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Tunisia

Executive Summary

In 2020, Tunisia’s economy was heavily impacted by the COVID-19 pandemic. Containment measures affected most business sectors and resulted in an unprecedented GDP contraction of 8.8 percent in 2020. The country still faces high unemployment, high inflation, and rising levels of public debt.

Parliament approved an initial government led by Prime Minister Fakhfakh in February 2020; however, Fakhfakh resigned in July 2020.  Parliament subsequently approved a government led by current Prime Minister Hichem Mechichi in September 2020.

Before the pandemic, successive governments had advanced some much-needed structural reforms to improve Tunisia’s business climate, including an improved bankruptcy law, investment code, an initial “negative list,” a law enabling public-private partnerships, and a supplemental law designed to improve the investment climate. The Government of Tunisia (GOT) encouraged entrepreneurship through the passage of the Start-Up Act. The GOT passed a new budget law that ensures greater budgetary transparency and makes the public aware of government investment projects over a three-year period. These reforms are intended to help Tunisia attract both foreign and domestic investment.

Tunisia’s strengths include its proximity to Europe, sub-Saharan Africa, and the Middle East; free-trade agreements with the EU and much of Africa; an educated workforce; and a strong interest in attracting foreign direct investment (FDI). Sectors such as agribusiness, aerospace, infrastructure, renewable energy, telecommunication technologies, and services are increasingly promising. The decline in the value of the dinar over recent years has strengthened investment and export activity in the electronic component manufacturing and textile sectors.

Nevertheless, substantial bureaucratic barriers to investment remain and additional economic reforms have yet to be achieved. State-owned enterprises play a large role in Tunisia’s economy, and some sectors are not open to foreign investment. The informal sector, estimated at 40 to 60 percent of the overall economy, remains problematic, as legitimate businesses are forced to compete with smuggled goods.

Since 2011, the United States has provided more than USD 500 million in economic growth-related assistance, in addition to loan guarantees in 2012, 2014, and 2016 that enabled the GOT to borrow nearly USD 1.5 billion at low interest.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2020 69 of 180 http://www.transparency.org/research/cpi/overview 
World Bank’s Doing Business Report 2020 78 of 190 http://www.doingbusiness.org/en/rankings 
Global Innovation Index 2020 65 of 131 https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, historical stock positions) 2019 320 https://apps.bea.gov/international/factsheet/ 
World Bank GNI per capita 2019 USD 3,370 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD 

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

The GOT is working to improve the business climate and attract FDI. The GOT prioritizes attracting and retaining investment, particularly in the underdeveloped interior regions, and reducing unemployment. More than 3,650 foreign companies currently operate in Tunisia, and the government has historically encouraged export-oriented FDI in key sectors such as call centers, electronics, aerospace and aeronautics, automotive parts, textile and apparel, leather and shoes, agro-food, and other light manufacturing. In 2020, the sectors that attracted the most FDI were energy (33.8 percent), the electrical and electronic industry (22.4 percent), agro-food products (10.6 percent), services (9.2 percent), and the mechanical industry (9 percent). Inadequate infrastructure in the interior regions results in the concentration of foreign investment in the capital city of Tunis and its suburbs (46 percent), the northern coastal region (23 percent), the northwest region (14.4 percent), and the eastern coastal region (12 percent). Internal western and southern regions attracted only 4.6 percent of foreign investment despite special tax incentives for those regions.

The Tunisian Parliament passed an Investment Law (#2016-71) in September 2016 that went into effect April 1, 2017 to encourage the responsible regulation of investments. The law provided for the creation of three major institutions:

  • The High Investment Council, whose mission is to implement legislative reforms set out in the investment law and decide on incentives for projects of national importance (defined as investment projects of more than 50 million dinars and 500 jobs).
  • The Tunisian Investment Authority, whose mission is to manage investment projects of more than 15 million dinars and up to 50 million dinars. Investment projects of less than 15 million dinars are managed by the Agency for Promotion of Industry and Innovation (APII).
  • The Tunisian Investment Fund, which funds foreign investment incentive packages.

These institutions were all launched in 2017. However, the Foreign Investment Promotion Agency (FIPA) continues to be Tunisia’s principal agency to promote foreign investment. FIPA is a one-stop shop for foreign investors. It provides information on investment opportunities, advice on the appropriate conditions for success, assistance and support during the creation and implementation of the project, and contact facilitation and advocacy with other government authorities.

Under the 2016 Investment Law (article 7), foreign investors have the same rights and obligations as Tunisian investors. Tunisia encourages dialogue with investors through FIPA offices throughout the country.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign investment is classified into two categories: “Offshore” investment is defined as commercial entities in which foreign capital accounts for at least 66 percent of equity, and at least 70 percent of the production is destined for the export market. However, investments in some sectors can be classified as “offshore” with lower foreign equity shares. Foreign equity in the agricultural sector, for example, cannot exceed 66 percent and foreign investors cannot directly own agricultural land, but agricultural investments can still be classified as “offshore” if they meet the export threshold.

  • “Offshore” investment is defined as commercial entities in which foreign capital accounts for at least 66 percent of equity, and at least 70 percent of the production is destined for the export market. However, investments in some sectors can be classified as “offshore” with lower foreign equity shares. Foreign equity in the agricultural sector, for example, cannot exceed 66 percent and foreign investors cannot directly own agricultural land, but agricultural investments can still be classified as “offshore” if they meet the export threshold.
  • “Onshore” investment caps foreign equity participation at a maximum of 49 percent in most non-industrial projects. “Onshore” industrial investment may have 100 percent foreign equity, subject to government approval.

Pursuant to the 2016 Investment Law (article 4), a list of sectors outlining which investment categories are subject to government authorization (the “negative list”) was set by decree no. 417 of May 11, 2018. The sectors include natural resources; construction materials; land, sea and air transport; banking, finance, and insurance; hazardous and polluting industries; health; education; and telecommunications. The decree specified the deadline to respond to authorization requests for most government agencies and fixed a deadline of 60 days for all other government decision-making bodies not specifically mentioned in the decree.

The decree went into effect on July 1, 2018.

Other Investment Policy Reviews

The WTO completed a Trade Policy Review for Tunisia in July 2016. The report is available here: https://www.wto.org/english/tratop_e/tpr_e/tp441_e.htm .

The OECD completed an Investment Policy Review for Tunisia in November 2012. The report is available here: http://www.oecd.org/daf/inv/investment-policy/tunisia-investmentpolicyreview-oecd.htm .

Business Facilitation

In May 2019, the Tunisian Parliament adopted law 2019-47, a cross-cutting law that impacts legislation across all sectors. The law is designed to improve the country’s business climate and further improve its ranking in the World Bank’s Doing Business Report. The law simplified the process of creating a business, permitted new methods of finance, improved regulations for corporate governance, and provided the private sector the right to operate a project under the framework of a public-private partnership (PPP).

This legislation and previous investment laws are all referenced on the United Nations Conference on Trade and Development (UNCTAD) website: https://investmentpolicy.unctad.org/country-navigator/221/tunisia .

The World Bank Doing Business 2020 report ranks Tunisia 19 in terms of ease of starting a business. In the Middle East and North Africa, Tunisia ranked second after the UAE, and first in North Africa ahead of Morocco, Egypt, Algeria, and Libya: https://www.doingbusiness.org/en/data/exploreeconomies/tunisia#DB_sb .

The Agency for Promotion of Industry and Innovation (APII) and the Tunisia Investment Authority (TIA) are the focal point for business registration. Online project declaration for industry or service sector projects for both domestic and foreign investment is available at: www.tunisieindustrie.nat.tn/en/doc.asp?mcat=16&mrub=122 .

The new online TIA platform allows potential investors to electronically declare the creation, extension, and renewal of all types of investment projects. The platform also allows investors to incorporate new businesses, request special permits, and apply for investment and tax incentives. https://www.tia.gov.tn/ .

APII has attempted to simplify the business registration process by creating a one-stop shop that offers registration of legal papers with the tax office, court clerk, official Tunisian gazette, and customs. This one-stop shop also houses consultants from the Investment Promotion Agency, Ministry of Employment, National Social Security Authority (CNSS), postal service, Ministry of Interior, and the Ministry of Trade and Export Development. Registration may face delays as some agencies may have longer internal processes. Prior to registration, a business must first initiate an online declaration of intent, to which APII provides a notification of receipt within 24 hours.

The World Bank’s Doing Business 2020 report indicates that business registration takes an average of nine days and costs about USD 90 (253 Tunisian dinars): http://www.doingbusiness.org/en/data/exploreeconomies/tunisia#DB_sb .

For agriculture and fisheries, business registration information can be found at: www.apia.com.tn .

In the tourism industry, companies must register with the National Office for Tourism at: http://www.tourisme.gov.tn/en/investing/administrative-services.html .

The central points of contact for established foreign investors and companies are the Tunisian Investment Authority (TIA): https://www.tia.gov.tn/en  and the Foreign Investment Promotion Agency (FIPA): http://www.investintunisia.tn .

Outward Investment

The GOT does not incentivize outward investment, and capital transfer abroad is tightly controlled by the Central Bank.

3. Legal Regime

Transparency of the Regulatory System

Per the 2014 constitution, Tunisia has adopted a semi-parliamentary political system whereby power is shared among the Parliament, the Presidency of the Republic, and the Government, which is composed of a ministerial cabinet led by a Prime Minister (Head of Government). The Presidency and the Government fulfill executive roles. The Government creates the majority of laws and regulations; however, the Presidency of the Republic and Parliament also develop and propose laws.

The Parliament debates and votes on the adoption of legislation. Draft legislation is accessible to the public via the Parliament’s website.

Ministerial decrees and other regulations are debated at the level of the Government and adopted by a Ministerial Council headed by the Prime Minister.

After adoption by Parliament and signature by the President of the Republic, all laws, decrees, and regulations are published on the website of the Official Gazette and enforced by the Government at the national level.

The Government takes few proactive steps to raise public awareness of the public consultation period for new draft laws and decrees. Civil society, NGOs, and political parties are all pushing for increased transparency and inclusiveness in rulemaking. Many draft bills, such as the budget law, were reviewed before submission for a final vote under pressure from civil society. Business associations, chambers of commerce, unions, and political parties reviewed the 2016 Investment Law prior to final adoption.

In January 2019, the Tunisian Parliament passed the Organic Budget Law, which is a foundational law defining the parameters for the government’s annual budgeting process. The law aims to bring the budget process in line with principles expressed in the 2014 constitution by enlarging Parliament’s role in the budgetary process and strengthening the financial autonomy of the legislative and judiciary branches.  The law requires the government to organize its budget by policy objective, detail budget projections over a three-year timeframe, and revise its accounting system to ensure greater transparency.

In May 2020, the government adopted decree #2020-316, establishing simplified conditions and procedures for granting project concessions and their monitoring based on a new public-private partnership (PPP) approach. The decree aims to further promote investment by young entrepreneurs (under the age of 35) and projects of all sizes, including those less than 15 million dinars ($5.5 million).

Not all accounting, legal, and regulatory procedures are in line with international standards. Publicly listed companies adhere to national accounting norms.

The Parliament has oversight authority over the GOT but cannot ensure that all administrative processes are followed.

The World Bank Global Indicators of Regulatory Governance  for Tunisia are available here: http://rulemaking.worldbank.org/en/data/explorecountries/tunisia .

Tunisia is a member of the Open Government Partnership, a multilateral initiative that aims to secure concrete commitments from governments to promote transparency, empower citizens, fight corruption, and harness new technologies to strengthen governance: http://www.opengovpartnership.org/country/tunisia .

Most of Tunisia’s public finances and debt obligations are debated and voted on by the Parliament.

International Regulatory Considerations

As part of its negotiations toward a comprehensive free-trade agreement with the EU, the GOT is considering incorporating a number of EU standards in its domestic regulations.

Tunisia became a member of the WTO in 1995 and is required to notify the WTO regarding draft technical regulations on Technical Barriers to Trade (TBT). However, in October 2018 the Ministry of Commerce released a circular that temporarily restricted the import of certain goods without going through the WTO notification process, which negatively impacted some business operations without forewarning.

In February 2017, Tunisia domestically ratified the WTO Trade Facilitation Agreement (TFA) and presented its instrument of ratification to the WTO in July 2020 for all categories A, B, and C. However, Tunisia has yet to communicate indicative and definitive dates under category B and is overdue in submitting notifications related to technical assistance requirements and support and information on assistance and capacity building (Article 22.3). Tunisia has also yet to submit two transparency notifications related to: (1) import, export, and transit procedures, contact information of enquiry points, (Article 1.4) and (2) contact points for customs cooperation (Article 12.2.2).

Legal System and Judicial Independence

The Tunisian legal system is secular and based on the French Napoleonic code and meets EU standards. While the 2014 Tunisian constitution guarantees the independence of the judiciary, constitutionally mandated reforms of courts and broader judiciary reforms are still ongoing.

Tunisia has a written commercial law but does not have specialized commercial courts.

Regulations or enforcement actions can be appealed at the Court of Appeals.

Laws and Regulations on Foreign Direct Investment

The 2016 Investment Law directs tax incentives towards regional development promotion, technology and high value-added products, research and development (R&D), innovation, small and medium-sized enterprises (SMEs), and the education, transport, health, culture, and environmental protection sectors. Foreign investors can apply for government incentives online through the Tunisian Investment Authority (TIA) website: https://www.tia.gov.tn/en .

The primary one-stop-shop webpage for investors looking for relevant laws and regulations is hosted at the Investment and Innovation Promotion Agency website, http://www.tunisieindustrie.nat.tn/en/doc.asp?mcat=12&mrub=209 . The 2016 Investment Law (article 15) calls for the creation of an Investor’s Unique Point of Contact within the ministry in charge of investment to assist new and existing investors to launch and expand their projects.

In addition, the Parliament has adopted a number of economic reforms since 2015, including laws concerning renewable energy, competition, public-private partnerships (PPP), bankruptcy, and the independence of the Central Bank of Tunisia, as well as a Start-Up Act to promote the creation of new businesses and entrepreneurship.

Competition and Antitrust Laws

The 2015 Competition Law established a government appointed Competition Council to reduce government intervention in the economy and promote competition based on supply and demand.

This law voided previous agreements that fixed prices, limited free competition, or restricted the entry of new companies as well as those that controlled production, distribution, investment, technical progress, or supply centers. While the law ensures free pricing of most products and services, there are a few protected items, such as bread, water, and electricity, for which the GOT can still intervene in pricing. Moreover, in exceptional cases of large increases or collapses in prices, such as sharp price increases of surgical masks, sanitizer, and disinfection products during the COVID-19 pandemic, the Ministry of Trade and Export Development reserved the right to regulate prices for a period of up to six months. The ministry can also intervene in some other sectors to ensure free and fair competition. However, the Competition Council can make exceptions to its anti-trust policies if it deems it necessary for overall technical or economic progress.

The Competition Council also has the power to investigate competition-inhibiting cases and make recommendations to the Ministry of Trade and Export Development upon the Ministry’s request.

Expropriation and Compensation

There are no outstanding expropriation cases involving U.S. interests. The 2016 Investment Law (article 8) states that investors’ property may not be expropriated except in cases of public interest. Expropriation, if carried out, must comply with legal procedures, be executed without discrimination on the basis of nationality, and provide fair and equitable compensation.

U.S. investments in Tunisia are protected by international law as stipulated in the U.S.-Tunisia Bilateral Investment Treaty (BIT). According to Article III of the BIT, the GOT reserves the right to expropriate or nationalize investments for the public good, in a non-discriminatory manner, and upon advance compensation of the full value of the expropriated investment. The treaty grants the right to prompt review by the relevant Tunisian authorities of conformity with the principles of international law. When compensation is granted to Tunisian or foreign companies whose investments suffer losses owing to events such as war, armed conflict, revolution, state of national emergency, civil disturbance, etc., U.S. companies are accorded “the most favorable treatment in regard to any measures adopted in relation to such losses.”

Dispute Settlement

ICSID Convention and New York Convention

Tunisia is a member of the International Center for the Settlement of Investment Disputes (ICSID) and is a signatory to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

Investor-State Dispute Settlement

U.S. investments in Tunisia are protected by international law as stipulated in the U.S.-Tunisia Bilateral Investment Treaty (BIT). The BIT stipulates that procedures shall allow an investor to take a dispute with a party directly to binding third-party arbitration.

Disputes involving U.S. persons are relatively rare. Over the past 10 years, there were three dispute cases involving U.S. investors; two were settled and one is still ongoing. U.S. firms have generally been successful in seeking redress through the Tunisian judicial system.

The Tunisian Code of Civil and Commercial Procedures allows for the enforcement of foreign court decisions under certain circumstances, such as arbitration.

There is no pattern of significant investment disputes or discrimination involving U.S. or other foreign investors.

International Commercial Arbitration and Foreign Courts

The Tunisian Arbitration Code brought into effect by Law 93-42 of April 26, 1993, governs arbitration in Tunisia. Certain provisions within the code are based on the United Nations Commission on International Trade Law (UNCITRAL) model law. Tunisia has several domestic dispute resolution venues. The best known is the Tunis Center for Conciliation and Arbitration. When an arbitral tribunal does not adhere to the rules governing the process, either party can apply to the national courts for relief. Unless the parties have agreed otherwise, an arbitral tribunal may, on the request of one of the parties, order any interim measure that it deems appropriate.

Bankruptcy Regulations

Parliament adopted in April 2016 a new bankruptcy law that replaced Chapter IV of the Commerce Law and the Recovery of Companies in Economic Difficulties Law. These two laws had duplicative and cumbersome processes for business rescue and exit and gave creditors a marginal role. The new law increases incentives for failed companies to undergo liquidation by limiting state collection privileges. The improved bankruptcy procedures are intended to decrease the number of non-performing loans and facilitate access of new firms to bank lending.

According to the World Bank Doing Business 2020 report, Tunisia’s recovery rate (how much creditors recover from an insolvent firm at the end of insolvency proceedings) is about 51.3 cents on the dollar, compared to 27.3 cents for MENA and 70.2 cents for OECD high-income countries.

6. Financial Sector

Capital Markets and Portfolio Investment

Tunisia’s financial system is dominated by its banking sector, with banks accounting for roughly 85 percent of financing in Tunisia. Overreliance on bank financing impedes economic growth and stronger job creation. Equity capitalization is relatively small; Tunisia’s stock market provided 9.1 percent of corporate financing in 2019 according to the Financial Market Council annual report. Other mechanisms, such as bonds and microfinance, contribute marginally to the overall economy.

Created in 1969, the Bourse de Tunis (Tunis stock exchange) listed 80 companies as of December 2020. The total market capitalization of these companies was USD 8.41 billion, equivalent to 23.1% of the GDP. During the last five years, the exchange’s regulatory and accounting systems have been brought more in line with international standards, including compliance and investor protections. The exchange is supervised and regulated by the state-run Capital Market Board. Most major global accounting firms are represented in Tunisia. Firms listed on the stock exchange must publish semiannual corporate reports audited by a certified public accountant. Accompanying accounting requirements exceed what many Tunisian firms can, or are willing to, undertake. GOT tax incentives attempt to encourage companies to list on the stock exchange. Newly listed companies that offer a 30 percent capital share to the public receive a five-year tax reduction on profits. In addition, individual investors receive tax deductions for equity investment in the market. Capital gains are tax-free when held by the investor for two years.

Foreign investors are permitted to purchase shares in resident (onshore) firms only through authorized Tunisian brokers or through established mutual funds. To trade, non-resident (offshore) brokers require a Tunisian intermediary and may only service non-Tunisian customers. Tunisian brokerage firms may have foreign participation, as long as that participation is less than 50 percent. Foreign investment of up to 50 percent of a listed firm’s capital does not require authorization.

Money and Banking System

According to the Central Bank of Tunisia (CBT) annual report on banking supervision published in March 2021, Tunisia hosts 30 banks, of which 23 are onshore and seven are offshore. Onshore banks include three Islamic banks, two microcredit and SME financing banks, and 18 commercial universal banks.

Domestic credit to the private sector provided by banks stood at 64 percent of GDP in 2019. According to the World Bank, this level is higher than the MENA region average of 56.7 percent. In the World Bank’s Doing Business 2020 survey, Tunisia’s ranking in terms of ease of access to credit fell from 99 in 2019 to 104 in 2020. Tunisia’s banking system penetration has grown by five percent annually for the past five years. 87 percent of banks are located in the coastal regions, with about 41 percent in the greater Tunis area alone.

Tunisia’s banking system activity is mainly within the 23 onshore banks, which accounted for 92.3 percent of assets, 93.8 percent of loans, and 97 percent of deposits in 2019. The onshore banks offer identical services targeting Tunisia’s larger corporations. Meanwhile, SMEs and individuals often have difficulty accessing bank capital due to high collateral requirements.

The CBT report noted that tighter monetary policy resulted in a slowdown in credit activity in 2019, affecting both loans to professionals (which only grew by 4.8% compared to an increase of 10.2% in 2018) and loans to individuals (0.4% compared to 5.5% in 2018).

Foreign banks are permitted to open branches and establish operations in Tunisia under the offshore regime and are subject to the supervision of the Central Bank.

Government regulations control lending rates. This prevents banks from pricing their loan portfolios appropriately and incentivizes bankers to restrict the provision of credit. Competition among Tunisia’s many banks has the effect of lowering observed interest rates; however, banks often place conditions on loans that impose far higher costs on borrowers than interest rates alone. These non-interest costs may include collateral requirements that come in the form of liens on real estate. Often, collateral must equal or exceed the value of the loan principal. Collateral requirements are high because banks face regulatory difficulties in collecting collateral, thereby adding to costs. According to the CBT banking supervision report, nonperforming loans (NPLs) were at 13.4 percent of all bank loans in 2019, mostly in the agriculture (27.1 percent) and tourism (47 percent) sectors.

Beyond the banks and stock exchange, few effective financing mechanisms are available in the Tunisian economy. A true bond market does not exist, and government debt sold to financial institutions is not re-traded on a formal, transparent secondary market. Private equity remains a niche element in the Tunisian financial system. Firms experience difficulty raising sufficient capital, sourcing their transactions, and selling their stakes in successful investments once they mature. The microfinance market remains underexploited, with non-governmental organization Enda Inter-Arabe the dominant lender in the field.

The GOT recognizes two categories of financial service activity: banking (e.g., deposits, loans, payments and exchange operations, and acquisition of operating capital) and investment services (reception, transmission, order execution, and portfolio management). Non-resident financial service providers must present initial minimum capital (fully paid up at subscription) of 25 million Tunisian dinars (USD 8.9 million) for a bank, 10 million dinars (USD 3.5 million) for a non-bank financial institution, 7.5 million dinars (USD 2.6 million) for an investment company, and 250,000 dinars (USD 89,000) for a portfolio management company.

Foreign Exchange and Remittances

Foreign Exchange

The Tunisian Dinar can only be traded within Tunisia, and it is illegal to move dinars out of the country.  The dinar is convertible for current account transactions (export-import operations, remittances of investment capital, earnings, loan or lease payments, royalties, etc.).  Central Bank authorization is required for some foreign exchange operations.  For imports, Tunisian law prohibits the release of hard currency from Tunisia as payment prior to the presentation of documents establishing that the merchandise has been shipped to Tunisia. In 2020, the dinar appreciated 4 percent against the dollar and 2 percent against the Euro.

Non-residents are exempt from most exchange regulations.  Under foreign currency regulations, non-resident companies are defined as having:

  • Non-resident individuals who own at least 66 percent of the company’s capital, and
  • Capital fully financed by imported foreign currency.

Foreign investors may transfer funds at any time and without prior authorization.  This applies to principal as well as dividends or interest capital.  The procedures for repatriation are complex, however, and within the discretion of the Central Bank.  The difficulty in the repatriation of capital and dividends is one of the most frequent complaints of foreign investors in Tunisia.

There are no limits to the amount of foreign currency that visitors can bring to Tunisia to exchange into local currency.  However, amounts exceeding the equivalent of 25,000 dinars (USD 8,900) must be declared to customs at the port of entry.  Non-residents must also report foreign currency imports if they wish to re-export or deposit more than 5,000 dinars (USD 1,780).  Tunisian customs authorities may require currency exchange receipts on exit from the country.

Remittance Policies

Tunisia’s 2016 Investment Law enshrines the right of foreign investors to transfer abroad funds in foreign currency with minimal interference from the Central Bank.  Ministerial decree no. 417 of May 2018 states that the Central Bank of Tunisia must decide on foreign currency remittance requests within 90 days. In case of no response, the investor may contact the Higher Investment Authority, which will give final approval within 30 days.

Sovereign Wealth Funds

By decree no. 85-2011, the GOT established a sovereign wealth fund, “Caisse des Depots et des Consignations” (CDC), to boost private sector investment and promote small and medium enterprise (SME) development. It is a state-owned investment entity responsible for independently managing a portion of the state’s financial assets. The CDC was set up with support from the French CDC and the Moroccan CDG (Caisse de Depots et de Gestion) and became operational in early 2012. The original impetus for the creation of the CDC was to manage assets confiscated from the former ruling family as independently as possible to serve the public interest. More information is available about the CDC at www.cdc.tn . As of December 2019, CDC had 8.2 billion dinars (USD 2.8 billion) in assets and 348 million dinars (USD 118 million) in capital.

All CDC investments are made locally, with the objective of boosting investments in the interior regions and promoting SME development.

The CDC is governed by a supervisory committee composed of representatives from different ministries and chaired by the Minister of Finance.

7. State-Owned Enterprises

There are 110 state-owned enterprises (SOEs) and public institutions in Tunisia per the Ministry of Finance’s most recent (May 2020) report on public enterprises. SOEs are still prominent throughout the economy but are heavily indebted. Per the February 2021 IMF Article IV report, the debt of Tunisia’s 30 major SOEs was about 40 percent of GDP in 2019, and debt equivalent to about 15 percent of GDP was covered by government guarantees as of mid-2020. Annual budgetary transfers amounted to 7-8 percent of GDP in mid-2020, with 40 percent of transfers directed to three SOEs in the form of subsidies for cereals, fuel, and electricity.

Many SOEs compete with the private sector, in industries such as telecommunications, banking, and insurance, while others hold monopolies in sectors considered sensitive by the government, such as railroad, transportation, water and electricity distribution, and port logistics. Importation of basic food staples and strategic items such as cereals, rice, sugar, and edible oil also remains under SOE control.

The GOT appoints senior management officials to SOEs, who report directly to the ministries responsible for the companies’ sector of operation. SOE boards of directors include representatives from various ministries and personnel from the company itself. Similar to private companies, the law requires SOEs to publish independently audited annual reports, regardless of whether corporate capital is publicly traded on the stock market.

The GOT encourages SOEs to adhere to OECD Guidelines on Corporate Governance, but adherence is not enforced. Investment banks and credit agencies tend to associate SOEs with the government and consider them as having the same risk profile for lending purposes.

Privatization Program

The GOT allows foreign participation in its privatization program. A significant share of Tunisia’s FDI in recent years has come from the privatization of state-owned or state-controlled enterprises. Privatization has occurred in many sectors, such as telecommunications, banking, insurance, manufacturing, and fuel distribution, among others.

In 2011, the GOT confiscated the assets of the former regime. The list of assets involved every major economic sector. According to the Commission to Investigate Corruption and Malfeasance, a court order is required to determine the ultimate handling of frozen assets.

Because court actions frequently take years –and with the government facing immediate budgetary needs – the GOT allowed privatization bids for shares in Ooredoo (a foreign telecommunications company of which 30 percent of shares were confiscated from the previous regime), Ennakl, Alpha Ford), and City Cars (car distribution), Goulette Shipping Cruise (cruise terminal management), Airport VIP Service (business lounge management), and Banque de Tunisie and Zitouna Bank (banking). The government is expected to sell some of its stakes in state-owned banks; however, no clear plan has been adopted or communicated so far due to fierce opposition by labor unions.

10. Political and Security Environment

In September 2020, the Parliament approved the new government under the leadership of Prime Minister Mechichi after being nominated by President Kais Saied. Mechichi replaced former Prime Minister Elyess Fakhfakh, who resigned in July 2020.

President Kais Saied was elected in the aftermath of presidential and parliamentary elections held in September and October 2019, the country’s first elections since its post-revolution constitution was ratified in 2014, which were widely regarded as well-executed and credible.  The transition of power was smooth and without incident, following a clear procedure outlined by the 2014 constitution.

In the 10 years since the revolution, Tunisia has made significant progress in the areas of civil society and rights-based reforms, but economic indicators continue to lag and have been a major driver of frequent protests.  Public opinion polls indicated that corruption, poor economic conditions, and persistently high unemployment fuel public discontent with the political class. While ideological differences with respect to religion dominate much of the political discord, differing economic ideologies – whether Tunisia will follow a statist economic model or a liberal one – have more tangible effects on policy.  The country’s first municipal elections, held in May 2018, were a critical first step in the decentralization process to help alleviate some of the economic disparity between the relatively wealthy coastal areas and the relatively poor interior of the country.

Two major terrorist attacks targeting the tourism sector occurred in 2015, killing dozens of foreign tourists at the Bardo National Museum in Tunis and a beach hotel in Sousse. Security conditions have markedly improved since then.  Travelers are urged to visit www.travel.state.gov for the latest travel alerts and warnings regarding Tunisia.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Tunisia
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) ($M USD) 2019 39,212 2019 38,797 www.worldbank.org/en/country 
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data: BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2019 270 2019 320 BEA data available at
https://apps.bea.gov/international/factsheet/ 
Host country’s FDI in the United States ($M USD, stock positions) N/A N/A 2019 1 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 40.35% 2019 76.16% UNCTAD data available at
https://stats.unctad.org/handbook/
EconomicTrends/Fdi.html 

*Source: Tunisia’s Foreign Investment Promotion Agency (FIPA) year-end December 2019 data, published in July 2020.

FIPA, which is the host country statistical source for FDI stock, does not track the stock of foreign investment in energy and uses statistics that have been constant since 2010.

Table 3: Sources and Destination of FDI
Foreign Direct Investment Flows (excluding energy) in Tunisia in 2020*
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward 431.8 100% Total Outward 72 100%
France 164.5 38.1% N/A
Italy 58.3 13.5%
Luxembourg 38.4 8.9%
Germany 37.1 8.6%
U.K. 31 7.2%
“0” reflects amounts rounded to +/- USD 500,000.

*Source: Tunisia’s Foreign Investment Promotion Agency (FIPA) year-end December 2020 data, published in February 2021 and Tunisia Central Bank data published in March 2021.

Tunisia was not covered by the IMF’s Coordinated Direct Investment Survey (CDIS).

Table 4: Sources of Portfolio Investment
Portfolio Investment Assets in Tunisia in 2020
Top Five Partners (Millions, current US Dollars)
Total Equity Securities Total Debt Securities
All Countries 18.32 100% All Countries N/A 100% All Countries N/A 100%

*Source: Tunisia’s Foreign Investment Promotion Agency (FIPA) year-end December 2020 data, published in February 2021. (Tunisia was not covered by the IMF’s Coordinated Portfolio Investment Survey (CPIS)). 14. Contact for More Information

Turkey

Executive Summary

Turkey experienced strong economic growth on the back of the many positive economic and banking reforms it implemented between 2002 and 2007, and it weathered the global economic crisis of 2008-2009 better than most countries, establishing itself as a relatively stable emerging market with a promising trajectory of reforms and a strong banking system.  However, over the last several years, economic and democratic reforms have stalled and by some measures, regressed.  GDP growth was 2.6 percent in 2018 as the economy entered a recession in the second half of the year.  Challenged by the continuing currency crisis, particularly in the first half of 2019, the Turkish economy grew by only 0.9 percent in 2019.   Turkey’s expansionist monetary policy and spending of over USD 100 billion in central bank foreign reserves caused Turkey’s economy to grow by 1.8 percent in 2020 despite the pandemic, though high inflation and persistently high unemployment have been exacerbated.  This year growth is expected to be around 3.5 percent with significant downside risks.

Despite recent growth, the government’s economic policymaking remains opaque, erratic, and politicized, contributing to long-term and sometimes acute lira depreciation.  Inflation in 2020 was 14.6 percent and unemployment 13.2 percent, though the labor force participation rate dropped significantly as well. 

The government’s push to require manufacturing and data localization in many sectors and the introduction of a 7.5 percent digital services tax in 2020 have negatively impacted foreign investment into the country.  Other issues of import include tax reform and the decreasing independence of the judiciary and the Central Bank.  Turkey hosts 3.6 million Syrian refugees, which creates an additional economic burden on the country as the government provides them services such as education and healthcare.  

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

The opacity and inconsistency of government economic decision making, and concerns about the government’s commitment to the rule of law, have led to historically low levels of foreign direct investment (FDI).  While there are still an estimated 1,700 U.S. businesses active in Turkey, many with long-standing ties to the country, the share of American activity is relatively low given the size of the Turkish economy.  Increased protectionist measures add to the challenges of investing in Turkey, which saw 2019-2020 investment flows from the world drop by 3.5 percent, although investment flows from the United States increased by 135 percent.

Turkey’s investment climate is positively influenced by its favorable demographics and prime geographical position, providing access to multiple regional markets.  Turkey is an island of relative stability in a turbulent region, making it a popular hub for regional operations.  Turkey has a relatively educated work force, well-developed infrastructure, and a consumption-based economy.   

Table 1: Key Metrics and Rankings 

Measure  Year  Index/Rank  Website Address 
TI Corruption Perceptions Index  2020  86 of 180  https://www.transparency.org/cpi2019 
World Bank’s Doing Business Report  2020  33 of 190  http://www.doingbusiness.org/en/rankings 
Global Innovation Index  2020  51 of 131  https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, stock positions)  2019  3,333  https://www.bea.gov/sites/default/files/2020-07/dici0720_0.pdf  
World Bank GNI per capita  2019  9,690 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD 

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment  

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

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

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

Limits on Foreign Control and Right to Private Ownership and Establishment  

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

Other Investment Policy Reviews 

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

Business Facilitation  

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

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

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

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

Outward Investment

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

3. Legal Regime

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

Turkey has a bilateral taxation treaty with the United States.

6. Financial Sector

Capital Markets and Portfolio Investment

The Turkish Government encourages and offers an effective regulatory system to facilitate portfolio investment.  Since the start of 2020, a currency crisis that has been exacerbated by the COVID-19 pandemic, and high levels of dollarization have raised liquidity concerns among some commentators.  Existing policies facilitate the free flow of financial resources into product and factor markets.  The government respects IMF Article VIII by refraining from restrictions on payments and transfers for current international transactions.  Credit is generally allocated on market terms, though the GOT has increased low- and no-interest loans for certain parties, and pressured state-owned, and even private banks to increase their lending, especially for stimulating economic growth and public projects.  Foreign investors are able to get credit on the local market.  The private sector has access to a variety of credit instruments.

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

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

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

Foreign Exchange and Remittances

Foreign Exchange

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

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

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

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

Remittance Policies

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

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

Sovereign Wealth Funds

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

7. State-Owned Enterprises

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

Privatization Program

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

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

10. Political and Security Environment

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

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

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

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

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

Host Country Statistical source* USG or 

international statistical source

USG or International Source of Data:  BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2020 $717,049 2019 $761,425 www.worldbank.org/en/country

www.turkstat.gov.tr

Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data:  BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2019 $3,112 2019 $3,333 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data

* https://evds2.tcmb.gov.tr/index.php?/evds/dashboard/4944

Host country’s FDI in the United States ($M USD, stock positions) 2019 $3,185 2019 $2,340 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data

https://evds2.tcmb.gov.tr/index.php?/evds/dashboard/4898

Total inbound stock of FDI as  percent host GDP 2019 19.9% 2019 21.9% UNCTAD data available at

https://unctad.org/en/Pages/DIAE/World percent20Investment percent20Report/Country-Fact-Sheets.aspx  

www.tcmb.gov.tr

Table 3: Sources and Destination of FDI

Direct Investment from/in Counterpart Economy Data (2019)
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward 103,648 100% Total Outward 49,980 100%
Qatar 21,553 21% Netherlands 18,232 36%
Netherlands 16,296 16% UK 3,649 7%
Germany 7,730 7% United States 3,449 7%
UAE 6,189 6% Jersey 2,546 5%
Azerbaijan 5,967 6% Austria 2,026 4%
“0” reflects amounts rounded to +/- USD 500,000.

IMF’s Coordinated Direct Investment Survey (CDIS) data available at: http://data.imf.org/?sk=40313609-F037-48C1-84B1-E1F1CE54D6D5&sId=1482331048410

Table 4: Sources of Portfolio Investment

 

Portfolio Investment Assets (June, 2020)
Top Five Partners (Millions, US Dollars)
Total Equity Securities Total Debt Securities
All Countries 1,367 100% All Countries 530 100% All Countries 898 100%
United States 611 45% United States 365 69%  United States 246 27%
Cayman Islands 206 15% UK 29 5% Cayman Islands 193 21%
UK 121 9% Germany 28 5%   Luxembourg 102 11%
Luxembourg 108 8% France 14 3% UK 92 10%
Azerbaijan 87 6% Russia 13 3%  Azerbaijan 87 10%

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

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

Turkmenistan

Executive Summary

Turkmenistan is slightly larger than the state of California but is sparsely inhabited, with abundant hydrocarbon resources, particularly natural gas. Turkmenistan’s economy depends heavily on the production and export of natural gas, oil, petrochemicals and, to a lesser degree, cotton, wheat, and textiles. The economy entered a deep recession following the late 2014 collapse in global energy prices. The COVID-19 pandemic put downward pressure on all Central Asian energy exporters in 2020 and further weakened the Turkmen economy. Endemic corruption, a weak commercial regulatory regime, and strict currency controls compromise the investment climate and discourage FDI. Turkmenistan is currently considered high risk for U.S. foreign direct investment. It does, however, offer numerous opportunities for the export of U.S. goods and services in certain sectors, including energy, food processing, agriculture, financial services, and IT services. The government recently announced a major digitalization effort for various sectors including banking and governmental operations.

Official figures from the government of Turkmenistan show that the country’s GDP at the official exchange rate was $45.25 billion in 2019 and $40.76 billion in 2018. The black-market exchange rate for dollars, which averaged over 5 times the official rate in 2019-2020, suggests the true GDP numbers are much lower. An official number for 2020 GDP was not yet available, though the government reported GDP growth of 5.4 percent in 2019. GDP growth in 2018 was reported as 6.2 percent. Most economic indicators released by the government are widely seen as unreliable.

The government has not taken serious measures to incentivize foreign direct investment outside the petroleum industry and there is no significant U.S. FDI in Turkmenistan. Most U.S. commercial activity in Turkmenistan is related to exports. Some companies, such as General Electric, Boeing, and John Deere, have established themselves as key suppliers of industrial equipment in certain sectors, but their business operations are largely limited to sales to the Turkmen government. Government delays in payment to foreign companies have occurred and some firms require upfront payment prior to delivery of goods.

A lack of established rule of law, an opaque regulatory framework, and rampant corruption remain serious problems in Turkmenistan. Contracts are often awarded to companies with close ties to the President’s family. The government strictly controls foreign exchange flows and limits on currency conversion make it difficult to repatriate profits or make payments to foreign suppliers. The official exchange rate is pegged at 3.5 manat (TMT)/dollar. Starting in 2015, the black-market value of the manat has steadily fallen against the dollar. In 2020 the average black market exchange rate was 22 TMT/dollar.

Although Turkmenistan regularly amends its laws to meet international standards, the country often fails to implement or consistently enforce investment-related legislation. There are no meaningful legal protections against government expropriation of assets and there is no independent judiciary. There have been reports in recent years of officials associated with the family of President Gurbanguly Berdimuhamedov seizing local companies. There have also been reports that local Turkmen business owners have been jailed using security-related laws as a pretext to reopen the business under new ownership.

Key issues to watch: developments in the financial sector, including the TMT/USD black market exchange rate and the severity of restrictions on currency conversion, will determine to some extent the health of the investment climate. The impact of COVID-19 on Central Asian economies remains to be seen. Forecasts from major international financial institutions estimate a contraction in 2020 of 1.7-2.1 percent in Central Asia, followed by positive but subdued growth in 2021 and 2022. Fundamental shifts in post-COVID-19 natural gas markets could add additional pressure on Turkmenistan’s hydrocarbon-dependent economy.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2020 165 of 180 https://www.transparency.org/
country/TKM
World Bank’s Doing Business Report 2020 N/A https://www.doingbusiness.org/
en/rankings
Global Innovation Index 2020 N/A https://www.wipo.int/global_innovation
_index/en/2020/
U.S. FDI in partner country ($M USD, stock positions) 2020 N/A https://apps.bea.gov/international/
factsheet/factsheet.cfm?Area=343&U
UID=912a1109-0ce4-466a-8e93-3c0
adb2c4b89
World Bank GNI per capita 2020 N/A https://data.worldbank.org/indicator/
NY.GNP.PCAP.CD?locations=TM

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Toward Foreign Direct Investment

Turkmenistan regularly announces its desire to attract more foreign investment, but tight state control of the economy, the government’s inability to meet its financial obligations, a lack of transparency, and a restrictive visa regime have created a difficult foreign investment climate.

Historically, the most promising areas for investment are in the energy, agricultural, financial services, and construction sectors and the government often touts foreign loans as investment. However, a number of foreign companies have been forced out of the market in recent years due to their inability to convert local manat into hard currency and non-payment of invoices by the government. Decisions to allow foreign investment are often politically driven; companies offering more “friendly” terms are generally more successful in winning tenders and signing contracts. The tender process is opaque and not all tenders are publicly announced.

State owned enterprises dominate Turkmenistan’s key industries. The Union of Industrialists and Entrepreneurs (UIE), however, has asserted that the private sector share of the economy reached 70 percent during 2020, but there are no independent estimates to verify this claim. The hydrocarbon sector, estimated to be as much as 35 percent of GDP, remains largely state controlled. The top economic priorities for the government include increasing domestic production as part of its drive toward import substitution and self-sufficiency in food production. The economy’s health remains reliant on natural gas exports.

The government selectively chooses its investment partners and establishing a strong relationship with a government official is often essential to achieving commercial success. Officials may “seek rents” for permitting or assisting foreign investors to enter the local market. Some foreign investors have found success working through foreign business representatives who are able to leverage their personal relationships with senior leaders to advance their business interests.

Turkmenistan has accepted financing from international financial institutions (IFIs) since its independence in 1991. In 2009, the government reportedly accepted a $4 billion loan from the Chinese Development Bank (CDB) to develop Galkynysh, the world’s second largest natural gas field, as well as several significantly smaller loans from the Chinese Export-Import Bank for transportation- and communication-related projects. In 2011, Turkmenistan secured a second $4.1 billion loan from CDB to further develop the Galkynysh field. In October 2016, the government announced that the Islamic Development Bank would provide a $710 million loan to finance the Turkmenistan segment of TAPI. If successful, the project would have a transformative impact on the region, but adequate financing remains an open question. The project is currently estimated to cost $8-10 billion.

Screening of FDI

Foreign companies with approved government contracts and wishing to operate in Turkmenistan generally receive government support and do not face problems or significant delays when registering their operations in Turkmenistan. Under Turkmen law, all local and foreign entities operating in Turkmenistan are required to register with the Registration Department under the Ministry of Finance and Economy. Before the registration is granted, however, an inter-ministerial commission that includes the Ministry of Foreign Affairs, the Agency for Protection from Economic Risks, law enforcement agencies, and industry-specific ministries must approve it.

Foreign companies without approved government contracts that seek to establish a legal entity in Turkmenistan must go through a lengthy and cumbersome registration process involving the inter-ministerial commission mentioned above. The commission evaluates foreign companies based on their financial standing, work experience, reputation, and perceived political and legal risks. The inter-ministerial commission does not give a reason when denying the registration of a legal entity.

In order to participate in a government tender, companies are not required to be registered in Turkmenistan. However, a company interested in participating in the tender process must submit all the tender documents to the respective ministry or agency in person. Many foreign companies with no presence in Turkmenistan provide a limited power of attorney to local representatives who then submit tender documents on the company’s behalf. A list of required documents for screening is usually provided by the state agency announcing the tender.

Before the contract can be signed, the State Commodity and Raw Materials Exchange, the Central Bank, the Supreme Control Chamber, and the Cabinet of Ministers must approve the agreement. The approval process is not transparent and is often politically driven. There is no legal guarantee that the information provided by companies to the government will be kept confidential.

Competition Law

While Turkmenistan does not have a specific law that governs competition, Article 17 (Development of Competition and Antimonopoly Activities) of the Law on State Support to Small and Medium Enterprises seeks to promote fair competition in the country.

Limits on Foreign Control and Right to Private Ownership and Establishment

There are no legal limits on foreign ownership or control of companies. In practice, however, the government has only allowed foreign ownership and foreign direct investment in the energy sector. The law permits foreigners to establish and own businesses and generally engage in business activities, but revenue repatriation is very challenging as currency conversion remains difficult. The nature of government-awarded contracts may vary in terms of the requirements for ownership of local enterprises. All contractors operating in Turkmenistan for a period of at least 183 days a year must register with the Tax Department of the Ministry of Finance and Economy (formerly the Main State Tax Service). National accounting and international financial reporting standards apply to foreign investors. In the energy sector, Turkmenistan precludes foreign investors from investing in the exploration and production of its onshore gas resources. All land in Turkmenistan is government owned. The State Migration Service of Turkmenistan requires that citizens of Turkmenistan make up 90 percent of the workforce of foreign-owned companies. (This policy does not apply to foreign-owned oil and gas companies, which are subject to a more lenient policy requiring only 30 percent of the workforce to be Turkmen citizens, with the expectation that expats will also gradually be replaced by local experts through training programs).

Moreover, there are several ways for the government to discriminate against investors, including excessive and arbitrary tax examinations, arbitrary license extension denials, and customs clearance and visa issuance obstacles. In most cases, the government has insisted on maintaining a majority interest in any joint venture (JV). Foreign investors have been reluctant to enter JVs controlled by the government, mainly because of differing business cultures and conflicting management styles. Although there is no specific legislation requiring foreign investors to receive government approval to divest, in practice they are expected to coordinate such actions with the government. The court system is subject to government interference.

Private entities in Turkmenistan have the right to establish and own business enterprises. The 2000 Law on Enterprises defines the legal forms of state and private businesses (state enterprises, sole proprietorships, cooperatives, partnerships, corporations, and enterprises of non-government organizations). The law allows foreign companies to establish subsidiaries, though the government does not currently register subsidiaries. The Civil Code of Turkmenistan and the Law on Enterprises govern the operation of representative and branch offices. Enterprises must be registered with the Registration Department of the Ministry of Finance and Economy. The 2008 Law on the Licensing of Certain Types of Activities (last amended in November 2015) lists 44 activities that require government licenses. The Law on Enterprises and the Law on Joint Stock Societies allow acquisitions and mergers. Turkmenistan’s legislation is not clear, however, about acquisitions and mergers involving foreign parties, nor does it have specific provisions for the disposition of interests in business enterprises, both solely domestic and those with foreign participation. Governmental approval is necessary for acquisitions and mergers of enterprises with state shares.

Other Investment Policy Reviews

The government has not undergone an investment policy review by the Organization for Economic Cooperation and Development (OECD) or World Trade Organization (WTO) trade policy review. In July 2020, Turkmenistan became an observer to the WTO. The WTO grants observer status for five years and observer governments are expected to take a decision on accession within that period of time.

Laws/Regulations on Foreign Direct Investment

Incoming foreign investment is regulated by the Law on Foreign Investment (last amended in 2008), the Law on Investments (last amended in 1993), and the Law on Joint Stock Societies (1999), which pertains to start-up corporations, acquisitions, mergers, and takeovers. Foreign investment activities are affected by bilateral or multilateral investment treaties, the Law on Enterprises (2000), the Law on Business Activities (last amended in 2008), and the Land Code (2004). Foreign investment in the energy sector is subject to the 2008 Petroleum Law (also known as the Law on Hydrocarbon Resources, which was amended in 2011 and 2012). The Tax Code provides the legal framework for the taxation of foreign investment. The Civil Code (2000) defines what constitutes a legal entity in Turkmenistan. The Organization for Security and Co-operation in Europe (OSCE) Center in Ashgabat maintains a database of Turkmenistan’s laws, presidential decrees and resolutions at http://www.turkmenlegaldatabase.info . This information is also available on the Ministry of Justice of Turkmenistan’s website at: https://minjust.gov.tm/ .

Turkmenistan has introduced measures to promote economic reform, including a law to combat money laundering and terrorism financing and a presidential decree that mandates the use of International Financial Reporting Standards (IFRS). In January 2010, Turkmenistan established a Financial Intelligence Unit under the Ministry of Finance to strengthen its anti-money laundering (AML) efforts and its ability to combat terrorism financing (CFT).

Most foreign investment is governed by project-specific presidential decrees, which can grant privileges not provided by legislation. Legally, there are no limits on the foreign ownership of companies. In practice, however, the government has allowed fully owned foreign operations only in the energy sector. Some companies take the presidential decree as a sovereign guarantee.

Industrial Promotion

In 2007, Turkmenistan created the Awaza (Avaza) Tourist Zone (ATZ) to promote tourism and the development of its Caspian Sea coast. It granted some tax incentives to those willing to invest in the construction of hotels and recreational facilities. However, the country’s visa regime is rigid, making an increase in foreign tourism unlikely in the near term. In addition, as of August 2017, Turkmenistan charges a $2 daily fee for foreigners traveling to Turkmenistan, as well as foreigners residing in Turkmenistan if they travel within the country. Information on these programs is not publicly available. While development of tourism is perpetually on the government’s agenda, the concept is largely one of organized tour operators seeking letters of invitation for clients who travel as a group, often to archeological and cultural heritage sites.

Business Facilitation

Turkmenistan does not have a business registration website for use by domestic or foreign companies. Depending on the type of business activity a foreign company seeks in Turkmenistan, registration with the local statistics office, the Agency for Protection from Economic Risks, the Registration and Tax Departments under the Ministry of Finance and Economy, and the State Commodity and Raw Materials Exchange could all be required. Business registration usually takes about six months and often depends on personal connections in various government offices. The World Bank’s Ease of Doing Business Index has no data for Turkmenistan.

Development and implementation of public policies to attract foreign investment, investment coordination, and assistance to foreign investors are carried out by the Cabinet of Ministers of Turkmenistan. The Agency for Protection from Economic Risks under the Ministry of Finance and Economy makes decisions on providing any investment-related services to potential foreign investors based on criteria such as the financial status of the investor.

Turkmenistan’s Law on State Support to Small and Medium Enterprises (adopted in August 2009) defines small- and medium-sized enterprises as follows: in industry, power generation, construction, and gas and water supply sectors, small enterprises are defined as those with up to 50 employees and medium enterprises are those with up to 200 employees; in all other sectors small enterprises are those with up to 25 employees and medium enterprises are those with up to 100 people.

However, the benefits of the Law on State Support to Small and Medium Enterprises do not apply to: 1) state-owned enterprises; 2) enterprises with foreign investment carrying out banking or insurance activities; and 3) activities related to gambling and gaming for money.

As in many countries, business-related activities, particularly any large-scale contracts for goods or services, benefits from face-to-face contact. Foreigners wishing to visit Turkmenistan usually request a letter of invitation from the Ministry of Foreign Affairs to travel to the country; permission also must be received from the government to meet with state ministries, agencies, and enterprises. It can also be possible to conduct business with the government by hiring a local agent. The U.S. Embassy in Ashgabat can assist U.S. companies interested in identifying potential local partners and requesting a letter of invitation, which allows a traveler to board a plane for Turkmenistan and to request a visa on arrival at the airport. Turkmenistan closed its borders to international commercial air travel in early 2020 due to the COVID-19 pandemic (domestic flights are still available). It is unclear when scheduled international commercial flights will resume. Foreign embassies and some foreign companies routinely arrange charter flights into and out of the country. However, these flights are not permitted to land at Ashgabat International Airport and instead must land and take off from Turkmenabat Airport, roughly 400 miles from Ashgabat. Private citizens are currently subject to quarantine upon entry, which may vary based on whether the traveler can show proof of vaccination against COVID-19. All travelers should refer to travel.state.gov for the most up-to-date information on travel restrictions and quarantine measures.

Outward Investment

The government of Turkmenistan does not promote or incentivize outward investment and there is no investment promotion agency. The existing policies are aimed at reducing imports and promoting exports. According to unofficial reports, individual entrepreneurs have been known to invest in real estate abroad, namely in Turkey and the United Arab Emirates. Those entrepreneurs who invest abroad tend not to disclose such information, fearing possible retribution from the government.

3. Legal Regime

Transparency of the Regulatory System

The government does not use transparent policies to foster competition and foreign investment. Laws have frequent references to bylaws that are not publicly available. Most bylaws are passed in the form of presidential decrees. Such decrees are not categorized by subject, which makes it difficult to find relevant cross references. Personal relations with government officials can play a decisive role in determining how and when government regulations are applied. There is no information available on whether the government conducts any market studies or quantitative analysis of the impact of regulations. Regulations often appear to follow the government’s “try-and-see approach” to addressing issues.

Some U.S. firms, including Boeing, General Electric, and John Deere, have established themselves as key suppliers in some sectors, but their business operations are largely limited to sales of industrial equipment to the Turkmen government. Some companies require upfront payment prior to delivery of goods. Government delays in payment to foreign companies and restrictions on converting earnings into hard currency are major contributors to the country’s challenging investment climate. Moreover, arbitrary audits and investigations by several government bodies are common in relation to both foreign and local companies.

Bureaucratic procedures are confusing and cumbersome. The government does not generally provide informational support to investors, and officials use this lack of information to their personal benefit. As a result, foreign companies may spend months conducting due diligence in Turkmenistan. A serious impediment to foreign investment is the lack of knowledge of internationally recognized business practices, as well as the limited number of fluent English speakers in Turkmenistan. English-language material on legislation is scarce, and there are very few business consultants to assist investors. Proposed laws and regulations are not generally published in draft form for public comment.

There are no standards-setting consortia or organizations besides the Main State Standards Service. There is no independent body for filing complaints. Financial disclosure requirements are neither transparent nor consistent with international norms. Government enterprises are not required to publicize financial statements, even to foreign partners. Financial audits are often conducted by local auditors, not internationally recognized firms.

The legal framework contained in the Law on Petroleum (2008) was a partial step toward creating a more transparent policy in the energy sector. Turkmenistan’s banks completed the transition to International Financial Reporting Standards (IFRS). State-owned agencies began the transition to IFRS in 2012 and fully transitioned to National Financing Reporting Standards (NFRS) in January 2014, which is reportedly in accordance with IFRS. While IFRS may improve accounting standards by bringing them into compliance with international standards, they have no discernible impact on Turkmenistan’s fiscal transparency since fiscal data remains inaccessible to the public. There is no publicly available information regarding the budget’s conformity with IFRS. There is no public consultation process on draft bills and there are no informal regulatory processes managed by nongovernmental organizations or private sector associations. Public finances and debt obligations are not transparent.

International Regulatory Considerations

Turkmenistan pursues a policy of neutrality (acknowledged by the United Nations in 1995) and generally does not join regional blocs. In drafting laws and regulations, the government usually includes a clause that states international agreements and laws will prevail in the case of a conflict between local and international legislation. Turkmenistan is not a member of Eurasian Economic Union. In July 2020, Turkmenistan became an observer to the WTO.

Legal System and Judicial Independence

Turkmenistan is a civil law country in terms of the nature of the legal system and many laws have been codified in an effort to transition from Soviet laws. The parliament adopts around 50 laws per year without involving the public. Most contracts negotiated with the government have an arbitration clause. The Embassy strongly advises U.S. companies to include an arbitration clause identifying a dispute resolution venue outside Turkmenistan. There have been commercial disputes involving U.S. and other foreign investors or contractors in Turkmenistan, though not all disputes were filed with arbitration courts. Investment and commercial disputes involving Turkmenistan have three common themes: nonpayment of debts, non-delivery of goods or services, and contract renegotiations. The government may claim the provider did not meet the terms of a contract as justification for nonpayment. Several disputes have centered on the government’s unwillingness to pay in freely convertible currency as contractually required. In cases where government entities have not delivered goods or services, the government has often ignored demands for delivery. Finally, a change in leadership in the government agency that signed the original contract routinely triggers the government’s desire to re-evaluate the entire contract, including profit distribution, management responsibilities, and payment schedules. The judicial branch is independent of the executive on paper only and is largely influenced by the executive branch. In February 2015, President Berdimuhamedov signed an updated law entitled “On the Chamber of Commerce and Industry of Turkmenistan” (first adopted in 1993). The new law redefined the legal and economic framework for the activities of the Chamber, defined the state support measures, and created a new body for international commercial arbitration under the Chamber’s purview. This body can consider disputes arising from contractual and other civil-legal relations in foreign trade and other forms of international economic relations, if at least one of the parties to the dispute is located outside of Turkmenistan. The enforcement of the decisions of commercial arbitration outside of Turkmenistan may be denied in Turkmenistan under certain conditions listed under Article 47 of the Law of Turkmenistan “On Commercial Arbitration” adopted in 2014 and in force as of 2016. According to the law, the parties in dispute can appeal the arbitration decision only to the Supreme Court of Turkmenistan and nowhere abroad. The government of Turkmenistan recognizes foreign court judgements on a case-by-case basis.

In February 2015, President Berdimuhamedov signed an updated law entitled “On the Chamber of Commerce and Industry of Turkmenistan” (first adopted in 1993). The new law redefined the legal and economic framework for the activities of the Chamber, defined the state support measures, and created a new body for international commercial arbitration under the Chamber’s purview. This body can consider disputes arising from contractual and other civil-legal relations in foreign trade and other forms of international economic relations, if at least one of the parties to the dispute is located outside of Turkmenistan. The enforcement of the decisions of commercial arbitration outside of Turkmenistan may be denied in Turkmenistan under certain conditions listed under Article 47 of the Law of Turkmenistan “On Commercial Arbitration” adopted in 2014 and in force as of 2016. According to the law, the parties in dispute can appeal the arbitration decision only to the Supreme Court of Turkmenistan and nowhere abroad. The government of Turkmenistan recognizes foreign court judgements on a case-by-case basis. • According to the 2008 Law on Foreign Investment, all foreign and domestic companies and foreign investments must be registered at the Ministry of Finance and Economy.

• According to the 2008 Law on Foreign Investment, all foreign and domestic companies and foreign investments must be registered at the Ministry of Finance and Economy. • The Petroleum Law of 2008 (last amended in 2012) regulates offshore and onshore petroleum operations in Turkmenistan, including petroleum licensing, taxation, accounting, and other rights and obligations of state agencies and foreign partners. The Petroleum Law supersedes all other legislation pertaining to petroleum activities, including the Tax Code.

• The Petroleum Law of 2008 (last amended in 2012) regulates offshore and onshore petroleum operations in Turkmenistan, including petroleum licensing, taxation, accounting, and other rights and obligations of state agencies and foreign partners. The Petroleum Law supersedes all other legislation pertaining to petroleum activities, including the Tax Code. • According to the Land Code (last amended February 2017), foreign companies or individuals are permitted to lease land for non-agricultural purposes, but only the Cabinet of Ministers has the authority to grant the lease. Foreign companies may own structures and buildings.

• According to the Land Code (last amended February 2017), foreign companies or individuals are permitted to lease land for non-agricultural purposes, but only the Cabinet of Ministers has the authority to grant the lease. Foreign companies may own structures and buildings. • Turkmenistan adopted a Bankruptcy Law in 1993. Other laws affecting foreign investors include the Law on Investments (last amended in 1993), the Law on Joint Stock Societies (1999), the Law on Enterprises (2000), the Law on Business Activities (last amended in 1993), the Civil Code enforced since 2000, and the 1993 Law on Property.

• Turkmenistan adopted a Bankruptcy Law in 1993. Other laws affecting foreign investors include the Law on Investments (last amended in 1993), the Law on Joint Stock Societies (1999), the Law on Enterprises (2000), the Law on Business Activities (last amended in 1993), the Civil Code enforced since 2000, and the 1993 Law on Property.

Turkmenistan requires that import/export transactions and investment projects be registered at the State Commodity and Raw Materials Exchange (SCRME) and the Ministry of Finance and Economy. The procedure applies not only to contracts and agreements signed at SCRME, but also to contracts signed between third parties. SCRME is state-owned and is the only exchange in the country. The contract registration procedure includes an assessment of “price justification,” and while SCRME does not directly dictate pricing, it does generally set a ceiling for imports and a minimum price for exports. Import transactions must be registered before goods are delivered to Turkmenistan. The government generally favors long-term investment projects that do not require regular hard currency purchases of raw materials from foreign markets.

Laws and Regulations on Foreign Direct Investment

Under Turkmenistan’s law, all local and foreign entities operating in Turkmenistan are required to register with the Registration Department under the Ministry of Finance and Economy. Before the registration is granted, however, an inter-ministerial commission that includes the Ministry of Foreign Affairs, the Agency for Protection from Economic Risks, law enforcement agencies, and industry-specific ministries must approve it. There is no “one-stop-shop” website for investment that provides relevant laws, rules, procedures, and reporting requirements for investors.

Foreign companies without approved government contracts that seek to establish a legal entity in Turkmenistan must go through a lengthy and cumbersome registration process involving the inter-ministerial commission mentioned above. The commission evaluates foreign companies based on their financial standing, work experience, reputation, and perceived political and legal risks.

In order to participate in a government tender, companies are not required to be registered in Turkmenistan. However, a company interested in participating in a tender process must submit all the tender documents to the respective ministry or agency in person. Many foreign companies with no presence in Turkmenistan provide a limited power of attorney to local representatives who then submit tender documents on their behalf. A list of required documents for screening is usually provided by the state agency announcing the tender. Before the contract can be signed, the State Commodity and Raw Materials Exchange, the Central Bank, the Supreme Control Chamber, and the Cabinet of Ministers must approve the agreement. The approval process is not transparent and is often politically driven. There is no legal guarantee that the information provided by companies to the government of Turkmenistan will be kept confidential.

Competition and Anti-Trust Laws

There is no publicly available information on which agencies review transactions for competition-related concerns. The government does not publish information on any competition cases. While Turkmenistan does not have a specific law that governs competition, Article 17 (Development of Competition and Antimonopoly Activities) of the Law on State Support to Small and Medium Enterprises seeks to promote fair competition in the country.

Expropriation and Compensation

Three cases raise expropriation concerns for foreign businesses investing in Turkmenistan. In December 2016, the government expropriated the largest (and only foreign owned) grocery store in Ashgabat, Yimpaş (Yimpash) shopping and business center, without compensation or other legal remedy. In April 2017, the Turkish Hospital in Ashgabat was expropriated without compensation. In September 2017, Russian cell phone service provider MTS suspended its operations after the state-owned Turkmen Telecom cut the company off from the network over an alleged expired license. In each case the companies involved had valid licenses or leases.

Turkmenistan’s legislation does not provide for private ownership of land. The government has a history of arbitrarily expropriating the property of local businesses and individuals.

Dispute Settlement

ICSID Convention and New York Convention

Turkmenistan is a Party to the 1995 Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID), but it is not a member of the 1958 Recognition and Enforcement of Foreign Arbitral Awards (New York Convention). The commercial law enforcement system includes the Arbitration Court of Turkmenistan, which tries 13 categories of both pre-contractual and post-contractual disputes, including taxation, legal foundations, and bankruptcy issues. The court does not interfere in an enterprise’s economic relations, but reviews disputes upon the request of either party involved. Appeals to decisions of the Arbitration Court can be filed at the Arbitration Committee of the Supreme Court of Turkmenistan.

Investor-State Dispute Settlement

Although Turkmenistan has adopted a number of laws designed to regulate foreign investment, the laws have not been consistently or effectively implemented. The government does not always distinguish between foreign investment and loans from foreign financial institutions. The Law on Foreign Investment, as amended in 2008, is the primary legal instrument defining the principles of investment. A foreign investor is defined in the law as an entity owning a minimum of 20 percent of a company’s assets.

There are several examples, as recently as 2017, of Western companies being unable to enforce contracts or prevail in state-level formal procedures in investment disputes. In some instances, the government bluntly refused to pay awards to the companies despite a court decision that required it to do so. In others, the government disputes the amount owed, which has made any collection efforts by the companies futile.

International Commercial Arbitration and Foreign Courts

Turkmenistan does not have a Bilateral Investment Treaty (BIT) or Free Trade Agreement (FTA) with an investment chapter with the United States.

There are no alternative dispute resolution mechanisms in Turkmenistan as a means for settling disputes between two private parties. The government’s dispute settlement clause in contracts generally does not allow for arbitration in a venue outside the country. However, the government is sometimes willing to codify the right to international arbitration in contracts with foreign companies. We urge U.S. companies to include an international arbitration clause in their contracts, as political considerations still influence local courts.

Several foreign companies have pursued international arbitration against the Turkmen government through the World Bank’s International Center for Settlement of Investment Disputes (ICSID) and the Arbitration Institute of the Stockholm Chamber of Commerce. In 2020, Turkish construction firm Setta Insaat Taahhüt initiated an ICSID claim against the Turkmen government for $27 million over the state’s alleged expropriation of several projects. In 2018, German company Unionmatex registered a $43.5 million ICSID claims against the Turkmen government alleging non-payment of invoices and expropriation of company assets by the state. Also in 2018, Turkish company SECE Insaat brought a similar ICSID claim against Turkmenistan for unjustified termination of contracts and non-payment of invoices.

The commercial law enforcement system includes the Arbitration Court of Turkmenistan, which tries 13 categories of disputes, both pre-contractual and post-contractual, including taxation, legal foundations, and bankruptcy issues. The court does not interfere in an enterprise’s economic relations, but reviews disputes upon the request of either party involved. Appeals to decisions of the Arbitration Court can be filed at the Arbitration Committee of the Supreme Court of Turkmenistan.

Bankruptcy Regulations

Turkmenistan adopted a Bankruptcy Law in 1993 (last amended March 2016), which protects certain rights of creditors, such as the satisfaction of creditors’ claims in case of the debtor’s inability or unwillingness to make payments. The law allows for criminal liability for intentional actions resulting in bankruptcy. The law does not specify the currency in which the monetary judgments are made. Turkmenistan’s economy is not ranked by the World Bank’s 2020 Doing Business Report.

6. Financial Sector

7. State-Owned Enterprises

State-owned enterprises (SOEs) dominate Turkmenistan’s economy and control the lion’s share of the country’s industrial production, especially in onshore hydrocarbon production, transportation, refining, electricity generation and distribution, chemicals, transportation, and construction material production. Education, healthcare, and media enterprises are, with some rare exceptions, also state owned and tightly controlled. SOEs are also to varying degrees involved in agriculture, food processing, textiles, communications, construction, trade, and services. Although SOEs are often inefficient, the government considers them strategically important. While there are some small-scale private enterprises in Turkmenistan, the government continues to exert significant influence most economic sectors. There are no mechanisms to ensure transparency or accountability in the business decisions or operations of SOEs. There is no publicly available information on the total assets of SOEs, total net income of SOEs, the number of people employed by SOEs and the expenses these SOEs allocate to research and development (R&D). There is no published list of SOEs. Turkmenistan is not a party to the Government Procurement Agreement (GPA) within the framework of the WTO. SOEs are not uniformly subject to the same tax burden as their private sector competitors.

10. Political and Security Environment

Turkmenistan’s political system has remained stable since Gurbanguly Berdimuhamedov became president in February 2007 and, with the exception of a reported coup attempt in 2002, there is no history of politically motivated violence. There have been no recorded examples of damage to projects or installations.

The government does not permit political opposition and maintains a tight grip on all politically sensitive issues, in part by requiring all organizations to register their activities. The Ministry of National Security and the Ministry of Internal Affairs actively monitor locals and foreigners. The country’s parliament passed a Law on Political Parties in January 2012 that defines the legal grounds for the establishment of political parties, including their rights and obligations. In August 2012, under the directive of President Berdimuhamedov, Turkmenistan created a second political party, the Party of Industrialists and Entrepreneurs. This pro-government party, created from the membership of the Union of Industrialists and Entrepreneurs, has a platform nearly identical to the President’s Democratic Party. The same is true for the Agrarian Party, which was created in September 2014 in an effort to move Turkmenistan towards a multi-party system. Organized crime is rare, and authorities have effectively rooted out organized crime groups and syndicates. Turkmenistan does not publish crime statistics or information about crime.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Government data on many economic indicators, including foreign direct investment, are generally unavailable or unreliable. According to various independent analysts, however, most foreign investment is directed toward the country’s oil and gas sector. Turkmenistan has a natural gas production sharing agreement (PSA) for the Bagtyyarlyk contractual territory with the China National Petroleum Corporation (CNPC), the only foreign firm Turkmenistan has allowed into onshore gas production. In the oil sector there are two onshore PSAs: the Nebitdag contractual territory operated by Italy’s ENI, and the Hazar project operated jointly by the Turkmennebit state oil concern and Mitro International of Austria. In addition, there are five PSAs for offshore operations: Block I operated by Petronas of Malaysia, Block II (Cheleken Contractual Territory) operated by Dragon Oil (UAE), Block III operated by Buried Hill (UK), Blocks 19 and 20 operated by ENI (Italy), and Block 21 operated by Areti (Russian-owned, headquartered in Switzerland).

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), in billions 2019 $45.25 2019 $45.5 http://unctadstat.
unctad.org/
countryprofile/
generalprofile/en-gb/795/
index.html 
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international
Source of data:
BEA;
IMF; Eurostat;
UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) N/A N/A ** 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 ** 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 ** UNCTAD data available at http://unctadstat.
unctad.org/
countryprofile/
generalprofile/en-gb/795/index.html

* Source for Host Country Data: 2020 Statistical Yearbook of Turkmenistan, State Committee of Statistics of Turkmenistan

** Statistics not available. Amount is either zero or is grouped with other countries under in the source data.

Table 3: Sources and Destination of FDI

UNCTAD has limited data on FDI for Turkmenistan: http://unctadstat.unctad.org/countryprofile/generalprofile/en-gb/795/index.html 

Data not available.

Table 4: Sources of Portfolio Investment

Data not available.

Uganda

Executive Summary

Uganda’s investment climate presents both important opportunities and major challenges for U.S. investors. With a market economy, ideal climate, ample arable land, a young and largely English-speaking population, and at least 1.4 billion barrels of recoverable oil, Uganda offers numerous opportunities for investors. Due to effects of the COVID-19 pandemic, including the collapse of the tourism industry, Uganda’s gross domestic product (GDP) grew by only 2.9% in fiscal year (FY) 2019/2020, the lowest growth rate since 2000. Foreign direct investment (FDI) decreased by 18.6% from $1.42 billion in FY 2018/19 to $1.2 billion in FY 2019/2020. However, the International Monetary Fund (IMF) projects a return to a pre-pandemic level of 4.9% growth for calendar year 2021. Uganda maintains a liberal trade and foreign exchange regime. As the economy begins to recover, Uganda’s power, agricultural, construction, infrastructure, technology, and healthcare sectors present attractive potential opportunities for U.S. business and investment.

President Yoweri Museveni and government officials vocally welcome foreign investment in Uganda. However, the government’s actions sometimes do not support its rhetoric. The closing of political and democratic space, poor economic management, endemic corruption, growing sovereign debt, weak rule of law, and the government’s failure to invest adequately in the health and education sectors all create risks for investors. U.S. firms often find themselves competing with third-country firms that cut costs and win contracts by disregarding environmental regulations and labor rights, dodging taxes, and bribing officials. Shortages of skilled labor and a complicated land tenure system also impede the growth of businesses and serve as disincentives to investment. The World Bank’s Ease of Doing Business Index 2020 ranks Uganda 135 out of 190 countries for ease of registration of property.

An uncertain mid-to-long-range political environment also increases risk to foreign businesses and investors. President Museveni was declared the winner in the widely disputed January 2021 general elections and will begin another five-year term after 35 years already in power. Domestic political tensions increased following election-related violence and threats to democratic institutions. Importantly, many of Uganda’s youth, a demographic that comprises 77% of the population, openly clamor for change. However, the 76-year-old President has not provided any indication of reforms to promote more inclusive, transparent, and representative governance.

On the legislative front, Uganda’s parliament passed in May 2020 the National Local Content Bill which would have imposed onerous local content requirements. U.S. firms noted its passage could have led to divestment from Uganda. In October 2020, President Museveni refused to sign the bill into law; the President noted that it contradicted regional integration protocols and international best practices. The bill is back before the finance committee of Parliament for review.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perception Index 2020 142 of 180 https://www.transparency.org/cpi2020 
World Bank’s Doing Business Report 2020 116 of 190 https://www.doingbusiness.org/en/
data/exploreeconomies/uganda 
Global Innovation Index 2020 114 of 131 https://www.globalinnovationindex.org/
analysis-indicator 
U.S. FDI in partner country ($M USD, historical stock positions) 2019 USD 42 million https://apps.bea.gov/international/
factsheet/factsheet.cfm?Area=446 
World Bank GNI per capita 2019 USD 780 https://data.worldbank.org/indicator/
NY.GNP.PCAP.CD?locations=UG
 

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

The Ugandan government and authorities vocally welcome FDI, and advocate for its job creation benefits. Furthermore, the country’s free market economy, liberal financial system, and close to 45-million-person consumer market attract investors. However, rampant corruption, weak rule of law, threats to open and free internet access (including a five-day complete internet shutdown for political reasons in January 2021), and an increasingly aggressive tax collection regime by the Uganda Revenue Authority (URA) create a challenging business environment.

The 2019 Investment Code Act (ICA) established both benefits and challenges to FDI. The ICA abolished restrictions on technology transfer and repatriation of funds by foreign investors, and established new incentives (e.g., tax waivers) for investment. However, the ICA also set a minimum value of $250,000 for FDI and a yet-to-be-specified minimum value for portfolio investment. Additionally, the ICA authorized the Ugandan government to alter these thresholds at any time, thereby creating potential uncertainty for investors. Under the ICA, investment licenses carry specific performance conditions varying by sector, such as requiring investors to allow the Uganda Investment Authority (UIA) to monitor operations, or to employ or train Ugandan citizens, or use Ugandan goods and services to the greatest extent possible. Further, the ICA empowers the Ugandan government to revoke investment licenses of entities that “tarnish the good repute of Uganda as an attractive base for investment.” The government has yet to revoke any investor license on this ground.

In October 2019, the Ugandan government passed the Communications Licensing Framework (CLF), which requires telecommunication (telecom) companies to list 20% of their equity on the Uganda Securities Exchange (USE), with the aim of increasing local ownership and reducing the repatriation of profits. In 2020, MTN Uganda and Airtel Uganda, which together control about 70% of mobile telecom market share, renewed their operator licenses for $100 million and $75 million respectively. In two years, both companies will start the process of listing on the USE, in compliance with the CLF.

The Uganda Investment Authority (UIA) facilitates investment by granting licenses to foreign investors, as well as promoting, facilitating, and supervising investments. It provides a “one-stop” shop online where investors can apply for a license, pay fees, register businesses, apply for land titles, and apply for tax identification numbers. In practice, investors may also need to liaise with other authorities to complete legal requirements. The UIA also triages complaints from foreign investors. The UIA’s website ( www.ugandainvest.go.ug ), the International Trade Administration’s website ( https://www.trade.gov/country-commercial-guides/uganda-market-overview ), and BidNetwork’s website, the Business in Development Network Guide to Uganda ( www.bidnetwork.org ), provide information on the laws and reporting requirements for foreign investors. In practice, investors often ultimately bypass the UIA after experiencing bureaucratic delays and corruption. For larger investments, companies have reported that political support and relationship-building from high-ranking Ugandan officials is a prerequisite.

President Museveni hosts an annual investors’ roundtable to consult a select group of foreign and local investors on increasing investment, occasionally including U.S. investors.

Every Ugandan embassy has a trade and investment desk charged with advertising investment opportunities in the country.

Limits on Foreign Control and Right to Private Ownership and Establishment

Except for land, foreigners have the right to own property, establish businesses, and make investments. Ugandan law permits foreign investors to acquire domestic enterprises and to establish green field investments. The Companies Act of 2010 permits the registration of companies incorporated outside of Uganda.

Foreigners seeking to invest in the oil and gas sector must register with the Petroleum Authority of Uganda (PAU) to be added to its National Supplier Database. More information on this process is available on the Embassy’s website (select – Registering a U.S. Firm on the National Supplier Database): ( https://ug.usembassy.gov/business/commercial-opportunities/).

The Petroleum Exploration and Development Act and the Petroleum Refining, Conversion, Transmission, and Midstream Storage Act require companies in the oil sector to prioritize using local goods and labor when possible and give the Minister of Energy and Mineral Development (MEMD) the authority to determine the extent of local content requirements in the sector.

All investors must obtain an investment license from the UIA. The UIA evaluates investment proposals based on several criteria, including potential for generation of new earnings; savings of foreign exchange; the utilization of local materials, supplies, and services; the creation of employment opportunities in Uganda; the introduction of advanced technology or upgrading of indigenous technology; and the contribution to locally or regionally balanced socioeconomic development.

Other Investment Policy Reviews

The United Nations Commission on Trade and Development (UNCTAD) issued its World Investment Report, 2020, available at: https://unctad.org/system/files/official-document/wir2020_en.pdf

The IMF issued an Article IV Consultation and Review in 2020, and its concluding statement is available at: https://www.imf.org/en/News/Articles/2020/02/03/pr2031-uganda-imf-staff-concludes-visit 

The World Trade Organization (WTO) issued its Trade Policy Review in 2019; the report is available at: https://docs.wto.org/dol2fe/Pages/FE_Search/FE_S_S009-DP.aspx?language=E&CatalogueIdList=254764,251521,117054,95202,80262,80232,82036,106989&CurrentCatalogueIdIndex=0&FullTextHash=&HasEnglishRecord=True&HasFrenchRecord=True&HasSpanishRecord=True 

Business Facilitation

The UIA one-stop shop website assists in registering businesses and investments. In practice, investors and businesses may need to liaise with multiple authorities to set up shop, and the UIA lacks the capacity to play a robust business facilitation role. According to the 2020 World Bank Doing Business report, business registration takes an average of 25 days.

Prospective investors can also register online and apply for an investment license at https://www.ebiz.go.ug/ . The UIA also assists with the establishment of local subsidiaries of foreign firms by assisting in registration with the Uganda Registration Services Bureau ( http://ursb.go.ug/ ). New businesses are required to obtain a Tax Identification Number from the URA, by clicking the “My TIN” link at https://www.ura.go.ug/  or through the UIA. Businesses must also secure a trade license from the municipality or local government in the area in which they intend to operate. Investors in specialized sectors such as finance, telecoms, and petroleum often need an additional permit from the relevant ministry in coordination with the UIA.

Under the Uganda Free Zones Act of 2014, the government continues to establish free trade zones for foreign investors seeking to produce goods for export and domestic use. Such investors receive a range of benefits including tax rebates on imported inputs and exported products. An investor seeking a free zone license may submit an application to the Uganda Free Zones Authority ( https://freezones.go.ug/ ).

Outward Investment

The Ugandan government does not promote or incentivize outward investment nor does it restrict domestic investors from investing abroad.

3. Legal Regime

Transparency of the Regulatory System

On paper, Uganda’s legal and regulatory systems are generally transparent and non-discriminatory, and they comply with international norms. In practice, bureaucratic hurdles and corruption significantly impact all investors, but with disproportionate effect on foreigners learning to navigate a parallel informal system. While Ugandan law requires open and transparent competition on government project tenders, U.S. investors have alleged that endemic corruption means that competitors not subject to the Foreign Corrupt Practices Act, or similar legislation, often pay bribes to win awards.

Ugandan law allows the banking, insurance, and media sectors to establish self-regulatory processes through private associations. The government continues to regulate these sectors, however, and the self-regulatory practices generally do not discriminate against foreign investors.

Potential investors must be aware of local, national, and supranational regulatory requirements in Uganda. For example, EAC rules on free movement of goods and services would affect an investor planning to export to the regional market. Similarly, regulations issued by local governments regarding operational hours or the location of factories would only affect an investor’s decision at the local level. Foreign investors should liaise with relevant ministries to understand regulations in the proposed sector for investment.

Uganda’s accounting procedures are broadly transparent and consistent with international norms, though full implementation remains a challenge. Publicly listed companies must comply with accounting procedures consistent with the International Auditing and Assurance Standards Board.

Governmental agencies making regulations typically engage in only limited public consultation. Draft bills similarly are subject to limited public consultation and review. Local media typically cover public comment only on more controversial bills. Although the government publishes laws and regulations in full in the Uganda Gazette, the gazette is not available online and can only be accessed through purchase of hard copies at the Uganda Printing and Publishing Corporation offices. The Uganda Legal Information Institute also publishes all enacted laws on its website ( https://ulii.org/ ).

Uganda’s court system and Inspector General of Government are responsible for ensuring the government adheres to its administrative processes, however, anecdotal reports suggest that corruption significantly undermines the judiciary’s oversight role.

In July 2020, the URA started the implementation of the amended Income Tax Act, which imposes presumptive taxes on rental income based on location using a blockchain compliance system meant to improve transparency and reduce corruption.

Generally, there is legal redress to review regulatory mechanisms through the courts, and the process is made public.

Uganda’s legislative process includes public consultations and, as needed, subject matter expert presentations before parliament; however, not all comments received by regulators are made publicly available and parliament’s decisions tend to be primarily politically driven. Formal scientific analyses of the potential impact of a pending regulation are seldom conducted.

Public finances are generally transparent and budget documents are available online. The government annually publishes the Annual Debt Statistical Bulletin, which contains the country’s debt obligations including status of public debt, cost of debt servicing, and liabilities. However, the government’s significant use of supplementary and classified budget accounts undermines parliamentary and public oversight of public finances.

International Regulatory Considerations

Per treaty, Uganda’s regulatory systems must conform to the below supranational regulatory systems. In practice, domestication of supranational legislation remains imperfect:

  • African, Caribbean, and Pacific Group of States (ACP)
  • African Union (AU)
  • Common Market for Eastern and Southern Africa (COMESA)
  • Commonwealth of Nations
  • East African Community (EAC)

Uganda, through the Uganda National Bureau of Standards (UNBS), is a member of the International Organization for Standardization (ISO), Codex Alimentarius, and International Organization of Legal Metrology (OIML). Uganda applies European Union directives and standards, but with modifications.

Uganda is a member of the WTO and notifies the WTO Committee on Technical Barriers to Trade (TBT) of all draft technical regulations through the Ugandan Ministry of Trade’s National TBT Coordination Committee.

Legal System and Judicial Independence

Uganda’s legal system is based on English Common Law. The courts are responsible for enforcing contracts. Litigants must first submit commercial disputes for mediation either within the court system or to the government-run Center of Arbitration for Dispute Resolution (CADER). Uganda does not have a singular commercial law; multiple statutes touch on commercial and contractual law. A specialized commercial court decides commercial disputes. Approximately 80% of commercial disputes are resolved through mediation. Litigants may appeal commercial court decisions and regulatory and enforcement actions through the regular national court system.

While in theory independent, in practice there are credible reports that the executive may attempt to influence the courts in high-profile cases. More importantly for most investors, endemic corruption and significant backlogs hamper the judiciary’s impartiality and efficacy.

Laws and Regulations on Foreign Direct Investment

The Constitution and ICA regulate FDI. The UIA provides an online “one-stop shop” for investors ( https://www.ugandainvest.go.ug/ ).

Competition and Antitrust Laws

Uganda does not have any specialized laws or institutions dedicated to competition-related concerns, although commercial courts occasionally handle disputes with competition elements. There was no significant competition-related dispute handled by the courts in 2020.

Expropriation and Compensation

The constitution guarantees the right to property for all persons, domestic and foreign. It also prohibits the expropriation of property, except when in the “national interest” such as eminent domain and preceded by compensation to the owner at fair market value. In 2020, the two National Telecom Operators – MTN Uganda and Airtel Uganda – renewed their licenses to operate in Uganda for 12 and 20 years respectively. One requirement of that license renewal is for the telecom companies to list 20% stakes on the Ugandan stock market within two years of being granted the license.

In 1972, then-President Idi Amin expropriated assets owned by ethnic South Asians. The expropriation was extrajudicial and was ordered by presidential decree. The government did not allow judicial challenge to the expropriations or offer any compensation to the owners. The Ugandan government has since returned the vast majority of the properties to the original owners or their descendants or representatives. There have not been any expropriations since, and government projects are often significantly delayed by judicial disputes over compensation for property the Ugandan government seeks to expropriate under eminent domain.

Dispute Settlement

ICSID Convention and New York Convention

Uganda is a party to both the ICSID Convention and the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards. The 2000 Domestic Arbitration and Conciliation Act incorporates the 1958 New York Convention.

Investor-State Dispute Settlement

Pursuant to the Arbitration and Conciliation Act, the courts and government in theory accept binding arbitration with foreign investors and between private parties. In practice, the overall challenges of the judiciary are likely to impede full enforcement. Uganda has not been involved in any official investment disputes with a U.S person in the last ten years; however, U.S. firms do complain about serious corruption in the award of government tenders.

Ugandan courts recognize and enforce foreign arbitral awards, including those issued against the government. The country is a party to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Additionally, the Arbitration and Conciliation Act creates a framework for the recognition and enforcement of foreign arbitral awards, including those against the government.

Uganda has not had any experience of extrajudicial action against foreign investors. However, in 1972, the government of then-President Idi Amin extrajudicially expropriated property owned by ethnic South Asians.

International Commercial Arbitration and Foreign Courts

Ugandan law provides for arbitration and mediation of civil disputes. The legal framework on arbitration includes the Arbitration and Conciliation Act and Commercial Court Division Mediation Rules. Litigants must first submit all civil disputes to mediation before a court-appointed mediator. CADER is a statutory institution that facilitates the mediation and operates based on the UN Commission on International Trade Law (UNCITRAL) Arbitration rules. However, unrecorded private arbitration is the most effective investment dispute resolution mechanism in Uganda.

The Foreign Judgments Reciprocal Enforcement Act enables the recognition and enforcement of judgments and awards made by foreign courts.

There is no evidence that Ugandan courts favor state-owned enterprises when arbitrating or settling disputes. However, court decisions are often influenced by corruption or high-level government officials.

Bankruptcy Regulations

The Bankruptcy Act of 1931, the Insolvency Act of 2011, and the Insolvency Regulations of 2013 generally align Uganda’s legal framework on insolvency with international standards. The 2020 World Bank Doing Business Report ranked Uganda 99 out of 190 countries for resolving insolvency. On average, Uganda recovers $ 0.39 per dollar, well above the sub-Saharan average of $0.20. Bankruptcy is not criminalized.

6. Financial Sector

Capital Markets and Portfolio Investment

The government generally welcomes foreign portfolio investment and has put in place a legal and institutional framework to manage such investments. The Capital Markets Authority (CMA) licenses brokers and dealers and oversees the USE, which is now trading the stock of 17 companies. Liquidity remains constrained to enter and exit sizeable positions on the USE. Capital markets are open to foreign investors and there are no restrictions for foreign investors to open a bank account in Uganda. However, the government imposes a 15% withholding tax on interest and dividends. Foreign-owned companies may trade on the stock exchange, subject to some share issuance requirements. The government respects IMF Article VIII and refrains from restricting payments and transfers for current international transactions.

Credit is available from commercial banks on market terms and foreign investors can access credit. However, persistently high lending rates, including high yields on Ugandan government-issued securities, push up interest rates on commercial loans, undermining the private sector’s access to affordable credit. For instance, commercial lending rates averaged 19% and government 10-year bonds averaged 16% at the end of February 2021.

Money and Banking System

Formal banking participation remains low, with only 35.5% of Ugandans having access to bank accounts, many via their membership in formal savings groups. However, 16 million Ugandans have bank accounts, while more than 30 million use mobile money to conduct basic financial transactions. Uganda’s banking and financial sector is generally healthy, though non-performing loans remain a problem. According to the Bank of Uganda’s Financial Soundness Indicators, Uganda’s non-performing loan rate stood at 6% at the end of June 2020. The effects of COVID-19 on the economy triggered the rise in non-performing loans in 2020 as business slowed down due to a government-imposed lockdown, among other measures. Uganda has 26 commercial banks, with the top six controlling at least 60% of the banking sector’s total assets, valued at $9.7 billion. The Bank of Uganda regulates the banking sector, and foreign banks may establish branches in the country. In February 2020, the Financial Action Taskforce added Uganda to its “Grey List” due to the country’s insufficient implementation of its anti-money laundering and countering financing of terrorism policies. As of the end of February 2021, Uganda was still on this watch list due to seven strategic deficiencies in the implementation of AML/CFT policies. As a result, Uganda’s correspondent banking relationships face increased oversight. Uganda does not restrict foreigners’ ability to establish a bank account.

Foreign Exchange and Remittances

Foreign Exchange

Uganda keeps open capital accounts, and there are no restrictions on capital transfers in and out of Uganda. If, however, an investor benefited from tax incentives on the original investment, he or she will need to seek a “certificate of approval” to “externalize” the funds. Investors may convert funds associated with any form of investment into any world currency. The Ugandan shilling (UGX) trades on a market-based floating exchange rate.

Remittance Policies

There are no restrictions for foreign investors on remittances to and from Uganda.

Sovereign Wealth Funds

In 2015, the government established the Uganda Petroleum Fund (PF) to receive and manage all government revenues from the oil and gas sector. By law, the government must spend a portion of proceeds from the fund on oil-related infrastructure, with parliament appropriating the remainder of revenues through the normal budget procedure. As of June 2020, the PF had a balance of $24 million. Uganda does not have a sovereign wealth fund, but plans to establish a fund called the Petroleum Revenue Investment Reserve (PRIR) to ensure responsible and long-term management of revenue from Uganda’s oil resources when oil production begins. In 2019, Uganda inaugurated PRIR’s investment advisory committee. The committee is meant to advise the Ugandan government on how to invest proceeds from oil revenue and establish fund governance, but that work is ongoing.

7. State-Owned Enterprises

Uganda has thirty State Owned Enterprises (SOEs). However, the Ugandan government does not publish a list of its SOEs, and the public is unable to access detailed information on SOE ownership, total assets, total net income, or number of people employed. Uganda Airlines, the national carrier, began service in late 2019 with regional service. Despite the woes associated with the travel industry due to COVID-19, it has since expanded its fleet to six planes including two Airbus A330-800neos, and has plans to service Europe, the Middle East, and China. While there is insufficient information to assess the SOEs’ adherence to the OECD Guidelines of Corporate Governance, the Ugandan government’s 2020 Office of Auditor General report noted corporate governance issues in 18 SOEs. In February 2021, the Ugandan government embarked on a plan to merge some of the SOEs to reduce duplication of roles and costs of administration. SOEs do not get special financing terms and are subject to hard budget constraints. According to the Ugandan Revenue Authority Act, they have the same tax burden as the private sector. According to the Land Act, private enterprises have the same access to land as SOEs. One notable exception is the Uganda National Oil Company (UNOC), which receives proprietary exploration data on new oil discoveries in Uganda. UNOC can then sell this information to the highest bidder in the private sector to generate income for its operations.

Privatization Program

The government privatized many SOEs in the 1990s. Uganda does not currently have a privatization program.

10. Political and Security Environment

Uganda has experienced periodic political violence associated with elections and other political activities. Security services routinely use excessive force to stop peaceful protests and demonstrations. There are no prominent examples in the past ten years of such violence leading to significant damage of projects or installations. There has been an uptick in crime over the past several years, and political tensions increased dramatically in the run up to, during, and in the wake of the 2021 general elections.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country statistical source* USG or international statistical source USG or International Source of Data: BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2020 $37,500 2020 $37,730 https://www.imf.org/external/
datamapper/NGDPD@WEO/UGA 
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data: BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) N/A N/A 2019 $42 BEA data available at
https://www.bea.gov/international/
direct-investment-and-multinational-
enterprises-comprehensive-data 
Host country’s FDI in the United States ($M USD, stock positions) N/A N/A 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 N/A N/A 2018 41% UNCTAD data available at
https://unctad.org/en/Pages/DIAE/
World%20Investment%20Report/
Country-Fact-Sheets.aspx 
* Source for Host Country Data: Uganda Bureau of Statistics Statistical (UBO) Abstract 2020
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 $9,294 100% No Data Available
The Netherlands $3,668 40%
Australia $1,519 16.3%
United Kingdom $840 9%
Kenya $778 8%
Mauritius $654 7%
“0” reflects amounts rounded to +/- USD 500,000.

The UBOS does not publish specific country sources of inward investment so there is no effective comparison with the IMF data. The IMF data above, however, indicates that two tax havens, The Netherlands and Mauritius, are among the top five sources of inward investment in Uganda.

Table 4: Sources of Portfolio Investment
Data not available.

Ukraine

Executive Summary

Ukraine offers a large consumer market, a highly educated and cost-competitive work force, and abundant natural resources. The government continues to advance legislation to capitalize on this potential.  In March 2020, parliament passed a law to lift the decades-old moratorium on the sale of agricultural land, effective July 1, 2021.  The World Bank projects that the establishment of the agricultural land market could attract $5 billion in investment.  Ukraine has continued to pass necessary legislation on intellectual property rights (IPR), including a new patent law bringing Ukraine’s patent regime closer in line with EU patent conventions.  The government also launched a new centralized body to speed up the review and issuance of patents.  On March 30, 2021, the Rada lifted a block on large privatizations and is looking at ways to facilitate the privatization process.

Ukraine’s Association Agreement with the EU gives the country preferential market access and is accelerating its economic integration with the bloc.  Many U.S. companies have found success in Ukraine, particularly in the agriculture, consumer goods, and technology sectors.  Ukraine is an agricultural powerhouse and the world’s second-largest grain exporter.  Ukraine has long had a skilled workforce in the IT service and software R&D sectors.  In recent months the Ukrainian government has increased its targeted recruitment of high-level IT talent into Ukraine.

Despite Ukraine’s potential, foreign direct investment (FDI) remains low. Ukraine experienced a net outflow of investment in 2020.  In addition to the pandemic, foreign investors cite corruption, particularly in the judiciary, as a key challenge to doing business in Ukraine.  To attract foreign investment the government adopted a new law in early 2021 granting considerable financial and operational incentives to companies that make large investments in Ukraine.

The April 2019 election of President Zelenskyy raised hopes that Ukraine would make the breakthrough reforms necessary to unlock its vast economic potential.  The government has worked to protect the gains of recent years and to implement many of the administration’s promises. Vested and corrupt interests, however, have resisted and even succeeded in rolling back some of the critical reforms enacted since the 2014 Revolution of Dignity.

Since 2014, Ukraine passed numerous reforms, including the launch of a number of anti-corruption institutions.  In fall 2020, however, the Constitutional Court of Ukraine invalidated key provisions of laws underpinning two of these institutions — the National Anti-Corruption Bureau (NABU) and the National Agency on Corruption Prevention (NACP).  These rulings have rolled back key provisions of prior IMF programs, preventing new disbursements of IMF, World Bank, and EU concessionary loans.  The Constitutional Court is also reviewing cases challenging the constitutionality of the High Anti-Corruption Court (HACC) and the Deposit Guarantee Fund.  The government and parliament are negotiating with international partners on legislation to reverse the effects of the rulings.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2020 117 of 180 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2019 64 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2020 45of 131 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2019 $596 http://apps.bea.gov/international/factsheet/
World Bank GNI per capita 2019 $3,370 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Toward Foreign Direct Investment

The government of Ukraine (GoU) actively seeks to attract FDI.  In 2014, the GoU established the National Investment Council as a consultative and advisory body under the president, and in 2016 the Ukrainian government established an investment promotion office UkraineInvest, with a mandate to attract and support FDI.  UkraineInvest’s mission is to provide a one-stop shop for investors by helping them find and/or initiate a project and then guiding them through any necessary regulatory processes.  UkraineInvest is also the primary point of contact for companies applying for tax and operational benefits under the newly enacted investment incentive law, “On State Support of Investment Projects with Significant Investments.”

The Business Ombudsman Council of Ukraine is as an advisory body under the Cabinet of Ministers that provides a forum for domestic or foreign businesses to file complaints about unjust treatment by government officials and state-owned enterprises. In June 2020, a draft law #3607 “On the Establishment of the Business Ombudsman Institution in Ukraine” was registered, which would significantly expand the institution’s authorities to investigate complaints.

Limits on Foreign Control and Right to Private Ownership and Establishment

The regulatory framework for the establishment and operation of businesses in Ukraine by foreign investors is generally similar to that for domestic investors.  Registering a foreign investment is governed by “The Law on Foreign Investments” (1996), although according to the Law “On amendments to some legislative acts of Ukraine to abolish the obligation of state registration of foreign investments” (2016), registration is not mandatory.  However, Article 395 of the Economic Code of Ukraine states that unregistered foreign investments will lose key legal guarantees. These guarantees include, the transfer of profits and income resulting from investment in Ukraine, the right to issue a permanent residence permit, a ban on nationalization, etc. Before registering their business, non-Ukrainian citizens must register with the Office of Immigration in the Ministry of Foreign Affairs and receive a taxpayer identification number through the State Fiscal Service.  Legislation adopted in October 2019 reduced the cost of accreditation for foreign representative offices (excluding Russian businesses) from $2,500 to one minimum monthly wage (which in 2020 was approximately $180) and the timeframe from 60 to 20 days.  The Ministry of Economic Development, Trade, and Agriculture issues these accreditations.

Foreign and domestic private entities can engage in all forms of remunerative activity, with some exceptions:  foreign companies are restricted from owning agricultural land, producing bioethanol, and some publishing activities.  In addition, Ukrainian law authorizes the government to set limits on foreign participation in state-owned enterprises, although the definition of “foreign participation” is vague, and the law is rarely used in practice.  Certain critical infrastructure, especially in the energy sector, is precluded by law from private ownership and therefore not available to foreign investors.  This includes the gas transmission system, electricity grids, and various plants and factories.  While the authorities currently review merger and acquisition investments on competition grounds, the government is developing a mechanism for investment review on security grounds.  On February 3, 2021 a draft Law # 5011 “On Foreign Investments in Economic Entities of Strategic Importance for the National Security of Ukraine” was registered in the Parliament.  If enacted, the bill is expected to introduce a system for assessing the impact of foreign investments on national interests and security of the state.

Other Investment Policy Reviews

The Organization for Economic Cooperation and Development (OECD) and the World Trade Organization (WTO) conducted formal reviews in 2016, and can be found at OECD: http://www.oecd.org/investment/oecd-investment-policy-reviews-ukraine-2016-9789264257368-en.htm; WTO: https://www.wto.org/english/tratop_e/tpr_e/tp434_e.htm.

Business Facilitation

Ukraine has taken major steps to improve the ease of doing business over the past five years, helping it move up seven spots in the World Bank’s 2020 Doing Business Ranking from 71st place in 2019 to 64th.  This was Ukraine’s largest annual leap since 2014 and the highest ranking the country has ever received.  Ukraine demonstrated improvements in six out of the ten indicators the World Bank assesses, scoring the highest in categories such as “starting a business” and “dealing with construction permits.”  However, an investor sentiment survey conducted by one of the largest private industry associations in Ukraine at the end of 2020 found a majority of its member company respondents felt the overall investment climate in Ukraine was declining. Companies cited corruption as one of the top reasons for this perceived downward movement in Ukraine’s investment climate. (Please note that the World Bank has put the 2021 Doing Business Rankings on hold until at least mid-2021).

The investor sentiment survey can be found at: https://eba.com.ua/wp content/uploads/2020/11/2020_ForeignInvestorSurvey_Presentation_en.pdf

Private entrepreneurs and legal entities can register online at https://poslugy.gov.ua/ and https://online.minjust.gov.ua/dokumenty/choise/.  These online registrations systems are not commonly used because it is difficult to submit the required documents online.  Once a company is registered with the State Registrar, its data is transferred by the registrar to the relevant state authorities, such as the State Committee of Statistics of Ukraine, the State Pension Fund, State Fiscal Service, the Employment Insurance Fund, the Social Security Fund, and the Fund for Social Insurance.  Registering a joint-stock company or a limited liability company takes approximately six days.

Outward Investment

As of January of 2020, Ukraine’s investments in foreign countries totaled approximately $3.5 billion, according to data provided by the National Bank of Ukraine.  Outward investment for legal entities and private entrepreneurs registered in Ukraine are capped of EUR 2 million ($2.2 million) per year.

3. Legal Regime

Transparency of the Regulatory System

Regulatory regimes in Ukraine are often characterized by outdated, contradictory, and burdensome regulations, a high degree of arbitrariness and favoritism in decisions by government officials, weak protection of property rights, and irregular payments.  Since 2014, however, the country has been generally moving toward clearer rules and fair competition.  Ukraine’s efforts to implement its EU Association Agreement, including the Deep and Comprehensive Free Trade Area (DCFTA), should continue to help boost overall transparency and legal certainty as Ukraine strives to establish legal and regulatory systems that are consistent with international norms.

The formulation of regulations falls solely under the purview of the government.  In Ukraine there are no regulatory processes managed by non-governmental organizations or private sector associations.  According to the Law “On the Principles of State Regulatory Policy in the Sphere of Economic Activity” (2004), the relevant ministry or regulatory agency is required to publish draft text of proposed regulations on its website for review and comment for at least one month but not more than three months.  Along with the draft text, the governmental body must include a data-based assessment justifying the need for the regulation and analyzing its potential impact.  The ministry or agency receives comments via its website, at public meetings, and through targeted outreach to stakeholders.  The comments received are generally not made public.  At the end of the consultation period, the relevant ministry or regulator may publish the results on its website.  Often, however, final draft legislative initiatives are not publicly available or they reappear in dramatically different form.  In 2020, the Ministry of Economy successfully launched an electronic platform (https://techreg.in.ua/main/), on which it is publicizing all draft regulatory measures, accepting public comments, and providing responses to those comments.  Information on draft laws and existing legislation is available on the Verkhovna Rada (parliament) and Cabinet of Ministers websites.

Public finances and debt obligations are transparent.  Budget documents and information on debt obligations are widely and easily accessible to the general public, including online.  Budget documents provide a mostly full picture of the government’s planned expenditures and revenue streams.  Information on debt obligations is publicly available, and is published as part of the budget document on the Parliament’s website.  Information on the status of sovereign and guaranteed debt is published and updated on a monthly basis on the Finance Ministry’s website.  Statistics are broken down by type of debt, type of creditor, and type of currency.

International Regulatory Considerations

Ukraine is not a member of the EU, but it is working to approximate many of its standards to meet EU requirements and facilitate access to EU markets.  As Ukraine drafts laws, it often incorporates or references EU norms and standards.  Ukraine is a member of the WTO and a signatory to the WTO Trade Facilitation Agreement.  The Ministry of Economic Development,  Trade and Agriculture (MEDTA) is responsible for notifying all draft technical regulations to the WTO Committee on Technical Barriers to Trade.  Despite occasional delays in submitting draft legislation to the WTO, Ukraine’s notification of draft texts to the WTO for comment has improved in the past few years.

Legal System and Judicial Independence

The legal system in Ukraine is based on a civil system of codified laws passed by parliamentary body, the Verkhovna Rada.  Contracts related to foreign investments fall within the jurisdiction of a system of specialized commercial courts.  Generally, the Foreign Investment Law provides that a dispute between a foreign investor and the state of Ukraine must be settled in the Ukrainian courts, unless otherwise provided for by international treaties.

Courts of general jurisdiction are organized by territory and specialty and include: local courts; appellate courts; specialized high courts for civil and criminal cases; and the Supreme Court.  Commercial and contract law in Ukraine is codified in the Commercial Code and Civil Code. There is a three-tier system of specialized commercial courts with first and appellate instances and the Commercial Cassation Court of the Supreme Court as the highest instance.  Local courts are either courts of general jurisdiction or specialized courts (i.e. commercial and administrative courts).  Local commercial courts exercise jurisdiction over commercial and corporate disputes, while local administrative courts administer justice in legal disputes connected with state government and municipalities, with the exception of military disputes.  Regulations and enforcement actions are subject to appeal with no exceptions within terms prescribed in procedural codes and are adjudicated in the national (general) court system.

The judicial system is independent of the executive branch; however, extensive corruption in the court system provides an opening for outside influence.  Among the major problems of the Ukrainian judicial system are its overall lack of capacity and the existence of executive and prosecutorial influence on judges.  In surveys of their members, two major business associations identified the lack of effectiveness and integrity in Ukraine’s judicial system as top impediments to greater investment in the country.

Laws and Regulations on Foreign Direct Investment

The Law on Investment Activity (1991) established the general principles for investment and was subsequently followed by additional legislative acts to facilitate foreign investment, most recently the law “On State Support of Investment Projects with Significant Investments” and subsequent amending legislation granting further tax and customs benefits for major investors.  Due in part to conflicts in the body of laws that govern investment and commercial activity in Ukraine, and persistent issues with corruption, foreign investors have found it difficult to pursue cases in Ukrainian courts and often seek arbitration outside of the country.  The website of Ukraine’s Investment Promotion Office (https://ukraineinvest.com/) provides relevant laws, rules, procedures, and reporting requirements for potential investors.

Competition and Anti-Trust Laws

The Antimonopoly Committee of Ukraine (AMCU) is the Ukrainian state authority for protection of economic competition.  AMCU’s functions include investigating and prosecuting anticompetitive conduct, granting permissions for mergers and acquisitions, considering applications regarding violations of public procurement as an appeal body, monitoring the state aid system, conducting competition advocacy within the government, and formulating competition policy.  AMCU decisions can be appealed to Ukraine’s economic courts of first instance, and then to the central appellate court and in some cases the Supreme Court.

Expropriation and Compensation

Current legislation permits legal expropriation of property in certain criminal proceedings or in cases of failure to fulfill investment obligations during privatization procedures.  Additionally, the Law “On Legal Regime of Martial Law” (2015) and the Law “On Confiscation of Property During Legal Regime of Martial Law” (2013) allow voluntary or forced expropriations for military purposes with compensation to be provided either immediately or following cancellation of the “special regime/martial law.”

Dispute Settlement

ICSID Convention and New York Convention

Ukraine is a Party to both the International Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID) and the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards.  On October 20, 2015, the Government of Ukraine submitted a formal UN communication, noting that Ukraine’s ability to implement its obligations under the New York Convention in the occupied territories of Crimea, Donetsk, and Luhansk is limited and not guaranteed until Ukraine regains effective control from the Russian Federation.  The full text of the communication is available at: C.N.597.2015.TREATIES-XXII.1 of 20 October 2015.

The procedure for recognition and enforcement of foreign arbitral awards in Ukraine is regulated by the following legislative acts:

  • The Law on International Commercial Arbitration (ICAL, 1994).  ICAL is almost a literal translation of the UNCITRAL Model Law.
  • The Code of Civil Procedure of Ukraine (CPC, 2004).  Pursuant to Article 390 of the CPC, Ukrainian courts shall enforce foreign court decisions provided that:  recognition and enforcement are stipulated under an international treaty ratified by the Verkhovna Rada; or on the basis of the reciprocity principle under an ad hoc agreement with a foreign country, whose court decision shall be enforced in Ukraine.

Investor-State Dispute Settlement

Many of Ukraine’s bilateral investment treaties recognize binding international arbitration of investment disputes.  Claims under the Bilateral Investment Treaty (BIT) between the United States and Ukraine by American investors are rare.  The Embassy only tracks disputes at the request of U.S. businesses or individuals involved in the case, and cannot provide a comprehensive number for all investment disputes involving U.S. or other foreign investors in Ukraine.  Such disputes are a significant problem, however, both in fact and in terms of public perception.   The Embassy is currently aware of one case pending in the International Center for Settlement of Investment Disputes in Washington, DC.

ICAL limits the jurisdiction of international arbitration tribunals to civil law disputes arising from international economic operations (provided that the commercial enterprise of at least one party exists outside of Ukraine), disputes between international organizations and enterprises with foreign investments in Ukraine, and intra-company disputes of these enterprises.  ICAL does not address foreign arbitral awards issued against the government.

Extrajudicial action against foreign investors in the form of official acts of government (e.g. unwarranted inspections, investigations, fines) and illegitimate acts by private parties (e.g. corporate raiding) occur in Ukraine.  The Ukrainian government has made it a stated priority to improve the business environment, end corporate raiding, and attract more foreign investment.  In 2019, the Ukrainian Parliament passed legislation aimed to end corporate raidership: the Law “On Amendments to Certain Legislative Acts of Ukraine on Property Rights Protection,” and the Law “On Amendments to the Land Code of Ukraine and Other Legislative Acts on Counteracting Raiding.”

International Commercial Arbitration and Foreign Courts

The Law on Arbitration Courts (2004) stipulates that parties can refer most of their commercial or civil law disputes to courts of arbitration, which are non-state bodies.  Article 51 stipulates that awards of the aforementioned courts of arbitration are final, and Article 57 stipulates that they can be subject to mandatory enforcement via a competent state court.

Ukraine’s International Commercial Arbitration Court (ICAC) and the Maritime Arbitration Commission at the Ukrainian Chamber of Commerce and Industry are both annexed to the ICAL, which itself is a near-direct translation of the UNCITRAL model law.  ICAL distributes the functions of arbitration assistance and supervision between the district courts and the President of the Chamber of Commerce and Industry of Ukraine for both ad hoc and institutional arbitrations.  Local courts are obliged to recognize and enforce foreign arbitral awards under ICAL and the CPC, per Ukraine’s obligations under the ICSID and the New York Convention of 1958.  However, the reliability, consistency, and timeliness of implementation are unknown.

Bankruptcy Regulations

In October 2019, a new Code of Bankruptcy Proceedings took effect, replacing bankruptcy law that had been in force since 1992.  The new law strengthened creditors’ rights by allowing them to select their bankruptcy administrator, decide the starting prices of debtor assets at auction, and participate in other asset sales matters.  The law also improved the procedures for selling debtors’ assets by introducing online auctions and removed a requirement for asset collection through courts or enforcement services before insolvency proceedings can begin, easing the debt collection process and reducing legal costs for creditors.  The new bankruptcy code also provides additional protection of secured creditors.

In November 2020, the government proposed additional technical amendments to the Code which are pending consideration in parliament

Bankruptcy is not criminalized in Ukraine.  The Criminal Code of Ukraine, however, does criminalize: 1) intentionally making an entity bankrupt and 2) distorting certain financial data in order to conceal the insolvency of a financial institution.  The World Bank’s 2020 Doing Business Report ranked Ukraine 146th out of 190 in the “resolving insolvency” subcategory, down from 145th in 2019.  Ukraine’s low ranking is driven by a low recovery rate and the high cost of recovering funds from insolvent firms by creditors.

6. Financial Sector

Capital Markets and Portfolio Investment

The Ukrainian government encourages foreign portfolio investment in Ukraine, but Ukraine’s capital and commodity markets remain underdeveloped.  Ukraine’s capital market consists of markets for stocks and for commodities.  Liquidity is limited and investors have few investment options.  The financial market includes ten stock exchanges, a settlement center, two depositories, and a securities market regulator.  Government bonds constitute 95 percent of the trades.  A few corporate securities are listed, but the volume of their trades is insignificant.  With limited exceptions, only Ukrainian-licensed securities traders may handle securities transactions.  In January 2020, China’s Bohai Commodity Exchange acquired a 49.9% stake in one of Ukraine’s leading stock exchanges, JSC PFTS Stock Exchange.  The commodity market in Ukraine does not have a transparent regulatory framework.

The regulator of Ukraine’s capital market, the National Securities and Stock Market Commission, lacks financial and operational independence and is not a signatory to the Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information of the International Organization of Securities Commissions.  Ukraine has been a member of the International Organization of Securities Commissions (IOSCO) since 1996.  In February 2021, a new draft law “On the National commission on securities and stock exchanges” was registered in parliament and is pending consideration.  The law would strengthen the independence and institutional capacity of the Securities Commission and facilitate compliance with IOSCO standards.  Ukraine committed to adoption of the law as part of its IMF program.  In November 2019, Ukraine adopted the so-called “Split” law to regulate the non-banking financial services sector.  The law, which entered into force on July 1, 2020, transitions Ukraine from a sectoral regulatory model to an integrated model, and lays the foundation for the full development of consumer rights protections and market conduct regulations in the financial markets. The law dissolved the National Commission for State Regulation of Financial Services Markets and split up its regulatory functions between the National Bank of Ukraine and the National Securities and Stock Market Commission.  The National Bank of Ukraine now supervises and regulates the insurance market, leasing and factoring companies, credit unions, credit bureaus, pawnshops and other financial companies, while the National Securities and Stock Market Commission regulates private funds, including pension funds, construction financing, and real estate transactions.

For many years, Ukrainian capital markets have struggled due to significant gaps and inconsistencies in the regulatory framework.  In June 2020, parliament passed the law “On amendments to certain laws regarding facilitating investments and new financial instruments,” aimed at restarting Ukrainian capital markets.  The law will bring Ukrainian legislation in line with key provisions of EU laws on capital markets (MiFID II, MiFIR, EMIR, the Settlement Finality Directive, and the Financial Collateral Directive), create a framework for updated capital markets’ infrastructure, and regulate commodity markets and derivatives.  The law is expected to have a transformative effect on Ukraine’s capital markets as it provides for new financial instruments for savings and investment, new tools for risk management, and new requirements for market transparency. The law is expected to enter into force on July 1, 2021.

Credit is largely allocated on market terms, and foreign investors are able to get credit on the local market through a variety of credit instruments.

Money and Banking System

Ukraine’s banking sector has seen remarkable progress following the 2014-2015 crisis thanks in large part to  banking sector cleanup, which resulted in the closure of over 100 banks for insolvency or money laundering activities, and the professionalization of Ukraine’s central bank, the National Bank of Ukraine.  At the end 2020, 73 solvent banks were operating in Ukraine.

Partly due to the Covid-19 pandemic, the number of unprofitable banks ticked up in 2020.  Eight banks were unprofitable in 2020 compared to six in 2019, and two banks were declared insolvent due to non-compliance with capital requirements.  The banking sector in Ukraine reported net profit of UAH 41.3 billion ($1.4 billion) for 2020, roughly a quarter of the profit reported in 2019.  State-owned PrivatBank accounted for more than half of the banking sector’s total profits.  In 2020, banks’ total assets increased by 22 percent to UAH 1.8 trillion ($64 billion), the total amount of loans decreased by 6.8 percent to UAH 963 billion ($34 billion), while total obligations increased by 24.6 percent to UAH 1.6 trillion ($21 billion).

Non-performing loans (NPL) decreased from 48.4 percent in 2019 to 41 percent in 2020 but remain one of the biggest unresolved issues in the banking sector.  State-owned banks wrote off UAH 30.6 billion ($1.1 billion) in local currency loans and $3.1 billion in dollar-denominated loans in 2020, reducing their share of NPLs from 63.5 percent to 57.4 percent.  The share of NPLs in foreign commercial banks decreased from 16 percent to 12.3 percent, and in Ukrainian commercial banks from 18.6 percent to 14.6 percent. Greater oversight by the National Financial Stability Council, along with the National Bank’s new criteria for writing off distressed assets, has improved the banks’ NPL strategies.

Foreign-owned banks may carry out all activities conducted by domestic banks, and there are no restrictions on their participation in the banking system, including operating via subsidiaries.  A foreign company can open a bank account in Ukraine for the purposes of investment operations; otherwise, it needs to register a representative office in Ukraine.  A nonresident private person can open a bank account in Ukraine.  A foreign investor may open an account in a bank operating in Ukraine and transfer in funds for further investment or invest directly into an account of a Ukrainian resident company.

Foreign Exchange and Remittances

Foreign Exchange

The National Bank of Ukraine (NBU) continued in 2020 to liberalize currency controls, which had been put in place to stabilize the Ukrainian foreign exchange market during the 2014 economic crisis.  Under the law “On Currency and Currency Transactions”, which entered into force in February 2019, individuals can purchase foreign currency online and on credit.  The National Bank increased the cap for currency transfers by individuals from EUR 50,000 in December 2019 to EUR 200,000 in February 2021.  The daily limit was raised to UAH 399.9 thousand (or the USD/EUR equivalent).  Currency transfers abroad for legal entities are capped at EUR 2 million a year. The cap includes any outward investments.  According its currency liberalization road map, one of NBU’s priorities is to eliminate foreign currency transfer limits for individuals. Even though many restrictions for foreign currency transactions have been loosened, the new regulations still require Ukrainian banks to monitor most foreign currency transactions.

In 2019, the NBU abolished all restrictions related to the repatriation of dividends. The NBU also cancelled the mandatory sale of foreign currency proceeds by businesses from June 2019.  In addition, it removed the hryvnia reserve requirement banks had to keep for foreign currency purchases, and it now allows unlimited daily purchase of foreign currency by individuals through banks, financial institutions, and via online banking.

The NBU now allows transactions from Ukrainian bank accounts opened by non-resident legal entities. Foreign companies can open, and make payments from, current accounts as well as accumulate and buy foreign currencies using these accounts.

The NBU has developed a road map for removing currency restrictions with the goal of reaching a full capital flow regime.  The roadmap is publicly available on the NBU’s website in both Ukrainian and English:

https://bank.gov.ua/en/markets/liberalization

Further liberalization is contingent on implementation of BEPS legislation and general macro-economic conditions.

The NBU has a floating exchange rate regime, although the NBU may carry out currency interventions to meet two objectives: reducing excessive currency fluctuations and replenishment of international reserves.

Remittance Policies

In 2020, the National Bank of Ukraine doubled the limit for some retail foreign currency remittances, including for investment abroad or foreign deposits, to EUR 200,000 ($230,000) per year.  As long as they comply with the limit, individuals are permitted to remit foreign currency (or the national currency hryvnia) abroad or to current accounts of corporate nonresidents in Ukraine.  The transactions allowed include: investing abroad, depositing funds into one’s own accounts abroad, transferring funds under life insurance agreements, or making loans to nonresidents.  In 2020, individuals transferred about EUR 274 million ($315 million) abroad.  The NBU aims to completely remove the limit on international investments by individuals, subject to the full adoption and implementation of the BEPS legislation.

Sovereign Wealth Funds

Ukraine does not maintain or operate a sovereign wealth fund.

7. State-Owned Enterprises

The Government of Ukraine operates 1,600 state-owned enterprises (SOEs) out of 3,358 registered SOEs, with an economic output of approximately ten percent of GDP.  While the government lists 3,358 enterprises, more than 1,700 of them no longer operate as functioning businesses.  SOEs in Ukraine are defined as companies in which the state owns at least 50-percent plus one share.  SOEs are active in areas such as energy, machine-building, and infrastructure.   Some of the companies have significant environmental problems, legacy legal issues, or oligarchs as minority owners.

There is no common public list of all SOEs in Ukraine and each ministry publishes a list of SOEs under its respective management.  The Ministry of Economic Development and Trade periodically updates information on annual financial reports of significant SOEs (100 of the largest SOEs), which it publishes on the ministry website.

http://www.me.gov.ua/Documents/List?lang=uk-UA&id=40a27e1b-8234-43d3-a37f-c4c752729fca&tag=FinansovaZvitnistPidprimstv

Ukraine’s law on corporate governance requires SOEs to publicize annual financial reports and disclosures on official websites, including information on financial indicators, company officials, transactions, etc.  The law also stipulates that SOEs publish their annual financial statements and audits, though a review of SOE financial statements and audits showed that SOEs did not rigorously adhere to the law.  Independent and government board members were selected in 2020 in certain strategic SOEs in the defense sector.  Since late 2019, some rollbacks of corporate governance protections at SOEs have been observed, especially in SOEs in the energy and infrastructure sectors, such as Naftogaz, Ukrenergo, and Energoatom.

In April 2020, the Cabinet of Ministers introduced a cap on the salaries of heads of executive bodies and members of supervisory boards of SOEs of $1,740 a month.  The limitation was nominally introduced for the duration of the COVID-19 lockdown period.  The move followed similar lowered pay caps for Ukraine’s ministers and their deputies.  Critics worried the salary cap would lead to the loss of crucial talent and necessary expertise.  In October 2020, the government canceled the cap on wages of SOE managers, including members of executive bodies and the restoration of supervisory board member pay to the levels determined by earlier contracts/agreements.  The end of the temporary limitation was followed by several failed attempts to pass legislation to introduce permanent caps on wages of civil servants and SOEs.

SOE senior managers traditionally report directly to the ministry overseeing the relevant SOE’s area of expertise.  Ukrainian law specifies that ministries are not permitted to interfere with the daily economic activities of an SOE, but numerous anecdotal reports indicate that ministries and vested interests ignore this restriction.  The Cabinet of Ministers has the power to decide on the creation, reorganization, and liquidation of SOEs, and to adopt and enforce SOE charters.  It can delegate this authority to the ministry charged with supervising the SOE.  The Cabinet of Ministers may also delegate to ministries the permission to create joint ventures with state property and prepare proposals to divide state property between the national and municipal levels.

Most SOEs rely on government subsidies to function and cannot directly compete with private firms.  Several SOEs capable of making a profit have already been privatized, and the result has been that the most inefficient firms have remained in government hands.  The Ukrainian government continues to heavily subsidize state-owned enterprises (especially in the coal mining, rail transportation, gas, and communal heating sectors) and has sometimes paid outstanding debts of some SOEs with sovereign loan guarantees.  SOE access to extensions of tax payment deadlines remains nontransparent, especially where SOEs are directed to sell their products at below-market prices.

Privatization Program

On March 30, 2021, parliament passed in its final reading the bill cancelling the laws blocking the privatization of large SOEs.  Auctions for 22 large SOEs slated for privatization should now start in the second half of 2021.  The government has also approved a list of smaller-scale SOEs to put up for sale in 2020.  Ukraine netted $75 million from 419 small-scale privatization auctions in 2020, including $41 million generated by the sale of Kyiv’s Dnipro Hotel.

Starting in 2019, Ukraine’s government has vowed to implement a series of major privatization reforms, including a dramatic reduction of the number of SOEs deemed strategic and exempt from sale.  In October 2019, the government nullified legislation from 1999 banning the privatization of a lengthy list of state assets. On March 30, 2021, parliament passed in its first reading a draft law establishing a list of 659 SOEs that are exempt from privatization.  Included in the list are energy and defense companies, natural monopolies like the state railway and postal service, forestry facilities, and entities with social value in the culture, sports, science, and education sectors.  In February 2020, as part of an effort to reform state-owned companies, the government started the legislative process to permit partial privatization of some previously excluded SOEs, including Naftogaz, MainGasPipelines of Ukraine, UkrTransGaz, UkrNafta, Ukrgasvydobuvannya, Ukrzaliznytsia, and UkrPoshta.  The United States has provided significant technical assistance to Ukraine to support an open and transparent privatization process.

The State Property Fund oversees privatizations in Ukraine.  The rules on privatization apply to foreign and domestic investors and, theoretically, establish a level playing field.  However, observers have pointed to numerous instances in past privatizations where vested interests have influenced the process to fit a pre-selected bidder.  Despite these concerns, the government has stated that there would be no revisions of past privatizations, but there are ongoing court cases wherein private companies are challenging earlier privatizations.

10. Political and Security Environment

Russia’s military aggression entered its eighth year in the eastern oblasts of Donetsk and Luhansk, as did its illegal occupation of Crimea.  Residents of Russia-controlled areas are subject to political violence at the hands of Russia’s proxy authorities.  Civilian casualties in eastern Ukraine from landmines, shelling, and small arms fire have decreased steadily since 2017, but continued to occur.  Infrastructure for water, gas, and electricity remained at risk of conflict-related damage, and fighting routinely disrupted maintenance of aging facilities, thereby threatening essential service delivery to populated areas.  Russia-led forces control approximately 400 km of Ukraine’s international border with Russia through which Russia supplies and equips its proxy forces, which receive logistical and command support from Russian Army soldiers.  Russia continued its illegal occupation of the Autonomous Republic of Crimea and the City of Sevastopol, and reports of political violence, repression, and religious persecution continue.

Since the 2019 Ukrainian presidential and parliamentary elections, the new administration’s efforts to take measurable steps toward peace, anti-corruption initiatives, and integration into Western institutions have faced push back from vested interests However, the government has demonstrated its commitment to reform in the face of adverse court decisions overturning key reform legislation.  The president has rallied his party’s majority in parliament to adopt laws to address many of these court decisions, but more needs to be done.  Protests in support of judicial reform drew up to 10,000 people in late February 2021.

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 $142,071 2019 $139,100 www.worldbank.org/en/country/ukraine/overview
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data:  BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2018 $489 2019 $596 BEA data available at

https://apps.bea.gov/international/factsheet/factsheet.cfm

Host country’s FDI in the United States ($M USD, stock positions) 2018 $ 0.6 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 29.4% 2019 33.9% UNCTAD data available at

https://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Country-Fact-Sheets.aspx

* Source for Host Country Data: State Statistics Service of Ukraine

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 $48.934 100% Total Outward $2,881 100%
Cyprus $14,958 30.5 % Cyprus $1,093 38.0%
Netherlands $10,004 20.4% Latvia $81.0 2.8%
Switzerland $2,758 5,6% Russia $67.6 2.3%
Germany $2,301 4.7% Lithuania $8,4 0.3%
Other $15.959 32.6 Switzerland $7.7 0.26%
“0” reflects amounts rounded to +/- USD 500,000.

Source: State Statistics Service of Ukraine

Table 4: Sources of Portfolio Investment
Portfolio Investment Assets
Top Five Partners (Millions, current US Dollars)
Total Equity Securities Total Debt Securities
All Countries 152 100% All Countries 78 100% All Countries 74 100%
USA 98 64.1% USA 71 90.2% Austria 96 130.3%
Austria 96 63.1% Cyprus 21 26.4% France 56 76.0%
France 56 36.8% % USA 27 36.4%
Cyprus 24 15.5% Other countries -13 Cyprus 3 3.9
Germany -102 -% Germany -102
Other countries -6

United Arab Emirates

Executive Summary

The Government of the United Arab Emirates (UAE) is urgently pursuing economic diversification to promote private sector development as a complement to the historical economic dominance of the state, to lessen its reliance on an unsustainable hydrocarbon industry, and to strengthen the country’s economic resilience amid the COVID-19 pandemic.

The UAE serves as a major trade and investment hub for the Middle East and North Africa, and increasingly South Asia, Central Asia, and Sub-Saharan Africa.  Multinational companies cite the UAE’s political and economic stability, excellent infrastructure, developed capital markets, and a perceived absence of systemic corruption as positive factors contributing to the UAE’s attractiveness to foreign investors.

The UAE and the country’s seven constituent emirates have passed numerous initiatives, laws, and regulations to attract more foreign investment.  Notable reforms introduced since 2020 include amendments to the UAE’s citizenship law, which allow foreign investors, members of certain professions, those with special talents, and their families to acquire long-term residency, Emirati passports, and citizenship.  The UAE issued Federal Decree-Law Number 26 in 2020, relaxing restrictions on foreign ownership of commercial companies.  The decree also annulled the requirement that commercial companies must be majority-owned by Emirati nationals, must have a majority-Emirati board, or must maintain an Emirati agent.  This effectively allowed majority or full foreign ownership of onshore companies in many sectors.  The decree granted licensed foreign investments the same treatment as national companies within the limits permitted by the legislation in force and provided better protection for minority shareholders. The new decree is unlikely to apply to state-owned entities and companies operating in strategically important sectors, such as oil and gas, defense, utilities, and transport.

While the UAE implemented an excise tax on certain products in October 2017 and a five percent Value-Added Tax (VAT) on most products and services beginning in January 2018, many investors continue to cite the absence of corporate and personal income taxes as a strength of the local investment climate relative to other regional options.

Foreign investors expressed concern over a lack of regulatory transparency, as well as weak dispute resolution mechanisms and insolvency laws.  In 2020, the federal Cabinet approved a resolution aimed at combating commercial fraud.  This resolution established a unified federal mechanism to deal with commercial fraud across the UAE and outlined a process for removal and destruction of counterfeit products.  Labor rights and conditions, although improving, continue to be an area of concern as the UAE prohibits both labor unions and worker strikes.

Free trade zones (FTZs) form a vital component of the local economy and serve as major re-export centers to other markets in the Gulf, South Asia, and Africa.  While the new decree allowing 100 percent foreign business ownership neutralizes one of the most important advantages FTZs offer foreign investors, U.S. and multinational companies indicate that these zones tend to have stronger and more equitable legal and regulatory frameworks for foreign investors than onshore jurisdictions.  FTZ-based firms also enjoy 100 percent import and export tax exemptions, 100 percent exemptions from commercial levies, and may repatriate 100 percent of capital and profits.  Goods and services delivered onshore by FTZ companies are subject to the five percent VAT.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2020 21 of 180 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2020 16 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2020 34 of 131 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2019 $17.2 https://apps.bea.gov/international/factsheet/
World Bank GNI per capita 2019 $43,470 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment (FDI) 

The UAE actively seeks FDI, citing it as a key part of its long-term economic development plans.  The COVID-19 pandemic accelerated government efforts to attract foreign investment to promote economic growth.  A letter issued by Dubai ruler Sheikh Mohammed Bin Rashid Al Maktoum (MbR) on January 4, 2020 outlined the ruler’s vision for the next 50 years, pledging increased government accountability and a push for greater government efficiency.  In 2015, Dubai’s Department of Economic Development launched the Dubai Investment Development Agency (Dubai FDI), an agency that provides essential information and invaluable support to foreign businesses looking to invest in Dubai’s thriving economy and take advantage of its global strategic importance.  The government of Abu Dhabi continues implementing its Economic Vision 2030, which aims at building an open, efficient, effective, and globally integrated economy.  In 2018, Abu Dhabi’s Department of Economic Development launched the Abu Dhabi Investment Office to attract foreign investments in the local economy by providing investors with clear data and information regarding the investment environment and the competitive edge of the emirate.

Federal Decree Law No. 26 of 2020 repealed the FDI Law (Federal Law No. 19 of 2018) effective January 2, 2021 and amended significant provisions of the Commercial Companies Law (Federal Law No. 2 of 2015).  As a result, onshore UAE companies are no longer required to have a UAE national or a GCC national as a majority shareholder.  UAE joint stock companies no longer must be chaired by an Emirati citizen or have the majority of its board be comprised of Emirati citizens.  Local branches of foreign companies are no longer required to have a UAE national or a UAE-owned company act as an agent.  An intra-emirate committee will recommend to the Cabinet a list of strategically important sectors requiring additional licensing restrictions, and companies operating in these sectors, likely including oil and gas, defense, utilities, and transportation, will remain subject to the above-described restrictions.  Analysts expect this list will be similar to the list of economic sectors in which foreign investment is barred under the recently abolished FDI Law.  The decree also grants emirate-level authorities powers to establish additional licensing restrictions.  These amendments will become effective six months after the publication of the law in the official gazette and require the publication of the Strategic Impact List to be implementable.  Until this happens, existing requirements for UAE or GCC majority shareholding still apply.

Federal Decree Law No. 26 of 2020 introduced provisions to protect the rights of minority shareholders.  It lowered the ownership threshold required to call for a general assembly and introduce agenda items.  It expedited the process for shareholders to assist a company in financial distress.  It extended mandates of external auditors.  It added additional flexibility in the IPO process to allow new investors to participate.  It also calls for additional regulations from the Ministry of Economy to address governance and related-party transactions.

Federal Law No. 11 of 2020 amended the Commercial Agencies Law (Federal Law No. 18 of 1981), which allowed UAE companies not fully owned by Emirati citizens to act as commercial agents.  These companies must still be majority-owned by Emirati citizens.

Non-tariff barriers to investment persist in the form of visa sponsorship and distributorship requirements.  Several constituent emirates, including Dubai, have recently introduced new long-term residency visas and land ownership rights to attract and retain expatriates with sought-after skills in the UAE.  In October 2020, Ras Al Khaimah Real estate developer Al Hamra, in partnership with Ras Al Khaimah Economic Zone, began offering investors a 12-year residence visa and a business license when they purchased a residential property in Al Hamra Village or Bab Al Bahr.

 Limits on Foreign Control and Right to Private Ownership and Establishment  

As documented above, Federal Decree-Law Number 26 annulled the requirement commercial companies be majority-owned by Emirati citizens, have a majority-Emirati board, or maintain an Emirati agent effectively allowing majority or full foreign ownership of onshore companies in many sectors.  The annulment will not apply to companies operating in strategically important sectors.

Neither Embassy Abu Dhabi nor Consulate General Dubai (collectively referred to as Mission UAE) has received any complaints from U.S. investors that they have been disadvantaged relative to other non-GCC investors.

Other Investment Policy Reviews

The UAE government underwent a World Trade Organization (WTO) Trade Policy Review in 2016.  The full WTO Review is available at:  https://www.wto.org/english/tratop_e/tpr_e/s338_e.pdf

Business Facilitation  

UAE officials emphasize the importance of facilitating business investment and tout the broad network of free trade zones as attractive to foreign investors.  The UAE’s business registration process varies by emirate, but generally happens through an emirate’s Department of Economic Development.  Links to information portals from each of the emirates are available at https://ger.co/economy/197.  At a minimum, a company must generally register with the Department of Economic Development, the Ministry of Human Resources and Emiratization, and the General Authority for Pension and Social Security, with a notary required in the process. In response to the pandemic, UAE authorities temporarily reduced fees, permits, and licenses to stimulate business formation in the onshore and free zone sectors.

In February 2021, Dubai launched the Invest in Dubai platform, a “single-window” service enabling investors to obtain trade licenses and launch their business quickly.  In August 2020, the Dubai International Financial Centre (DIFC) introduced a new license for startups, entrepreneurs, and technology firms, starting at $1,500 per year.  In October 2019, Dubai introduced a ‘Virtual Business License’ for non-resident entrepreneurs and freelancers in 101 countries.  In 2019, the Dubai Free Zone Council allowed companies to operate out of multiple free zones in Dubai through a single license under the “one free zone passport” scheme.  In 2017, Dubai’s Department of Economic Development introduced an “Instant License” program, under which investors can obtain a license valid for one year in minutes without a registered lease agreement.   In November 2020, the Abu Dhabi Department of Economic Development issued a resolution permitting non-citizens to obtain freelancer licenses allowing them to engage in 48 economic activities.  The licenses were previously limited to UAE nationals only.  In 2018, Abu Dhabi announced the issuance of dual licenses enabling free zone companies to operate onshore and to compete for government tenders.  In 2018, Sharjah announced that foreigners may purchase property in the emirate without a UAE residency visa on a 100-year renewable land lease basis.

Outward Investment  

The UAE is an important participant in global capital markets, primarily through its sovereign wealth funds, as well as through several emirate-level, government-related investment corporations.

3. Legal Regime

Transparency of the Regulatory System  

The onshore regulatory and legal framework in the UAE generally favors local Emirati investors over foreign investors.

The Trade Companies Law requires all companies to apply international accounting standards and practices, generally the International Financial Reporting Standards (IFRS).  The UAE does not have local generally accepted accounting principles.

Generally, legislation is only published after it has been enacted into law and is not formally available for public comment beforehand.  Government-friendly press occasionally reports details of high-profile legislation.  The government may consult with large private sector stakeholders on draft legislation on an ad hoc basis.  Final versions of federal laws are published in Arabic in an official register “The Official Gazette,” though there are private companies that translate laws into English.  The UAE Ministry of Justice (MoJ) maintains a partial library of translated laws on its website.  Other ministries and departments inconsistently offer official English translations via their websites.  The emirates of Abu Dhabi, Dubai, and Sharjah publish official gazettes online in Arabic.  Regulators are not required to publish proposed regulations before enactment, but may share them either publicly or with stakeholders on a case-by-case basis.

International Regulatory Considerations 

The UAE is a member of the GCC, along with Bahrain, Kuwait, Oman, Qatar, and Saudi Arabia.  It maintains regulatory autonomy, but coordinates efforts with other GCC members through the GCC Standardization Organization (GSO).  In 2020, the UAE submitted 72 notifications to the WTO committee, including notifications of emergency measures and issues relating to Intellectual Property Rights.

Legal System and Judicial Independence  

Islam is identified as the state religion in the UAE constitution, and serves as the principal source of domestic law.  The legal system of the country is generally divided between a British-based system of common law used in offshore FTZs and onshore domestic law.  Domestic law is a dual legal system of civil and Sharia laws – the majority of which has been codified.  Most codified legislation in the UAE is a mixture of Islamic law and other civil laws such as Egyptian and French civil laws.

Common law principles, such as following legal precedents, are generally not recognized in the UAE, although lower courts commonly follow higher court judgments.  Judgments of foreign civil courts are typically recognized and enforceable under local courts.  The United States District Court for the Southern District of New York signed a memorandum with Dubai International Financial Center (DIFC) courts providing companies operating in Dubai and New York with procedures for the mutual enforcement of financial judgments.  The Abu Dhabi-based financial free zone hub Abu Dhabi Global Financial Market (ADGM) signed a Memorandum of Understanding (MoU) with the Abu Dhabi Judicial Department in February 2018 allowing reciprocal enforcement of judgments, decisions, orders, and arbitral awards between ADGM and Abu Dhabi courts.

The UAE constitution stipulates each emirate can set up a local emirate-level judicial system (local courts) or rely exclusively on federal courts.  The Federal Judicial Authority has jurisdiction over all cases involving a “federal entity” with the Federal Supreme Court in Abu Dhabi, the highest court at the federal level.  Federal courts have exclusive jurisdiction in seven categories of cases:  disputes between emirates; disputes between an emirate and the federal government; cases involving national security; interpretation of the constitution; questions over the constitutionality of a law; and cases involving the actions of appointed ministers and senior officials while performing their official duties.  The federal government administers the courts in Ajman, Fujairah, Umm al Quwain, and Sharjah, including vetting, appointing, and paying judges.  Judges in these courts apply both local and federal law, as appropriate.  Dubai, Ras Al Khaimah, and Abu Dhabi administer their own local courts, hiring, vetting, and paying local judges and attorneys.  Local courts in Dubai, Ras al Khaimah, and Abu Dhabi have jurisdiction over all matters not specifically reserved for federal courts in the constitution.  Abu Dhabi operates both local (the Abu Dhabi Judicial Department) and federal courts in parallel.

Family Law:  In November 2020, the UAE government issued Federal Law Number 8 (2019), amending to the UAE Family Law.  The reforms liberalized laws related to cohabitation by unmarried couples, divorce and separation, custody, execution of wills and asset distribution, use of alcohol, suicide, and the protection of women.  The amendments stipulated that in a divorce taking place in the UAE by a couple married abroad, the legal proceedings would be governed by the laws of their home country.  The reforms also decriminalized alcohol consumption and removed the licensing requirement to purchase alcohol.

Probate:  The UAE Government announced in November 2020 that in the absence of a will, probate laws of the deceased’s country of citizenship would prevail.  Prior to this reform, Sharia law inheritance provisions determined the disposal of a UAE non-national resident’s assets on his or her death in most cases.  The new Federal decree-law no. 29 of 2020 allows each emirate to maintain a registry for non-UAE national wills.

Employment Law:  Employment in the private sector outside of financial free zones is regulated by Federal Law No. 8 of 1980.  The Labor Law defines working hours, leave entitlements, safety, and healthcare regulations.  There is no minimum wage defined by the law and trade unions, strikes, and collective bargaining is prohibited.  Expatriates’ legal residence in the UAE is tied to their employer (kafala system), but skilled labor usually has more flexibility in transferring their residency visa.  In 2009, the UAE Ministry of Human Resources and Emiratization (MOHRE) introduced a Wages Protection System (WPS) to ensure unbanked workers were paid according to the terms of their employment agreement.  Most domestic workers remain uncovered by the WPS.  In 2019, the UAE government launched a WPS pilot program for domestic workers and announced plans to extend WPS protection to include domestic workers in the future.

The constitution prohibits discrimination based on religion, race, and national origin.  Labor Law gives national preference in employment to Emirati citizens.  Federal Law No. 06 of 2020 stipulates equal wages for women and men in the private sector.  The decree came into force in September 2020.

The DIFC Employment Law No. 2 of 2019, which took effect in August 2019, addressed key issues such as paternity leave, sick pay, and end-of-service settlements.  ADGM also issued new employment regulations with effect in January 2020, which allowed employers and employees more flexibility in negotiating notice periods and introduced protective provisions for employees age 15-18.

Laws and Regulations on Foreign Direct Investment  

There are four major federal laws affecting investment in the UAE:  the Federal Commercial Companies Law, the Trade Agencies Law, the Federal Industry Law, and the Government Tenders Law.

Federal Commercial Companies Law:  As noted above, Federal Decree-Law Number 26 annulled the default requirement for commercial companies to be majority-owned by Emirati citizens, have a majority-Emirati board, or maintain an Emirati agent effectively allowing majority or full foreign ownership of onshore companies in most sectors.

Trade Agencies Law:  The Trade Agencies Law currently requires that foreign firms without a local UAE subsidiary to distribute their products in the UAE through trade agents who are either UAE nationals or through companies majority-owned by UAE nationals.  Federal Law No. 11 of 2020 amended the Trade Agencies Law, removing the requirement that UAE companies be fully owned by Emirati citizens to act as commercial agents.  However, those companies still need to be majority-owned by Emirati citizens. The Ministry of Economy handles registration of trade agents.  A foreign principal can appoint one agent for the entire UAE, or for a particular emirate or group of emirates.  It is difficult and expensive to sever a commercial agency agreement.  Federal Law No. 5 of 1985 (Civil Code) governs unregistered distribution agreements.

Federal Law No. 11 of 2020 will also allow family-owned companies to convert to public joint stock companies; to open shareholding to foreign investors; and to establish rules of governance and protection against default.  The changes also encourage UAE nationals to engage in business activities and invest in public companies and their commercial agents.  The changes offer protections for small shareholders and owners of SMEs acting as agents, granting them statutory protection in cases of termination or non-renewal of agreements without “material reasons.”

In August 2020, the Dubai ruler issued Law No. 9 (2020) regulating family-owned businesses in Dubai.  The Law enables family members with a common interest to jointly own moveable or immoveable property (other than shares in public joint-stock companies) on the tailored terms of a Family Property Contract that ensures the continuity, development, and smooth transition of family property from one generation to another.

Federal Industry Law:  Federal Law No. 1 (1979) regulates industrial projects in the UAE. Under this law, an industry advisory committee shall be established to examine issues pertaining to most industrial projects.  The law excludes projects which meet specific requirements, including projects related to petroleum exploration and mining industry; projects with fixed capital, not exceeding $68,064 or that do not have more than ten people, or that use a motor power of no more than five horses; concession projects; and projects implemented by the federal government.

Other Relevant Legislation:  According to the Central Bank Law, a bank incorporated in the United Arab Emirates must be 60 percent owned by UAE nationals.  The limit on foreign ownership of local banks is subject to approval by regulators on a case-by-case basis.  Some major banks have reached the maximum foreign ownership of 40 percent in recent years.  Foreign banks are licensed in the UAE as branches of foreign banks, with a maximum of eight local branches allowed per bank.

The Federal Industry Law stipulates industrial projects must have 51 percent UAE national ownership.  The law also requires that projects either be managed by a UAE national or have a board of directors with a majority of UAE nationals.  Exemptions from the law are provided for projects related to the extraction and refining of oil and natural gas and select hydrocarbon projects governed by special laws or agreements.

To register with the Abu Dhabi Securities Exchange, go to: https://www.adx.ae/English/Pages/Members/BecomeAMember/default.aspx

To obtain an investor number for trading on Dubai Exchanges, go to:  http://www.nasdaqdubai.com/assets/docs/NIN-Form.pdf

Competition and Anti-Trust Laws  

The Ministry of Economy’s Competition Regulation Committee reviews transactions for competition-related concerns.

Expropriation and Compensation  

Mission UAE is not aware of foreign investors subjected to any expropriation in the UAE in the recent past.  There are no federal rules governing compensation if expropriations were to occur.   Individual emirates would likely treat expropriations differently.  In practice, authorities would be unlikely to expropriate unless there were a compelling development or public interest need to do so.

Dispute Settlement

ICSID Convention and New York Convention  

The UAE is a contracting state to the International Center for the Settlement of Investment Disputes (ICSID) and a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral awards (1958 New York Convention).

Investor-State Dispute Settlement  

Mission UAE is aware of several substantial investment and commercial disputes over the past few years involving U.S. or other foreign investors and government and/or local businesses.  There have also been multiple contractor/payment disputes with the government as well as with local businesses.  Onshore dispute resolution can be difficult and uncertain, and payment following settlements is often slow.  Disputes are generally resolved by direct negotiation and settlement between the parties themselves, arbitration, or recourse within the legal system.  Firms avoid escalating payment disputes through civil or arbitral courts, particularly disputes involving politically connected local parties to preserve access to UAE markets.  Legal or dispute-resolution mechanisms that can take months or years to reach resolution, leading some firms to exit the UAE market instead of pursuing claims.  Arbitration may commence by petition to the UAE federal courts based on mutual consent (a written arbitration agreement), independently (by nomination of arbitrators), or through referral to an appointing authority without recourse to judicial proceedings.  Mechanisms for enforcing ownership of property through either offshore or domestic courts are generally effective.  There have been no confirmed reports of government interference in the court system affecting foreign investors.  Domestic courts are generally perceived as favoring Emirati nationals over foreigners.

International Commercial Arbitration and Foreign Courts  

The UAE government acceded to the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards in November 2006.  An arbitration award issued in the UAE is now enforceable in all 138 member states, and any award issued in another member state is directly enforceable in the UAE.  The Convention supersedes all incompatible legislation and rulings in the UAE.  Mission UAE is not aware of any U.S. firm attempting to use arbitration under the UN convention on the recognition and enforcement of foreign arbitral awards.  Some analysts have raised concerns about delays and procedural obstacles to enforcing arbitration awards in the UAE.

In June 2018, Federal Law No. 6 (2018) on Arbitration came into force.  The Federal Law on Arbitration is based on the United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration.  The new law is expected to bolster confidence in the UAE’s arbitration regime.  In October 2020, DIFC courts set up a new arbitration working group to accommodate the rising number of arbitration-related cases.  On December 23, 2020, ADGM enacted amendments to its arbitration regulations to establish itself as a venue for arbitration; codify international best practices; and accommodate the changing needs of various stakeholders to arbitration.  The amendments also allowed greater flexibility in the way the arbitration process can be conducted, particularly with the introduction of explicit provisions accommodating virtual hearings and electronic submissions.

Bankruptcy Regulations  

The bankruptcy law for companies, Federal Decree Law No. 9 (2016), was first applied in February 2019.  The law covers companies governed by the Commercial Companies Law, most FTZ companies, sole proprietorships, and companies conducting professional business.  It allows creditors owed $27,225 or more to file insolvency proceedings against a debtor 30 business days after written notification to the debtor.  The law decriminalized “bankruptcy by default,” ending a system in which out-of-cash businesspeople faced potential criminal liability, including fines and potential imprisonment, if they did not initiate insolvency procedures within 30 days.  In October 2020, the UAE Cabinet approved amendments to the law and added provisions regarding “Emergency Situations” that impinge on trade or investment, to enable individuals and business to overcome credit challenges during extraordinary circumstances such as pandemics, natural and environmental disasters, and wars.  Under the amendments, a debtor may request a grace period from creditors, or negotiate a debt settlement for a period up to 12 months.

The bankruptcy law for individuals, Insolvency Law No. 19 (2019) came into effect in November 2019.  It applies only to natural persons and estates of the deceased.  The law allows a debtor to seek court assistance for debt settlement or to enter into liquidation proceedings as a result of the inability to pay for an extended period of time.  Under this law, a debtor facing financial difficulties may apply to the court for assistance and guidance in the settlement of his financial commitments through one or more court-appointed experts, or through a court-supervised binding settlement plan.  If a debtor fails to pay any of his due debts for a period exceeding 50 consecutive business days, he shall apply to the court to commence proceedings for the liquidation of his assets.  The law offers only limited protection to individuals, and non-payment of debt remains a criminal offense.

DIFC enacted a New Insolvency Law on May 30, 2019.  The law, which applies only to DIFC companies, introduces methods to deal with insolvency situations, including a new debtor in possession regime, appointment of an administrator in cases of mismanagement, and adoption of UNCITRAL Model Law, consistent with globally recognized best practices.  In July 2020, ADGM also announced amendments to its regulations to provide greater clarity on the prescribed form and content in procedural matters and to better align with the ADGM Courts platform.

In June 2020, the UAE’s federal export credit Company, Etihad Credit Insurance (ECI) reaffirmed its commitment to support companies operating in the UAE to recover from COVID implications.  ECI has recently helped a UAE manufacturer recover payments from a U.S. firm that filed for bankruptcy.

The Federal Government’s Al Etihad Credit Bureau (AECB) is the only credit rating agency that assesses the financial strength of individuals in the UAE.  It also provides risk measures for various entities.  The AECB partnered with local institutions to collect data that assist in assessing credit risk and improve capital market efficiency.  A credit rating allows investors to make better-informed lending decisions and apply appropriate risk premiums to borrowers.  A credit report from AECB can unburden borrowers from scrutiny each time they take a loan.

6. Financial Sector

Capital Markets and Portfolio Investment  

UAE government efforts to create an environment that fosters economic growth and attracts foreign investment resulted in:  i) no taxes or restrictions on the repatriation of capital; ii) free movement of labor and low barriers to entry (effective tariffs are five percent for most goods); and iii) an emphasis on diversifying the economy away from oil, which offers a broad array of investment options for FDI.  Key non-hydrocarbon drivers of the economy include real estate, renewable energy, tourism, logistics, manufacturing, and financial services.

The UAE issued investment fund regulations in September 2012 known as the “twin peak” regulatory framework designed to govern the marketing of investment funds established outside the UAE to domestic investors and the establishment of local funds domiciled inside the UAE.  This regulation gave the Securities and Commodities Authority (SCA), rather than the Central Bank, authority over the licensing, regulation, and marketing of investment funds.  The marketing of foreign funds, including offshore UAE-based funds, such as those domiciled in the DIFC, require the appointment of a locally licensed placement agent.  The UAE government has also encouraged certain high-profile projects to be undertaken via a public joint stock company to allow the issuance of shares to the public.  Further, the UAE government requires any company carrying out banking, insurance, or investment services for a third party to be a public joint stock company.

The UAE has three stock markets:  Abu Dhabi Securities Exchange, Dubai Financial Market, and NASDAQ Dubai.  SCA, the onshore regulatory body, classifies brokerages into two groups:  those that engage in trading only while the clearance and settlement operations are conducted through clearance members, and those that engage in trading clearance and settlement operations for their clients.  Under the regulations, trading brokerages require paid-up capital of $820,000, whereas trading and clearance brokerages need $ 2.7 million.  Bank guarantees of $367,000 are required for brokerages to trade on the bourses.

In June 2020, the SCA amended the decision on issuing and offering Islamic securities, to ensure SCA legislation is in line with the principles of the International Organization of Securities Commissions (IOSCO).  In July 2020, SCA embarked on a project to restructure the legislative system for broker classification to keep pace with global practices and enhance the confidence of domestic and foreign investors.  According to the restructuring project, the following five licensing categories were introduced:  dealing in securities, dealing in investments, safekeeping, clearing and registration, credit rating, and arrangement and counseling.

The SCA’s decision on Capital Adequacy Criteria of Investment Manager and Management Company stipulates that the investment manager and the management company must allocate capital to constitute a buffer for credit risk, market risk, or operational risk, even if it does not appear as a line item in the balance sheet.

On the issue of Real Estate Investment Fund control, the SCA stipulates that a public or private real estate investment fund shall invest at least 75 percent of its assets in real estate assets.  According to the SCA, a real estate investment fund may establish or own one or more real estate services companies provided that its investment in the ownership of each company and its subsidiaries shall not be more than 20 percent of the fund’s total assets.

Credit is generally allocated on market terms, and foreign investors can access local credit markets.  Interest rates usually closely track those in the United States since the local currency is pegged to the dollar.  However, there have been complaints that GREs crowd out private sector borrowers to the detriment of mostly local SMEs.

Money and Banking System  

The UAE has a robust banking sector with 48 banks, 21 of which are foreign institutions, and six are GCC-based banks.  The number of national bank branches declined to 541 by the end of 2020, compared to 656 at the end of 2019, due to bank mergers and the transition to online banking.

Non-performing loans (NPL) comprised 6.2 percent of outstanding loans in 2019, compared with 5.7 percent in 2018, according to figures from the Central Bank of the UAE (CBUAE). Under a new reporting standard, the NPL ratio of the UAE banking system for the year-end 2018 stood at 5.6 percent, compared to 7.1 percent under the previous methodology.  The CBUAE recorded total sector assets of USD 868 billion as of December 2020.

The banking sector remains well-capitalized but has experienced a decline in lending and a rise in NPL as a result of the pandemic.  These factors have significantly reduced reported profits as banks have made greater provisions for non-performing loans.  On March 15, 2020, the CBUAE announced the USD $ 27.2 billion Targeted Economic Support Scheme (TESS) stimulus package, which included USD $13.6 billion in zero-interest, collateralized loans for UAE-based banks, and USD $13.6 billion in funds freed up from banks’ capital buffers.  In November 2020, The CBUAE extended The TESS to June 2021.

There are some restrictions on foreigners’ ability to establish a current bank account, and legal residents and Emiratis can access loans under more favorable terms than non-residents.

Foreign Exchange and Remittances  

Foreign Exchange Policies  

According to the IMF, the UAE has no restrictions on making payments and transfers for international transactions, except security-related restrictions.  Currencies trade freely at market-determined prices.  The UAE dirham has been pegged to the dollar since 2002.  The mid-point between the official buying and selling rate for the dirham (AED or Dhs) is fixed at AED 3.6725 per USD.

Remittance Policies  

The Central Bank of the UAE initiated the creation of the Foreign Exchange & Remittance Group (FERG), comprising various exchange companies, which is registered with the Dubai Chamber of Commerce & Industry.  Unlike their counterparts across the world that deal mainly in money exchange, exchange companies in the UAE are primary conduits for transferring large volumes of remittances through official channels.  According to migration and remittance data from the World Bank, in 2019, the UAE had migrant remittance outflows of USD $44.9 billion.  Exchange companies are important partners in the UAE government’s electronic salary transfer system, called the Wage Protection System.  They also handle various ancillary services ranging from credit card payments to national bonds, to traveler’s checks.

As part of its focus on improving Anti-Money Laundering and Countering Financing of Terrorism (AML/CFT) systems within the UAE, in September 2020, the CBUAE introduced a mandatory registration framework for Hawala providers or informal money transfer service providers that operate in the UAE.

Sovereign Wealth Funds  

Abu Dhabi is home to four sovereign wealth funds—the Abu Dhabi Investment Authority (ADIA) and Mubadala Investment Company are the largest—with estimated total assets of approximately USD $814.6 billion as of February 2020.  Each fund has a chair and board members appointed by the Ruler of Abu Dhabi.  President Khalifa Bin Zayed Al Nahyan is the chair of ADIA and Abu Dhabi Crown Prince Mohammed Bin Zayed Al Nahyan is the chair of Mubadala.  Other rapidly expanding Abu Dhabi sovereign funds include: ADQ, with investment portfolios in food and agriculture, aviation, financial services, healthcare, industries, logistics, media, real estate, tourism and hospitality, transport and utilities; and EDGE, which covers  weapons, cyber defense and electronic warfare and intelligence, among others.  Emirates Investment Authority, the UAE’s federal sovereign wealth fund, is modest by comparison, with estimated assets of about USD 44 billion.  The Investment Corporation of Dubai (ICD) is Dubai’s primary sovereign wealth fund, with an estimated USD $301 billion in assets according to ICD’s June 2020 financial report.

UAE funds vary in their approaches to managing investments.  ADIA generally does not actively seek to manage or take an operational role in the public companies in which it invests, while Mubadala tends to take a more active role in particular sectors, including oil and gas, aerospace, infrastructure, and early-stage venture capital.  According to ADIA, the fund carries out its investment program independently and without reference to the government of Abu Dhabi.

In 2008, ADIA agreed to act alongside the IMF as co-chair of the International Working Group of Sovereign Wealth Funds, which eventually became the International Forum of Sovereign Wealth Funds (IFSWF).  Comprising representatives from 31 countries, the IFSWF was created to demonstrate that sovereign wealth funds had robust internal frameworks and governance practices, and that their investments were made only on an economic and financial basis.

7. State-Owned Enterprises

State-owned enterprises (SOEs) are a key component of the UAE economic model.  There is no

published list of SOEs or GREs, at the national or individual emirate level.  Some SOEs, such as the influential Abu Dhabi National Oil Company (ADNOC), are strategically important companies and provide a major source of revenue for the government.  Mubadala established Masdar in 2006 to develop renewable energy and sustainable technologies industries.  Some SOEs, such as Emirates Airlines and Etisalat, the largest local telecommunications firm, have in recent years emerged as internationally recognized brands.  Some, but not all, of these companies have competition.  In some cases, these firms compete against other state-owned firms (Emirates and Etihad airlines, for example, or telecommunications company Etisalat against du).  While they are not granted full autonomy, these firms leverage ties between entities they control to foster national economic development.  Perhaps the best example of such an economic ecosystem is Dubai, where SOEs have been used as drivers of diversification in sectors including construction, hospitality, transport, banking, logistics, and telecommunications.  Sectoral regulations in some cases address governance structures and practices of state-owned companies.  The UAE is not party to the WTO Government Procurement Agreement.

Privatization Programs  

There is no privatization program in the UAE.  There have been several listings of portions of SOEs, on local UAE stock exchanges, as well as some “greenfield” IPOs focused on priority projects.  However, several state-owned enterprises have allowed partial foreign ownership in their shares.  For example, Abu Dhabi National Oil Company for Distribution, many national banks, some utility operators and the telecom operators, Etisalat and du, now allow minority foreign ownership.

10. Political and Security Environment

There have been no reported instances of politically motivated property damage in recent years.

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) ($B USD) 2019 $421.1 2019 $421.1 www.worldbank.org/en/country
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data:  BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($B USD, stock positions) N/A N/A 2019 $17.2 BEA data available at https://apps.bea.gov/international/factsheet/
Host country’s FDI in the United States ($B USD, stock positions) N/A N/A 2019 $5.1 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 2019 3.4% UNCTAD data available at

https://unctad.org/topic/investment/world-investment-report 

* Source for Host Country Data: Economic Report, Ministry of Economy

Table 3: Sources and Destination of FDI  

Data from the Federal Competitiveness and Statistics Center indicates that the real GDP for 2019 in constant prices (base year 2010) were approximately USD $404.6 billion, while the nominal GDP at current prices was about USD $421.1 billion in 2019.

The UAE Ministry of Economy’s Annual Economic Report 2019, cited UNCTAD statistics that net annual FDI inflows to the UAE in 2018 were $10.385 billion, compared to USD $10.354 billion in 2017.  The Emirates Centre for Strategic Studies and Research (ECSSR)  reported that according to the CBUAE statistics, the net annual FDI inflows to the UAE in 2019 were approximately USD $13.78 billion.  The largest investors in the UAE were:  India, United States, UK, Japan, China, Saudi Arabia, Germany, Kuwait, France, and the Netherlands.

Table 4: Sources of Portfolio Investment
Data not available.

United Kingdom

Executive Summary

The United Kingdom (UK) is a top global destination for foreign direct investment (FDI) and imposes few impediments to foreign ownership.  The United States is the largest source of direct investment into the UK.  Thousands of U.S. companies have operations in the UK.  The UK also hosts more than half of the European, Middle Eastern, and African corporate headquarters of American-owned firms.  The UK government provides comprehensive statistics on FDI in its annual inward investment  report:   https://www.gov.uk/government/statistics/department-for-international-trade-inward-investment-results-2019-to-2020.

Following a drop in inward investment each year since 2016 that mirrored global declines, and amidst a historically sharp but temporary recession related to the COVID-19 pandemic, the UK government established the Office for Investment in November 2020.  The Office is focused on attracting high-value investment opportunities into the UK which “align with key government priorities, such as reaching net zero [carbon emissions], investing in infrastructure, and advancing research and development.  It also aims to drive inward investment into “all corners of the UK through a ‘single front door.’”

The UK’s National Security and Investment Act, which came into effect in May 2021, significantly strengthened the UK’s existing investment screening powers.  Investments resulting in foreign control generally exceeding 15 percent of companies in 17 sectors pertaining to national security require mandatory notifications to the UK government’s Investment Security Unit

The UK formally withdrew from the EU’s political institutions on January 31, 2020, and from  the bloc’s economic and trading institutions on December 31, 2020.  The UK and the EU concluded a Trade and Cooperation Agreement (TCA) on December 24, 2020, setting out the terms of their future economic relationship.  The TCA maintains tariff-free trade between the UK and the EU but introduced a number of new non-tariff, administrative barriers.   On January 1, 2021, the UK began reviewing cross-border activities with a UK-EU nexus in parallel to the European Commission.

The United States and the UK launched free trade agreement negotiations in May 2020, which were paused with the change in U.S. Administration.  The United States and UK have enjoyed a “Commerce and Navigation” Treaty since 1815 which guarantees national treatment of U.S. investors.  A Bilateral Tax Treaty specifically protects U.S. and UK investors from double taxation.

On April 8, 2021, the UK established the Digital Markets Unit, a new regulatory body that will be responsible for implementing upcoming changes to competition rules in digital markets.  The Competition and Markets Authority (CMA), the UK’s competition regulator, has indicated that it intends to scrutinize and police the digital sector more thoroughly going forward.   The EU’s General Data Protection Regulation (GDPR) no longer applies to the UK.  Entities based in the UK must comply with the Data Protection Act (DPA) 2018, which incorporated provisions of the EU GDPR directly into UK law

In April 2020  a two percent digital services tax (DST) came into force that targets certain types of digital activity attributable to UK users. The in-scope digital services activities are: social media services; Internet search engines; and online marketplaces.  If an activity is ancillary or incidental to an in-scope digital services activity, its revenues may also be subject to the DST.

In March 2021, The UK government identified eight sites as post-Brexit freeports to spur trade, investment, innovation and economic recovery.  The eight sites are: East Midlands Airport, Felixstowe and Harwich, Humber region, Liverpool City Region, Plymouth, Solent, Thames, and Teesside.  The designated areas will offer special customs and tax arrangements and additional infrastructure funding to improve transport links.

HMG brought forward new immigration rules on January 1, 2021. The new rules have wide-ranging implications for foreign employees, students, and EU citizens.  The new rules are points-based, meaning immigrants need to attain a certain number of points in order to be awarded a visa.  The previous cap on visas has been abolished.  EU citizens who arrived before December 31, 2020, will not have to apply for a visa, but instead are eligible to apply for “settled” or “pre-settled” status, which allows them to live and work in the UK much the same as they were before the UK left the EU.  EU citizens arriving to the UK after January 1, 2021, must apply for the relevant visa.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2020 11 of 180 www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report “Ease of Doing Business” 2020 8 of 190 www.doingbusiness.org/rankings
Global Innovation Index 2020 4 of 131 https://www.globalinnovationindex.org/analysis-economy  
U.S. FDI in partner country (M USD, stock positions) 2019 $851,400 www.bea.gov/international/factsheet/
World Bank GNI per capita 2019 $49,040 data.worldbank.org/indicator/NY.GNP.PCAP.CD 

Currency conversions have been done using XE and Bank of England data.

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Market entry for U.S. firms is facilitated by a common language, legal heritage, and similar business institutions and practices.  The UK is well supported by sophisticated financial and professional services industries and has a transparent tax system in which local and foreign-owned companies are taxed alike.  The pound sterling is a free-floating currency with no restrictions on its transfer or conversion.  There are no exchange controls restricting the transfer of funds associated with an investment into or out of the UK.

UK legal, regulatory, and accounting systems are transparent and consistent with international standards.  The UK legal system provides a high level of investor protections.  Private ownership is protected by law and monitored for competition-restricting behavior.  U.S. exporters and investors generally will find little difference between the United States and the UK in the conduct of business, and common law prevails as the basis for commercial transactions in the UK.

The UK actively encourages inward FDI.  The Department for International Trade, including through its newly created Office for Investment, actively promotes inward investment and prepares market information for a variety of industries.  U.S. companies establishing British subsidiaries generally encounter no special nationality requirements on directors or shareholders.  Once established in the UK, foreign-owned companies are treated no differently from UK firms.  The UK government is a strong defender of the rights of any British-registered company, irrespective of its nationality of ownership.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign ownership is limited in only a few private sector companies for national security reasons, such as Rolls Royce (aerospace) and BAE Systems (aircraft and defense).  No individual foreign shareholder may own more than 15 percent of these companies.  Theoretically, the government can block the acquisition of manufacturing assets from abroad by invoking the Industry Act of 1975, but it has never done so.  Investments in energy and power generation require environmental approvals. Certain service activities (like radio and land-based television broadcasting) are subject to licensing.

The UK requires that at least one director of any company registered in the UK be ordinarily resident in the country.

The UK’s National Security and Investment Act, which came into effect in May 2021, significantly strengthened the UK’s existing investment screening powers.  Investments resulting in foreign control generally exceeding 15 percent of companies in 17 sectors pertaining to national security require mandatory notifications to the UK government’s Investment Security Unit (see https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/965784/nsi-scope-of-mandatory-regime-gov-response.pdf for details).  The regime operates separately from competition law.  The bill provides authority to a newly created Investment Security Unit to review investments retroactively for a period of five years.

Other Investment Policy Reviews

The Economist Intelligence Unit, World Bank Group’s “Doing Business 2020,” and the OECD’s Economic Forecast Summary (December 2020) have current investment policy reports for the United Kingdom:

http://country.eiu.com/united-kingdom

http://www.doingbusiness.org/data/exploreeconomies/united-kingdom/

https://www.oecd.org/economy/united-kingdom-economic-snapshot/  

Business Facilitation

The UK government has promoted administrative efficiency to facilitate business creation and operation.  The online business registration process is clearly defined, though some types of companies cannot register as an overseas firm in the UK, including partnerships and unincorporated bodies.  Registration as an overseas company is only required when the company has some degree of physical presence in the UK.  After registering their business with the UK governmental body Companies House, overseas firms must separately register to pay corporation tax within three months.  On average, the process of setting up a business in the UK requires 13 days, compared to the European average of 32 days, putting the UK in first place in Europe and sixth in the world.

As of April 2016, companies have to declare all “persons of significant control.”  This policy recognizes that individuals other than named directors can have significant influence on a company’s activity and that this information should be transparent.  More information is available at this link: https://www.gov.uk/government/publications/guidance-to-the-people-with-significant-control-requirements-for-companies-and-limited-liability-partnerships.  Companies House maintains a free, publicly searchable directory, available at https://www.gov.uk/get-information-about-a-company.

The UK offers a welcoming environment to foreign investors, with foreign equity ownership restrictions in only a limited number of sectors covered by the World Bank’s Investing Across Sectors indicators.

https://www.gov.uk/government/organisations/department-for-international-trade

https://www.gov.uk/set-up-business

https://www.gov.uk/topic/company-registration-filing/starting-company

http://www.doingbusiness.org/data/exploreeconomies/united-kingdom/starting-a-business

Special Section on the British Overseas Territories and Crown Dependencies

The British Overseas Territories (BOTs) comprise Anguilla, British Antarctic Territory, Bermuda, British Indian Ocean Territory, British Virgin Islands, Cayman Islands, Falkland Islands, Gibraltar, Montserrat, Pitcairn Islands, St. Helena, Ascension and Tristan da Cunha, Turks and Caicos Islands, South Georgia and South Sandwich Islands, and Sovereign Base Areas on Cyprus.  The BOTs retain a substantial measure of authority for their own affairs.  Local self-government is usually provided by an Executive Council and elected legislature.  Governors or Commissioners are appointed by the Crown on the advice of the British Foreign Secretary, and retain responsibility for external affairs, defense, and internal security.

Many of the territories are now broadly self-sufficient.  The UK’s Foreign, Commonwealth and Development Department (FCDO), however, maintains development assistance programs in St. Helena, Montserrat, and Pitcairn. This includes budgetary aid to meet the islands’ essential needs and development assistance to help encourage economic growth and social development in order to promote economic self-sustainability.  In addition, all other BOTs receive small levels of assistance through “cross-territory” programs for issues such as environmental protection, disaster prevention, HIV/AIDS, and child protection.

Seven of the BOTs have financial centers:  Anguilla, Bermuda, British Virgin Islands, Cayman Islands, Gibraltar, Montserrat, and the Turks and Caicos Islands.  These territories have committed to the OECD’s Common Reporting Standard (CRS) for the automatic exchange of taxpayer financial account information.  They have long exchanged information with the UK, and began exchanging information with other jurisdictions under the CRS from September 2017.

Of the BOTs, Anguilla is the only one to receive a “non-compliant” rating by the Global Forum for Exchange of Information on Request, putting it on the EU list of non-cooperative tax jurisdictions.  The Global Forum has rated the other six territories as “largely compliant.”  Anguilla, Bermuda, British Virgin Islands, Cayman Islands, Gibraltar, and the Turks and Caicos Islands have committed in reciprocal bilateral arrangements with the UK to hold beneficial ownership information in central registers or similarly effective systems, and to provide UK law enforcement authorities with near real-time access to this information.

Anguilla:  Anguilla has no income, capital gains, estate, profit or other forms of direct taxation on either individuals or corporations, for residents or non-residents of the jurisdiction.  The territory has no exchange rate controls.  Non-Anguillan nationals may purchase property, but the transfer of land to an alien includes a 12.5 percent tax on the assessed value of the property or the sales proceeds, whichever is greater.

British Virgin Islands:  The government of the British Virgin Islands offers a series of tax incentive packages aimed at reducing the cost of doing business on the islands.  This includes relief from corporation tax payments over specific periods, but companies must pay an initial registration fee and an annual license fee to the BVI Financial Services Commission.  Crown land grants are not available to non-British Virgin Islanders, but private land can be leased or purchased following the approval of an Alien Land Holding License.  Stamp duty is imposed on transfers of real estate and the transfer of shares in a BVI company owning real estate in the BVI at a rate of four percent for belongers (i.e., residents who have proven they meet a legal standard of close ties to the territory) and 12 percent for non-belongers.  There is no corporate income tax, capital gains tax, branch tax, or withholding tax for companies incorporated under the BVI Business Companies Act.  Payroll tax is imposed on every employer and self-employed person who conducts business in BVI.  The tax is paid at a graduated rate depending upon the size of the employer.  The current rates are 10 percent for small employers (those which have a payroll of less than $150,000, a turnover of less than $300,000 and fewer than seven employees) and 14 percent for larger employers.  Eight percent of the total remuneration is deducted from the employee, the remainder of the liability is met by the employer.  The first $10,000 of remuneration is free from payroll tax.

Cayman Islands:  There are no direct taxes in the Cayman Islands.  In most districts, the government charges stamp duty of 7.5 percent on the value of real estate at sale, but certain districts, including Seven Mile Beach, are subject to a rate of nine percent.  There is a one percent fee payable on mortgages of less than KYD 300,000, and one and a half percent on mortgages of KYD 300,000 or higher.  There are no controls on the foreign ownership of property and land.  Investors can receive import duty waivers on equipment, building materials, machinery, manufacturing materials, and other tools.

Falkland Islands:  Companies located in the Falkland Islands are charged corporation tax at 21 percent on the first £1 million ($1.4 million) and 26 percent for all amounts in excess of £1 million ($1.4 million).  The individual income tax rate is 21 percent for earnings below £12,000 ($16,800) and 26 percent above this level.

Gibraltar:  With BREXIT, Gibraltar is not currently a part of the EU, but under the terms of an agreement in principle reached between the UK and Spain on December 31, 2020, it is set to become a part of the EU’s passport-free Schengen travel area.  The UK and EU are set to begin negotiations on a treaty on the movement of people and goods between Gibraltar and the bloc.  Gibraltar has a buoyant economy with a stable currency and few restrictions on moving capital or repatriating dividends.  The corporate income tax rate is 20 percent for utility, energy, and fuel supply companies, and 10 percent for all other companies.  There are no capital or sales taxes.

Montserrat:   Foreign investors are permitted to acquire real estate, subject to the acquisition of an Alien Land Holding license, which carries a fee of five percent of the purchase price.  The government also imposes stamp and transfer fees of 2.6 percent of the property value on all real estate transactions.  Foreign investment in Montserrat is subject to the same taxation rules as local investment and is eligible for tax holidays and other incentives.  Montserrat has preferential trade agreements with the United States, Canada, and Australia.  The government allows 100 percent foreign ownership of businesses, but the administration of public utilities remains wholly in the public sector.

St. Helena:  The  government offers tax-based incentives, which are considered on the merits of each project – particularly tourism projects.  All applications are processed by Enterprise St. Helena, the business development agency.

Pitcairn Islands:  The Pitcairn Islands have approximately 50 residents, with a workforce of approximately 29 employed in 10 full-time equivalent roles.  The territory does not have an airstrip or a commercially viable harbor.  Residents exist on fishing, subsistence farming, and handcrafts.

The Turks and Caicos Islands:  Through an “open arms” investment policy, the government commits to a streamlined business licensing system, a responsive immigration policy to give investment security, access to government-owned land under long-term leases, and a variety of duty concessions to qualified investors.  The islands have a “no tax” policy, but property purchasers must pay a stamp duty on purchases over $25,000.  Depending on the island, the stamp duty rate may be up to 6.5 percent for purchases up to $250,000, eight percent for purchases $250,001 to $500,000, and 10 percent for purchases over $500,000.

The Crown Dependencies:  The Crown Dependencies are the Bailiwick of Jersey, the Bailiwick of Guernsey, and the Isle of Man.  The Crown Dependencies are not part of the UK but are self-governing dependencies of the Crown.  This means they have their own directly elected legislative assemblies, administrative, fiscal and legal systems, and their own courts of law.  The Crown Dependencies are not represented in the UK Parliament.  The following tax data are current as of April 2021:

Jersey’s standard rate of corporate tax is zero percent.  The exceptions to this standard rate are financial service companies, which are taxed at 10 percent; utility companies, which are taxed at 20 percent; and income specifically derived from Jersey property rentals or Jersey property development, taxed at 20 percent.  A five percent VAT is applicable in Jersey.

Guernsey has a zero percent rate of corporate tax.  Exceptions include some specific banking activities, taxed at 10 percent; utility companies, which are taxed at 20 percent; Guernsey residents’ assessable income is taxed at 20 percent; and income derived from land and buildings is taxed at 20 percent.

The Isle of Man’s corporate standard tax is zero percent.  The exceptions to this standard rate are income received from banking business, which is taxed at 10 percent, and income received from land and property in the Isle of Man, which is taxed at 20 percent.  In addition, a 10 percent tax rate also applies to companies which carry on a retail business in the Isle of Man and have taxable income in excess of £500,000 ($695,000) from that business.  A 20 percent rate of VAT is applicable in the Isle of Man.

Outward Investment

The UK is one of the largest outward investors in the world, undergirded by numerousbilateral investment treaties (BITs) .  The UK’s international investment position abroad (outward investment) increased from £1,453 billion ($1,938) in 2018 to £1,498 ($1,912) by the end of 2019.  The main destination for UK outward FDI is the United States, which accounted for approximately 25 percent of UK outward FDI stocks at the end of 2019.  Other key destinations include the Netherlands, Luxembourg, France, and Spain which, together with the United States, account for a little under half of the UK’s outward FDI stock.  Europe and the Americas remain the dominant areas for UK international investment positions abroad, accounting for eight of the top 10 destinations for total UK outward FDI.

3. Legal Regime

International Regulatory Considerations

The UK’s withdrawal from the EU may result in a period in which the future regulatory direction of the UK is uncertain as the UK determines the extent to which it will either maintain and enforce the current EU regulatory regime or deviate towards new regulations in any particular sector.  The UK is an independent member of the WTO and actively seeks to comply with all WTO obligations.

Transparency of the Regulatory System

U.S. exporters and investors generally will find little difference between the United States and UK in the conduct of business.  The regulatory system provides clear and transparent guidelines for commercial engagement.  Common law prevails in the UK as the basis for commercial transactions, and the International Commercial Terms (INCOTERMS) of the International Chambers of Commerce are accepted definitions of trading terms.  As of 1 January 2021 firms in the UK must use the UK-adopted international accounting standards (IAS) instead of the EU-adopted IAS in terms of accounting standards and audit provisions. .  The UK’s Accounting Standards Board provides guidance to firms on accounting standards and works with the IASB on international standards.

Statutory authority over prices and competition in various industries is given to independent regulators, primarily the Competition and Markets Authority (CMA).  Other sector regulators with some jurisdiction over competition include, the Office of Communications (Ofcom), the Water Services Regulation Authority (Ofwat), the Office of Gas and Electricity Markets (Ofgem), the Rail Regulator, and the Prudential Regulatory Authority (PRA).  The PRA was created out of the dissolution of the Financial Services Authority (FSA) in 2013.  The PRA reports to the Financial Policy Committee (FPC) in the Bank of England.  The PRA is responsible for supervising the safety and soundness of individual financial firms, while the FPC takes a systemic view of the financial system and provides macro-prudential regulation and policy actions.  The Competition and Markets Authority (CMA) acts as a single integrated regulator focused on enforcement of the UK’s competition laws.  The Financial Conduct Authority (FCA) is a regulator that addresses financial and market misconduct through legally reviewable processes.  These regulators work to protect the interests of consumers while ensuring that the markets they regulate are functioning efficiently.  Most laws and regulations are published in draft for public comment prior to implementation.  The FCA maintains a free, publicly searchable register of their filings on regulated corporations and individuals here: https://register.fca.org.uk/

The UK government publishes regulatory actions, including draft text and executive summaries, on the Department for Business, Energy & Industrial Strategy webpage listed below.  The current policy requires the repeal of two regulations for any new one in order to make the business environment more competitive.

https://www.gov.uk/government/policies/business-regulation

https://www.gov.uk/government/organisations/regulatory-delivery

Legal System and Judicial Independence

The UK is a common-law country.  UK business contracts are legally enforceable in the UK, but not in the United States or other foreign jurisdictions.  International disputes are resolved through litigation in the UK Courts or by arbitration, mediation, or some other alternative dispute resolution (ADR) method.  The UK has a long history of applying the rule of law to business disputes.  The current judicial process remains procedurally competent, fair, and reliable, which helps position London as an international hub for dispute resolution with over 10,000 cases filed per annum.

Laws and Regulations on Foreign Direct Investment

Outside of national security reviews of investment in the 17 sectors deemed to be central to national security per the National Security and Investment Act, few statutes govern or restrict foreign investment in the UK.  The procedure for establishing a company in the UK is identical for British and foreign investors.  No approval mechanisms exist for foreign investment, apart from the process outlined in Section 1.  Foreigners may freely establish or purchase enterprises in the UK, with a few limited exceptions, and acquire land or buildings.  As noted above, the UK is currently reviewing its procedures and has proposed new rules for restricting foreign investment in those sectors of the economy with higher risk for adversely impairing national security.

Alleged tax avoidance by multinational companies, including by several major U.S. firms, has been a controversial political issue and subject of investigations by the UK Parliament and EU authorities.  Foreign and UK firms are subject to the same tax laws, however, and several UK firms have also been criticized for tax avoidance.  Foreign investors may have access to certain EU and UK regional grants and incentives designed to attract industry to areas of high unemployment, but these do not include tax concessions.  Access to EU grants ended on December 31, 2020.

The UK flattened its structure of corporate tax rates in 2015, toa flat rate of 19 percent for non-ring-fenced companies, with marginal tax relief granted for companies with profits falling between £300,000 ($420,000) and £1.5 million ($2.1 million).   There are different Corporation Tax rates for companies that make profits from oil extraction or oil rights in the UK or UK continental shelf.  These are known as “ring fence” companies.  Small ”ring fence” companies are taxed at a rate of 19 percent for profits up to £300,000 ($420,000), and 30 percent for profits over £300,000 ($420,000).  A special rate of 20 percent is given to unit trusts and open-ended investment companies.

On March 3, 2021, Chancellor of the Exchequer Rishi Sunak announced that, starting in 2023, UK corporate tax would increase to 25 percent for companies with profits over £250,000 ($346,000).  A small profits rate (SPR) will also be introduced for companies with profits of £50,000 ($69,000) or less so that they will continue to pay Corporation Tax at 19 percent.  Companies with profits between £50,000 ($69,000) and £250,000 ($346,000) will pay tax at the main rate reduced by a marginal relief providing a gradual increase in the effective Corporation Tax rate.

Tax deductions are allowed for expenditure and depreciation of assets used for trade purposes.  These include machinery, plant, industrial buildings, and assets used for research and development.

The UK has a simple system of personal income tax.  The marginal tax rates for 2020-2021 are as follows: up to £12,500 ($17,370), 0 percent; £12,501 ($17,370) to £50,000 ($69,481), 20 percent; £50,001 ($69,481) to £150,000 ($208,444), 40 percent; and over £150,000 ($208,444), 45 percent.

UK citizens also make mandatory payments of about 12 percent of income into the National Insurance system, which funds social security and retirement benefits.  The UK requires non-domiciled residents of the UK to either pay tax on their worldwide income or the tax on the relevant part of their remitted foreign income being brought into the UK.  If they have been resident in the UK for seven tax years of the previous nine, and they choose to pay tax only on their remitted earnings, they may be subject to an additional charge of £30,000 ($42,000).  If they have been resident in the UK for 12 of the last 14 tax years, they may be subject to an additional charge of £60,000 ($84,000).

The Scottish Parliament has the legal power to increase or decrease the basic income tax rate in Scotland, currently 20 percent, by a maximum of three percentage points.

For further guidance on laws and procedures relevant to foreign investment in the UK, follow the link below:

https://www.gov.uk/government/collections/investment-in-the-uk-guidance-for-overseas-businesses

Competition and Anti-Trust Laws

UK competition law prohibits anti-competitive behavior within the UK through Chapters I and II of the Competition Act of 1998 and the Enterprise Act of 2002.  The UK’s Competition and Markets Authority (CMA) is responsible for implementing these laws by investigating potentially anti-competitive behaviors, including cases involving state aid, cartel activity, or mergers that threaten to reduce the competitive market environment.  While merger notification in the UK is voluntary, the CMA may impose substantial fines or suspense orders on potentially non-compliant transactions.  The CMA has no prosecutorial authority, but it may refer entities for prosecution in extreme cases, such as those involving cartel activity, which carries a penalty of up to five years imprisonment.  The CMA is also responsible for ensuring consumer protection, conducting market research, and coordinating with sectoral regulators, such as those involved in the regulation of the UK’s energy, water, and telecommunications markets.

On January 1, 2021, the UK began reviewing cross-border activities with a UK-EU nexus in parallel to the European Commission.  On April 8, 2021, the UK established the Digital Markets Unit, a new regulatory body that will be responsible for implementing upcoming changes to competition rules in digital markets.

UK competition law requires:

1) the prohibition of agreements or practices that restrict free trading and competition between business entities (this includes in particular the repression of cartels);

2) the banning of abusive behavior by a firm dominating a market, or anti-competitive practices that tend to lead to such a dominant position (practices controlled in this way may include predatory pricing, tying, price gouging, refusal to deal and many others); and,

3) the supervision of mergers and acquisitions of large corporations, including some joint ventures.

Any transactions which could threaten competition also fall into scope of the UK’s regulators.  UK law provides for remedies to problematic transactions, such as an obligation to divest part of the merged business or to offer licenses or access to facilities to enable other businesses to continue competing.  In addition to the CMA, the Takeover Panel, the Financial Conduct Authority, and the Pensions Regulator have principal regulatory authority:

  • The Takeover Panel is an independent body, operating per the City Code on Takeover and Mergers(the “Code”), which regulates takeovers of public companies,  centrally managed or controlled in the UK, the Isle of Man, Jersey, and Guernsey.  The Code provides a binding set of rules for takeovers aimed at ensuring fair treatment for all shareholders in takeover bids, including requiring bidders to provide information about their intentions after a takeover.
  • The Financial Conduct Authority administers Listing Rules, Prospectus Regulation Rules, and Disclosure Guidance and Transparency Rules, which can apply to takeovers of publicly-listed companies.
  • The Pensions Regulator has powers to intervene in investments in pension schemes.

Expropriation and Compensation

The UK is a member of the OECD and adheres to the OECD principle that when a government expropriates property, compensation should be timely, adequate, and effective.  In the UK, the right to fair compensation and due process is uncontested and is reflected in all international investment agreements.  Expropriation of corporate assets or the nationalization of industry requires a special act of Parliament.  In response to the 2007-2009 financial crisis, the UK government nationalized Northern Rock Bank (sold to Virgin Money in 2012) and took major stakes in the Royal Bank of Scotland (RBS) and Lloyds Banking Group.

Dispute Settlement

As a member of the World Bank-based International Center for Settlement of Investment Disputes (ICSID), the UK accepts binding international arbitration between foreign investors and the State.  As a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, the UK provides local enforcement on arbitration judgments decided in other signatory countries.

London is a thriving center for the resolution of international disputes through arbitration under a variety of procedural rules such as those of the London Court of International Arbitration, the International Chamber of Commerce, the Stockholm Chamber of Commerce, the American Arbitration Association International Centre for Dispute Resolution, and others.  Many of these arbitrations involve parties with no connection to the jurisdiction, but who are drawn to the jurisdiction because they perceive it to be a fair, neutral venue with an arbitration law and courts that support competent and efficient resolution of disputes.  They also choose London-based arbitration because of the general prevalence of the English language and law in international commerce.  A wide range of contractual and non-contractual claims can be referred to arbitration in this jurisdiction including disputes involving intellectual property rights, competition, and statutory claims.  There are no restrictions on foreign nationals acting as arbitration counsel or arbitrators in this jurisdiction.  There are few restrictions on foreign lawyers practicing in the jurisdiction as evidenced by the fact that over 200 foreign law firms have offices in London.

ICSID Convention and New York Convention

In addition to its membership in ICSID, the UK is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.  The latter convention has territorial application to Gibraltar (September 24, 1975), Hong Kong (January 21, 1977), Isle of Man (February 22, 1979), Bermuda (November 14, 1979), Belize and Cayman Islands (November 26, 1980), Guernsey (April 19, 1985), Bailiwick of Jersey (May 28, 2002), and British Virgin Islands (February 24, 2014).

The United Kingdom has consciously elected not to follow the UNCITRAL Model Law on International Commercial Arbitration.  Enforcement of an arbitral award in the UK is dependent upon where the award was granted.  The process for enforcement in any particular case is dependent upon the seat of arbitration and the arbitration rules that apply.  Arbitral awards in the UK can be enforced under a number of different regimes, namely:  The Arbitration Act 1996, The New York Convention, The Geneva Convention 1927, The Administration of Justice Act 1920 and the Foreign Judgments (Reciprocal Enforcement) Act 1933, and Common Law.

The Arbitration Act 1996 governs all arbitrations seated in England, Wales and Northern Ireland, both domestic and international.  The full text of the Arbitration Act can be found here: http://www.legislation.gov.uk/ukpga/1996/23/data.pdf.

The Arbitration Act is heavily influenced by the UNCITRAL Model Law, but it has some important differences.  For example, the Arbitration Act covers both domestic and international arbitration; the document containing the parties’ arbitration agreement need not be signed; an English court is only able to stay its own proceedings and cannot refer a matter to arbitration; the default provisions in the Arbitration Act require the appointment of a sole arbitrator as opposed to three arbitrators; a party retains the power to treat its party-nominated arbitrator as the sole arbitrator in the event that the other party fails to make an appointment (where the parties’ agreement provides that each party is required to appoint an arbitrator); there is no time limit on a party’s opposition to the appointment of an arbitrator; parties must expressly opt out of most of the provisions of the Arbitration Act which confer default procedural powers on the arbitrators; and there are no strict rules governing the exchange of pleadings.  Section 66 of the Arbitration Act applies to all domestic and foreign arbitral awards.  Sections 100 to 103 of the Arbitration Act provide for enforcement of arbitral awards under the New York Convention 1958.  Section 99 of the Arbitration Act provides for the enforcement of arbitral awards made in certain countries under the Geneva Convention 1927.

UK courts have a good record of enforcing arbitral awards.  The courts will enforce an arbitral award in the same way that they will enforce an order or judgment of a court.  At the time of writing, there are no examples of the English courts enforcing awards which were set aside by the courts at the place of arbitration.

Under Section 66 of the Arbitration Act, the court’s permission is required for an international arbitral award to be enforced in the UK.  Once the court has given permission, judgment may be entered in terms of the arbitral award and enforced in the same manner as a court judgment or order.  Permission will not be granted by the court if the party against whom enforcement is sought can show that (a) the tribunal lacked substantive jurisdiction and (b) the right to raise such an objection has not been lost.

The length of arbitral proceedings can vary greatly.  If the parties have a relatively straightforward dispute, cooperate, and adopt a fast-track procedure, arbitration can be concluded within months or even weeks.  In a substantial international arbitration involving complex facts, many witnesses and experts and post-hearing briefs, the arbitration could take many years.  A reasonably substantial international arbitration will likely take between one and two years.

There are two alternative procedures that can be followed in order to enforce an award.  The first is to seek leave of the court for permission to enforce.  The second is to begin an action on the award, seeking the same relief from the court as set out in the tribunal’s award.  Enforcement of an award made in the jurisdiction may be opposed by challenging the award.  The court may also, however, refuse to enforce an award that is unclear, does not specify an amount, or offends public policy.  Enforcement of a foreign award may be opposed on any of the limited grounds set out in the New York Convention.  A stay may be granted for a limited time pending a challenge to the order for enforcement.  The court will consider the likelihood of success and whether enforcement of the award will be made more or less difficult as a result of the stay.  Conditions that might be imposed on granting the stay include such matters as paying a sum into court.  Where multiple awards are to be rendered, the court may give permission for the tribunal to continue hearing other matters, especially where there may be a long delay between awards.

Most awards are complied with voluntarily.  If the party against whom the award was made fails to comply, the party seeking enforcement can apply to the court.  The length of time it takes to enforce an award which complies with the requirements of the New York Convention will depend on whether there are complex objections to enforcement which require the court to investigate the facts of the case.  If a case raises complex issues of public importance the case could be appealed to the Court of Appeal and then to the Supreme Court.  This process could take around two years.  If no complex objections are raised, the party seeking enforcement can apply to the court using a summary procedure that is fast and efficient.  There are time limits relating to the enforcement of the award.  Failure to comply with an award is treated as a breach of the arbitration agreement.  An action on the award must be brought within six years of the failure to comply with the award or 12 years if the arbitration agreement was made under seal.  If the award does not specify a time for compliance, a court will imply a term of reasonableness.

Bankruptcy Regulations

The UK has strong bankruptcy protections going back to the Bankruptcy Act of 1542.  Today, both individual bankruptcy and corporate insolvency are regulated in the UK primarily by the Insolvency Act 1986 and the Insolvency Rules 1986, regulated through determinations in UK courts.  The World Bank’s Doing Business Index ranks the UK 14 out of 190 for ease of resolving insolvency.

Regarding individual bankruptcy law, the court will oblige a bankrupt individual to sell assets to pay dividends to creditors.  A bankrupt person must inform future creditors about the bankrupt status and may not act as the director of a company during the period of bankruptcy.  Bankruptcy is not criminalized in the UK, and the Enterprise Act of 2002 dictates that for England and Wales bankruptcy will not normally last longer than 12 months.  At the end of the bankrupt period, the individual is normally no longer held liable for bankruptcy debts unless the individual is determined to be culpable for his or her own insolvency, in which case the bankruptcy period can last up to 15 years.

For corporations declaring insolvency, UK insolvency law seeks to distribute losses equitably between creditors, employees, the community, and other stakeholders in an effort to rescue the company.  Liability is limited to the amount of the investment.  If a company cannot be rescued, it is liquidated and assets are sold to pay debts to creditors, including foreign investors.  In March 2020, the UK government announced it would introduce legislation to change existing insolvency laws in response to COVID-19.  The new measures seek to enable companies undergoing a rescue or restructuring process to continue trading and help them avoid insolvency.

6. Financial Sector

Capital Markets and Portfolio Investment

The City of London houses one of the largest and most comprehensive financial centers globally.  London offers all forms of financial services:  commercial banking, investment banking, insurance, venture capital, private equity, stock and currency brokers, fund managers, commodity dealers, accounting and legal services, as well as electronic clearing and settlement systems and bank payments systems.  London is highly regarded by investors because of its solid regulatory, legal, and tax environments, a supportive market infrastructure, and a dynamic, highly skilled workforce.

The UK government is generally hospitable to foreign portfolio investment.  Government policies are intended to facilitate the free flow of capital and to support the flow of resources in product and services markets.  Foreign investors are able to obtain credit in local markets at normal market terms, and a wide range of credit instruments are available.  The principles underlying legal, regulatory, and accounting systems are transparent, and  are consistent with international standards.  In all cases, regulations have been published and are applied on a non-discriminatory basis by the Bank of England’s Prudential Regulation Authority (PRA).

The London Stock Exchange is one of the most active equity markets in the world.  London’s markets have the advantage of bridging the gap between the day’s trading in the Asian markets and the opening of the U.S. market.  This bridge effect is also evidenced by the fact that many Russian and Central European companies have used London stock exchanges to tap global capital markets.

The Alternative Investment Market (AIM), established in 1995 as a sub-market of the London Stock Exchange, is specifically designed for smaller, rapidly expanding companies.  The AIM has a more flexible regulatory system than the main market and has no minimum market capitalization requirements.  Since its launch, the AIM has raised more than £68 billion ($95 billion) for more than 3,000 companies.

Money and Banking System

The UK banking sector is the largest in Europe and represents the continent’s deepest capital pool.  More than 150 financial services firms from the EU are based in the UK.  The financial and related professional services industry contributed approximately 10 percent of UK economic output in 2020, employed approximately 2.3 million people, and contributed the most to UK tax receipts of any sector.  The long-term impact of Brexit on the financial services industry is uncertain at this time.  Some firms have already moved limited numbers of jobs outside the UK in order to service EU-based clients, but the UK is anticipated to remain a top financial hub.

The Bank of England serves as the central bank of the UK.  According to its guidelines, foreign banking institutions are legally permitted to establish operations in the UK as subsidiaries or branches.  Responsibilities for the prudential supervision of a foreign branch are split between the parent’s home state supervisors and the Prudential Regulation Authority (PRA).  The PRA, however, expects the whole firm to meet the PRA’s threshold conditions.  The PRA expects new foreign branches to focus on wholesale and corporate banking and to do so at a level that is not critical to the UK economy.  The Financial Conduct Authority (FCA) is the conduct regulator for all banks operating in the United Kingdom.  For foreign branches the FCA’s Threshold Conditions and conduct of business rules apply, including areas such as anti-money laundering.  Eligible deposits placed in foreign branches may be covered by the UK deposit guarantee program and therefore foreign branches may be subject to regulations concerning UK depositor protection.

There are no legal restrictions that prohibit foreign residents from opening a business bank account; setting up a business bank account as a non-resident is in principle straightforward.   In practice, however, most banks will not accept applications from overseas due to fraud concerns and the additional administration costs.  To open a personal bank account, an individual must at minimum present an internationally recognized proof of identification and prove residency in the UK.  This can present a problem for incoming FDI and American expatriates.  Unless the business or the individual can prove UK residency, they will have limited banking options.

Foreign Exchange and Remittances

Foreign Exchange

The pound sterling is a free-floating currency with no restrictions on its transfer or conversion.  Exchange controls restricting the transfer of funds associated with an investment into or out of the UK are not exercised.

Remittance Policies

Not applicable.

Sovereign Wealth Funds

The United Kingdom does not maintain a national wealth fund.  Although there have at time been calls to turn The Crown Estate – created in 1760 by Parliament as a means of funding the British monarchy – into a wealth fund, there are no current plans to do so.  Moreover, with assets of just under $20 billion, The Crown Estate would be small in relation to other national funds.

7. State-Owned Enterprises

There are 20 partially or fully state-owned enterprises in the UK at the national level.  These enterprises range from large, well-known companies to small trading funds.  Since privatizing the oil and gas industry, the UK has not established any new energy-related state-owned enterprises or resource funds.

Privatization Program

The privatization of state-owned utilities in the UK is now essentially complete.  With regard to future investment opportunities, the few remaining government-owned enterprises or government shares in other utilities are likely to be sold off to the private sector when market conditions improve.

10. Political and Security Environment

The UK is politically stable but continues to be a target for both domestic and global terrorist groups.  Terrorist incidents in the UK have significantly decreased in frequency and severity since 2017, which saw five terrorist attacks that caused 36 deaths.  In 2019, the UK suffered one terrorist attack resulting in three deaths (including the attacker), and another two attacks in early 2020 caused serious injuries and resulted in the death of one attacker.  In November 2019, the UK lowered the terrorism threat level to substantial, meaning the risk of an attack was reduced from “highly likely” to “likely.”  UK officials categorize Islamist terrorism as the greatest threat to national security, though officials identify a rising threat from racially or ethnically motivated extremists, which they refer to as “extreme right-wing” terrorism.  Since March 2017, police and security services have disrupted 19 Islamist and seven extreme right-wing plots.

Environmental advocacy groups in the UK have been involved with numerous protests against a variety of business activities, including: airport expansion, bypass roads, offshore structures, wind farms, civilian nuclear power plants, and petrochemical facilities.  These protests tend not to be violent but can be disruptive, with the aim of obtaining maximum media exposure.

Brexit has waned as a source of political instability.  Nonetheless, the June 2016 EU referendum campaign was characterized by significant polarization and widely varying perspectives across the country.  Differing views about the future UK-EU relationship continue to polarize political opinion across the UK.  Scottish political leaders have indicated that the UK leaving the EU may provide justification to pursue another Referendum on Scotland leaving the UK.  Implementation of the Withdrawal Agreement has contributed to heightened political and sectarian tensions in Northern Ireland.

The UK formally departed the bloc on January 31, 2020, following the ratification of the Withdrawal Agreement, and completed its transition out of the EU on December 31, 2020.

The Conservative Party, traditionally the UK’s pro-business party, was, until the COVID-19 pandemic, focused on implementing Brexit, a process many international businesses opposed because they anticipated it would make trade in goods, services, workers, and capital with the UK’s largest trading partners more challenging and costly, at least in the short term.  The Conservative Party-led government implemented a Digital Services Tax (DST), a two percent tax on the revenues of predominantly American search engines, social media services and online marketplaces which derive value from UK users, and has additionally legislated for an increase in the Corporation Tax rate from 19 percent to 25 percent.

The Labour Party’s leader, Sir Keir Starmer, is widely acknowledged to be more economically centrist than his predecessor.  In his first major economic speech following his election as Labour Party leader, Starmer declared his intention to repair and improve the party’s relationship with the business community, but has proposed few policies beyond the focus of the COVID-19 crisis.

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 $2,710,000 2019 $2,829,000 https://data.worldbank.org/
country/united-kingdom
Foreign Direct Investment Host Country Statistical source USG or international statistical source USG or international Source of data:  BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country (M USD, stock positions) 2019 $527,000 2019 $851,414 BEA data available at
https://apps.bea.gov/
international/factsheet/ 
Host country’s FDI in the United States (M USD, stock positions) 2019 $524,000 2019 $505,088 https://www.selectusa.gov/
country-fact-sheet/United-Kingdom 
Total inbound stock of FDI as percent host GDP 2018 25.3% 2019 11.3% Calculated using respective GDP and FDI data
Table 3: Sources and Destination of FDI 
Direct Investment from/in Counterpart Economy 
 From Top Five Sources/To Top Five Destinations (USD, Billions)
Inward Direct Investment 2019 Outward Direct Investment 2018
Total Inward 2,155.9 Proportion Total Outward 2,060 Proportion
USA 527.8 24.5% USA 525.2 25.3%
Netherlands 231.3 10.7% Netherlands 215.4 10.4%
Luxembourg 185.9 8.6% Luxembourg 132.6 6.4%
Belgium 161 7.5% France 104 5.0%
Japan 125.2 7.4% Spain 104 5.0%
 Table 4: Sources of Portfolio Investment
Portfolio Investment Assets
Top Five Partners (Millions, current US Dollars)
Total Equity Securities Total Debt Securities
All Countries 100% All Countries 100% All Countries 100%
United States 1,077,839 32% United States 549,159 30% United States 528,680 34%
Ireland 422,939 13% Ireland 340,790 19% France 131,552 8%
Luxembourg 184,953 6% Luxembourg 144,231 8% Germany 101,282 7%
France 171,948 5% Japan 81,081 5% Int’l Orgs 96,055 6%
Germany 146,051 4% China, P.R Mainland 49,373 3% Ireland 82,148 5%

Uruguay

Executive Summary

The Government of Uruguay recognizes the important role foreign investment plays in economic development and offers a stable investment climate that does not discriminate against foreign investors. Uruguay’s legal system treats foreign and national investments equally, most investments are allowed without prior authorization, and investors can freely transfer the capital and profits from their investments abroad. International investors can choose between arbitration and the judicial system to settle disputes. Local courts recognize and enforce foreign arbitral awards.

The World Bank’s 2020 “Doing Business” Index placed Uruguay fourth out of twelve countries in South America. In 2020, Transparency International ranked Uruguay as the most transparent country in Latin America and the Caribbean, and the second most transparent in the Western Hemisphere. U.S. firms have not identified corruption as an obstacle to investment. Uruguay is a stable democracy, one of only four in the Western Hemisphere and ranked 15th in the world, according to the Economist Intelligence Unit. As of April 2021, Standard & Poor’s and Moody’s rate Uruguay one step above the investment grade threshold with a stable outlook.

Domestic and foreign investment rose substantially from 2004-2014 following Uruguay´s economic boom, but has dropped significantly since 2015 despite tax incentives for investors passed in mid-2018 and late 2020. About 120 U.S. firms operate locally and are invested among a wide array of sectors, including forestry, tourism and hotels, services, and telecommunications. In 2019, the United States was the largest foreign investor in Uruguay, reflecting its longstanding presence in the country. Uruguay has bilateral investment treaties with over 30 countries, including the United States. The United States does not have a double-taxation treaty with Uruguay. Both countries have a Trade and Investment Framework Agreement in place, and have signed agreements on open skies, trade facilitation, customs mutual assistance, promotion of small and medium enterprises, and social security totalization.

Over the past decade, Uruguay strengthened bilateral trade, investment, and political ties with China, its principal trading partner. In 2018, Uruguay was the first country in the Southern Cone to join China’s Belt and Road Initiative. Uruguay formally joined the Asian Infrastructure Investment Bank in 2020. In recent years, China has signaled openness to a free trade agreement either with Uruguay bilaterally or with Mercosur.

A 2018 survey by Uruguay’s Ministry of Economy and Finance showed that about half of foreign investors were satisfied or very satisfied with Uruguay´s investment climate, principally due to its rule of law, low political risk, macroeconomic stability, strategic location, and investment incentives. Almost all investors were satisfied or highly satisfied with Uruguay’s 11 free trade zones and free ports. However, roughly one-fourth of investors were dissatisfied with at least one aspect of doing business locally, expressing concerns about high labor costs and taxes, high energy costs, as well as unions and labor conflicts.

Uruguay is a founding member of Mercosur, the Southern Cone Common Market created in 1991 that is headquartered in Montevideo and also comprises Argentina, Brazil, and Paraguay. (Note: Venezuela joined the bloc in June 2012 and was suspended in December 2016.) Uruguay has separate trade agreements with Bolivia, Chile, Colombia, Ecuador, and Peru, all of which are also Mercosur associate members. The current administration is lobbying Mercosur to relax its requirement for members to negotiate as a bloc, and allow Uruguay to embark on trade negotiations independently. Uruguay and Mexico have a comprehensive trade agreement in place since 2004, and in 2018, Uruguay extended its existing free trade agreement with Chile to increase trade in goods and services.

Uruguay’s strategic location (in the center of Mercosur’s wealthiest and most populated area), and its special import regimes (such as free zones and free ports) make it a well-situated distribution center for U.S. goods into the region. Several U.S. firms warehouse their products in Uruguay’s tax-free areas and service their regional clients effectively. With a small market of high-income consumers, Uruguay can also be a good test market for U.S. products. The U.S.-Uruguay IT services trade is a significant recent growth area.

Table 1: International Rankings and Statistics
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2020 21 of 179 http://www.transparency.org/research/cpi/overview 
World Bank’s Doing Business Report “Ease of Doing Business” 2020 101 of 190 http://www.doingbusiness.org/en/rankings 
Global Innovation Index 2020 69 of 129 https://www.globalinnovationindex.org/ dex 
U.S. FDI in Partner Country ($M USD, stock positions) 2019 999 https://apps.bea.gov/international/factsheet/ 
World Bank GNI per capita 2019 16,230 https://data.worldbank.org/indicator/NY.GNP.PCAP.CD?locations=UY 

1. Openness To, and Restrictions Upon, Foreign Investment

Policies towards Foreign Direct Investment

Uruguay recognizes the important role foreign investment plays in economic development and offers a stable investment climate that does not discriminate against foreign investors. Uruguay’s legal system treats foreign and national investments equally, most investments are allowed without prior authorization, and investors can freely transfer abroad the capital and profits from their investments . Investors can choose between arbitration and the judicial system to settle disputes. The judiciary is independent and professional.

Foreign investors are not required to meet any specific performance requirements. Moreover, foreign investors are not subject to discriminatory or excessively onerous visa, residence, or work permit requirements. The government does not require that nationals own shares or that the share of foreign equity be reduced over time, and does not impose conditions on investment permits. Uruguay normally treats foreign investors as nationals in public sector tenders. Uruguayan law permits investors to participate in any stage of the tender process.

Uruguay’s export and investment promotion agency, Uruguay XXI (http://www.uruguayxxi.gub.uy), provides information on Uruguay’s business climate and investment incentives, at both a national and a sectoral level. The agency also has several programs to promote the internationalization of local firms and regularly participates in trade missions.

There is no formal business roundtable or ombudsman responsible for regular dialogue between government officials and investors. Uruguay levies value-added and non-resident income taxes on foreign-based digital services, while locally-based digital services are generally tax exempt. Tax rates vary depending on whether the company provides audiovisual transmissions or intermediation services, and on the geographical locations of the company and consumers of the service.

Limits on Foreign Control and Right to Private Ownership and Establishment

Aside from the few limited sectors involving national security and limited legal government monopolies in which foreign investment is not permitted, Uruguay practices neither de jure nor de facto discrimination toward investment by source or origin, with national and foreign investors treated equally.

In general, Uruguay does not require specific authorization for firms to set up operations, import and export, make deposits and banking transactions in any particular currency, or obtain credit. Screening mechanisms do not apply to foreign or national investments, and investors do not need special government authorization for access to capital markets or to foreign exchange.

Other Investment Policy Reviews

The World Trade Organization published its Trade Policy Review of Uruguay, which included a detailed description of the country’s trade and investment regimes in 2018 and is available at https://www.wto.org/english/tratop_e/tpr_e/tp474_e.htm.

In July 2020, after a two-year examination process, Uruguay joined the Organization for Economic Cooperation and Development’s (OECD) Investment Committee. While Uruguay is not a member of the OECD, it has gradually endorsed several principles and joined some of its institutions. Uruguay is a member of the OECD Development Center and its Global Forum on Transparency and Exchange of Information for Tax Purposes, and it participates in its Program for International Student Assessment (PISA). The Partido Nacional administration that took office in March 2020 has not yet taken a position regarding potential OECD membership.

Uruguay is a member of the UN Conference on Trade and Development (UNCTAD), but the organization has not yet conducted an Investment Policy Review on the country.

Business Facilitation

In 2020, Uruguay was ranked 66th in the World Bank’s “starting a business” sub-indicator (against its overall aggregate ranking of 101st for the ease of doing business). Domestic and foreign businesses can register operations in approximately seven days without a notary at http://empresas.gub.uy. Uruguay receives high marks in electronic government. The UN’s 2018 Electronic Government Development and Electronic Participation indexes (latest edition available) ranked Uruguay third in the entire Western Hemisphere (after the United States and Canada).

Recently, U.S. industrial small- to medium-sized enterprises (SMEs), in chemical production for example, describe the Uruguayan market as difficult for new foreign entrants. Those SMEs pointed to legacy business relationships and loyalties, along with a cultural resistance by distributors and clients to trusting new producers.

Outward Investment

The government does not promote nor restrict domestic investment abroad.

3. Legal Regime

Transparency of the Regulatory System

Transparent and streamlined procedures regulate local and foreign investment in Uruguay at the state and national level. Uruguay has state and national regulations. The Constitution does not provide for supra-national regulations. Most draft laws, except those having an impact on public finances, can start either in the executive branch or in the parliament. Uruguay’s president needs the agreement of all ministries with competency on the regulated matter to issue decrees. Ministers may also issue resolutions. All regulatory actions —including bills, laws, decrees, and resolutions — are publicly available at https://www.presidencia.gub.uy/normativa.

The U.S. government’s Fiscal Transparency Report labels Uruguay as a “fiscally transparent” country. Public finances and debt obligations, including explicit and contingent liabilities, are transparent. Accounting, legal, and regulatory procedures are transparent and consistent with international norms. The government only occasionally proposes laws and regulations in draft form for public comment. Parliamentary commissions typically engage stakeholders while discussing a bill. Non-governmental organizations or private sector associations do not manage any informal regulatory processes.

Article 10 of the U.S.–Uruguay BIT mandates that both countries publish promptly or make public any law, regulation, procedure, or adjudicatory decision related to investments. Article 11 sets transparency procedures that govern the accord.

International Regulatory Considerations

Uruguay is a member of several regional economic blocs, including Mercosur and the Latin American Integration Association (ALADI, by its Spanish acronym), neither of which have supranational legislation. In order to create local law, Uruguay’s parliament must ratify these blocs’ decisions. Uruguay is also a member of the WTO and notifies all draft technical regulations to its committee on technical barriers to trade.

Legal System and Judicial Independence

The legal system in Uruguay follows civil law based on the Spanish civil code. The highest court in the country is the Supreme Court of Uruguay. The executive branch nominates judges and the Parliament’s General Assembly appoints them. Supreme Court judges serve a ten-year term and can be reelected after a lapse of five years following the previous term. Other subordinate courts include the court of appeal, district courts, peace courts, and rural courts. Uruguay has a written commercial law and specialized civil courts.

The judiciary remains independent of the executive branch. Critics of the court system complain that its civil sector can be slow. The executive branch rarely interferes directly in judicial matters, but at times voices its dissatisfaction with court rulings. Investors can appeal regulations, enforcement actions, and legislation. International investors may choose between arbitration and the judicial system to settle disputes.

Laws and Regulations on Foreign Direct Investment

Uruguayan law treats foreign and domestic investment alike.

Law No. 16,906 (passed in 1998) declares that promotion and protection of investments made by both national and foreign investors are in the nation’s interest, and allows investments without prior authorization or registration. The law also provides that investors can freely transfer their capital and profits abroad and that the government will not prevent the establishment of investments in the country.

U.S. and other foreign firms are able to participate in local or national government financed or subsidized research and development programs. Uruguay’s accountancy and administration document (TOCAF by its Spanish acronym) contains the norms and regulations that govern public purchases, including the laws, decrees, resolutions, and international agreements that apply to the contracting process.

Uruguay uses government procurement as a tool for promoting local industry, especially micro, small, and medium enterprises (MSMEs), and enterprises that innovate in technological and scientific areas. Most government contracts (except for those in areas in which the public and private sectors compete) prioritize goods, services, and civil engineering works produced or supplied by domestic MSMEs. The most commonly used preferential regime grants an eight percent price preference to goods and services produced domestically, regardless of the firm’s size. MSME programs grant price preferences ranging from 12 to 16 percent for MSMEs competing against foreign firms. Uruguay’s export and investment promotion agency, Uruguay XXI, helps potential investors navigate Uruguayan laws and rules.

Competition and Antitrust Laws

Uruguay has transparent legislation established by the Commission for the Promotion and Defense of Competition at the Ministry of Economy to foster competition. The main legal pillars (Law No. 18,159 and decree 404, both passed in 2007) are available at the commission’s site: https://www.mef.gub.uy/578/5/areas/defensa-de-la- percent20competencia—uruguay.html.

A 2017 peer review of Uruguay´s competition law and policy is available at https://unctad.org/en/pages/PublicationWebflyer.aspx?publicationid=1640.

In 2001, Uruguay created regulatory and controlling agencies for telecommunications (URSEC), water, and energy. In 2020, the new government enhanced URSEC’s autonomy through article 256 of an omnibus reform law (No. 19,889), making it a decentralized and independent service directed by a three-member board appointed by the Presidency.

Uruguay passed an Audiovisual Communications Law (Law No. 19,307) in December 2014. Also known as the media law, it includes provisions on market caps for cable TV providers that could limit competition. In April 2016, Uruguay’s Supreme Court ruled that these market caps and some local content requirements were unconstitutional. The government proposed new legislation in April 2020 to change the media law, which remains under review by Parliament. U.S. companies have expressed concerns about some of the proposed articles.

Expropriation and Compensation

Uruguay’s Constitution declares property rights an “inviolable right” subject to legal determinations that may be taken for general interest purposes and states that no individuals can be deprived of this right — except in case of public need and with fair compensation.

Article 6 of the U.S.–Uruguay BIT rules out direct and indirect expropriation or nationalization of private property except under specific circumstances. The article also contains detailed provisions on how to compensate investors, should expropriation take place. There are no known cases of expropriation of investment from the United States or other countries within the past five years.

Dispute Settlement

International Center for the Settlement of Investment Disputes (ICSID) Convention and New York Convention

Uruguay became a member of the ICSID in September 2000 and is a signatory of the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

Investor–State Dispute Settlement

Local courts recognize and enforce foreign arbitral awards issued against the government. The U.S.–Uruguay BIT established detailed and expedited dispute settlement procedures.

Over the past decade, two U.S. companies have sued Uruguay before the World Bank´s ICSID. In 2010, the tobacco company Philip Morris International sued Uruguay, arguing that new health measures involving cigarette packaging amounted to unfair treatment of the firm. They filed the case under the Uruguay–Switzerland BIT, and in 2016 the ICSID ruled in Uruguay’s favor. In 2015, U.S. telecom company Italba sued Uruguay before ICSID, which in March 2019 ruled in Uruguay’s favor. In 2017, a subsidiary of the Indian mining company Zamin Ferrous filed a lawsuit against Uruguay before the UN Commission on International Trade Law (UNCITRAL) under the 1991 UK-Uruguay BIT. The panel decided in Uruguay´s favor in August 2020. In May 2019, Panamanian company Latin American Regional Aviation Holding, registered a case against Uruguay under the 1988 Panama-Uruguay BIT. As of April 2021, the case is pending resolution.

International Commercial Arbitration and Foreign Courts

Commercial contracts frequently contain mediation and arbitration clauses and local courts recognize them. Investors may choose between arbitration and the judicial system to settle disputes. Local courts recognize and enforce foreign courts’ arbitral awards.

Duration of Dispute Resolution

Uruguay’s judiciary is independent. The average time to resolve a dispute, counted from the moment the plaintiff files the lawsuit in court until payment, is about two years, according to contacts in local law firms. The courts’ decisions are legally enforced and Uruguayan law respects international arbitration awards.

Bankruptcy Regulations

The Bankruptcy Law passed in 2008 (Law No. 18,387) expedites bankruptcy procedures, encourages arrangements with creditors before a firm may go bankrupt, and provides the possibility of selling the firm as a single unit. Bankruptcy has criminal and civil implications with intentional or deliberate bankruptcy deemed a crime. The law protects the rights of creditors according to the nature of the credit, and workers have privileges over other creditors.

The World Bank’s 2020 Doing Business Report ranks Uruguay second out of twelve countries in South America for its ease of “resolving insolvency.” Uruguay ranks 70th globally in this sub-index (vs. its overall aggregate global ranking of 101st for ease of doing business).

6. Financial Sector

Capital Markets and Portfolio Investment

Uruguay passed a capital markets law (No. 18,627) in 2009 to jumpstart the local capital market. However, despite some successful bond issuances by public firms, the local capital market remains underdeveloped and highly concentrated in sovereign debt. This makes it very difficult to finance business ventures through the local equity market, and restricts the flow of financial resources into the product and factor markets. Due to the underdevelopment and lack of sufficient liquidity in its capital market, Uruguay typically receives only “active” investments oriented to establishing new firms or gaining control over existing ones and lacks “passive investments” from major investment funds.

The government maintains an open attitude towards foreign portfolio investment, though there is no effective regulatory system to encourage or facilitate it. Uruguay does not impose any restrictions on payments and transfers for current international transactions.

Uruguay allocates credit on market terms, but long-term banking credit has traditionally been difficult to obtain. Foreign investors can access credit on the same market terms as nationals.

As part of the process of complying with OECD requirements (see Bilateral Investment Agreements section), Uruguay banned “bearer shares” in 2012, which had been widely used. Private firms do not use “cross shareholding” or “stable shareholder” arrangements to restrict foreign investment, nor do they restrict participation in or control of domestic enterprises.

Money and Banking System

Uruguay established its Central Bank (BCU) in 1967 as an autonomous state entity. The government-owned Banco de la República Oriental del Uruguay (BROU) is the nation’s largest commercial bank and has the largest market share. The rest of the banking system comprises a government-owned mortgage bank and nine international commercial banks. The BCU’s Superintendent of Financial Services regulates and supervises foreign and domestic banks or branches alike. As of April 2021, the banking sector seems healthy, with good capital and liquidity ratios.

Since Uruguay’s establishment of a financial inclusion program in 2011, and especially after the passage of a financial inclusion law in 2014 (No. 19,210), the use of debit cards, credit cards, and bank accounts has increased significantly. Uruguay has authorized a number of private sector firms to issue electronic currency. Articles 215 and 216 of the Urgency Law (No. 19,889) reinstated the possibility of paying workers’ salaries in cash instead of electronically.

With regard to technological innovation in the financial sector, the first regional Fintech Forum was held in Montevideo in 2017, leading to the creation of the Fintech Ibero-American Alliance. While some local firms have developed domestic and international electronic payment systems, emerging technologies like blockchain and crypto currencies remain underdeveloped.

There have been some cases of U.S. citizens having difficulties establishing a first-time bank account, mostly related to the United States’ Foreign Account Tax Compliance Act provisions.

Foreign Exchange and Remittances

Foreign Exchange

Uruguay maintains a long tradition of not restricting the purchase of foreign currency or the remittance of profits abroad. Free purchases of any foreign currency and free remittances were preserved even during the severe 2002 financial crisis.

Uruguay does not engage in currency manipulation to gain competitive advantage. Since 2002, the peso has floated relatively freely, albeit with intervention from the Central Bank aimed at reducing the volatility of the price of the dollar. Foreign exchange can be obtained at market rates and there is no black market for currency exchange.

Remittance Policies

Uruguay maintains a long tradition of not restricting remittance of profits abroad.

Article 7 of the U.S. – Uruguay BIT provides that both countries “shall permit all transfers relating to investments to be made freely and without delay into and out of its territory.” The agreement also establishes that both countries will permit transfers “to be made in a freely usable currency at the market rate of exchange prevailing at the time of the transfer.”

Sovereign Wealth Funds

There are no sovereign wealth funds in Uruguay.

7. State-Owned Enterprises

The State still plays a dominant role in the economy and Uruguay maintains government monopolies or oligopolies in certain areas, including the importing and refining of oil, workers compensation insurance, and landline telecommunications.

Uruguay’s largest state-owned enterprises (SOEs) include the petroleum, cement, and alcohol company ANCAP, telecommunications company ANTEL, electric utility UTE, water utility OSE, and Uruguay’s largest bank BROU. While deemed autonomous, in practice these enterprises coordinate in several areas — mainly on tariffs — with their respective ministries and the executive branch. The boards of these entities are appointed by the executive branch, require parliamentary approval, and remain in office for the same term as the executive branch. Uruguayan law requires SOEs to publish an annual report, and independent firms audit their balances. There is no consolidated published list of SOEs.

Some traditionally government-run monopolies are open to private-sector competition. Cellular and international long-distance services, insurance, and media services are open to local and foreign competitors. Uruguay permits private-sector generation of power and private interests dominate renewable energy production, but the state-owned power company UTE holds a monopoly on the transfer of electrical power through transmission and distribution lines from one utility’s service area to another’s, otherwise known as wheeling rights. State-owned companies tend to have the largest market share even in sectors open to competition. Potential cross-subsidies likely give SOEs an advantage over their private sector competitors.

Uruguay does not adhere to the OECD’s Guidelines on Corporate Governance of State-Owned Enterprises. The current government plans to reform and increase the efficiency of its SOEs.

Privatization Program

Uruguay has not undertaken any major privatization program in recent decades. While Uruguay opened some previously government-run monopolies to private-sector competition, the government continues to maintain a monopoly in the import and refining of petroleum as well as landline telecommunications.

Parliament passed a public-private partnership (PPP) law in 2011 and created regulations with Decree 007/12. The law allows private sector companies to design, build, finance, operate, and maintain certain infrastructure, including brownfield projects. With some exceptions (such as medical services in hospitals or educational services in schools), PPPs can also be applied to social infrastructure. The return for the private sector company may come in the form of user payments, government payments, or a combination of both. In 2015, Uruguay passed regulations (Decree 251/15) to simplify the procedures and expedite the PPP process. The only fully operational project to date is a USD 93 million prison. As of April 2021, there are three PPP projects in the implementation phase, the largest of which is a 170-mile railroad for approximately USD 1 billion. There is a pipeline of ten other projects for USD 873 million, in different stages of development, related to roads, education, and health. The current government aims to improve PPP approval times.

In the 2020 omnibus reform law, the government determined that –with a transition period of up to three years – local fuel prices should closely track import parity prices (i.e., international price plus import cost). The legislation was aimed at generating competition and increasing the efficiency of the state-owned oil company in order to reduce the local price of fuels.

10. Political and Security Environment

Uruguay is a stable democracy in which respect for the rule of law and transparent national debates to resolve political differences are the norm. The majority of the population is committed to non-violence. In 2020, the Economist magazine ranked Uruguay as one of only two “full democracies” in South America, and one of four in the Western Hemisphere. There have been no cases of political violence or damage to projects or installations over the past decade.

Violent crime is on the rise in Uruguay, alarming business owners. The issue of deteriorating citizen security was a central issue in the 2019 presidential election and is a top priority of the current government. 11. Labor Policies and Practices

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source* USG or international statistical source USG or International
Source of Data: BEA;
IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2020 $ 53,639 2019 $56,046 www.worldbank.org/en/country 
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international
Source of data: BEA; IMF;
Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2019 $ 3,578 2019 $999 https://apps.bea.gov/
international/factsheet/ 
Host country’s FDI in the United States ($M USD, stock positions) N/A N/A 2018 $391 https://apps.bea.gov/
international/factsheet/
Total inbound stock of FDI as % host GDP 2019 55% N/A N/A

*Host country source: https://www.bcu.gub.uy/Estadisticas-e-Indicadores/Paginas/Default.aspx 

Uruguay’s Central Bank reports the United States was the largest foreign investor in FDI flows Uruguay in 2019. The vast majority of U.S. investment consisted of intra-company loans, and not greenfields, brownfields, or reinvestment. U.S. investment is distributed among a wide array of sectors, including forestry, tourism and hotels, services (e.g., call centers or back office), and telecommunications.

Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data, 2019
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward 30,396 100% Total Outward N/A
Spain – 8,208– 27% N/A N/A
Argentina – 4,691 – 15% N/A N/A
Switzerland – 4,341 – 14% N/A N/A
United States – 3,691 – 12% N/A N/A
Chile – 1,815 – 6% N/A N/A
“0” reflects amounts rounded to +/- $500,000.

Source: IMF Coordinated Direct Investment Survey

Table 4: Sources of Portfolio Investment
Portfolio Investment Assets, December 2019
Top Five Partners (Millions, US Dollars)
Equity Securities
Total Debt Securities
Total 11,793
All Countries 1,275 All Countries 10,518
United States 4,315 37% Luxembourg 526 41% United States 4,165 40%
Luxembourg 750 6% Brazil 154 12% Int’l Orgs. 1,692 16%
Brazil 580 5% United States 150 12% Australia 497 5%
Australia 497 4% Bermuda 80 6% Brazil 425 4%
The Netherlands 424 4% Argentina 16 1% The Netherlands 422 4%

Source: IMF Coordinated Portfolio Investment Survey

Uzbekistan

Executive Summary

The pandemic and subsequent stagnation of the global economy had an impact on the economy of Uzbekistan and the dynamics of market reforms launched in 2016. Addressing public health and social support issues became a higher priority and required the mobilization of significant resources. Quarantine measures, domestic lockdowns, and travel restrictions led to the bankruptcy of a significant number of private businesses and an increase in unemployment, especially in the first half of the year. Mining, services, transportation, and tourism sectors suffered the most. In the second half of the year, however, business activity began to recover after quarantine restrictions were relaxed. The government has taken measures to mitigate the impact of the pandemic on business, including the introduction of temporary tax holidays, concessional lending, and other incentives.

In general, Uzbekistan’s economy demonstrated relative resilience in 2020 with 1.6% GDP growth. Despite 2020’s challenges, foreign direct investment (FDI) inflows continued – about $6.6 billion in 2020 compared to $9.3 billion in 2019 – which is undoubtedly the result of pre-pandemic reforms. Over 11,780 companies with foreign capital were operating in Uzbekistan as of January 1, 2021, including 1,399 created in 2020. While the government encouraged investors to develop processing and manufacturing industries in support of its import-substitution and export diversification policy, there was a notable increase of FDI in the service, retail, and banking sectors. In November, Uzbekistan successfully placed $750 million in dual-tranche sovereign international bonds denominated both in U.S. dollars and Uzbekistani so’m on the London Stock Exchange.

In 2020, Uzbekistan’s leadership continued to implement reform policies targeted at boosting economic growth and improving public welfare by creating a supportive climate for private and foreign direct investment and reducing the share of the public sector in the economy. To further develop anti-corruption measures, Uzbekistan established an Anti-Corruption Agency to inspect governmental bodies and legal entities, including state-owned banks, and to prevent and combat corruption in public procurement based on the ISO 37001 standard. President Mirziyoyev signed a decree to reduce government involvement in the economy, prohibiting the establishment and operation of state-owned enterprises (SOE) in commodity markets, where SOEs might compete with private firms or have conflicts of interest. The decree also called for compliance with anti-monopoly statutes by nine large SOEs, including the national airline, car producers, and energy companies. In October, Mirziyoyev announced plans to perform internal corporate governance reforms at 39 SOEs and privatize 548 SOEs, including strategic assets in the oil and gas, mining, chemical, transportation, banking, and manufacturing industries which had been considered off-limits in previous rounds of privatization. The pandemic delayed the process of SOE reorganization and privatization, and slowed further liberalization and development of Uzbekistan’s capital market.

During the reporting period, foreign businesses continued reporting cases of non-transparent public procurement practices, and cases where government agencies and state-owned enterprises inconsistently complied with official policy guidelines and regulations. Enforcement of legislation on protection of intellectual property rights also remains insufficient. Uzbekistan has the potential to become one of the most successful economies in Central Asia, but to achieve this goal, it needs to ensure that market reforms become entrenched by improving legislation and ensuring laws are then properly enforced.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2020 146 of 180 http://www.transparency.org/research/cpi/overview 
World Bank’s Doing Business Report 2019 69 of 190 http://www.doingbusiness.org/en/rankings 
Global Innovation Index 2020 93 of 131 https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, historical stock positions) 2019 $82 million https://apps.bea.gov/international/factsheet/ 
World Bank GNI per capita 2019 $1,800 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 Uzbekistan (“the government” or “the GOU”) has declared attracting foreign direct investments (FDI) one of its core policy priorities, acknowledging that greater private sector involvement is critical for economic growth and addressing social challenges caused by relatively high unemployment and poverty rates. In 2020, the GOU improved the business environment by creating additional tax incentives for enterprises affected by the pandemic, reducing government involvement in the economy, promoting public-private partnership projects, announcing plans to reorganize and privatize SOEs, and implementing additional anti-corruption measures. The new Tax Code, which became effective on January 1, 2020, lowered corporate and individual income taxes by almost 50% and considerably simplified taxation procedures for private entrepreneurs. President Mirziyoyev challenged all regional governments to improve the attractiveness of their territories to foreign investors and provide FDI progress reports on a quarterly basis. The Law on Investments and Investment Activities, which entered into force on January 27, 2020, guaranteed unrestricted transfer of funds out of Uzbekistan and the protection of investments from nationalization. Established in November 2019, the Presidential Council of Foreign Investors became a new enhanced platform of communication with foreign investors, experts and the business community, though pandemic restrictions forced postponement of its planned plenary session with the president.

The government has yet to address several fundamental problems reported by businesses and investors, such as the lack of transparency in public procurements, its poor record of enforcing public-private contracts, poor protection of private property rights, and insufficient enforcement of intellectual property rights. Uzbekistan is ranked 179 in Transparency International’s Corruption Perceptions Index, and ranked 69 in 2020 Ease of Doing Business (DB) with a DB Score indicator of 69.9 (100 is the standard of excellence).

By law, foreign investors are welcome in all sectors of Uzbekistan’s economy and the government cannot discriminate against foreign investors based on nationality, place of residence, or country of origin. However, government control of key sectors, including energy, telecommunications, transportation, and mining has discriminatory effects on foreign investors. The government has demonstrated a continued desire to control capital flows in major industries, encouraging investments in a preapproved list of import-substituting and export-oriented projects, while investments in import-consuming projects can generally expect very little support.

The Ministry of Investments and Foreign Trade (https://mft.uz/en/, http://www.invest.gov.uz/en/) provide foreign investors with consulting services, information and analysis, business registration, and other legal assistance, as does the Chamber of Commerce and Industry of Uzbekistan (http://www.chamber.uz/en/index), on a contractual basis.

The GOU organizes and attends media events and joint government-business forums on a regular basis and at these events officials stress their interest in seeing new companies establish operations in Uzbekistan. To improve direct communication with foreign businesses, international financial institutions, banks, and other structures operating in Uzbekistan, the GOU has established the Council of Foreign Investors, which operates as an institutional advisory body. The GOU established the Institute of the Business Ombudsperson (IBO) in 2017 to protect the rights and legitimate interests of businesses and provide legal support. The Law on Investments and Investment Activities, which entered into force on January 27, 2020, obliges Uzbekistan state bodies, diplomatic missions and consular institutions abroad to provide advisory and informational assistance to investors. The Law also obliges the IBO to assist foreign businesses in resolving emerging disputes through extrajudicial and pre-trial procedures.

During the reporting period, various GOU officials attended dozens of in-person and virtual meetings with representatives of U.S. companies, business facilitation agencies, the U.S. International Development Finance Corporation (DFC), and other American entities. Earlier, in 2019, Uzbekistan hosted the first U.S. Department of Commerce Certified Trade Mission, supported by the American Chamber of Commerce in Uzbekistan. The event provided 35 representatives of 13 U.S. companies with an opportunity to meet senior GOU officials and their Uzbekistani business counterparts.

Limits on Foreign Control and Right to Private Ownership and Establishment

By law, Uzbekistan guarantees the right of foreign and domestic private entities to establish and own business enterprises, and to engage in most forms of remunerative activity. However, due to the prevalence in state-owned monopolies in several sectors, in reality, the right to establish business enterprises is still limited in some sectors. The GOU has started the process of reconsidering the role of large state-owned monopolies, especially in the transportation, banking, energy, and cotton sectors. In 2020, President Mirziyoyev ordered measures to reduce government involvement in the economy, including enforcement of an antimonopoly compliance system in SOE operations, reorganization for optimized corporate governance of 39 SOEs, and privatization of 548 SOEs and state-owned assets. This ambitious SOE reorganization program covers large state-owned monopolies, including the largest mining company, national monopolies in the energy sector, the information, technology and communications sector and postal operators, chemical plants, national air and railway companies, automotive companies, banks, insurance firms, and other formerly off-the-table state assets. President Mirziyoyev formally ended SOE Uzpaxtasanoat’s monopoly over the raw cotton trade, giving private investors the right to create integrated value chain systems, called clusters, in the cotton sector. The clusters allow businesses to manage cotton cultivation, harvesting, processing, and exports independently of SOE-run supply chains. The state still reserves the exclusive right to export some commodities, such as nonferrous metals and minerals. In theory, private enterprises may freely establish, acquire, and dispose of equity interests in private businesses, but, in practice, this is difficult to do because Uzbekistan’s securities markets are still underdeveloped.

Private capital is not allowed in some industries and enterprises. The Law on Denationalization and Privatization (adopted in 1991, last amended in 2020) lists state assets that cannot be sold off or otherwise privatized, including land with mineral and water resources, the air basin (atmospheric resources in the airspace over Uzbekistan), flora and fauna, cultural heritage sites and assets, state budget funds, foreign capital and gold reserves, state trust funds, the Central Bank, enterprises that facilitate monetary circulation, military and security-related assets and enterprises, firearm and ammunition producers, nuclear research and development enterprises, some specialized producers of drugs and toxic chemicals, emergency response entities, civil protection and mobilization facilities, public roads, and cemeteries.

Foreign ownership and control for airlines, railways, power generation, long-distance telecommunication networks, and other sectors deemed related to national security requires special GOU permission, but so far foreigners have not been welcomed in these sectors. By law, foreign nationals cannot obtain a license or tax permit for individual entrepreneurship in Uzbekistan. In practice, therefore, they cannot be self-employed, and must be employed by a legally recognized entity.

According to Uzbekistan’s law, local companies with at least 15% foreign ownership can qualify as having foreign investment. The minimum fixed charter-funding requirement for a company with foreign investment is 400 million s’om ($1 equals about 10,600 s’om as of March 2021). The same requirement for companies registered in the Republic of Karakalpakstan and the Khorezm region is 200 million s’om. Minimum charter funding requirements can be different for business activities subject to licensing. For example, the requirement for banking activities is 100 billion s’om; for activities of microcredit organizations – 2 billion s’om; for pawnshops – 500 million s’om; for production of ethyl alcohol and alcoholic beverages – 10,000 Base Calculation Rates (BCR) (one BCR equals 245,000 s’om or about $23, as of March 2021); lotteries – 200 million s’om; and for tourism operators – 400 BCRs. Foreign investment in media enterprises is limited to 30%.

The government may scrutinize foreign investment, with special emphasis on sectors of the economy that it considers strategic, such as mining, energy, transportation, banking and telecommunications. There is no standard, transparent screening mechanism, and some elements of Uzbekistan’s legal framework are expressly designed to protect domestic industries and limit competition from abroad, such as a list created in 2020 of several hundred imported items banned from the public procurement process. There are no legislative restrictions that specifically disadvantage U.S. investors.

Other Investment Policy Reviews

The Organization for Economic Cooperation and Development (OECD), the World Trade Organization (WTO), and the United Nations Conference on Trade and Development (UNCTAD) have not conducted investment policy reviews of Uzbekistan in the past three years.

Business Facilitation

The GOU has declared that business facilitation and improvement of the business environment are among its top policy priorities. Uzbekistan’s working-age population has been growing by over 200,000 people per year over the past decade. Therefore, the GOU prioritizes private businesses and joint ventures with the potential to create additional jobs and help the government address unemployment concerns. The introduction of one-window and on-line registration practices and electronic reporting systems simplified and streamlined business registration procedures. The GOU has created 12 industrial, seven pharmaceutical, two agricultural, and one tourism-focused free economic zones (FEZ), as well as 64 special small industrial zones (SIZ) in all regions of the country to attract more FDI. New legislation has created additional tax incentives for private businesses and promised firms protection against unlawful actions by government authorities.

By legislation (effective from January 2018), foreign and domestic private investors can register their business in Uzbekistan using any Center of Government Services (CGS) facility, which operate as “Single Window” (SW) registration offices, or the Electronic Government (EG) website – https://my.gov.uz/en. The registration procedure requires electronic submission of an application, company name or trademark, and foundation documents. The SW/EG service will register the company with the Ministry of Justice, Tax Committee, local administration, and other relevant government agencies. The registration fee is equivalent to one BCR for local investors and 10 BCR for foreign investors (one BCR equals 245,000 s’om, or about $23, as of March 2021). Applicants receive a 50% discount for using the EG website. The new system has reduced the length of the registration process from several weeks to 30 minutes.

Depending on the extent of foreign participation, a business can be defined as an “enterprise with foreign capital” (EFC) if less than 15% foreign-owned, or as an “enterprise with foreign investment” (EFI) if more than 15% foreign-owned and holding a minimum charter capital of 400 million s’om (about $38,000 as of March 2021). Foreign companies may also maintain a physical presence in Uzbekistan as “permanent establishments” without registering as separate legal entities, other than with the tax authorities. A permanent establishment may have its own bank account.

The World Bank ranked Uzbekistan as eighth in the world for the “Starting a Business” indicator in its 2020 Doing Business report.

Outward Investment

In general, the GOU does not promote or incentivize outward investments. The Ministry of Investments and Foreign Trade coordinates outward investments mainly in the form of bilateral economic cooperation engagements. Some state-owned enterprises invest in development of their marketing networks abroad as part of efforts to boost export sales. Private companies that operate primarily in the retail, manufacturing, transportation, construction, and textile sectors use outward investments for market outreach, to access foreign financial resources, for trade facilitation, and, in some cases, for expatriation of capital. The most popular destinations for outward investments are Russia, China, Kazakhstan, Singapore, UAE, and Germany.

There are no formal restrictions on outward investments. However, financial transactions with some foreign jurisdictions (such as Afghanistan, Iran, Syria, Libya, and Yemen) and offshore tax havens can be subject to additional screening by the authorities.

3. Legal Regime

Transparency of the Regulatory System

Uzbekistan has a substantial body of laws and regulations aimed at protecting the business and investment community. Primary legislation regulating competition includes the 2012 Law on Competition (last updated in 2019), the Law on Guarantees of the Freedoms of Entrepreneurial Activity, the 2003 Law on Private Enterprise (last updated in 2018), the 2019 Law on Investments and Investment Activities and a body of decrees, resolutions and instructions. In late 2016, the GOU publicly recognized the need to improve and streamline business and investment legislation, which is still perceived as complicated, often contradictory, and not fully consistent with international norms. In some cases, the government may require businesses to comply with decrees or instructions that are not publicly available. To simplify and streamline the legislation, Parliament and the GOU adopted 35 laws and over 100 regulations on amendments to the legislation, which abolished nearly 1000 laws and regulations in 2020. For example, the Law on Changes in the Legislation for the Reduction of Bureaucracy (ZRU-638 of September 28, 2020) and the Presidential Decree on Improvement of the Business Environment through Systematic Review of Irrelevant Legislation (UP-6075 of September 27, 2020) abolished and simplified more than 600 outdated decrees, resolutions and regulations. To avoid problems with tax and regulatory measures, foreign investors often secure government benefits through Cabinet of Ministers decrees, which are approved directly by the president. These, however, have proven to be easily revocable.

For additional information, please review the World Bank’s Regulatory Governance assessment on Uzbekistan: https://rulemaking.worldbank.org/en/data/explorecountries/uzbekistan.

Practices that appear as informal regulatory processes are not associated with nongovernmental organizations or private sector associations, but rather with influential local politicians or well-connected local elites.

Most rule-making and regulatory authority exists on the national level. Businesses in some regions and special economic zones can be regulated differently, but relevant legislation must be adopted by the central government and then regulated by national-level authorities.

Only a few local legal, regulatory, and accounting systems are transparent and fully consistent with international norms. Although the GOU has started to unify local accounting rules with international standards, local practices are still document- and tax-driven, with an underdeveloped concept of accruals.

Parliament and GOU agencies publish some draft legislation for public comment, including draft laws, decrees and resolutions on the government’s development strategies, tax and customs regulation, and legislation to create new economic zones. Public review of the legislation is available through the website https://regulation.gov.uz.

Uzbekistan’s laws, presidential decrees, and government decisions are available online. Uzbekistan’s legislation digest (http://www.lex.uz/) serves as a centralized online location for current legislation in effect. As of now, there is no centralized nor comprehensive online location for Uzbekistan’s legislation, similar to the Federal Register in the United States, where all key regulatory actions or their summaries are published. There are other online legislative resources with executive summaries, interpretations, and comments that could be useful for businesses and investors, including http://www.norma.uz/ and http://www.minjust.uz/ru/law/newlaw/.

Formally, the Ministry of Justice and the Prosecutor’s Office of Uzbekistan are responsible for oversight to ensure that government agencies follow administrative processes. In some cases, however, local officials have inconsistently interpreted laws, often in a manner detrimental to private investors and the business community at large.

GOU officials have publicly suggested that improvement of the regulatory system is critical for the overall business climate. In 2020, Uzbekistan adopted several laws and regulations to simplify and streamline business sector legislation and regulations, including eight decrees on providing additional support to the economy and entrepreneurs affected by the pandemic, and two decrees on the improvement of anti-corruption measures. In May 2020, the GOU said it planned to present 24 laws to the Parliament by the end of the year (Resolution 278 of May11, 2020), but its implementation was slowed by the pandemic. In general, Presidential Decree UP-5690 “On Measures for the Comprehensive Improvement of the System of Support and Protection of Entrepreneurial Activity,” adopted in March 2019, set enforcement mechanisms for effective protection of private businesses, including foreign investors. The Law on Investments and Investment Activities, adopted in December 2019, guarantees free transfer of funds to and from the country without any restrictions. This law also guarantees protection of investments from nationalization. The GOU has implemented several additional reforms in recent years, including the currency exchange liberalization, tax reform, simplification of business registration and foreign trade procedures, and establishment of the business Ombudsperson.

The government’s development strategies include a range of targets for upcoming reforms, such as ensuring reliable protection of private property rights; further removal of barriers and limitations for private entrepreneurship and small business; creation of a favorable business environment; suppression of unlawful interference of government bodies in the activities of businesses; improvement of the investment climate; decentralization and democratization of the public administration system; and expansion of public-private partnerships.

Previously implemented regulatory system reforms often left room for interpretation and were, accordingly, enforced subjectively. New and updated legislation continues to leave room for interpretation and contains unclear definitions. In many cases, private businesses still face difficulties associated with enforcement and interpretation of the legislation. More information on Uzbekistan’s regulatory system can be reviewed at the World Bank’s Global Indicators of Regulatory Governance (http://rulemaking.worldbank.org/data/explorecountries/uzbekistan).

The Ministry of Justice and the system of Economic Courts are formally responsible for regulatory enforcement, while the Institute of Business Ombudsperson was established in May 2017 to protect the rights and legitimate interests of businesses and render legal support. The state body responsible for enforcement proceedings is the Bureau of Mandatory Enforcement under the General Prosecutor’s Office. Several GOU policy papers call for expanding the role of civil society, non-governmental organizations, and local communities in regulatory oversight and enforcement. The government also publishes drafts of business-related legislation for public comments, which are publicly available. However, the development of a new regulatory system, including enforcement mechanisms outlined in various GOU reform and development roadmaps, has yet to be completed.

Uzbekistan’s fiscal transparency still does not meet generally accepted international standards, although the government demonstrated notable progress in this area in 2019. A Presidential Resolution, dated August 22, 2018, called for transparency of public finances and wider involvement of citizens in the budgetary process. One positive step was the publication of the detailed state budget proposals for the 2018-2021 fiscal years (FY) within the framework of Budget for Citizens project. In 2019, the GOU introduced amendments to the Budget Code mandating the publication of the conclusions of the Accounts Chamber of the Republic of Uzbekistan, which are based on the results of an external audit and evaluation of annual reports on the implementation of the state budget and the budgets of state trust funds. The Law on the State Budget for 2021 introduced amendments to the Administrative Code, which establishes fines for senior officials of ministries and departments who fail to publish reports on the execution of budgets, off-budget funds and state trust funds, or commit other violations that undermine the transparency of the budget process.

In accordance with the law, the Ministry of Finance now posts state budget related reports on its Open Budget website: https://openbudget.uz. Recent legislation also contains measures to harmonize budget accounting with international standards, provides for international assessment of budget documents through the Public Expenditure and Financial Accountability (PEFA) process, and submitting the budget for an Open Budget Survey ranking. In 2019, the GOU officially requested the U.S. Government’s technical assistance to improve fiscal accountability and transparency, initiating an assistance program that began in 2020.

In line with the December 2019 Law on the State Budget, in 2020, government agencies, state trust funds, and the Reconstruction and Development Fund of Uzbekistan (FRDU) published quarterly reports on: distribution of budget funds by subordinate budget organizations; financial statements; implementation of budget funded projects; and all major public procurements. By law, such reports must be published within 25 days after the end of the reporting quarter. The GOU uses https://openbudget.uz/  to ensure transparency of state budget funds directed to the Investment Program of Uzbekistan, tax and customs benefits provided to the taxpayers, measures to control and combat financial violations, and spending of above-forecasted budget incomes.

Despite this progress, the government is still not releasing complete information on its off-budget accounts or on its oversight of those accounts, publishing only some generalized parameters at https://www.mf.uz/en/deyatelnost/deyatelnost-ii/mestnyj-byudzhet.html. In FY2019 and FY2020, the GOU’s budget implementation reports were less itemized than in previous years.

International Regulatory Considerations

Uzbekistan is not currently a member of the WTO or any existing economic blocs although it is pursuing WTO accession. In 2020, Uzbekistan assumed observer status in the Eurasian Economic Union. No regional or other international regulatory systems, norms, or standards have been directly incorporated or cited in Uzbekistan’s regulatory system – although GOU officials often claim the government’s regulatory system incorporates international best practices. Uzbekistan joined the CIS Free Trade Zone Agreement in 2014, but that does not constitute an economic bloc with supranational trade tariff regulation requirements.

Legal System and Judicial Independence

Uzbekistan’s contemporary legal system belongs to the civil law family. The hierarchy of Uzbekistan’s laws descends from the Constitution of the Republic of Uzbekistan, constitutional laws, codes, ordinary laws, decrees of the president, resolutions of the Cabinet of Ministers, and normative acts, in that order. Contracts are enforced under the Civil Code, the Law “About the Contractual Legal Base of Activities of Business Entities” (No. 670-I, issued August 29, 1998, and last revised in 2020), and several other regulations.

Uzbekistan’s contractual law is established by the Law “About the Contractual Legal Base of Activities of Business Entities.” It establishes the legal basis for the conclusion, execution, change, and termination of economic agreements, the rights and obligations of business entities, and also the competence of relevant public authorities and state bodies in the field of contractual relations. Economic disputes, including intellectual property claims, can be heard in the lower-level Economic Court and appealed to the Supreme Court of the Republic of Uzbekistan. Economic court judges are appointed for five-year terms. This judicial branch also includes regional, district, town, city, Tashkent city (a special administrative territory) courts, and arbitration courts.

On paper, the judicial system in Uzbekistan is independent, but government interference and corruption are common. Government officials, attorneys, and judges often interpret legislation inconsistently and in conflict with each other’s interpretations. In recent years, for example, many lower-level court rulings have been in favor of local governments and companies which failed to compensate plaintiffs for the full market value of expropriated and demolished private property, as required under the law.

In December 2020, President Mirziyoyev approved additional measures to eliminate corruption in the courts and ensure the independence of judges (Decree UP-6127). Starting from February 1, 2021, these measures include the introduction of a transparent selection of judicial candidates with the process streamed online, electronic systems for assessment of their qualifications and performance evaluation. The Decree also creates new inspections for combating corruption in the judicial system.

Court decisions or enforcement actions are appealable though a process that can be initiated in accordance with the Economic Procedural Code and other applicable laws of Uzbekistan, and can be adjudicated in the national court system.

Laws and Regulations on Foreign Direct Investment

Several laws, presidential decrees, and government resolutions relate to foreign investors. The main laws are:

  • Law on Investments and Investment Activities (ZRU-598, December 25, 2019)
  • Law on Guarantees of the Freedoms of Entrepreneurial Activity (ZRU-328, 2012)
  • Law on Special Economic Zones (ZRU-604, February 17, 2020)
  • Law on Production Sharing Agreements (№ 312-II, 2001)
  • Law on Concessions (№ 110-I, 1995)
  • Law on Investment and Share Funds (ZRU-392, 2015)
  • Law on Public-Private Partnership (ZRU 537, 2019)

In 2020, Parliament, the President and the government of Uzbekistan adopted 62 laws, 125 decrees, and over 4,000 resolutions, regulations, and other judicial decisions. New legislation that could affect foreign investors includes:

The Law on the State Budget for 2021, (ZRU-657, adopted December 25, 2020). The law establishes Uzbekistan’s macroeconomic outlook and consolidated state budget parameters for FY 2021, and budget targets for 2022-2023. It also amends some tax regulations and introduces additional measures to improve fiscal transparency.

The Law on Innovative Activities (ZRU-630, adopted July 24, 2020). The law determines subjects and objects of innovation and establishes a conceptual framework with legal interpretation of innovation-related activities and other relevant terms. The text is available in English: https://lex.uz/docs/5155423.

The Law on Special Economic Zones (ZRU-604, adopted February 17, 2020). The law sub-categorizes special economic zones (SEZ) into free economic zones, special scientific and technological zones, tourism-recreational zones, free trade zones, and special industrial zones. It sets both general rules for SEZs and specific rules for each category of zones, with provisions for the creation, terms of operation, liquidation, management, customs regulation, taxation, land use, and the legal status of participants. The law also establishes local content requirements, such as a requirement to have at least 90% of the labor force sourced locally. The text is available in English: https://lex.uz/docs/4821319.

The Law on State Fees (ZRU-600, adopted January 6, 2020). The law specifies the state fee as a mandatory payment charged for the commission of legally significant actions and (or) the issuance of documents (including consular and patent) by authorized institutions and (or) officials. It also defines the rates of the fees.

The Law on Joining the International Convention on the Simplification and Harmonization of Customs Procedures (Kyoto, May 18, 1973, as amended on June 26, 1999) (ZRU-654, adopted December 12, 2020).

The Law on Ratification of the Statute of the Hague Conference on Private International Law (The Hague, October 31, 1951) (ZRU-605, adopted March 2, 2020).

Presidential Decree on Measures to Reduce the Grey Economy and Improve the Efficiency of Tax Authorities (UP-6098, adopted October 30, 2020). The decree simplifies taxation for small businesses, real estate developers, and employers in the construction sector.

Presidential Decree on Measures for Accelerated Reform of Enterprises with State Participation and Privatization of State Assets (UP-6096, adopted October 27, 2020). The decree orders the optimization and transformation of the structure of 32 large SOEs, the introduction of advanced corporate governance and financial audit systems in 39 SOEs, the privatization of state-owned shares in 541 enterprises through public auctions, and the sale of 15 public facilities to the private sector.

Presidential Decree on Improvement of Licensing and Approval Procedures (UP-6044, adopted August 28, 2020). The decree cancels 70 (out of 266) licensing requirements and 35 (out of 140) permit requirements.

Presidential Decree on Measures for Development of the Export and Investment Potential of Uzbekistan (UP-6042, adopted August 28, 2020). The decree, along with GOU Resolution PKM-601 of October 6, 2020, orders the creation of the Governmental Commission for the Development of Export and Investment. The Commission, headed by the Deputy Prime Minister for Investments and Foreign Economic Relations, will coordinate investment attraction and ensure implementation of investment projects.

Presidential Decree on Measures for Development of a Competitive Environment and Reduction of State Participation in the Economy (UP-6019, adopted July 7, 2020). This document elevates the status of the Anti-Monopoly Committee and introduces requirements to improve the transparency of public procurements, among other provisions.

Presidential Decree on Cancellation of some Tax and Customs Privileges (UP-6011, adopted June 6, 2020). This decree abolished privileged groups’ exemptions from paying social tax and says that VAT exemptions for services procured from foreign entities shall not apply to services provided by foreign entities operating in Uzbekistan through permanent establishments. It also abolishes VAT privileges in compliance with the Tax Code and other legislation.

Presidential Decree on Banking Sector Reform Strategy (UP-5992, adopted May 12, 2020). The decree approves a five-year strategy for reforming the banking sector with a goal to reduce the state share in its capital from the current 85% to 40%. It also orders the privatization of six large state-owned banks in close cooperation with international financial institutes.

As of now, there is no real “one-stop-shop” website for investors that provides relevant laws, rules, procedures, and reporting requirements in Uzbekistan. In December 2018, the GOU created a specialized web portal for investors called Invest Uz (http://invest.gov.uz/en/), which provides some useful information. The website of the Ministry of Investments and Foreign Trade (http://mift.uz/) offers some general information on laws and procedures, but mainly in the Uzbek and Russian languages.

Competition and Antitrust Laws

Competition and anti-trust legislation in Uzbekistan is governed by the Law on Competition (ZRU-319, issued January 6, 2012, and last revised in 2019). The main entity that reviews transactions for competition-related concerns is the State Antimonopoly Committee (established in January 2019). This government agency is responsible for advancing competition, controlling the activities of natural monopolies, protecting consumer rights and regulating the advertisement market. There were no significant competition-related cases involving foreign investors in 2020.

Expropriation and Compensation

Private property is protected against baseless expropriation by legislation, including the Law on Investments and Investment Activities and the Law on Guarantees of the Freedoms of Entrepreneurial Activity. Despite these protections, however, the government potentially may seize foreign investors’ assets due to violations of the law or for arbitrary reasons, such as a unilateral revision of an investment agreement, a reapportionment of the equity shares in an existing joint venture with an SOE, or in support of a public works or social improvement project (similar to an eminent domain taking). By law, the government is obligated to provide fair market compensation for seized property, but many who have lost property allege the compensation has been significantly below fair market value.

Uzbekistan has a history of alleged expropriations. Profitable, high-profile foreign businesses have been at greater risk for expropriation, but smaller companies are also vulnerable. Under the previous administration, large companies with foreign capital in the food processing, mining, retail, and telecommunications sectors oftenfaced expropriation. In cases where the property of foreign investors is expropriated for arbitrary reasons, the law obligates the government to provide fair compensation in a transferable currency. However, in most cases the private property was expropriated based upon court decisions after the owners were convicted for breach of contract, failure to complete investment commitments, or other violations, making them ineligible to claim compensation.

Decisions of Uzbekistan’s Economic Court on expropriation of private property can be appealed to the Supreme Court of the Republic of Uzbekistan in accordance with the Economic Procedural Code or other applicable local law. Reviews usually are quite slow. Some foreign investors have characterized the process as unpredictable, non-transparent, and lacking due process.

Dispute Settlement

ICSID Convention and New York Convention

Uzbekistan is a member of the International Center for the Settlement of Investment Disputes (ICSID) and a signatory to the 1958 UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention).

By law, foreign arbitral awards or other acts issued by a foreign country can be recognized and enforced if Uzbekistan has a relevant bilateral or multilateral agreement with that country. According to new Law on International Commercial Arbitration (which will enter into force by September 2021), the arbitral award, regardless of the country in which it was made, is recognized as binding, and must be enforced upon submission of a written application. Implementation of the law shall be in full compliance with existing bilateral agreements of Uzbekistan with foreign states and multilateral agreements.

Investor-State Dispute Settlement

Dispute settlement methods are regulated by the Economic Procedural Code, the Law on Arbitration Courts, and the Law on Contractual Basics of Activities of Commercial Enterprises. The Law on Guarantees to Foreign Investors and Protection of their Rights requires that involved parties settle foreign investment disputes using the methods they define themselves, generally in terms predefined in an investment agreement. Investors are entitled to use any international dispute settlement mechanism specified in their contracts and agreements with local partners, and these agreements should define the methods of settlement.

The Law on Guarantees to Foreign Investors and Protection of their Rights permits resolution of investment disputes in line with the rules and procedures of the international treaties to which Uzbekistan is a signatory, including the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, the 1992 CIS Agreement on Procedure for Settling Disputes Arising Out of Business Activity, and other bilateral legal assistance agreements with individual countries. Currently there is no such bilateral treaty that covers U.S. citizens.

If the parties fail to specify an international mechanism, Uzbekistan’s economic courts can settle commercial disputes arising between local and foreign businesses. The economic courts have subordinate regional and city courts. Complainants may seek recognition and enforcement of foreign arbitral awards pursuant to the New York Convention through the economic courts. When the court decides in favor of a foreign investor, the Ministry of Justice is responsible for enforcing the ruling.

Currently Uzbekistan does not have a ratified Bilateral Investment Treaty (BIT) or a Free Trade Agreement (FTA) with an investment chapter with the United States. The governments of the United States and Uzbekistan signed a BIT in 1994, but ratification documents have not been exchanged and the agreement never entered into force.

Since President Mirziyoyev came to power, investment disputes have been more limited in scope, but still exist: 1) Following a two-year delay, during which the government refused to honor the terms of a power purchase agreement signed in 2018, stating that adhering to the terms would violate its fiduciary duty, the government agreed to honor the original contract terms. The project is now moving forward.

1) Following a two-year delay, during which the government refused to honor the terms of a power purchase agreement signed in 2018, stating that adhering to the terms would violate its fiduciary duty, the government agreed to honor the original contract terms. The project is now moving forward. 2) The government unilaterally cancelled an agricultural equipment purchase contract on the grounds that the imported equipment was more expensive than it had thought and did not meet the government’s new requirements for local content. The company has stated that it considers the matter closed and is focusing on bringing other products to the market.

2) The government unilaterally cancelled an agricultural equipment purchase contract on the grounds that the imported equipment was more expensive than it had thought and did not meet the government’s new requirements for local content. The company has stated that it considers the matter closed and is focusing on bringing other products to the market. 3) A chemical company in partnership with a SOE alleged that the SOE breached its contract obligations and violated Uzbekistani law by withholding dividends, intending to create leverage to buy out the U.S. investor at a reduced price. The U.S. firm has stated it is willing to leave, as long as it earns a reasonable return on its investment.

3) A chemical company in partnership with a SOE alleged that the SOE breached its contract obligations and violated Uzbekistani law by withholding dividends, intending to create leverage to buy out the U.S. investor at a reduced price. The U.S. firm has stated it is willing to leave, as long as it earns a reasonable return on its investment. 4) An agricultural firm reported its farmland, on which it held a 99-year lease, had been illegally reassigned to other agricultural producers by the local government. Post assisted the company in raising its complaints to the attention of the Presidential Administration and the Supreme Court.

4) An agricultural firm reported its farmland, on which it held a 99-year lease, had been illegally reassigned to other agricultural producers by the local government. Post assisted the company in raising its complaints to the attention of the Presidential Administration and the Supreme Court. 5) An invoice on a refinery remains unpaid, following the suspension of work on the project, despite the U.S. firm having passed the contractual threshold for work provided that would require payment.

5) An invoice on a refinery remains unpaid, following the suspension of work on the project, despite the U.S. firm having passed the contractual threshold for work provided that would require payment.

Post is aware of a number of cases of commercial or investment disputes involving foreign investors which occurred nearly a decade ago.  These have included alleged asset seizures, alleged expropriations, or liquidations; lengthy forced production stoppages; pressure to sell off foreign shares in joint ventures; and failure to honor contractual obligations.  These cases have involved a variety of sectors, including food production, mining, telecommunications, agriculture, and chemicals.  Although government actions in such cases have been taken under the guise of law enforcement, some observers have claimed more arbitrary or extralegal motives were at play.

In September 2012, the Tashkent City Criminal Court seized the assets of a cellular telecom provider for financial crimes.  An appeals court reversed this decision in November 2012, but upheld the $600 million in fines imposed.  The company wrote off its total assets in Uzbekistan of $1.1 billion and left the market.  In 2013, the government transferred all of the company’s assets to a state-owned telecom operator after twice trying unsuccessfully to liquidate them.  In 2014, the company dropped legal proceedings against Uzbekistan and signed a settlement.

In October 2011, the government halted the production and distribution operations of a brewery owned by the Danish firm Carlsberg during a dispute over alleged tax violations.  The interruption of business lasted 18 months before the company re-opened.

Earlier in 2011, the government liquidated the Amantaytau Goldfields, a 50-50 joint venture of the British company Oxus Gold and an Uzbekistani state mining company.

In March 2011, government authorities also seized a large chain grocery store and approximately 50 smaller companies owned by Turkish investors.

By the Law on International Commercial Arbitration (will enter into force by September 2021), foreign arbitral awards, including those issued against the government, regardless of the country in which it was made, are recognized as binding, and must be enforced upon written application to the court. Foreign arbitral awards or other acts issued by a foreign country also can be recognized and enforced if Uzbekistan has a relevant bilateral or multilateral agreement with that country. If international arbitration is permitted, awards can be challenged in domestic courts.

Although in many cases investor-state disputes in Uzbekistan were associated with immediate asset freezes, almost all of them were followed by formal legal proceedings.

International Commercial Arbitration and Foreign Courts

Alternative dispute resolution institutions of Uzbekistan include arbitration courts (also known as Third-Party Courts), and specialized arbitration commissions. Businesses and individuals can apply to arbitration courts only if they have a relevant dispute-settlement clause in their contract or a separate arbitration agreement. The Civil Procedural Code and the Commercial Procedural Code also have provisions that regulate arbitration. The Law on International Commercial Arbitration, drafted in late 2018 and approved in February 2021, will enter into force by September 2021. It states that contractual and non-contractual commercial disputes can be referred to international commercial arbitration by agreement of the parties. The parties can determine the number of arbitrators and the language or languages that can be used in the arbitration. The interim measure prescribed by the arbitration court shall be recognized as binding. The award must be made in writing.

The main domestic arbitration body is the Arbitration Court. General provisions of the Law on Arbitration Courts are based on principles of the UNCITRAL model law, but with some national specifics – namely that Uzbekistani arbitration courts cannot make reference to non-Uzbekistani laws. According to the Law, parties of a dispute can choose their own arbiter and the arbiter in turn choses a chair. The decisions of these courts are binding. The Law says that executive or legislative bodies, as well as other state agencies, are barred from creating arbitration courts and cannot be a party to arbitration proceedings. Either party to the dispute can appeal the verdict of the Arbitration Court to the general court system within thirty days of the verdict. Separate arbitration courts are also available for civil cases, and their decisions can be appealed in the general court system. Arbitration courts do not review cases involving administrative and labor/employment disputes.

The Tashkent International Arbitration Center (TIAC) under the Chamber of Commerce and Industry of Uzbekistan was created in late 2019 as a non-governmental non-profit organization. The main function of this organization is to facilitate dispute resolution for businesses, including foreign investors. The Center may employ qualified arbitration lawyers, both local and foreign. The Center has the right to resolve disputes through mediation or other alternative methods permitted by the law.

The Law on International Commercial Arbitration was approved by Parliament in 2020 and signed by the president in February 2021. It will enter into force by September 2021. According to the law, the arbitral award, regardless of the country in which it was made, is recognized as binding, and must be enforced upon submission of a written application. Implementation of the law shall be in full compliance with existing bilateral and multilateral agreements of Uzbekistan with foreign states.

Most investment disputes involving Uzbekistan’s state-owned enterprises (SOEs) that were brought into Uzbekistan’s have either been decided in favor of the SOEs or have been settled out of court. When the court decides in favor of a foreign investor, the Ministry of Justice is responsible for enforcing the ruling. In some cases, the Ministry’s authority is limited and co-opted by other elements within the government. Judgments against SOEs have proven particularly difficult to enforce.

Bankruptcy Regulations

The Law on Bankruptcy regulates bankruptcy procedures. Creditors can participate in liquidation or reorganization of a debtor only in the form of a creditor’s committee. According to the Law on Bankruptcy and the Labor Code, an enterprise may claim exemption from paying property and land taxes, as well as fines and penalties for back taxes and other mandatory payments, for the entire period of the liquidation proceedings. Monetary judgments are usually made in local currency. Bankruptcy itself is not criminalized, but in August 2013, the GOU introduced new legislation on false bankruptcy, non-disclosure of bankruptcy, and premeditated bankruptcy cases. In its 2020 Doing Business report, the World Bank ranked Uzbekistan 100 out of 190 for the “Resolving Insolvency” indicator (https://www.doingbusiness.org/en/data/exploreeconomies/uzbekistan).

6. Financial Sector

Capital Markets and Portfolio Investment

Prior to 2017, the government focused on investors capable of providing technology transfers and employment in local industries and had not prioritized attraction of portfolio investments. In 2017, the GOU announced its plans to improve the capital market and use stock market instruments to meet its economic development goals. The government created a new Agency for the Development of Capital Markets (CMDA) in January 2019 as the institution responsible for development and regulation of the securities market and protection of the rights and legitimate interests of investors in securities market. CMDA is currently implementing a capital markets development strategy for 2020-2025. According to CMDA officials, the goal of the strategy is to make the national capital market big enough to attract not only institutional investors, but to become a key driver of domestic wealth creation. The U.S. Government is supporting this strategy through a technical assistance program led by the Department of the Treasury.

Uzbekistan has its own stock market, which supports trades through the Republican Stock Exchange “Tashkent,” Uzbekistan’s main securities trading platform and only corporate securities exchange ( https://www.uzse.uz ). The stock exchange mainly hosts equity and secondary market transactions with shares of state-owned enterprises. In most cases, government agencies determine who can buy and sell shares and at what prices, and it is often impossible to locate accurate financial reports for traded companies.

Uzbekistan formally accepted IMF Article VIII in October 2003, but due to excessive protectionist measures of the government, businesses had limited access to foreign currency, which stimulated the grey economy and the creation of multiple exchange rate systems. Effective September 5, 2017, the GOU eliminated the difference between the artificially low official rate and the black-market exchange rate and allowed unlimited non-cash foreign exchange transactions for businesses. The Law on Currency Regulation (ZRU-573 of October 22, 2019) fully liberalized currency operations, current cross-border and capital movement transactions.

In 2019, the GOU considerably simplified repatriation of capital invested in Uzbekistan’s industrial assets, securities, and stock market profits. According to the law (ZRU-531), foreign investors that have resident entities in Uzbekistan can convert their dividends and other incomes to foreign currencies and transfer them to their accounts in foreign banks. Non-resident entities that buy and sell shares of local companies can open bank accounts in Uzbekistan to accumulate their revenues.

Under the law, foreign investors and private sector businesses can have access to various credit instruments on the local market, but the still-overregulated financial system yields unreliable credit terms. Access to foreign banks is limited and is usually only granted through their joint ventures with local banks. Commercial banks, to a limited degree, can use credit lines from international financial institutions to finance small and medium sized businesses.

Money and Banking System

As of January 2021, 32 commercial banks operate in Uzbekistan. Five commercial banks are state-owned, 13 banks are registered as joint-stock financial organizations (eight of which are partly state-owned), seven banks have foreign capital, and seven banks are private. Commercial banks have 884 branches and a network of exchange offices and ATMs throughout the country. State-owned banks hold 84% of banking sector capital and 85% of banking sector assets, leaving privately owned banks as relatively small niche players. The nonbanking sector is represented by 63 microcredit organizations and 64 pawn shops.

In May 2020, President Mirziyoyev approved a five-year strategy for reformation of the banking sector to address existing weaknesses of the banking sector, such as excessive share of state assets, insufficient competition, poor quality of corporate governance and banking services in comparison with best international standards, as well as a relatively low penetration of modern global technologies. The goal of the strategy is to reduce the state share in the sector from the current 84% to 60% and to increase the market share of the non-banking sector from current 0.35% to 4%. The government will privatize its shares in six banks and facilitate modernization of banking services in remaining state-owned banks.

According to assessments of international rating agencies, including Fitch and Moody’s, the banking sector of Uzbekistan is stable and poses limited near-term risks, primarily due to high concentration and domination of the public sector, which controls over 80% of assets in the banking system. Moody’s notes high resilience of the country’s banking system to the impact of the COVID pandemic in comparison with other CIS countries. The average rate of capital adequacy within the system is 18.4%, and the current liquidity rate is 67.4%. The growing volume of state-led investments in the economy supports the stability of larger commercial banks, which often operate as agents of the government in implementing its development strategy. Privately owned commercial banks are relatively small niche players. The government and the Central Bank of Uzbekistan (CBU) still closely monitor commercial banks.

According to the Central Bank of Uzbekistan, the share of nonperforming loans out of total gross loans is 2.1% (as of January 1, 2021). The average share of nonperforming loans in state-owned banks is about 2.1% and 1.9% in private banks. A majority of Uzbekistan’s commercial banks have earned “stable” ratings from international rating agencies.

As of January 1, 2021, the banking sector’s capitalization was about $5.8 billion, and the value of total bank assets in the whole country was equivalent to about $37 billion. The three largest state-owned banks – the National Bank of Uzbekistan, Asaka Bank, and Uzpromstroybank – hold 46% of the banking sector’s capital ($2.7 billion) and 47.7% of the assets ($17.5 billion).

Uzbekistan maintains a central bank system. The Central Bank of Uzbekistan (CBU) is the state issuing and reserve bank and central monetary authority. The bank is accountable to the Supreme Council of Uzbekistan and is independent of the executive bodies (the bank’s organization chart is available here: http://www.cbu.uz/en/).

In general, any banking activity in Uzbekistan is subject to licensing and regulation by the Central Bank of Uzbekistan. Foreign banks often feel pressured to establish joint ventures with local financial institutions. Currently there are seven banks with foreign capital operating in the market, and five foreign banks have accredited representative offices in Uzbekistan, but do not provide direct services to local businesses and individuals. Information about the status of Uzbekistan’s correspondent banking relationships is not publicly available.

Foreigners and foreign investors can establish bank accounts in local banks without restrictions. They also have access to local credit, although the terms and interest rates do not represent a competitive or realistic source of financing.

Foreign Exchange and Remittances

Foreign Exchange

Uzbekistan adopted Article VIII of the IMF’s Articles of Agreement in October 2003, but full implementation of its obligations under this article began only in September 2017. In accordance with new legislation (ZRU 531 of March 2019 and ZRU-573 of October 2019), all businesses, including foreign investors, are guaranteed the ability to convert their dividends and other incomes in local currencies to foreign currencies and transfer to foreign bank accounts for current cross-border, dividend payments, or capital repatriation transactions without limitations, provided they have paid all taxes and other financial obligations in compliance with local legislation. Uzbekistan authorities may stop the repatriation of a foreign investor’s funds in cases of insolvency and bankruptcy, criminal acts by the foreign investor, or when so directed by arbitration or a court decision.

The exchange rate is determined by the CBU, which insists that it is based on free market forces (10,600 s’om per one U.S dollar as of March 2021). On February 15, 2015, trade sessions at the local FX Exchange transferred from the previous “fixing” methods to the combination of “call auction” and bilateral continuous auctions (“matching”). The CBU publishes the official exchange rate of foreign currencies at 1600 every business day for accounting, statistical and other reporting purposes, as well as for the calculation of customs and other mandatory payments in the territory of Uzbekistan.

After the almost 50% devaluation of the national currency in September 2017, the exchange rate had been relatively stable in 2018 with an average of 2.4% annual devaluation. In 2019, the devaluation of s’om accelerated to 14%, although the CBU reported it had made $3.6 billion in interventions in the forex market to support the local currency. In 2020, the annual devaluation was held below 10%. The local currency’s relative stability in 2020 was supported by reduced imports and strong FX reserves ($34.9 billion by January 1, 2021).

Remittance Policies

President Mirziyoyev launched foreign exchange liberalization reform on September 2017 by issuing a decree “On Priority Measures for Liberalization of Monetary Policy.” The Law on Currency Regulation (ZRU-573), adopted on October 22, 2019, has liberalized currency exchange operations, current cross-border, and capital movement transactions. Business entities can purchase foreign currency in commercial banks without restrictions for current international transactions, including import of goods, works and services, repatriation of profits, repayment of loans, payment of travel expenses and other transfers of a non-trade nature.

Banking regulations mandate that the currency conversion process should take no longer than one week. In 2019 businesses reported that they observed no delays with conversion and remittance of their investment returns, including dividends; return on investment, interest and principal on private foreign debt; lease payments; royalties; and management fees.

Sovereign Wealth Funds

The Fund for Reconstruction and Development of Uzbekistan (UFRD) serves as a sovereign wealth fund. Uzbekistan’s Cabinet of Ministers, Ministry of Finance, and the five largest state-owned banks were instrumental in establishing the UFRD, and all those institutions have membership on its Board of Directors.

The fund does not follow the voluntary code of good practices known as the Santiago Principles, and Uzbekistan does not participate in the IMF-hosted International Working Group on sovereign wealth funds. The GOU established the UFRD in 2006, using it to sterilize and accumulate foreign exchange revenues, but officially the goal of the UFRD is to provide government-guaranteed loans and equity investments to strategic sectors of the domestic economy.

The UFRD does not invest, but instead provides debt financing to SOEs for modernization and technical upgrade projects in sectors that are strategically important for Uzbekistan’s economy. All UFRD loans require government approval.

7. State-Owned Enterprises

State-owned enterprises (SOEs) dominate those sectors of the economy recognized by the government as being of national strategic interest. These include energy (power generation and transmission, and oil and gas refining, transportation and distribution), metallurgy, mining (ferrous and non-ferrous metals and uranium), telecommunications (fixed telephony and data transmission), machinery (the automotive industry, locomotive and aircraft production and repair), and transportation (airlines and railways). Most SOEs register as joint-stock companies, and a minority share in these companies usually belongs to employees or private enterprises. Although SOEs have independent boards of directors, they must consult with the government before making significant business decisions.

The government owns majority or blocking minority shares in numerous non-state entities, ensuring substantial control over their operations, as it retains the authority to regulate and control the activities and transactions of any company in which it owns shares. The Agency for Management of State-owned Assets is responsible for management of Uzbekistan’s state-owned assets, both those located in the country and abroad. There are no publicly available statistics with the exact number of wholly and majority state-owned enterprises, the number of people employed, or their contribution to the GDP. According to some official reports and fragmented statistics, there are over 3,500 SOEs in Uzbekistan, including 27 large enterprises and holding companies, about 2,900 unitary enterprises, and 486 joint stock companies, which employ about 1.5-1.7 million people, or about 13% of all domestically employed population. In 2020, the share of SOEs in the GDP was about 55%, and taxes paid by 10 largest SOEs contributed 63.3% of total state budget revenues.

The published list of major Uzbekistani SOEs is available on the official GOU website (listing large companies and banks only): http://www.gov.uz/en/pages/government_sites .

By law, SOEs are obligated to operate under the same tax and regulatory environment as private businesses. In practice, however, private enterprises do not enjoy the same terms and conditions.

In certain sectors, private businesses have limited access to commodities, infrastructure, and utilities due to legislation or licensing restrictions. They also face more than the usual number of bureaucratic hurdles if they compete with the government or government-controlled firms. Most SOEs have a range of advantages, including various tax holidays, as well as better access to commodities, energy and utility supplies, local and external markets, and financing. There are cases when gaps in the legislation are used to ignore the rights of private shareholders (including minority shareholders and holders of privileged shares) in joint stock companies with a state share.

A May 2019 IMF Staff Report concluded that SOEs absorbed disproportionate shares of skilled labor, energy, and financial resources, while facing weak competition enforcement and enjoying a wealth of investment preferences. The GOU has officially recognized the problem. President Mirziyoyev said strong involvement of the state in the fuel and energy, petrochemical, chemical, transport, and banking sectors was hampering their development. In 2020, he issued several decrees and resolutions to improve the competition environment and reduce the dominance of SOEs in the economy. New legislation has strengthened the role of the Anti-Monopoly Committee, overturned over 600 obstructing laws and regulations, abolished 70 (out of 266) types of licenses and 35 (out of 140) permits for various types of businesses. The Presidential decree on SOE reformation and privatization (adopted October 27, 2020) orders 32 large SOEs to optimize and transform their corporate structure, 39 SOEs to introduce advanced corporate governance and financial audit systems, the privatization of state-owned shares in 541 enterprises through public auctions, and the sale of 15 public facilities to the private sector. The reform covers large SOEs in the energy, mining, telecommunications, transportation, construction, chemical, manufacturing, and other key industries. Another decree orders large-scale privatization in the banking sector. In 2020, the government started projects to privatize six state-owned banks in cooperation with international financial institutions. In addition to privatization efforts, the GOU intends to attract private investments to the public sector through promotion of public-private partnerships (PPP). The new law on PPP, adopted in 2019, and a number of follow-up regulations introduced in 2020 create a more favorable environment for such partnerships.

Implementation of this SOE optimization and reform program will likely take some time, as the GOU seeks to avoid high social costs, such as mass unemployment. In September 2020, the IMF staff noted, “The crisis should not delay the reform of the state-owned banks and state-owned enterprises—including by improving their governance—and the agricultural sector. As the crisis abates, the authorities should also continue with reducing the role of the state in the economy, opening up markets and enhancing competition, and improving the business environment.”

Privatization Program

GOU policy papers indicate it is prioritizing further privatization of state-owned assets. The GOU’s goal is to reduce the public share of capital in the banking sector and business entities through greater attraction of foreign direct investments, local private investments, and promotion of public-private partnerships.

The new public sector optimization policy was first announced in 2018. A special working group headed by the Prime Minister performed careful due diligence on about 3,000 enterprises with state shares and developed proposals for their reorganization and privatization. Based on the results, the GOU approved a program that covers over 620 SOEs in the energy, mining, telecommunications, transportation, construction, chemical, manufacturing, and other key industries. The program foresees privatization of 541 state-owned enterprises, six state-owned banks, and the sale of 15 public facilities to the private sector. In a longer-term perspective, the government plans to privatize over 1,115 SOEs and offer about 50 SOEs for public-private partnership projects. Companies that operate critical infrastructure and enterprises that qualify as companies of strategic importance will remain in full state ownership.

Senior government officials see privatization and public-private partnerships as a solution to improve the economic performance of inefficient large SOEs and as an instrument to attract private investments. They view such investments as critical for the creation of new jobs and mitigation of state budget deficits. The GOU believes it needs to prepare SOEs for privatization by introducing advanced corporate governance methods and restructuring the organization and finances of underperforming SOEs.

By law, privatization of non-strategic assets does not require government approval and can be cleared by local officials. Foreign investors are allowed to participate in privatization programs. For investors that privatize assets at preferential terms, the payment period is three years, and the investment commitment fulfillment term is five years. Large privatization deals with the involvement of foreign investment require GOU approval. Formally, such approval can be issued after examination by the Contracts Detailed Due Diligence Center under the Ministry of Economy.

C. Do these programs have a public bidding process?  If so, is it easy to understand, non-discriminatory and transparent? Please provide a link to the relevant government website.

Privatization programs officially have a public bidding process. The legislation and regulations adopted in 2020 for acceleration of the privatization program are intended to ensure the transparency and fairness of the process, as well as facilitating greater involvement of international financial institutions and foreign experts as consultants. In the past, however, privatization procedures have been confusing, discriminatory, and non-transparent.  Many investors note a lack of transparency at the final stage of the bidding process, when the government negotiates directly with bidders before announcing the results.  In some cases, the bidders have been foreign-registered front companies associated with influential Uzbekistani families. The State Assets Management Agency of Uzbekistan coordinates the privatization program (https://davaktiv.uz/en/privatization).

10. Political and Security Environment

Uzbekistan does not have a history of politically motivated violence or civil disturbance. There have not been any examples of damage to projects or installations over the past ten years. Uzbekistani authorities maintain a high level of alert and aggressive security measures to thwart terrorist attacks. The environment in Uzbekistan is not growing increasingly politicized or insecure.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source* USG or international statistical source USG or International
Source of Data: BEA;
IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2020 $57,698 2019 $57,921 www.worldbank.org/en/country 
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international
Source of data: BEA;
IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2019 N/A 2019 $82 BEA data available at
https://apps.bea.gov/
international/factsheet/ 
Host country’s FDI in the United States ($M USD, stock positions) 2019 N/A 2019 $0 BEA data available at
https://www.bea.gov/international/
direct-investment-and-
multinational-enterprises-comprehensive-data 
Total inbound stock of FDI as % host GDP 2020 5.7% 2019 4.1% UNCTAD data available at https://stats.unctad.org/
handbook/Economic
Trends/Fdi.html
 

* Source for Host Country Data: BEA and the World Bank

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 $2,484 100% Total Outward $1,032 100%
China $1,010 40.7% Russia $839 81.3%
The Netherlands $324 13% Cyprus $52 5%
Republic of Korea $269 10.8% Latvia $36 3.5%
Turkey $184 7.4% UK $34 3.3%
Russia $127 5.1% Azerbaijan $17 1.6%
“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 $1,003 100% All Countries Amount 100% All Countries Amount 100%
Luxemburg $502 50% Country #1 N/A N/A% Country #1 N/A N/A%
Netherlands $100 10% Country #2 N/A N/A% Country #2 N/A N/A%
Germany $100 10% Country #3 N/A N/A% Country #3 N/A N/A%
Denmark $63 6.3% Country #4 N/A N/A% Country #4 N/A N/A%
Ireland $61 6.1% Country #5 N/A N/A% Country #5 N/A N/A%

Vietnam

Executive Summary

Vietnam continues to welcome foreign direct investment (FDI), and the government has policies in place that are broadly conducive to U.S. investment. Factors that attract foreign investment include recently-signed free trade agreements, political stability, ongoing economic reforms, a young and increasingly urbanized population, and competitive labor costs. Vietnam has received USD 231 billion in FDI from 1988 through 2020, per the Ministry of Public Affairs (MPI), which oversees foreign investments.

Vietnam’s exceptional handling of the COVID-19 pandemic, which has included proactive management of health policy, fiscal stimulus, and monetary policy, combined with supply chain shifts, contributed to Vietnam receiving USD 19.9 billion in FDI in 2020 – almost as much as the USD 20.3 billion received in 2019. Of the 2020 investments, 48 percent went into manufacturing – especially in the electronics, textiles, footwear, and automobile parts industries; 18 percent in utilities and energy; 15 percent in real estate; and smaller percentages in assorted industries. The government approved the following significant FDI projects in 2020: Delta Offshore’s USD 4 billion investment in the Bac Lieu liquified natural gas (LNG) power plant; Siam Cement Group’s (SCG) USD 1.8 billion investment in the Long Son Integrated Petrochemicals Complex; a Daewoo-led, South Korean consortium’s USD 774 million investment in the West Lake Capital Township real estate development in Hanoi; and Taiwan-based Pegatron’s USD 481 million investment in electronics production.

Vietnam recently moved forward on free trade agreements that will likely make it easier to attract future FDI by providing better market access for Vietnamese exports and encouraging investor-friendly reforms. The EU-Vietnam Free Trade Agreement (EVFTA) came into force August 1, 2020. Vietnam signed the UK-Vietnam Free Trade Agreement on December 31, 2020, which will come into effect May 1, 2021. On November 15, 2020, Vietnam signed the Regional Comprehensive Economic Partnership (RCEP). While these agreements lower certain trade and investment barriers for companies from participating countries, U.S. companies may find it more difficult to compete without similar advantages.

In February 2021, the 13th Party Congress of the Communist Party approved a ten-year economic strategy that calls for shifting foreign investments to high-tech industries and ensuring those investments include provisions relating to environmental protection. On January 1, 2021, Vietnam’s Securities Law and new Labor Code Law, which the National Assembly originally approved in 2019, came into force. The Securities Law formally states the government’s intention to remove foreign ownership limits for investments in most industries, and the new Labor Code provides more contract flexibility – including provisions that make it easier for an employer to dismiss an employee and allow workers to join independent trade unions – although no such independent trade unions yet exist in Vietnam. On June 17, 2020, Vietnam passed a revised Investment Law and a new Public Private Partnership Law, both designed to encourage foreign investment into large infrastructure projects, reduce the burden on the government to finance such projects, and increase linkages between foreign investors and the Vietnamese private sector.

Despite a comparatively high level of FDI inflow as a percentage of GDP – 7.3 percent in 2020 – significant challenges remain in Vietnam’s investment climate. These include corruption, weak legal infrastructure, poor enforcement of intellectual property rights (IPR), a shortage of skilled labor, restrictive labor practices, and the government’s slow decision-making process.

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2020 104 of 180 http://www.transparency.org/research/cpi/overview 
World Bank’s Doing Business Report 2020 70 of 190 http://www.doingbusiness.org/en/rankings 
Global Innovation Index 2020 42 of 131 https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, historical stock positions) 2019 USD 2,615 https://apps.bea.gov/international/factsheet/ 
World Bank GNI per capita 2019 USD 2,590 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD 
Table 1: Key Metrics and Rankings

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Toward Foreign Direct Investment

Since Vietnam embarked on economic reforms in 1986 to transition to a market-based economy, the government has welcomed FDI, recognizing it as a key component of Vietnam’s high rate of economic growth over the last two decades. Foreign investments continue to play a crucial role in the economy: according to Vietnam’s General Statistics Office (GSO), Vietnam exported USD 281 billion in goods in 2020, of which 72 percent came from projects utilizing FDI.

The Politburo issued Resolution 55 in 2019 to increase Vietnam’s attractiveness to foreign investment. This Resolution aims to attract USD 50 billion in new foreign investment by 2030. In 2020, the government revised laws on investment and enterprise, in addition to passing the Public Private Partnership Law, to further the goals of this Resolution. The revisions encourage high-quality investments, use and development of advanced technologies, and environmental protection mechanisms.

While Vietnam’s revised Investment Law says the government must treat foreign and domestic investors equally, foreign investors have complained about having to cross extra hurdles to get ordinary government approvals. The government continues to have foreign ownership limits (FOLs) in industries Vietnam considers important to national security. In January 2020, the government removed FOLs on companies in the eWallet sector and reformed electronic payments procedures for foreign firms. Some U.S. investors report that these changes have provided more regulatory certainty, which has, in turn, instilled greater confidence as they consider long-term investments in Vietnam.U.S. investors continue to cite concerns about confusing tax regulations and retroactive changes to laws – including tax rates, tax policies, and preferential treatment of state-owned enterprises (SOEs). In 2020, members of the American Chamber of Commerce (AmCham) in Hanoi noted that fair, transparent, stable, and effective legal frameworks would help Vietnam better attract U.S. investment.

The Ministry of Planning and Investment (MPI) is the country’s national agency charged with promoting and facilitating foreign investment; most provinces and cities also have local equivalents. MPI and local investment promotion offices provide information and explain regulations and policies to foreign investors. They also inform the Prime Minister and National Assembly on trends in foreign investment. However, U.S. investors should still consult lawyers and/or other experts regarding issues on regulations that are unclear.

The Prime Minister, along with other senior leaders, has stated that Vietnam prioritizes both investment retention and ongoing dialogue with foreign investors. Vietnam’s senior leaders often meet with foreign governments and private-sector representatives to emphasize Vietnam’s attractiveness as an FDI destination. The semiannual Vietnam Business Forum includes meetings between foreign investors and Vietnamese government officials; the U.S.-ASEAN Business Council (USABC), AmCham, and other U.S. associations also host multiple yearly missions for their U.S. company members, which allow direct engagement with senior government officials. Foreign investors in Vietnam have reported that these meetings and dialogues have helped address obstacles.

Limits on Foreign Control and Right to Private Ownership and Establishment

Both foreign and domestic private entities have the right to establish and own business enterprises in Vietnam and engage in most forms of legal remunerative activity in non-regulated sectors.

Vietnam has some statutory restrictions on foreign investment, including FOLs or requirements for joint partnerships, projects in banking, network infrastructure services, non-infrastructure telecommunication services, transportation, energy, and defense. By law, the Prime Minister can waive these FOLs on a case-by-case basis. In practice, however, when the government has removed or eased FOLs, it has done so for the whole industry sector rather than for a specific investment.

MPI plays a key role with respect to investment screening. All FDI projects require approval by the provincial People’s Committee in which the project would be located. By law, large-scale FDI projects must also obtain the approval of the National Assembly before investment can proceed. MPI’s approval process includes an assessment of the investor’s legal status and financial strength; the project’s compatibility with the government’s long- and short-term goals for economic development and government revenue; the investor’s technological expertise; environmental protection; and plans for land use and land clearance compensation, if applicable. The government can, and sometimes does, stop certain foreign investments if it deems the investment harmful to Vietnam’s national security.

The following FDI projects also require the Prime Minister’s approval: airports; grade 1 seaports (seaports the government classifies as strategic); casinos; oil and gas exploration, production, and refining; telecommunications/network infrastructure; forestry projects; publishing; and projects that need approval from more than one province. In the period between this year’s Investment Climate Statement and last year’s, the government removed the requirement that the Prime Minister needs to approve investments over USD 271 million or investments in the tobacco industry.

Other Investment Policy Reviews

Recent third-party investment policy reviews include the World Bank’s Review from 2020: https://openknowledge.worldbank.org/handle/10986/33598 

https://openknowledge.worldbank.org/handle/10986/33598 

And OECD’s 2018 Review: https://www.oecd.org/countries/vietnam/oecd-investment-policy-reviews-viet-nam-2017-9789264282957-en.htm 

https://www.oecd.org/countries/vietnam/oecd-investment-policy-reviews-viet-nam-2017-9789264282957-en.htm 

UNCTAD released a report in 2009: https://unctad.org/webflyer/investment-policy-review-viet-nam 

https://unctad.org/webflyer/investment-policy-review-viet-nam 

Business Facilitation

The World Bank’s 2020 Ease of Doing Business Index ranked Vietnam 70 of 190 economies. The World Bank reported that in some factors Vietnam lags behind other Southeast Asian countries. For example, it takes businesses 384 hours to pay taxes in Vietnam compared with 64 in Singapore, 174 in Malaysia, and 191 in Indonesia.

In May 2021, USAID and the Vietnam Chamber of Commerce and Industry (VCCI) released the Provincial Competitiveness Index (PCI) 2020 Report, which examined trends in economic governance: http://eng.pcivietnam.org/ . This annual report provides an independent, unbiased view on the provincial business environment by surveying over 8,500 domestic private firms on a variety of business issues. Overall, Vietnam’s median PCI score improved, reflecting the government’s efforts to improve economic governance and the quality of infrastructure, as well as a decline in the prevalence of corruption (bribes).

Outward Investment

The government does not have a clear mechanism to promote or incentivize outward investment, nor does it have regulations restricting domestic investors from investing abroad. Vietnam does not release periodical statistics on outward investment, but reported that by the end of 2019 total outward FDI investment from Vietnam was USD 21 billion in more than 1,300 projects in 78 countries. Laos received the most outward FDI, with USD 5 billion, followed by Russia and Cambodia with USD 2.8 billion and USD 2.7 billion, respectively. SOEs like PetroVietnam, Viettel, and SOCB are Vietnam’s largest sources of outward FDI, and have invested more than USD 13 billion in outward FDI, per media reports.

3. Legal Regime

Transparency of the Regulatory System

U.S. companies continue to report that they face frequent and significant challenges with inconsistent regulatory interpretation, irregular enforcement, and an unclear legal framework. AmCham members have consistently voiced concerns that Vietnam lacks a fair legal system for investments, which affects U.S. companies’ ability to do business in Vietnam. The 2020 PCI report documented companies’ difficulties dealing with land, taxes, and social insurance issues, but also found improvements in procedures related to business administration and anti-corruption.

Accounting systems are inconsistent with international norms, and this increases transaction costs for investors. The government had previously said it intended to have most companies transition to International Financial Reporting Standards (IFRS) by 2020. Unable to meet this target, the Ministry of Finance in March 2020 extended the deadline to 2025.

In Vietnam, the National Assembly passes laws, which serve as the highest form of legal direction, but often lack specifics. Ministries provide draft laws to the National Assembly. The Prime Minister issues decrees, which provide guidance on implementation. Individual ministries issue circulars, which provide guidance on how a ministry will administer a law or decree.

After implementing ministries have cleared a particular law to send the law to the National Assembly, the government posts the law for a 60-day comment period. However, in practice, the public comment period is sometimes truncated. Foreign governments, NGOs, and private-sector companies can, and do, comment during this period, after which the ministry may redraft the law. Upon completion of the revisions, the ministry submits the legislation to the Office of the Government (OOG) for approval, including the Prime Minister’s signature, and the legislation moves to the National Assembly for committee review. During this process, the National Assembly can send the legislation back to the originating ministry for further changes. The Communist Party of Vietnam’s Politburo reserves the right to review special or controversial laws.

In practice, drafting ministries often lack the resources needed to conduct adequate data-driven assessments. Ministries are supposed to conduct policy impact assessments that holistically consider all factors before drafting a law, but the quality of these assessments varies.

The Ministry of Justice (MOJ) is in charge of ensuring that government ministries and agencies follow administrative procedures. The MOJ has a Regulatory Management Department, which oversees and reviews legal documents after they are issued to ensure compliance with the legal system. The Law on the Promulgation of Legal Normative Documents requires all legal documents and agreements to be published online and open for comments for 60 days, and to be published in the Official Gazette before implementation.

Business associations and various chambers of commerce regularly comment on draft laws and regulations. However, when issuing more detailed implementing guidelines, government entities sometimes issue circulars with little advance warning and without public notification, resulting in little opportunity for comment by affected parties. In several cases, authorities allowed comments for the first draft only and did not provide subsequent draft versions to the public. The centralized location where key regulatory actions are published can be found here:   http://vbpl.vn/  .

While general information is publicly available, Vietnam’s public finances and debt obligations (including explicit and contingent liabilities) are not transparent. The National Assembly set a statutory limit for public debt at 65 percent of nominal GDP, and, according to official figures, Vietnam’s public debt to GDP ratio in late 2020 was 55.3 percent – down from 56 percent the previous year. However, the official public-debt figures exclude the debt of certain large SOEs. This poses a risk to Vietnam’s public finances, as the government is liable for the debts of these companies. Vietnam could improve its fiscal transparency by making its executive budget proposal, including budgetary and debt expenses, widely and easily accessible to the general public long before the National Assembly enacts the budget, ensuring greater transparency of off-budget accounts, and by publicizing the criteria by which the government awards contracts and licenses for natural resource extraction.

International Regulatory Considerations

Vietnam is a member of ASEAN, a 10-member regional organization working to advance economic integration through cooperation in economic, social, cultural, technical, scientific and administrative fields. Within ASEAN, the ASEAN Economic Community (AEC) has the goal of establishing a single market across ASEAN nations (similar to the EU’s common market), but member states have not made significant progress. To date, AEC’s greatest success has been in reducing tariffs on most products traded within the bloc.

Vietnam is also a member of the Asia-Pacific Economic Cooperation (APEC), an inter-governmental forum for 21 member economies in the Pacific Rim that promotes free trade throughout the Asia-Pacific region. APEC aims to facilitate business among member states through trade facilitation programming, senior-level leaders’ meetings, and regular dialogue. However, APEC is a non-binding forum. ASEAN and APEC membership has not resulted in Vietnam incorporating international standards, especially when compared with the EU or North America.

Vietnam is a party to the WTO’s Trade Facilitation Agreement (TFA) and has been implementing the TFA’s Category A provisions. Vietnam submitted its Category B and Category C implementation timelines on August 2, 2018. According to these timelines, Vietnam will fully implement the Category B and C provisions by the end of 2023 and 2024, respectively.

Legal System and Judicial Independence

Vietnam’s legal system mixes indigenous, French, and Soviet-inspired civil legal traditions. Vietnam generally follows an operational understanding of the rule of law that is consistent with its top-down, one-party political structure and traditionally inquisitorial judicial system.

The hierarchy of the country’s courts is: 1) the Supreme People’s Court; 2) the High People’s Court; 3) Provincial People’s Courts; 4) District People’s Courts, and 5) Military Courts. The People’s Courts operate in five divisions: criminal, civil, administrative, economic, and labor. The Supreme People’s Procuracy is responsible for prosecuting criminal activities as well as supervising judicial activities.

Vietnam lacks an independent judiciary and separation of powers among Vietnam’s branches of government. For example, Vietnam’s Chief Justice is also a member of the Communist Party’s Central Committee. According to Transparency International, there is significant risk of corruption in judicial rulings. Low judicial salaries engender corruption; nearly one-fifth of surveyed Vietnamese households that have been to court declared that they had paid bribes at least once. Many businesses therefore avoid Vietnamese courts as much as possible.

The judicial system continues to face additional problems: for example, many judges and arbitrators lack adequate legal training and are appointed through personal or political contacts with party leaders or based on their political views. Regulations or enforcement actions are appealable, and appeals are adjudicated in the national court system. Through a separate legal mechanism, individuals and companies can file complaints against enforcement actions under the Law on Complaints.

The 2005 Commercial Law regulates commercial contracts between businesses. Specific regulations prescribe specific forms of contracts, depending on the nature of the deals. If a contract does not contain a dispute-resolution clause, courts will have jurisdiction over a dispute. Vietnamese law allows dispute-resolution clauses in commercial contracts explicitly through the Law on Commercial Arbitration. The law follows the United Nations Commission on International Trade Law (UNCITRAL) model law as an international standard for procedural rules.

Vietnamese courts will only consider recognition of civil judgments issued by courts in countries that have entered into agreements on recognition of judgments with Vietnam or on a reciprocal basis. However, with the exception of France, these treaties only cover non-commercial judgments.

Laws and Regulations on Foreign Direct Investment

The legal system includes provisions to promote foreign investment. Vietnam uses a “negative list” approach to approve foreign investment, meaning foreign businesses are allowed to operate in all areas except for six prohibited sectors – from which domestic businesses are also prohibited. These include illicit drugs, wildlife trade, prostitution, human trafficking, human cloning, and debt collection services.

The law also requires that foreign and domestic investors be treated equally in cases of nationalization and confiscation. However, foreign investors are subject to different business-licensing processes and restrictions, and companies registered in Vietnam that have majority foreign ownership are subject to foreign-investor business-license procedures.

The new Labor Code, which came into effect January 1, 2021, provides greater flexibility in contract termination, allows employees to work more overtime hours, increases the retirement age, and adds flexibility in labor contracts.

The Investment Law, revised in June 2020, stipulated Vietnam would encourage FDI, through incentives, in university education, pollution mitigation, and certain medical research. Public Private Partnership Law, passed in June 2020 lists transportation, electricity grid and power plants, irrigation, water supply and treatment, waste treatment, health care, education and IT infrastructure as prioritized sectors for FDI and private public partnerships.

Vietnam has a “one-stop-shop” website for investment that provides relevant laws, rules, procedures, and reporting requirements for investors:  https://vietnam.eregulations.org/  

Competition and Antitrust Laws

In 2018, Vietnam passed a new Law on Competition, which came into effect on July 1, 2019, replacing Vietnam’s Law on Competition of 2004. The Law includes punishments – such as fines – for those who violate the law. The government has not prosecuted any person or entity under this law since it came into effect, though there were prosecutions under the old law in the early 2000s. The law does not appear to have affected foreign investment. On March 24, 2020, Decree 35, the second decree to implement the Law on Competition, came into effect. Decree 35 addresses issues on anti-competitive agreements, abuse of dominance, and merger control. For merger control, the decree replaces the single market share threshold for when parties must notify a merger with an approach that puts forward four alternative benchmarks based on the value of assets, transaction value, revenue, and market share. The decree also provides details on merger filing assessment.

Expropriation and Compensation

Under the law, the government of Vietnam can only expropriate investors’ property in cases of emergency, disaster, defense, or national interest, and the government is required to compensate investors if it expropriates property. Under the U.S.-Vietnam Bilateral Trade Agreement, Vietnam must apply international standards of treatment in any case of expropriation or nationalization of U.S. investor assets, which includes acting in a non-discriminatory manner with due process of law and with prompt, adequate, and effective compensation. The U.S. Mission in Vietnam is unaware of any current expropriation cases involving U.S. firms.

Dispute Settlement

ICSID Convention and New York Convention

Vietnam has not acceded to the International Center for Settlement of Investment Disputes (ICSID) Convention but is a member of UN Commission on International Trade Laws for the period 2019-2025. MPI has submitted a proposal to the government to join the ICSID, but the government has not moved forward on it. Vietnam is a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”), meaning that Vietnam courts should recognize foreign arbitral awards rendered by a recognized international arbitration institution without a review of cases’ merits.

Investor-State Dispute Settlement

Vietnam has signed 67 bilateral investment treaties, is party to 26 treaties with investment provisions, and is a member of 15 free trade agreements in force. Some of these include provisions for Investor-State Dispute Settlement. As a signatory to the New York Convention, Vietnam is required to recognize and enforce foreign arbitral awards within its jurisdiction, with few exceptions. Technically, foreign and domestic arbitral awards are legally enforceable in Vietnam; however, foreign investors in Vietnam generally prefer international arbitration for predictability. Vietnam courts may reject foreign arbitral awards if the award is contrary to the basic principles of domestic laws. The new Investment law provides that only Vietnam arbitration and courts can solve disputes between investors and government authorities, while investors can select foreign or mutually agreed arbitrations to solve their disputes.

According to UNCTAD, over the last 10 years, there were two dispute cases against the Vietnamese government involving U.S. companies.  The courts decided in favor of the government in one case, and the parties decided to discontinue the other.  The government is currently in two pending, active disputes (with the UK and South Korea). More details are available at  https://investmentpolicy.unctad.org/investment-dispute-settlement/country/229/viet-nam.

International Commercial Arbitration and Foreign Courts

With an underdeveloped legal system, Vietnam’s courts are often ineffective in settling commercial disputes. Negotiation between concerned parties or arbitration are the most common means of dispute resolution. Since the Law on Arbitration does not allow a foreign investor to refer an investment dispute to a court in a foreign jurisdiction, Vietnamese judges cannot apply foreign laws to a case before them, and foreign lawyers cannot represent plaintiffs in a court of law. The Law on Commercial Arbitration of 2010 permits foreign arbitration centers to establish branches or representative offices (although none have done so).

There are no readily available statistics on how often domestic courts rule in favor of SOEs. In general, the court system in Vietnam works slowly. International arbitration awards, when enforced, may take years from original judgment to payment. Many foreign companies, due to concerns related to time, costs, and potential for bribery, have reported that they have turned to international arbitration or have asked influential individuals to weigh in.

Bankruptcy Regulations

Under the 2014 Bankruptcy Law, bankruptcy is not criminalized unless it relates to another crime. The law defines insolvency as a condition in which an enterprise is more than three months overdue in meeting its payment obligations. The law also provides provisions allowing creditors to commence bankruptcy proceedings against an enterprise and procedures for credit institutions to file for bankruptcy. According to the World Bank’s 2020 Ease of Doing Business Report, Vietnam ranked 122 out of 190 for resolving insolvency. The report noted that it still takes, on average, five years to conclude a bankruptcy case in Vietnam. The Credit Information Center of the State Bank of Vietnam provides credit information services for foreign investors concerned about the potential for bankruptcy with a Vietnamese partner.

6. Financial Sector

Capital Markets and Portfolio Investment

The government generally encourages foreign portfolio investment. The country has two stock markets: the Ho Chi Minh City Stock Exchange (HOSE), which lists publicly traded companies, and the Hanoi Stock Exchange, which lists bonds and derivatives. The Law on Securities, which came into effect January 1, 2021, states that Vietnam Exchange, a parent company to both exchanges, with board members appointed by the government, will manage trading operations. Vietnam also has a market for unlisted public companies (UPCOM) at the Hanoi Securities Center.

Although Vietnam welcomes portfolio investment, the country sometimes has difficulty in attracting such investment. Morgan Stanley Capital International (MSCI) classifies Vietnam as a Frontier Market, which precludes some of the world’s biggest asset managers from investing in its stock markets.

Vietnam did not meet its goal to be considered an “emerging market” in 2020, and pushed back the timeline to 2025. Foreign investors often face difficulties in making portfolio investments because of cumbersome bureaucratic procedures. Furthermore, in the first three months of 2021, surges in trading frequently crashed the HOSE’s decades-old technology platform, resulting in investor frustration.

There is enough liquidity in the markets to enter and maintain sizable positions. Combined market capitalization at the end of 2020 was approximately USD 230 billion, equal to 84 percent of Vietnam’s GDP, with the HOSE accounting for USD 177 billion, the Hanoi Exchange USD 9 billion, and the UPCOM USD 43 billion. Bond market capitalization reached over USD 50 billion in 2019, the majority of which were government bonds held by domestic commercial banks.

Vietnam complies with International Monetary Fund (IMF) Article VIII. The government notified the IMF that it accepted the obligations of Article VIII, Sections 2, 3, and 4, effective November 8, 2005.

Local banks generally allocate credit on market terms, but the banking sector is not as sophisticated or capitalized as those in advanced economies. Foreign investors can acquire credit in the local market, but both foreign and domestic firms often seek foreign financing since domestic banks do not have sufficient capital at appropriate interest rate levels for a significant number of FDI projects.

Money and Banking System

Vietnam’s banking sector has been stable since recovering from the 2008 global recession. Nevertheless, the State Bank of Vietnam (SBV), Vietnam’s central bank, estimated in 2019 that 55 percent of Vietnam’s population is underbanked or lacks bank accounts due to a preference for cash, distrust in commercial banking, limited geographical distribution of banks, and a lack of financial acumen. The World Bank’s Global Findex Database 2017 (the most recent available) estimated that only 31 percent of Vietnamese over the age of 15 had an account at a financial institution or through a mobile money provider.

The COVID-19 pandemic increased strains on the financial system as an increasing number of debtors were unable to make loan payments. Slow credit growth, together with increases in debtors’ inability to pay back loans, squeezed bank profits in 2020. At the end of 2020, the SBV reported that the percentage of non-performing loans (NPLs) in the banking sector was 2.14 percent, up from 1.9 percent at the end of 2019.

By the end of 2020, per SBV, the banking sector’s estimated total assets stood at USD 572 billion, of which USD 236 billion belonged to seven state-owned and majority state-owned commercial banks – accounting for 41 percent of total assets in the sector. Though classified as joint-stock (private) commercial banks, the Bank of Investment and Development Bank (BIDV), Vietnam Joint Stock Commercial Bank for Industry and Trade (VietinBank), and Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank) all are majority-owned by SBV. In addition, the SBV holds 100 percent of Agribank, Global Petro Commercial Bank (GPBank), Construction Bank (CBBank), and Oceanbank.

Currently, the total foreign ownership limit (FOL) in a Vietnamese bank is 30 percent, with a 5 percent limit for non-strategic individual investors, a 15 percent limit for non-strategic institutional investors, and a 20 percent limit for strategic institutional partners.

The U.S. Mission in Vietnam did not find any evidence that a Vietnamese bank had lost a correspondent banking relationship in the past three years; there is also no evidence that a correspondent banking relationship is currently in jeopardy.

Foreign Exchange and Remittances

Foreign Exchange

There are no legal restrictions on foreign investors converting and repatriating earnings or investment capital from Vietnam. A foreign investor can convert and repatriate earnings provided the investor has the supporting documents required by law proving they have completed financial obligations. The SBV sets the interbank lending rate and announces a daily interbank reference exchange rate. SBV determines the latter based on the previous day’s average interbank exchange rates, while considering movements in the currencies of Vietnam’s major trading and investment partners. The government generally keeps the exchange rate at a stable level compared to major world currencies.

Remittance Policies

Vietnam mandates that in-country transactions must be made in the local currency – Vietnamese dong (VND). The government allows foreign businesses to remit lawful profits, capital contributions, and other legal investment earnings via authorized institutions that handle foreign currency transactions. Although foreign companies can remit profits legally, sometimes these companies find bureaucratic difficulties, as they are required to provide supporting documentation (audited financial statements, import/foreign-service procurement contracts, proof of tax obligation fulfillment, etc.). SBV also requires foreign investors to submit notification of profit remittance abroad to tax authorities at least seven working days prior to the remittance; otherwise there is no waiting period to remit an investment return.

The inflow of foreign currency into Vietnam is less constrained. There are no recent changes or plans to change investment remittance policies that either tighten or relax access to foreign exchange for investment remittances.

Sovereign Wealth Funds

Vietnam does not have a sovereign wealth fund.

7. State-Owned Enterprises

The 2020 Enterprises Law, which came into effect January 1, 2021, defines an SOE as an enterprise that is more than 50 percent owned by the government. Vietnam does not officially publish a list of SOEs.

In 2018, the government created the Commission for State Capital Management at Enterprises (CMSC) to manage SOEs with increased transparency and accountability. The CMSC’s goals include accelerating privatization in a transparent manner, promoting public listings of SOEs, and transparency in overall financial management of SOEs.

SOEs do not operate on a level playing field with domestic or foreign enterprises and continue to benefit from preferential access to resources such as land, capital, and political largesse. Third-party market analysts note that a significant number of SOEs have extensive liabilities, including pensions owed, real estate holdings in areas not related to the SOE’s ostensible remit, and a lack of transparency with respect to operations and financing.

Privatization Program

Vietnam officially started privatizing SOEs in 1998. The process has been slow because privatization typically transfers only a small share of an SOE (two to three percent) to the private sector, and investors have had concerns about the financial health of many companies. Additionally, the government has inadequate regulations with respect to privatization procedures.

10. Political and Security Environment

Vietnam is a unitary single-party state, and its political and security environment is largely stable. Protests and civil unrest are rare, though there are occasional demonstrations against perceived or real social, environmental, labor, and political injustices.

In August 2019, online commentators expressed outrage over the slow government response to an industrial fire in Hanoi that released unknown amounts of mercury. Other localized protests in 2019 and early 2020 broke out over alleged illegal dumping in waterways and on public land, and the perceived government attempts to cover up potential risks to local communities.

Citizens sometimes protest actions of the People’s Republic of China (PRC), usually online. For example, in June 2019, when PRC Coast Guard vessels harassed the operations of Russian oil company Rosneft in Block 06-01, Vietnam’s highest-producing natural gas field, Vietnamese citizens protested via Facebook and, in a few instances, in public.

In April 2016, after the Formosa Steel plant discharged toxic pollutants into the ocean and caused a large number of fish deaths, affected fishermen and residents in central Vietnam began a series of regular protests against the company and the government’s lack of response to the disaster. Protests continued into 2017 in multiple cities until security forces largely suppressed the unrest. Many activists who helped organize or document these protests were subsequently arrested and imprisoned.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

 

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) (millions USD) 2020 2370 2020 3400 General Statistics Office (GSO) for Host Country and IMF for International Source https://www.imf.org/en/Countries/VNM#countrydata 
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data: BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2020 10,418 2019 2,615 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  
Host country’s FDI in the United States ($M USD, stock positions) 2020 N/A 2019 57 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  
Total inbound stock of FDI as % host GDP 2020 N/A 2019 49.3 UNCTAD data available at https://unctad.org/en/Pages/DIAE/World%20Investment%20Report/ountry-Fact-Sheets.aspx  
Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy

* General Statistics Office (GSO)

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 Amount 100% Total Outward Amount 100%
Singapore 6,828 32%
South Korea 2,946 14%
China 2,070 10%
Hong Kong 1,737 8%
Taiwan 1,707 8%
“0” reflects amounts rounded to +/- USD 500,000.

Data not available.

Portfolio Investment Assets
Top Five Partners (Millions, current US Dollars) (From MPI)
Total Equity Securities Total Debt Securities
All Countries Amount 100% N/A N/A
Singapore 2,166 29%
Japan 1,149 15%
South Korea 1,003 13%
Netherlands 445 6%
China 390 5%
Table 4: Sources of Portfolio Investment

West Bank and Gaza

Executive Summary

The Palestinian economy is small and relatively open. While 99 percent of firms in the West Bank and Gaza are family owned small- and medium-sized enterprises employing less than 20 people, large holding companies (only 1 percent) dominate certain sectors. Palestinian businesses have a reputation for professionalism and quality products. The private sector is mostly firms with moderate productivity, low investment, and limited competition, the majority of which are operating in retail and wholesale trade activities. Due to the small size of the local market (about 5 million consumers with relatively low purchasing power), access to foreign markets through trade is essential for private sector growth. Enterprises are highly dependent on Israel for either inputs or as a market, and 90 percent of Palestinian exports are sold to Israel. Preliminary 2020 export statistics obtained from the Palestine Central Bureau of Statistics (PCBS) show total exports of USD 1.094 billion, representing a 2.4 percent increase over 2019 (USD 1.068 billion).

Large Palestinian enterprises are connected internationally, with partnerships extending to Asia, Europe, the Gulf, and the Americas. However, Israeli government restrictions on the movement and access of goods and people between the West Bank, Gaza, and external markets continue to limit Palestinian private sector growth and reflect Israeli security concerns. Roughly 40 percent of the West Bank falls under the civil control of the Palestinian Authority (PA), referred to as Area A and Area B following the 1993 Oslo Accords and the 1994 economic agreement commonly known as the Paris Protocol. The Israeli government maintains full administrative and security control of Area C, which comprises roughly 60 percent of the West Bank. A 2017 USAID study found that high transaction costs stemming from limitations on movement, access, and trade are the most immediate impediment to Palestinian economic growth, followed by energy and water insecurity.

The Palestinian labor force is well educated, boasting a 98 percent literacy rate and the West Bank and Gaza enjoy high technology penetration, despite poor internet service. Nevertheless, already high unemployment persisted and worsened in 2020. According to the latest figures available from the PCBS, the combined West Bank and Gaza unemployment rate in the fourth quarter of 2020 was 23.4 percent. While the unemployment rates in both the West Bank and Gaza have remained the same in the last few years, the West Bank’s rate of 14.9 percent pales by comparison with the Gaza’s 43.1 percent, according to the PCBS. The rates were high for youth aged 20-24 years old (40.3 percent), and for the educated (28 percent). The public sector continues to be the largest Palestinian employer, providing 21.3 percent of all jobs.

In 2020, the economy contracted by 11-12 percent, according to World Bank preliminary estimates, due to COVID-19 response measures taken by the PA to combat the pandemic which affected all economic sectors as well as decisions taken for political reasons. The most prominent example of this was the PA’s decision to reject clearance revenues (taxes on imports collected by Israel on the PA’s behalf and transferred to the PA on a monthly basis) for six months (May-November 2020). For 2021, the World Bank estimates a modest economic recovery of 2.5 percent. With population growth at roughly 3 percent per year, real per capita GDP is projected to decline as unemployment and poverty rates rise. Ongoing political, economic, and fiscal uncertainty has generally deterred large-scale internal and foreign direct investment. Foreign direct investment, representing 1 percent of GDP, is also very low in comparison with fast-growing economies.

According to the World Bank, in 2020 investment rates remained low, with the majority channeled into non-traded activities that generate low productivity employment and returns that are less affected by political risk, such as internal trade and real estate development. Private investment levels, averaging about 15-16 percent of GDP in recent years, have been low compared with rates of over 25 percent in fast-growing middle-income economies. The manufacturing and agricultural sectors’ contribution to GDP is also in decline. Manufacturing fell from 19 percent of GDP in 1994 to 12 percent in 2019 and agriculture fell from 12 percent of GDP in 1994 to 7 percent in 2019. To reverse these trends, the Palestinian Investment Promotion Agency (PIPA) included both sectors in its National Export Strategy. Target sectors include:

Stone and marble

Tourism

Agriculture, including olive oil, fresh fruits, vegetables, and herbs

Food and beverage, including agro-processed meat

Textiles and garments

Manufacturing, including furniture and pharmaceuticals

Information and communication technology (ICT)

Renewable energy

In 2020, the PA ran a total fiscal deficit of nearly USD 1.6 billion, of which around USD $487 million ($356 million in recurrent budget support and $131 million in development financing) was covered by direct budget support from foreign donors. The PA covered its financing gap by taking an additional $748 million in new bank loans and accumulating more arrears to the private sector suppliers of goods and services (exceeding $1 billion), and the PA civil servants’ pension fund. The PA remains heavily dependent on Israeli transfers of PA clearance revenues which comprised 68 percent of all PA revenues in 2020. The PA’s continued practice of making prisoner and “martyr” payments – paying families of Palestinian security prisoners in Israeli jails and Palestinians killed or seriously injured due to the Israeli-Palestinian conflict, including terrorists – jeopardized these transfers. Israel imposes penalties to deter such payments, a position shared by the United States and applied to U.S. assistance through the Taylor Force Act and Anti-Terrorism Clarification Act (ATCA).

Any short-term growth in the Palestinian economy is connected to ongoing challenges with COVID-19 including delayed efforts to vaccinate the population. Future economic growth, however, depends on a number of factors: further easing of Israeli movement and access restrictions, balanced with Israeli security concerns; expanded external trade and private sector growth; PA approval and implementation of long-pending commercial legislative reforms; political stability; increased water and energy supply to the productive sectors at lower cost; and PA fiscal stability. Economic sectors that are not dependent on traditional infrastructure and freedom of movement, such as information and communications technologies, are able to grow somewhat independently of these factors and therefore have enjoyed greater success in the Palestinian economy during the past decade. The 2018 introduction of Third Generation (3G) communications technology into the West Bank stimulated further development of businesses that benefitted from real-time GPS/location data.

The Palestinian economy is expected to slowly recover after a sharp decline in 2020, and investment opportunities continue to exist in information technology, stone and marble, real estate development, light manufacturing, agriculture, and agro-industry. Coronavirus pandemic response measures have had a significant negative impact on both the stone and marble industry and the tourism sector, previously considered growth areas. While the economy overall should start recovering after Coronavirus response measures are totally lifted, the tourism sector is projected to continue to be adversely impacted by the loss of inbound tourism throughout 2021, negatively affecting 37,800 tourism industry workers.

This report focuses on investment issues related to areas under the administrative jurisdiction of the PA, except where explicitly stated. Where applicable, this report addresses issues related to investment in Gaza, although the de facto Hamas-led government’s implementation of PA legislation and regulations may differ significantly from the West Bank’s. For issues where PA law is not applicable, Gazan courts typically refer to Israeli and Egyptian law; however, Hamas does not consistently apply PA, Egyptian, or Israeli law. These inconsistencies in the legal environment, among a number of other, more challenging factors, are strong deterrents to private investment in Gaza.

Due to evolving circumstances, potential investors are encouraged to contact the PA Ministry of National Economy ( www.mne.gov.ps ), Palestinian Investment Promotion Agency ( www.PIPA.ps ), the Palestine Trade Center ( www.paltrade.org ), and the Palestinian-American Chamber of Commerce ( www.pal-am.com ), as well as the U.S. Embassy in Jerusalem ( https://il.usembassy.gov/embassy/ ) and the U.S. Commercial Service ( http://export.gov/westbank ) for the latest information.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index N/A N/A http://www.transparency.org/research/cpi/overview 
World Bank’s Doing Business Report 2020 117 of 190 http://www.doingbusiness.org/en/rankings 
Global Innovation Index N/A N/A https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, historical stock positions) N/A N/A https://apps.bea.gov/international/factsheet/ 
World Bank GNI per capita (USD) 2018 $3,882 https://data.worldbank.org/indicator/NY.GNP.PCAP.KN?locations=PS 

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

The West Bank and Gaza received an overall ranking of 117 out of 190 in the World Bank’s 2020 Ease of Doing Business report, a slight decrease from 116 out of 190 in 2019. (World Bank rankings range from 1 to 190, with a lower rank representing greater ease of doing business. The 2021 Doing Business Report has been delayed.) In the 2020 Doing Business Report, the Getting Credit component achieved a score of 25. However, other areas that continue to rank poorly and where significant regulatory improvement is still needed fall under the critical business-enabling categories of Resolving Insolvency (168 of 190), Starting a Business (173 of 190), Protecting Minority Investors (114 of 190), and Dealing with Construction Permits (148 of 190). The ease of registering real property score fell from 84 to 91 out of 190.

The National Policy Agenda is both a national development policy and a political document outlining the PA’s aspirations in three pillars: the path to independence, government reform, and sustainable development. The last section highlights the need for economic independence, including domestic reform to promote economic growth with fewer regulatory restrictions, supporting business start-ups and micro, small, and medium enterprises, as well as looking ahead to economic opportunities following the resolution of the political conflict with Israel. The PA released its National Policy Agenda for 2017-2022 in 2017, replacing the 2014-2016 National Development Plan.

PA-Israeli government trade relations are governed by the 1994 Paris Protocol, which was intended to endure for five years until a final peace agreement was signed. Many of the stipulations are outdated or not fully implemented. Since 1995, the PA has taken steps to facilitate and increase foreign trade by signing free trade agreements. The PA has finalized trade agreements with Russia, Jordan, Egypt, the Gulf States, Morocco, Tunisia, Mercosur, Vietnam, and Germany, and is a member of the Greater Arab Free Trade Area. The PA’s signed trade agreements with the European Union, the European Free Trade Association (EFTA), Canada, and Turkey have not been recognized by Israel and therefore, cannot be implemented; however, the PA remains eligible for the benefits of the Free Trade Agreement signed between the United States and Israel. The PA participates roughly every other year in the World Trade Organization (WTO) Ministerial meetings as an ad hoc observer, most recently in 2017. The next WTO Ministerial meetings were planned for June 2020 but have been postponed indefinitely due to COVID-19.

Limits on Foreign Control and Right to Private Ownership and Establishment

The PA’s 2014 amendments to the Promotion of Investment in Palestine Law No. 1 of 1998 shifted promotional incentives from a focus on those that benefit from providing large capital investments to industrial projects to a focus on employment growth, development of human capital, increased exports, and local sourcing of machinery and raw materials (see Investment Incentives section below).

Under the Jordanian Company Law of 1966 (still in effect in the West Bank), a foreign investor should own no more than 49 percent of a company, with a local partner holding at least 51 percent. Currently, foreign investors can obtain exceptions to this law by working with PIPA and the Ministry of National Economy (MONE). Foreign and domestic private entities may establish and own business enterprises in areas under PA civil control. The PA’s draft of a new Company Law, which would replace the outdated 1966 law, is still under review. Once approved, it would introduce best practices from regional models for debt resolution/insolvency and protecting minority investors and would simplify the registration process for starting a business.

Certain investment categories require pre-approval by the Council of Ministers (PA Cabinet). These include investments involving (1) weapons and ammunition, (2) aviation products and airport construction, (3) electrical power generation/distribution, (4) reprocessing of petroleum and its derivatives, (5) waste and solid waste reprocessing, (6) wired and wireless telecommunication, and (7) radio and television. Purchase of land by foreigners also requires approval by the Council of Ministers. U.S. investors are not specifically disadvantaged or singled out by any of the ownership or control mechanisms, sector restrictions, or investment screening mechanisms, relative to other foreign investors.

Other Investment Policy Reviews

The Office of the Quartet (OQ), an international organization working to support Palestinian economic development, rule of law, and improved movement and access for goods and people, has continued to work on advancing economic initiatives and the application of the rule of law. The OQ gives priority to areas where accomplishments are most viable under current conditions. Its current priorities focus on: (i) energy; (ii) water; (iii) rule of law; (iv) movement and trade; and (v) telecommunication. The Organization for Economic Cooperation and Development (OECD), the WTO, and the United Nations Conference on Trade and Development (UNCTAD) do not provide investment policy reviews for the West Bank and Gaza.

Business Facilitation

Foreign companies may register businesses in the West Bank and Gaza according to the 1964 Companies Law (Gaza, under Hamas’s direction, passed a separate Companies Law in 2012). The PIPA provides information online about the business registration process at http://www.pipa.ps/page.php?id=1c1ba7y1842087Y1c1ba7  but the PA does not offer a business registration website.

The West Bank and Gaza rank low in Starting a Business on the World Bank’s Ease of Doing Business Report, with a score in 2020 of 173 out of 190. The PA is working to simplify the process of starting a business, which currently requires ten steps and 43.5 days to complete, according to the World Bank report. The timeline includes two days to register the company, one day to pay registration fees, two days to register for taxes, one day to register with the Chamber of Commerce, and 36 days to obtain the required business license from the Municipality. Foreign investors must also obtain approval from the MONE and submit the application for registration through a local attorney.

Foreign companies may work with PIPA to obtain the investment registration certificate and investment confirmation certificate. See http://pipa.ps/page.php?id=1c395fy1849695Y1c395f  and http://pipa.ps/page.php?id=1c1ba7y1842087Y1c1ba7 . In addition, foreign companies seeking to open branches in the West Bank or Gaza must submit registration documents certified by the Palestinian Liberation Organization (PLO) representative in their home country. Due to the closure of the PLO office in New York in 2018, U.S investors can use the PLO office in Canada. According to PIPA, the majority of Palestinian companies are small- and medium-sized enterprises (SMEs), and the PA has sought to support SME development and financing. The PA categorizes SMEs according to staff size: small enterprises employ up to nine people, while medium enterprises employ 10-19 people.

Outward Investment

The PA does not have any mechanism for tracking outward private investment.

3. Legal Regime

Transparency of the Regulatory System

The PA Ministry of Justice, in cooperation with Birzeit University, publishes online the Official Gazette of all PA legislation since 1994 at http://muqtafi.birzeit.edu/en/index.aspx .

The PA established a sound legislative framework for business and other economic activity in the areas under its jurisdiction in 1994; however, implementation and monitoring of implementation needs to be strengthened, according to many observers. The PA Ministry of National Economy is in the process of drafting key pieces of economic legislation to improve business and commercial regulation, including an updated Companies Law (already under consideration by the President’s Office), new intellectual property rights protections, a Competition Law, and procedures for resolving bankruptcy. The PA President’s approval in May 2016 of the Secure Transactions Law, Leasing Law, and Moveable Assets Regulations, greatly improved Palestinians’ access to credit.

The PA Ministry of National Economy holds stakeholder meetings for draft commercial legislation to gather input from the private sector and publishes drafts of the proposed laws. Because the Palestinian Legislative Council (PLC) has not met since 2007, each law must be approved by the Cabinet and adopted as a Presidential decree, an effort that often delays reform efforts. The proposed laws will likely need to be approved by the PLC, should it reconvene in the future. On December 22, 2018, PA President Abbas announced that the PA Constitutional Court had issued a decision formally dissolving the PLC and calling for PLC elections within six months. As of April 2021, no PLC elections have taken place, but are now scheduled for May 2021. The PA budget execution reports are publicly available, including on the Ministry of Finance website ( http://www.pmof.ps/pmof/index.php ). A regulatory body governs the insurance sector, and the PA has adopted a telecommunications law that calls for establishment of an independent regulator. Establishment of the telecommunications regulator remains stalled, however.

The Palestinian Standards Institution (PSI) also has a website with information on standards for the business community ( http://www.psi.pna.ps/en  ).

International Regulatory Considerations

The PA is not a member of the WTO but has consistently expressed an interest in Permanent Observer status, having participated in the 2005, 2009, 2011, 2013, 2015, and 2017 WTO Ministerial meetings as an ad hoc observer.

Legal System and Judicial Independence

Commercial disputes can be resolved by way of conciliation, mediation, or domestic arbitration. Arbitration in the Palestinian territories is governed by PA Law No. 3 of 2000. International arbitration is accepted. The law sets out the basis for court recognition and enforcement of arbitral awards. Generally, every dispute may be referred to arbitration by agreement of the parties, unless prohibited by the law’s Article 4, including disputes involving marital status, public order issues, and cases where no conciliation is permitted. If the parties do not agree on the formation of the arbitration tribunal, each party may choose one arbitrator and those arbitrators shall then choose a presiding arbitrator, unless the parties agree to do otherwise.

Judgments made in other countries that need to be enforced in the West Bank and Gaza are honored, according to the prevailing law in the West Bank, primarily Jordanian Law No. 8 of 1952 as amended by the PA in 2005. Gazan courts refer back to Israeli and Egyptian laws, which were in force prior to 1993, for matters not covered by PA law; however, the de facto Hamas-led government in Gaza does not consistently apply PA, Egyptian, or Israeli laws.

Laws and Regulations on Foreign Direct Investment

Laws that govern foreign direct investment are overseen by the PA Ministry of National Economy.

Competition and Antitrust Laws

There is no Competition Law for the West Bank and Gaza currently. The PA drafted a law in 2003 that was not enacted. An effort to develop, draft, and implement a new Competition Law began in 2017 with the assistance of the U.S. Department of Commerce’s Commercial Law Development Program (CLDP). The PA’s resulting revised draft law has not yet been issued and is currently undergoing review and re-drafting before it can go to the cabinet. Because of the geographic divisions between and within the West Bank and Gaza, many firms have little to no competition, causing variations in both pricing and firm productivity between regions and sometimes between cities within a region.

Expropriation and Compensation

The Investment Law, as amended in 2014, prohibits expropriation and nationalization of approved foreign investments, other than in exceptional cases for a public purpose with a court decision and in return for fair compensation based on market prices and for losses suffered because of such expropriation.

PA sources and independent lawyers say that any Palestinian citizen can file a petition or a lawsuit against the PA. In 2011, the PA established independent, specialized courts for labor, chambers, customs, and anti-corruption. These courts are composed of judges and representatives from the Ministries of National Economy and Finance. There is general confidence in the judicial system and businesses rely on the courts and police to enforce contracts and seek redress, though alternative means of arbitration are still used to resolve some disputes.

Dispute Settlement

ICSID Convention and New York Convention

The PA signed the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) in January 2015, and the Convention entered into force in April 2015. The PA is not a member of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention). In 2014, the IMF reported an average of 540 days to resolve a standard commercial dispute through the courts, with 44 separate procedures required for dispute resolution. Litigants suggested that the decisions at different levels of the courts were inconsistent, prompting more appeals and a larger overall caseload.

Investor-State Dispute Settlement

The Investment Law, as amended in 2014, provides for dispute resolution between the investor and official agencies either via binding independent arbitration or by a Palestinian court decision. It has been reported that some contracts contain clauses referring dispute resolutions to the London Court of Arbitration. The Jerusalem Arbitration Center (JAC) provides a forum for resolving business disputes between Palestinian and Israeli companies.

International Commercial Arbitration and Foreign Courts

International arbitration is permitted and governed by Law No. 3 of 2000 (see section on Legal System and Judicial Independence above). Generally, every dispute may be referred to arbitration by the agreement of the parties, unless prohibited by law. Article 4 of the law states that certain disputes cannot be referred to arbitration, including those involving marital status, public order issues, and cases where no conciliation is permitted. In the event that parties do not agree on the formation of the arbitration panel, each party may choose an arbitrator and those arbitrators shall choose a presiding arbitrator unless the parties agree to proceed otherwise. Arbitral awards made in other countries that need to be enforced in the West Bank and Gaza are honored, according to the prevailing law in the West Bank, mainly Jordanian Law No. 8 of 1952 as amended by the PA in 2005. The law covers many issues in relation to the enforcement of foreign judgments.

Bankruptcy Regulations

The World Bank’s 2020 Doing Business Report did not cite any cases involving a foreclosure, liquidation, or reorganization proceedings filed in the last 12 months. According to that report, no priority is assigned to post-commencement creditors, and debtors may only file for liquidation. The PA Ministry of National Economy, with the assistance of international donors, is in the process of drafting several proposed laws related to bankruptcy, but no bankruptcy reform has been enacted. The pending Companies Law includes a chapter on insolvency.

6. Financial Sector

Capital Markets and Portfolio Investment

In 2004, the PA enacted the Capital Markets Authority Law and the Securities Commission Law and created the Capital Market Authority to regulate the stock exchange, insurance, leasing, and mortgage industries. In 2010, a Banking Law was adopted to bring the Palestinian Monetary Authority’s (PMA) regulatory capabilities in line with the Basel Accords, a set of recommendations for regulations in the banking industry. The 2010 law provides a legal framework for the establishment of deposit insurance, management of the Real Time Gross Settlement (RTGS) system, and treatment of weak banks in areas such as merger, liquidation, and guardianship. It also gives the PMA regulatory authority over the microfinance sector. In 2013, the PA passed a Commercial Leasing Law and in 2015 the MONE finalized a registry for moveable assets, intended to facilitate secured transactions, especially for small and medium-sized businesses. In April 2016, the PA passed the Secured Transactions Law, which established the legal grounds and modern systems to regulate the use of movable assets as collateral.

Notwithstanding this regulatory environment, the World Bank’s 2020 Ease of Doing Business report assigned the West Bank and Gaza a particularly low score for Protecting Minority Investors (114 out of 190) and Resolving Insolvency (168 out of 190). Founders of recently established SMEs complain that loan terms from Palestinian creditors fail to allow the borrower enough time to establish a sustainable business, although the new Moveable Assets Registry, coupled with the Secured Transactions Law and Commercial Leasing Law, led to a substantial improvement in the Getting Credit ranking (25 out of 190) from 2018.

The Palestine Exchange (PEX) was established in 1995 to promote investment in the West Bank and Gaza. Launched as a private shareholding company, it was transformed into a public shareholding company in February 2010. The PEX was fully automated upon establishment – the first fully automated stock exchange in the Arab world, and the only Arab exchange that is publicly traded and fully owned by the private sector. The PEX is registered with the Companies Controller at the Ministry of National Economy and it operates under the supervision of the Palestinian Capital Market Authority. PEX’s 49 listed companies are divided into five sectors: banking and financial services, insurance, investment, industry, and services, with a USD 3.5 billion market capitalization. Shares trade in Jordanian dinars and U.S. dollars. PEX member securities companies (brokerage firms) operations are found across the West Bank and Gaza and authorized custodians are available to work on behalf of foreign investors.

Money and Banking System

The Palestinian banking sector continues to perform well under the supervision of the PMA. World Bank reports to the Ad Hoc Liaison Committee (AHLC) have consistently noted that the PMA is effectively supervising the banking sector. The PMA continues to enhance its institutional capacity and provides rigorous supervision and regulation of the banking sector, consistent with international practice.

An Anti-Money Laundering Law that was prepared in line with international standards with technical assistance from the International Monetary Fund (IMF) and USAID came into force in October 2007. In December 2015, the PA President signed the Anti-Money Laundering and Terrorism Financing Decree Law Number 20 for the PA to join the Middle East and North Africa Financial Action Task Force (MENA/FATF), a voluntary organization of regional governments focused on combating money laundering and the financing of terrorism and proliferation. Improvements contained in the 2015 law make terrorist financing a criminal offense and defines terrorists, terrorist acts, terrorist organizations, foreign terrorist fighters, and terrorist financing (AML/CFT). The PMA completed a National Risk Assessment (NRA) – an AML/CTF self-assessment – in 2018. The PMA is implementing the recommendations from the self-assessment to strengthen the AML/CTF regime in preparation for a MENA/FATF member review of the Palestinian economy’s AML/CFT safeguards, initially scheduled for August 2020. However, due to the COVID-19 pandemic, the PA asked MENA FATF to postpone its review. The PMA is considered a regional leader in AML/CTF safeguards and its representatives provide training to other Arab governments.

Credit is affected by uncertain political and economic conditions and by the limited availability of real estate collateral due to non-registration of most West Bank land.  Despite these challenges, the sector’s loan-to-deposit ratio continues to increase towards parity, moving from 58 percent at the end of 2015 to 68 percent at the end of 2019. However, in 2020, the loan to deposit ratio slightly declined to 66.6 percent due to reduced lending to businesses because of COVID-19. The increase in the loan to deposit ratio in the past was in part because of the PMA’s encouragement to banks to participate in loan guarantee programs sponsored by the United States and international financial institutions, by supporting a national strategy on microfinance, and by imposing restrictions on foreign placements.  The PA Ministry of National Economy’s enactment of the Secured Transactions Law in April 2016 allows for use of moveable assets, such as equipment, as collateral for loans.  Non-performing loans in 2020 were 4.19 percent of total loans, due to credit bureau assessments of borrowers’ credit worthiness and a heavy collateral system. In addition, in 2020 banks avoided default by restructuring and rescheduling loans to help customers cope with the impact of COVID-19.

Palestinian banks have remained stable in general but have suffered from a deterioration in relations with Israeli correspondent banks since the Hamas takeover of Gaza in 2007, at which time Israeli banks cut ties with Gaza branches and gradually restricted cash services provided to West Bank branches.  All Palestinian banks were required to move their headquarters to Ramallah in 2008.  Israeli restrictions on the movement of cash between West Bank and Gaza branches of Palestinian banks have caused intermittent liquidity crises in Gaza and for all major currencies, including U.S. dollars, Jordanian dinars, and Israeli shekels. An Israeli government decision in late 2018 to increase the deposit transfer amount from Palestinian banks to the Bank of Israel to NIS 1 billion monthly (an increase from NIS 350 million per month) and again in the first quarter of 2021 to NIS 1.2 billion monthly reduced the excess amount of shekels in the West Bank and Gaza.

The PMA regulates and supervises 13 banks (6 Palestinian, 6 Jordanian, and 1 Egyptian) with 379 branches and offices in the West Bank and Gaza, with USD 19.2 billion net assets up from USD 17.2 billion in 2019.  No Palestinian currency exists and, as a result, the PA places no restrictions on foreign currency accounts.  The PMA is responsible for bank regulation in both the West Bank and Gaza.  Palestinian banks are some of the most liquid in the region, with customers deposits of USD 15 billion and gross credit of USD 10 billion as of the end of 2020.

Foreign Exchange and Remittances

Foreign Exchange

The PA does not have its own currency. According to the 1995 Interim Agreement, the Israeli shekel (NIS) freely circulates in the West Bank and Gaza and serves as means of payment for all purposes, including official transactions. The exchange of foreign currency for NIS and vice-versa by the PMA is carried out through the Bank of Israel Dealing Room, at market exchange rates.

Remittance Policies

The Investment Law guarantees investors the free transfer of all financial resources out of the Palestinian territories, including capital, profits, dividends, wages, salaries, and interest and principal payments on debts. Most remittances under USD 10,000 can be processed within a week. In addition to the Israeli Shekel (NIS), U.S. dollars (USD) and Jordanian dinars (JD) are widely used in business transactions. There are no other PA restrictions governing foreign currency accounts and currency transfer policies. Banks operating in the West Bank and Gaza, however, are subject to Israeli restrictions on correspondent relations with Israeli banks and the ability to transfer shekels into Israel, which occasionally limit services such as wire transfers and foreign exchange transactions.

Sovereign Wealth Funds

The privately-run Palestine Investment Fund (PIF) acts as a sovereign wealth fund, owned by the Palestinian people.  According to PIF’s 2019 annual report (the most recent available), its assets reached USD 1 billion and net income USD 24.3 million.  PIF’s investments in 2019 were concentrated in infrastructure, energy, telecommunications, real estate and hospitality, micro/small/medium enterprises, large caps, and capital market investments.  90 percent of PIF investments are domestic, but excess liquidity is invested in international and regional fixed income and equity markets.  In 2014, the fund established the Palestine for Development Foundation, a separate not-for-profit foundation managing PIF’s corporate social responsibility initiatives, which are primarily focused on support to Palestinians in the West Bank, Gaza, Jerusalem, and abroad.  Since 2003, PIF has transferred over USD 850 million to the PA in annual dividends, but PIF leadership does not report to the PA per PIF bylaws.  International auditing firms conduct both internal and external annual audits of the PIF.

7. State-Owned Enterprises

Although there are no state-owned enterprises (SOEs), some observers have noted that the PIF essentially acts as a sovereign wealth fund for the PA, and enjoys a competitive advantage in some sectors, including housing and telecommunications, due to its close ties with the PA. The import of petroleum products falls solely under the mandate of the Ministry of Finance’s General Petroleum Corporation, which then re-sells the products to private distributors at fixed prices.

Privatization Program

There is no PA privatization program for industries within the West Bank and Gaza.

10. Political and Security Environment

The security environment in the West Bank and Gaza remains complex. The security situation can change rapidly, depending on the political situation, recent events, and the geographic region. Potential investors should regularly consult the State Department’s latest travel warnings, available at https://travel.state.gov. According to a comprehensive USAID study published in 2017, restrictions on movement and access to resources and markets remained the key obstacles to investment.

Violent clashes between security forces and Palestinian residents of the West Bank and Gaza as well as between Israeli settlers and Palestinians have resulted in numerous deaths and injuries. During periods of unrest, the Israeli government may restrict access to and within the West Bank and may place some areas under curfew. In June 2007, Hamas, a designated Foreign Terrorist Organization (FTO), violently seized control of the Gaza. The security environment within Gaza and on its borders is dangerous and volatile. Violent demonstrations and shootings occur on a frequent basis and the collateral risks are high. While Israel and Hamas continue to observe the temporary cease-fire that ended the latest war between Israel and Gaza in 2014, periodic mortar and rocket fire and Israeli military responses continue to occur. Following the 2007 Hamas takeover, the Israeli government implemented a closure policy that restricted imports to limited humanitarian and commercial shipments, effectively blocking exports from Gaza until 2015, when exports rebounded to an average of 115 truckloads per month.

The economic situation and investment outlook in Gaza have deteriorated since the 2007 takeover, with especially challenging periods following Israeli combat operations there: December 2008-January 2009 (Operation Cast Lead); November 2012 (Operation Pillar of Defense); and July-August 2014 (Operation Protective Edge). The Israeli government has at times eased its closure policy by lifting some restrictions on goods imported into and exported out of Gaza. The Israeli government allows limited exports (transshipments) to overseas markets and to Israel, and some sales to the West Bank. 11. Labor Policies and Practices

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

According to the PCBS, the stock of foreign investment in the West Bank and Gaza at the end of 2018 (most recent data available) amounted to USD 3.837 billion. This includes foreign direct investment (USD 2.716 billion), portfolio investments (USD 668 million), and other investments (USD 453 million).

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) (USD) 2019 $15.8 billion 2019 $14.75 billion World Bank, West Bank and Gaza Country Data http://data.worldbank.org/country/west-bank-and-gaza 
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 N/A N/A BEA data unavailable
Host country’s FDI in the United States (M USD, stock positions) N/A N/A N/A N/A BEA data unavailable
Total inbound stock of FDI as % host GDP 2016 20% 2016 20% IMF Coordinated Direct Investment Survey http://data.imf.org/?sk=40313609-F037-48C1-84B1-E1F1CE54D6D5&ss=1482331048410 

* Host source: http://www.pcbs.gov.ps/statisticsIndicatorsTables.aspx?lang=en&table_id=377  and http://www.pcbs.gov.ps/Portals/_Rainbow/Documents/E.QNA_Curret.htm 

Note:

  • Preliminary PCBS data – note final and Basis Year for GDP calculations was changed by PCBS from 2004 to 2015
  • Estimated GDP for 2020 is $12.97 billion

**Host Source: PCBS Foreign Investment Survey of Palestinian Enterprises (stocks) at the end of 2018 available at: http://www.pcbs.gov.ps/Portals/_Rainbow/Documents/e-IIP-2018%20sector.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 (N/A)
Total Inward $1,432 100% Total Outward Amount 100%
Jordan $146 8.4% N/A Amount X%
Egypt $48 2.8% N/A Amount X%
United States $36 2.1% N/A Amount X%
Kingdom of Saudi Arabia $27 1.6% N/A Amount X%
Cyprus $26 1.5% N/A Amount X%
“0” reflects amounts rounded to +/- USD 500,000.

The private Palestine Development and Investment Company (PADICO) has invested over USD 250 million in telecommunications, housing, and the establishment of the Palestine Exchange (PEX). The Ramallah-based Arab Palestinian Investment Company (APIC) is a large foreign investment group with authorized capital of over USD 100 million. Four private equity funds operate in the West Bank/Gaza, largely comprised of foreign investors: Riyada, Siraj, Sharakat, and Sadara. Other significant foreign investments include Qatari mobile operator Ooredoo’s projected USD 600 million investment in Ooredoo Palestine (formerly Wataniya Mobile) over a 10-year period, and Qatari Diar’s USD 1 billion investment in Rawabi, a mixed use/affordable housing real estate development. The largest U.S. investment is Coca-Cola’s 15 percent stake in the local bottler, Palestine National Beverage Company (PNBC), a company valued at USD 70 million. PNBC opened a USD 20 million bottling facility in Gaza in December 2016, in addition to its three West Bank-based plants.

Table 4: Portfolio Investment
Table 4: Portfolio Investment Assets
Top Five Partners (Millions, current US Dollars)
Total Equity Securities Total Debt Securities
All Countries $1,416 100% All Countries $402 100% All Countries $1,014 100%
Jordan $1,009 71.25 Jordan $260 64.7% Jordan $749 74%
UAE $65 4.6% Non-Specified $30 7.5% UAE $63 6.2%
Non- Specified $56 3.9% Kuwait $15 3.7% International Organizations $43 4.2%
International Organizations $36 2.5% Egypt $6 1.5% Not Specified $26 2.5%
Kuwait $31 2% United States $4 1% United States $19 1.5%

Zambia

Executive Summary

Zambia is a landlocked country in southern Africa that shares a border with eight countries: Angola, Democratic Republic of the Congo, Tanzania, Malawi, Mozambique, Zimbabwe, Botswana, and Namibia. The country has an estimated population of 17.86 million and GDP per capita of USD 1,430, according to the World Bank.

Despite broad economic reforms in the early 2000s, Zambia has struggled to diversify its economy from mining and accelerate private-led growth to address the poverty of its people. Cumbersome administrative procedures and unpredictable legal and regulatory changes inhibit Zambia’s immense potential for private sector investment. This is compounded by insufficient transparency in government contracting, ongoing lack of reliable electricity, and the high cost of doing business due to poor infrastructure, the high cost of capital, and lack of skilled labor.

Zambia’s already struggling economy was deeply impacted by the COVID-19 global pandemic. The International Monetary Fund (IMF) estimates Zambia’s economy contracted by 3.5 percent in 2020, after previously slowing to 1.8 percent in 2019 in a marked decline from the 4.0 percent growth seen in 2018. Inflation rose from 9.2 percent in 2019 to 19.2 percent by December 2020, well above the Bank of Zambia’s target range of 6.0 to 8.0 percent for 2020. In 2018 and 2019, Zambia’s economy was hit by a severe nationwide drought that considerably lowered agricultural production and hydropower electricity generation; electricity rationing continued in 2020, which dampened activity in almost all economic sectors. Copper is the country’s largest export; copper production in 2020 increased in the face of rising global copper prices to 10.8 percent over 2019’s anemic levels. Production in 2019 suffered a 12.5 percent decline from 2018 levels due in part to an onerous mining tax regime and falling global demand.

Zambia’s external debt grew to USD 11.98 billion in 2020, up from USD 11.2 billion at the end of 2019. The fiscal deficit at the end of 2020 was 11 percent of GDP, well above the government’s 6.5 percent target. The Zambian kwacha depreciated against the dollar by 34.1 percent in 2020, increasing the cost of external debt service and reducing the purchase power of Zambian businesses and consumers. Investor appetite for domestic bonds continued to shrink, and short- and long-term domestic borrowing costs rose. In November 2020 Zambia defaulted on a USD 42.5 million payment on its Eurobond, and the country has defaulted on numerous other commercial loans with foreign creditors. Fiscal responsibility is key to ensuring that macroeconomic fundamentals do not deteriorate further. At the end of 2020, foreign exchange reserves stood at USD 1.18 billion (representing 2.4 months of import cover), compared to USD 1.45 billion as of year-end 2019.

Budget execution by the Government of the Republic of Zambia (GRZ) has historically been poor and is widely viewed as aspirational rather than accurate, with documented extra budgetary spending. The GRZ continues to negotiate a potential loan package from the International Monetary Fund (IMF) intended to put Zambia on a path of debt sustainability and improved fiscal governance.

The U.S. Embassy works closely with the American Chamber of Commerce of Zambia (AmCham) to support its 65+ American and Zambian members seeking to increase two-way trade. Agriculture and mining remain headlining sectors for the Zambian economy. U.S. firms are present or exploring new projects in tourism, power generation, agriculture, and services.

Note: The ongoing global COVID-19 pandemic brought not only health but additional economic challenges. The GRZ in collaboration with the United Nations Development Program (UNDP) conducted a business survey in May 2020 to provide data on measures to help businesses respond during and after the pandemic. The report indicates that the pandemic has adversely affected business operations, with 71 percent of respondents indicating they partially closed their businesses, while another 14 percent of respondents noted that they closed their businesses totally. The GRZ is currently seeking emergency funding, debt relief, and debt restructuring to mitigate the pandemic’s economic impact.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2020 117 of 180 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2019 85 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2020 85 of 190 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2019      $42 https://apps.bea.gov/international/factsheet/factsheet.cfm
World Bank GNI per capita 2019      $1,430 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

In general, Zambian law does not restrict foreign investors in any sector of the economy, although there are a few regulations and practices limiting foreign control laid out below. Foreign Direct Investment (FDI) continues to play an important role in Zambia’s economy. The Zambia Development Agency (ZDA) is charged with attracting more FDI to Zambia, in addition to promoting trade and investment and coordinating the country’s private sector-led economic development strategy.

Zambia has undertaken certain institutional reforms aimed at improving its attractiveness to investors; these reforms include the Private Sector Development Reform Program (PSDRP), which addresses the cost of doing business through legislation and institutional reforms, and the Millennium Challenge Account (MCA), which addresses issues relating to transparency and good governance ( https://data.mcc.gov/evaluations/index.php/catalog/72/study-description ). However, frequent government policy changes have created uncertainty for foreign investors. Recent examples include a rapid transition from a value-added tax regime to a sales tax that was slated to take effect in July 2019, but ultimately scrapped in September 2019 after multiple last minute delays and stakeholder backlash; taxes and royalty increases in the mining sector that took effect in January 2019 and marked the tenth significant change to mining taxes and regulations in 16 years; a labor law update with insufficient public consultation that significantly increased hiring costs for formal businesses; and unpredictable changes to limits on various crop exports.

Limits on Foreign Control and Right to Private Ownership and Establishment

The ZDA does not discriminate against foreign investors, and all sectors are open to both local and foreign investors. Foreign and domestic private entities have a right to establish and own business enterprises and engage in all forms of remunerative activities, and no business ventures are reserved solely for the government. Although private entities may freely establish and dispose of interests in business enterprises, investment board approval is required to transfer an investment license for a given enterprise to a new owner.

Currently, all land in Zambia is considered state land and ownership is vested in the president. Land titles held are for renewable 99-year leases; ownership is not conferred. According to the government, the current land administration system leaves little room for the empowerment of citizens, especially the poor and vulnerable rural communities. The government began reviewing the current land policy in earnest in March 2017; though shorter terms continue to be suggested, no changes have been adopted to date.

Foreign investors in the telecom sector are required to disclose certain proprietary information to the ZDA as part of the regulatory approval process. Further information regarding information and communication regulation can be found at the website of the Zambia Information and Communication Technology Authority at http://www.zicta.zm 

The ZDA board screens all investment proposals and usually makes its decision within 30 days. The reviews appear to be routine and non-discriminatory and applicants have the right to appeal investment board decisions. Investment applications are screened, with effective due diligence to determine the extent to which the proposed investment will help to create employment; the development of human resources; the degree to which the project is export-oriented; the likely impact on the environment; the amount of technology transfer; and any other considerations the Board considers appropriate.

The following are the requirements for registering a foreign company in Zambia:

  1. At least one and not more than nine local directors must be appointed as directors of a majority foreign-owned company. At least one local director of the company must be resident in Zambia, and if the company has more than two local directors, more than half of them shall be residents of Zambia.
  2. There must be at least one documentary agent (a firm, corporate body registered in Zambia, or an individual who is a resident in Zambia).
  3. A certified copy of the Certificate of Incorporation from the country of origin must be attached to Form 46.
  4. The charter, statutes, regulations, memorandum and articles, or other instrument relating to a foreign company must be submitted.
  5. The Registration Fee of K5,448.50 (~ USD 250.00) must be paid.
  6. The issuance and sealing of the Certificate of Registration marks the end of the process for registration.

This information can also be found at the web address of the Patents and Companies Registration Agency (PACRA), http://www.pacra.org.zm 

Other Investment Policy Reviews

The GRZ conducted a trade policy review through the World Trade Organization (WTO) in June 2016. The report found that Zambia recorded relatively strong economic growth at an average rate of 6.6 percent per year up to 2015. The improvement was attributed to growing demand for copper (the main export product) and its spillover effects on some other sectors such as transport, communications, and wholesale and retail trade. Buoyant construction activity and higher agricultural production also helped.

The trade policy review report of 2016 reached the following conclusions: the government should continue to implement programs and initiatives directed at attaining inclusive growth and job creation and pay particular attention to macroeconomic stability, diversification of the economy, support to small and medium enterprises (SMEs), engagement with cooperating partners, and promotion of investment. Zambia also uses bilateral, regional, and multilateral frameworks to support economic growth and development.

Report found here: https://www.wto.org/english/tratop_e/tpr_e/tp440_e.htm 

Business Facilitation

The Zambian government, often with support from cooperating partners, has undertaken economic reforms to improve its business facilitation process and attract foreign investors, including steps to support more transparent policymaking and to encourage competition. The impact of these progressive policies, however, has been undermined by persistent fiscal deficits, struggling economy, high cost of doing business and widespread corruption. Business surveys, including TRACE International, generally indicate that corruption in Zambia is a major obstacle for conducting business in the country.

The Zambian Business Regulatory Review Agency (BRRA) manages Regulatory Services Centers (RSCs) that serve as a one-stop shop for investors. RSCs provide an efficient regulatory clearance system by streamlining business registration processes; providing a single licensing system; reducing the procedures and time it takes to complete the registration process; and increasing accessibility of business registration institutions by placing them under one roof.

The government established RSCs in Lusaka, Livingstone, Kitwe, and Chipata, and has plans to establish additional RSCs so that there is at least one in each of the country’s 10 provinces. Information about the RSCs can be found at the following links:

The Companies Act No. 10 of 2017 was operationalized through a statutory instrument (June 2018) and implementing regulations (February 2019) aimed at fostering accountability and transparency in the management of companies. Companies are required to maintain a register of beneficial owners, and persons holding shares on behalf of other persons or entities must now disclose those beneficial owners.

In order to facilitate improved access to credit, the Patents and Company Registration Office (PACRA) established the collateral registry system, a central database that records all registrations of charges or collaterals created by borrowers to secure credits provided by lenders. This service allows lenders to search for collateral offered by loan applicants to see if that collateral already has an existing claim registered against it. Creditors can also register security interests against the proposed collateral to protect their priority status in accordance with the Movable Property (Security Interest) Act No. 3 of 2016. Generally, the first registered security interest in the collateral has first priority over any subsequent registrations.

Parliament passed the Border Management and Trade Facilitation Act in December 2018. The Act, among other things, calls for coordinated border management and control to facilitate the efficient movement and clearance of goods; puts into effect provisions for one-stop border posts; and simplifies clearance of goods with neighboring countries. While one-stop border posts have existed for several years and agencies are co-located at some border crossings, the new law seeks to harmonize conflicting regulations and processes within the interagency.

Outward Investment

Through the Zambia Development Agency (ZDA), the government continues to undertake a number of activities to promote investment through provision of fiscal and non-fiscal incentives, establishment of Multi-Facility Economic Zones (MFEZs), the development of SMEs, as well as the promotion of skills development, productive investment, and increased trade. However, there is no incentive for outward investment nor is there any known government restriction on domestic investors from investing abroad.

3. Legal Regime

Transparency of the Regulatory System

Proposed laws and other statutory instruments are often insufficiently vetted with interest groups or are not released in draft form for public comment. Proposed bills are published on the National Assembly of Zambia website ( http://www.parliament.gov.zm/ ) for public viewing and to facilitate public submissions to parliamentary committees reviewing the legislation. Hard copies of the documents are delivered by courier to the stakeholders’ premises/mailboxes. Finalized statutory instruments can be purchased through the Printing Department under the Ministry of Works and Supply or viewed online via https://www.enotices.co.zm/categories/statutory-instruments-2020/ .

Opportunities for comment on proposed laws and regulations sometimes exist through trade associations and policy thinktanks such as the Zambia Institute for Policy Analysis and Research, Centre for Trade Policy and Development, Zambia Chamber of Commerce and Industry, Zambia Association of Manufacturers, Zambia Chamber of Mines, and the American Chamber of Commerce in Zambia. Stakeholder consultation in developing legislation and regulation has, however, generally been poor under the current administration. The government established the Business Regulatory Review Agency (BRRA) in 2014 with the mandate to administer the Business Regulatory Act. The Act requires public entities to submit for Cabinet approval a policy or proposed law that regulates business activity, after the policy or proposed law has BRRA approval. A public entity that intends to introduce any policy or law for regulating business activities should give notice, in writing, to the BRRA at least two months prior to submitting it to Cabinet; hold public consultations for at least 30 days with relevant stakeholders; and perform a Regulatory Impact Assessment (RIA). The BRRA works in collaboration with the Ministry of Justice, which does not approve any proposed law to regulate business activity without the approval of BRRA. While this framework exists on paper, the BRRA and the consultative process is still relatively new and unknown even by other government officials, and in some cases, it appears that the BRRA was informed after the Ministry of Justice had already approved a law.

While there are clear public procurement guidelines, concerns persist regarding transparency and a level playing field for U.S. firms. To enhance the transparency, integrity, and efficiency of Zambia’s procurement system, the GRZ launched the Electronic Government Procurement (e-GP) in July 2016. In 2018, Cabinet approved legislation to repeal the Public Procurement Act of 2008 in order to introduce price benchmarking and expert estimates in tendering for capital projects and other high value goods and services, and to make the use of e-GP mandatory. President Lungu assented to the Bill in October 2020 effectively passing it into law, but as of April 2021 the Act’s Implementation still awaits the commencement order and regulations from Ministries of Finance and Justice respectively.

International Regulatory Considerations

Zambia is a member of a number of regional and international groupings aimed at expanding markets for domestically produced goods and services. These include membership in both COMESA and SADC Free Trade Areas (FTAs). Zambia is also an active participant in the establishment of the Tripartite Free Trade Area between COMESA, SADC, and the East African Community (EAC).

In February 2019, Zambia signed the African Continental Free Trade Agreement (AfCFTA) and on February 05, 2021, Zambia deposited the instruments of ratification to the AfCFTA to the African Union, making Zambia the 36th African Union member to fully accede to the agreement. The trade agreement among 54 African Union member states creates a continent-wide single market, followed by the free movement of people and a single-currency union; much work remains to develop implementation protocols and mechanisms across Africa.

At the multilateral level, Zambia has been a WTO member since January 1, 1995. Zambia’s investment incentives program is transparent and has been included in the WTO’s trade policy reviews. The incentive packages are also subject to reviews by the Board of the ZDA and to periodic reviews by the Parliamentary Accounts Committee. Zambia is a signatory to the WTO Trade Facilitation Agreement (TFA), but still faces major challenges in expediting the movement, release, and clearance of goods, including goods in transit, which is a major requisite of the TFA. Zambia has benefited from duty-free and quota-free market access to the EU through its Everything but Arms FTA, and to the United States via the Generalized System of Preferences (GSP) and AGOA agreements.

Legal System and Judicial Independence

Zambia has a dual legal system that consists of statutory and customary law enforced through a formal court system. Statutory law is derived from the English legal system with some English Acts of Parliament still deemed to be in full force and effect within Zambia. Traditional and customary laws, which remain in a state of flux, are generally not written or codified, although some of them have been unified under Acts of Parliament. No clear definition of customary law has been developed by the courts, and there has not been systematic development of this subject.

Zambia has a written commercial law. The Commercial Court, a division of the High Court, deals with disputes arising out of commercial transactions. All commercial matters are registered in the commercial registry and judges of the Commercial Court are experienced in commercial law. Appeals from the Commercial Court, based on the amended January 2016 constitution, now fall under the recently established Court of Appeals, comprised of eight judges. The Foreign Judgments (Reciprocal Enforcement) Act, Chapter 76, makes provision for the enforcement in Zambia of judgments given in foreign countries that accord reciprocal treatment. The registration of a foreign judgment is not automatic. Although Zambia is a state party to international human rights and regional instruments, its dualist system of jurisprudence considers international treaty law as a separate system of law from domestic law. Domestication of international instruments by Acts of Parliament is necessary for these to be applicable in the country. Systematic efforts to domesticate international instruments have been slow but continue to see progress.

The courts support Alternative Dispute Resolution (ADR) and there has been an increase in the use of arbitration, mediation, and tribunals by litigants in Zambia. Arbitration is common in commercial matters and the proceedings are governed by the Arbitration Act No. 19 of 2000. The Act incorporates United Nations Commission on International Trade Law (UNCITRAL) and the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Zambian courts have no jurisdiction if parties have agreed to an arbitration clause in their contract. The establishment of the fee-based judicial commercial division in 2014 to adjudicate high-value claims has helped accelerate resolution of such cases.

The courts in Zambia are generally independent, but contractual and property rights enforcement is weak and final court decisions can take a prohibitively long time. At times, politicians have exerted pressure on the judiciary in politically controversial cases. Regulations or enforcement actions are appealable, and adjudication depends on the matter at hand and the principal law or act governing the regulations.

Laws and Regulations on Foreign Direct Investment

The major laws affecting foreign investment in Zambia include:

  1. The Zambia Development Agency Act of 2006, which offers a wide range of incentives in the form of allowances, exemptions, and concessions to companies.
  2. The Companies Act of 1994, which governs the registration of companies in Zambia.
  3. The Zambia Revenue Authority’s Customs and Excise Act, Income Tax Act of 1966, and the Value Added Tax of 1995 provide for general incentives to investors in various sectors.
  4. The Employment Code Act of 2019, Zambia’s basic employment law that provides for required minimum employment contractual terms.
  5. The Immigration and Deportation Act, Chapter 123, regulates the entry into and residency in Zambia of visitors, expatriates, and immigrants.

Competition and Antitrust Laws

Market competition operates under a relatively weak regulatory framework, although there is freedom of pricing, currency convertibility, freedom of trade, and free use of profits. A fairly strong institutional framework is provided for strategic sectors, such as mining and mining supply industries, and large-scale commercial farming. The Competition and Consumer Protection Commission (CCPC) is a statutory body established with a unique dual mandate to protect the competition process in the economy and to protect consumers. The CCPC’s mandate cuts across all economic sectors in an effort to avoid restrictive business practices, abuse of dominant position of market power, anti-competitive mergers and acquisitions, and cartels, and to enhance consumer protection and safeguard competition.

In 2016 the CCPC published a series of guidelines and policies that included adoption of a formal Leniency Policy intended to encourage persons to report information that may help to uncover prohibited agreements. In certain circumstances the person receives immunity from prosecution, imposition of fines, or the guarantee of a reduction in fines. The policy also calculates administrative penalties. In addition, the CCPC in 2016 published draft Settlement Guidelines, which provide a formal framework for parties seeking to engage the CCPC to reach a settlement.

The Competition and Fair Trading Act, Chapter 417, prevents firms from distorting the competitive process through conduct or agreements designed to exclude actual or potential competitors, and applies to all entities, regardless of whether private, public, or foreign. Although the CCPC largely opens investigations when a complaint is filed, it can also open investigations on its own initiative. Zambian competition law can also be enforced by civil lawsuits in court brought by private parties, while criminal prosecution by the CCPC is possible in cartel cases without the involvement of the Director of Public Prosecution under the Competition and Consumer Protection Act (CCPA) No. 24 of 2010. However, the general perception is that the Commission may be restricted in applying the competition law against government agencies and State-Owned Enterprises (SOEs), especially those protected by other laws.

Expropriation and Compensation

Zambia is a signatory to the Multilateral Investment Guarantee Agency (MIGA) of the World Bank and other international agreements. This guarantees foreign investment protection in cases of war, strife, disasters, and other disturbances, or in cases of expropriation. Zambia has signed bilateral reciprocal promotional and protection of investment protocols with a number of countries. The ZDA also offers further security for investments in the country through the signing of the Investment Promotion and Protection Agreements (IPPAs).

Investments may only be legally expropriated by an act of Parliament relating to the specific property expropriated. Although the ZDA Act states that compensation must be at a fair market value, the method for determining fair market value is ill-defined. Compensation is convertible at the current exchange rate. The ZDA Act also protects investors from being adversely affected by any subsequent changes to the Investment Act of 1993 for seven years from their initial investment.

Leasehold land, which is granted under 99-year leases, may revert to the government if it is determined to be undeveloped after a certain amount of time, generally five years. Land title is sometimes questioned in court, and land is re-titled to other owners.

There is no pattern of discrimination against U.S. persons by way of an illegal expropriation by the government or authority in the country. There are no high-risk sectors prone to expropriation actions.

Dispute Settlement

ICSID Convention and New York Convention

Zambia is party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958, and party to the Convention of the Settlement of Investment Disputes between States and Nationals of Other States of 1965. These are enforced through the Investment Disputes Convention Act Chapter 42.

Zambia is a member state of the International Center for the Settlement of Investment Disputes (ICSID) Convention and a signatory to the United Nations Commission of International Trade Law (UNCITRAL Model Law). In 2002 Zambia ratified the convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention).

Investor-State Dispute Settlement

Over the past ten years, U.S. specific investment disputes involved delayed payments from SOEs to U.S. companies for goods and services and the delayed deregistration of a U.S.-owned aircraft that was leased to a Zambian airline company that went bankrupt. Currently, a U.S. company is in dispute over the refusal of payment by its local joint venture partner that resulted from goods delivered to the government of Zambia. The case, however, has not officially reached Zambian courts.

Relatively few investment disputes involving U.S. companies have occurred since Zambia’s economy was liberalized following the introduction of multi-party democracy in 1991. The Zambian Investment Code stipulates that claimants must first file internal dispute claims with the Zambian High Court. Failing that, the parties may go to international arbitration. However, U.S. companies can encounter difficulties in receiving payments from the government for work performed or products and services rendered. This can be due to inefficient government bureaucracy or, more often, due to a lack of funds available to the government to meet its obligations.

International Commercial Arbitration and Foreign Courts

The Zambian Arbitration Act Number 19 of 2000 incorporates the UNCITRAL and the New York Convention on the recognition and enforcement of foreign arbitral awards. The Act applies to both domestic and international arbitration and is based on the UNCITRAL model law. Foreign lawyers cannot be used to represent parties in domestic or international arbitrations taking place in Zambia. There are no facilities that provide online arbitration, although the Zambia Institute of Arbitrators promotes and facilitates arbitration and other forms of ADR. The New York Convention on the recognition and enforcement of foreign arbitral awards has been domesticated into Zambian legislation by virtue of Section 31 of the Arbitration Act. Arbitration awards are enforced in the High Court of Zambia, and judgments enforcing or denying enforcement of an award can be appealed to the Supreme Court.

Bankruptcy Regulations

The Bankruptcy Act, Chapter 82, provides for the administration of bankruptcy of the estates of debtors and makes provision for punishment of offenses committed by debtors. It also provides for reciprocity in bankruptcy proceedings between Zambia and other countries and for matters incidental to and consequential upon the foregoing. This applies to individuals, local, and foreign investors. Bankruptcy judgments are made in local currency but can be paid out in any internationally convertible currency. Under the Bankruptcy Act, a person can be charged as a criminal. A person guilty of an offense declared to be a felony or misdemeanor under the Bankruptcy Act in respect of which no special penalty is imposed by the Act shall be liable on conviction to imprisonment for a term not exceeding two years.

Zambia has made strides in improving its credit information system. Since 2008, the credit bureau, TransUnion, requires banks and some non-banks to provide loan requirement information and consult it when making loans. The credit bureau eventually captures data from other institutions, such as utilities. However, the bureau’s coverage is still less than ten percent of the population, the quality of its information is suspect, and there it lacks clarity on data sources and the inclusion of positive information.

6. Financial Sector

Capital Markets and Portfolio Investment

Government policies generally facilitate the free flow of financial resources to support the entry of resources in the product and factor market. Banking supervision and regulation by the Bank of Zambia (BoZ) has improved slightly over the past few years. Improvements include revoking licenses of some insolvent banks, denying bailouts, limiting deposit protection, strengthening loan recovery efforts, and upgrading the training of and incentives for bank supervisors. High domestic lending rates, a lack of dollar and foreign exchange liquidity, and the limited accessibility of domestic financing constrain business. High returns on government securities encourage commercial banks to invest heavily in government debt to the exclusion of financing productive private sector investments, particularly for SMEs.

The Lusaka Stock Exchange (LuSE), established in 1993, is structured to meet international recommendations for clearing and settlement system design and operations. There are no restrictions on foreign participation in the LuSE, and foreigners may invest in stocks on the same terms as Zambians. The LuSE has offered trading in equity securities since its inception and, in March 1998, the LuSE became the official market for selling Zambian government bonds. Investors intending to trade a listed security or government bond are now mandated to trade via the LuSE. The market is regulated by the Securities Act of 1993 and enforced by the Securities and Exchange Commission (SEC) of Zambia. Secondary trading of financial instruments in the market is very low or non-existent in some areas. As of the beginning of 2021, there were 25 companies listed on the LuSE with a portfolio worth about K24 billion (USD 1.2 billion).

Existing policies facilitate the free flow of financial resources into the product and factor markets. The government and the BoZ respect IMF Article VIII by refraining from restrictions on payments and transfers for current international transactions. Credit is allocated on market terms and foreign investors can get credit on the local market, although local credit is relatively expensive and most investors therefore prefer to obtain credit outside the country.

Money and Banking System

The financial sector is comprised of three sub-sectors according to financial sector supervisory authorities. The banking and financial institutions sub-sector is supervised by the BoZ, the securities sub-sector by the SEC, and the pensions and insurance sub-sector by the Pensions and Insurance Authority. The Banking and Financial Services Act, Chapter 387, and the Bank of Zambia Act, Chapter 360, govern the banking industry. Zambia’s banking sector is considered relatively well-developed in the African context, but the sector remains highly concentrated. There are currently 19 banks in Zambia with the largest four banks holding nearly two-thirds of total banking assets. The dominance of the four largest banks in deposits and total assets has been diluted by increased market capture of smaller banks and new industry entrants, an indication of growing competitive intensity in this segment of the banking market. Government policies generally facilitate the free flow of financial resources to support the entry of resources in the product and factor market. There continued to be a steady increase in electronic banking and related services over the last few years.

The BoZ’s current policy rate, as of February 2021, was 8.5 percent. Commercial lending rates range between 23 and 30 percent, among the highest in the region. The persistence of high interest rates led the government to urge commercial banks to reduce their lending rates in order to stimulate private sector growth and the economy as a whole. One factor inhibiting more affordable lending is a culture of tolerating loan default, which many borrowers view as a minor transgression. Non-performing loans (NPLs) remain elevated, with some estimates as high as 15 percent. The government contributes to this problem, as it has arrears of about USD 1.3 billion to government contractors who reportedly hold a high percentage of the NPLs.

Banking officials acknowledge the need to upgrade the risk assessment and credit management skills of their institutions to better serve borrowers, but note widespread financial illiteracy limits borrowers’ ability to access credit. Banks provide credit denominated in foreign currencies only for investments aimed at producing goods for export. Banks provide services on a fee-based model and banking charges are generally high. Home mortgages are available from several leading Zambian banks, although interest rates are still very high.

To operate a bank in Zambia, the bank must be licensed by the Registrar of Banks, Financial Institutions, and Financial Businesses (“the Registrar”) whose office is based at the BoZ. The decision to license banks lies with the Registrar. Foreign banks or branches are allowed to operate in country as long as they fulfill BoZ requirements and meet the minimum capital requirement of USD 100 million for foreign banks and USD 20 million for local banks. According to the BoZ, many banks in the country have correspondent banking relationships; it is difficult to assess how many there are or whether any bank has lost any correspondent banking relationships in the past three years. It is also difficult to analyze if any of those correspondent relationships are currently in jeopardy as the daily management of those relationships are carried out by the individual banks and not by the BoZ.

Generally, all regulatory agencies that issue operating licenses have statutory reporting requirements that businesses operating under their laws and regulations must meet. For example, the Banking and Financial Services Act has stringent reporting provisions that require all commercial banks to submit weekly returns indicating their liquidity position. Late submission of the weekly returns or failure to meet the minimum core liquidity and statutory reserves incur punitive penalty interest, and may lead to the placement of non-compliant commercial banks under direct supervision of BoZ, closure of the undertaking, or the prosecution of directors.

All companies listed under the Lusaka Stock Exchange (LuSE) are obliged to publish interim and annual financial statements within three months after the close of the financial year. Listed companies are also required to disclose in national print media any information that can affect the value of the price of their securities. According to the Companies Act, Chapter 388, company directors need to generate annual account reports after the end of each financial year. The annual account, auditor’s report or reports on the accounts, and directors’ report should be sent to each person entitled to receive notice of the annual general meeting and to each registered debenture holder of the company. A foreign company is required to submit annual accounts and an auditor’s report to the Registrar.

The Non-Bank Financial Institutions (NBFIs) are licensed and regulated in accordance with the provisions of the Banking and Financial Services Act of 1994 (BFSA) and related Regulations and Prudential Guidelines. As key players in the financial sector, NBFIs are subject to regulatory requirements governing their prudential position, consumer protection, and market conduct in order to safeguard the overall soundness and stability of the financial system. The NBFIs comprise eight leasing and finance companies, three building societies, one credit reference bureau, one savings and credit institution, one development finance institution, 80 bureaux de change, one credit reference bureau, and 34 micro-finance institutions.

Private firms are open to foreign investment through mergers and acquisitions. The CCPC reviews and handles big mergers and acquisitions. The High Court of Zambia may reverse decisions made by the Commission. Under the CCPA, foreign companies without a presence in Zambia and taking over local firms do not have to notify their transactions to the Commission, as it has not established disclosure requirements for foreign companies acquiring existing businesses in Zambia.

Foreign Exchange and Remittances

Foreign Exchange

There are currently no restrictions or limitations placed on foreign investors converting or transferring funds associated with an investment (including remittances of investment capital, earnings, loan repayments, and lease payments) into freely usable currency and at a legal market-clearing rate. Investors are free to repatriate capital investments, as well as dividends, management fees, interest, profit, technical fees, and royalties. Foreign nationals can also transfer and/or remit wages earned in Zambia. Funds associated with investments can be freely converted into internationally convertible currencies. The BoZ pursues a flexible exchange rate policy, which generally allows the currency to freely float, though it intervened heavily to support the local currency, the kwacha, in 2014 to 2016. Currency transfers are protected by IMF Article VII.

In March 2014, the government announced the revocation of SI Number 33 (mandating use of the kwacha for domestic transactions) and SI Number 55 (monitoring foreign exchange transactions). The government experienced challenges implementing these statutory instruments and – along with problems of fiscal management and weakening global copper prices – the SIs were perceived as undermining confidence in Zambia’s economy and currency, leading to sharp depreciation of the kwacha. The decision to revoke the SIs was widely praised in the business community. The kwacha, however, has remained weak in historical terms and continues to depreciate against the dollar. As of early April 2021, the kwacha was trading at more than 22 to the dollar.

Over-the-counter cash conversion of the kwacha into foreign currency is restricted to a USD 5,000 maximum per transaction for account holders and USD 1,000 for non-account holders. No exchange controls exist in Zambia for anyone doing business as either a resident or non-resident. There are no restrictions on non-cash transactions. The exchange rate of the Zambian national currency is mostly determined by market forces; because the volume and value of exports from Zambia are overwhelmingly related to the extractive industries sector, mining companies’ financial transactions play a major role in exchange rate determination.

Remittance Policies

There are no recent changes or plans to change investment remittance policies that tighten or relax access to foreign exchange for investment remittances. There are no restrictions on converting or transferring funds associated with an investment (including remittances of investment capital, earnings, loan repayments, or lease payments) into freely usable currency at the legal market clearing rate. Foreign investors can remit through a legal parallel market, including one utilizing convertible, negotiable instruments such as dollar-denominated government bonds issued in lieu of immediate payment in dollars. There are no limitations on the inflow or outflow of funds for remittances of profits or revenue and there is no evidence to show that Zambia manipulates the currency. Zambia is a member of the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG), which in 2018, conducted an on-site assessment of the implementation of anti-money laundering and counter-terrorist financing (AML/CTF) measures in Zambia. ESAAMLG coordinates with other international organizations concerned with combating money laundering, studying emerging regional typologies, developing institutional and human resource capacities to deal with these issues, and coordinating technical assistance where necessary. In June 2019, Zambia adopted the recommendations. Zambia has demonstrated commitment to establish an AML/CTF framework. The enactment of the Prohibition and Prevention of Money Laundering Act and the Anti-Terrorism Act, establishment of the Anti-Money Laundering Investigations Unit and the Financial Intelligence Center as the sole designated national agencies mandated to handle AML/CTF and other serious offences, and its September 2018 accession to the Egmont Group reflect this commitment.

Sovereign Wealth Funds

The GRZ had planned to launch a Sovereign Wealth Fund (SWF) following the 2015 reincorporation of the Industrial Development Corporation (IDC) as the parastatal holding company, but has yet to establish the fund.

7. State-Owned Enterprises

There are currently 34 state-owned enterprises (SOEs) operating in different sectors in Zambia including agriculture, education, energy, financial services, infrastructure, manufacturing, medical, mining, real estate, technology, media and communication, tourism, and transportation and logistics. Most SOEs are wholly owned or majority owned by the government under the IDC established in 2015. Zambia has two categories of SOEs: those incorporated under the Companies Act and those established by particular statutes, referred to as statutory corporations. There is a published list of SOEs in the Auditor General’s annual reports; SOE expenditure on research and development is not detailed. There is no exhaustive list or online location of SOEs’ data for assets, net income, or number of employees. Consequently, inaccurate information is scattered throughout different government agencies/ministries. The majority of SOEs have serious operational and management challenges.

In theory, SOEs do not enjoy preferential treatment by virtue of government ownership, however, they may obtain protection when they are not able to compete or face adverse market conditions. The Zambia Information Communications Authority Act has a provision restricting the private sector from undertaking postal services that would directly compete with the Zambia Postal Services Corporation. Zambia is not party to the Government Procurement Agreement (GPA) within the framework of the WTO, however private enterprises are allowed to compete with public enterprises under the same terms and conditions with respect to access to markets, credit, and other business operations such as licenses and supplies.

SOEs in Zambia are governed by Boards of Directors appointed by government in consultation with and including members from the private sector. The chief executive of the SOE reports to the board chairperson. In the event that the SOE declares dividends, these are paid to the Ministry of Finance. The board chair is informally obliged to consult with government officials before making decisions. The line minister appoints members of the Board of Directors from within public service, the private sector, and civil society. The independence of the board, however, is limited since most boards are comprised of a majority of government officials, while board members from the private sector or civil society that are appointed by the line minister can be removed.

SOEs can and do purchase goods or services from the private sector, including foreign firms. SOEs are not bound by the GPA and can procure their own goods, works, and services. SOEs are subject to the same tax policies as their private sector competitors and are generally not afforded material advantages such as preferential access to land and raw materials. SOEs are audited by the Auditor General’s Office, using international reporting standards. Audits are carried out annually, but delays in finalizing and publishing results are common. Controlling officers appear before a Parliamentary Committee for Public Accounts to answer audit queries. Audited reports are submitted to the president for tabling with the National Assembly, in accordance with Article 121 of the Constitution and the Public Audit Act, Chapter 378.

In 2015, the government transferred most SOEs from the Ministry of Finance to the revived Industrial Development Corporation (IDC). The move, according to the government, was to allow line ministries to focus on policy making thereby giving the IDC direct mandate and authorization to oversee SOE performance and accountability on behalf of the government. In 2016, the government stated its intent to review state owned enterprises in order to improve their performance and contribution to the treasury and directed the IDC to conduct a situational analysis of all the SOEs under its portfolio with a view to recapitalize successful businesses while hiving off ones that are no longer viable; these reviews are ongoing. The IDC’s oversight responsibilities include all aspects of governance, commercial, financing, operational, and all matters incidental to the interests of the state as shareholder. Zambia strives to adhere to OECD Guidelines on Corporate Governance to ensure a level playing field between SOEs and private sector enterprises.

Privatization Program

There were no sectors or companies targeted for privatization in 2020. The privatization of parastatals began in 1991, with the last one occurring in 2007. The divestiture of state enterprises mostly rests with the IDC, as the mandated SOE holding company. The Privatization Act includes the provision for the privatization and commercialization of SOEs; most of the privatization bidding process is advertised via printed media and the IDC’s website ( www.idc.co.zm ). There is no known policy that forbids foreign investors from participating in the country’s privatization programs.

10. Political and Security Environment

Zambia has benefited from almost 30 years of largely peaceful multi-party politics, with two peaceful transfers of power, and does not have a history of large-scale political violence. More recently, however, political tensions have been on the rise. Before and during the 2016 elections, there were numerous clashes of supporters of different political parties, resulting in some injuries and arrests. The leading opposition party contested the election results, leading to a heightened state of political tension that continues to flare up whenever by-elections are held. The same dynamic is expected to persist in the runup to the August 2021 general election. Freedoms of assembly, speech, and media freedoms have increasingly been curtailed or threatened, and opposition parties, media outlets and civil society organizations that are critical of the government face increasingly narrow space to operate

In early 2020, there were pockets of civil unrest throughout the country triggered by a spate of “gassing” incidents, in which an unidentified gas was sprayed on people in their homes, schools, and/or in public, which sickened and injured people, and by rumors of witchcraft and ritual killings. Community protests and patrolling at times spawned protests, riots, and vigilante justice that led to extra-judicial personal harm or property damage.

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 $23.31 https://data.worldbank.org/country/zambia
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data:  BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2019 N/A 2019 $42 BEA data available at
https://apps.bea.gov/international/
factsheet/factsheet.cfm
Host country’s FDI in the United States ($M USD, stock positions) 2019 N/A 2019 -$1 BEA data available at
https://apps.bea.gov/international/
factsheet/factsheet.cfm
Total inbound stock of FDI as % host GDP 2018 N/A 2018 81.2 UNCTAD data available at
https://unctad.org/en/Pages/DIAE/
World%20Investment%20Report/
Country-Fact-Sheets.aspx
 

* Host country statistical data released is almost non-existent.  If it exists, there is not a central source for retrieving the data, and at most times it does not match international sources.

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 $25,777 100% Total Outward $5,048 100%
Canada $3,747 14.5% United Kingdom $951 18.8%
China, P.R.: Mainland $3,353 13.0% China, P.R.: Mainland $882 17.5%
Switzerland $2,904 11.3% United States $589 11.7%
United Kingdom $2,348 9.1% Congo, Dem. Rep. of the $545 10.8%
South Africa $1,805 7.0% South Africa $517 10.2%
“0” reflects amounts rounded to +/- USD 500,000.

**Results published 03/2020

Table 4: Sources of Portfolio Investment
Data not available.

Zimbabwe

Executive Summary

Zimbabwe suffered serious economic contractions in 2019 and 2020 due to the extended effects of climate shocks that crippled agriculture and electricity generation as well as a fiscal adjustment, a volatile currency, and the negative impact of the COVID-19 pandemic which led to lockdowns, reduced investment inflows, and broken supply chains. Although the authorities acknowledge the COVID-19 pandemic still presents risks, they project that a favorable balance of payments position, fiscal consolidation, and a good 2020/21 agricultural season will result in a 7.4 percent economic recovery in 2021. International financial institutions also project positive, if more modest, growth. In 2020, inflation peaked at 837 percent in July then remained high but steadily declined to end the year at 384 percent. Authorities attributed the decline to the introduction of a weekly foreign exchange auction system in June 2020. Although the weekly weighted average exchange rate between the Zimbabwe dollar and the U.S. dollar depreciated by 70 percent between June 2020 and February 2021, it remains overvalued relative to the black market. The government aims to reduce inflation to 135 percent in 2021.

To improve the ease of doing business, the government formed the Zimbabwe Investment and Development Agency (ZIDA) in 2020, intended as a one-stop-shop to promote and facilitate both domestic and foreign investment in Zimbabwe. Zimbabwe’s incentives to attract FDI include tax breaks for new investment by foreign and domestic companies, and making capital expenditures on new factories, machinery, and improvements fully tax deductible. The government waives import taxes and surtaxes on capital equipment. It has made gradual progress in improving the business environment by reducing regulatory costs, but policy inconsistency and weak institutions have continued to frustrate businesses. Corruption remains rife and there is little protection of property rights, particularly with respect to agricultural land. Historically, the government has committed to protect property rights but has, at times, resorted to expropriating land without compensation.

The Finance Act (No 2) at the end of 2020 amended the Indigenization Act by removing language designating diamonds and platinum as the only minerals subject to indigenization (requiring majority ownership by indigenous Zimbabweans), thus finally ending all indigenization requirements in all sectors. However, the new legislation also granted broad discretion to the government to designate minerals as subject to indigenization in the future. The government subsequently issued statements to reassure investors that no minerals will be subject to indigenization, including diamonds and platinum.

The government ended its 2019 ban on using foreign currencies for domestic transactions in March 2020. However, the authorities decreed that businesses selling in foreign exchange must surrender 20 percent of the receipts to the central bank in exchange for local currency. Exporters must surrender 40 percent of foreign currency earnings.

Zimbabwe’s arrears in payments to international financial institutions and its high external debt (public and private) of over USD 10.7 billion limit the country’s ability to access official development assistance at concessional rates. Additionally, domestic banks do not offer financing for periods longer than two years, with most financing limited to 180 days or less. The sectors that attract the most investor interest include agriculture (tobacco, in particular), mining, energy, and tourism. Zimbabwe has a well-earned reputation for the high education levels of its workers.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2020 157 of 175 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2020 140 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2020 120 of 131 https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, historical stock positions) 2019 -USD 72 https://apps.bea.gov/international/factsheet/
World Bank GNI per capita 2019 USD 1,390 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

To attract FDI and improve the country’s competitiveness, the government has encouraged public-private partnerships and emphasized the need to improve the investment climate by lowering the cost of doing business as well as restoring the rule of law and sanctity of contracts. Implementation, however, has been limited.

The government amended the Indigenization Act by removing diamonds and platinum from minerals subject to indigenization (requiring majority ownership by indigenous Zimbabweans), although the new legislation appeared to grant broad discretion to the GOZ to designate minerals as subject to indigenization in the future. Subsequently, the GOZ reassured investors that no minerals will be subject to indigenization, including diamonds and platinum. However, there are smaller sectors “reserved” for Zimbabweans (see below).

To improve the ease of doing business, the government enacted legislation that led to the formation of the Zimbabwe Investment and Development Agency (ZIDA) in 2020. ZIDA replaced the Zimbabwe Investment Authority and describes itself as a one-stop-shop center in promoting and facilitating both domestic and foreign investment in Zimbabwe.

While the government has committed to prioritizing investment retention, there are still no mechanisms or formal structures to maintain ongoing dialogue with investors.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign and domestic private entities have a right to establish and own business enterprises and engage in all forms of remunerative activity, but foreign ownership of businesses in certain reserved sectors is limited, as outlined below.

Foreign investors are free to invest in most sectors without any restrictions as the government aims to bring in new technologies, generate employment, and value-added manufacturing. According to the ZIDA Act, “foreign investors may invest in, and reinvest profits of such investments into, any and all sectors of the economy of Zimbabwe, and in the same form and under the same conditions as defined for Zimbabweans under the applicable laws and regulations of Zimbabwe.” However, the government reserves certain sectors for Zimbabweans such as passenger buses, taxis and car hire services, employment agencies, grain milling, bakeries, advertising, dairy processing, and estate agencies.

The country screens FDI through the ZIDA in liaison with relevant line ministries to confirm compliance with the country’s laws.

According to the country’s laws, U.S. investors are not especially disadvantaged or singled out by any of the ownership or control mechanisms relative to other foreign investors. In its investment guidelines, the government states its commitment to non-discrimination between foreign and domestic investors and among foreign investors.

Other Investment Policy Reviews

In the past three years, the government has not conducted an investment policy review through the Organization for Economic Cooperation and Development (OECD), the World Trade Organization (WTO) or the United Nations Conference on Trade and Development (UNCTAD).

Business Facilitation

Policy inconsistency, administrative delays and costs, and corruption hinder business facilitation. Zimbabwe does not have a fully online business registration process, though one can begin the process and conduct a name search online via the ZimConnect web portal. The government created the Zimbabwe Investment Development Agency (ZIDA, https://www.zidainvest.com/ ) which replaced the Zimbabwe Investment Authority (ZIA), the Special Economic Zones Authority, and the Joint Venture Unit to oversee the licensing and implementation of investment projects in the country. The Agency has established a one-stop investment services center (OSISC) which houses several agencies that play a role in the licensing, establishment, and implementation of investment projects including the Zimbabwe Revenue Authority (ZIMRA), Environmental Management Agency (EMA), Reserve Bank of Zimbabwe (RBZ), National Social Security Authority (NSSA), Zimbabwe Energy Regulatory Authority (ZERA), Zimbabwe Tourism Authority, the State Enterprises Restructuring Agency, and specialized investment units within relevant line ministries. The business registration process currently takes 27 days.

Outward Investment

Zimbabwe does not promote or incentivize outward investment due to the country’s tight foreign exchange reserves. Although the government does not restrict domestic investors from investing abroad, any outward investment requires approval by exchange control authorities. Firms interested in outward investment would face difficulty accessing the limited foreign currency at the more favorable official exchange rate.

3. Legal Regime

Transparency of the Regulatory System

The government officially encourages competition within the private sector and seeks to improve the ease of doing business, but the bureaucracy within regulatory agencies still lacks transparency, and corruption is prevalent. Investors have complained of policy inconsistency and unpredictability. Moreover, Zimbabwe does not have a centralized online location where key regulatory actions are published and investors have to contact ZIDA.

The government at times uses statutory instruments and temporary presidential powers to alter legislation impacting economic policy. These powers have limited duration – the government must pass legislation within six months for the presidential powers to become permanent. These measures, which can appear without warning, often surprise businesses and lack implementation details, leading firms to delay major business decisions until gaining clarity. For example, the government unexpectedly prohibited the use of foreign currencies for domestic transactions in June 2019 but lifted the ban in March 2020, amidst the COVID-19 pandemic and growing economic pressure. The government has made changes to share of foreign currency earnings that exporters must surrender to the central bank without warning or stakeholder consultations. The standard legislative process, on the other hand, does provide ample opportunity for public review and comment before the final passage of new laws. The development of regulations follows a standard process and includes a period for public review and comment.

According to the Department of State’s 2020 Fiscal Transparency Report, public budget documents do not provide a full picture of government expenditures, and there is a notable lack of transparency regarding state-owned enterprises and the extraction of natural resources. The information on public finances is generally unreliable, as actual revenue and expenditure have deviated significantly from the enacted budgets. Information on some debt obligations is publicly available, but not information on contingent debt.

International Regulatory Considerations

Zimbabwe is a member of the Southern African Development Community (SADC) and the Common Market for Eastern and Southern Africa (COMESA), and it is a signatory to the SADC and COMESA trade protocols establishing free trade areas (FTA) with the aim of growing into a customs union. Zimbabwe is also a member of the African Continental Free Trade Area (AfCFTA) which came into force on January 1, 2021, with the aim of creating a single continental market and paving the way for the establishment of a customs union. Although the country is also a member of the World Trade Organization (WTO), it normally notifies only SADC and COMESA of measures it intends to implement.

Legal System and Judicial Independence

According to the country’s law and constitution, Zimbabwe has an independent judicial system whose decisions are binding on the other branches of government. The country has written commercial law and, in 2019, established four commercial courts at the magistrate level. The government also trained 55 magistrates in the same year. Administration of justice in commercial cases that do not touch on political interests is still generally impartial, but for politicized cases government interference in the court system has hindered the delivery of impartial justice. Regulations or enforcement actions are appealable and are adjudicated in the national court system.

Laws and Regulations on Foreign Direct Investment

As noted above, in 2020, foreign investors are free to invest in most sectors including mining without any restrictions following the amendment to the Indigenization and Economic Empowerment Act which required majority ownership by indigenous Zimbabweans, as the government aims to bring in new technologies, generate employment, and value-added manufacturing. In certain sectors, such as primary agriculture, transport services, and retail and wholesale trade including distribution, foreign investors may not own more than 35 percent equity.

The ZIDA (found at https://www.zidainvest.com/  ), which now acts a one-stop shop for investors, promotes and facilitates both local and foreign direct investment.

Competition and Antitrust Laws

The government officially encourages competition within the private sector according to the Zimbabwe Competition Act. The Act provided for the formation of the Tariff and Competition Commission charged with investigating restrictive practices, mergers, and monopolies in the country. The Competition and Tariff Commission (CTC) is an autonomous statutory body established in 2001 with the dual mandate of implementing and enforcing Zimbabwe’s competition policy and law and executing the country’s trade tariffs policy. The Act provides for transparent norms and procedures. Although the decision of the Commission is final, any aggrieved party can appeal to the Administrative Court against that decision.

Expropriation and Compensation

In 2000, the government began to seize privately-owned agricultural land and transfer ownership to government officials and other regime supporters. In April of that year, the government amended the constitution to grant the state’s right to assert eminent domain, with compensation limited to the improvements made on the land. In September 2005, the government amended the constitution again to transfer ownership of all expropriated land to the government. Since the passage of this amendment, top government officials, supporters of the ruling Zimbabwe African National Union – Patriotic Front (ZANU-PF) party, and members of the security forces have continued to disrupt production on commercial farms, including those owned by foreign investors and those covered by bilateral investment agreements. Similarly, government officials have sought to impose politically connected individuals as indigenous partners on privately and foreign-owned wildlife conservancies.

In 2006, the government began to issue 99-year leases for land seized from commercial farmers, retaining the right to withdraw the lease at any time for any reason. These leases, however, are not readily transferable, and banks do not accept them as collateral for borrowing and investment purposes. The government continues to seize commercial farms without compensating titleholders, who have no recourse to the courts. The seizures continue to raise serious questions about respect for property rights and the rule of law in Zimbabwe.

In 2017, the government announced its intention to compensate farmers who lost their land and made small partial payments to the most vulnerable claimants. In July 2020, the government and white commercial farmers who lost land to the land reform program signed a US$3.5 billion global compensation agreement (GCA) for improvements made by commercial farmers on the farms. The government promised to pay a 50 percent deposit within 12 months of signing the GCA and 25% of the remainder in each subsequent year so that it makes full payment over five years. Given fiscal constraints, it remains unclear how the government will finance this sum.

Dispute Settlement

ICSID Convention and New York Convention

Zimbabwe acceded to the 1965 Convention on the Settlement of Investment Disputes between States and Nationals of Other States and to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards in 1994. However, the government does not always accept binding international arbitration of investment disputes between foreign investors and the state.

Investor-State Dispute Settlement

The government is signatory to several bilateral investment agreements with several countries (see above) in which international arbitration of investment disputes is recognized. As noted above, Zimbabwe does not have a Bilateral Investment Treaty or Free Trade Agreement with an investment chapter with the United States.

Local courts recognize and enforce foreign arbitral awards issued against the government, but there is a history of extrajudicial action against foreign investors. For example, senior politicians declined to support enforcement of a 2008 SADC Tribunal decision ordering Zimbabwe to return expropriated commercial farms to the original owners. Once an investor has exhausted the administrative and judicial remedies available locally, the government of Zimbabwe agrees, in theory, to submit matters for settlement by arbitration according to the rules and procedures promulgated by the United Nations Commission on International Trade Law (UNCITRAL). However, this has not occurred in practice.

International Commercial Arbitration and Foreign Courts

Domestic legislation on arbitration is modeled after the United Nations Commission on International Trade Law (UNCITRAL) model law, with minor modifications. This law covers both domestic and international arbitration. As noted above, local courts recognize and enforce foreign arbitral awards issued against the government, but there is a history of extrajudicial action against foreign investors. For example, senior politicians declined to support enforcement of a 2008 SADC Tribunal decision ordering Zimbabwe to return expropriated commercial farms to the original owners. Once an investor has exhausted the administrative and judicial remedies available locally, the government of Zimbabwe agrees, in theory, to submit matters for settlement by arbitration according to the rules and procedures promulgated by the United Nations Commission on International Trade Law. However, this has not occurred in practice.

Bankruptcy Regulations

In the event of insolvency or bankruptcy, Zimbabwe applies the Insolvency Act. All creditors have equal rights against an insolvent estate. In terms of resolving insolvency, Zimbabwe ranks 142 out of 190 economies in the World Bank’s 2020 Doing Business Report. Zimbabwe does not criminalize bankruptcy unless it is the result of fraud, but the government blacklists a person declared bankrupt from undertaking any new business.

6. Financial Sector

Capital Markets and Portfolio Investment

Zimbabwe has two stock exchanges in Harare and Victoria Falls. The Zimbabwe Stock Exchange (ZSE) in Harare currently has 56 publicly listed companies with a total market capitalization of USD 5.2 billion on March 19, 2021. Stock and money markets are open to foreign portfolio investment. Foreign investors can take up to a maximum of 49 percent of any locally listed company with any single investor limited to a maximum of 15 percent of the outstanding shares. With regard to the money market, foreign investors may buy up to 100 percent of the primary issues of bonds and stocks and there is no limit on the level of individual participation.

There is a 1.48 percent withholding tax on the sale of marketable securities, while the tax on purchasing stands at 1.73 percent. Totaling 3.21 percent, the rates are comparable with the average of 3.5 percent for the region. As a way of raising funds for the state, the government mandated that insurance companies and pension funds invest between 25 and 35 percent of their portfolios in prescribed government bonds. Zimbabwe’s high inflation has greatly eroded the value of domestic debt instruments and resulted in negative real interest rates on government bonds.

Zimbabwe launched the Victoria Falls Stock Exchange (VFEX) in September 2020 after the government suddenly suspended trading on the ZSE for five weeks between June and August following a rapid depreciation of the Zimbabwe dollar. The government blamed instability of the Zimbabwe dollar and rising inflation on the behavior of stock trading counters dual-listed on foreign exchanges, and suspended trading on the ZSE from late June to early August. When trading resumed, the authorities suspended trading of dual-listed counters on the ZSE, advising them to list on the VFEX where they trade in foreign currency and benefit from generous incentives meant to attract foreign investment. To date, only one company is listed on the VFEX.

The country respects IMF’s Article VIII and refrains from restrictions on payments and transfers for current international transactions provided there is sufficient foreign exchange to finance the transactions. Depending on foreign currency availability, foreign companies with investments in Zimbabwe can borrow locally on market terms.

Money and Banking System

Three major international commercial banks and several regional and domestic banks operate in Zimbabwe, but they have reduced their branch network substantially in line with declining business opportunities. The central bank (Reserve Bank of Zimbabwe (RBZ) maintains that the banking sector is generally stable despite a harsh operating environment characterized by high credit risk, high inflation, and foreign exchange constraints. Most Zimbabwean correspondent banking relationships are in jeopardy or have already been severed due to international bank efforts to reduce risk (de-risking) connected to the high penalties for non-compliance with prudential anti-money laundering/counter-terrorism finance guidelines in developed countries. As of December 31, 2020, the sector had 19 operating institutions, comprising 13 commercial banks, five building societies, and one savings bank. According to the RBZ, as of December 2020, all operating banking institutions complied with the prescribed minimum core capital requirements. The level of non-performing loans fell from 1.75 percent in December 2019 to 0.31 percent by December 2020 largely reflecting the banks’ low appetite to lend to high-risk clients. The RBZ reports that the total loans to deposits ratio rose from 36.6 percent in December 2019 to 39.5 percent as of December 31, 2020.

According to the central bank, the total deposits (including interbank deposits), rose from ZWL$34.5 billion in December 2019 to ZWL$208.9 billion by December 2020, an increase of 19 percent in US dollar terms.

Foreign Exchange and Remittances

Foreign Exchange

A large share of the economy operates using U.S. dollars for day-to-day transactions. The RBZ takes 40 percent of foreign currency earned from exports at the official exchange rate while exporters retain the other 60 percent in foreign exchange. The authorities change these levels periodically without notice depending on the severity of the foreign exchange constraint. Additionally, businesses selling domestically in foreign currency must surrender 20 percent of the receipts to the central bank in exchange for local currency.

Weak investment inflows and poor export growth have resulted in a perennial shortage of foreign exchange. Consequently, investors cannot freely convert funds associated with any form of investment into foreign currency. Although the situation improved after authorities adopted an auction system to allocate foreign exchange, businesses still rely on a black market for foreign exchange to make external payments.

Remittance Policies

Foreigners can remit capital appreciation, dividend income, and after-tax profits provided the foreign exchange is available. Firms may find difficulty in accessing foreign exchange at the auction rate.

Sovereign Wealth Funds

The government set aside USD 1 million toward administrative costs related to the setting up of a SWF in its 2016 Budget. Although the government proposed to capitalize the SWF through a charge of up to 25 percent on royalty collections on mineral sales, as well as through a special dividend on the sale of diamond, gas, granite and other minerals, it has not done so. In 2021, state media listed the SWF as a shareholder of a new major mining company in Zimbabwe.

7. State-Owned Enterprises

Zimbabwe has 107 state-owned enterprises (SOEs), defined as companies wholly owned by the state. A list of the SOEs appears here . Many SOEs support vital infrastructure including energy, mining, and agribusiness. Competition within the sectors where SOEs operate tends to be limited. However, the government of Zimbabwe (GOZ) invites private investors to participate in infrastructure projects through public-private partnerships (PPPs). Most SOEs have public function mandates, although in more recent years, they perform hybrid activities of satisfying their public functions while seeking profits. SOEs should have independent boards, but in some instances such as the recent case of the Zimbabwe Mining Development Corporation (ZMDC), the government allows the entities to function without boards.

Zimbabwe does not appear to subscribe to the Organization for Economic Cooperation and Development (OECD) guidelines on corporate governance of SOEs. SOEs are subject to the same taxes and same value added tax rebate policies as private sector companies. SOEs face several challenges that include persistent power outages, mismanagement, lack of maintenance, inadequate investment, a lack of liquidity and access to credit, and debt overhangs. As a result, SOEs have performed poorly. Few SOEs produce publicly available financial data and even fewer provide audited financial data. This has imposed significant costs on the rest of the economy.

Privatization Program

Although the government committed itself to privatize most SOEs in the 1990s, it only successfully privatized two parastatals. In 2018, the government announced it would privatize 48 SOEs. So far, it has only targeted five in the telecommunications sector, postal services, and financial sector for immediate reform, but the privatizations have not yet concluded. The government encourages foreign investors to take advantage of the privatization program to invest in the country, but inter-SOE debts of nearly USD 1 billion pose challenges for privatization plans. According to the government’s investment guidelines, it is still working out the process under which it will dispose its shareholding to the private sector.

10. Political and Security Environment

Political parties, labor organizations, and civil society groups sometimes encounter state-sponsored intimidation and repression from government security forces and Zimbabwe African National Union – Patriotic Front (ZANU-PF) – slinked activists. Disagreements between and within political parties occasionally results in violence targeting political party members. Political tensions and civil unrest persist since the end of Robert Mugabe’s rule in November 2017. On August 1, 2018, the army fired upon people demonstrating against the delay in announcing official presidential election results, killing six civilians. In response to January 2019 demonstrations against rising fuel prices, security forces killed 17, raped 16, injured hundreds, and arrested more than 800 people over the course of several weeks. The crackdown targeted members of the opposition political party, civil society groups, and labor leaders. In 2020 and 2021, the government arrested and detained journalists, several leaders of opposition parties, and trade union activists for organizing demonstrations against corruption and allegedly violating bail conditions. Police also arrested three women members of the opposition party, MDC Alliance, including a member of parliament for violating lockdown measures when they demonstrated against corruption and food shortages during the first of several lockdowns imposed on the country to fight COVID-19. They were subsequently abducted from police custody and tortured by alleged security agents. Since then, the government routinely arrests and detains the three leaders whenever they speak out against the government. Political uncertainty remains high. Violent crime, such as assault, smash and grabs, and home invasion, is common. Local police lack the resources to respond effectively to serious criminal incidents. Incidents of violence have typically not targeted investment projects.

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 $24,312 2019 $21,440 www.worldbank.org/en/country
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data:  BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2019 N/A 2019 -$72 BEA data available at https://apps.bea.gov/international/factsheet/
Host country’s FDI in the United States ($M USD, stock positions) 2019 N/A 2019 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 9.3 2019 7.0 UNCTAD data available at

https://stats.unctad.org/handbook/EconomicTrends/Fdi.html   

* Zimbabwe Statistical Agency (Zimstat).

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

Table 4: Sources of Portfolio Investment
Data not available.