The Government of India continued to actively court foreign investment. In the wake of COVID-19, India enacted ambitious structural economic reforms, including new labor codes and landmark agricultural sector reforms, that should help attract private and foreign direct investment. In February 2021, the Finance Minister announced plans to raise $2.4 billion though an ambitious privatization program that would dramatically reduce the government’s role in the economy. In March 2021, parliament further liberalized India’s insurance sector, increasing the foreign direct investment (FDI) limits to 74 percent from 49 percent, though still requiring a majority of the Board of Directors and management personnel to be Indian nationals.
In response to the economic challenges created by COVID-19 and the resulting national lockdown, the Government of India enacted extensive social welfare and economic stimulus programs and increased spending on infrastructure and public health. The government also adopted production linked incentives to promote manufacturing in pharmaceuticals, automobiles, textiles, electronics, and other sectors. These measures helped India recover from an approximately eight percent fall in GDP between April 2020 and March 2021, with positive growth returning by January 2021.
India, however, remains a challenging place to do business. New protectionist measures, including increased tariffs, procurement rules that limit competitive choices, sanitary and phytosanitary measures not based on science, and Indian-specific standards not aligned with international standards, effectively closed off producers from global supply chains and restricted the expansion in bilateral trade.
The U.S. government continued to urge the Government of India to foster an attractive and reliable investment climate by reducing barriers to investment and minimizing bureaucratic hurdles for businesses.
1. Openness To, and Restrictions Upon, Foreign Investment
Policies toward Foreign Direct Investment
Changes in India’s foreign investment rules are notified in two different ways: (1) Press Notes issued by the Department for Promotion of Industry and Internal Trade (DPIIT) for most sectors, and (2) legislative action for insurance, pension funds, and state-owned enterprises in the coal sector. FDI proposals in sensitive sectors, however, require the additional approval of the Home Ministry.
DPIIT, under the Ministry of Commerce and Industry, is India’s chief investment regulator and policy maker. It compiles all policies related to India’s FDI regime into a single document to make it easier for investors to understand, and this consolidated policy is updated every year. The updated policy can be accessed at: http://dipp.nic.in/foreign-direct–investment/foreign–direct–investment-policy. DPIIT, through the Foreign Investment Implementation Authority (FIIA), plays an active role in resolving foreign investors’ project implementation problems and disseminates information about the Indian investment climate to promote investments. The Department establishes bilateral economic cooperation agreements in the region and encourages and facilitates foreign technology collaborations with Indian companies and DPIIT oftentimes consults with lead ministries and stakeholders. There however have been multiple incidents where relevant stakeholders reported being left out of consultations.
Limits on Foreign Control and Right to Private Ownership and Establishment
In most sectors, foreign and domestic private entities can establish and own businesses and engage in remunerative activities. Several sectors of the economy continue to retain equity limits for foreign capital as well as management and control restrictions, which deter investment. For example, the 2015 Insurance Act raised FDI caps from 26 percent to 49 percent, but also mandated that insurance companies retain “Indian management and control.” In the parliament’s 2021 budget session, the Indian government approved increasing the FDI caps in the insurance sector to 74 percent from 49 percent. However, the legislation retained the “Indian management and control” rider. In the August 2020 session of parliament, the government approved reforms that opened the agriculture sector to FDI, as well as allowed direct sales of products and contract farming, though implementation of these changes was temporarily suspended in the wake of widespread protests. In 2016, India allowed up to 100 percent FDI in domestic airlines; however, the issue of substantial ownership and effective control (SOEC) rules that mandate majority control by Indian nationals have not yet been clarified. A list of investment caps is accessible at: http://dipp.nic.in/foreign-direct–investment/foreign-direct–investment-policy.
Screening of FDI
All FDI must be reviewed under either an “Automatic Route” or “Government Route” process. The Automatic Route simply requires a foreign investor to notify the Reserve Bank of India of the investment and applies in most sectors. In contrast, investments requiring review under the Government Route must obtain the approval of the ministry with jurisdiction over the appropriate sector along with the concurrence of DPIIT. The government route includes sectors deemed as strategic including defense, telecommunications, media, pharmaceuticals, and insurance. In August 2019, the government announced a new package of liberalization measures and brought a number of sectors including coal mining and contract manufacturing under the automatic route.
FDI inflows were mostly directed towards the largest metropolitan areas – Delhi, Mumbai, Bangalore, Hyderabad, Chennai – and the state of Gujarat. The services sector garnered the largest percentage of FDI. Further FDI statistics are available at: http://dipp.nic.in/publications/fdi–statistics.
DPIIT is responsible for formulation and implementation of promotional and developmental measures for growth of the industrial sector, keeping in view national priorities and socio- economic objectives. While individual lead ministries look after the production, distribution, development and planning aspects of specific industries allocated to them, DPIIT is responsible for overall industrial policy. It is also responsible for facilitating and increasing the FDI flows to the country.
InvestIndia is the official investment promotion and facilitation agency of the Government of India, which is managed in partnership with DPIIT, state governments, and business chambers. Invest India specialists work with investors through their investment lifecycle to provide support with market entry strategies, industry analysis, partner search, and policy advocacy as required. Businesses can register online through the Ministry of Corporate Affairs website: http://www.mca.gov.in/. After the registration, all new investments require industrial approvals and clearances from relevant authorities, including regulatory bodies and local governments. To fast-track the approval process, especially in the case of major projects, Prime Minister Modi started the Pro-Active Governance and Timely Implementation (PRAGATI initiative) – a digital, multi-modal platform to speed the government’s approval process. As of January 2020, a total of 275 project proposals worth around $173 billion across ten states were cleared through PRAGATI. Prime Minister Modi personally monitors the process to ensure compliance in meeting PRAGATI project deadlines. The government also launched an Inter-Ministerial Committee in late 2014, led by the DPIIT, to help track investment proposals that require inter-ministerial approvals. Business and government sources report this committee meets informally and on an ad hoc basis as they receive reports of stalled projects from business chambers and affected companies.
The Ministry of Commerce’s India Brand Equity Foundation (IBEF) claimed in March 2020 that outbound investment from India had undergone a considerable change in recent years in terms of magnitude, geographical spread, and sectorial composition. Indian firms invest in foreign markets primarily through mergers and acquisition (M&A). According to a Care Ratings study, corporate India invested around $12.25 billion in overseas markets between April and December 2020. The investment was mostly into wholly owned subsidiaries of companies. In terms of country distribution, the dominant destinations were the Unites States ($2.36 billion), Singapore ($2.07 billion), Netherlands ($1.50 billion), British Virgin Islands ($1.37 billion), and Mauritius ($1.30 million).
2. Bilateral Investment Agreements and Taxation Treaties
India adopted a new model Bilateral Investment Treaty (BIT) in December 2015, following several adverse rulings in international arbitration proceedings. The new model BIT does not allow foreign investors to use investor-state dispute settlement methods, and instead requires foreign investors first to exhaust all local judicial and administrative remedies before entering international arbitration. The Indian government also served termination notices for existing BITs with 73 countries.
In September 2018, Belarus became the first country to execute a new BIT with India, based on the new model BIT, followed by the Taipei Cultural & Economic Centre (TECC) in December 2019, and Brazil in January 2020. India has also entered into a BIT negotiation with the Philippines and joint interpretative statements are under discussion with Iran, Switzerland, Morocco, Kuwait, Ukraine, UAE, San Marino, Hong Kong, Israel, Mauritius, and Oman.
Currently 14 BITs are in force. The Ministry of Finance said the revised model BIT will be used for the renegotiation of existing and any future BITs and will form the investment chapter in any Comprehensive Economic Cooperation Agreements (CECAs)/Comprehensive Economic Partnership Agreements (CEPAs)/Free Trade Agreements (FTAs).
Some government policies are written in a way that can be discriminatory to foreign investors or favor domestic industry. For example, approval in 2021 for higher FDI thresholds in the insurance sector came with a requirement of “Indian management and control.” On most occasions the rules are framed after thorough discussions by government authorities and require the approval of the cabinet and, in some cases, the Parliament as well. Policies pertaining to foreign investments are framed by DPIIT, and implementation is undertaken by lead federal ministries and sub-national counterparts. However, in some instances the rules have been framed without following any consultative process.
In 2017, India began assessing a six percent “equalization levy,” or withholding tax, on foreign online advertising platforms with the ostensible goal of “equalizing the playing field” between resident service suppliers and non-resident service suppliers. However, its provisions did not provide credit for taxes paid in other countries for services supplied in India. In February 2020, the FY 2020-21 budget included an expansion of the “equalization levy,” adding a two percent tax to the equalization levy on foreign e-commerce and digital services provider companies. Neither the original 2017 levy, nor the additional 2020 two percent tax applied to Indian firms. In February 2021, the FY 2021-22 budget included three amendments “clarifying” the 2020 equalization levy expansion that will significantly extend the scope and potential liability for U.S. digital and e-commerce firms. The changes to the levy announced in 2021 will be implemented retroactively from April 2020. The 2020 and 2021 changes were enacted without prior notification or an opportunity for public comment.
The Indian Accounting Standards were issued under the supervision and control of the Accounting Standards Board, a committee under the Institute of Chartered Accountants of India (ICAI), and has government, academic, and professional representatives. The Indian Accounting Standards are named and numbered in the same way as the corresponding International Financial Reporting Standards. The National Advisory Committee on Accounting Standards recommends these standards to the Ministry of Corporate Affairs, which all listed companies must then adopt. These can be accessed at: http://www.mca.gov.in/MinistryV2/Stand.html
International Regulatory Considerations
India is a member of the South Asia Association for Regional Cooperation (SAARC), an eight- member regional block in South Asia. India’s regulatory systems are aligned with SAARC’s economic agreements, visa regimes, and investment rules. Dispute resolution in India has been through tribunals, which are quasi-judicial bodies. India has been a member of the WTO since 1995, and generally notifies all draft technical regulations to the WTO Committee on Technical Barriers to Trade; however, at times there are delays in publishing the notifications. The Governments of India and the United States cooperate in areas such as standards, trade facilitation, competition, and antidumping practices.
Legal System and Judicial Independence
India adopted its legal system from English law and the basic principles of the Common Law as applied in the UK are largely prevalent in India. However, foreign companies need to make adaptations for Indian Law and the Indian business culture when negotiating and drafting contracts in India to ensure adequate protection in case of breach of contract. The Indian judiciary provides for an integrated system of courts to administer both central and state laws. The judicial system includes the Supreme Court as the highest national court, as well as a High Court in each state or a group of states which covers a hierarchy of subordinate courts. Article 141 of the Constitution of India provides that a decision declared by the Supreme Court shall be binding on all courts within the territory of India. Apart from courts, tribunals are also vested with judicial or quasi-judicial powers by special statutes to decide controversies or disputes relating to specified areas.
Courts have maintained that the independence of the judiciary is a basic feature of the Constitution, which provides the judiciary institutional independence from the executive and legislative branches.
The government has a policy framework on FDI, which is updated every year and formally notified as the Consolidated FDI Policy (http://dipp.nic.in/foreign-direct–investment/foreign-direct–investment-policy). DPIIT makes policy pronouncements on FDI through Consolidated FDI Policy Circular/Press Notes/Press Releases which are notified by the Ministry of Finance as amendments to the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 under the Foreign Exchange Management Act, 1999 (42 of 1999) (FEMA). These notifications take effect from the date of issuance of the Press Notes/ Press Releases, unless specified otherwise therein. In case of any conflict, the relevant Notification under Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 will prevail. The payment of inward remittance and reporting requirements are stipulated under the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 issued by the Reserve Bank of India (RBI). The regulatory framework, over a period, thus, consists of FEMA and Rules/Regulations thereunder, Consolidated FDI Policy Circulars, Press Notes, Press Releases, and Clarifications.
The government has introduced a “Make in India” program. “Self-Reliant India” program, as well as investment policies designed to promote domestic manufacturing and attract foreign investment. “Digital India” aimed to open up new avenues for the growth of the information technology sector. The “Start-up India” program created incentives to enable start-ups to become commercially viable businesses and grow. The “Smart Cities” project was launched to open new avenues for industrial technological investment opportunities in select urban areas.
Competition and Anti-Trust Laws
The central government has been successful in establishing independent and effective regulators in telecommunications, banking, securities, insurance, and pensions. The Competition Commission of India (CCI), India’s antitrust body, reviews cases against cartelization and abuse of dominance as well as conducts capacity-building programs for bureaucrats and business officials. Currently, the Commission’s investigations wing is required to seek the approval of the local chief metropolitan magistrate for any search and seizure operations. The Securities and Exchange Bureau of India (SEBI) enforces corporate governance standards and is well-regarded by foreign institutional investors. The RBI, which regulates the Indian banking sector, is also held in high regard. Some Indian regulators, including SEBI and the RBI, engage with industry stakeholders through periods of public comment, but the practice is not consistent across the government.
Expropriation and Compensation
Tax experts confirm that India does not have domestic expropriation laws in place. Legislative authority does exist in the form of the retroactive taxation, a measure introduced in 2012 and that has been defended despite government assurances of not introducing new retroactive taxes. The Indian government has been divesting from state owned enterprises (SOEs) since 1991. In February 2021, the Finance Minister detailed an ambitious program to privatize roughly $24 billion in SOEs and public sector assets to both help finance the FY 2021-22 budget without increasing taxes and reducing the role of the government in the economy.
India made resolving contract disputes and insolvency easier with the enactment and implementation of the Insolvency and Bankruptcy Code (IBC). Among the areas where India has improved the most in the World Bank’s Ease of Doing Business Ranking the past three years has been under the resolving insolvency metric. The World Bank Report noted that the 2016 law introduced the option of insolvency resolution for commercial entities as an alternative to liquidation or other mechanisms of debt enforcement, reshaping the way insolvent companies can restore their financial well-being or close down. The Code put in place effective tools for creditors to successfully negotiate and increased their ability to receive payments. As a result, the overall recovery rate for creditors jumped from 26.5 to 71.6 cents on the dollar and the time taken for resolving insolvency also was reduced significantly from 4.3 years to 1.6 years. With these changes, India became the highest performer in South Asia in this category and exceeded the average for OECD high-income economies
India enacted the Arbitration and Conciliation Act in 1996, based on the United Nations Commission on International Trade Law model, as an attempt to align its adjudication of commercial contract dispute resolution mechanisms with global standards. The government established the International Center for Alternative Dispute Resolution (ICADR) as an autonomous organization under the Ministry of Law and Justice to promote the settlement of domestic and international disputes through alternate dispute resolution. The World Bank has also funded ICADR to conduct training for mediators in commercial dispute settlement.
Judgments of foreign courts have been enforced under multilateral conventions, including the Geneva Convention. India is a signatory to the convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention). It is not unusual for Indian firms to file lawsuits in domestic courts in order to delay paying an arbitral award. Several cases are currently pending, the oldest of which dates to 1983, and the latest case is that of Amazon Vs. Future Retail, in which Amazon also received an interim award in its favour from the Singapore International Arbitration Centre. Future Retail refused to accept the findings and initiated litigation in Indian courts. India is not a member state to the International Centre for the Settlement of Investment Disputes (ICSID).
The Permanent Court of Arbitration (PCA) at The Hague and the Indian Law Ministry agreed in 2007 to establish a regional PCA office in New Delhi, although it remains pending. The office would provide an arbitration forum to match the facilities offered at The Hague but at a lower cost.
In November 2009, the Department of Revenue’s Central Board of Direct Taxes established eight dispute resolution panels across the country to settle the transfer-pricing tax disputes of domestic and foreign companies. In 2016 the government also presented amendments to the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act to establish specialized commercial divisions within domestic courts to settle long-pending commercial disputes.
Though India is not a signatory to the ICSID Convention, current claims by foreign investors against India can be pursued through the ICSID Additional Facility Rules, the UN Commission on International Trade Law (UNCITRAL Model Law) rules, or via ad hoc proceedings.
International Commercial Arbitration and Foreign Courts
Alternate Dispute Resolution (ADR)
Since formal dispute resolution is expensive and time consuming, many businesses choose methods, including ADR, for resolving disputes. The most used ADRs are arbitration and mediation. India has enacted the Arbitration and Conciliation Act based on the UNCITRAL Model Laws of Arbitration. Experts agree that the ADR techniques are extra-judicial in character and emphasize that ADR cannot displace litigation. In cases that involve constitutional or criminal law, traditional litigation remains necessary.
An increasing backlog of cases at all levels reflects the need for reform of the dispute resolution system, whose infrastructure is characterized by an inadequate number of courts, benches, and judges; inordinate delays in filling judicial vacancies; and a very low rate of 14 judges per one million people.
The introduction and implementation of the IBC in 2016 led to an overhaul of the previous framework on insolvency and paved the way for much-needed reforms. The IBC created a uniform and comprehensive creditor-driven insolvency resolution process that encompasses all companies, partnerships, and individuals (other than financial firms). According to the World Bank Doing Business Report, after the implementation of the IBC, the time taken to for resolving insolvency was reduced significantly from 4.3 years to 1.6 years. The law, however, does not provide for U.S. style Chapter 11 bankruptcy provisions.
In August 2016, the Indian Parliament passed amendments to the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, and the Debt Recovery Tribunals Act. These amendments targeted helping banks and financial institutions recover loans more effectively, encouraging the establishment of more asset reconstruction companies (ARCs), and revamping debt recovery tribunals. Union Finance Minister Nirmala Sitharaman, while presenting the FY 2021-22 budget, proposed setting up an ARC, or “bad bank”, to address perennial non-performing assets (NPAs) in the public banking sector.
4. Industrial Policies
The regulatory environment in terms of foreign investment has been eased to make it investor friendly. The measures taken by the Government are directed to open new sectors for foreign direct investment, increase the sectoral limit of existing sectors, and simplifying other conditions of the FDI policy. The Indian government has issued guarantees to investments but only in cases of strategic industries.
Foreign Trade Zones/Free Ports/Trade Facilitation
The government established several foreign trade zone initiatives to encourage export-oriented production. These include Special Economic Zones (SEZs), Export Processing Zones (EPZs), Software Technology Parks (STPs), and Export Oriented Units (EOUs). EPZs are industrial parks with incentives for foreign investors in export-oriented businesses. STPs are special zones with similar incentives for software exports. EOUs are industrial companies, established anywhere in India, that export their entire production and are granted the following: duty-free import of intermediate goods, income tax holidays, exemption from excise tax on capital goods, components, and raw materials, and a waiver on sales taxes. According to the Ministry of Commerce and Industry, as of October 2020, 426 SEZ’s have been approved and 262 SEZs were operational. SEZs are treated as foreign territory — businesses operating within SEZs are not subject to customs regulations nor have FDI equity caps. They also receive exemptions from industrial licensing requirements and enjoy tax holidays and other tax breaks. In 2018, the Indian government announced guidelines for the establishment of the National Industrial and Manufacturing Zones (NIMZs), envisaged as integrated industrial townships to be managed by a special purpose vehicle and headed by a government official. So far, three NIMZs have been accorded final approval and 13 have been accorded in-principal approval. In addition, eight investment regions along the Delhi-Mumbai Industrial Corridor (DIMC) have also been established as NIMZs. These initiatives are governed by separate rules and granted different benefits, details of which can be found at: http://www.sezindia.nic.in, https://www.stpi.in/ http://www.fisme.org.in/export_schemes/DOCS/B–
The GOI’s revised Foreign Trade Policy, which will be effective for five years starting April 1, 2021, is expected to include a new regionally focused District Export Hubs initiative in addition to existing SEZs and NIMZs
Performance and Data Localization Requirements
Preferential Market Access (PMA) for government procurement has created substantial challenges for foreign firms operating in India. State-owned “Public Sector Undertakings” and the government accord a 20 percent price preference to vendors utilizing more than 50 percent local content. However, PMA for government procurement limits access to the most cost effective and advanced ICT products available. In December 2014, PMA guidelines were revised and reflect the following updates:
1. Current guidelines emphasize that the promotion of domestic manufacturing is the objective of PMA, while the original premise focused on the linkages between equipment procurement and national security.
2. Current guidelines on PMA implementation are limited to hardware procurement only. Former guidelines were applicable to both products and services.
3. Current guidelines widen the pool of eligible PMA bidders, to include authorized distributors, sole selling agents, authorized dealers or authorized supply houses of the domestic manufacturers of electronic products, in addition to OEMs, provided they comply with the following terms:
a. The bidder shall furnish the authorization certificate by the domestic manufacturer for selling domestically manufactured electronic products.
b. The bidder shall furnish the affidavit of self-certification issued by the domestic manufacturer to the procuring agency declaring that the electronic product is domestically manufactured in terms of the domestic value addition prescribed.
c. It shall be the responsibility of the bidder to furnish other requisite documents required to be issued by the domestic manufacturer to the procuring agency as per the policy.
4. The current guidelines establish a ceiling on fees linked with the complaint procedure. There would be a complaint fee of INR 200,000 ($3,000) or one percent of the value of the Domestically Manufactured Electronic Product being procured, subject to a maximum of INR 500,000 ($7,500), whichever is higher.
In January 2017, the Ministry of Electronics & Information Technology (MeitY) issued a draft notification under the PMA policy, stating a preference for domestically manufactured servers in government procurement. A current list of PMA guidelines, notified products, and tendering templates can be found on MeitY’s website: http://meity.gov.in/esdm/pma.
Research and Development
The Government of India allows for 100 percent FDI in research and development through the automatic route.
Data Storage & Localization
In April 2018, the RBI, announced, without prior stakeholder consultation, that all payment system providers must store their Indian transaction data only in India. The RBI mandate went into effect on October 15, 2018, despite repeated requests by industry and U.S. officials for a delay to allow for more consultations. In July 2019, the RBI, again without prior stakeholder consultation, retroactively expanded the scope of its 2018 data localization requirement to include banks, creating potential liabilities going back to late 2018. RBI policy overwhelmingly and disproportionately has affected U.S. banks and investors, who depend on the free flow of data to both achieve economies of scale and to protect customers by providing global real-time monitoring and analysis of fraud trends and cybersecurity. U.S. payments companies have been able to implement the mandate for the most part, though at great cost and potential damage to the long-term security of their Indian customer base, which will receive fewer services and no longer benefit from global fraud detection and anti-money-laundering/combatting the financing of terrorism (AML/CFT) protocols. Similarly, U.S. banks have been able to comply with RBI’s expanded mandate, though incurring significant compliance costs and increased risk of cybersecurity vulnerabilities.
In addition to the RBI data localization directive for payments companies and banks, the government formally introduced its draft Personal Data Protection Bill (PDPB) in December 2019 which has remained pending in Parliament. The PDPB would require “explicit consent” as a condition for the cross-border transfer of sensitive personal data, requiring users to fill out separate forms for each company that held their data. Additionally, Section 33 of the bill would require a copy of all “sensitive personal data” and “critical personal data” to be stored in India, potentially creating redundant local data storage. The localization of all “sensitive personal data” being processed in India could directly impact IT exports. In the current draft no clear criteria for the classification of “critical personal data” has been included. The PDPB also would grant wide authority for a newly created Data Protection Authority to define terms, develop regulations, or otherwise provide specifics on key aspects of the bill after it becomes a law. Reports on Non-Personal Data and the implementation of a New Information Technology Rule 2021 with Intermediary Guidelines and Digital Media Ethics Code added further uncertainty to how existing rules will interact with the PDPB and how non-personal data will be handled. 5.Protection of Property Rights
In India, a registered sales deed does not confer title of land ownership and is merely a record of the sales transaction. It only confers presumptive ownership, which can still be disputed. The title is established through a chain of historical transfer documents that originate from the land’s original established owner. Accordingly, before purchasing land, buyers should examine all the documents that establish title from the original owner. Many owners, particularly in urban areas, do not have access to the necessary chain of documents. This increases uncertainty and risks in land transactions.
Several cities, including the metropolitan cities of Delhi, Kolkata, Mumbai, and Chennai, have grown according to a master plan registered with the central government’s Ministry of Urban Development. Property rights are generally well-enforced in such places, and district magistrates — normally senior local government officials — notify land and property registrations. Banks and financial institutions provide mortgages and liens against such registered property.
In other urban areas, and in areas where illegal settlements have been established, titling often remains unclear. As per the Department of Land Resources, in 2008 the government launched the National Land Records Modernization Program (NLRMP) to clarify land records and provide landholders with legal titles. The program requires the government to survey an area of approximately 2.16 million square miles, including over 430 million rural households, 55 million urban households, and 430 million land records. Initially scheduled for completion in 2016, the program is now scheduled to conclude in 2021.
Though land is a state government (sub-national) subject, “acquisition and requisitioning of property” is in the concurrent list and so both the Indian Parliament and state legislatures can make laws on this subject. Land acquisition in India is governed by the Land Acquisition Act (2013), which entered into force in 2014, and continues to be a complicated process due to the lack of an effective legal framework. Land sales require adequate compensation, resettlement of displaced citizens, and 70 percent approval from landowners. The displacement of poorer citizens is politically challenging for local governments.
Foreign and domestic private entities are permitted to establish and own businesses in trading companies, subsidiaries, joint ventures, branch offices, project offices, and liaison offices, subject to certain sector-specific restrictions. The government does not permit foreign investment in real estate, other than company property used to conduct business and for the development of most types of new commercial and residential properties. Foreign Institutional Investors (FIIs) can now invest in initial public offerings (IPOs) of companies engaged in real estate. They can also participate in pre-IPO placements undertaken by such real estate companies without regard to FDI stipulations.
Businesses that intend to build facilities on land they own are also required to take the following steps: register the land, seek land use permission if the industry is located outside an industrially zoned area, obtain environmental site approval, seek authorization for electricity and financing, and obtain appropriate approvals for construction plans from the respective state and municipal authorities. Promoters must also obtain industry-specific environmental approvals in compliance with the Water and Air Pollution Control Acts. Petrochemical complexes, petroleum refineries, thermal power plants, bulk drug makers, and manufacturers of fertilizers, dyes, and paper, among others, must obtain clearance from the Ministry of Environment and Forests.
In 2016, India introduced its first regulator in the real estate sector in the form of the Real Estate Act. The Real Estate Act, 2016 aims to protect the rights and interests of consumers and promote uniformity and standardization of business practices and transactions in the real estate sector. Details are available at: http://mohua.gov.in/cms/TheRealEstateAct2016.php
The Foreign Exchange Management Regulations and the Foreign Exchange Management Act set forth the rules that allow foreign entities to own immoveable property in India and convert foreign currencies for the purposes of investing in India. These regulations can be found at: https://www.rbi.org.in/scripts/Fema.aspx. Foreign investors operating under the automatic route are allowed the same rights as an Indian citizen for the purchase of immovable property in India in connection with an approved business activity.
Traditional land use rights, including communal rights to forests, pastures, and agricultural land, are sanctioned according to various laws, depending on the land category and community residing on it. Relevant legislation includes the Scheduled Tribes and Other Traditional Forest Dwellers (Recognition of Forest Rights) Act 2006, the Tribal Rights Act, and the Tribal Land Act.
Intellectual Property Rights
India remained on the Priority Watch List in the 2020 Special 301 Report due to concerns over weak intellectual property (IP) protection and enforcement. The 2020 Review of Notorious Markets for Counterfeiting and Piracy includes physical and online marketplaces located in or connected to India. The United States and India have continued to engage on a range of IP challenges facing U.S. companies in India with the intention of creating stronger IP protection and enforcement in India.
In the field of copyright, procedural hurdles, problematic policies, and effective enforcement remained concerns. In February 2019, the Cinematograph (Amendment) Bill, which would criminalize illicit camcording of films, was tabled in Parliament and remains pending. The expansive granting of licenses under Chapter VI of the Indian Copyright Act and overly broad exceptions for certain uses have raised concerns regarding the strength of copyright protection and complicated the market for music licensing. In June 2020, the Copyright Board was merged with the Intellectual Property Appellate Board. The lack of a functional copyright board had previously created uncertainty regarding how IP royalties were collected and distributed.
In 2019, the DPIIT proposed draft Copyright Amendment Rules that would broaden the scope of statutory licensing to encompass not only radio and television broadcasting but also online broadcasting, despite a high court ruling earlier in 2019 that held that statutory broadcast licensing does not include online broadcasts. If implemented, the Amendment Rules would have severe implications for Internet content-related right holders.
In the area of patents, a number of factors negatively affect stakeholders’ perception of India’s overall IP regime, investment climate, and innovation goals. The potential threat of compulsory licenses and patent revocations, and the narrow patentability criteria under the Indian Patent Act, burden companies across different sectors. Patent applications continue to face expensive and time consuming pre- and post-grant oppositions and excessive reporting requirements. In October 2020, India issued a revised “Statement of Working of Patents” (Form 27). The United States is monitoring whether the revision addresses concerns previously raised by innovators over Form 27’s burdensome nature and required disclosure of sensitive business information.
While certain administrative decisions in past years have upheld patent rights, and specific tools and remedies do exist in India to support the rights of a patent holder, concerns remain over revocations and other challenges to patents, especially patents for agriculture biotechnology and pharmaceutical products. In particular, the United States continues to monitor India’s application of its compulsory licensing law. Moreover, the Indian Supreme Court’s 2013 decision that India’s Patent Law created a second tier of requirements for patenting certain technologies, such as pharmaceuticals, continues to be of concern as it may limit the patentability in India for an array of potentially beneficial innovations.
India currently lacks an effective system for protecting against unfair commercial use, as well as unauthorized disclosure, of undisclosed tests or other data generated to obtain marketing approval for pharmaceutical and agricultural products. The U.S. government and stakeholders have also raised concerns with respect to allegedly infringing pharmaceuticals being marketed without advance notice or opportunity for parties to resolve their IP disputes.
U.S. and Indian companies have expressed interest in eliminating gaps in India’s trade secrets regime, such as through the adoption of standalone trade secrets legislation. In 2016, India’s National Intellectual Property Rights Policy called for trade secrets to serve as an “important area of study for future policy development,” but India has not yet prioritized this work.
Developments Strengthening the Rights of IP Holders
In terms of progress in patent examination, India issued a revised Manual of Patent Office Practice and Procedure in November 2019 that requires patent examiners to look to the World Intellectual Property Organization’s Centralized Access to Search and Examination (CASE) system and Digital Access Service (DAS) to find prior art and other information filed by patent applicants in other jurisdictions.
Other developments over the past year strengthening the rights of IP holders include India’s continued efforts to reduce delays and backlogs of patent and trademark applications, the Cell for IPR Promotion and Management’s (CIPAM) promotion of IP awareness and commercialization throughout India, and ongoing efforts to improve IP enforcement, particularly at the state level. However, state-level IP enforcement remains uneven in India, with some states conducting enforcement activities and others falling short in this regard.
Capital Markets and Portfolio Investment
According to media reports, India climbed two notches in 2020 to take the eighth spot among the world’s top stock markets as equities crossed the $2.5 trillion market capitalization mark on December 28, 2020 for the first time. The previous high was in January 2018 when market capitalization reached $2.47 trillion. 2020 saw 15 initial public offer (IPO) issues raising over $3.8 billion (INR 266.11 billion), a 115.3 percent rise over $1.77 billion (INR 123.61 billion) raised in 2019 through 16 IPO issues.
The Securities and Exchange Board of India (SEBI) is considered one of the most progressive and well-run of India’s regulatory bodies. It regulates India’s securities markets, including enforcement activities, and is India’s direct counterpart to the U.S. Securities and Exchange Commission (SEC). SEBI oversees three national exchanges: the BSE Ltd. (formerly the Bombay Stock Exchange), the National Stock Exchange (NSE), and the Metropolitan Stock Exchange. SEBI also regulates the three national commodity exchanges: the Multi Commodity Exchange (MCX), the National Commodity & Derivatives Exchange Limited, and the National Multi-Commodity Exchange.
Foreign venture capital investors (FVCIs) must register with SEBI to invest in Indian firms. They can also set up domestic asset management companies to manage funds. All such investments are allowed under the automatic route, subject to SEBI and RBI regulations, and to FDI policy. FVCIs can invest in many sectors, including software, information technology, pharmaceuticals and drugs, biotechnology, nanotechnology, biofuels, agriculture, and infrastructure.
Companies incorporated outside India can raise capital in India’s capital markets through the issuance of Indian Depository Receipts (IDRs) based on SEBI guidelines. Standard Chartered Bank, a British bank which was the first and only foreign entity to list in India in June 2010, delisted from the domestic exchanges in June 2020. Experts attribute the lack of interest in IDR to initial entry barriers, lack of clarity on conversion of the IDR holding into overseas shares, lack of tax clarity, and the regulator’s failure to popularize the product.
External commercial borrowing (ECB), or direct lending to Indian entities by foreign institutions, is allowed if it conforms to parameters such as minimum maturity; permitted and non-permitted end-uses; maximum all-in-cost ceiling as prescribed by the RBI; funds are used for outward FDI or for domestic investment in industry, infrastructure, hotels, hospitals, software, self-help groups or microfinance activities, or to buy shares in the disinvestment of public sector entities. The rules are published by the RBI: https://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=47736.
According to RBI data, external commercial borrowings (ECBs) by corporations reached $36.35 billion in 2020. This was the second highest inflow of offshore loans in a calendar year, following $50.51 billion raised in 2019. The monthly borrowing dropped to a multi-year low of $0.9 billion in April when the lockdown brought both economic and lending activities to a standstill. It then improved to $5.22 billion in September, driven by funds-raising by Reliance Industries. Non-banking financial companies (NBFC) also increased borrowing and corporations raised $1.6 billion through the issuance of rupee-denominated bonds.
The RBI has taken a number of steps in the past few years to bring the activities of the offshore Indian rupee market in Non-Deliverable Forwards (NDF) onshore, in order to deepen domestic markets, enhance downstream benefits, and generally obviate the need for an NDF market. FPIs with access to currency futures or the exchange-traded currency options market can hedge onshore currency risks in India and may directly trade in corporate bonds.
The RBI allowed banks to freely offer foreign exchange quotes to non-resident Indians at all times and said trading on rupee derivatives would be allowed and settled in foreign currencies in the International Financial Services Centers (IFSCs). In June 2020, the RBI allowed foreign branches of Indian banks and branches located in the IFSC to participate in the NDF. With the rupee trading volume in the offshore market higher than the onshore market, RBI felt the need to limit the impact of the NDF market and curb volatility in the movement of the rupee.
The International Financial Services Centre at Gujarat International Financial Tech-City (GIFT City) in Gujarat is being developed to compete with global financial hubs. The BSE was the first to start operations there, in January 2016. NSE domestic banks and foreign banks have started IFSC banking units in GIFT city. As part of its Budget 2020 proposal, the government proposed establishing an international bullion exchange at IFSC, which would lead to better price discovery of gold, create more jobs, and enhance India’s position in such markets.
Money and Banking System
The public sector remains predominant in the banking sector, with public sector banks (PSBs) accounting for about 66 percent of total banking sector assets. However, the share of public banks has fallen sharply in the last five years (from 74.2 percent in 2015 to 59.8 percent in 2020), primarily driven by stressed balance sheets and non-performing loans. Also, several new licenses were granted to private financial entities (two new universal bank licenses and 10 small finance bank licenses) in the past few years. The government announced plans in 2021 to privatize two PSBs. This follows Indian authorities consolidating 10 public sector banks into four in 2019, which reduced the total number of public sector banks from 18 to 12. Although most large PSBs are listed on exchanges, the government’s stakes in these banks often exceeds the 51 percent legal minimum. Aside from the large number of state-owned banks, directed lending and mandatory holdings of government paper are key facets of the banking sector. The RBI requires commercial banks and foreign banks with more than 20 branches to allocate 40 percent of their loans to priority sectors which include agriculture, small and medium enterprises, export-oriented companies, and social infrastructure. Additionally, all banks are required to invest 18 percent of their net demand and time liabilities in government securities.
PSBs continue to face two significant hurdles: capital constraints and poor asset quality. As of September 2020, gross non-performing loans represented 7.5 percent of total loans in the banking system, with the public sector banks having a larger share at 9.7 percent of their loan portfolio. The PSBs’ asset quality deterioration in recent years has been driven by their exposure to a broad range of industrial sectors including infrastructure, metals and mining, textiles, and aviation. The COVID-19 crisis further exacerbated the stress, with NPAs likely to rise as the forbearance period ends. The government announced its intention to set up an asset reconstruction company to take over legacy stressed assets from bank balance sheets. With IBC in place, banks were making progress in non-performing asset recognition and resolution. However, the IBC Code was suspended following the onset of COVID-19 through March 2021 to help businesses cope with the economic disruptions caused by the pandemic.
To address asset quality challenges faced by public sector banks, the government injected $32 billion into public sector banks in recent years. The capitalization largely aimed to address the capital inadequacy of public sector banks and marginally provide for growth capital. Following the recapitalization, public sector banks’ total capital adequacy ratio (CAR) improved to 13.5 percent in September 2020 from 12.9 in March 2020.
Women in the Financial Sector
Women’s lack of sufficient access to finance remained a major impediment to women’s entrepreneurship and participation in the workforce. According to experts, women are more likely than men to lack financial awareness, confidence to approach a financial institution, or possess adequate collateral, often leaving them vulnerable to poor terms of finance. Despite legal protections against discrimination, some banks reportedly remained unwelcoming towards women as customers. The International Finance Corporation (IFC) analysts described Indian women-led Micro, Small, and Medium Enterprises (MSME) as a large but untapped market that has a total finance requirement of $29 billion (72 percent for working capital). However, 70 percent of this demand remained unmet, creating a shortfall of $20 billion. The IFC argued that financial institutions should view this market as a compelling, profitable business segment, not corporate social responsibility or charitable activity.
The government-affiliated think tank NITI Aayog provides information on networking, mentorship, and financing to more than 18,000 members via its Women Entrepreneurship Platform (WEP). The WEP was launched in March 2018, following the 2017 Global Entrepreneurship Summit, that India hosted in partnership with the United States, focused on “Women First and Prosperity for All.” The GOI’s financial inclusion scheme Pradhan Mantri Jan Dhan Yojana (PMJDY) provides universal access to banking facilities with at least one basic banking account for every adult, financial literacy, access to credit, insurance, and pension. As of March 3, 2021, 233 million out of 420 million beneficiaries are women (55 percent.) In 2015, the Modi government started the Micro Units Development and Refinance Agency Ltd. (MUDRA), which supports the development of micro-enterprises. The initiative encourages women’s participation and offers collateral-free loans of around $15,000 — 70 percent of the beneficiaries are women.
Foreign Exchange and Remittances
The RBI, under the Liberalized Remittance Scheme, allows individuals to remit up to $250,000 per fiscal year (April-March) out of the country for permitted current account transactions (private visit, gift/donation, going abroad on employment, emigration, maintenance of close relatives abroad, business trip, medical treatment abroad, studies abroad) and certain capital account transactions (opening of foreign currency account abroad with a bank, purchase of property abroad, making investments abroad, setting up Wholly Owned Subsidiaries and Joint Ventures outside of India, extending loans). The Indian Rupee or INR is fully convertible only in current account transactions, as regulated under the Foreign Exchange Management Act regulations of 2000 (https://www.rbi.org.in/Scripts/Fema.aspx).
Foreign exchange withdrawal is prohibited for remittance of lottery winnings; income from racing, riding or any other hobby; purchase of lottery tickets, banned or proscribed magazines; football pools and sweepstakes; payment of commission on exports made towards equity investment in Joint Ventures or Wholly Owned Subsidiaries of Indian companies abroad; and remittance of interest income on funds held in a Non-Resident Special Rupee Scheme Account (https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10193#sdi). Furthermore, the following transactions require the approval of the Central Government: cultural tours; remittance of hiring charges for transponders for television channels under the Ministry of Information and Broadcasting, and Internet Service Providers under the Ministry of Communication and Information Technology; remittance of prize money and sponsorship of sports activity abroad if the amount involved exceeds $100,000; advertisement in foreign print media for purposes other than promotion of tourism, foreign investments and international bidding (over $10,000) by a state government and its public sector undertakings (PSUs); and multi-modal transport operators paying remittances to their agents abroad. RBI approval is required for acquiring foreign currency above certain limits for specific purposes including remittances for: maintenance of close relatives abroad; any consultancy services; funds exceeding 5 percent of investment brought into India or $100,000, whichever is higher, by an entity in India by way of reimbursement of pre-incorporation expenses.
Capital account transactions are open to foreign investors, though subject to various clearances. Non-resident Indian investment in real estate, remittance of proceeds from the sale of assets, and remittance of proceeds from the sale of shares may be subject to approval by the RBI or FIPB.
FIIs may transfer funds from INR to foreign currency accounts and back at market exchange rates. They may also repatriate capital, capital gains, dividends, interest income, and compensation from the sale of rights offerings without RBI approval. The RBI also authorizes automatic approval to Indian industry for payments associated with foreign collaboration agreements, royalties, and lump sum fees for technology transfer, and payments for the use of trademarks and brand names. Royalties and lump sum payments are taxed at 10 percent.
The RBI has periodically released guidelines to all banks, financial institutions, NBFCs, and payment system providers regarding Know Your Customer (KYC) and reporting requirements under Foreign Account Tax Compliance Act (FATCA)/Common Reporting Standards (CRS). The government’s July 7, 2015 notification (https://rbidocs.rbi.org.in/rdocs/content/pdfs/CKYCR2611215_AN.pdf) amended the Prevention of Money Laundering (Maintenance of Records) Rules, 2005, (Rules), for setting up of the Central KYC Records Registry (CKYCR)—a registry to receive, store, safeguard and retrieve the KYC records in digital form of clients.
Remittances are permitted on all investments and profits earned by foreign companies in India once taxes have been paid. Nonetheless, certain sectors are subject to special conditions, including construction, development projects, and defense, wherein the foreign investment is subject to a lock-in period. Profits and dividend remittances as current account transactions are permitted without RBI approval following payment of a dividend distribution tax.
Foreign banks may remit profits and surpluses to their headquarters, subject to compliance with the Banking Regulation Act, 1949. Banks are permitted to offer foreign currency-INR swaps without limits for the purpose of hedging customers’ foreign currency liabilities. They may also offer forward coverage to non-resident entities on FDI deployed since 1993.
Sovereign Wealth Funds
In 2016 the Indian government established the National Infrastructure Investment Fund (NIIF), touted as India’s first sovereign wealth fund to promote investments in the infrastructure sector. The government agreed to contribute $3 billion to the fund, while an additional $3 billion will be raised from the private sector primarily from sovereign wealth funds, multilateral agencies, endowment funds, pension funds, insurers, and foreign central banks. In December 2020, NIIF officially closed the Master Fund with $2.34 billion in commitments from other Sovereign Wealth Funds and global pension funds. The NIIF Master Fund is focused on investing in core infrastructure sectors including transportation, energy, and urban infrastructure.
The government owns or controls interests in key sectors with significant economic impact, including infrastructure, oil, gas, mining, and manufacturing. The Department of Public Enterprises (http://dpe.gov.in) controls and formulates all the policies pertaining to SOEs and is headed by a minister to whom the senior management reports. The Comptroller and Auditor General audits the SOEs. The government has taken several steps to improve the performance of SOEs, also called Central Public Sector Enterprises (CPSEs), including improvements to corporate governance. This was necessary as the government planned to disinvest its stake from these entities. All the CPSE’s are listed on stock exchanges as the government partially divested its equity from these entities.
According to the Public Enterprise Survey 2018-19, as of March 2019 there were 348 central public sector enterprises (CPSEs) with a total investment of $234 billion, of which 248 are operating CPSEs. The report puts the number of profit-making CPSEs at 178, while 70 CPSEs were incurring losses.
Foreign investments are allowed in CPSEs in all sectors. The Master List of CPSEs can be accessed at http://www.bsepsu.com/list-cpse.asp. While the CPSEs face the same tax burden as the private sector, on issues like procurement of land they receive streamlined licensing that private sector enterprises do not.
Despite the financial upside to disinvestment in loss-making SOEs, the government has not generally privatized its assets as they have led to job losses in the past, and therefore engendered political risks. Instead, the government adopted a gradual disinvestment policy that dilutes government stakes in public enterprises without sacrificing control. Such disinvestment has been undertaken both as fiscal support and as a means of improving the efficiency of SOEs.
In the FY 2021-22 budget, however, Finance Minister Nirmala Sitharaman unveiled a new Disinvestment/Strategic Disinvestment Policy detailing the government’s intent to privatize most state-owned companies in a phased manner. A few sectors were categorized as strategic sectors where the government plans to maintain a minimal presence. The budget established a disinvestment target of $24 billion for FY2021-22 after disinvestments planned for the prior fiscal year were not completed, many of which the government claimed were negatively impacted by the COVID-19 pandemic.
Foreign institutional investors can participate in the disinvestment programs. The earlier limits for foreign investors were 24 percent of the paid-up capital of the Indian company and 10 percent for non-resident Indians and persons of Indian origin. In the case of public sector banks, the limit is 20 percent of the paid-up capital. For many SOEs there is no bidding process as the shares of the entities being disinvested are sold in the open market. Certain SOEs, however, such as Air India are subject to a structure bidding process.
Among Indian companies there is a general awareness of standards for responsible business conduct. The Ministry of Corporate Affairs (MCA) administers the Companies Act of 2013 and is responsible for regulating the corporate sector in accordance with the law. The MCA is also responsible for protecting the interests of consumers by ensuring competitive markets.
The Companies Act of 2013 also established the framework for India’s corporate social responsibility (CSR) laws. While the CSR obligations are mandated by law, non-government organizations (NGOs) in India also track CSR activities and provide recommendations in some cases for effective use of CSR funds. MCA released the National Guidelines on Responsible Business Conduct, 2018 (NGRBC) on March 13, 2019 to improve the 2011 National Voluntary Guidelines on Social, Environmental & Economic Responsibilities of Business. The NGRBC aligned with the United Nations Guiding Principles on Business & Human Rights (UNGPs).
Per the Ministry of Corporate Affairs, corporations used all or most of their CSR money in 2020 to combat the COVID-19 pandemic, be it through contributions to the PM CARES Fund or other relief funds; distribution of food, masks, personal protective equipment (PPE) kits; or providing relief material to the needy. About $1 billion was spent during March-May 2020 that was classified as CSR. The tally of eligible companies that spent on CSR in FY 2019 and duly reported it rose to 1,276, compared with 1,246 the previous fiscal and their total CSR spend increased by around 14 percent year on year. Over two-thirds of these spent 2 percent or more of their net profits. (Note: The Companies Act, 2013 mandates that companies spend an average of 2 percent of their average net profit of the preceding three fiscal years. End Note).
India does not adhere to the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Afflicted and High-Risk Areas. There are provisions to promote responsible business conduct throughout the supply chain.
India is not a member of Extractive Industries Transparency Initiative (EITI) nor is it a member of Voluntary Principles on Security and Human Rights.
India is a signatory to the United Nation’s Conventions Against Corruption and is a member of the G20 Working Group against corruption. India, with a score of 40, ranked 86 among 180 countries in Transparency International’s 2020 Corruption Perception Index.
Corruption is addressed by the following laws: The Companies Act, 2013; the Prevention of Money Laundering Act, 2002; the Prevention of Corruption Act, 1988; the Code of Criminal Procedures, 1973; the Indian Contract Act, 1872; and the Indian Penal Code of 1860. Anti- corruption laws amended since 2004 have granted additional powers to vigilance departments in government ministries at the central and state levels and elevated the Central Vigilance Commission (CVC) to be a statutory body. In addition, the Comptroller and Auditor General is charged with performing audits on public-private-partnership contracts in the infrastructure sector based on allegations of revenue loss to the exchequer.
Other statutes approved by parliament to tackle corruption include:
The Benami Transactions (Prohibition) Amendment Act of 2016
The Real Estate (Regulation and Development) Act, 2016, enacted in 2017
The Whistleblower Protection Act, 2011 was passed in 2014 but has yet to be operationalized
The Companies Act of 2013 established rules related to corruption in the private sector by mandating mechanisms for the protection of whistle blowers, industry codes of conduct, and the appointment of independent directors to company boards. However, the government has not established any monitoring mechanism, and it is unclear the extent to which these protections have been instituted. No legislation focuses particularly on the protection of NGOs working on corruption issues, though the Whistleblowers Protection Act of 2011 may afford some protection once implemented.
In 2013, Parliament enacted the Lokpal and Lokayuktas Act, which created a national anti- corruption ombudsman and required states to create state-level ombudsmen within one year of the law’s passage. A national ombudsman was finally appointed in March 2019.
UN Anticorruption Convention, OECDConvention on Combatting Bribery
India is a signatory to the United Nations Conventions against Corruption and is a member of the G20 Working Group against Corruption. India is not party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.
The Indian chapter of Transparency International was closed in 2019.
Resourcesto ReportCorruption at the Embassy
Economic Growth Unit Chief U.S. Embassy New Delhi Shantipath, Chanakyapuri New Delhi +91 11 2419 8000 email@example.com
India is a multiparty, federal, parliamentary democracy with a bicameral legislature. The president, elected by an electoral college composed of the state assemblies and parliament, is the head of state, and the prime minister is the head of government. National parliamentary elections are held every five years. Under the constitution, the country’s 28 states and eight union territories have a high degree of autonomy and have primary responsibility for law and order. Electors chose President Ram Nath Kovind in 2017 to serve a five-year term. Following the May 2019 national elections, Prime Minister Modi’s Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) received a larger majority in the lower house of Parliament, or Lok Sabha, than it had won in the 2014 elections and returning Modi for a second term as prime minister. Observers considered the parliamentary elections, which included more than 600 million voters, to be free and fair, although there were reports of isolated instances of violence.
The government’s first 100 days of its second term were marked by two controversial decisions. The removal of special constitutional status from the state of Jammu and Kashmir (J&K) and the passage of the Citizenship Amendment Act (CAA). Protests followed the enactment of the CAA but ended with the onset of COVID-19 in March 2020 and the imposition of a strict national lockdown. The management of COVID-19 became the dominant issue in 2020 including the drop in economic activity and by December 2020, economic activity started to show signs of positive growth. The BJP-led government has faced some criticism for its response to the recent surge in COVID-19 cases.
Although there are more than 20 million unionized workers in India, unions still represent less than 5 percent of the total work force. Most of these unions are linked to political parties. Unions are typically strong in state-owned enterprises. A majority of the unionized work force can be found in the railroads, port and dock, banking, and insurance sectors. According to provisional figures form the Ministry of Labor and Employment (MOLE), over 1.74 million workdays were lost to strikes and lockouts during 2018. Labor unrest occurs throughout India, though the reasons and affected sectors vary widely. A majority of the labor problems are the result of workplace disagreements over pay, working conditions, and union representation.
In an effort to reduce the number of labor related statutes, the Indian parliament passed the Code on Wages in 2019. During 2020, the parliament passed the Industrial Relations Code; the Occupational Safety, Health and Working Conditions Code; and the Code on Social Security. Along with the 2019 Code on Wages, the four codes harmonize and simplify India’s 29 existing labor laws with the aim of improving the business environment for both industry and workers. The changes expanded the potential use of contract labor, raised the threshold for small and medium sized enterprise exemptions from 100 to 300 employees, and expanded minimum wage and social security coverage to informal sector workers in agriculture and the growing gig economy, and gave employers greater hiring and firing flexibility. Details of the laws approved by parliament can be accessed at https://labour.gov.in/labour-law-reforms.
In March 2017, the Maternity Benefits Act was amended to increase the paid maternity leave for women from 12 weeks to 26 weeks. The amendment also made it mandatory for all industrial establishments employing 50 or more workers to have a creche for babies to enable nursing mothers to feed the child up to 4 times in a day.
In August 2016, the Child Labor Act was amended establishing a minimum age of 14 years for work and 18 years as the minimum age for hazardous work. In December 2016, the government promulgated legislation enabling employers to pay worker salaries through checks or e-payment in addition to the prevailing practice of cash payment.
There are no reliable unemployment statistics for India due to the informal nature of most employment. During the COVID-19 pandemic experts claimed the unemployment rate spiraled as people in the informal sector lost their jobs. The Centre for Monitoring Indian Economy (CMIE) reported that the average unemployment in the April-June period of 2020 was around 24 percent. during a stringent national lockdown imposed in response to COVID-19. As the lockdown was eased, CMIE estimated the unemployment rate during the August-October period improved to around 7.9 percent.
The government has acknowledged a shortage of skilled labor in high-growth sectors of the economy, including information technology and manufacturing. In response, the government established a Ministry of Skill Development and embarked on a national program to increase skilled labor.
The United States and India signed an Investment Incentive Agreement in 1997. This agreement covered the Overseas Private Investment Corporation (OPIC) and its successor agency, the U.S. International Development Finance Corporation (DFC). The DFC is the U.S. Government’s development finance institution, launched in December 2019, to incorporate OPIC’s programs as well as the Direct Credit Authority of the U.S. Agency for International Development. Since 1974 the DFC (under its predecessor agency, OPIC) has provided support to over 200 projects in India in the form of loans, investment funds, and political risk insurance.
As of March 2021, DFC’s current outstanding portfolio in India comprised more than $2.5 billion across 50 projects. These commitments were concentrated in renewable energy, financial services (including microfinance), and impact investments that include agribusiness and healthcare.
Table2: KeyMacroeconomicData, U.S. FDI in HostCountry/Economy
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Cumulative FDI April 2000 to December 2020
(in USD million)
Total Inward 521,468
Source: Inward FDI DIPP, Ministry of Commerce and Industry
Outward investments from India (April – November 2020)
(in USD millions)
Total Outward 12,250
British Virgin Islands 1,370
Economic Growth Unit Chief
U.S. Embassy New Delhi
Shantipath, Chanakyapuri New Delhi
+91 11 2419 8000 IngeneriPM@state. gov
Despite challenges posed by the COVID-19 pandemic, the Philippines is committed to improving its overall investment climate. Sovereign credit ratings remain at investment grade based on the country’s sound macroeconomic fundamentals. Foreign direct investment (FDI), however, still remains relatively low when compared to the Association of Southeast Asian Nations (ASEAN) figures; the Philippines ranks sixth out of ten ASEAN countries for total FDI in 2020. FDI declined by almost 25 percent in 2020 to USD 6.5 billion from USD 8.7 billion in 2019, according to the Bangko Sentral ng Pilipinas (the Philippine’s Central Bank), mainly due to the disruptive impact of the pandemic on global supply chains and weak business outlook that affected investors’ decisions. The majority of FDI investments included manufacturing, real estate, and financial/insurance activities. (https://www.bsp.gov.ph/SitePages/MediaAndResearch/MediaDisp.aspx?ItemId=5704)
Foreign ownership limitations in many sectors of the economy constrain investments. Poor infrastructure, high power costs, slow broadband connections, regulatory inconsistencies, and corruption are major disincentives to investment. The Philippines’ complex, slow, and sometimes corrupt judicial system inhibits the timely and fair resolution of commercial disputes. Traffic in major cities and congestion in the ports remain a regular cost of business. Recently passed tax reform legislation (Corporate Recovery and Tax Incentives for Enterprises — CREATE) will reduce the corporate income tax from ASEAN’s highest rate of 30 percent to 25 percent in 2020 and eventually to 20 percent by 2025. CREATE could be positive for business investment, although some foreign investors have concerns about the performance-based and time-bound nature of the incentives scheme adopted in the measure.
The Philippines continues to address investment constraints. In late 2018, President Rodrigo Duterte updated the Foreign Investment Negative List (FINL), which enumerates investment areas where foreign ownership or investment is banned or limited. The latest FINL allows 40 percent foreign participation in construction and repair of locally funded public works, up from 25 percent. The FINL, however, is limited in scope since it cannot change prior laws relating to foreign investments, such as Constitutional provisions which bar investment in mass media, utilities, and natural resource extraction.
There are currently several pending pieces of legislation, such as amendments to the Public Service Act, the Retail Trade Liberalization Act, and the Foreign Investment Act, all of which would have a large impact on investment within the country. The Public Service Act would provide a clearer definition of “public utility” companies, in which foreign investment is limited to 40 percent according to the 1987 Constitution. This amendment would lift foreign ownership restrictions in key areas such as telecommunications and energy, leaving restrictions only on distribution and transmission of electricity, and maintenance of waterworks and sewerage systems. The Retail Trade Liberalization Act aims to boost foreign direct investment in the retail sector by changing capital thresholds to reduce the minimum investment per store requirement for foreign-owned retail trade businesses from USD 830,000 to USD 200,000. It also would reduce the quantity of locally manufactured products foreign-owned stores are required to carry. The Foreign Investment Act would ease restrictions on foreigners practicing their professions in the Philippines and give them better access to investment areas that are currently reserved primarily for Philippine nationals, particularly in sectors within education, technology, and retail.
While the Philippine bureaucracy can be slow and opaque in its processes, the business environment is notably better within the special economic zones, particularly those available for export businesses operated by the Philippine Economic Zone Authority (PEZA), known for its regulatory transparency, no red-tape policy, and one-stop shop services for investors. Finally, the Philippines plans to spend more than USD 82.6 billion through 2022 to upgrade its infrastructure with the Administration’s aggressive Build, Build, Build program; many projects are already underway.
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment
The Philippines seeks foreign investment to generate employment, promote economic development, and contribute to inclusive and sustained growth. The Board of Investments (BOI) and Philippine Economic Zone Authority (PEZA) are the country’s lead investment promotion agencies (IPAs). They provide incentives and special investment packages to investors. Noteworthy advantages of the Philippine investment landscape include free trade zones, including economic zones, and a large, educated, English-speaking, and relatively low-cost Filipino workforce. Philippine law treats foreign investors the same as their domestic counterparts, except in sectors reserved for Filipinos by the Philippine Constitution and the Foreign Investment Act (see details under Limits on Foreign Control section). Additional information regarding investment policies and incentives are available on the BOI (http://boi.gov.ph) and PEZA (http://www.peza.gov.ph) websites.
Restrictions on foreign ownership, inadequate public investment in infrastructure, and lack of transparency in procurement tenders hinder foreign investment. The Philippines’ regulatory regime remains ambiguous in many sectors of the economy, and corruption is a significant problem. Large, family-owned conglomerates, including San Miguel, Ayala, Aboitiz Equity Ventures, and SM Investments, dominate the economic landscape, crowding out other smaller businesses.
Limits on Foreign Control and Right to Private Ownership and Establishment
Foreigners are prohibited from fully owning land under the 1987 Constitution, although the 1993 Investors’ Lease Act allows foreign investors to lease a contiguous parcel of up to 1,000 hectares (2,471 acres) for a maximum of 75 years. Dual citizens are permitted to own land.
The 1991 Foreign Investment Act (FIA) requires the publishing every two years of the Foreign Investment Negative List (FINL), which outlines sectors in which foreign investment is restricted. The latest FINL was released in October 2018 and will be updated once the Strategic Investment Priorities Plan (SIPP) is drafted. The FINL bans foreign ownership/participation in the following investment activities: mass media (except recording and internet businesses); small-scale mining; private security agencies; utilization of marine resources; cockpits; manufacturing of firecrackers and pyrotechnic devices; and manufacturing and distribution of nuclear, biological, chemical and radiological weapons, and anti-personnel mines. With the exception of the practices of law, radiologic and x-ray technology, and marine deck and marine engine officers, other laws and regulations on professions allow foreigners to practice in the Philippines if their country permits reciprocity for Philippine citizens, these include medicine, pharmacy, nursing, dentistry, accountancy, architecture, engineering, criminology, teaching, chemistry, environmental planning, geology, forestry, interior design, landscape architecture, and customs brokerage. In practice, however, language exams, onerous registration processes, and other barriers prevent this from taking place.
The Philippines limits foreign ownership to 40 percent in the manufacturing of explosives, firearms, and military hardware; private radio communication networks; natural resource exploration, development, and utilization (with exceptions); educational institutions (with some exceptions); operation and management of public utilities; operation of commercial deep sea fishing vessels; Philippine government procurement contracts (40 percent for supply of goods and commodities); contracts for the construction and repair of locally funded public works (with some exceptions); ownership of private lands; and rice and corn production and processing (with some exceptions). Other areas that carry varying foreign ownership ceilings include the following: private employee recruitment firms (25 percent) and advertising agencies (30 percent).
Retail trade enterprises with capital of less than USD 2.5 million, or less than USD 250,000, for retailers of luxury goods, are reserved for Filipinos. The Philippines allows up to full foreign ownership of insurance adjustment, lending, financing, or investment companies; however, foreign investors are prohibited from owning stock in such enterprises, unless the investor’s home country affords the same reciprocal rights to Filipino investors.
Foreign banks are allowed to establish branches or own up to 100 percent of the voting stock of locally incorporated subsidiaries if they can meet certain requirements. However, a foreign bank cannot open more than six branches in the Philippines. A minimum of 60 percent of the total assets of the Philippine banking system should, at all times, remain controlled by majority Philippine-owned banks. Ownership caps apply to foreign non-bank investors, whose aggregate share should not exceed 40 percent of the total voting stock in a domestic commercial bank and 60 percent of the voting stock in a thrift/rural bank.
Business registration in the Philippines is cumbersome due to multiple agencies involved in the process. It takes an average of 33 days to start a business in Quezon City in Metro Manila, according to the 2020 World Bank’s Ease of Doing Business report. The Duterte Administrations’ landmark law, Republic Act No. 11032 or the Ease of Doing Business and Efficient Government Service Delivery Act of 2018 sought to address the issues through the amendment of the Anti-Red Tape Act of 2007 (https://www.officialgazette.gov.ph/2018/05/28/republic-act-no-11032/). It legislates standardized deadlines for government transactions, a single business application form, a one-stop-shop, automation of business permits processing, a zero-contact policy, and a central business databank. Implementing rules and regulations for the Act was signed in 2019 (http://arta.gov.ph/pages/IRR.html). It created an Anti-Red Tape Authority (ARTA) under the Office of the President that oversees national policy on anti-red tape issues and implements reforms to improve competitiveness rankings. It also monitors compliance of agencies and issue notices to erring and non-compliant government employees and officials. ARTA is governed by a council that includes the Secretaries of Trade and Industry, Finance, Interior and Local Governments, and Information and Communications Technology. The Department of Trade and Industry serves as interim Secretariat for ARTA. Since this landmark legislation, the Philippines jumped 29 notches in the World Bank’s 2020 Doing Business Report ranking 95th from its previous 124th rank with the ARTA pushing for the full adoption of an online application system as an efficient alternative to on-site application procedures, issue online permits, and use e-signatures in the processing of government transactions.
The Revised Corporation Code, a business-friendly amendment that encourages entrepreneurship, improves the ease of business and promotes good corporate governance. This new law amends part of the four-decade-old Corporation Code and allows for existing and future companies to hold a perpetual status of incorporation, compared to the previous 50-year term limit which required renewal. More importantly, the amendments allow for the formation of one-person corporations, providing more flexibility to conduct business; the old code required all incorporation to have at least five stockholders and provided less protection from liabilities.
There are no restrictions on outward portfolio investments for Philippine residents, defined to include non-Filipino citizens who have been residing in the country for at least one year; foreign-controlled entities organized under Philippine laws; and branches, subsidiaries, or affiliates of foreign enterprises organized under foreign laws operating in the country. However, outward investments funded by foreign exchange purchases above USD 60 million or its equivalent per investor per year, require prior notification to the Central Bank.
2. Bilateral Investment Agreements and Taxation Treaties
The Philippines has neither a bilateral investment nor a free trade agreement with the United States, but it utilizes the Generalized System of Preferences (GSP – https://ustr.gov/issue-areas/trade-development/preference-programs/generalized-system-preference-gsp), which is yet to be renewed. The only bilateral free trade agreement the Philippines has is with Japan. The Philippines has signed bilateral investment agreements with 37 countries or entities: Argentina, Australia, Austria, Bangladesh, Belgium-Luxembourg Economic Union, Cambodia, Canada, Chile, China, Czech Republic, Denmark, Finland, France, Germany, India, Indonesia, Iran, Italy, Kuwait, Mongolia, Myanmar, Netherlands, Pakistan, Portugal, Republic of Korea, Romania, Russian Federation, Saudi Arabia, Spain, Sweden, Switzerland, Syria, Taiwan, Thailand, Turkey, United Kingdom, and Vietnam.
The Philippines is party to ASEAN regional trade agreements, including an investment chapter with trading partners Australia and New Zealand, Republic of Korea, India, Japan, and China. It also has an investment agreement with Iceland, Liechtenstein, Norway, and Switzerland under the Philippines-European Free Trade Association (EFTA) Free Trade Agreement. On November 15, the Philippines along with 14 other Asia-Pacific countries, signed the Regional Comprehensive Economic Partnership (RCEP) trade agreement. The agreement will be implemented after a ratification process, which could take up to two years.
The Philippines has a tax treaty with United States to avoid double taxation and provide procedures for resolving interpretative disputes and tax enforcement in both countries. The treaty encourages bilateral trade and investment by allowing the exchange of capital, goods, and services under clearly defined tax rules and, in some cases, preferential tax rates or tax exemptions.
U.S. recipients of royalty income qualify for preferential tax rates (currently 10 percent) under the most favored nation clause of the United States-Philippines tax treaty. A preferential tax treaty rate of 15 percent applies to dividends and interest income from bona fide loans; and 10 percent on interest income from government bonds. The Philippine Supreme Court ruled in 2013 that securing a tax treaty relief ruling from the Bureau of Internal Revenue (BIR) is not a legal requirement to qualify for preferential treatment and tax treaty rates; however, based on experience, tax experts generally still advise filing a tax treaty relief application to avoid potential challenges or controversies. Despite efforts to streamline processes, taxpayers find documentation requirements for tax treaty relief applications burdensome. The volume of tax treaty relief applications has resulted in processing delays, with most applications reportedly pending for over a year. Inconsistent taxation rulings are also a concern.
Given the recent updates on tax rulings, the BIR rules and regulations for tax accounting are yet to be fully harmonized with the Philippine Financial Reporting Standards. The BIR requires taxpayers to maintain records in case of further audits of financial statements and income tax returns. Additional information regarding BIR regulations is available on the BIR website (https://www.bir.gov.ph/).
The Philippines and United States signed a reciprocal Inter-Governmental Agreement (IGA) in July 2015 for automatic exchange of information between tax authorities to implement the U.S. Foreign Account Tax Compliant Act (FATCA). The bilateral agreement has yet to enter into force pending completion of domestic legal remedies to overcome stringent bank secrecy restrictions to the disclosure/sharing of information.
3. Legal Regime
Transparency of the Regulatory System
Proposed Philippine laws must undergo public comment and review. Government agencies are required to craft implementing rules and regulations (IRRs) through public consultation meetings within the government and with private sector representatives after laws are passed. New regulations must be published in newspapers or in the government’s official gazette, available online, before taking effect (https://www.gov.ph/). The 2016 Executive Order on Freedom of Information (FOI) mandates full public disclosure and transparency of government operations, with certain exceptions. The public may request copies of official records through the FOI website (https://www.foi.gov.ph/). Government offices in the Executive Branch are expected to come up with their respective agencies’ implementation guidelines. The order is criticized for its long list of exceptions, rendering the policy less effective.
Stakeholders report regulatory enforcement in the Philippines is generally weak, inconsistent, and unpredictable. Many U.S. investors describe business registration, customs, immigration, and visa procedures as burdensome and frustrating. Regulatory agencies are generally not statutorily independent but are attached to cabinet departments or the Office of the President and, therefore, are subject to political pressure. Issues in the judicial system also affect regulatory enforcement.
The Philippines continues to fulfill required regulatory reforms under the ASEAN Economic Community (AEC). The Philippines officially joined live operations of the ASEAN Single Window (ASW) on December 30, 2019. The country’s National Single Window (NSW) now issues an electronic Certificate of Origin via the TRADENET.gov.ph platform, and the NSW is connected to the ASW, allowing for customs efficiencies and better transparency.
The Philippines passed the Customs Modernization and Tariff Act in 2016, which enables the country to largely comply with the WTO Agreement on Trade Facilitation. However, the various implementing rules and regulations to execute specific provisions have not been completed by the Department of Finance and the Bureau of Customs as of April 2020.
Legal System and Judicial Independence
The Philippines has a mixed legal system of civil, common, Islamic, and customary laws, along with commercial and contractual laws.
The Philippine judicial system is a separate and largely independent branch of the government, made up of the Supreme Court and lower courts. The Supreme Court is the highest court and sole constitutional body. More information is available on the court’s website (http://sc.judiciary.gov.ph/). The lower courts consist of: (a) trial courts with limited jurisdictions (i.e., Municipal Trial Courts, Metropolitan Trial Courts, etc.); (b) Regional Trial Courts (RTCs); (c) Shari’ah District Courts (Muslim courts); and (d) Court of Appeals (appellate courts). Special courts include the “Sandiganbayan” (anti-graft court for public officials) and the Court of Tax Appeals. Several RTCs have been designated as Special Commercial Courts (SCC) to hear intellectual property (IP) cases, with four SCCs authorized to issue writs of search and seizure on IP violations, enforceable nationwide. In addition, nearly any case can be appealed to appellate courts, including the Supreme Court, increasing caseloads and further clogging the judicial system.
Foreign investors describe the inefficiency and uncertainty of the judicial system as a significant disincentive to investment. Many investors decline to file dispute cases in court because of slow and complex litigation processes and corruption among some personnel. The courts are not considered impartial or fair. Stakeholders also report an inexperienced judiciary when confronted with complex issues such as technology, science, and intellectual property cases. The Philippines ranked 152nd out of 190 economies, and 18th among 25 economies from East Asia and the Pacific, in the World Bank’s 2020 Ease of Doing Business report in terms of enforcing contracts.
Laws and Regulations on Foreign Direct Investment
The Fiscal Incentives Review Board (FIRB) is the ultimate governing body that oversees the administration and grant of tax incentives by investments promotions agencies (IPAs). It also determines the target performance metrics used as conditions to avail of tax incentives and reviews, approve, and cancels incentives for investments above USD 20 million as endorsed by IPAs. The BOI regulates and promotes investment into the Philippines that caters to the domestic market. The Strategic Investment Priorities Plan (SIPP), identified by the National Economic and Development Authority (NEDA) and administered by the BOI, identifies preferred economic activities approved by the President. Government agencies are encouraged to adopt policies and implement programs consistent with the SIPP.
The Foreign Investment Act (FIA) requires the publishing of the Foreign Investment Negative List (FINL) that outlines sectors in which foreign investment is restricted. The FINL consists of two parts: Part A details sectors in which foreign equity participation is restricted by the Philippine Constitution or laws; and Part B lists areas in which foreign ownership is limited for reasons of national security, defense, public health, morals, and/or the protection of small and medium enterprises (SMEs).
The 1995 Special Economic Zone Act allows PEZAs to regulate and promote investments in export-oriented manufacturing and service facilities inside special economic zones, including grants of fiscal and non-fiscal incentives.
Further information about investing in the Philippines is available at BOI website (http://boi.gov.ph/) and PEZA website (http://www.peza.gov.ph).
Competition and Antitrust Laws
The 2015 Philippine competition law established the Philippine Competition Commission (PCC), an independent body mandated to resolve complaints on issues such as price fixing and bid rigging, to stop mergers that would restrict competition. More information is available on PCC website (http://phcc.gov.ph/#content). The Department of Justice (https://www.doj.gov.ph/) prosecutes criminal offenses involving violations of competition laws.
Expropriation and Compensation
Philippine law allows expropriation of private property for public use or in the interest of national welfare or defense in return for fair market value compensation. In the event of expropriation, foreign investors have the right to receive compensation in the currency in which the investment was originally made and to remit it at the equivalent exchange rate. However, the process of agreeing on a mutually acceptable price can be protracted in Philippine courts. No recent cases of expropriation involve U.S. companies in the Philippines.
The 2016 Right-of-Way Act facilitates acquisition of right-of-way sites for national government infrastructure projects and outlines procedures in providing “just compensation” to owners of expropriated real properties to expedite implementation of government infrastructure programs.
ICSID Convention and New York Convention
The Philippines is a member of the International Center for the Settlement of Investment Disputes (ICSID) and has adopted the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, or the New York Convention.
Investor-State Dispute Settlement
The Philippines is signatory to various bilateral investment treaties that recognize international arbitration of investment disputes. Since 2002, the Philippines has been respondent to five investment dispute cases filed before the ICSID. Details of cases involving the Philippines are available on the ICSID website (https://icsid.worldbank.org/en/).
International Commercial Arbitration and Foreign Courts
Investment disputes can take years to resolve due to systemic problems in Philippine courts. Lack of resources, understaffing, and corruption make the already complex court processes protracted and expensive. Several laws on alternative dispute resolution (ADR) mechanisms (i.e., arbitration, mediation, negotiation, and conciliation) were approved to decongest clogged court dockets. Public-Private Partnership (PPP) infrastructure contracts are required to include ADR provisions to make resolving disputes less expensive and time-consuming.
A separate action must be filed for foreign judgments to be recognized or enforced under Philippine law. Philippine law does not recognize or enforce foreign judgments that run counter to existing laws, particularly those relating to public order, public policy, and good customary practices. Foreign arbitral awards are enforceable upon application in writing to the regional trial court with jurisdiction. The petition may be filed any time after receipt of the award.
The 2010 Philippine bankruptcy and insolvency law provides a predictable framework for rehabilitation and liquidation of distressed companies, although an examination of some reported cases suggests uneven implementation. Rehabilitation may be initiated by debtors or creditors under court-supervised, pre-negotiated, or out-of-court proceedings. The law sets conditions for voluntary (debtor-initiated) and involuntary (creditor-initiated) liquidation. It also recognizes cross-border insolvency proceedings in accordance with the United Nations Conference on Trade and Development (UNCTAD) Model Law on Cross-Border Insolvency, allowing courts to recognize proceedings in a foreign jurisdiction involving a foreign entity with assets in the Philippines. Regional trial courts designated by the Supreme Court have jurisdiction over insolvency and bankruptcy cases. The Philippines ranked 65th out of 190 economies, and ninth among 25 economies from East Asia and the Pacific, in the World Bank’s 2020 Ease of Doing Business report in terms of resolving insolvency and bankruptcy cases.
4. Industrial Policies
The Philippines’ Investment Priorities Plan (IPP) enumerates investment activities entitled to incentives facilitated by BOI, such as an income tax holiday. Non-fiscal incentives include the following: employment of foreign nationals, simplified customs procedures, duty exemption on imported capital equipment and spare parts, importation of consigned equipment, and operation of a bonded manufacturing warehouse.
The 2017 IPP provides incentives to the following activities: manufacturing (e.g., agro-processing, modular housing components, machinery, and equipment); agriculture, fishery, and forestry; integrated circuit design, creative industries, and knowledge-based services (e.g., IT-Business Process Management services for the domestic market, repair/maintenance of aircraft, telecommunications, etc.); healthcare (e.g., hospitals and drug rehabilitation centers); mass housing; infrastructure and logistics (e.g., airports, seaports, and PPP projects); energy (development of energy sources, power generation plants, and ancillary services); innovation drivers (e.g,. fabrication laboratories); and environment (e.g., climate change-related projects). Further details of the 2017 IPP are available on the BOI website (http://boi.gov.ph/). The BOI was tasked to update the investment priorities and formulate a Strategic Investment Priorities Plan to replace the IPP in light of the planned amendments in the tax incentive scheme of the Philippines under the Comprehensive Tax Reform Program (CREATE).
In the current set-up, BOI-registered enterprises that locate in less-developed areas are entitled to pioneer incentives and can deduct 100 percent of the cost of necessary infrastructure work and labor expenses from taxable income. Pioneer status can be granted to enterprises producing new products or using new methods, goods deemed highly essential to the country’s agricultural self-sufficiency program, or goods utilizing non-conventional fuel sources. Furthermore, an enterprise with more than 40 percent foreign equity that exports at least 70 percent of its production may be entitled to incentives even if the activity is not listed in the IPP. Export-oriented firms with at least 50 percent of revenues derived from exports may register for additional incentives under the 1994 Export Development Act.
Multinational entities that establish regional warehouses for the supply of spare parts, manufactured components, or raw materials for foreign markets also enjoy incentives on imports that are re-exported, including exemption from customs duties, internal revenue taxes, and local taxes. The first package of the Tax Reform for Acceleration and Inclusion (TRAIN) law which took effect January 1, 2018, removed the 15 percent special tax rate on gross income of employees of multinational enterprises’ regional headquarters (RHQ) and regional operating headquarters (ROHQ) located in the Philippines. RHQ and ROHQ employees are now subjected to regular income tax rates, usually at higher and less competitive rates.
Foreign Trade Zones/Free Ports/Trade Facilitation
Export-related businesses enjoy preferential tax treatment when located in export processing zones, free trade zones, and certain industrial estates, collectively known as economic zones, or ecozones. Businesses located in ecozones are considered outside customs territory and are allowed to import capital equipment and raw material free of customs duties, taxes, and other import restrictions. Goods imported into ecozones may be stored, repacked, mixed, or otherwise manipulated without being subject to import duties and are exempt from the Bureau of Customs’ Selective Pre-shipment Advance Classification Scheme. While some ecozones are designated as both export processing zones and free trade zones, individual businesses within them are only permitted to receive incentives under a single category.
Philippine Economic Zone Authority (PEZA)
PEZA operates 379 ecozones, primarily in manufacturing, IT, tourism, medical tourism, logistics/warehousing, and agro-industrial sectors. PEZA manages four government-owned export-processing zones (Mactan, Baguio, Cavite, and Pampanga) and administers incentives to enterprises in other privately owned and operated ecozones. Any person, partnership, corporation, or business organization, regardless of nationality, control and/or ownership, may register as an export, IT, tourism, medical tourism, or agro-industrial enterprise with PEZA, provided the enterprise physically locates its activity inside any of the ecozones. PEZA administrators have earned a reputation for maintaining a clear and predictable investment environment within the zones of their authority (http://www.peza.gov.ph/index.php/economic-zones/list-of-economic-zones/operating-economic-zones).
Bases Conversion Development Authority (BCDA) and Subic Bay Metropolitan Authority (SBMA)
The ecozones located inside former U.S. military bases were established under the 1992 Bases Conversion and Development Act. The BCDA (http://www.bcda.gov.ph/) operates Clark Freeport Zone (Angeles City, Pampanga), John Hay Special Economic Zone (Baguio), Poro Point Freeport Zone (La Union), and Bataan Technology Park (Morong, Bataan). The SBMA operates the Subic Bay Freeport Zone (Subic Bay, Zambales). Clark and Subic have their own international airports, power plants, telecommunications networks, housing complexes, and tourist facilities. These ecozones offer comparable incentives to PEZA. Enterprises already receiving incentives under the BCDA law are disqualified to receive incentives and benefits offered by other laws.
The Phividec Industrial Estate (Misamis Oriental Province, Mindanao) is governed by Phividec Industrial Authority (PIA) (http://www.piamo.gov.ph/), a government-owned and controlled corporation. Other ecozones are Zamboanga City Economic Zone and Freeport (Zamboanga City, Mindanao) (http://www.zfa.gov.ph/), Cagayan Special Economic Zone (CEZA) and Freeport (Santa Ana, Cagayan Province) (http://ceza.gov.ph/), and Freeport Area of Bataan (FAB) (Mariveles, Bataan). CEZA grants gaming licenses in addition to offering export incentives. The Regional Economic Zone Authority (Cotabato City, Mindanao) (https://reza.bangsamoro.gov.ph/) has been operated by the Bangsamoro Autonomous Region in Muslim Mindanao (BARMM). The FAB is operated by the Authority of the Freeport Area of Bataan (AFAB) (https://afab.gov.ph/). The incentives available to investors in these zones are similar to PEZA but administered independently.
Performance and Data Localization Requirements
The BOI imposes a higher export performance requirement on foreign-owned enterprises (70 percent of production) than on Philippine-owned companies (50 percent of production) when providing incentives under SIPP.
Companies registered with BOI and PEZA may employ foreign nationals in supervisory, technical, or advisory positions for five years from date of registration (possibly extendable upon request). Top positions and elective officers of majority foreign-owned BOI-registered enterprises (such as president, general manager, and treasurer, or their equivalents) are exempt from employment term limitation. Foreigners intending to work locally must secure an Alien Employment Permit from the Department of Labor and Employment (DOLE), renewable every year with the duration of employment (which in no case shall exceed five years). The BOI and PEZA facilitate special investor’s resident visas with multiple entry privileges and extend visa facilitation assistance to foreign nationals, their spouses, and dependents.
The 2006 Biofuels Act establishes local content requirements for diesel and gasoline. Regarding diesel, only locally produced biodiesel is permitted. For gasoline, all local ethanol must be bought off the market before imports are allowed to meet the blend requirement, and the local ethanol production may only be sourced from locally-produced sugar/molasses feedstock.
The Philippines does not impose restrictions on cross-border data transfers. Sensitive personal information is protected under the 2012 Data Privacy Act, which provides penalties for unauthorized processing and improper disposal of data even if processed outside the Philippines.
5. Protection of Property Rights
The Philippines recognizes and protects property rights, but the enforcement of laws is weak and fragmented. The Land Registration Authority and the Register of Deeds (http://www.lra.gov.ph/), which facilitate the registration and transfer of property titles, are responsible for land administration, with more information available on their websites. Property registration processes are tedious and costly. Multiple agencies are involved in property administration, which results in overlapping procedures for land valuation and titling processes. Record management is weak due to a lack of funds and trained personnel. Corruption is also prevalent among land administration personnel and the court system is slow to resolve land disputes. The Philippines ranked 120th out of 190 economies in terms of ease of property registration in the World Bank’s 2020 Ease of Doing Business report.
Intellectual Property Rights
The Philippines is not listed on the United States Trade Representative’s (USTR) Special 301 Watch List. The country has a generally robust intellectual property rights (IPR) regime in place, although enforcement is irregular and inconsistent. The total estimated value of counterfeit goods reported seized in 2020 was USD180 million, lower than 2019’s USD 460 million. The closure of commercial establishments and a strict three-month lockdown due to the COVID-19 pandemic,impacted enforcement activities. The sale of imported counterfeit goods in local markets has visibly decreased, though the amount of counterfeit goods sold online has dramatically increased due to the shift of most businesses to online activities.
The Intellectual Property (IP) Code provides a legal framework for IPR protection, particularly in key areas of patents, trademarks, and copyrights. The Intellectual Property Office of the Philippines (IPOPHL) is the implementing agency of the IP Code, with more information available on its website (https://www.ipophil.gov.ph/). The Philippines generally has strong patent and trademark laws. IPOPHL’s IP Enforcement Office (IEO) reviews IPR-related complaints and visits establishments reportedly engaged in IPR-related violations. However, weak border protection, corruption, limited enforcement capacity by the government, and lack of clear procedures continue to weaken enforcement. In addition, IP owners still must assume most enforcement and storage costs when counterfeit goods are seized.
Enforcement actions are often not followed by successful prosecutions. The slow and capricious judicial system keeps most IP owners from pursuing cases in court. IP infringement is not considered a major crime in the Philippines and takes a lower priority in court proceedings, especially as the courts become more crowded out with criminal cases deemed more serious, which receive higher priority. Many IP owners opt for out-of-court settlements (such as ADR) rather than filing a lawsuit that may take years to resolve in the unpredictable Philippine courts.
The IPOPHL has jurisdiction to resolve certain disputes concerning alleged infringement and licensing through its Arbitration and Mediation Center.
The Philippines welcomes the entry of foreign portfolio investments, including local and foreign-issued equities listed on the Philippine Stock Exchange (PSE). Investments in certain publicly listed companies are subject to foreign ownership restrictions specified in the Constitution and other laws. Non-residents are allowed to issue bonds/notes or similar instruments in the domestic market with prior approval from the Central Bank; in certain cases, they may also obtain financing in Philippine pesos from authorized agent banks without prior Central Bank approval.
Although growing, the PSE (with 271 listed firms as of end-2020) lags behind many of its neighbors in size, product offerings, and trading activity. Efforts are underway to deepen the equity market, including introduction of new instruments (e.g., real investment trusts) and plans to amend listing rules for small and medium enterprises (SME). The securities market is growing, and while it remains dominated by government bills and bonds, corporate issuances continue to expand due to the favorable interest rate environment and recent regulatory reforms. Hostile takeovers are uncommon because most companies’ shares are not publicly listed and controlling interest tends to remain with a small group of parties. Cross-ownership and interlocking directorates among listed companies also decrease the likelihood of hostile takeovers.
The Bangko Sentral ng Pilipinas (BSP/Central Bank) does not restrict payments and transfers for current international transactions in accordance to the country’s acceptance of International Monetary Fund Article VIII obligations of September 1995. Purchase of foreign currencies for trade and non-trade obligations and/or remittances requires submission of a foreign exchange purchase application form if the foreign exchange is sourced from banks and/or their subsidiary/affiliate foreign exchange corporations falls within specified thresholds (currently USD 500,000 for individuals and USD 1 million for corporates/other entities). Purchases above the thresholds are also subject to the submission of minimum documentary requirements but do not require prior Central Bank approval. Meanwhile, a person may freely bring in or carryout foreign currencies up to USD 10,000; more than this threshold requires submission of a foreign currency declaration form.
Credit is generally granted on market terms and foreign investors are able to obtain credit from the liquid domestic market. However, some laws require financial institutions to set aside loans for preferred sectors such as agriculture, agrarian reform, and MSMEs. Notwithstanding, bank loans to these sectors remain constrained; for example, lending to MSMEs only amount to 5.9 percent of the total banking system loans despite comprising 99 percent of domestic firms. The government has implemented measures to promote lending to preferred sectors at competitive rates, including the establishment of a centralized credit information system and enactment of the 2018 Personal Property Security Law allowing the use of non-traditional collaterals (e.g., movable assets like machinery and equipment and inventories). The government also established the Philippine Guarantee Corporation in 2018 to expand development financing by extending credit guarantees to priority sectors, including MSMEs.
Money and Banking System
The Bangko Sentral ng Pilipinas (BSP/Central Bank) is a highly respected institution that oversees a stable banking system. The Central Bank has pursued regulatory reforms promoting good governance and aligning risk management regulations with international standards. Capital adequacy ratios are well above the eight percent international standard and the Central Bank’s 10 percent regulatory requirement. The non-performing loan ratio was at 3.7 percent as of end-2020, and there is ample liquidity in the system, with the liquid assets-to-deposits ratio estimated at about 53 percent. Commercial banks constitute more than 93 percent of the total assets of the Philippine banking industry. As of September 2020, the five largest commercial banks represented 60 percent of the total resources of the commercial banking sector. The banking system was liberalized in 2014, allowing the full control of domestic lenders by non-residents and lifting the limits to the number of foreign banks that can operate in the country, subject to central bank prudential regulations. Twenty-six of the 46 commercial banks operating in the country are foreign branches and subsidiaries, including three U.S. banks (Citibank, Bank of America, and JP Morgan Chase). Citibank has the largest presence among the foreign bank branches and currently ranks 12th overall in terms of assets. Despite the adequate number of operational banks, 31 percent of cities and municipalities in the Philippines were still without banking presence as of end-2019 and 4.6 percent were without any financial access point. The level of bank account penetration – the percentage of adults with a formal transaction account – stands at 34.5 percent, nearly halfway to the central bank goal of 70 percent by 2023.
Foreign residents and non-residents may open foreign and local currency bank accounts. Although non-residents may open local currency deposit accounts, they are limited to the funding sources specified under Central Bank regulations. Should non-residents decide to convert to foreign currency their local deposits, sales of foreign currencies are limited up to the local currency balance. Non-residents’ foreign currency accounts cannot be funded from foreign exchange purchases from banks and banks’ subsidiary/affiliate foreign exchange corporations.
Foreign Exchange and Remittances
The Bangko Sentral ng Pilipinas (Central Bank) has actively pursued reforms since the 1990s to liberalize and simplify foreign exchange regulations. As a general rule, the Central Bank allows residents and non-residents to purchase foreign exchange from banks, banks’ subsidiary/affiliate foreign exchange corporations, and other non-bank entities operating as foreign exchange dealers and/or money changers and remittance agents to fund legitimate foreign exchange obligations, subject to provision of information and/or supporting documents on underlying obligations. No mandatory foreign exchange surrender requirement is imposed on exporters, overseas workers’ incomes, or other foreign currency earners; these foreign exchange receipts may be sold for pesos or retained in foreign exchange in local and/or offshore accounts. The Central Bank follows a market-determined exchange rate policy, with scope for intervention to smooth excessive foreign exchange volatility.
Foreign exchange policies do not require approval of inward foreign direct and portfolio investments unless the investor will purchase foreign currency from banks to convert its local currency proceeds or earnings for repatriation or remittance. Registration of foreign investments with the Central Bank or custodian banks is generally optional. Duly registered foreign investments are entitled to full and immediate repatriation of capital and remittance of dividends, profits, and earnings. The Central Bank particularly requires foreign exchange for divestment purposes to be directly remitted to the account of non-resident investor on the date of purchase, with limited exemptions. To repatriate capital from investments that did not fully materialize, non-resident investors can exchange excess local currencies provided at least 50 percent of inwardly remitted foreign exchange have been invested onshore, except for certain conditions.
As a general policy, government-guaranteed private sector foreign loans/borrowings (including those in the form of notes, bonds, and similar instruments) require prior Central Bank approval. Although there are exceptions, private sector loan agreements should also be registered with the Central Bank if serviced through the purchase of foreign exchange from the banking system.
The Philippines strengthened its Anti-Money Laundering Act (AMLA) on January 29, 2021. The amended law expands covered entities and empowers the Anti-Terrorism Council to designate covered persons.
Sovereign Wealth Funds
The Philippines does not presently have sovereign wealth funds.
7. State-Owned Enterprises
State-owned enterprises, known in the Philippines as government-owned and controlled corporations (GOCC), are predominantly in the finance, power, transport, infrastructure, communications, land and water resources, social services, housing, and support services sectors. There were 133 operational and functioning GOCCs as of end-2020; a list is available on the Governance Commission for GOCC [GCG] website (https://gcg.gov.ph). The government corporate sector has a combined asset of USD 300 billion and liability of USD 210 billion (or net assets/equity worth about USD 9 billion) as of end-2019. Its total income increased by 3.3 percent to USD 33 billion during the year, while total expense rose by 0.6 percent to USD 24 billion; these result in a profit of USD 9 billion. GOCCs are required to remit at least 50 percent of their annual net earnings (e.g., cash, stock, or property dividends) to the national government.
Private and state-owned enterprises generally compete equally. The Government Service Insurance System (GSIS) is the only agency, with limited exceptions, allowed to provide coverage for the government’s insurance risks and interests, including those in build-operate-transfer (BOT) projects and privatized government corporations. Since the national government acts as the main guarantor of loans, stakeholders report GOCCs often have an advantage in obtaining financing from government financial institutions and private banks. Most GOCCs are not statutorily independent, thus could potentially be subject to political interference.
OECD Guidelines on Corporate Governance of SOEs
The Philippines is not an OECD member country. The 2011 GOCC Governance Act addresses problems experienced by GOCCs, including poor financial performance, weak governance structures, and unauthorized allowances. The law allows unrestricted access to GOCC account books and requires strict compliance with accounting and financial disclosure standards; establishes the power to privatize, abolish, or restructure GOCCs without legislative action; and sets performance standards and limits on compensation and allowances. The GCG formulates and implements GOCC policies. GOCC board members are limited to one-year term and subject to reappointment based on a performance rating set by GCG, with final approval by the Philippine President.
The Philippine Government’s privatization program is managed by the Privatization Management Office (PMO) under the Department of Finance (DOF). The privatization of government assets undergoes a public bidding process. Apart from restrictions stipulated in FINL, no regulations discriminate against foreign buyers and the bidding process appears to be transparent. Additional information is available on the PMO website (http://www.pmo.gov.ph/index.htm).
8. Responsible Business Conduct
Responsible Business Conduct (RBC) is regularly practiced in the Philippines, although no domestic laws require it. The Philippine Tax Code provides RBC-related incentives to corporations, such as tax exemptions and deductions. Various non-government organizations and business associations also promote RBC. The Philippine Business for Social Progress (PBSP) is the largest corporate-led social development foundation involved in advocating corporate citizenship practice in the Philippines. U.S. companies report strong and favorable responses to RBC programs among employees and within local communities.
OECD Guidelines for Multinational Enterprises
The Philippines is not an OECD member country. The Philippine government strongly supports RBC practices among the business community but has not yet endorsed the OECD Guidelines for Multinational Enterprises to stakeholders.
Corruption is a pervasive and long-standing problem in both the public and private sectors. The country’s ranking in Transparency International’s Corruption Perceptions Index declined to the 115th spot (out of 180), its worst score in eight years. Philippine efforts to control corruption appears stagnant since 2012. The ranking was also dragged by the government’s poor response to COVID-19, having been characterized as abusive enforcement of and major violations of human rights and media freedom, according to Transparency International. Various organizations, including the World Economic Forum, have cited corruption among the top problematic factors for doing business in the Philippines. The Bureau of Customs is still considered to be one of the most corrupt agencies in the country.
The Philippine Development Plan 2017-2022 outlines strategies to reduce corruption by streamlining government transactions, modernizing regulatory processes, and establishing mechanisms for citizens to report complaints. A front line desk in the Office of the President, the Presidential Complaint Center, or PCC (https://op-proper.gov.ph/contact-us/), receives and acts on corruption complaints from the general public. The PCC can be reached through its complaint hotline, text services (SMS), and social media sites.
The Philippine Revised Penal Code, the Anti-Graft and Corrupt Practices Act, and the Code of Ethical Conduct for Public Officials all aim to combat corruption and related anti-competitive business practices. The Office of the Ombudsman investigates and prosecutes cases of alleged graft and corruption involving public officials, with more information available on its website. Cases against high-ranking officials are brought before a special anti-corruption court, the Sandiganbayan, while cases against low-ranking officials are filed before regional trial courts.
The Office of the President can directly investigate and hear administrative cases involving presidential appointees in the executive branch and government-owned and controlled corporations. Soliciting, accepting, and/or offering/giving a bribe are criminal offenses punishable by imprisonment, a fine, and/or disqualification from public office or business dealings with the government. Government anti-corruption agencies routinely investigate public officials, but convictions by courts are limited, often appealed, and can be overturned. Recent positive steps include the creation of an investors’ desk at the Ombudsman’s Office, and corporate governance reforms of the Securities and Exchange Commission.
UN Anticorruption Convention, OECD Convention on Combatting Bribery
The Philippines ratified the United Nations Convention against Corruption in 2003. It is not a signatory to the OECD Convention on Combating Bribery.
Resources to Report Corruption
Contact at government agency or agencies are responsible for combating corruption:
Office of the Ombudsman
Ombudsman Building, Agham Road, North Triangle
Diliman, Quezon City
Hotline: (+632) 8926.2662
Telephone: (+632) 8479.7300
Email/Website: firstname.lastname@example.org / http://www.ombudsman.gov.ph/
Terrorist groups and criminal gangs operate around the country. The Department of State publishes a consular information sheet and advises all Americans living in or visiting the Philippines to review the information periodically. A travel advisory is in place for those U.S. citizens contemplating travel to the Philippines.
Terrorist groups, including the ISIS-Philippines affiliated Abu Sayyaf Group (ASG), the Maute Group, Ansar al-Khalifa Philippines (AKP) and elements of the Bangsamoro Islamic Freedom Fighters (BIFF), periodically attack civilian targets, kidnap civilians – including foreigners – for ransom, and engage in armed attacks against government security forces. These groups have mostly carried out their activities in the western and central regions of Mindanao, including the Sulu Archipelago and Sulu Sea. Groups affiliated with ISIS-Philippines continued efforts to recover from battlefield losses, recruiting and training new members, and staging suicide bombings and attacks with improvised explosive devices (IEDs) and small arms that targeted security forces and civilians.
In 2017, ISIS-affiliated groups in Mindanao occupied and held siege to Marawi City for five months, prompting President Duterte to declare martial law over the entire Mindanao region – approximately one-third of the country’s territory. After granting multiple extensions of over two and a half years, Congress, with support from the government, allowed martial law to lapse on December 31, 2019. In expressing its support for the decision, the military cited improvement in the security climate in Mindanao, but also noted that Proclamation 55, a national state of emergency declaration, remained in effect and would be used as necessary.
The Philippines’ most significant human rights problems were killings allegedly undertaken by vigilantes, security forces, and insurgents; cases of apparent governmental disregard for human rights and due process; official corruption; shrinking civic spaces; and a weak and overburdened criminal justice system notable for slow court procedures, weak prosecutions, and poor cooperation between police and investigators. In 2020, the Philippines has seen a number of arrests and killings of human rights defenders and members of the media.
President Duterte’s administration continued its nationwide campaign against illegal drugs, led primarily by the Philippine National Police (PNP) and the Philippine Drug Enforcement Agency (PDEA), which continues to receive worldwide attention for its harsh tactics. In 2020, the government also renewed focus on anti-terrorism with a particular emphasis against communist insurgents. In addition to Philippine military and police actions against the insurgents, the Philippine government also pressured a number of political groups and activists – accusing them of links to the NPA, often without evidence. The Anti-Terrorism Act of 2020, signed into law on July 3, intends to prevent, prohibit, and penalize terrorism in the country, although critics question whether law enforcement and prosecutors might be able to use the law to punish political opponents and endanger human rights.
11. Labor Policies and Practices
Managers of U.S. companies in the Philippines report that local labor costs are relatively low and workers are highly motivated, with generally strong English language skills. As of October 2020, the Philippine labor force reached 44 million workers, with an employment rate of 91.3 percent and an unemployment rate of 8.7 percent. These figures include employment in the informal sector and do not capture the substantial rates of underemployment in the country. Youths between the ages of 15 and 24 made up over 19 percent of the unemployed. More than half of all employment was in the services sector, with 57.2 percent. Agriculture and industry sectors constitute 24.5 percent and 18.3 percent, respectively.
Compensation packages in the Philippines tend to be comparable with those in neighboring countries. Regional Wage and Productivity Boards meet periodically in each of the country’s 16 administrative regions to determine minimum wages. The non-agricultural daily minimum wage in Metro Manila is approximately USD 10, although some private sector workers receive less. Most regions set their minimum wage significantly lower than Metro Manila. Violation of minimum wage standards is common, especially non-payment of social security contributions, bonuses, and overtime. Philippine law also provides for a comprehensive set of occupational safety and health standards. The Department of Labor and Employment (DOLE) has responsibility for safety inspection, but a shortage of inspectors has made enforcement difficult.
The Philippines Constitution enshrines the right of workers to form and join trade unions. The trend among firms using temporary contract labor to lower employment costs continues despite government efforts to regulate the practice. The DOLE Secretary has the authority to end strikes and mandate a settlement between parties in cases involving national interest. DOLE amended its rules concerning disputes in 2013, specifying industries vital to national interest: hospitals, the electric power industry, water supply services (excluding small bottle suppliers), air traffic control, and other industries as recommended by the National Tripartite Industrial Peace Council (NTIPC). Economic zones often offer on-site labor centers to assist investors with recruitment. Although labor laws apply equally to economic zones, unions have noted some difficulty organizing inside the zones.
The Philippines is signatory to all International Labor Organization (ILO) core conventions but has faced challenges with enforcement. Unions allege that companies or local officials use illegal tactics to prevent workers from organizing. The quasi-judicial National Labor Relations Commission reviews allegations of intimidation and discrimination in connection with union activities. Meanwhile, the NTIPC monitors the application of international labor standards.
Reports of forced labor in the Philippines continue, particularly in connection with human trafficking in the commercial sex, domestic service, agriculture, and fishing industries, as well as online sexual exploitation of children.
12. U.S. International Development Finance Corporation (DFC) and Other Investment Insurance and Development Finance Programs
The U.S. International Development Finance Corp. (DFC) provides debt financing, partial credit guarantees, political risk insurance, grants, equity investment, and private equity capital to support U.S. investors and their investments. It does so under a bilateral agreement with the Philippines. DFC can provide debt financing, in the form of direct loans and loan guarantees, of up to USD 1 billion per project for business investments, preferably with U.S. private sector participation, covering sectors as diverse as tourism, transportation, manufacturing, franchising, power, infrastructure, and others. DFC political risk insurance for currency inconvertibility, expropriation, and political violence for U.S. and other investments including equity, loans and loan guarantees, technical assistance, leases, and consigned inventory or equipment is also available for business investments in the Philippines. Grants are available for projects that are already reasonably developed but need additional, limited funding and specific work – for example technical, environment and social, or legal – in order to be bankable and eligible for DFC financing or insurance. In all cases, DFC support is available only where sufficient or appropriate investment support is unavailable from local or other private sector financial institutions. In addition, DFC supports fifteen private equity funds that are eligible to invest in projects within the Philippines.
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
Host Country Gross Domestic Product (GDP) ($B USD)
Direct Investment from/in Counterpart Economy Data, as of end-2019
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment
Outward Direct Investment
“0” reflects amounts rounded to +/- USD 500,000.
The Philippine Central Bank does not publish or post inward and outward FDI stock broken down by country. Total stock figures are reported under the “International Investment Position” data that the Central Bank publishes and submits to the International Monetary Fund’s Dissemination Standards Bulletin Board (DSBB). As of the third quarter of 2020, inward direct investment (i.e. liabilities) is USD 95 billion, while outward direct investment (i.e., assets) is USD 61 billion.
Table 4: Sources of Portfolio Investment
Portfolio Investment Assets, as of end-2019
Top Five Partners (Millions, current US Dollars)
Total Debt Securities
British Virgin Islands
The Philippine Central Bank disaggregates data into equity and debt securities but does not publish or post the stock of portfolio investments assets broken down by country. Total foreign portfolio investment stock figures are reported under the “International Investment Position” data that Central Bank publishes and submits to the International Monetary Fund’s Dissemination Standards Bulletin Board (DSBB). As of third quarter 2020, outward portfolio investment (i.e., assets) was USD 30.9 billion, of which USD 3.9 billion was in equity investments and USD 27 billion was in debt securities.
Portugal’s economic recovery and pro-business policies increased market attractiveness in 2019, a positive year before the country was hard-hit by the COVID-19 pandemic in 2020. The country’s notable recovery since concluding an EU/IMF bailout adjustment program in 2014 culminated in a first-ever budget surplus in 2019. Portugal recovered its investment-grade sovereign bond ratings and now enjoys record-low financing costs. While the country continues to hold strong potential for U.S. investors, the Covid-19 pandemic has had a serious impact on the economy.
The Portuguese economy contracted by 7.6% in 2020, the most severe yearly drop since 1928. The pandemic also increased the already problematic public debt by over €20 billion to 133.7% of GDP in 2020, from 117.7% in 2019. As of early 2021, the government predicted a budget deficit of 7.3% in 2020 and 4.3% in 2021. However, the government was able to contain a significant rise in unemployment, which at 6.8% in 2020, was higher than the 2019 figure of 6.5%, but was well below the government’s October forecast of 8.7%, as the labor market showed resilience during the first year of the pandemic. However, in January 2021, the government imposed a second lockdown to counter spiking COVID-19 numbers that continued to impact the tourism, hospitality, and retail sectors. The depth of the pandemic’s impact on the banking and tourism sectors will depend largely on the length of global travel restrictions and retail closures.
Portugal will have a once-in-a-generation chance to boost its economic recovery, using around €14 billion in European Union (EU) grants expected to flow to state coffers between 2021 and 2026, to support its Recovery and Resilience Plan. The government is expected to allocate the funds in support of energy and digital transitions.
Before the pandemic, the services sector, particularly Portugal’s tourism industry, served as an engine of economic recovery, while textiles, footwear, and agriculture moved up the value chain and became more export-oriented over the last decade. The auto sector, together with heavy industry, technology, agriculture, construction, and energy remain influential clusters.
The banking sector faced considerable challenges in recent years, including the costly central bank-led bailing out of Banco Espírito Santo in 2014 and Banif in 2015 from the global financial crisis. Even so, banks regained momentum since, restructuring and strengthening capital structures to address the lingering stock of non-performing loans. They are now in the frontline of the Covid-19 economic shock, supporting pandemic-related credit lines and debt moratoria programs initiated by the government. While banks entered the pandemic in a relatively strong position, investors are particularly attentive to the potential aftershocks related to the end of the extraordinary bank credit moratorium introduced to temporarily shield borrowers. Portugal’s economy is fully integrated in the European Union. Portugal’s primary trading partners are Spain, France, Germany, the United Kingdom, and the United States.
Beyond Europe, Portugal maintains significant links with former colonies including Brazil, Angola, Mozambique, Cape Verde, and Guinea-Bissau.
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment
The government of Portugal recognizes the importance of foreign investment and sees it as a driver of economic growth, with an overall positive attitude towards foreign direct investment (FDI). Portuguese law is based on a principle of non-discrimination, meaning foreign and domestic investors are subject to the same rules. Foreign investment is not subject to any special registration or notification to any authority, with exceptions for a few specific activities.
The Portuguese Agency for Foreign Investment and Commerce (AICEP) is the lead for promotion of trade and investment. AICEP is responsible for attracting FDI, global promotion of Portuguese brands, and export of goods and services. It is the primary point of contact for investors with projects over € 25 million or companies with a consolidated turnover of more than € 75 million. For foreign investments not meeting these thresholds, AICEP will make a preliminary analysis and direct the investor to assistance agencies such as the Institute of Support to Small- and Medium- Sized Enterprises and Innovation (IAPMEI), a public agency within the Ministry of Economy that provides technical support, or to AICEP Capital Global, which offers technology transfer, incubator programs, and venture capital support. AICEP does not favor specific sectors for investment promotion. It does, however, provide a “Prominent Clusters” guide on itswebsite, where it advocates investment in Portuguese companies by sector. Additionally, Portugal has introduced the website Simplex, designed to help navigate starting a business.
The Portuguese government maintains regular contact with investors through the Confederation of Portuguese Business (CIP), the Portuguese Commerce and Services Confederation (CCP), the Portuguese Chamber of Commerce and Industry (CCIP), among other industry associations.
Limits on Foreign Control and Right to Private Ownership and Establishment
There are no legal restrictions in Portugal on foreign investment. To establish a new business, foreign investors must follow the same rules as domestic investors, including mandatory registration and compliance with regulatory obligations for specific activities. There are no nationality requirements and no limitations on the repatriation of profits or dividends.
Non-resident shareholders must obtain a Portuguese taxpayer number for tax purposes. EU residents may obtain this number directly with the tax administration (in person or by means of an appointed proxy); non-EU residents must appoint a Portuguese resident representative to handle matters with tax authorities.
Portugal enacted a national security investment review framework in 2014, which gave the Council of Ministers authority to block specific foreign investment transactions that would compromise national security. Reviews can be triggered on national security grounds in strategic industries like energy, transportation, and communication. Investment reviews can be conducted in cases where the purchaser acquiring control is an individual or entity not registered in an EU member state. In such instances, the review process is overseen by the applicable Portuguese ministry according to the assets in question. Portugal has yet to activate its investment screening mechanism.
Portuguese government approval is required in the following sensitive sectors: defense, water management, public telecommunications, railways, maritime transportation, and air transport. Any economic activity that involves the exercise of public authority also requires government approval; private sector companies can operate in these areas only through a concession contract.
Portugal additionally limits foreign investment with respect to the production, transmission, and distribution of electricity, the production of gas, the pipeline transportation of fuels, wholesale services of electricity, retailing services of electricity and non-bottled gas, and services incidental to electricity and natural gas distribution. Concessions in the electricity and gas sectors are assigned only to companies with headquarters and effective management in Portugal.
Investors wishing to establish new credit institutions or finance companies, acquire a controlling interest in such financial firms, and/or establish a subsidiary must have authorization from the Bank of Portugal (for EU firms) or the Ministry of Finance (for non-EU firms). Non-EU insurance companies seeking to establish an agency in Portugal must post a special deposit and financial guarantee and must have been authorized for such activity by the Ministry of Finance for at least five years.
Other Investment Policy Reviews
To combat the perception of a cumbersome regulatory environment, the government has created a ‘cutting red tape’ the website Simplex (simplex.gov.pt) that details measures taken since 2005 to reduce bureaucracy, and the Empresa na Hora (“Business in an Hour”) program that facilitates company incorporation by citizens and non-citizens in less than 60 minutes. More information is available atEmpresa na Hora.
In 2007, the government established AICEP, a promotion agency for investment and foreign trade that also manages industrial parks and provides business location solutions for investors through its subsidiary AICEP Global Parques.
Established in 2012, Portugal’s “Golden Visa” program gives fast-track residence permits to foreign investors meeting certain conditions, including making capital transfers, job creation or real estate acquisitions. As of 2021, the government is planning to introduce changes to the “Golden Visa” program that includes restricting the purchase of real estate to regions in the interior, in the Azores and Madeira, a package of measures expected to kick-in in 2022. Between 2012 and 2020, Portugal issued 9,444 ‘Golden Visas’, representing €5.67 billion of investment, of which €5.1 billion went into real estate. Chinese nationals dominate the ‘Golden Visa’ issuance, with 5,672, followed by Brazilian nationals, with 994. Other measures implemented to help attract foreign investment include the easing of some labor regulations to increase workplace flexibility and EU-funded programs.
Portuguese citizens can alternatively register a business online through the “Citizen’s Portal” available at Portal do Cidadão. Companies must also register with the Directorate General for Economic Activity (DGAE), the Tax Authority (AT), and with the Social Security administration. The government’s standard for online business registration is a two to three day turnaround but the online registration process can take as little as one day.
Portugal defines an enterprise as micro-, small-, and medium-sized based on its headcount, annual turnover, or the size of its balance sheet. To qualify as a micro-enterprise, a company must have fewer than 10 employees and no more than €2 million in revenues or €2 million in assets. Small enterprises must have fewer than 50 employees and no more than €10 million in revenues or €10 million in assets. Medium-sized enterprises must have fewer than 250 employees and no more than €50 million in revenues or €43 million in assets. The Small- and Medium-Sized Enterprise (SME) Support Institute (IAPMEI) offers financing, training, and other services for SMEs based in Portugal.
More information on laws, procedures, registration requirements, and investment incentives for foreign investors in Portugal is available at AICEP’s website.
The Portuguese government does not restrict domestic investors from investing abroad. On the contrary, it promotes outward investment through AICEP’s customer managers, export stores and its external commercial network that, in cooperation with the diplomatic and consular network, are operating in about 80 markets. AICEP provides support and advisory services on the best way of approaching foreign markets, identifying international business opportunities for Portuguese companies, particularly SMEs.
3. Legal Regime
Transparency of the Regulatory System
The government of Portugal employs transparent policies and effective laws to foster competition, and the legal system welcomes FDI on a non-discriminatory basis, establishing clear rules of the game. Legal, regulatory, and accounting systems are consistent with international norms. Public finances and debt obligations are transparent, with data regularly published by the Bank of Portugal, the IGCP debt management agency, and the Ministry of Finance. Regulations drafted by ministries or agencies must be approved by Parliament and, in some cases, by European authorities. All proposed regulations are subject to a 20 to 30 day public consultation period during which the proposed measure is published on the relevant ministry or regulator’s website. Only after ministries or regulatory agencies have conducted an impact assessment of the proposed regulation can the text be enacted and published. The process can be monitored and consulted at the official websites ofParliamentand of the Official Portuguese Republic Journal. Ministries or regulatory agencies report the results of the consultations through a consolidated response published on the website of the relevant ministry or regulator.
Rule-making and regulatory authorities exist across sectors including energy, telecommunications, securities markets, financial, and health. Regulations are enforced at the local level through district courts, on the national level through the Court of Auditors, and at the supra-national level through EU mechanisms including the European Court of Justice, the European Commission, and the European Central Bank. The OECD, theEuropean Commission, and the IMF also publish key regulatory actions and analysis. UTAO, the Parliamentary Technical Budget Support Unit, is a nonpartisan body composed of economic and legal experts that support parliamentary budget deliberations by providing the Budget Committee with quality analytical reports on the executive’s budget proposals. In addition, the Portuguese Public Finance Council conducts an independent assessment of the consistency, compliance with stated objectives, and sustainability of public finances, while promoting fiscal transparency.
The legal, regulatory, and accounting systems are transparent and consistent with international norms. Since 2005, all listed companies must comply with International Financial Reporting Standards as adopted by the European Union (“IFRS”), which closely parallels the U.S. GAAP-Generally Accepted Accounting Principles. Portugal’s Competition Authority enforces adherence to domestic competition and public procurement rules. The European Commission further ensures adhesion to EU administrative processes among its member states.
Public finances are generally deemed transparent, closely scrutinized by Eurostat and monitored by an independent technical budget support unit, UTAO, and the Supreme Audit Institution ‘Tribunal de Contas.’ Over the last decades, Portugal has also consolidated within the State accounts many state-owned enterprises, making budget analysis more accurate.
International Regulatory Considerations
Portugal has been a member of the EU since 1986, a member of the Schengen area since 1995, and joined the Eurozone in 1999. With the Treaty of Lisbon’s entry into force in 2009, trade policy and rules on foreign direct investment became exclusive EU competencies, as part of the bloc’s common commercial policy. The European Central Bank is the central bank for the euro and determines monetary policy for the 19 Eurozone member states, including Portugal. Portugal complies with EU directives regarding equal treatment of foreign and domestic investors. Portugal has been a member of the World Trade Organization since 1995.
Legal System and Judicial Independence
The Portuguese legal system is a civil law system, based on Roman law. The hierarchy among various sources of law is as follows: (i) Constitutional laws and amendments; (ii) the rules and principles of general or common international law and international agreements; (iii) ordinary laws enacted by Parliament; (iv) instruments having an effective equivalent to that of laws, including approved international conventions or decisions of the Constitutional Court; and (v) regulations used to supplement and implement laws. The country’s Commercial Company Law and Civil Code define Portugal’s legal treatment of corporations and contracts. Portugal has a Supreme Court and specialized family courts, labor courts, commercial courts, maritime courts, intellectual property courts, and competition courts. Regulations or enforcement actions are appealable, and are adjudicated in national Appellate Courts, with the possibility to appeal to the European Court of Justice. The judicial system is independent of the executive branch and the judicial process procedurally competent, fair, and reliable. Regulations and enforcement actions are appealable.
Laws and Regulations on Foreign Direct Investment
The Bank of Portugal defines FDI as “an act or contract that obtains or increases enduring economic links with an existing Portuguese institution or one to be formed.” A non-resident who invests in at least 10 percent of a resident company’s equity and participates in the company’s decision-making is considered a foreign direct investor. Current information on laws, procedures, registration requirements, and investment incentives for foreign investors in Portugal is available at AICEP’s website.
Competition and Antitrust Laws
The domestic agency that reviews transactions for competition-related concerns is the Portuguese Competition Authority and the international agency is the European Commission’s Directorate General for Competition. Portuguese law specifically prohibits collusion between companies to fix prices, limit supplies, share markets or sources of supply, discriminate in transactions, or force unrelated obligations on other parties. Similar prohibitions apply to any company or group with a dominant market position. The law also requires prior government notification of mergers or acquisitions that would give a company more than 30 percent market share in a sector, or mergers or acquisitions among entities that had total sales in excess of €150 million during the preceding financial year. The Competition Authority has 60 days to determine if the merger or acquisition can proceed. The European Commission may claim authority on cross-border competition issues or those involving entities large enough to have a significant EU market share.
Expropriation and Compensation
Under Portugal’s Expropriation Code, the government may expropriate property and its associated rights if it is deemed to support the public interest, and upon payment of prompt, adequate, and effective compensation. The code outlines criteria for calculating fair compensation based on market values. The decision to expropriate as well as the fairness of compensation can be challenged in national courts.
On July 2, 2020, the government of Portugal nationalized a 71.7% stake in energy company Efacec, controlled by Angola’s Isabel dos Santos, given its strategic importance for the economy, in a move aimed at ending legal uncertainty and facilitating the sale of her shares. The government is currently seeking investors interested in reprivatizing the company.
ICSID Convention and New York Convention
Portugal has been a member of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention – also known as the Washington Convention) since 1965. Portugal has been a party to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards since January 1995. Portugal’s national arbitration law No. 63-2011 of December 14, 2011 enforces awards under the 1958 New York Convention and the ICSID Convention.
Investor-State Dispute Settlement
Portugal has ratified the 1927 Geneva Convention on the Execution of Foreign Arbitral Awards, and in 2002 ratified the 1975 Inter-American Convention on International Commercial Arbitration.
Portugal’s Voluntary Arbitration Law, enacted in 2011, is based on the UNCITRAL Model Law, and applies to all arbitration proceedings in Portugal. The leading commercial arbitration institution is theArbitration Center of the Portuguese Chamber of Commerce and Industry.
The government promotes non-judicial dispute resolution through the Ministry of Justice’s Office for Alternative Dispute Resolution (GRAL), including conciliation, mediation or arbitration. Portuguese courts recognize and enforce foreign arbitral awards issued against the government. There have been no recent extrajudicial actions against foreign investors.
International Commercial Arbitration and Foreign Courts
Arbitration is the preferred alternative dispute resolution mechanism in Portugal. The country has a long-standing tradition of arbitration in administrative and contract disputes. It has also become the standard mechanism for resolving tax disputes between private citizens or companies and tax authorities, as well as in pharmaceutical patent disputes.
Portugal has four domestic arbitration bodies: 1) The Arbitration Center of the Portuguese Chamber of Commerce and Industry (CAC); 2) CONCORDIA (Centro de Conciliacao, Mediacao, de Conflictos de Arbritragem); 3) Arbitrare (Centro de Arbitragem para a Propriedade Industrial, Nomes de Dominio, Firmas e Denominacoes); and 4) the Instituto de Arbitragem Commercial do Porto. Each arbitration body has its own regulations, but all comply with the Portuguese Arbitration Law 63/11, which came into force in March 2012. The Arbitration Council of the Centre for Commercial Arbitration also follows New York Convention, Washington Convention, and Panama Convention guidelines. Arbitration Law 63/11 follows the standard established by the UNCITRAL Model Law, but is not an exact copy of that text.
Under the Portuguese Constitution, the Civil Code of Procedure (CCP) and the New York Convention, applied in Portugal since 1995, awards rendered in a foreign country must be recognized by the Portuguese courts before they can be enforced in Portugal. There is no legal authority in Portugal on the enforceability of foreign awards set aside at the seat of the arbitration. The CCP sets forth the legal regime applicable to all judicial procedures related to arbitration, including appointment of arbitrators, determination of arbitrators’ fees, challenge of arbitrators, appeal (where admissible), setting aside, enforcement (and opposition to enforcement) and recognition of foreign arbitral awards.
While Portugal’s judicial system has historically been considered relatively slow and inefficient, the country has taken several important steps, including simplifying land registry procedures and increasing the portfolio of online services.
Portugal’s Insolvency and Corporate Recovery Code defines insolvency as a debtor’s inability to meet his commitments as they fall due. Corporations are also considered insolvent when their liabilities clearly exceed their assets. A debtor, creditor or any person responsible for the debtor’s liabilities can initiate insolvency proceedings in a commercial court. The court assumes the key role of ensuring compliance with legal rules governing insolvency proceedings, with particular responsibility for ruling on the legality of insolvency and payment plans approved by creditors. After declaration of insolvency, creditors may submit their claims to the court-appointed insolvency administrator for a specific term set for this purpose, typically up to 30 days. Creditors must submit details regarding the amount, maturity, guarantees, and nature of their claims. Claims are ranked as follows: (i) claims over the insolvent’s estate, i.e. court fees related to insolvency proceedings; (ii) secured claims; (iii) privileged claims; (iv) common, unsecured claims; and (v) subordinated claims, including those of shareholders. Portugal ranks highly – 15th of 190 countries – in the World Bank’s Doing Business Index “Resolving Insolvency” measure.
4. Industrial Policies
The Portuguese government offers investment incentives that can be tailored to individual investors’ needs and capital, based on industry, investment size, and project sustainability, including grants, tax credits and deferrals, access to loans, and reduced cost of land. Investment agency AICEP actively recruits investors across the globe, intermediating the terms on a case-by-case basis for the larger investments. The Autonomous Regions of Madeiraand the Azores also offer investment incentives. Since Portugal is an EU Member, potential investors may be able to access European funds providing further incentives. Such support has been used by Portugal to co-finance key investments in the areas of research and development, information and communications technology, transport, water, solid waste, energy efficiency and renewable energy, urban regeneration, health, education, and culture.
In 2020, Portugal merged ‘PME Investmentos’ and the ‘Instituição Financeira de Desenvolvimento’ (IFD) into the creation of the Banco Português de Fomento. The IFD is a national promotion bank tasked with providing credit to companies, managing State-guarantee schemes and supporting companies by helping them strengthen their capital structure, exports, and internationalization. It manages a €200 million co-investment fund. Through Portugal Ventures, a state-financed private equity company, the government has a risk capital arm that finances the growth of the Portuguese entrepreneurship ecosystem. This entity is part of the public business sector, operating under the same terms and conditions that apply to private companies and subject to the general domestic and community competition rules. As a venture capital firm, its funds are under the supervision of the Portuguese Securities Market Commission, CMVM.
Foreign Trade Zones/Free Ports/Trade Facilitation
Portugal has one foreign trade zone (FTZ)/free port in the Autonomous Region of Madeira, established in 1987. Continued operation of the International Business Centre of Madeira’s corporate tax regime is authorized by EU rules on incentives granted to member states. Industrial and commercial activities, international service activities, trust and trust management companies, and offshore financial branches are all eligible. Companies established in the foreign trade zone/free port enjoy import- and export-related benefits, financial incentives, tax incentives for investors and companies.
In December 2020, the European commission said that companies on the island of Madeira illegally benefitted from tax cuts under the FTZ, as they failed to meet the key requirement of contributing to the region’s growth. Portugal was asked to reimburse funds deemed incompatible with EU state aid rules, plus interest, from companies that failed to meet the conditions, the Commission said in a statement.
Under EU rules, company profits benefitting from income tax reductions must originate exclusively from substantive activities carried out in Madeira and these companies must create and maintain jobs in Madeira, conditions the Commission is concerned Portuguese authorities may have failed to respect.
Performance and Data Localization Requirements
Portugal does not impose performance requirements or mandate specific local employment conditions for foreign investors. Qualification standards for investment incentives are applied uniformly to domestic and foreign investors. There is a high level of labor mobility between Portugal and other EU member states. To work in Portugal, non-EU foreign nationals must be sponsored for a work permit by a Portuguese employer. An investor may also obtain permission to reside and work via the ‘Golden Visa’ scheme. There are no nationality-related restrictions that affect a foreign national’s ability to serve in senior management or on a board of directors. Foreign or expatriate workers with appropriate work authorizations are entitled to the same rights and subject to the same laws as employees with Portuguese citizenship.
While Portugal does not force data localization, according to the Portuguese Data Protection Law (pursuant to the EU’s 1995 Data Protection Directive) “data controllers,” i.e., people or corporations that process personal data, must register with the National Commission for Data Protection (CNPD). Data transfers outside the EU are only allowed if the recipient country or company ensures an adequate level of protection. Portugal is subject to new rules stipulated in the EU’sGeneral Data Protection Regulation.
There are no requirements for foreign IT providers to turn over source code and/or provide access to encryption; the same rules apply to foreign IT providers as apply to national providers.
Data transfers to other countries within the EU do not require prior authorization from the CNPD. However, data transfers to countries outside the EU can only take place in compliance with the Data Protection Law, meaning the receiving state must also provide an adequate level of protection to personal data. If the receiving state does not ensure an adequate level of protection, the CNPD can authorize the transfer under specific conditions, as outlined in Act 67/98. CNPD can also authorize a transfer or a set of transfers of personal data to a receiving state that does not provide an adequate level of protection only if the controller provides adequate safeguards to protect the privacy and fundamental rights and freedoms of individuals. As a member of the EU, business entities operating in Portugal are asked to comply with the bloc’s General Data Protection Regulation (GDPR).
Generally, there are no excessively onerous visa, residence, work permit, or similar requirements inhibiting mobility of foreign investors and their employees. Portugal does not follow ‘forced localization’, the policy in which foreign investors must use domestic content in goods or technology.
5. Protection of Property Rights
Portugal reliably enforces property rights and interests. The Portuguese Constitution ensures the right to private property and grants Parliament the power to establish rules on the renting of property, the determination of property in the public domain, and the rules of land management and urban planning. The Civil Code of 1967 provides the right to absolute and full ownership, which can be restricted by mortgage, liens, or other security interests. Additional laws have established or modified rules on time-sharing, condominiums, and land registration.
Property registration can be done online at Predial Online. According to the World Bank’s 2020 Doing Business Index, the number of days to process registration stood at 10 in 2020. Portugal ranked 35 out of 190 countries in the World Bank’s 2020 ease of registering property ranking. The cost to register a property remains slightly higher than average, at 7.3 percent of the property value. Foreign investors can directly own/purchase property freehold or leasehold, to build industrial and commercial premises or can purchase through a real estate company.
If legally purchased property is unoccupied, Portuguese law allows ownership to revert to other owners, including squatters, through an adverse domain process set out in Chapter VI of the Portuguese Civil Code (CCP), Article 1287.
Intellectual Property Rights
Intellectual property rights (IPR) infringement and theft are not common in Portugal. It is fairly easy for investors to register copyrights, industrial property, patents, and designs with Portugal’s Institute of Industrial Property (INPI) and the Inspectorate-General of Cultural Activities (IGAC). Intellectual property can be registered online for a small fee. For more details, consult: https://inpi.justica.gov.pt/Servicos and https://www.igac.gov.pt/.
The Portuguese government became party to the World Trade Organization’s (WTO’s) Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) and provisions of the General Agreement on Tariffs and Trade (GATT) in 2003. Portuguese legislation for the protection of IPR has been consistent with WTO rules and EU directives since 2004. The Arbitration Centre for Industrial Property, Domain Names, and Company Names (ARBITRARE) was established in 2009 to facilitate voluntary arbitration of IPR disputes in English or Portuguese, and in 2012, the government created an IPR court with two judges. In 2019, Portugal brought into force a new industrial property package of legislation, enhancing the protection of a wide range of IPR, including patents, geographical indications, trademarks and designs. See more at https://wipolex.wipo.int/en/members/profile/PT.
Portugal is a participant in the eMAGE and eMARKS projects, which provide multilingual access to databases of trademarks and industrial designs. Portugal’s Food and Economic Security Authority (ASAE), in partnership with other national law enforcement agencies, provides statistics on seizures of counterfeit goods at: https://www.asae.gov.pt/inspecao-fiscalizacao/resultados-operacionais.aspx.
Portugal is not included in the U.S. Trade Representative’s (USTR’s) Special 301 Report or Notorious Markets List.
The Portuguese stock exchange is managed by Euronext Lisbon, part of the NYSE Euronext Group, which allows a listed company access to a global and diversified pool of investors. The Portuguese Stock Index-20 (PSI20) is Portugal’s benchmark index representing the largest (only 18, not 20, since 2018) and most liquid companies listed on the exchange. The Portuguese stock exchange offers a diverse product portfolio: shares, funds, exchange traded funds, bonds, and structured products, including warrants and futures.
The Portuguese Securities Market Commission (CMVM) supervises and regulates securities markets, and is a member of the Committee of European Securities Regulators and the International Organization of Securities Commissions. Additional information on CMVM can be found here: http://www.cmvm.pt/en/Pages/homepage.aspx.
Portugal respects IMF Article VIII by refraining from placing restrictions on payments and transfers for current international transactions. Credit is allocated on market terms, and foreign investors are eligible for local market financing. Private sector companies have access to a variety of credit instruments, including bonds.
Money and Banking System
Portugal has 148 credit institutions, of which 60 are banks. Online banking penetration stood at 60 percent in 2019. Portugal’s banking assets totaled EUR 410.4 billion at the end of June 2020. Portuguese banks’ non-performing loan portfolios remain among the largest in Europe despite improving since the global financial crisis. Total loans stood at around €200 billion, 5.5% of which constitute non-performing loans, above the Eurozone average of around 2.8% percent.
Banks’ return on equity and on assets remained was 0.9% in the first half of 2020 versus 4.9% for full-year 2019. In terms of capital buffers, the Common Equity Tier 1 ratio stabilized at 14.6% as of June 2020.
Foreign banks are allowed to establish operations in Portugal. In terms of decision-making policy, a general ‘four-eyes policy,’ with two individuals approving actions, must be in place at all banks and branches operating in the country, irrespective of whether they qualify as international subsidiaries of foreign banks or local banks. Foreign branches operating in Portugal are required to have such decision-making powers that enable them to operate in the country, but this requirement generally does not prevent them from having internal control and rules governing risk exposure and decision-making processes, as customary in international financial groups.
No restrictions exist on a foreigners’ ability to establish a bank account and both residents and non-residents may hold bank accounts in any currency. However, any transfers of EUR 10,000 or more must be declared to Portuguese customs authorities. See more at: https://www.bportugal.pt/.
Foreign Exchange and Remittances
Portugal has no exchange controls and there are no restrictions on the import or export of capital. Funds associated with any form of investment can be freely converted into any world currency.
Portugal is a member of the European Monetary Union (Eurozone) and uses the euro, a floating exchange rate currency controlled by the European Central Bank (ECB). The Bank of Portugal is the country’s central bank; the Governor of the Bank of Portugal participates on the board of the ECB.
There are no limitations on the repatriation of profits or dividends. There are no time limitations on remittances.
Sovereign Wealth Funds
The Ministry of Labor, Solidarity, and Social Security manages Portugal’s Social Security Financial Stabilization Fund (FEFSS), with total assets of around EUR 22 billion. It is not a Sovereign Wealth Fund (SWF) and does not subscribe to the voluntary code of good practices (Santiago Principles), or participate in the IMF-hosted International Working Group on SWFs. Among other restrictions, Portuguese law requires that at least 25 percent of the fund’s assets be invested in Portuguese public debt, and limits FEFSS investment in equity instruments to that of EU or OECD members. FEFSS acts as a passive investor and does not take an active role in the management of portfolio companies.
7. State-Owned Enterprises
There are currently over 40 major state-owned enterprises (SOEs) operating in Portugal in the banking, health care, transportation, water, and agriculture sectors. Portugal’s only SOE with revenues greater than one percent of GDP is the Caixa Geral de Depositos (CGD). CGD has the largest market share in customer deposits, commercial loans, mortgages, and many other banking services in the Portuguese market.
Parpublica is a government holding company for several smaller SOEs, providing audits and reports on these. More information can be found at:http://www.parpublica.pt/. The activities and accounts of Parpublica are fully disclosed in budget documents and audited annual reports. In addition, the Ministry of Finance publishes an annual report on SOEs through a specialized monitoring unit (UTAM) that presents annual performance data by company and sector: http://www.utam.pt/. In 2019, total assets were around €12 billion and the net income of Parpublica was €23.3 million.
When SOEs are wholly owned, the government appoints the board, although when SOEs are majority-owned the board of executives and non-executives nomination depends on the negotiations between government and the remaining shareholders, and in some cases on negotiations with EU authorities as well.
According to Law No. 133/2013, SOEs must compete under the same terms and conditions as private enterprises, subject to Portuguese and EU competition laws. Still, SOEs often receive preferential financing terms from private banks.
In 2008 Portugal’s Council of Ministers approved resolution no. 49/2007, which defined the Principles of Good Governance for SOEs according to OECD guidelines. The resolution requires SOEs to have a governance model that ensures the segregation of executive management and supervisory roles, to have their accounts audited by independent entities, to observe the same standards as those for companies publicly listed on stock markets, and to establish an ethics code for employees, customers, suppliers, and the public. The resolution also requires the Ministry of Finance’s Directorate General of the Treasury and Finances to publish annual reports on SOEs’ compliance with the Principles of Good Governance. Credit and equity analysts generally tend to criticize SOEs’ over-indebtedness and inefficiency, rather than any poor governance or ties to government.
Portugal launched an aggressive privatization program in 2011 as part of its EU-IMF-ECB bailout, including SOEs in the air transportation, land transportation, energy, communications, and insurance sectors. Foreign companies have been among the most successful bidders in these privatizations since the program’s inception. The bidding process was public, transparent, and non-discriminatory to foreign investors. On July 2, 2020, the government of Portugal nationalized a 71.7% stake in energy company Efacec, controlled by Angola’s Isabel dos Santos, given its strategic importance for the economy, in a move aimed at ending legal uncertainty and facilitating the sale of her shares. The government is currently seeking investors interested in reprivatizing the company.
In July 2020, the Portuguese Government reached an agreement with the private shareholders of TAP to assume a 72.5% stake in the airline, an increase of 22.5 percentage points. U.S.-Brazilian entrepreneur David Neeleman exited the company and shareholder businessman Humberto Pedrosa remained with a 22.5% stake, with workers keeping the remaining 5%. The Government has stated its interest in seeing other airlines enter TAP’s capital structure in the future.
8. Responsible Business Conduct
There is strong awareness of responsible business conduct in Portugal and broad acceptance of the need to consider the community among the key stakeholders of any company. The Group of Reflection and Support for Business Citizenship (GRACE) was founded in 2000 by a group of companies, primarily multinational enterprises, to expand the role of the Portuguese business community in social development.
The Ministry of Economy and AICEP encourage foreign and local enterprises to observe the due diligence approach of the OECD Guidelines for Multinational Enterprises, and both agencies jointly comprise the National Contact Point (NCP) to provide good offices for mediating disputes that may arise regarding the Guidelines. The Portuguese Business Ethics Association (APEE) is dedicated to promoting corporate social responsibility and works in collaboration with the Ministry of Economy’s Directorate-General of Economic Activities. It promotes events like Social Responsibility Week and celebrates protocols and agreements with companies to ensure they follow responsible business conduct principles incorporated into the labor code.
Portugal’s Competition Authority both encourages and enforces competition rules, including ethical business practices. The Competition Authority operates aleniency programfor companies that self-identify lapses. There have not been any high profile, controversial instances of private sector impact on human rights. The Portuguese government enforces domestic laws effectively and fairly through the domestic courts system, and through the supra-national European Court of Human Rights. Within its constitution, Portugal states that constitutional precepts concerning fundamental rights must be interpreted and observed in harmony with the Universal Declaration of Human Rights.
The Portuguese legal and regulatory framework on corporate governance includes not only regulations and recommendations from the Portuguese Securities Market Commission (CMVM), but also specific legal provisions from the Portuguese Companies Code and the Portuguese Securities Code. CMVM promotes sound corporate governance for listed companies by setting out a group of recommendations and regulations on the standards of corporate governance. CMVM regulations are binding for listed companies.
Non-governmental organizations also promote awareness of environmental and good governance issues in business. These include Quercus Portugal, which publishes guidelines and organizes events to promote environmental responsibility in business practices, and Transparencia e Integridade Associacao Civica (TIAC), which produces reports on corruption on everything from soccer match-fixing to conflicts of interest in public and private enterprise. TIAC also allows whistle-blowers to anonymously submit reports of corruption through their website.
Portugal does not participate in the Extractive Industries Transparency Initiative (EITI) or the Voluntary Principles on Security and Human Rights. The country’s two main umbrella unions, CGTP-Confederação Geral dos Trabalhadores Portugueses and UGT-União Geral dos Trabalhadores, also regularly denounce and combat non-compliant business practices, particularly related to labor rights violations.
There are no reports of serious human or labor rights concerns relating to responsible business conduct.
U.S. firms do not identify corruption as an obstacle to foreign direct investment. Portugal has made legislative strides toward further criminalizing corruption. The government’s Council for the Prevention of Corruption, formed in 2008, is an independent administrative body that works closely with the Court of Auditors to prevent corruption in public and private organizations that use public funds. Transparencia e Integridade Associacao Civica, the local affiliate of Transparency International, also actively publishes reports on corruption and supports would-be whistleblowers in Portugal.
In 2010, the country adopted a law criminalizing violation of urban planning rules and increasing transparency in political party funding. In 2015, Parliament unanimously approved a revision to existing anti-corruption laws that extended the statute of limitations for the crime of trading in influence to 15 years and criminalized embezzlement by employees of state-owned enterprises with a prison term of up to eight years. The laws extend to family members of officials and to political parties.
Despite being seen as generally aligned with the best international practices in terms of preventing and combating corruption, a June 2019 interim report by the Council of Europe’s Group of States against Corruption (GRECO) concluded that only one of the fifteen recommendations contained in GRECO´s Fourth Round Evaluation Report had been implemented satisfactorily or dealt in a satisfactory manner by Portugal at end-2019 in terms of compliance with GRECO anti-corruption recommendations addressed to lawmakers, judges and prosecutors.
Portugal has laws and regulations to counter conflict-of-interest in awarding contracts or government procurement.
The Portuguese government encourages (and in some cases requires) private companies to establish internal codes of conduct that, among other things, prohibit bribery of public officials. Most private companies use internal controls, ethics, and compliance programs to detect and prevent bribery of government officials. As described above, the Competition Authority operates a leniency program for companies that self-identify infringements of competition rules, including ethical lapses.
Portugal has ratified and complies with both the UN Convention against Corruption and the OECD Anti-Bribery Convention.
Resources to Report Corruption
Council for the Prevention of Corruption
Avenida da Republica,
651050-189, Lisbon, Portugal
+351 21 794 5138
Contact at “watchdog” organization:
Transparency International –
Transparencia e Integridade Associacao Civica
Rua dos Fanqueiros,
+351 21 8873412
10. Political and Security Environment
Since the 1974 Carnation Revolution, Portugal has had a long history of peaceful social protest. Portugal experienced its largest political rally since its revolution in response to proposed budgetary measures in 2012. Public workers, including nurses, doctors, teachers, aviation professionals, and public transportation workers organized peaceful demonstrations periodically in protest of insufficient economic support, low salary levels, and other measures.
11. Labor Policies and Practices
Numerous labor reform packages aimed at improving productivity were implemented after the 2011 bailout, but overall low labor productivity remains a challenge. The annualized monthly minimum wage increased stands at €776.
After the difficulties of the eurozone debt crisis, when many Portuguese migrated out of the country along with some resident migrants, net-migration became positive again in 2017 and has strengthened since. The number of legal foreign residents in Portugal stands at around 589,000, the highest level since records started in 1976. The largest communities of workers come from Brazil, Cape Verde, Romania, Ukraine, UK, China, France, Italy, Angola, Guinea-Bissau, Nepal and India. The employment rate of foreign workers is similar to that of Portuguese nationals at around 75%. In the southern Algarve region, the tourism sector employs most of the migrant workers. Alentejo and the coastal regions of central Portugal, with their intensive agriculture sectors, hosts substantial Asian workers’ communities, namely from Bangladesh.
Employers are allowed to conduct collective dismissals linked to adverse market or economic conditions, or due to technological advancement, but must provide advance notice and severance pay. Depending on the seniority of each employee, an employer must provide between 15 to 75 days of advance notice, and pay severance ranging from 12 days’ to one month’s salary per year worked. Employees may challenge termination decisions before a Labor Court. Labor laws are uniformly applicable and enforced, including in Portugal’s foreign trade zone/free port in the Autonomous Region of Madeira.
Collective bargaining is common in Portugal’s banking, insurance, and public administration sectors. More information is available at the Directorate General for Labor Relations site.
Portugal has labor dispute resolution mechanisms in place through Labor Courts and Arbitration Centers. Labor strikes are more common than in the United States, but are nonviolent and of short duration. Labor laws are not waived in order to attract or retain investment.
Portugal is a member of the International Labor Organization (ILO), and has ratified all eight Fundamental Conventions as well as all four Governance (Priority) Conventions.
The Labor Code caps the work schedule at eight hours per day, and 40 hours per week. The public sector employee workweek, with certain exclusions, was capped at 35 hours in July 2016. Employees are entitled to at least 22 days of annual leave per year. Employers must pay employees a Christmas and vacation bonus, both equivalent to one month’s salary.
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
Host Country Gross Domestic Product (GDP) (Million)