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Australia

Executive Summary

Australia is generally welcoming to foreign investment as such investment is widely considered to be an essential contributor to Australia’s economic growth and productivity.  The United States is the dominant source of foreign direct investment (FDI) in Australia. According to the U.S. Bureau of Economic Analysis, the stock of U.S. FDI totaled USD168 billion in January 2018.

Australia runs an annual current-account deficit and, therefore, is dependent on foreign investment, both FDI and portfolio investment.  Mining and resources attracts, by far, the largest share of FDI from the United States. Real estate investment is the second largest recipient of FDI from the United States, although remains much smaller than mining investment in absolute terms.  The Australia-United States Free Trade Agreement establishes higher thresholds for screening U.S. investment for most classes of direct investment.

While welcoming toward FDI, Australia does apply a “national interest” test to qualifying types of investment through its Foreign Investment Review Board review process.  Various changes to the foreign investment rules have been made in recent years, primarily aimed at strengthening national security. The Security of Critical Infrastructure Act 2018 was introduced in July 2018, providing information-collection powers to the Critical Infrastructure Centre and requiring the establishment of a register of critical infrastructure assets.  This will facilitate the Centre playing a greater role in advising the Treasurer on particular cases of foreign investment where national security concerns are present. The related Telecommunications Sector Security Reforms came into force in September 2018 to manage national security concerns surrounding investment in the telecommunications sector.

In response to a perceived lack of fairness, the Australian government has tightened anti-tax avoidance legislation targeting multi-national corporations with operations in multiple tax jurisdictions.  While some laws have been complementary to international efforts to address tax avoidance schemes and the use of low-tax countries or tax havens, Australia has also gone further than the international community in some areas.  This trend will likely continue in 2019 as both of the main political parties are considering options to further strengthen anti-avoidance measures focused on multi-national corporations.

Australia has a strong legal system grounded in procedural fairness, judicial precedent, and the independence of the judiciary.  Property rights are well established and enforceable. The establishment of government regulations typically requires consultation with impacted stakeholders and requires approval by a central regulatory oversight body before progressing to the legislative phase.  Anti-bribery and anti-corruption laws exist and Australia performs well in measures of transparency. Finally, Australia’s business environment is generally conducive to foreign companies operating in the country, and it ranks 18th overall in the World Bank’s Ease of Doing Business Index.

Table 1

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 13 of 180 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report “Ease of Doing Business” 2018 18 of 190 https://www.doingbusiness.org/rankings
Global Innovation Index 2018 20 of 126 https://www.globalinnovationindex.org/content/page/data-analysis
U.S. FDI in partner country ($M USD, stock positions) 2017 USD 169 http://www.bea.gov/international/factsheet/
World Bank GNI per capita 2017 USD 51,360 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

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

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

Limits on Foreign Control and Right to Private Ownership and Establishment

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

Other than the screening process described in Section 4, there are few limits or restrictions on foreign investment in Australia.  Foreign purchases of agricultural land greater than AUD15 million (USD11 million) is subject to screening. This threshold applies to the cumulative value of agricultural land owned by the foreign investor, including the proposed purchase. However, the agricultural land screening threshold does not affect investments made under the Australia-United States Free Trade Agreement (AUSFTA).  The current threshold remains AUD 1.154 billion (USD808 million) for U.S. non-government investors. Investments made by U.S. non-government investors are subject to inclusion on the foreign ownership register of agricultural land and to Australian Tax Office (ATO) information gathering activities on new foreign investment.

Other Investment Policy Reviews

Australia has not conducted an investment policy review in the last three years through either the OECD or UNCTAD system.  The last WTO review of Australia’s trade policies and practices took place in April 2015, and can be found at https://www.wto.org/english/tratop_e/tpr_e/tp412_e.htm  .  Australia is not scheduled for a WTO trade policy review in 2019.

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

Business Facilitation

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

In registering a business, individuals and entities are required to register as a company with ASIC, which then gives the company an Australian Company Number, registers the company, and issues a Certificate of Registration.  According to the World Bank “Starting a Business” indicator, registering a business in Australia takes 2.5 days, and Australia ranks 7th globally on this indicator.

Outward Investment

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

2. Bilateral Investment Agreements and Taxation Treaties

Australia is a party to bilateral investment treaties with Argentina, China, Czech Republic, Egypt, Hong Kong, Hungary, India, Indonesia, Laos, Lithuania, Mexico, Pakistan, Papua New Guinea, Peru, Philippines, Poland, Romania, Sri Lanka, Turkey, Uruguay and Vietnam.

In addition to the AUSFTA free trade agreement (FTA) with the United States, Australia has bilateral FTAs in force with Chile, China, Japan, Korea, Malaysia, Singapore, and Thailand, and a multilateral FTA with New Zealand and the countries of the Association of Southeast Asian States (ASEAN), all of which contain chapters on investment.  Australia signed the Comprehensive and Progressive Agreement for Trans Pacific Partnership (CPTPP) in March 2018, and it entered into force in December 2018. Australia has signed, but not yet ratified, bilateral FTAs with Hong Kong, Indonesia, and Peru, and the multilateral Pacific trade and economic agreement known as“PACER Plus”.

Australia is currently engaged in bilateral FTA negotiations with the EU and India, and in the following plurilateral FTA negotiations: the Regional Comprehensive Economic Partnership (RCEP, consisting of the ASEAN + Six group of nations); the Gulf Cooperation Council (GCC); and the Pacific Alliance (comprising Chile, Peru, Mexico and Colombia.

The U.S.-Australia Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes has been in place since 1982, with amendments made in 2001.  In addition to the United States, Australia has income tax treaties with 44 other countries and Taiwan.

In 2014, Australia signed an Intergovernmental Agreement with the United States to implement the Foreign Account Tax Compliance Act (FATCA) and improve tax cooperation. Under FATCA, Australian financial institutions are required to submit information on accounts held by U.S. citizens.  The Intergovernmental Agreement allows financial institutions to report the information via the Australian Tax Office under the existing Australia–US tax treaty arrangements.

The Australian government has moved aggressively in efforts to fight tax avoidance schemes by multinational corporations.  Australia ratified the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting in September 2018, and it entered into force on January 1, 2019.  Australia has used this instrument to modify its tax treaties with several countries, but not with the United States. Australia has actively participated in the OECD Base Erosion Profit Shifting (BEPS) recommendations but has also moved further than the BEPS recommendations.  Multinational anti-avoidance legislation targets companies that do business in Australia without establishing a permanent establishment, and Australia’s diverted profits tax legislation targets tax schemes that recognize income in lower tax jurisdictions. Australia has implemented the OECD’s hybrid mismatch rules (as of January 2019) and limits interest deductions through a Safe Harbor Debt Limit of 60 percent (further legislation dealing with thin capitalization is before parliament at the time of writing.).

4. Industrial Policies

Investment Incentives

The Commonwealth government and state and territory governments provide a range of measures to assist investors with setting up and running a business and undertaking investment.  Types of assistance available vary by location, industry, and the nature of the business activity. Austrade provides coordinated government assistance to attracting FDI and is intended to serve as the national point-of-contact for investment inquiries.  State and territory governments similarly offer a suite of financial and non-financial incentives. Australian and State and Territory Governments provide selected grants to businesses for establishing or expanding a business, or for specific activities such as research.  The Commonwealth Government also provides incentives for companies engaging in research and development (R&D), and delivers a tax offset for expenditure on eligible R&D activities undertaken during the year. R&D activities conducted overseas are also eligible under certain circumstances, and the program is jointly administered by AusIndustry (Government agency) and the Australian Taxation Office (ATO). The Australian Government typically does not offer guarantees on, or jointly finance projects with, foreign investors.

Foreign Trade Zones/Free Ports/Trade Facilitation

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

Performance and Data Localization Requirements

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

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

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

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

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

5. Protection of Property Rights

Real Property

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

Intellectual Property Rights

Australia generally provides strong intellectual property rights (IPR) protection and enforcement through legislation that, among other things, criminalizes copyright piracy and trademark counterfeiting.  Australia is not listed in USTR’s Special 301 report or on USTR’s notorious market report.

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

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

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

Under the AUSFTA, Australia must notify the holder of a pharmaceutical patent of a request for marketing approval by a third party for a product claimed by that patent.  U.S. and Australian pharmaceutical companies have raised concerns that unnecessary delays in this notification process restrict their options for action against third parties that would infringe their patents if granted marketing approval by the Australian Therapeutic Goods Administration.

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

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

6. Financial Sector

Capital Markets and Portfolio Investment

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

Money and Banking System

Australia’s banking system is robust, highly evolved, and international in focus.  Bank profitability is strong and has been supported by further improvements in asset performance.

Total assets of the four largest banks is USD 2.6 trillion, 21 percent of the market value of all listed Australian companies.  According to Australia’s central bank, the Reserve Bank of Australia or RBA, the ratio of non-performing assets to total loans was just under 1 percent at the end of 2017, having remained at around that level for the last four years after falling from highs of nearly 2 percent following the Global Financial Crisis.  The RBA is responsible for monitoring and reporting on the stability of the financial sector, while the Australian Prudential Regulatory Authority (APRA) monitors individual institutions. Foreign banks are allowed to operate as a branch or a subsidiary in Australia. Australia has generally taken an open approach to allowing foreign companies to operate in the financial sector, largely to ensure sufficient competition in an otherwise small domestic market.

The RBA is responsible for monitoring and regulating payments systems in Australia.  It has recently overseen the creation of the New Payments Platform that came on line in early 2018, allowing fast processing of low value transactions.

Foreign Exchange and Remittances

Foreign Exchange

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

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

Remittance Policies

Australia does not limit investment remittances.

Sovereign Wealth Funds

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

In addition to the Future Fund, the Australian government has a number of “nation-building funds”, the DisabilityCare Fund, and the Medical Research Future Fund.  The Building Australia Fund enhances the Commonwealth’s ability to make payments towards the creation or development of transport, communications, energy, and water infrastructure and in relation to eligible national broadband matters.  The Education Investment Fund makes payments towards the creation or development of higher education infrastructure, research infrastructure, vocational education and training infrastructure, and eligible education infrastructure. The DisablityCare Australia Fund aims to reimburse States, Territories and the Commonwealth for expenditure incurred in relation to the National Disability Insurance Scheme Act 2013 and to fund implementation of that Act in its initial period of operation.  The Medical Research Future Fund provides grants of financial assistance to support medical research and medical innovation.

As of December 31, 2018, the value of the Future Fund totaled AUD 147 billion (USD 103 billion).  The value of the Education Investment Fund totaled AUD 3.9 billion (USD 2.7 billion); the Building Australia Fund totaled AUD 3.9 billion (USD 2.7 billion); the DisabilityCare Australia Fund totaled AUD 14.4 billion (USD 10.1 billion), and the Medical Research Future Fund totaled AUD 9.4 billion (USD 6.6 billion).

7. State-Owned Enterprises

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

Privatization Program

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

8. Responsible Business Conduct

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

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

9. Corruption

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

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

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

Under Australian law, it is an offense to bribe a foreign public official, even if a bribe may be seen to be customary, necessary or required.  The maximum penalty for an individual is 10 years imprisonment and/or a fine of AUD 2.1 million (approximately USD 1.5 million). For a corporate entity, the maximum penalty is the greatest of: 1) AUD 21 million  (approximately USD 14.7 million); 2) three times the value of the benefits obtained; or 3) 10 percent of the previous 12-month turnover of the company concerned.

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

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

UN Anticorruption Convention, OECD Convention on Combatting Bribery

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

Resources to Report Corruption

Western Australia – Corruption and Crime Commission
86 St Georges Terrace
Perth, Western Australia
Tel. (08) 9215 4888
https://www.ccc.wa.gov.au/  

Queensland – Corruption and Crime Commission
Level 2, North Tower Green Square
515 St Pauls Terrace
Fortitude Valley, Queensland
Tel. (07) 3360 6060
https://www.ccc.qld.gov.au/  

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

New South Wales – Independent Commission against Corruption
Level 7, 255 Elizabeth Street
Sydney NSW 2000
Australia
02 8281 5999
https://www.icac.nsw.gov.au/  

South Australia – Independent Commission against Corruption NSW
Level 1, 55 Currie Street
Adelaide, South Australia
Tel. 08 8463 5173
https://icac.sa.gov.au  

10. Political and Security Environment

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

11. Labor Policies and Practices

Australia’s strong economy has seen unemployment fall to relatively low levels, albeit remaining above levels associated with full employment.  As of March 2019 the employment rate in Australia is at 5.0 percent. Average weekly earnings for full time workers in Australia were AUD 1,670 (approximately USD 1,170) as of November 2018.  The minimum wage is set annually and is significantly higher than that of the United States (approximately twice the U.S. minimum wage). Overall wage growth has been low in recent years, growing only slightly above the rate of inflation.

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

Immigration has always been an important source for skilled labor in Australia.  The Department of Home Affairs publishes an annual list of occupations with skill shortages to be used by potential applicants seeking to work in Australia.  The visas available to applicants, and length of stay allowed for, differ by occupation. The main working visa is the Temporary Skills Shortage visa (subclass 482) which replaced the former subclass 457 visa in March 2018.  Applicants must have a nominated occupation when they apply which is applicable to their circumstances, and applications are subject to local labor market testing rules. These rules preference the hiring of Australian labor over foreign workers so long as local workers can be found to fill the advertised job.

In March 2018, the Government announced a one-year trial of a new visa category aimed to provide companies access to highly skilled international professionals.  This visa is eligible to listed companies, companies with turnover greater than AUD4 million (USD 2.76 million), or recognized startup companies, paying the foreign worker AUD180,000 (USD 124,398) or more.

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

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

There were 158 industrial disputes nationwide in 2017.  This was a slight increase on the 154 disputes recorded in 2017, although there was a 26 percent reduction in the number of working days lost due to these disputes.

12. OPIC and Other Investment Insurance Programs

The Overseas Private Investment Corporation excludes Australia, as it is not a developing country.  The U.S. Export-Import Bank (EXIM) can provide financing and other services for major resource sector and energy projects in Australia which support U.S. jobs and exports.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

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

Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2018 $1,280,000 2017 $1,320,000 www.worldbank.org/en/country  
Foreign Direct Investment Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2017 $132,000 2017 $168,000 http://bea.gov/international/direct_investment_multinational_companies_comprehensive_data.htm  
Host country’s FDI in the United States ($M USD, stock positions) 2017 $83,000 2017 $67,000 http://bea.gov/international/direct_investment_multinational_companies_comprehensive_data.htm  
Total inbound stock of FDI as % host GDP 2017 10% 2018 48.1% https://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Country-Fact-Sheets.aspx  

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


Table 3: Sources and Destination of FDI

Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Billions)
Inward Direct Investment Outward Direct Investment
Total Inward 662.3 100% Total Outward 460.6 100%
USA 148.1 22% USA 99.3 22%
Japan 72.2 11% UK 65.4 14%
UK 64.8 10% New Zealand 48.4 11%
Netherlands 41.7 6% Singapore 15.7 3%
China 31.7 5% Papua New Guinea 12.8 3%
“0” reflects amounts rounded to +/- USD 500,000.


Table 4: Sources of Portfolio Investment

Portfolio Investment Assets
Top Five Partners (Millions, US Dollars)
Total Equity Securities Total Debt Securities
All Countries $808,049 100% All Countries $515,382 100% All Countries $292,667 100%
United States $335,258 41% United States $237,834 46% United States $97,424 33%
United Kingdom $71,863 9% United Kingdom $44,153 9% United Kingdom $27,710 9%
Japan $33,282 5% Japan $27,190 5% Germany $24,514 8%
Cayman Islands $36,282 4% Switzerland $11,080 2% Japan $17,092 6%
Canada $27,724 3% Netherlands $10,778 2% Canada $14,269 5%

14. Contact for More Information

Deputy Economic Counsellor Steven Dyokas
U.S. Embassy
21 Moonah Place, Yarralumla, ACT
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Brazil

Executive Summary

Brazil is the second largest economy in the Western Hemisphere behind the United States, and the eighth largest economy in the world, according to the World Bank.  The United Nations Conference on Trade and Development (UNCTAD) named Brazil the fourth largest destination for global Foreign Direct Investment (FDI) flows in 2017.  In recent years, Brazil received more than half of South America’s total incoming FDI, and the United States is a major foreign investor in Brazil. The Brazilian Central Bank (BCB) reported the United States had the largest single-country stock of FDI by final ownership, representing 22 percent of all FDI in Brazil (USD 118.7 billion) in 2017, the latest year with available data.  The Government of Brazil (GoB) prioritized attracting private investment in infrastructure during 2017 and 2018.

The current economic recovery, which started in the first quarter of 2017, ended the deepest and longest recession in Brazil’s modern history.  The country’s Gross Domestic Product (GDP) expanded by 1.1 percent in 2018, below most initial market analysts’ projections of 3 percent growth in 2018.  Analysts forecast a 2 percent growth rate for 2019. The unemployment rate reached 11.6 percent at the end of 2018. Brazil was the world’s fourth largest destination for FDI in 2017, with inflows of USD 62.7 billion, according to UNCTAD.  The nominal budget deficit stood at 7.1 percent of GDP (USD132.5 billion) in 2018 and is projected to end 2019 at around 6.5 percent of GDP (USD 148.5 billion). Brazil’s debt-to-GDP ratio reached 76.7 percent in 2018 with projections to reach 83 percent by the end of 2019.  The BCB has maintained its target for the benchmark Selic interest rate at 6.5 percent since March 2018 (from a high of 13.75 percent at the end of 2016).

President Bolsonaro took office on January 1, 2019, following the interim presidency by President Michel Temer, who had assumed office after the impeachment of former President Dilma Rousseff in August 2016.  Temer’s administration pursued corrective macroeconomic policies to stabilize the economy, such as a landmark federal spending cap in December 2016 and a package of labor market reforms in 2017. President Bolsonaro’s economic team pledged to continue pushing reforms needed to help control costs of Brazil’s pension system, and has made that issue its top economic priority.  Further reforms are also planned to simplify Brazil’s complex tax system. In addition to current economic difficulties, since 2014, Brazil’s anti-corruption oversight bodies have been investigating allegations of widespread corruption that have moved beyond state-owned energy firm Petrobras and a number of private construction companies to include companies in other economic sectors.  

Brazil’s official investment promotion strategy prioritizes the automobile manufacturing, renewable energy, life sciences, oil and gas, and infrastructure sectors.  Foreign investors in Brazil receive the same legal treatment as local investors in most economic sectors; however, there are restrictions in the health, mass media, telecommunications, aerospace, rural property, maritime, and air transport sectors.  The Brazilian Congress is considering legislation to liberalize restrictions on foreign ownership of rural property and air carriers.

Analysts contend that high transportation and labor costs, low domestic productivity, and ongoing political uncertainties hamper investment in Brazil.  Foreign investors also cite concerns over poor existing infrastructure, still relatively rigid labor laws, and complex tax, local content, and regulatory requirements; all part of the extra costs of doing business in Brazil.  

 

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 105 of 180 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2019 109 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 64 of 126 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, historical-cost basis) 2017 $68,272 http://www.bea.gov/international/factsheet/
World Bank GNI per capita 2017 $8,600 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Brazil was the world’s fourth largest destination for Foreign Direct Investment (FDI) in 2017, with inflows of USD 62.7 billion, according to UNCTAD.  The GoB actively encourages FDI – particularly in the automobile, renewable energy, life sciences, oil and gas, and transportation infrastructure sectors – to introduce greater innovation into Brazil’s economy and to generate economic growth.  GoB investment incentives include tax exemptions and low-cost financing with no distinction made between domestic and foreign investors. Foreign investment is restricted in the health, mass media, telecommunications, aerospace, rural property, maritime, insurance, and air transport sectors.  

The Brazilian Trade and Investment Promotion Agency (APEX) plays a leading role in attracting FDI to Brazil by working to identify business opportunities, promoting strategic events, and lending support to foreign investors willing to allocate resources to Brazil.  APEX is not a one-stop-shop for foreign investors, but the agency can assist in all steps of the investor’s decision-making process, to include identifying and contacting potential industry segments, sector and market analyses, and general guidelines on legal and fiscal issues.  Their services are free of charge. The website for APEX is: http://www.apexbrasil.com.br/en  .

Limits on Foreign Control and Right to Private Ownership and Establishment

A 1995 constitutional amendment (EC 6/1995) eliminated distinctions between foreign and local capital, ending favorable treatment (e.g. tax incentives, preference for winning bids) for companies using only local capital.  However, constitutional law restricts foreign investment in the healthcare (Law 13097/2015), mass media (Law 10610/2002), telecommunications (Law 12485/2011), aerospace (Law 7565/1986 a, Decree 6834/2009, updated by Law 12970/2014, Law 13133/2015, and Law 13319/2016), rural property (Law 5709/1971), maritime (Law 9432/1997, Decree 2256/1997), insurance (Law 11371/2006), and air transport sectors (Law 13319/2016).  

Screening of FDI

Foreigners investing in Brazil must electronically register their investment with the BCB within 30 days of the inflow of resources to Brazil.  In cases of investments involving royalties and technology transfer, investors must register with Brazil’s patent office, the National Institute of Industrial Property (INPI).  Investors must also have a local representative in Brazil. Portfolio investors must have a Brazilian financial administrator and register with the Brazilian Securities Exchange Commission (CVM).  

To enter Brazil’s insurance and reinsurance market, U.S. companies must establish a subsidiary, enter into a joint venture, acquire a local firm, or enter into a partnership with a local company.  The BCB reviews banking license applications on a case-by-case basis. Foreign interests own or control 20 of the top 50 banks in Brazil. Santander is the only major wholly foreign-owned retail bank remaining in Brazil.  Brazil’s anti-trust authorities (CADE) approved Itau bank’s purchase of Citibank’s Brazilian retail banking operation in August 2017. In June 2016, CADE approved Bradesco bank’s purchase of HSBC’s Brazilian retail banking operation.  

Currently, foreign ownership of airlines is limited to 20 percent.  Congressman Carlos Cadoca (PCdoB-PE) presented a bill to Brazilian Congress in August of 2015 to allow for 100 percent foreign ownership of Brazilian airlines (PL 2724/2015).  The bill was approved by the lower house, and since March 2019, it is pending a Senate vote. In 2011, the United States and Brazil signed an Air Transport Agreement as a step towards an Open Skies relationship that would eliminate numerical limits on passenger and cargo flights between the two countries.  Brazil’s lower house approved the agreement in December 2017, and the Senate ratified it in March 2018. The Open Skies agreement has now entered into force.

In July 2015, under National Council on Private Insurance (CNSP) Resolution 325, the Brazilian government announced a significant relaxation of some restrictions on foreign insurers’ participation in the Brazilian market, and in December 2017, the government eliminated restrictions on risk transfer operations involving companies under the same financial group.  The new rules revoked the requirement to purchase a minimum percentage of reinsurance and eliminated a limitation or threshold for intra-group cession of reinsurance to companies headquartered abroad that are part of the same economic group. Rules on preferential offers to local reinsurers, which are set to decrease in increments from 40 percent in 2016 to 15 percent in 2020, remain unchanged.  Foreign reinsurance firms must have a representation office in Brazil to qualify as an admitted reinsurer. Insurance and reinsurance companies must maintain an active registration with Brazil’s insurance regulator, the Superintendence of Private Insurance (SUSEP) and maintaining a minimum solvency classification issued by a risk classification agency equal to Standard & Poor’s or Fitch ratings of at least BBB-.

In September 2011, Law 12485/2011 removed a 49 percent limit on foreign ownership of cable TV companies, and allowed telecom companies to offer television packages with their service.  Content quotas require every channel to air at least three and a half hours per week of Brazilian programming during primetime. Additionally, one-third of all channels included in any TV package have to be Brazilian.  

The National Land Reform and Settlement Institute administers the purchase and lease of Brazilian agricultural land by foreigners.  Under the applicable rules, the area of agricultural land bought or leased by foreigners cannot account for more than 25 percent of the overall land area in a given municipal district.  Additionally, no more than 10 percent of agricultural land in any given municipal district may be owned or leased by foreign nationals from the same country. The law also states that prior consent is needed for purchase of land in areas considered indispensable to national security and for land along the border.  The rules also make it necessary to obtain congressional approval before large plots of agricultural land can be purchased by foreign nationals, foreign companies, or Brazilian companies with majority foreign shareholding. Draft Law 4059/2012, which would lift the limits on foreign ownership of agricultural land,

has been awaiting a vote in the Brazilian Congress since 2015.

Brazil is not a signatory to the World Trade Organization (WTO) Agreement on Government Procurement (GPA), but became an observer in October 2017.  By statute, a Brazilian state enterprise may subcontract services to a foreign firm only if domestic expertise is unavailable. Additionally, U.S. and other foreign firms may only bid to provide technical services when there are no qualified Brazilian firms.  U.S. companies need to enter into partnerships with local firms or have operations in Brazil in order to be eligible for “margins of preference” offered to domestic firms to participate in Brazil’s public sector procurement to help these firms win government tenders.  Foreign companies are often successful in obtaining subcontracting opportunities with large Brazilian firms that win government contracts. Under trade bloc Mercosul’s Government Procurement Protocol, member nations Brazil, Argentina, Paraguay, and Uruguay are entitled to non-discriminatory treatment of government-procured goods, services, and public works originating from each other’s suppliers and providers.  However, only Argentina has ratified the protocol, and per the Brazilian Ministry of Economy website, this protocol has been in revision since 2010, so it has not yet entered into force.

Other Investment Policy Reviews

The Organization for Economic Co-operation and Development’s (OECD) 2018 Brazil Economic Survey of Brazil highlights Brazil as a leading global economy.  However, it notes that high commodity prices and labor force growth will no longer be able to sustain Brazil’s economic growth without deep structural reforms.  While praising the Temer government for its reform plans, the OECD urged Brazil to pass all needed reforms to realize their full benefit. The OECD cautions about low investment rates in Brazil, and cites a World Economic Forum survey that ranks Brazil 116 out of 138 countries on infrastructure as an area in which Brazil must improve to maintain competitiveness.  

The OECD’s March 15, 2019 Enlarged Investment Committee Report BRAZIL: Position Under the OECD Codes of Liberalisation of Capital Movements and of Current Invisible Operations noted several areas in which Brazil needs to improve.  These observations include, but are not limited to: restrictions to FDI requiring investors to incorporate or acquire residency in order to invest; lack of generalized screening or approval mechanisms for new investments in Brazil; sectoral restrictions on foreign ownership in media, private security and surveillance, air transport, mining, telecommunication services; and, restrictions for non-residents to own Brazilian flag vessels.  The report did highlight several areas of improvement and the GoB’s pledge to ameliorate several ongoing irritants as well.

The IMF’s 2018 Country Report No. 18/253 on Brazil highlights that a mild recovery supported by accommodative monetary and fiscal policies is currently underway.  But the economy is underperforming relative to its potential, public debt is high and increasing, and, more importantly, medium-term growth prospects remain uninspiring, absent further reforms.  The IMF advises that against the backdrop of tightening global financial conditions, placing Brazil on a path of strong, balanced, and durable growth requires a committed pursuit of fiscal consolidation, ambitious structural reforms, and a strengthening of the financial sector architecture.  The WTO’s 2017 Trade Policy Review of Brazil notes the country’s open stance towards foreign investment, but also points to the many sector-specific limitations (see above). All three reports highlight the uncertainty regarding reform plans as the most significant political risk to the economy.  These reports are located at the following links:

http://www.oecd.org/brazil/economic-survey-brazil.htm  ,

https://www.oecd.org/daf/inv/investment-policy/Code-capital-movements-EN.pdf ,

https://www.imf.org/~/media/Files/Publications/CR/2017/cr17216.ashx  , and https://www.wto.org/english/tratop_e/tpr_e/tp458_e.htm  .

Business Facilitation

A company must register with the National Revenue Service (Receita) to obtain a business license and be placed on the National Registry of Legal Entities (CNPJ).  Brazil’s Export Promotion and Investment Agency (APEX) has a mandate to facilitate foreign investment. The agency’s services are available to all investors, foreign and domestic.  Foreign companies interested in investing in Brazil have access to many benefits and tax incentives granted by the Brazilian government at the municipal, state, and federal levels. Most incentives target specific sectors, amounts invested, and job generation.  Brazil’s business registration website can be found at http://receita.economia.gov.br/orientacao/tributaria/cadastros/cadastro-nacional-de-pessoas-juridicas-cnpj  .  

Outward Investment

Brazil does not restrict domestic investors from investing abroad, and APEX-Brasil supports Brazilian companies’ efforts to invest abroad under its “internationalization program”: http://www.apexbrasil.com.br/como-a-apex-brasil-pode-ajudar-na-internacionalizacao-de-sua-empresa  .  Apex-Brasil frequently highlights the United States as an excellent destination for outbound investment.  Apex-Brasil and SelectUSA (the U.S. government’s investment promotion office at the U.S. Department of Commerce) signed a memorandum of cooperation to promote bilateral investment in February 2014.

2. Bilateral Investment Agreements and Taxation Treaties

Brazil does not have a Bilateral Investment Treaty (BIT) with the United States.  In the 1990s, Brazil signed BITs with Belgium, Luxembourg, Chile, Cuba, Denmark, Finland, France, Germany, Italy, the Republic of Korea, the Netherlands, Portugal, Switzerland, the United Kingdom, and Venezuela.  The Brazilian Congress has not ratified any of these agreements. In 2002, the Executive branch withdrew the agreements from Congress after determining that treaty provisions on international Investor-State Dispute Settlement (ISDS) were unconstitutional.  

In 2015, Brazil developed a state-to-state Cooperation and Facilitation Investment Agreement (CFIA) which, unlike traditional BITs, does not provide for an ISDS mechanism.  CFIAs instead outline progressive steps for the settlement of “issue[s] of interest to an investor,” including: 1) an ombudsmen and a Joint Committee appointed by the two governments will act as mediators to amicably settle any dispute; 2) if amicable settlement fails, either of the two governments may bring the dispute to the attention of the Joint Committee; 3) if the dispute is not settled within the Joint Committee, the two governments may resort to interstate arbitration mechanisms.”  The GOB has signed several CFIAs since 2015 with: Mozambique (April 2015), Angola (May 2015), Mexico (May 2015), Malawi (October 2015), Colombia (October 2015), Peru (October 2015), Chile (November 2015), Iran (November 2016), Azerbaijan (December 2016), Armenia (November 2017), Ethiopia (April 2018), Suriname (May 2018), Guyana (December 2018), and the United Arab Emirates (March 2019). The following CFIAs are in force: Mexico, Angola, Armenia, Azerbaijan, and Peru. A few CFIAs have received Congressional ratification in Brazil and are pending ratification by the other country: Mozambique, Malawi, and Colombia (https://concordia.itamaraty.gov.br/ ).  Brazil also negotiated an intra-Mercosul protocol similar to the CFIA in April 2017, which was ratified on December 21, 2018.  (See sections on responsible business conduct and dispute settlement.)

Brazil does not have a double taxation treaty with the United States, but it does have such treaties with 34 other countries, including: Japan, France, Italy, the Netherlands, Canada, Spain, Portugal, and Argentina.  Brazil signed a Tax Information Exchange Agreement (TIEA) with the United States in March 2007, which entered into force on May 15, 2013. In September 2014, Brazil and the United States signed an intergovernmental agreement to improve international tax compliance and to implement the Foreign Account Tax Compliance Act (FATCA).  This agreement went into effect in August 2015.

4. Industrial Policies

Investment Incentives

The GoB extends tax benefits for investments in less developed parts of the country, including the Northeast and the Amazon regions, with equal application to foreign and domestic investors.  These incentives were successful in attracting major foreign plants to areas like the Manaus Free Trade Zone in Amazonas State, but most foreign investment remains concentrated in the more industrialized southern states in Brazil.  

Individual states seek to attract private investment by offering tax benefits and infrastructure support to companies, negotiated on a case-by-case basis.  Competition among states to attract employment-generating investment leads some states to challenge such tax benefits as beggar-thy-neighbor fiscal competition.  

While local private sector banks are beginning to offer longer credit terms, the state-owned Brazilian National Development Bank (BNDES) is the traditional Brazilian source of long-term credit as well as export credits.  BNDES provides foreign- and domestically-owned companies operating in Brazil financing for the manufacturing and marketing of capital goods and primary infrastructure projects. BNDES provides much of its financing at subsidized interest rates.  As part of its package of fiscal tightening, in December 2014, the GoB announced its intention to scale back the expansionary activities of BNDES and ended direct Treasury support to the bank. Law 13483, from September 2017, created a new Long-Term Lending Rate (TLP) for BNDES, which will be phased-in to replace the prior subsidized loans starting on January 1, 2018.  After a five-year phase in period, the TLP will float with the market and reflect a premium over Brazil’s five-year bond yield (a rate that incorporates inflation). The GoB plans to reduce BNDES’s role further as it continues to promote the development of long-term private capital markets.

In January 2015, the GoB eliminated the industrial products tax (IPI) exemptions on vehicles, while keeping all other tax incentives provided by the October 2012 Inovar-Auto program.  Through Inovar-Auto, auto manufacturers were able to apply for tax credits based on their ability to meet certain criteria promoting research and development and local content. Following successful WTO challenges against the trade-restrictive impacts of some of its tax benefits, the government allowed Inovar-Auto program to expire on December 31, 2017.  Although the government has announced a new package of investment incentives for the auto sector, Rota 2030, it remains at the proposal stage, with no scheduled date for a vote or implementation.

On February 27, 2015, Decree 8415 reduced tax incentives for exports, known as the Special Regime for the Reinstatement of Taxes for Exporters, or Reintegra Program.  Decree 8415 reduced the previous three percent subsidy on the value of the exports to one percent for 2015, to 0.1 percent for 2016, and two percent for 2017 and 2018.

Brazil provides tax reductions and exemptions on many domestically-produced information and communication technology (ICT) and digital goods that qualify for status under the Basic Production Process (PPB).  The PPB is product-specific and stipulates which stages of the manufacturing process must be carried out in Brazil in order for an ICT product to be considered produced in Brazil. The major fiscal benefits of the National Broadband Plan (PNBL) and supporting implementation plan (REPNBL-Redes) have either expired or been revoked.  In 2017, Brazil held a public consultation on a National Connectivity Plan to replace the PNBL, but has not yet published a final version.

Under Law 12598/2013, Brazil offers tax incentives ranging from 13 percent to 18 percent to officially classified “Strategic Defense Firms” (must have Brazilian control of voting shares) as well as to “Defense Firms” (can be foreign-owned) that produce identified strategic defense goods.  The tax incentives for strategic firms can apply to their entire supply chain, including foreign suppliers. The law is currently undergoing a revision, expected to be complete in 2018.

Industrial Promotion

The InovAtiva Brasil and Startup Brasil programs support start-ups in the country.  The GoB also uses free trade zones to incentivize industrial production. A complete description of the scope and scale of Brazil’s investment promotion programs and regimes can be found at: http://www.apexbrasil.com.br/en/home  .  

Foreign Trade Zones/Free Ports/Trade Facilitation

The federal government grants tax benefits to certain free trade zones.  Most of these free trade zones aim to attract investment to the country’s relatively underdeveloped North and Northeast regions.  The most prominent of these is the Manaus Free Trade Zone, in Amazonas State, which has attracted significant foreign investment, including from U.S. companies.  Constitutional amendment 83/2014 came into force in August 2014 and extended the status of Manaus Free Trade Zone until the year 2073.

Performance and Data Localization Requirements

Government Procurement Preferences:  The GoB maintains a variety of localization barriers to trade in response to the weak competitiveness of its domestic tech industry.

  1. Tax incentives for locally sourced information and communication technology (ICT) goods and equipment (Basic Production Process (PPB), Law 8248/91, and Portaria 87/2013);
  2. Government procurement preferences for local ICT hardware and software (2014 Decrees 8184, 8185, 8186, 8194, and 2013 Decree 7903); and the CERTICS Decree (8186), which aims to certify that software programs are the result of development and technological innovation in Brazil.

Presidential Decree 8135/2013 (Decree 8135) regulated the use of IT services provided to the Federal government by privately and state-owned companies, including the provision that Federal IT communications be hosted by Federal IT agencies. In 2015, the Ministry of Planning developed regulations to implement Decree 8135, which included the requirement to disclose source code if requested.  On December 26, 2018, President Michel Temer approved and signed the Decree 9.637/2018, which revoked Decree 8.135/2013 and eliminated the source code disclosure requirements.

The Institutional Security Cabinet (GSI) mandated the localization of all government data stored on the cloud during a review of cloud computing services contracted by the Brazilian government in Ordinance No. 9 (previously NC 14), this was made official in March 2018.  While it does provide for the use of cloud computing for non-classified information, it imposes a data localization requirement on all use of cloud computing by the Brazil government.

Investors in certain sectors in Brazil must adhere to the country’s regulated prices, which fall into one of two groups: those regulated at the federal level by a federal company or agency, and those set by sub-national governments (states or municipalities).  Regulated prices managed at the federal level include telephone services, certain refined oil and gas products (such as bottled cooking gas), electricity, and healthcare plans. Regulated prices controlled by sub-national governments include water and sewage fees, vehicle registration fees, and most fees for public transportation, such as local bus and rail services.  As part of its fiscal adjustment strategy, Brazil sharply increased regulated prices in January 2015.

For firms employing three or more persons, Brazilian nationals must constitute at least two-thirds of all employees and receive at least two-thirds of total payroll, according to Brazilian Labor Law Articles 352 to 354.  This calculation excludes foreign specialists in fields where Brazilians are unavailable.

Decree 7174 from 2010, which regulates the procurement of information technology goods and services, requires federal agencies and parastatal entities to give preferential treatment to domestically produced computer products and goods or services with technology developed in Brazil based on a complicated price/technology matrix.  

Brazil’s Marco Civil, an Internet law that determines user rights and company responsibilities, states that data collected or processed in Brazil must respect Brazilian law, even if the data is subsequently stored outside the country.  Penalties for non-compliance could include fines of up to 10 percent of gross Brazilian revenues and/or suspension or prohibition of related operations. Under the law, Internet connection and application providers must retain access logs for specified periods or face sanctions.  While the Marco Civil does not require data to be stored in Brazil, any company investing in Brazil should closely track its provisions – as well provisions of other legislation and regulations, including a data privacy bill passed in August 2018 and cloud computing regulations.

5. Protection of Property Rights

Real Property

Brazil has a system in place for mortgage registration, but implementation is uneven and there is no standardized contract.  Foreign individuals or foreign-owned companies can purchase real property in Brazil. Foreign buyers frequently arrange alternative financing in their own countries, where rates may be more attractive.  Law 9514 from 1997 helped spur the mortgage industry by establishing a legal framework for a secondary market in mortgages and streamlining the foreclosure process, but the mortgage market in Brazil is still underdeveloped, and foreigners may have difficulty obtaining mortgage financing.  Large U.S. real estate firms, nonetheless, are expanding their portfolios in Brazil.

Intellectual Property Rights

The last year brought increased attention to IP in Brazil, but rights holders still face significant challenges.  Brazil’s National Institute of Industrial Property (INPI) streamlined procedures for review processes to increase examiner productivity for patent and trademark decisions.  Nevertheless, the wait period for a patent remains nine years and the market is flooded with counterfeits. Brazil’s IP enforcement regime is constrained by limited resources.  Brazil has remained on the “Watch List” of the U.S. Trade Representative’s Special 301 report since 2007. For more information, please see: https://ustr.gov/issue-areas/intellectual-property/Special-301 .

Brazil has no physical markets listed on USTR’s 2017 Review of Notorious Markets, though the report does acknowledge a file sharing site popular among Brazilians that is known for pirated digital media.  For more information, please see: https://ustr.gov/sites/default/files/files/Press/Reports/2017 percent20Notorious percent20Markets percent20List percent201.11.18.pdf .

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

6. Financial Sector

Capital Markets and Portfolio Investment

The Central Bank of Brazil (BCB) embarked in October 2016 on a sustained monetary easing cycle, lowering the Special Settlement and Custody System (Selic) baseline reference rate from a high of 14 percent in October 2016 to 6.5 percent in December 2018.  Inflation for 2018 was 3.67 percent, within the 1.5 percent plus/minus of the 4 percent target. In June 2018, the National Monetary Council (CMN) set the BCB’s inflation target to 4.25 percent in 2019, 4.5 percent in 2020, and 3.75 percent for 2021. Because of a heavy public debt burden and other structural factors, most analysts expect the “neutral policy rate will remain higher than target rates in Brazil’s emerging-market peers (around five percent) over the forecast period.  

After a boom in 2004-2012 that more than doubled the lending/GDP ratio (to 55 percent of GDP), the recession and higher interest rates significantly decreased lending.  In fact, the lending/GDP ratio remained below 55 percent at year-end 2017. Financial analysts contend that credit will pick up again in the medium term, owing to interest rate easing and economic recovery.  

The role of the state in credit markets grew steadily beginning in 2008, with public banks now accounting for over 55 percent of total loans to the private sector (up from 35 percent).  Directed lending (that is, to meet mandated sectoral targets) also rose and accounts for almost half of total lending. Brazil is paring back public bank lending and trying to expand a market for long-term private capital.  

While local private sector banks are beginning to offer longer credit terms, state-owned development bank BNDES is a traditional Brazilian source of long-term credit.  BNDES also offers export financing. Approvals of new financing by BNDES increased 27 percent year-over-year, with the infrastructure sector receiving the majority of new capital.

The Sao Paulo Stock Exchange (BOVESPA) is the sole stock market in Brazil, while trading of public securities takes place at the Rio de Janeiro market.  In 2008, the Brazilian Mercantile & Futures Exchange (BM&F) merged with the BOVESPA to form what is now the fourth largest exchange in the Western Hemisphere, after the NYSE, NASDAQ, and Canadian TSX Group exchanges.  As of April 2019, there were 430 companies traded on the BM&F/BOVESPA. The BOVESPA index increased 15.03 percent in valuation during 2018. Foreign investors, both institutions and individuals, can directly invest in equities, securities, and derivatives.  Foreign investors are limited to trading derivatives and stocks of publicly held companies on established markets.

Wholly owned subsidiaries of multinational accounting firms, including the major U.S. firms, are present in Brazil.  Auditors are personally liable for the accuracy of accounting statements prepared for banks.

Money and Banking System

The Brazilian financial sector is large and sophisticated.  Banks lend at market rates that remain relatively high compared to other emerging economies.  Reasons cited by industry observers include high taxation, repayment risk, and concern over inconsistent judicial enforcement of contracts, high mandatory reserve requirements, and administrative overhead, as well as persistently high real (net of inflation) interest rates.  According to BCB data collected from 2011 through the first quarter of 2019, the average rate offered by Brazilian banks was 9.22 percent, with an average monthly high of 11.34 percent in July 2016, and an average monthly rate of 7.7 percent for March 2019.

The financial sector is concentrated, with BCB data indicating that the four largest commercial banks (excluding brokerages) account for approximately 70 percent of the commercial banking sector assets, totaling USD 1.59 trillion as of Q1, 2019.  Three of the five largest banks (by assets) in the country – Banco do Brasil, Caixa Economica Federal, and BNDES – are partially or completely federally owned. Large private banking institutions focus their lending on Brazil’s largest firms, while small- and medium-sized banks primarily serve small- and medium-sized companies.  Citibank sold its consumer business to Itau Bank in 2016, but maintains its commercial banking interests in Brazil. It is currently the sole U.S. bank operating in the country.

In recent years, the BCB has strengthened bank audits, implemented more stringent internal control requirements, and tightened capital adequacy rules to reflect risk more accurately.  It also established loan classification and provisioning requirements. These measures apply to private and publicly owned banks alike. In April 2018, Moody’s upgraded a collection of 20 Brazilian banks and their affiliates to stable from negative.  The Brazilian Securities and Exchange Commission (CVM) independently regulates the stock exchanges, brokers, distributors, pension funds, mutual funds, and leasing companies with penalties against insider trading.

Foreigners may find it difficult to open an account with a Brazilian bank.  The individual must present a permanent or temporary resident visa, a national tax identification number issued by the Brazilian government (CPF), either a valid passport or identity card for foreigners (CIE), proof of domicile, and proof of income.  On average, this process from application to account opening lasts more than three months

Foreign Exchange and Remittances

Foreign Exchange

Brazil’s foreign exchange market remains small, despite recent growth.  The latest Triennial Survey by the Bank for International Settlements, conducted in December 2016, showed that the net daily turnover on Brazil’s market for OTC foreign exchange transactions (spot transactions, outright forwards, foreign-exchange swaps, currency swaps and currency options) was USD 19.7 billion, up from USD 17.2 billion in 2013.  This was equivalent to around 0.3 percent of the global market in both years.

Brazil’s banking system has adequate capitalization and has traditionally been highly profitable, reflecting high interest rates and fees.  Per an April 2018 Central Bank Financial Stability Report, all banks exceeded required solvency ratios, and stress testing demonstrated the banking system has adequate loss absorption capacity in all simulated scenarios.  Furthermore, the report noted 99.9 percent of banks already met Basel III requirements, and possess a projected Common Equity Tier 1 (CET1) capital ratio above the minimum 7 percent required at the beginning of 2019.

There are few restrictions on converting or transferring funds associated with a foreign investment in Brazil.  Foreign investors may freely convert Brazilian currency in the unified foreign exchange market where buy-sell rates are determined by market forces.  All foreign exchange transactions, including identifying data, must be reported to the BCB. Foreign exchange transactions on the current account are fully liberalized.

The BCB must approve all incoming foreign loans.  In most cases, loans are automatically approved unless loan costs are determined to be “incompatible with normal market conditions and practices.”  In such cases, the BCB may request additional information regarding the transaction. Loans obtained abroad do not require advance approval by the BCB, provided the Brazilian recipient is not a government entity.  Loans to government entities require prior approval from the Brazilian Senate as well as from the Economic Ministry’s Treasury Secretariat, and must be registered with the BCB.

Interest and amortization payments specified in a loan contract can be made without additional approval from the BCB.  Early payments can also be made without additional approvals, if the contract includes a provision for them. Otherwise, early payment requires notification to the BCB to ensure accurate records of Brazil’s stock of debt.

In March 2014, Brazil’s Federal Revenue Service consolidated the regulations on withholding taxes (IRRF) applicable to earnings and capital gains realized by individuals and legal entities resident or domiciled outside Brazil.  The regulation states that the cost of acquisition must be calculated in Brazilian currency (reais). Also, the definition of “technical services” was broadened to include administrative support and consulting services rendered by individuals (employees or not) or resulting from automated structures having clear technological content.

Upon registering investments with the BCB, foreign investors are able to remit dividends, capital (including capital gains), and, if applicable, royalties.  Investors must register remittances with the BCB. Dividends cannot exceed corporate profits. Investors may carry out remittance transactions at any bank by documenting the source of the transaction (evidence of profit or sale of assets) and showing payment of applicable taxes.

Remittance Policies

Under Law 13259/2016 passed in March 2016, capital gain remittances are subject to a 15 to 22.5 percent income withholding tax, with the exception of capital gains and interest payments on tax-exempt domestically issued Brazilian bonds.  The capital gains marginal tax rates are: 15 percent up to USD 1.5 million in gains; 17.5 percent for USD 1.5 million to USD 2.9 million in gains; 20 percent for USD 2.9 million to USD 8.9 million in gains; and 22.5 percent for more than USD 8.9 million in gains.

Repatriation of a foreign investor’s initial investment is also exempt from income tax under Law 4131/1962.  Lease payments are assessed a 15 percent withholding tax. Remittances related to technology transfers are not subject to the tax on credit, foreign exchange, and insurance, although they are subject to a 15 percent withholding tax and an extra 10 percent Contribution for Intervening in Economic Domain (CIDE) tax.

Sovereign Wealth Funds

Law 11887 established the Sovereign Fund of Brazil (FSB) in 2008.  It was a non-commodity fund with a mandate to support national companies in their export activities and to offset counter-cyclical development, promoting investment in projects of strategic interest to Brazil both domestically and abroad.  The GoB also had the authority to use money from this fund to help meet its fiscal targets when annual revenues were lower than expected, and to invest in state-owned companies. In May 2018, then-President Temer signed an executive order abolishing the fund.  The money in the fund was earmarked for repayment of foreign debt.

7. State-Owned Enterprises

The GoB maintains ownership interests in a variety of enterprises at both the federal and state levels.  Typically, boards responsible for state-owned enterprise (SOE) corporate governance are comprised of directors elected by the state or federal government with additional directors elected by any non-government shareholders.  Although Brazil, a non-OECD member, has participated in many OECD working groups, it does not follow the OECD Guidelines on Corporate Governance of SOEs. Brazilian SOEs are concentrated in the oil and gas, electricity generation and distribution, transportation, and banking sectors.  A number of these firms also see a portion of their shares publically traded on the Brazilian and other stock exchanges.

In the 1990s and early 2000s, the GoB privatized many state-owned enterprises across a broad spectrum of industries, including mining, steel, aeronautics, banking, and electricity generation and distribution.  While the GoB divested itself from many of its SOEs, it maintained partial control (at both the federal and state level) of some previously wholly state-owned enterprises. This control can include a “golden share” whereby the government can exercise veto power over proposed mergers or acquisitions.  

Notable examples of majority government owned and controlled firms include national oil and gas giant Petrobras and power conglomerate Eletrobras.  Both Petrobras and Eletrobras include non-government shareholders, are listed on both the Brazilian and NYSE stock exchanges, and are subject to the same accounting and audit regulations as all publicly-traded Brazilian companies.  Brazil previously restricted foreign investment in offshore oil and gas development through 2010 legislation that obligated Petrobras to serve as the sole operator and minimum 30 percent investor in any oil and gas exploration and production in Brazil’s prolific offshore pre-salt fields.  As a result of the GoB’s desire to increase foreign investment in Brazil’s hydrocarbon sector, in October 2016 the Brazilian Congress granted foreign companies the right to serve as sole operators in pre-salt exploration and production activities and eliminated Petrobras’ obligation to serve as a minority equity holder in pre-salt oil and gas operations.  Nevertheless, the 2016 law still gives Petrobras right-of-first refusal in developing pre-salt offshore fields before those areas are available for public auction.  Industry estimates project bonuses of USD 26.3 billion by opening the Brazilian oil and gas market to foreign investment.

Privatization Program

Given limited public investment funding, the GoB has focused on privatizing state–owned energy, airport, road, railway, and port assets through long-term (up to 30 year) infrastructure concession agreements.  Eletrobras successfully sold its six principal, highly-indebted power distributors. The SOE is currently working to begin a capitalization process to reduce the GoB’s share holdings in the company to less than 50 percent.  The process cannot move forward, however, until Congress passes a bill authorizing the reduction. In 2018, Petrobras faced criticism over its daily fuel adjustment policy and a major 12-day truckers strike hit Brazil and forced the resignation of Petrobras’ CEO Pedro Parente.  To end the strike, the GoB eliminated the collection of the CIDE tax over diesel and gave a USD 3 billion subsidy to diesel producers (mainly Petrobras) to reduce the prices to consumers (primarily truckers).

In 2016, Brazil launched its newest version of these efforts to promote privatization of primary infrastructure.  The Temer administration created the Investment Partnership Program (PPI) to expand and accelerate the concession of public works projects to private enterprise and the privatization of some state entities.  PPI covers federal concessions in road, rail, ports, airports, municipal water treatment, electricity transmission and distribution, and oil and gas exploration and production contracts. Between 2016 and 2018, PPI auctioned off 124 projects and collected USD 62.5 billion in investments.  The full list of PPI projects is located at: https://www.ppi.gov.br/schedule-of-projects 

While some subsidized financing through BNDES will be available, PPI emphasizes the use of private financing and debentures for projects.  All federal and state-level infrastructure concessions are open to foreign companies with no requirement to work with Brazilian partners. In 2017, Brazil launched the Agora é Avançar initiative for promoting investments in primary infrastructure, and this has supported several projects.  Details can be found at: www.avancar.gov.br .The latest information available about Avançar Parcerias is from September 30, 2018.  From over 7,000 projects, the program has completed 36.5 percent and 92.2 percent are in progress.

In 2008, the Ministry of Health initiated the use of Production Development Partnerships (PDPs) to reduce the increasing dependence of Brazil’s healthcare sector on international drug production and the need to control costs in the public healthcare system, services that are an entitlement enumerated in the constitution.  The healthcare sector accounts for 9 percent of GDP, 10 percent of skilled jobs, and more than 25 percent of research and development nationally. These agreements provide a framework for technology transfer and development of local production by leveraging the volume purchasing power of the Ministry of Health. In the current administration, there is increasing interest in PDPs as a cost saving measure.  U.S. companies have both competed for these procurements and at times raised concerns about the potential for PDPs to be used to subvert intellectual property protections under the WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).

8. Responsible Business Conduct

Most state-owned and private sector corporations of any significant size in Brazil pursue corporate social responsibility (CSR) activities.  Brazil’s new CFIAs (see sections on bilateral investment agreements and dispute settlement) contain CSR provisions. Some corporations use CSR programs to meet local content requirements, particularly in information technology manufacturing.  Many corporations support local education, health and other programs in the communities where they have a presence. Brazilian consumers, especially the local residents where a corporation has or is planning a local presence, expect CSR activity.  Corporate officials frequently meet with community members prior to building a new facility to review the types of local services the corporation will commit to providing. Foreign and local enterprises in Brazil often advance United Nations Development Program (UNDP) Millennium Development Goals (MDGs) as part of their CSR activity, and will cite their local contributions to MDGs, such as universal primary education and environmental sustainability.  Brazilian prosecutors and civil society can be very proactive in bringing cases against companies for failure to implement the requirements of the environmental licenses for their investments and operations. National and international nongovernmental organizations monitor corporate activities for perceived threats to Brazil’s biodiversity and tropical forests and can mount strong campaigns against alleged misdeeds.

The U.S. diplomatic mission in Brazil supports U.S. business CSR activities through the +Unidos Group (Mais Unidos), a group of more than 100 U.S. companies established in Brazil.  Additional information on how the partnership supports public and private alliances in Brazil can be found at: www.maisunidos.org 

9. Corruption

Brazil has laws, regulations, and penalties to combat corruption, but their effectiveness is inconsistent.  Several bills to revise the country’s regulation of the lobbying/government relations industry have been pending before Congress for years.  Bribery is illegal, and a bribe by a local company to a foreign official can result in criminal penalties for individuals and administrative penalties for companies, including fines and potential disqualification from government contracts.  A company cannot deduct a bribe to a foreign official from its taxes. While federal government authorities generally investigate allegations of corruption, there are inconsistencies in the level of enforcement among individual states. Corruption is problematic in business dealings with some authorities, particularly at the municipal level.  U.S. companies operating in Brazil are subject to the U.S. Foreign Corrupt Practices Act (FCPA).

Brazil signed the UN Convention against Corruption in 2003, and ratified it in 2005.  Brazil is a signatory to the OECD Anti-Bribery Convention and a participating member of the OECD Working Group on bribery.  It was one of the founders, along with the United States, of the intergovernmental Open Government Partnership, which seeks to help governments increase transparency.  

In 2018, Brazil ranked 105th out of 180 countries in Transparency International’s Corruption Perceptions Index.  The full report can be found at: https://www.transparency.org/cpi2018 

Since 2014, the federal criminal investigation known as Operação Lava Jato (Operation Car Wash) has uncovered a complex web of public sector corruption, contract fraud, money laundering, and tax evasion stemming from systematic overcharging for government contracts, particularly at parastatal oil company Petrobras.  The ongoing investigation led to the arrests of Petrobras executives, oil industry suppliers including executives from Brazil’s largest construction companies, money launderers, former politicians, and political party operatives. Many sitting Brazilian politicians are currently under investigation.  In July 2017, former Brazilian President Luiz Inacio Lula da Silva (Lula) was convicted of corruption and money laundering charges stemming from the Lava Jato investigation.  The Brazilian authorities jailed Lula in April 2018, and the courts sentenced him in February 2019 to begin serving an almost 13-year prison sentence.  In March 2019, authorities arrested former President Michel Temer on charges of corruption.

In December 2016, Brazilian construction conglomerate Odebrecht and its chemical manufacturing arm Braskem agreed to pay the largest FCPA penalty in U.S. history and plead guilty to charges filed in the United States, Brazil, and Switzerland that alleged the companies paid hundreds of millions of dollars in bribes to government officials around the world.  The U.S. Department of Justice case stemmed directly from theLava Jatoinvestigation and focused on violations of the anti-bribery provisions of the FCPA.  Details on the case can be found at: https://www.justice.gov/opa/pr/odebrecht-and-braskem-plead-guilty-and-agree-pay-least-35-billion-global-penalties-resolve 

In January 2018, Petrobras settled a class-action lawsuit with investors in U.S. federal court for USD 3 billion, which was one of the largest securities class action settlements in U.S. history.  The investors alleged that Petrobras officials accepted bribes and made decisions that had a negative impact on Petrobras’ share value. In September 2018, the U.S. Department of Justice announced that Petrobras would pay a fine of USD 853.2 million to settle charges that former executives and directors violated the FCPA through fraudulent accounting used to conceal bribe payments from investors and regulators.

In 2015, GoB prosecutors announced Operacão Zelotes (Operation Zealots), in which both domestic and foreign firms were alleged to have bribed tax officials to reduce their assessments.  The operation resulted in a complete closure and overhaul of Brazilian tax courts, including a reduction in the number of courts and judges as well as more subsequent rulings in favor of tax authorities.  

Resources to Report Corruption

Petalla Brandao Timo Rodrigues
International Relations Chief Advisor
Brazilian Federal Public Ministry
contatolavajato@mpf.mp.br

Transparencia Brasil
Bela Cintra, 409; Sao Paulo, Brasil
+55 (11) 3259-6986
http://www.transparencia.org.br/contato 

10. Political and Security Environment

Strikes and demonstrations occasionally occur in urban areas and may cause temporary disruption to public transportation.  Occasional port strikes continue to have an impact on commerce. Brazil has over 60,000 murders annually, with low rates of success in murder investigations and even lower conviction rates.  Brazil announced emergency measures in 2017 to counter a rise in violence in Rio de Janeiro state, and approximately 8,500 military personnel deployed to the state to assist state law enforcement.  In February, 2018, then-President Temer signed a federal intervention decree giving the federal government control of the state’s entire public security apparatus under the command of an Army general.  The federal intervention ended on December 31, 2018, with the withdrawal of the military. Shorter-term and less expansive deployments of the military in support of police forces also occurred in other states in 2017, including Rio Grande do Norte and Roraima.  The military also supported police forces in 11 states and nearly 500 cities for the 2018 general elections.

In 2016, millions peacefully demonstrated to call for and against then-President Dilma Rousseff’s impeachment and protest against corruption, which was one of the largest public protests in Brazil’s history.  Non-violent pro- and anti-government demonstrations have occurred regularly in recent years.

Although U.S. citizens are usually not targeted during such events, U.S. citizens traveling or residing in Brazil are advised to take common-sense precautions and avoid any large gatherings or any other event where crowds have congregated to demonstrate or protest.  For the latest U.S. State Department guidance on travel in Brazil, please consult www.travel.state.gov

11. Labor Policies and Practices

The Brazilian labor market is composed of approximately 124 million workers of whom 32.9 million (26.5 percent) work in the informal sector.  Brazil had an unemployment rate of 12 percent as of March 2019, although that percentage was nearly double (22.6 percent) for young workers ages 18-29.  Foreign workers made up less than one percent of the overall labor force, but the arrival of 160,000 economic migrants and refugees from Venezuela since 2016 has led to large local concentrations of foreign workers in the border state of Roraima and the city of Manaus.  Migrant workers from within Brazil play a significant role in the agricultural sector. There are no government policies requiring the hiring of Brazilian nationals.

Low-skilled employment dominates Brazil’s labor market.  During the country’s economic recession (2014-2016), eight low-skilled occupations – such as market attendants and janitors – accounted for half of the roughly 900,000 job openings added to the market.  The number of professionals working as biomedical and information analysts – however small – also increased, while that of bill collectors, cashier supervisors, and welders saw declines. Sectors such as information technology services stood out among those that generated job vacancies between 2011 and 2016.

Workers in the formal sector contribute to the Time of Service Guarantee Fund (FGTS) that equates to one month’s salary over the course of a year.  If a company terminates an employee, the employee can access the full amount of their FGTS contributions or 20 percent in the event they leave voluntarily.  Brazil’s labor code guarantees formal sector workers 30 days of annual leave and severance pay in the case of dismissal without cause. Unemployment insurance also exists for laid off workers equal to the country’s minimum salary (or more depending on previous income levels) for six months.  A labor law that went into effect in November 2017 modified 121 sections of the national labor code (CLT). The law introduced flexible working hours, eased restrictions on part-time work, relaxed how workers can divide their holidays and cut the statutory lunch hour to 30 minutes. The government does not waive labor laws to attract investment; they apply uniformly across the country.  

Collective bargaining is common, and there were 11,587 labor unions operating in Brazil in 2018.  Labor unions, especially in sectors such as metalworking and banking, are well organized in advocating for wages and working conditions, and account for approximately 19 percent of the official workforce according to the Brazilian Institute of Applied Economic Research (IPEA).  Unions in various sectors engage in collective bargaining negotiations, often across an entire industry when mandated by federal regulation. The November 2017 labor law ended mandatory union contributions, which has reduced union finances by as much as 90 percent according to the Inter-Union Department of Statistics and Socio-economic Studies (DIESSE).  DIESSE reported a significant decline in the number of collective bargaining agreements reached in 2018 (3,269) compared to 2017 (4,378).

Employer federations also play a significant role in both public policy and labor relations.  Each state has its own federation, which reports to the National Confederation of Industry (CNI), headquartered in Brasilia, and the National Confederation of Commerce (CNC), headquartered in Rio de Janeiro.  

Brazil has a dedicated system of labor courts that are charged with resolving routine cases involving unfair dismissal, working conditions, salary disputes, and other grievances.  Labor courts have the power to impose an agreement on employers and unions if negotiations break down and either side appeals to the court system. As a result, labor courts routinely are called upon to determine wages and working conditions in industries across the country.  The labor courts system has millions of pending legal cases on its docket, although the number of new filings has decreased since the November 2017 labor law went into effect. Nevertheless, pending legal challenges to the 2017 labor law have resulted in considerable legal uncertainty for both employers and employees.

Strikes occur periodically, particularly among public sector unions.  A strike organized by truckers unions protesting increased fuel prices paralyzed the Brazilian economy in May 2018, and led to billions of dollars in losses to the economy.

Brazil has ratified 97 International Labor Organization (ILO) conventions.  Furthermore, Brazil is party to the UN Convention on the Rights of the Child and major ILO conventions concerning the prohibition of child labor, forced labor, and discrimination.  For the past eight years (2010-2018), the Department of Labor, in its annual publication Findings on the Worst forms of Child Labor, has recognized Brazil for its significant advancement in efforts to eliminate the worst forms of child labor.  The Ministry of Labor (MTE), in 2018, inspected 231 properties, resulting in the rescue of 1,133 victims of forced labor. Additionally, MTE rescued 1,409 children working in violation of child labor laws.

On January 1, 2019, newly elected President Jair Bolsonaro extinguished MTE and divided its responsibilities between the Ministries of Economy, Justice and Social Development.  

12. OPIC and Other Investment Insurance Programs

Programs of the Overseas Private Investment Corporation (OPIC) are fully available.  Brazil has been a member of the Multilateral Investment Guarantee Agency (MIGA) since 1992.

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) ($ USD) 2017 $2,053 trillion 2017 $2.056 trillion www.worldbank.org/en/country  
U.S. FDI in partner country ($M USD, stock positions)

BCB data, year-end.

2017 $95,100 2017 $68,300 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  

*U.S. is historical-cost basis

Host country’s FDI in the United States ($M USD, stock positions) 2017 $16,070 2017 ($2,030) BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  

*U.S. is historical-cost basis

Total inbound stock of FDI as % host GDP 2017 26.29% 2017 36.4% UNCTAD data available at

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

* IBGE and BCB data, year-end.


Table 3: Sources and Destination of FDI

Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, billions)
Inward Direct Investment Outward Direct Investment
Total Inward 635.12 100% Total Outward 254.23 100%
Netherlands 158.42 24.9% Cayman Islands 72.58 28.5%
United States 109.61 17.3% British Virgin Islands 46.73 18.4%
Luxembourg 60.12 6.5% Bahamas 37.21 14.6%
Spain 57.98 9.1% Austria 32.14 12.6%
France 33.30 5.2% United States 14.92 5.9%
“0” reflects amounts rounded to +/- USD 500,000.


Table 4: Sources of Portfolio Investment

Portfolio Investment Assets
Top Five Partners (billions, US Dollars)
Total Equity Securities Total Debt Securities
All Countries 40.13 100% All Countries 31.11 100% All Countries 9.02 100%
United States 13.84 34.5% United States 10.37 33.3% United States 3.47 38.5%
Bahamas 6.80 16.9% Bahamas 6.76 21.7% Spain 2.64 29.3%
Cayman Islands 4.25 10.6% Cayman Islands 3.93 12.6% Korea, South 0.50 5.5%
Spain 3.72 9.3% Switzerland 2.01 6.5% Switzerland 0.41 4.5%
Switzerland 2.42 6.0% Luxembourg 1.69 5.4% Denmark 0.38 4.2%

 

14. Contact for More Information

Economic Section
U.S.  Embassy Brasilia
BrasiliaECON2@State.gov
+55-61-3312-7000

Chile

Executive Summary

As the seventh largest economy in the Western Hemisphere, Chile enjoys levels of stability and prosperity that are among the highest in the region.  Chile’s solid macroeconomic policy framework has smoothed adjustment to economic cycles, contributing to relatively low unemployment, resilient household consumption, and a stable financial sector.  Due to its attractive investment climate, trade openness, and reputation for strong financial institutions and sound policies, Chile also boasts the strongest sovereign bond rating in Latin America. The country’s economy grew 4 percent in 2018, and the forecast for Chile’s economic growth in 2019 is in the range of 3 percent to 4 percent. 

Chile has successfully attracted Foreign Direct Investment (FDI) despite its relatively small domestic market.  The country’s market-oriented policies have created significant opportunities for foreign investors to participate in the country’s economic growth.  Chile has a sound legal framework and there is general respect for private property rights. Sectors that attract significant FDI include mining, finance/insurance, chemical manufacturing, and wholesale trade.  Mineral, hydrocarbon, and fossil fuel deposits within Chilean territory are restricted from foreign ownership, but companies may enter into contracts with the government to extract these resources. Corruption exists in Chile but on a much smaller scale than in most Latin American countries, ranking of 27 out of 180 countries in Transparency International’s 2018 Corruption Perceptions Index.

Although Chile is an attractive destination for foreign investment, challenges remain. Despite a general respect for intellectual property (IP) rights, Chile has not fully complied with its IP obligations set forth in the U.S.-Chile FTA.  Environmental permitting processes, indigenous consultation requirements, and cumbersome court proceedings have made large project approvals increasingly time consuming and unpredictable, especially in cases with political sensitivities. The current administration has prioritized attracting foreign investment and is implementing measures to streamline the process, including the creation of an investment projects management office in the Ministry of Economy.

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 27 of 180 http://www.transparency.org/research/cpi/overview 
World Bank’s Doing Business Report 2019 56 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 47 of 126 https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country (USD million, stock positions) 2017 $25,884 http://www.bea.gov/international/factsheet/ 
World Bank GNI per capita (USD) 2017 $13,610 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD 

1. Openness To, and Restrictions Upon, Foreign Investment

Policies towards Foreign Direct Investment

Chile has a successful track record of attracting foreign direct investment (FDI), despite the relatively small size of its domestic market.  For nearly four decades, promoting FDI has been an essential part of the Chilean government’s national development strategy. The country’s market-oriented economic policies create significant opportunities for foreign investors to participate. Laws and practices are not discriminatory against foreign investors, who receive treatment similar to Chilean nationals. While Chile’s business climate is generally straightforward and transparent, the permitting process of infrastructure, mining and energy projects has become increasingly contentious, especially regarding politically sensitive environmental impact assessments and indigenous consultations.

InvestChile is the government agency that implements various types of initiatives aimed to foster the entry and retention of FDI into Chile. It provides services in four categories:

  1. attraction (information provision about Chile’s business climate and specific investment opportunities in both public and private projects);
  2. pre-investment (sector-specific legal advisory services and information for decision-making);
  3. landing (advice for installation of the company, foreign investor certificates, access to funds and regional support networks), and
  4. after-care (management of inquiries, assistance for exporting and information for re-investment).

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign investors have access to all productive activities, except for the internal waterways freight transportation sector, in which there is a cap on foreign equity ownership of companies of 49 percent. In 2019, Chile loosened maritime cabotage rules and began allowing large foreign cruise ships to move between Chilean ports. Some international reciprocity restrictions exist for fishing.

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

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

Other Investment Policy Reviews

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

Business Facilitation

The Chilean government took significant steps towards business facilitation during the present decade, including introducing digital processes to start a company.  According to the World Bank, Chile has one of the smoothest and shortest processes among Latin American and Caribbean countries – 11 procedures over an average of 29 days – to establish a foreign-owned limited liability company (LLC). Drafting corporate statutes and obtaining an authorization number can be done online at the platform www.tuempresaenundia.cl  .  Electronic signature and electronic invoicing allow one to register a company, obtain a taxpayer ID number, and get legal receipts, invoices, credit and debit notes, and accountant registries.  A company typically needs to register with Chile’s Internal Revenue Service, obtain a business license from a municipality, and register either with the Institute of Occupational Safety (public) or with one of three private nonprofit entities that provide work-related accident insurance, which is mandatory for employers.  In addition to the steps required of a domestic company, a foreign company establishing a subsidiary in Chile must authenticate the parent company’s documents abroad and register the incoming capital with the Central Bank. This procedure, established under Chapter XIV of the Foreign Exchange Regulations, requires a notice of conversion of foreign currency into Chilean pesos when the investment exceeds USD 10,000.00.  The registration process at the Registry of Commerce of Santiago is available online.

Outward Investment

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

2. Bilateral Investment Agreements and Taxation Treaties

According to ICSID, Chile has signed 50 Bilateral Investment Treaties (BITs), 37 of which are in force to date. There are agreements in force with Argentina, Austria, Belgium and Luxembourg, Bolivia, Colombia, Costa Rica, Croatia, Cuba, Czech Republic, Denmark, Dominican Republic, El Salvador, Finland, France, Germany, Greece, Guatemala, Honduras, Iceland, Italy, Malaysia, Nicaragua, Norway, Panama, Paraguay, Philippines, Poland, Portugal, Romania, South Korea, Spain, Sweden, Switzerland, Ukraine, the United Kingdom and Venezuela.

Chile has 26 FTAs with 64 countries. On January 1, 2004, the United States and Chile brought into force the investment chapter in our bilateral FTA.  Chile has additional investment chapters in force under FTAs with Australia, Canada, China (Supplementary Investment Agreement to the FTA), Colombia, Japan, Mexico, Republic of Korea, Peru and the Pacific Alliance (composed of four countries: Chile, Colombia, Mexico and Peru).  Chile also signed a new generation bilateral investment agreement with Uruguay that entered into force in 2012. FTAs with investment chapters that are signed but have not entered into force include the Investment Agreement with Hong Kong SAR (Supplementary Investment Agreement to the FTA), the Comprehensive and Progressive Transpacific Partnership (CPTPP) –which currently awaits ratification from the Senate-, and the Chile-Argentina FTA.  Chile is currently negotiating investment chapters that are part of FTA negotiations between the Pacific Alliance and Associated States (Australia, Canada, New Zealand and Singapore), and between Chile and the European Union.

Chile and the United States signed the U.S.-Chile Treaty to Avoid Double Taxation in 2010.  In May 2012, it was submitted to the U.S. Senate and is still pending ratification. The Chilean Congress ratified the treaty in September 2015. Chile has 33 double taxation treaties in force with Argentina, Australia, Austria, Belgium, Brazil, Canada, China, Colombia, Croatia, Czech Republic, Denmark, Ecuador, France, Ireland, Italy, Japan, Malaysia, Mexico, New Zealand, Norway, Paraguay, Peru, Poland, Portugal, Russia, South Africa, South Korea, Spain, Sweden, Switzerland, Thailand, the United Kingdom and Uruguay.  Apart from the U.S.-Chile Treaty to Avoid Double Taxation, Chile has signed double taxation treaties with the Pacific Alliance countries (Colombia, Mexico and Peru) and with China, which have not yet entered into force.

Chile’s 2014 tax reform increased the effective marginal income tax rate on dividends or profits earned by Chilean residents in other countries up to 44.45 percent.  This change is only applied to residents from countries without a bilateral taxation treaty in force with Chile (such as the United States), while residents from the 32 countries with such a treaty maintain a maximum marginal tax rate of 35 percent.

4. Industrial Policies

Investment Incentives

The Chilean government generally does not subsidize foreign investment, nor does it issue guarantees or joint financing for FDI projects.  There are, however, some incentives directed to isolated geographical zones and to the information technology sector. These benefits relate to co-financing of feasibility studies as well as to incentives for the purchase of land in industrial zones, the hiring of local labor, and the facilitation of project financing.  Other important incentives include accelerated depreciation accounting for tax purposes and legal guarantees for remitting profits and capital. Additionally, the Start-Up Chile program provide selected entrepreneurs with grants for USD 15,000 to USD 80,000, along with a Chilean work visa to develop a “startup” business in Chile over a period of 4 to 7 months.  Chile has other special incentive programs aimed at promoting investment and employment in remote regions, as well as other areas that suffer development lags.

Foreign Trade Zones/Free Ports/Trade Facilitation

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

Performance and Data Localization Requirements

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

Chile does not follow “forced localization.”  A draft bill that moved forward in Congress and is currently pending final approval could result in additional requirements (owner’s consent) for international data transfers in cases involving jurisdictions with data protection regimes below Chile’s standards.  The bill also proposes the creation of an independent Chilean Data Protection Agency that would be responsible for enforcing data protection standards. Private sector legal experts believe that this draft legislation would impose fewer restrictions on the international transfer of commercial data compared to current U.S. law.

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

5. Protection of Property Rights

Real Property

Secured interests in real property are recognized and generally enforced in Chile.  Chile ranked 61 out of 190 economies in the “Registering Property” category of the World Bank’s 2019 Doing Business report.  There is a recognized and generally reliable system for recording mortgages and other forms of liens.

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

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

Intellectual Property Rights

According to the U.S. Chamber of Commerce’s International IP Index, Chile’s legal framework provides for fair and transparent use of compulsory licensing; extends necessary exclusive rights to copyright holders and voluntary notification system; and provides for civil and procedural remedies.  However, intellectual property (IP) protection challenges remain. Private stakeholders have deemed Chile’s framework for trade secret protection insufficient. Pharmaceutical and agrochemical products suffer from relatively weak patenting procedures, there is an absence of an effective patent enforcement and resolution mechanism, and gaps exist in regulations governing data protection.

According to the World Intellectual Property Organization (WIPO) Country Profile study, no new IP-related laws were enacted in 2018.  A draft bill submitted to Congress in October 2018 would reform Chile’s Industrial Property Law. The new IP bill aims to reduce timeframes, modernize procedures and increase legal certainty for patents and trademarks registration.  On April 9, 2019, the Lower Chamber passed the bill, and it moved to the Senate for a vote.

The Chilean Senate passed a Pharmaceutical Law (Farmacos II) bill in January 2018 “to further modernize local pharmaceutical regulations and provide greater and more informed pharmaceutical access to the Chilean population.”  In addition to problematic provisions related to labeling and prescriptions, the bill introduced for the first time the concept of “economic accessibility” as a criterion that could be used to justify importation of generic medicines despite the existence of a patented drug in the market.

On March 9, 2018, on the last working day of the Bachelet government, the outgoing Minister of Health issued a resolution that allows the government to issue compulsory licenses (CLs) for patent-protected hepatitis C drugs.  Resolution 399 stipulates a “public interest” that justifies granting one or more CLs for the exploitation of patents protecting the active ingredient Sofosbuvir, useful for the treatment of chronic hepatitis C. The Ministry of Health subsequently upheld Resolution 399 through Resolution 1165.

As of April 2019, the Farmacos II bill is still pending Chamber approval.  Although the Piñera administration revised the bill to address several problematic trademark-related provisions in May 2018, members of the Chamber’s opposition-controlled Health Committee reincorporated most of these provisions through the amendment process.  The committee then took the more troubling step of introducing into Farmacos II, for the first time, amendments that stipulate the criteria and process for issuance of a compulsory license.

The Intellectual Property Brigade (BRIDEPI) of the Chilean Investigative Police (PDI) reported that in 2018 Chile seized 1,041,708 items which amounted to USD 9.4 million (a 32.6 percent increase compared to 2017), and arrested 56 individuals on charges related to IPR infringement.  The National Customs Service seized more than 7 million counterfeit products in 2018, worth a total of nearly USD 103 million. These seizures included 113.5 million cigarette boxes and 3.3 million products that violated health regulations (medicines, cosmetics, toys and food).

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

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

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

6. Financial Sector

Capital Markets and Portfolio Investment

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

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

Money and Banking System

Nearly a quarter of Chileans have a credit card from a bank and nearly one third have a non-bank credit card, but a lower proportion (16 percent) has a checking account.  However, financial inclusion is higher than banking penetration: a large number of lower-income Chilean residents have a CuentaRut, which is a commission-free card with an electronic account available for all, launched by the state-owned Banco Estado, also the largest provider of microcredit in Chile.

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

The Chilean banking system’s total assets, as of February 2019, amounted to USD 371.9 billion, according to the Superintendence of Banks and Financial Institutions.  The largest four banks account for approximately 65 percent of banking assets (Banco Santander-Chile, Banco de Credito e Inversiones, Banco de Chile and Banco Estado).  Chile’s Central Bank conducts the country’s monetary policy, is constitutionally autonomous from the government, and is not subject to regulation by the Superintendence of Banks.

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

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

Foreign Exchange and Remittances

Foreign Exchange

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

Investors, importers, and others have unrestricted access to foreign exchange in the official inter-bank currency market.  The Central Bank reserves the right to deny access to the inter-bank currency market for royalty payments in excess of five percent of sales.  The same restriction applies to payments for the use of patents that exceed five percent of sales. In such cases, firms would have access to the informal market.  The Chilean tax service reserves the right to prevent royalties of over five percent of sales from being counted as expenses for domestic tax purposes.

Chile has a free-floating (flexible) exchange rate system.  Exchange rates of foreign currencies are fully determined by the market.  The Central Bank reserves the right to intervene (and seldom uses it in practice) under exceptional circumstances to correct significant deviations of the currency from its fundamentals.

Remittance Policies

Remittances of profits generated by investments are allowed at any time after tax obligations are fulfilled; remittances of capital can be made after one year since the date of entry into the country.  In practice, this permanency requirement does not constitute a restriction for productive investment, because projects normally need more than one year to mature. Under the investment chapter of the U.S.–Chile FTA, the parties must allow free and immediate transfer of covered investments into and out of its territory.  These include transfers of profits, royalties, sales proceeds, and other remittances related to the investment. However, for certain types of short-term capital flows this chapter allows Chile to impose transfer restrictions for up to 12 months as long as those restrictions do not substantially impede transfers. If restrictions are found to impede transfers substantially, damages accrue from the date of the initiation of the measure.  In practice, these restrictions have not been applied in the last two decades.

Sovereign Wealth Funds

Chile has two sovereign wealth funds (SWFs) where the government deposits savings from effective fiscal surpluses.  The Economic and Social Stabilization Fund (FEES) was established in 2007 and was valued at USD 14.2 billion as of February 2019.  The FEES seeks to fund public debt payments and temporary deficit spending, in order to keep a countercyclical fiscal policy. The Pensions Reserve Fund (FRP) was built up in 2006 and amounted to USD 10 billion as of February 2019.  The purpose of the FRP is to anticipate future needs of payments to those eligible to receive pensions, but whose contributions to the private pension system fall below a minimum threshold.

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

Chile’s government policy is to invest SWFs abroad into instruments denominated in foreign currencies.  As of February 2019, FEES’ portfolio consisted of 55.5 percent of sovereign bonds, 3.5 percent of inflation-indexed sovereign bonds, 33.8 percent of money market instruments and 7.2 percent of stocks.  At the same date, FRP’s portfolio consisted of 38.0 percent of sovereign bonds and related instruments, 10.8 percent of inflation-indexed sovereign bonds, 21.0 percent of corporate and high-yield bonds, 5.9 percent of mortgage backed securities from U.S. agencies and 24.3 percent of stocks.

7. State-Owned Enterprises

Chile had 28 state-owned enterprises (SOEs) in operation as of 2017.  They are all commercial companies. Twenty-five SOEs are not listed on any stock exchange and are fully owned by the government. The remaining three are majority government owned.  Ten Chilean SOEs operate in the port management sector; seven in the services sector, three in the defense sector, three in the mining sector (including CODELCO, the world’s largest copper producer); two in transportation; one in the water sector; one TV station; one is an oil and gas company –ENAP-; and one state-owned bank (Banco Estado).  The state also holds a minority stake in four water companies as a result of a privatization process. Total assets of SOEs amounted to USD 73.7 billion in 2017. Total net income of SOEs in 2017 was USD 2.2 billion. SOEs employed 51,564 people in 2017.

Twenty SOEs in Chile fall under the supervision of the Public Enterprises System (SEP), a state holding in charge of overseeing SOE governance, as well as exercising minority rights in four water companies.  The rest – including CODELCO, ENAP and Banco Estado – have their own supervisory structures outside of SEP jurisdiction, but report to government ministries. All 28 SOEs are accountable to Congress, the President and the General Comptroller Office.  Allocation of seats on the boards of Chilean SOEs is determined by the SEP, as described above, or outlined by the laws that regulate them. In CODELCO’s corporate governance, there is a mix between seats appointed by recommendation from an independent high-level civil service committee, and seats allocated by political authorities in the government.

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

In general, Chilean SOEs work under hard budget constraints and compete under the same regulatory and tax frameworks than private firms.  For instance, CODELCO and Banco Estado compete with many private copper mines and private banks, respectively. However, there are specific areas where SOEs enjoy special advantages.  For example, ENAP is the only company allowed to refine oil in Chile. As an OECD member, Chile adheres to the OECD Guidelines on Corporate Governance for SOEs.

Privatization Program

Chile does not have a privatization program in place at this time.

8. Responsible Business Conduct

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

The government of Chile encourages foreign and local enterprises to follow generally accepted Responsible Business Conduct (RBC) principles and uses the United Nations’ Rio+20 Conference statements as its principal reference.  Chile adhered in 1997 to the OECD Guidelines for Multinational Enterprises. It also recognizes the ILO Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy; the UN Guiding Principles on Business and Human Rights; the UN Global Compact’s Ten Principles and the ISO 26000 Guidance on Social Responsibility.  The government established a National Contact Point (NCP) for OECD MNE guidelines located at the General Directorate for International Economic Relations, and recently created the Responsible Business Conduct Department, whose chief is also the NCP. On August 21, 2017 Chile released its National Action Plan on Business and Human Rights based on the UN Guiding Principles.  Separately, the Council on Social Responsibility for Sustainable Development, coordinated by Chile’s Ministry of Economy, is currently developing a National Policy on Social Responsibility.

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

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

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

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

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

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

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

9. Corruption

Chile applies, in a non-discriminatory manner, various laws to combat corruption of public officials, including the 2009 Transparency Law that mandated disclosure of public information related to all areas of government and created an autonomous Transparency Council in charge of overseeing its application.  In 2018, a new provision of law expanded the number of public trust positions required to release financial disclosure, mandated disclosure in greater detail, and allowed for stronger penalties for noncompliance.

Anti-corruption laws do extend to family members of officials, in particular mandatory asset disclosure, and a draft bill incorporating restrictions on appointments and incompatibilities for family members of public officials has been submitted to Congress.  Political parties are subject to laws that limit campaign financing and require transparency in party governance and contributions to parties and campaigns.

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

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

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

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

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

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

Resources to Report Corruption

Raul Ferrada
Director General
Consejo para la Transparencia
Morande 360 piso 7
(+56)-(2)-2495-2000
rferrada@consejotransparencia.cl

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

Renata Avila
Executive Director
Ciudadania Inteligente (Founder NGO of the Anticorruption Observatory)
Holanda 895, Providencia, Santiago, Chile
(+56)-(2)-2419-2770

10. Political and Security Environment

Since Chile’s return to democracy in 1990, the incidence of political violence and civil disturbance has been generally low, and has had little impact on the Chilean economy.   During the last 20 years, there have been few incidents of politically motivated attacks on investment projects or installations with the exception of the southern Araucania region and its neighboring Arauco province in the southwest of Bio-Bio region. This area, home to nearly half million indigenous inhabitants, has seen a growing trend of politically motivated violence.  Land claims and conflicts with forestry companies are the main grievances underneath the radicalization of a relatively small number of indigenous Mapuche communities, which has led to the rise of organized groups that pursue their demands by violent means. Incidents include arson attacks on churches, farms, facilities at forestry plantations, and forestry contractors’ machinery and vehicles, as well as occupation of private lands, resulting in over a half-dozen deaths (including some by police forces), injuries, and damage to property. In 2018, the government announced special measures and policies towards the Araucania region. However, the indigenous issue has been further politicized due to anger among landowners, forestry transport contractors and farmers affected by violence, as well as the illegal killing of a young Mapuche activist by special police forces in 2018 and the controversy over accusations of fraud by the police during the investigation of indigenous organized groups.

Since 2011, there have been occasional incidents of vandalism of storefronts and public transport during student and labor groups’ protests, some of which included violent incidents.  Since 2007, Chile has experienced a number of small-scale attacks with explosive and incendiary devices, targeting mostly banks, police stations and public spaces throughout Santiago, including ATM’s, metro stations, universities and churches.  Anarchist groups often claim responsibility for these acts, as they also have been involved in incidents during student and labor protests. In January 2017, an eco-terrorist group claimed responsibility for a parcel bomb that detonated at the home of the chairman of the board of Chilean state-owned mining giant CODELCO.  The same group detonated a bomb of similar characteristics on January 4, 2019 at a bus stop in downtown Santiago, causing five injuries. The investigation of both crimes is still ongoing at the time of this report.

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

Civil disturbance is not present at levels that could put investments at risk or destabilize the government.  Chilean civil society is active and demonstrations occur frequently. Although the vast majority of demonstrations are peaceful, on occasion protestors have veered off pre-approved routes.  In a few instances, criminal elements have taken advantage of civil society protests to loot stores along the protest route and have clashed with the police. Demonstrations on March 29, the Day of the Young Combatant, and September 11, the anniversary of the 1973 coup against the government of President Salvador Allende, have in the past resulted in damage to property.

11. Labor Policies and Practices

Unemployment in Chile averaged 6.9 percent of the labor force during 2018, while the labor participation rate was 59.7 percent of the working age population.  Immigrants account for nearly nine percent of the labor force. Chilean workers are adequately skilled and some sectors such as mining, agriculture, and fishing employ highly skilled workers.  In general, there is an adequate availability of technicians and professionals. Data on informality are not available for Chile in the ILO databases, but recent estimations made by the National Institute of Statistics suggest informal employment in Chile constitutes 30 percent of the workforce.

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

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

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

According to the Labor Directorate, 1,139,955 workers (13.9 percent of Chilean workers) belonged to a trade union in the last quarter of 2016 (latest data available), when 11,653 unions were active.  In the same period, 347,142 workers (4.2 percent of Chilean workers) were covered by collective bargaining agreements. Collective bargaining coverage rates are higher in the financial, mining, and manufacturing sectors.  Unions can form nationwide labor associations and can affiliate with international labor federations. Contracts are normally negotiated at the company level. Workers in public institutions do not have collective bargaining rights, but national public workers’ associations undertake annual negotiations with the government.

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

According to a report from the Centre for Social Conflict and Cohesion Studies (COES), during 2017, 128 legal strikes took place in sectors where collective bargaining is permitted (a smaller number in comparison to 2017 when there were 198 strikes).  31,799 workers were involved in total in strikes during 2016 (latest data available from the Labor Directorate). As legal strikes in Chile have a restricted scope and duration, in general they do not present a risk for foreign investment.

Chile has and generally enforces laws and regulations in accordance with internationally recognized labor rights of: freedom of association and collective bargaining; the elimination of forced labor; child labor, including the minimum age for work; discrimination with respect to employment and occupation; and acceptable conditions of work related to minimum wage, occupational safety and health, and hours of work.  The maximum number of labor hours allowed per week in Chile is 45. In September 2018, Congress approved a minimum wage increase, by which beginning March, 2019 the national minimum wage is CLP 301,000 – USD 444 – a month for all occupations, including domestic servants, more than twice the official poverty line. There is a special minimum wage of CLP 224,704 (USD 331) a month for workers age 65 and older and age 18 and younger.  There are no gaps in compliance with international labor standards that may pose a reputational risk to investors.

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

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

12. OPIC and Other Investment Insurance Programs

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

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

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

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

Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) (USD million) 2017 $281,452 2017 $277,076 www.worldbank.org/en/country   
Foreign Direct Investment Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country (USD million, stock positions) 2017 $32,266 2017 $25,884 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  
Host country’s FDI in the United States (USD million, stock positions) 2017 $10,334 2017 $2,097 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  
Total inbound stock of FDI as % host GDP 2017 100.3% 2017 109.6% UNCTAD data available at https://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Country-Fact-Sheets.aspx  

* Source for Host Country Data: Central Bank of Chile.


Table 3: Sources and Destination of FDI

According to the IMF’s Coordinated Direct Investment Survey (CDIS), total stock of FDI in Chile in 2017 amounted to USD 274.7 billion, compared to USD 248.6 billion in 2016.  The United States remains the main source of FDI to Chile with USD 31.7 billion, representing 12 percent of the total. The following top sources (Canada, Spain and the Netherlands) accounted for 25 percent of Chile’s inward FDI stock.  Cayman Islands, a tax haven, is Chile’s fifth source of FDI. Chile’s outward direct investment stock in 2017 remains concentrated in South America, where Brazil, Peru and Argentina together represented 31 percent of total Chilean outward FDI.  The United States accounted for 9 percent of the total.

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 274,653 100% Total Outward $123,643 100%
United States 31,750 12% Brazil $18,234 15%
Canada 26,647 10% Panama $15,232 12%
Spain  22,170 8% Peru $11,122 9%
Netherlands  17,899 7% United States $9,818 8%
Cayman Islands 9,179  4% Argentina $9,142 7%
“0” reflects amounts rounded to +/- USD 500,000.


Table 4: Sources of Portfolio Investment

According to the IMF’s Coordinated Portfolio Investment Survey (CPIS), total stock of portfolio investment in Chile as of June 2018 amounted to USD 180.6 billion, of which USD 139 billion were equity and investment funds shares, and the rest were debt securities. The United States are the main source of portfolio investment to Chile with USD 55.6 billion, representing 31 percent of the total.  The following top source is Luxembourg (a tax haven), which is also the main source of equity investment, with 40 percent of the total. Ireland, the United Kingdom and Germany are the following top sources of total portfolio investment to Chile, while Mexico and Japan are among the top five sources of debt securities investment.

Portfolio Investment Assets
Top Five Partners (Millions, US Dollars)
Total Equity Securities Total Debt Securities
All Countries $180,621 100% All Countries $138,958 100% All Countries $41,663 100%
United States $55,613 31% Luxembourg $55,007 40% United States $15,571 37%
Luxembourg $55,214 31% United States $40,042 29% Mexico $5,450 13%
Ireland $11,459 6% Ireland $11,412 8% Japan $4,239 10%
United Kingdom $6,743 4% United Kingdom $5,120 4% Germany $2,192 5%
Germany $6,556 4% Germany $4,364 3% United Kingdom $1,623 4%

14. Contact for More Information

Alexis Gutierrez
Economic Specialist
Avenida Andres Bello 2800, Las Condes, Santiago, Chile
(56-2) 2330 3485
gutierrezaj@state.gov

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