s judicial system defines the legal rights of commercial entities, reviews regulatory enforcement procedures, and adjudicates contract disputes in the business community.  The judicial framework includes the Council of State, the Constitutional Court, the Supreme Court of Justice, and the various departmental and district courts, which are also overseen for administrative matters by the Superior Judicial Council.  The 1991 Constitution provided the judiciary with greater administrative and financial independence from the executive branch.  However, the judicial system in general remains hampered by time-consuming bureaucratic requirements and corruption.

Competition and Anti-Trust Laws

The Superintendence of Industry and Commerce (SIC), Colombia’s independent national competition authority, monitors and protects free economic competition, consumer rights, compliance with legal requirements and regulations, and protection of personal data.  It also manages the national chambers of commerce.  The SIC has been strengthened in recent years with the addition of personnel, including economists and lawyers.  The SIC has recently investigated companies, including U.S.-based technology firms, gig-economy platforms, and Colombian banks, for failing to protect customer data.  Other investigations include those related to pharmaceutical pricing, “business cartelization” among companies supplying public entities, and misleading advertising by a major brewing company.  U.S. companies have expressed concern about limited ability to appeal SIC orders and the SIC’s increasing reliance on orders to remedy perceived problems.  Other U.S. companies have noted that similar to the judicial system in general, SIC investigations can be drawn-out and opaque.

Expropriation and Compensation

Article 58 of the Constitution governs indemnifications and expropriations and guarantees owners’ rights for legally-acquired property.  For assets taken by eminent domain, Colombian law provides a right of appeal both on the basis of the decision itself and on the level of compensation.  The Constitution does not specify how to proceed in compensation cases, which remains a concern for foreign investors.  The Colombian government has sought to resolve such concerns through the negotiation of bilateral investment treaties and strong investment chapters in free trade agreements, such as the CTPA.

Dispute Settlement

ICSID Convention and New York Convention

Colombia is a member of the New York Convention on Investment Disputes, the International Center for the Settlement of Investment Disputes (ICSID), and the Multilateral Investment Guarantee Agency.  Colombia is also party to the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards.  The National and International Arbitration Statute (Law 1563), modeled after the UNCITRAL Model Law, has been in effect since 2012.

Investor-State Dispute Settlement

Domestic law allows contracting parties to agree to submit disputes to international arbitration, provided that: the parties are domiciled in different countries; the place of arbitration agreed to by the parties is a country other than the one in which they are domiciled; the subject matter of the arbitration involves the interests of more than one country; and the dispute has a direct impact on international trade.  The law permits parties to set their own arbitration terms, including location, procedures, and the nationality of rules and arbiters.  Foreign investors have found the arbitration process in Colombia complex and dilatory, especially with regard to enforcing awards.  However, some progress has been made in the number of qualified professionals and arbitrators with ample experience on transnational transactions, arbitrage centers with cutting-edge infrastructure and administrative capacity, and courts that are progressively more accepting of arbitration processes.

There were 13 pending investment disputes in Colombia in 2020.  The pending cases include:

  • A project management consultant contract with state-owned entity Refiería de Cartagena (Reficar) related to the refurbishment of an oil refinery. Claims arise out of a $2.4 billion liability imposed by the national comptroller general, with claimants contending they provided limited management consultancy services under contract with Reficar, the party responsible for the misconduct.
  • Concession contract for Puerto Nuevo, with claims arising out of the building and maintenance of an access channel to the port.
  • Investments in the construction of Meritage, a luxury real-estate development, with claims arising out of the government’s seizure of property from investors, resulting from claims prior investors used the property for criminal activity.
  • Two separate shareholder claims related to the Colombian bank Granahorrar, which Colombia put under new management and ultimately seized in 1998.
  • Three separate claims related to ownership and mining rights related to the Constitutional Court’s decision to ban mining in the paramos, a range of high-altitude wetlands.
  • Investment and mining rights in Sergovia and Marmato, with claims alleging the government failed to address civil strikes and other disruptions to the mining project caused by illegal artisanal miners and guerilla groups.
  • Ownership of a mobile communications subsidiary, with claims arising out of the government’s order that certain assets revert to State control on expiration of a concession.
  • Majority shareholder claims arising out of the government’s decision to seize and liquidate Electricaribe, an electricity provider.
  • Ownership of a cellular communications subsidiary, with claims arising out of measures claimants contend prevented use or sale of assets after the termination of a concession contract.
  • Interests in a gold mining concession, with claims arising out of the establishment of a national park that entailed cessation of a mining exploration and exploitation concession.

According to the Doing Business 2020 report, the time from the moment a plaintiff files a lawsuit until actual payment and enforcement of the contract averages 1,288 days.  Traditionally, most court proceedings are carried out in writing and only the evidence-gathering stage is carried out through hearings, including witness depositions, site inspections, and cross-examinations.  The government has accelerated proceedings and reduced the backlog of court cases by allowing more verbal public hearings and creating alternative court mechanisms.  The new Code of General Procedure that entered into force in 2014 also establishes oral proceedings that are carried out in two hearings, and there are now penalties for failure to reach a ruling in the time limit set by the law.  Enforcement of an arbitral award can take between six months and one and a half years; a regular judicial process can take up to seven years for private parties and upwards of 15 years in conflicts with the State.  Thus, arbitration results are cheaper and much more efficient.  According to the Doing Business report, Colombia has made enforcing contracts easier by simplifying and speeding up the proceedings for commercial disputes.  In 2020, Colombia’s ranking in the enforcing contracts category of the report held at 177.

International Commercial Arbitration and Foreign Courts

Foreign judgments are recognized and enforced in Colombia once an application is submitted to the Civil Chamber of the Supreme Court.  In 2012, Colombia approved the use of the arbitration process when new legislation based on the United Nations Commission on International Trade Law (UNCITRAL) Model Law was adopted.  The statute stipulates that arbitral awards are governed by both domestic law as well as international conventions (New York Convention, Panama Convention, etc.).  This has made the enforcement of arbitral awards easier for all parties involved.  Arbitration in Colombia is completely independent from judiciary proceedings, and, once arbitration has begun, the only competent authority is the arbitration tribunal itself.  The CTPA protects U.S. investments by requiring a transparent and binding international arbitration mechanism and allowing investor-state arbitration for breaches of investment agreements if certain parameters are met.  The judicial system is notoriously slow, leading many foreign companies to include international arbitration clauses in their contracts.

Bankruptcy Regulations

Colombia’s 1991 Constitution grants the government the authority to intervene directly in financial or economic affairs, and this authority provides solutions similar to U.S. Chapter 11 filings for companies facing liquidation or bankruptcy.  Colombia’s bankruptcy regulations have two major objectives:  to regulate proceedings to ensure creditors’ protection, and to monitor the efficient recovery and preservation of still-viable companies.  This was revised in 2006 to allow creditors to request judicial liquidation, which replaces the previous forced auctioning option.  Now, inventories are valued, creditors’ rights are taken into account, and either a direct sale takes place within two months or all assets are assigned to creditors based on their share of the company’s liabilities.  The insolvency regime for companies was further revised in 2010 to make proceedings more flexible and allow debtors to enter into a long-term payment agreement with creditors, giving the company a chance to recover and continue operating.  Bankruptcy is not criminalized in Colombia.  In 2013, a bankruptcy law for individuals whose debts surpass 50 percent of their assets value entered into force.

Restructuring proceedings aim to protect the debtors from bankruptcy.  Once reorganization has begun, creditors cannot use collection proceedings to collect on debts owed prior to the beginning of the reorganization proceedings.  All existing creditors at the moment of the reorganization are recognized during the proceedings if they present their credit.  Foreign creditors, equity shareholders including foreign equity shareholders, and holders of other financial contracts, including foreign contract holders, are recognized during the proceeding.  Established creditors are guaranteed a vote in the final decision.  According to the Doing Business 2020 report Colombia is ranked 32nd for resolving insolvency and it takes an average of 1.7 years – the same as OECD high-income countries – to resolve insolvency; the average time in Latin America is 2.9 years.

4. Industrial Policies

Investment Incentives

The Colombian government offers investment incentives, such as income tax exemptions and deductions in specific priority sectors, including the so-called “orange economy,” which refers to the creative industries, as well as agriculture and entrepreneurship.  More recently, the government has offered additional incentives in an effort to generate investments in former conflict municipalities.  Investment incentives through free trade agreements between Colombia and other nations include national treatment and most favored nation treatment of investors; establishment of liability standards assumed by countries regarding the other nation’s investors, including the minimum standard of treatment and establishment of rules for investor compensation from expropriation; establishment of rules for transfer of capital relating to investment; and specific tax treatment.

The government offers tax incentives to all investors, such as preferential import tariffs, tax exemptions, and credit or risk capital.  Some fiscal incentives are available for investments that generate new employment or production in areas impacted by natural disasters and former conflict-affected municipalities.  Companies can apply for these directly with participating agencies.  Tax and fiscal incentives are often based on regional, sector, or business size considerations.  Border areas have special protections due to currency fluctuations in neighboring countries which can impact local economies.  National and local governments also offer special incentives, such as tax holidays, to attract specific industries.

The Colombian government introduced a variety of incentives for specific sectors as part of the 2019 tax reform. Included are:

  • Income from hotels built, renovated, or extended through January 1, 2029 in municipalities of less than 200,000 inhabitants will be taxed at nine percent for 20 years. The same facilities in larger municipalities will be taxed at nine percent for 10 years.
  • New theme parks, ecotourism and agrotourism enterprises, and boat docks put into operation through January 1, 2029 in smaller municipalities will also be taxed at nine percent for 20 years. The same facilities in municipalities greater than 200,000 population put into service until 2023 will be taxed at nine percent for 10 years.
  • Income normally taxed at 33 percent that is invested in agricultural projects or orange (creative) economy initiatives will be tax free.
  • Income from the sale of electric power generated by wind, biomass, solar, geothermal, or tidal movement will be tax free provided carbon dioxide emission certificates are sold in accordance with the Kyoto Protocol, and 50 percent of the income from the certificate sale is invested in social projects benefiting the region where the power was generated.
  • Income from river transportation services using low-draft vessels is tax free.

Foreign investors can participate without discrimination in government-subsidized research programs, and most Colombian government research has been conducted with foreign institutions.  Investments or grants to technological research and development projects are fully tax deductible in the year the investment was made.  R&D incentives include Value-Added Tax (VAT) exemptions for imported equipment or materials used in scientific, technology, or innovation projects, and qualified investments may receive tax credits.

In a tax reform passed in 2016, the Colombian government created two tax incentives to support investment in the 344 municipalities most affected by the armed conflict (ZOMAC).  Small and microbusinesses that invest in ZOMACs and meet a series of other criteria will be exempt from paying any taxes through 2021, pay 25 percent of the general rate through 2024, and 50 percent through 2027.  Medium and large-sized businesses will pay 50 percent of their normal taxes through 2021 and 75 percent through 2024.  The second component is entitled “works for taxes” (“Obras por Impuestos”), a program through which the private sector can directly fund social investments and infrastructure projects in lieu of paying taxes.

Foreign Trade Zones/Free Ports/Trade Facilitation

To attract foreign investment and promote the importation of capital goods, the Colombian government uses a number of drawback and duty deferral programs.  One example is free trade zones (FTZs).  While DIAN oversees requests to establish FTZs, the Colombian government is not involved in their operations.  Benefits under the FTZ regime include a single 20 percent tax rate and no customs value-added taxes or duties on raw material imports for use in the FTZ.  Each permanent FTZ must meet specific investment and direct job creation commitments, depending on their total assets, during the first three years.  Special FTZs are required to generate a certain number of direct jobs depending on the economic sector.

Colombia also has initiated Special Economic Zones for Exports in the municipalities of Buenaventura, Cucuta, Valledupar, and Ipiales in order to encourage investment.  These zones receive the same import benefits of FTZs, while operators are also exempted from some payroll taxes and surcharges.  In addition, infrastructure projects in the zones are exempt from some income taxes.

Performance and Data Localization Requirements

Performance requirements are not imposed on foreigners as a condition for establishing, maintaining, or expanding investments.  The Colombian government does not have performance requirements, impose local employment requirements, or require excessively difficult visa, residency, or work permit requirements for investors.  Under the CTPA, Colombia grants substantial market access across its entire services sector.

The SIC, under the Deputy Office for Personal Data Protection, is the Data Protection Authority (DPA) and has the legal mandate to ensure proper data protection and has issued a circular defining adequate data protection and responsibilities with respect to international data transfers.  The SIC requires data storage facilities that hold personal data to comply with government requirements for security and privacy, and data storage companies have one year to register.  The SIC enforces the rules on local data storage within the country through audits/investigations and imposed sanctions.

Software and hardware are protected by IPR.  There is no obligation to submit source code for registered software.

5. Protection of Property Rights

Real Property

The 1991 Constitution explicitly protects individual rights against state actions and upholds the right to private property.

Secured interests in real property, and to a lesser degree movable property, are recognized and generally enforced after the property is properly registered.  In terms of protecting third-party purchasers, existing law is inadequate.  The concepts of a mortgage, trust, deed, and other types of liens exist, as does a reliable system of recording such secured interests.  Deeds, however, present some legal risk due to the prevalence of transactions that have never been registered with the Public Instruments Registry.  According to a survey made shortly before the signing of the 2016 FARC peace accord, some eight million hectares of land – 14 percent of the country – had been abandoned or acquired illegally.  The Colombian government is working to title these plots and has started a formalization program for land restitution.

Intellectual Property Rights

In Colombia, the granting, registration, and administration of IPR are carried out by four primary government entities.  The SIC acts as the Colombian patent and trademark office.  The Colombian Agricultural Institute (ICA) is in charge of issuing plant variety protections and data protections for agricultural products. The Ministry of Interior administers copyrights through the National Copyright Directorate (DNDA).  The Ministry of Health and Social Protection handles data protection for products registered through the National Food and Drug Institute (INVIMA).

The Intersectoral Intellectual Property Commission (CIPI) serves as the interagency technical body for IPR issues, and at its annual meeting in 2019 discussed a new national policy for Intellectual Property to be drafted in 2020, progress toward ratifications of the Treaty of Marrakech and the Beijing Treaty, the reactivation and update of the Anti-Piracy Agreement for Colombia, and the possible accession of Colombia to the Hague System on Industrial Designs.  The last comprehensive interagency policy for IPR issues (Conpes 3533) was issued by the National Planning Department in 2008.   Colombia is subject to Andean Community Decision 486 on trade secret protection, which is fully implemented domestically by the Unfair Competition Law of 1996.

Colombia provides a 20-year protection period for patents, a 10-year term for industrial designs, and 20- or 15-year protection for new plant varieties, depending on the species.  Colombia has been on the U.S. Trade Representative’s Special 301 Watch List every year since 1991, and in 2019 was upgraded from “Priority Watch List” to “Watch List” status.  The Special 301 report can be found at https://ustr.gov/about-us/policy-offices/press-office/press-releases/2020/april/ustr-releases-annual-special-301-report-intellectual-property-protection-and-review-notorious .

The CTPA improved standards for the protection and enforcement of a broad range of IPR.  Improvements include state-of-the-art protections for digital products such as software, music, text, and videos; stronger protection for U.S. patents, trademarks, and test data; and prevention of piracy and counterfeiting by criminalizing end-use piracy.  However, Colombia has outstanding CTPA commitments related to IPR.  Colombian officials continue discussing with the United States draft legislation regulating internet service providers on issues such as compulsory takedown of online content and the protection of intermediaries with “safe harbor” provisions for unintentional copyright infringement.  The legislation has not yet been introduced to Congress.  Colombia did not make progress in 2019 on an international agreement that it needs to sign: the International Union for the Protection of NewVarieties of Plants (UPOV 91).  Colombia maintains that the existing Andean Community Decision 345 is in effect and equivalent to UPOV 91, but this is not an interpretation shared by the United States.  Colombia is a member of the Inter-American Convention for Trademark and Commercial Protection.

Colombia reformed its copyright law under Decree 1915 of July 2018.  The bill extends the term of copyright protection, imposes civil liability for circumvention of technological protection measures, and strengthens enforcement of copyright and related rights.  On July 31, 2019 the Colombian Constitutional Court issued ruling C-345-19 that recognizes the constitutionality of statutory damages for copyright infringement.

Colombia’s success combating counterfeiting and IPR violations, and enforcement in the digital space, remains limited.  A 2015 law increased penalties for those involved in running contraband, but more effective implementation is needed.  Key agencies do not have the requisite authorities or sufficient numbers of trained personnel to effectively inspect and seize merchandise and to investigate smugglers and counterfeiters.  Positive recent developments in enforcement include the seizure of 122 containers with footwear, clothing, toys, toiletries, medicines, textiles, and perishables worth more than USD 32 million between August 2018 and October 2019, and the dismantling of 78 criminal structures and prosecution of 436 people over the same period.  However, counterfeit goods remain widely available in Colombia’s “San Andresitos” markets.  Minister of Commerce, Industry and Trade Jose Manuel Restrepo established a high-level anti-contraband working group in 2018 that is chaired by the Customs Office and includes representatives of the Fiscal and Customs Police.  The group meets biweekly.

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/.

6. Financial Sector

Capital Markets and Portfolio Investment

The Colombian Securities Exchange (BVC after its acronym in Spanish) is the main forum for trading and securities transactions in Colombia.  The BVC is a private company listed on the stock market.  The BVC, as a multi-product and multi-market exchange, offers trading platforms for the stock market, along with fixed income and standard derivatives.  The BVC also provides listing services for issuers.

Foreign investors can participate in capital markets by negotiating and acquiring shares, bonds, and other securities listed by the Foreign Investment Statute.  These activities must be conducted by a local administrator, such as trust companies or Financial Superintendence-authorized stock brokerage firms.  Direct and portfolio foreign investments must be registered with the Central Bank.  Foreigners can establish a bank account in Colombia as long as they have a valid visa and Colombian government identification.

The market has sufficient liquidity for investors to enter and exit sizeable positions.  The central bank respects IMF Article VIII and does not restrict payments and transfers for current international transactions.  The financial sector in Colombia offers credit to nationals and foreigners that comply with the requisite legal requirements.

Money and Banking System

In 2005, Colombia consolidated supervision of all aspects of the banking, financial, securities, and insurance sectors under the Financial Superintendence.  Colombia has an effective regulatory system that encourages portfolio investment, and the country’s financial system is strong by regional standards.  Commercial banks are the principal source of long-term corporate and project finance in Colombia.  Loans rarely have a maturity in excess of five years.  Unofficial private lenders play a major role in meeting the working capital needs of small and medium-sized companies.  Only the largest of Colombia’s companies participate in the local stock or bond markets, with the majority meeting their financing needs either through the banking system, by reinvesting their profits, or through credit from suppliers.

Colombia’s central bank is charged with managing inflation and unemployment through monetary policy.  Foreign banks are allowed to establish operations in the country, and must set up a Colombian branch in order to do so.  The Colombian central bank has a variety of correspondent banks abroad.

Foreign Exchange and Remittances

Foreign Exchange

There are no restrictions on transferring funds associated with FDI.  Foreign investment into Colombia must be registered with the central bank in order to secure the right to repatriate capital and profits.  Direct and portfolio investments are considered registered when the exchange declaration for operations channeled through the official exchange market is presented, with few exceptions.  The official exchange rate is determined by the central bank.  The rate is based on the free market flow of the previous day.  Colombia does not manipulate its currency to gain competitive advantages.

Remittance Policies

The government permits full remittance of all net profits regardless of the type or amount of investment.  Foreign investments must be channeled through the foreign exchange market and registered with the central bank’s foreign exchange office within one year in order for those investments to be repatriated or reinvested.  There are no restrictions on the repatriation of revenues generated from the sale or closure of a business, reduction of investment, or transfer of a portfolio.  Colombian law authorizes the government to restrict remittances in the event that international reserves fall below three months’ worth of imports.  International reserves have remained well above this threshold for decades.

Sovereign Wealth Funds

In 2012, Colombia began operating a sovereign wealth fund called the Savings and Stabilization Fund (FAE), which is administered by the central bank with the objective of promoting savings and economic stability in the country.  The fund can administer up to 30 percent of annual royalties from the extractives industry.  The government transfers royalties not dedicated to the fund to other internal funds to boost national economic productivity through strategic projects, technological investments, and innovation.

7. State-Owned Enterprises

Since 2015, the Government of Colombia has concentrated its industrial and commercial enterprises under the supervision of the Ministry of Finance.  According to the latest annual report issued in 2019, the number of state-owned companies is 105, with a combined value of USD 20 billion.  The government is the majority shareholder of 39 companies and a minority shareholder in the remaining 66.  Among the most notable companies with a government stake are Ecopetrol (Colombia’s majority state-owned and privately-run oil company), ISA (electricity distribution), Banco Agrario de Colombia, Bancoldex, and Satena (regional airline).  SOEs competing in the Colombian market do not receive non-market-based advantages from the government.  The Ministry of Finance updates their annual report on SOEs every June.

Privatization Program

Colombia has privatized state-owned enterprises under article 60 of the Constitution and Law Number 226 of 1995.  This law stipulates that the sale of government holdings in an enterprise should be offered to two groups:  first to cooperatives and workers’ associations of the enterprise, then to the general public.  During the first phase, special terms and credits have to be granted, and in the second phase, foreign investors may participate along with the general public.  The government views stimulating private-sector investment in roads, ports, electricity, and gas infrastructure as a high priority.  The government is increasingly turning to concessions and utilizing public-private partnerships (PPPs) as a means for securing and incentivizing infrastructure development.

In order to attract investment and promote PPPs, Colombian modified infrastructure regulations to clarify provisions for frequently-cited obstacles to participate in PPPs, including environmental licensing, land acquisition, and the displacement of public utilities.  The law puts in place a civil procedure that facilitates land expropriation during court cases, allows for expedited environmental licensing, and clarifies that the cost to move or replace public utilities affected by infrastructure projects falls to private companies.  However, infrastructure development companies considering bidding on tenders have raised concerns about unacceptable levels of risk that result from a law establishing a framework for public works projects.  Interpretations of the law (Ley 80) do not establish a liability cap on potential judgments and views company officials equal to those with fiscal oversight authority when it comes to criminally liability for misfeasance.

Municipal enterprises operate many public utilities and infrastructure services.  These municipal enterprises have engaged private sector investment through concessions.  There are several successful concessions involving roads.  These kinds of partnerships have helped promote reforms and create a more attractive environment for private, national, and foreign investment.

8. Responsible Business Conduct

In 2015, the Colombian government released its National Action Plan on Business and Human Rights, which responds to the UN Guiding Principles on Business and Human Rights and the OECD’s Guidelines for Multinational Enterprises. Colombia also adheres to the corporate social responsibility (CSR) principles outlined in the OECD Guidelines for Multinational Enterprises. CSR cuts across many industries and Colombia encourages public and private enterprises to follow OECD CSR guidelines. Beneficiaries of CSR programs include students, children, populations vulnerable to Colombia’s armed conflict, victims of violence, and the environment. Larger companies structure their CSR programs in accordance with accepted international CSR principles. Companies in Colombia have been recognized on an international level for their CSR initiatives, including by the State Department.

Overall, Colombia has adequate environmental laws, is proactive at the federal level in enacting environmental protections, and does not waive labor or environmental regulations to attract investors. However, the Colombian government struggles with enforcement, particularly in more remote areas. Geography, lack of infrastructure, and lack of state presence all play a role, as does a general shortage of resources in national and regional institutions. The Environmental Chapter of the CTPA requires Colombia to maintain and enforce environmental laws, protect biodiversity, and promote opportunities for public participation.
In parallel with its OECD accession, the Colombian government worked with the Organization in a series of assessments in order to develop the implementation the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Afflicted and High-Risk Areas, especially related to gold mining. The Colombian government faces challenges in formalizing illegal gold mining operations throughout the country. Colombia ratified the Minamata Convention on Mercury in 2018 and banned the use of mercury in mining. It will phase out mercury use from all other industries by 2023.

Buyers, sellers, traders, and refiners of gold may wish to conduct additional due diligence as part of their risk management regimes to account for the influx of illegally-mined Colombian gold into existing supply chains. Throughout the country, Colombian authorities have taken steps to dismantle illegal gold mining operations that are responsible for negative environmental, criminal, and human health impacts. The Colombian government has focused its efforts on transnational criminal elements involved in the production, laundering, and sale of illegally- mined gold, and the fraudulent documentation that is used to obscure the origin of illegally- mined gold.

9. Corruption

Corruption, and the perception of it, is a serious obstacle for companies operating or planning to invest in Colombia.  Analyses of the business environment, such as the WEF Global Competitiveness Index, consistently cite corruption as a problematic factor, along with high tax rates, inadequate infrastructure, and inefficient government bureaucracy.  Transparency International’s latest “Corruption Perceptions Index” ranked Colombia 96th out of 180 countries assessed, assigned it a score of 37/100, unchanged from four years earlier.  Among OECD member states, only Mexico ranked lower.  Customs, taxation, and public works contracts are commonly-cited areas where corruption exists.

Colombia has adopted the OECD Convention on Combating Bribery of Foreign Public Officials and is a member of the OECD Anti-Bribery Committee.  It also passed a domestic anti-bribery law in 2016.  It has signed and ratified the UN Anticorruption Convention.  Additionally, it has adopted the OAS Convention against Corruption.  The CTPA protects the integrity of procurement practices and criminalizes both offering and soliciting bribes to/from public officials.  It requires both countries to make all laws, regulations, and procedures regarding any matter under the CTPA publicly available.  Both countries must also establish procedures for reviews and appeals by any entities affected by actions, rulings, measures, or procedures under the CTPA.

Resources to Report Corruption

Useful resources and contact information for those concerned about combating corruption in Colombia include the following:

  • The Transparency and Anti-Corruption Observatory is an interactive tool of the Colombian government aimed at promoting transparency and combating corruption available at http://www.anticorrupcion.gov.co/.
  • The National Civil Commission for Fighting Corruption, or Comisión Nacional Ciudadana para la Lucha Contra la Corrupción (CNCLCC), was established by Law 1474 of 2011 to give civil society a forum to discuss and propose policies and actions to fight corruption in the country. Transparencia por Colombia is the technical secretariat of the commission. http://ciudadanoscontralacorrupcion.org/es/inicio
  • The national chapter of Transparency International, Transparencia por Colombia: http://transparenciacolombia.org.co/
  • The Presidential Secretariat of Transparency advises and assists the president to formulate and design public policy about transparency and anti-corruption. This office also coordinates the implementation of anti-corruption policies. http://wsp.presidencia.gov.co/secretaria-transparencia/Paginas/default.aspx/.

10. Political and Security Environment

Security in Colombia has improved significantly over recent years.  Colombia experienced a significant decrease in terrorist activity, due in large part to a bilateral ceasefire between government forces and Colombia’s largest terrorist organization, the FARC.  On November 26, 2016, President Santos signed a peace agreement with the FARC to end half a century of confrontation.  Congressional approval of a peace accord between the government and the FARC on November 30, 2016 put in motion a six-month disarmament, demobilization, and reintegration process, which granted the FARC status as a legal political organization.  Security forces estimate 1,200 combatants (FARC dissidents) have chosen not to participate in the process.  Currently the peace negotiations with the National Liberation Army (ELN), which began in 2017, are suspended.  This terrorist group continues a low-cost, high-impact asymmetric insurgency.  ELN attacks, alongside powerful narco-criminal group operations, are posing a threat to commercial activity and investment, especially in some rural zones where government control is weak.  The ELN often focuses attacks on oil pipelines, mines, roads, and electricity towers to disrupt economic activity and pressure the government.  The ELN also extorts businesses in their areas of operation, kidnaps personnel, and destroys property of entities that refuse to pay for protection.

11. Labor Policies and Practices 

An OECD economic survey of Colombia was published in October 2019.  The report mentions progress on labor market reforms, but cites a weakening of the labor market given decelerating economic growth, stalled progress on labor force participation, and high income inequality.  In 2019, the unemployment rate according to government figures was 10.5 percent, an increase over the 2018 rate of 9.7 percent, and one of the highest in Latin America.  According to DANE,  47.7 percent of the urban workforce was working in the informal economy at the end of 2019.  A new National Development Plan, signed into law in May 2019, aims to reduce informality by formalizing hourly work, reform the pension system, and expand social protection.  Colombia has made strong efforts to incorporate Venezuelan migrants into the formal economy.  Colombia has a wide range of skills in its workforce, including managerial-level employees who are often bilingual, but faces large skills gaps.

Labor rights in Colombia are set forth in its Constitution, the Labor Code, the Procedural Code of Labor and Social Security, sector-specific legislation, and ratified international conventions, which are incorporated into national legislation.  Colombia’s Constitution guarantees freedom of association and provides for collective bargaining and the right to strike (with some exceptions).  It also addresses forced labor, child labor, trafficking, discrimination, protections for women and children in the workplace, minimum wages, working hours, skills training, and social security.  Colombia has ratified all eight of the International Labor Organization’s (ILO’s) fundamental labor conventions, and all are in force.  Colombia has also ratified conventions related to hours of work, occupational health and safety, and minimum wage.

The 1991 Constitution protects the right to constitute labor unions.  Pursuant to Colombia’s labor law, any group of 25 or more workers, regardless of whether they are employees of the same company or not, may form a labor union.  Employees of companies with fewer than 25 employees may affiliate themselves with other labor unions.  Colombia has a low trade union density (9.5 percent).  Where unions are present, multiple affiliation sometimes poses challenges for collective bargaining.  The largest and most influential unions are composed mostly of public-sector employees, particularly of the majority state-owned oil company and the state-run education sector.  Only 6.2 percent of all salaried workers are covered by collective bargaining agreements (CBAs), according to the OECD.  The Ministry of Labor has expressed commitment to working on decrees to incentivize sectoral collective bargaining, and to strengthen union representation within companies and regulate strikes in the essential public services sector (i.e. hospitals).

Strikes, when held in accordance with the law, are recognized as legal instruments to obtain better working conditions and employers are prohibited from using strike-breakers at any time during the course of a strike.  After 60 days of strike action, the parties are subject to compulsory arbitration.  Strikes are prohibited in certain “essential public services,” as defined by law, although Colombia has been criticized for having an overly-broad interpretation of “essential.”

Foreign companies operating in Colombia must follow the same hiring rules as national companies, regardless of the origin of the employer and the place of execution of the contract.  No labor laws are waived in order to attract or retain investment.  In 2010, Law 1429 eliminated the mandatory proportion requirement for foreign and national personnel; 100 percent of the workforce, including the board of directors, can be foreign nationals.  Labor permits are not required in Colombia, except for minors of the minimum working age.  Foreign employees have the same rights as Colombian employees.  Employers may use temporary service agencies to subcontract additional workers for peaks of production.  Employers must receive advance permission from the Ministry of Labor before undertaking permanent layoffs.  The Ministry of Labor typically does not grant permission to lay off workers who have enhanced legal protections (those with work-related injuries or union leaders, for example).  The Ministry of Labor has been cracking down on using temporary or contract workers for jobs that are not temporary in nature.

Reputational risks to investors come with a lack of effective and systematic enforcement of labor law, especially in rural sectors.  Homicides of unionists (social leaders) remain a concern.  In January 2017, the U.S. Department of Labor issued a public report of review in response to a submission filed under Chapter 17 (the Labor Chapter) of the CTPA by the American Federation of Labor and Congress of Industrial Organizations and five Colombian workers’ organizations that alleged failures on the part of the government to protect labor rights in line with CTPA commitments.  In January 2018, the Department of Labor published the first periodic review of progress to address issues identified in the submission report.  For additional information on labor law enforcement see:

  • Section 7 of Colombia’s Human Rights Report

https://www.state.gov/j/drl/rls/hrrpt

  • Department of Labor Findings on the Worst Forms of Child Labor (

https://www.dol.gov/agencies/ilab/resources/reports/child-labor/colombia 

  • Lists of Goods Produced with Child or Forced Labor

https://www.dol.gov/agencies/ilab/reports/child-labor/list-of-goods 

12. U.S. International Development Finance Corporation (DFC) and Other Investment Insurance Programs

OPIC, the Overseas Private Investment Corporation and the predecessor to the Development Finance Corporation (DFC), made its first investment in Colombia in 1985.  DFC has 10 active projects and is exploring more, with its new charter allowing investment in non-U.S. companies and to make loans in local currency.  Priority segments for DFC are infrastructure, renewable energy, technology, and agriculture.  DFC’s largest project in Colombia is a USD 350 million Puerta de Hierro toll road connecting the port cities of Barranquilla and Cartagena with the country’s interior.  As of end 2019, DFC’s active investments in Colombia totaled nearly USD 1.1 billion.  Additional information can be found at www.dfc.gov .

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Colombia statistical  source* USG or international statistical source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount  
Colombia Gross Domestic Product (GDP) ($B USD) 2019 $323.2 2018 $331.0 www.worldbank.org/en/country 
Foreign Direct Investment Colombia statistical  source* USG or international statistical source USG or international Source of data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in Colombia ($M USD, stock positions) 2019 $2,685.7 2018 $7,737 BEA data available at
https://www.bea.gov/international/
direct-investment-and-multinational-
enterprises-comprehensive-data
 
Colombia’s FDI in the United States ($M USD, stock positions) 2019 $35.7 N/A N/A BEA data available at
https://www.bea.gov/international/
direct-investment-and-multinational-
enterprises-comprehensive-data
 
Total inbound stock of FDI as % host GDP 2018 $188.7B 2018 56.7% UNCTAD data available at
https://unctad.org/en/Pages/DIAE/
World%20Investment%20Report/
Country-Fact-Sheets.aspx
 
 

* Data from the Colombian Statistics Departments, DANE, (https://www.dane.gov.co/ )  and the Colombian central bank (http://www.banrep.gov.co ).  Note: U.S. FDI reported by Banco de la Republica is not historically adjusted.

Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward 26,218 100% Total Outward 47,297 100%
Panama 8,537 32.6% USA 7,737 16.4%
Chile 5,326 20.3% Spain 7,107 15.0%
Spain 4,388 16.7% Chile 6,241 13.2%
Guatemala 1,966 7.5% Netherlands 5,988 12.7%
Costa Rica 1,451 5.5% Switzerland 4,749 10.0%
Table 4: Sources of Portfolio Investment
Portfolio Investment Assets
Top Five Partners (Millions, current US Dollars)
Total Equity Securities Total Debt Securities
All Countries 39,602 100% All Countries 23,334 100% All Countries 16,268 100%
USA 26,888 67.9% USA 16,154 69.2% USA 10,734 66.0%
Luxembourg 4,853 12.3% Luxembourg 4,848 20.8% France 772 4.7%
Ireland 1,189 3.0% Ireland 1,183 5.1% Canada 703 4.3%
France 881 2.2% U.K. 393 1.7% Mexico 631 3.9%
U.K. 819 2.1% Germany 120 0.5% Germany 427 2.6%

14. Contact for More Information

U.S. Embassy Bogota
Economic Section
Carrera 45 #22B-45
Bogota, Colombia
(571) 275-2000
BogotaECONShared@state.gov

Croatia

Executive Summary

Croatia became a member of the EU in 2013, which enhanced its economic stability and provided new opportunities for trade and investment.  Croatia is accessing a substantial amount of available EU funds, but many direct benefits of EU entry are still to come.  The Croatian government pledged to take legislative and administrative steps to reduce barriers to investment, streamline bureaucracy and public administration, and program EU funds more efficiently, but it has been slow to deliver promised reforms.

The government is willing to meet at senior levels with interested investors and to assist in resolving problems.  Prime Minister Andrej Plenkovic is a former member of the European Parliament and has signaled his commitment to wide-ranging structural reforms in line with recommendations from the EU and global financial institutions. His government is working with the World Bank and other international institutions to improve the ease of doing business in Croatia and to attract investment.  Relative strengths in the Croatian economy include low inflation, a stable exchange rate, and developed infrastructure.  Historically, the most promising sectors for investment in Croatia have been tourism, telecommunications, pharmaceuticals, and banking.

Although the Croatian economy was stable ahead of the COVID-19 global epidemic, the government assessed in late April that GDP will drop by at least 9.4 percent in 2020.  Tourism directly contributes 12 percent of Croatia’s GDP and up to 20 percent when indirect contributions of the sector are included; the tourism sector is expected to suffer tremendous losses due to the COVID-19 crisis.  The COVID-19 impact is not entirely negative.  The government sped up the digitalization of many public administration services and will likely expand this effort.  The economy is burdened by a large government bureaucracy, underperforming state-owned enterprises, and low regulatory transparency, all of which contributes to poor performance and relatively low levels of foreign investment.  Following a decade of growth from the end of the war in 1995, investment activity in Croatia slowed substantially in 2008 and remained under historic levels despite the economy’s emergence from the recession at the end of 2015, relatively robust growth in 2016, and continued moderate growth through 2019.

The banking system weathered the global financial crisis well but was saddled with financial costs related to the government-mandated conversion of Swiss Franc loans into euros in 2015.

In the last three years, the government implemented a number of financial incentives and measures designed to attract investment and support entrepreneurship.  However, these incentives are not corrective for profound deficiencies in the investment climate which are predominantly linked to an inefficient, unpredictable judicial system that is slow to resolve legal disputes.  Investors continue to face high “para-fiscal” fees, rigid labor laws, and slow and complex permitting procedures for most investments.

Before the COVID-19 crisis, the government maintained a budget deficit well within EU-recommended levels, but now expects a 6.8 percent budget deficit for 2020.  In March 2020, the government announced the fourth economic reform package of PM Plenkovic’s tenure.  This package is expected to create sustainable economic growth and development, to connect education to the labor market, and to sustain public finances.  Significant structural reform is still needed.  Although the government continues to make incremental improvements to the business environment, its primary focus remains on preventing job losses from state-owned enterprises and “strategic” sectors.  In the last year, the government provided state guarantees for two major shipbuilding companies.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2019 63 of 180 https://www.transparency.org/
country/HRV
World Bank’s Doing Business Report 2020 51 of 190 https://www.doingbusiness.org/en/
data/exploreeconomies/croatia
Global Innovation Index 2019 42 of 128 https://www.globalinnovationindex.org/
gii-2019-report#
U.S. FDI in partner country ($M USD, stock positions) 2019 $83.4 Host government, Croatian National Bank
https://www.hnb.hr/statistics/statistical-
data/rest-of-the-world/foreign-direct-investments
World Bank GNI per capita 2018 $23,316 https://data.worldbank.org/indicator/
NY.GNP.PCAP.PP.KD?name_desc=false

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Croatia is generally open to foreign investment and the Croatian government continues to make efforts, through financial incentives, to attract foreign investors.  All investors, both foreign and domestic, are guaranteed equal treatment by law, with a handful of exceptions described below.  However, bureaucratic and political barriers remain.  Investors agree that an unpredictable regulatory framework, lack of transparency, judicial inefficiencies, lengthy administrative procedures, lack of structural reforms, and unresolved property ownership issues weigh heavily upon the investment climate.

Croatia is partnered with the World Bank on the “Croatia Business Environment Reform” project which intends to help Croatia implement various business reforms. The Ministry of Economy, Entrepreneurship and Crafts Directorate for Investment, Industry and Innovation assists investors.  For more information, see: http://investcroatia.gov.hr/ .  The Strategic Investment Act fast-tracks and streamlines bureaucratic processes for large projects valued at USD 10.7 million or more on the investor’s behalf.  Various business groups, including the American Chamber of Commerce, Foreign Investors’ Council, and the Croatian Employers’ Association, are in dialogue with the government about ways to make doing business easier and to keep investment retention as a priority.

Limits on Foreign Control and Right to Private Ownership and Establishment

Croatian law allows for all entities, both foreign and domestic, to establish and own businesses and to engage in all forms of remunerative activities.  Article 49 of the Constitution states all entrepreneurs have equal legal status.  However, the Croatian government restricts foreign ownership or control of services for a handful of national security-sensitive sectors:  inland waterways transport, maritime transport, rail transport, air to ground handling, freight-forwarding, publishing, education, and ski instruction.  Apart from these, the only blocks to market access involve professional licensing requirements (architect, auditor, engineer, lawyer, and veterinarian, etc), about which detailed information can be found at http://psc.hr/en/sectoral-requirements/ .  Over 90 percent of the banking sector is foreign-owned.

Other Investment Policy Reviews

The Organization for Economic Cooperation and Development (OECD) published an invest