Policies Toward Foreign Direct Investment

The Algerian economy is both challenging and potentially highly rewarding.  While the Algerian government publicly welcomes FDI, a difficult business climate, an inconsistent regulatory environment, and contradictory government policies complicate foreign investment.  There are business opportunities in nearly every sector, including energy, power, water, healthcare, telecommunications, transportation, recycling, agribusiness, and consumer goods. 

Algerians’ urgency to diversify their economy away from reliance on hydrocarbons has increased amid low and fluctuating oil prices since mid-2014.  The government has sought to reduce the country’s trade deficit through import substitution policies and import tariffs. Despite higher oil prices in 2018 that helped shrink the trade deficit, Algeria’s decreasing hydrocarbons exports has kept government rhetoric focused on the need to diversify Algeria’s economy.  On January 29, 2019 the government implemented tariffs between 30-200 percent on over 1,000 goods it believes are destined for direct sale to consumers. Companies that set up local manufacturing operations can receive permission to import materials the government would not otherwise approve for import if the importer can show those materials will be used in local production.  Certain regulations explicitly favor local firms at the expense of foreign competitors, most prominently in the pharmaceutical sector, where an outright import ban the government implemented in 2009 remains in place on more than 360 medicines and medical devices. The arbitrary nature of the government’s frequent changes to business regulations has added to the uncertainty in the market.

Algerian state enterprises have a “right of first refusal” on transfers of foreign holdings to foreign shareholders.  Companies must notify the Council for State Participation (CPE) of these transfers. 

There are two main agencies responsible for attracting foreign investment, the National Agency of Investment Development (ANDI) and the National Agency for the Valorization of Hydrocarbons (ALNAFT).

ANDI is the primary Algerian government agency tasked with recruiting and retaining foreign investment.  ANDI runs branches in each of Algeria’s 48 governorates (“wilayas”) which are tasked with facilitating business registration, tax payments, and other administrative procedures for both domestic and foreign investors.  In practice, U.S. companies report that the agency is under-staffed and ineffective. Its “one-stop shops” only operate out of physical offices, and there are no efforts to maintain dialogue with investors after they have initiated an investment.  The agency’s effectiveness is undercut by its lack of decision-making authority, particularly for industrial projects, which is exercised by the Ministry of Industry and Mines, the Minister of Industry himself, and in many cases the Prime Minister.

ALNAFT is charged with attracting foreign investment to Algeria’s upstream oil and gas sector.  In addition to organizing events marketing upstream opportunities in Algeria to potential investors, the agency maintains a paid-access digital database with extensive technical information about Algeria’s hydrocarbons resources. 

Limits on Foreign Control and Right to Private Ownership and Establishment

Establishing a presence in Algeria can take any of three basic forms: 1) a liaison office with no local partner requirement and no authority to perform commercial operations, 2) a branch office to execute a specific contract, with no obligation to have a local partner, allowing the parent company to conduct commercial activity (considered a resident Algerian entity without full legal authority), or 3) a local company with 51 percent of share-capital held by a local company or shareholders.  A business entity can be incorporated as a joint stock company (JSC), a limited liability company (LLC), a limited partnership (LP), a limited partnership with shares (LPS), or an undeclared partnership. Groups and consortia are also used by foreign companies when partnering with other foreign companies or with local firms.

Foreign and domestic private entities have the right to establish and own business enterprises and engage in all forms of remunerative activity.  However, the 51/49 rule requires majority Algerian ownership (at least 51 percent) in all projects involving foreign investments. This requirement was first adopted in 2006 for the hydrocarbons sector and was expanded across all sectors in the 2009 investments law.  The rule was removed from the 2016 Investment Law, but remains in force by virtue of its inclusion in the 2016 annual finance law, which requires foreign investment activities be subject to the incorporation of an Algerian company in which at least 51 percent of capital stock is held by resident national shareholder(s). 

Algerian government officials have defended the 51/49 requirement as necessary to prevent capital flight, protect Algerian businesses, and provide foreign businesses with local expertise.  The government has argued the rule is not an impediment to attracting foreign investment and is needed to diversify investment in Algeria’s economy, foster private sector growth, create employment for nationals, transfer technology and expertise, and develop local training initiatives.  Additionally, officials contend, and some foreign investors agree, a range of tailored measures can mitigate the effect of the 51/49 rule and allow the minority foreign shareholder to exercise other means of control. Some foreign investors use multiple local partners in the same venture, effectively reducing ownership of each individual local partner to enable the foreign partner to own the largest share.

The 51/49 investment rule poses challenges for various types of investors.  For example, the requirement hampers market access for foreign small and medium-sized enterprises (SMEs), as they often do not have the human resources or financial capital to navigate complex legal and regulatory requirements.  Large companies can find creative ways to work within the law, sometimes with the cooperation of local authorities who are more flexible with large investments that promise of significant job creation and technology and equipment transfers.  SMEs usually do not receive this same consideration. There are also allegations that Algerian partners sometimes refuse to invest the required funds in the company’s business, require non-contract funds to win contracts, and send unqualified workers to job sites.  Manufacturers are also concerned about intellectual property rights (IPR), as foreign companies do not want to surrender control of their designs and patents. Several U.S. companies have reported they have internal policies that preclude them from investing overseas without maintaining a majority share, out of concerns for both IPR and financial control of the local venture, which correspondingly prevent them from establishing businesses in Algeria.

The Algerian government does not officially screen FDI, though Algerian state enterprises have a “right of first refusal” on transfers of foreign holdings to foreign shareholders.  Companies must notify the Council for State Participation (CPE) of these transfers. In addition, initial foreign investments are still subject to approvals from a host of ministries that cover the proposed project, most often the Ministries of Commerce, Health, Energy, and Industry and Mines.  U.S. companies have reported that certain high-profile industrial proposals, such as for automotive assembly, are subject to informal approval by the Prime Minister. In 2017, the government instituted an Investments Review Council chaired by Prime Minister for the purpose of “following up” on investments; in practice, the establishment of the council means FDI proposals are subject to additional government scrutiny.  According to the 2016 Investment Law, projects registered through the ANDI deemed to have special interest for the national economy or high employment generating potential may be eligible for extensive investment advantages. For any project over 5 billion dinars (approximately USD 44 million) to benefit from these advantages, it must be approved by the Prime Minister-chaired National Investments Council (CNI). The CNI meets regularly, though it is not clear how the agenda of projects considered at each meeting is determined. 

Other Investment Policy Reviews

Algeria has not conducted an investment policy review through the Organization for Economic Cooperation and Development (OECD) or the World Trade Organization (WTO).  The last investment policy review by a third party was conducted by the United Nations Conference on Trade and Development (UNCTAD) in 2003 and published in 2004.

Business Facilitation

Algeria’s online information portal dedicated to business creation www.jecreemonentreprise.dz   and the business registration website www.cnrc.org.dz   are currently under maintenance.  The websites provide information about several business registration steps applicable for registering certain kinds of businesses.  Entrepreneurs report that additional information about requirements or regulation updates for business registration are available only in person at the various offices involved in the creation and registration process.

In the World Bank’s 2019 Doing Business report, Algeria’s ranking for starting a business dropped from 145 to 157 (http://www.doingbusiness.org/en/data/exploreeconomies/algeria  ) despite seeing improvement in rankings for half of the ten indicator categories, including reforms which made getting electricity and trading across borders simpler.  The World Bank report lists 12 procedures that cumulatively take an average of 17.5 days to complete to register a new business. New business owners seeking to establish their enterprises have sometimes reported the process takes longer, noting that the most updated version of regulations and required forms are only available in person at multiple offices, therefore requiring multiple visits.

Outward Investment

Algeria does not currently have any restrictions on domestic investors from investing overseas, provided they can access foreign currency for such investments.  The exchange of Algerian dinars outside of Algerian territory is illegal, as is the carrying abroad of more than 3,000 dinars in cash at a time (approximately USD 26; see section 7 for more details on currency exchange restrictions).

Algeria’s National Agency to Promote External Trade (ALGEX), housed in the Ministry of Commerce, is the lead agency responsible for supporting Algerian businesses outside the hydrocarbons sector that want to export abroad.  ALGEX controls a special promotion fund to promote exports but the funds can only be accessed for very limited purposes. For example, funds might be provided to pay for construction of a booth at a trade fair, but travel costs associated with getting to the fair – which can be expensive for overseas shows – would not be covered.  The Algerian Company of Insurance and Guarantees to Exporters (CAGEX), also housed under the Ministry of Commerce, provides insurance to exporters. In 2003, Algeria established a National Consultative Council for Promotion of Exports (CCNCPE) that is supposed to meet annually. Algerian exporters claim difficulties working with ALGEX including long delays in obtaining support funds, and the lack of ALGEX offices overseas despite a 2003 law for their creation.  The Bank of Algeria’s 2002 Money and Credit law allows Algerians to request the conversion of dinars to foreign currency in order to finance their export activities, but exporters must repatriate an equivalent amount to any funds spent abroad, for example money spent on marketing or other business costs incurred.

Algeria has signed bilateral investment treaties with Argentina, Austria, Bahrain, BLEU (Belgium-Luxembourg Economic Union), Bulgaria, China, Cuba, Denmark, Egypt, Ethiopia, Finland, France, Germany, Greece, Indonesia, Iran, Italy, Jordan, Kuwait, Libya, Malaysia, Mali, Mauritania, Mozambique, Netherlands, Niger, Nigeria, Oman, Portugal, Qatar, Romania, Russian Federation, Serbia, South Africa, South Korea, Spain, Sudan, Sweden, Switzerland, Syria, Tajikistan, Tunisia, Turkey, Ukraine, United Arab Emirates, Vietnam, and Yemen.

In 2001, Algeria and the United States signed a Trade and Investment Framework Agreement (TIFA), and its council met most recently in Washington, D.C. in October 2018.

Algeria has trade agreements with the European Union and the Arab League, although neither has been fully implemented.  Recently instituted import barriers violate the terms of both agreements. The Algerian government concluded two years of “renegotiation” talks with the European Union in March 2017.  None of the trade terms of the 2005 EU-Algeria Association Agreement were modified, but the European Union committed to approximately USD 43 million of technical assistance for various Algerian ministries.

Algeria does not have a bilateral taxation treaty with the United States.  Algeria has bilateral taxation treaties with the Arab Maghreb Union (Libya, Mauritania, Morocco, and Tunisia), Austria, Bahrain, Belgium, Bosnia and Herzegovina, Bulgaria, Canada, China, Egypt, France, Germany, Indonesia, Iran, Italy, Lebanon, Portugal, Qatar, Romania, South Africa, South Korea, Spain, Switzerland, Turkey, and United Arab Emirates.

Transparency of the Regulatory System

The national government manages all regulatory processes.  Legal and regulatory procedures, as written, are considered consistent with international norms, although the decision-making process is at times opaque.

Algeria implemented a new accounting system called Financial Accounting System (FAS) in 2010.  Though legislation does not make explicit references, FAS appears to be based on International Accounting Standards Board and International Financial Reporting Standards (IFRS).  Operators generally find accounting standards to follow international norms, though they note that some particularly complex processes in IFRS have detailed explanations and instructions but by comparison are explained relatively briefly in FAS.

There is no specific mechanism for public comment on draft laws, regulations or regulatory procedures.  Typically, government officials give testimony to Parliament on draft legislation, and that testimony receive press coverage.  Occasionally copies of bills are leaked to the media.  However, full-text copies of draft laws are not made publicly accessible before enactment.  All laws and some regulations are published in the Official Gazette (www.joradp.dz  ) in Arabic and French, but the database has only limited online search features, and no summaries are published.  Often secondary legislation and/or administrative acts (known as ‘circulaires’ or ‘directives’) provide important details on how to implement laws and procedures.  Administrative acts are generally written at the ministry-level and not made public, though may be available if requested in person at a particular agency or ministry.  Public tenders are often accompanied by a book of specifications which is not made public, but only provided upon payment.

In some cases, authority over a matter may rest among multiple ministries, which imposes additional bureaucratic steps and the likelihood of either inaction or the issuance of conflicting regulations due to errors or unusual circumstances.  The development of regulations occurs largely away from public view; internal discussions at or between ministries are not usually made public.  In some instances, the only public interaction on regulations development is a press release from the official state press service at the conclusion of the process; in other cases, a press release is issued earlier.  Regulatory enforcement mechanisms and agencies exist at some ministries, but they are usually understaffed and enforcement remains weak.

The National Economic and Social Council (CNES) looks broadly at the effects of Algerian government policies and regulations in economic and social spheres.  The CNES has also been known to provide feedback on proposed legislation, though this is not required and neither the feedback nor legislation are necessarily made public.

Information on external debt obligations up to fiscal year 2018 was publicly available via the Central Bank’s quarterly statistical bulletin online  .  The statistical bulletin only describes external debt and not public debt, but the Ministry of Finance’s budget execution summaries reflect amalgamated debt totals.  The Ministry of Finance is working on a project to create an electronic, consolidated database of internal and external debt information. An amendment of the law on currency and credit authorizes the Central Bank to purchase bonds directly from the Treasury for a period of up to five years.  The Ministry of Finance indicated this would include purchasing debt from state enterprises, a process they described as the Central Bank transferring money to the treasury, which then provides the cash to, for example, state owned enterprises, in exchange for their debt. 

International Regulatory Considerations

Algeria is not a member of any regional economic bloc or of the WTO.  The structure of Algerian regulations largely follows European—specifically French—standards.

Legal System and Judicial Independence

Algeria’s legal system is based on the French civil law tradition.  The commercial law was established in 1975 and most recently updated in 2007 (www.joradp.dz/TRV/FCom.pdf ).  The judiciary is nominally independent from the executive branch, but U.S. companies have reported allegations of political pressure exerted on the courts by the executive.  Regulation enforcement actions are adjudicated in the national courts system and are appealable. Algeria has a system of administrative tribunals for adjudicating disputes with the government, distinct from the courts that handle civil disputes and criminal cases.  Decisions made under treaties or conventions to which Algeria is a signatory are binding and enforceable under Algerian law.

Laws and Regulations on Foreign Direct Investment

The 51/49 rule in the 2016 annual finance law requires a majority Algerian partner for any foreign investment (see section 2), but otherwise there are few laws restricting foreign investment.  In practice, the many regulatory and bureaucratic requirements for business operations provide officials avenues to advance informally political or protectionist policies. The investments law enacted in 2016 charged ANDI with creating four new branches to assist with business establishment and the management of investment incentives.  ANDI’s website (www.andi.dz/index.php/en/investir-en-algerie  ) lists the relevant laws, rules, procedures, and reporting requirements for investors.  However, much of the information lacks detail—particularly for the new incentives elaborated in the 2016 investments law—and refers prospective investors to ANDI’s physical “one-stop shops” located throughout the country. 

There is an ongoing effort by customs, under the Ministry of Finance, to establish a new digital platform featuring one-stop shops for importers and exports to streamline bureaucratic processes.

Competition and Anti-Trust Laws

The National Competition Council (www.conseil-concurrence.dz/  ) is responsible for reviewing both domestic and foreign competition related concerns.  Established in late 2013, it is housed under the Ministry of Commerce. Once the economic concentration of enterprises exceeds 40 percent of a market’s sales or purchases, the Competition Council is authorized to investigate, though a 2008 directive from the Ministry of Commerce exempted economic operators working for national economic progress from this review/approval.

Expropriation and Compensation

The Algerian state can expropriate property under limited circumstances proscribed by law, with the state mandated to pay “just and equitable” compensation to the defendants for the property.  Expropriation of property is extremely rare, with no cases within the last 10 years. However, in late 2018 a government measure required farmers to comply with a new regulation altering the concession contracts of their land in a way that would cede more control to the government.  Those who refused to switch contract type by December 31, 2018 lost their right to their land. 

Dispute Settlement

ICSID Convention and New York Convention

Algeria is a signatory to the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (The New York Convention) and the Convention on the International Center for the Settlement of Investment Disputes (ICSID Convention).  The Algerian code of civil procedure allows both private and public companies full recourse to international arbitration. Algeria permits the inclusion of international arbitration clauses in contracts. 

Investor-State Dispute Settlement

Investment disputes sometimes occur, especially on major projects.  These disputes can be settled informally through negotiations between the parties or via the domestic court system.  For disputes with foreign investors, cases can be decided during international arbitration. The most common disputes in the last several years have involved state-owned oil and gas company Sonatrach and its foreign partners concerning the retroactive application since 2006 of a windfall profits tax on hydrocarbons production.  Sonatrach won a case in October 2016 against Spanish oil company Repsol and two Korean firms. In 2018 Sonatrach announced it had settled all outstanding international disputes.

The most recent investment dispute involving a U.S. company dates to 2012.  The company, which had encountered bureaucratic blocks on the expatriation of dividends from a 2005 investment, did not resort to arbitration.  The dispute was resolved in 2017, with the government permitting the company to expatriate the dividends.

There is no U.S.-Algeria Bilateral Investment Treaty or Free Trade Agreement.

International Commercial Arbitration and Foreign Courts

The Algerian Chamber of Commerce and Industry (CACI), the nationwide, state-supported chamber of commerce, has the authority to arbitrate investment disputes as an agent of the court.  The bureaucratic nature of Algeria’s economic and legal system, as well as its opaque decision-making process, means that disputes can drag on for years before a resolution is reached. Businesses have reported cases in the court system are subject to political influence and generally tend to favor the government’s position.

Local courts recognize and have the authority to enforce foreign arbitral awards.  Disputes between state-owned enterprises (SOEs) and foreign investors are rarely decided in domestic courts, since nearly all contracts between foreign and Algerian partners include clauses for international arbitration.  The Ministry of Justice is in charge of enforcing arbitral awards against SOEs.

Bankruptcy Regulations

Algeria’s bankruptcy law generally follows international norms.  While bankruptcy per se is not criminalized, management decisions (such as company spending, investment decisions, and even procedural mistakes) are subject to criminal penalties, ranging from fines to jail time, so decisions that lead to bankruptcy can be punishable under Algerian criminal law.  However, bankruptcy cases rarely proceed to a full dissolution of assets. The Algerian government generally props up public companies on the verge of bankruptcy via cash infusions from the public banking system. According to the World Bank’s Doing Business report, both debtors and creditors may file for both liquidation and reorganization.

Investment Incentives

Any incentive offered by the Algerian government is generally available to any company, though there are multiple tiers of “common, additional, and exceptional” incentives under the 2016 investments law (www.joradp.dz/FTP/jo-francais/2016/F2016046.pdf ).  “Common” incentives available to all investors include exemption from customs duties for all imported production inputs, exemption from value-added sales tax (VAT) for all imported goods and services that enter directly into the implementation of the investment project, a 90 percent reduction on tenancy fees during construction, and a 10-year exemption on real estate taxes.  Investors also benefit from a three-year exemption on corporate and professional activity taxes and a 50 percent reduction for three years on tenancy fees after construction is completed. Additional incentives are available for investments made outside the coastal regions, namely the reduction of tenancy fees to a symbolic dinar (USD .01) per square meter of land for 10 years in the High Plateau region and 15 years in the south of Algeria, plus a 50 percent reduction thereafter.  The law also charges the state to cover, in part or in full, the necessary infrastructure works for the realization of the investment. “Exceptional” incentives apply for investments “of special interest to the national economy,” including the extension of the common tax incentives to 10 years. The sectors of “special interest” have not yet been publicly specified. An investment must receive the approval of the National Investments Council in order to qualify for the exceptional incentives. 

Regulations passed in a March 2017 executive decree exclude approximately 150 economic activities from eligibility for the incentives (www.joradp.dz/FTP/jo-francais/2017/F2017016.pdf ).  The list of excluded investments is concentrated on the services sector but also includes manufacturing for some products.  All investments in sales, whether retail or wholesale, and imports business are ineligible.

The 2016 investments law also provided state guarantees for the transfer of incoming investment capital and outgoing profits.  Pre-existing incentives established by other laws and regulations also include favorable loan rates well below inflation from public banks for qualified investments.

Foreign Trade Zones/Free Ports/Trade Facilitation

Algeria does not have any foreign trade zones or free ports.

Performance and Data Localization Requirements

The Algerian government does not officially mandate local employment, but companies usually must provide extensive justification to various levels of the government as to why an expatriate worker is needed.  Some businesses have reported instances of the government pressuring foreign companies operating in Algeria, particularly in the hydrocarbons sector, to limit the number of expatriate middle and senior managers so that Algerians can be hired for these positions.  Any person or legal entity employing a foreign citizen is required to notify the Ministry of Labor. Contacts at multinational companies have alleged this pressure is applied via visa applications for expatriate workers. U.S. companies in the hydrocarbons industry have reported that, when granted, expatriate work permits are usually valid for no longer than six months and are delivered up to three months late, requiring firms to apply perpetually for renewals.

In 2017, the Algerian government began instituting forced localization in the auto sector.  Industry regulations issued in December 2017 require companies producing or assembling cars in the country to achieve a local integration rate of at least 15 percent within three years of operation.  The threshold rises to between 40 and 60 percent after a company’s fifth year of operation. Since 2014, the government has required car dealers to invest in industrial or “semi-industrial” activities as a condition for doing business in Algeria.  Dealers seeking to import new vehicles must obtain an import license from the Ministry of Commerce. Since January 2017, the Ministry has not issued any licenses. As the Algerian government further restricts imports, localization requirements are expected to broaden to other manufacturing industries over the next several years.  For example, a tender launched in 2018 for 150 megawatts of photovoltaic solar energy power plants mandated that bidders be Algerian legal entities.

Information technology providers are not required to turn over source codes or encryption keys, but all hardware and software imported to Algeria must be approved by the Agency for Regulation of Post and Electronic Communications (ARPCE), under the Ministry of Post, Information Technology and Communication.  The ARPCE was created in May 2018, dissolving and taking over the function of the previous Agency for Regulation of Post and Telecommunications (APRT). In practice, the Algerian government requires public sector entities to store data on servers within the country.

Real Property

Secured interests in property are generally recognized and enforceable, but court proceedings can be lengthy and results unpredictable.  All property not clearly titled to private owners remains under government ownership. As a result, the government controls most real property in Algeria, and instances of unclear titling have resulted in conflicting claims of ownership, which has made purchasing and financing real estate difficult.  Several business contacts have reported significant difficulty in obtaining land from the government to develop new industrial activities; the state prefers to lease land for 33-year terms, renewable twice, rather than sell outright. The procedures and criteria for awarding land contracts are opaque.

Property sales are subject to registration at the tax inspection and publication office at the Mortgage Register Center and are part of the public record of that agency.  All property contracts must go through a notary.

According to the 2019 World Bank Doing Business report, Algeria ranks 165/190 for ease of registering property.

Intellectual Property Rights

Patent and trademark protection in Algeria is covered by a series of ordinances dating back to 2003 and 2005.  U.S. company representatives operating in Algeria reported that these laws were satisfactory in terms of both the scope of what they cover and the mandated penalties for violations.  A 2015 government decree to pursue patent and trademark infringements increased coordination between the National Office of Copyrights and Related Rights (ONDA), the National Institute for Industrial Property (INAPI), and law enforcement.  However, U.S. companies note that enforcement remains an issue.

ONDA, under the Ministry of Culture, and INAPI, under the Ministry of Industry and Mines, are the two separate entities within the Algerian government that have primary responsibility for IP protections.  ONDA covers literary and artistic copyrights as well as digital software rights, while INAPI oversees the registration and protection of industrial trademarks and patents. Despite strengthened efforts at ONDA, INAPI, and the General Directorate for Customs (under the Ministry of Finance), which have seen local production of pirated or counterfeit goods nearly disappear since 2011, imported counterfeit goods are prevalent and easily obtained.  Algerian law enforcement agencies annually confiscate several hundred items, including clothing, cosmetics, sports items, foodstuffs, automotive spare parts, and home appliances. ONDA destroyed more than 100,000 copies of pirated media to commemorate World Intellectual Property Day in 2017, but software firms estimate that more than 85 percent of the software used in Algeria, and a similar percentage of titles used by government institutions and state-owned companies, is not licensed.

Algeria has remained on the Priority Watch List of USTR’s Special 301 Report   since 2009.

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

Capital Markets and Portfolio Investment

The Algiers Stock Exchange has five stocks listed—each at no more than 35 percent equity—with a total market capitalization representing less than 0.1 percent of Algeria’s GDP.  Daily trading volume on the exchange averages around USD 2,000. Despite its small size, the market functions well and is adequately regulated by an independent oversight commission that enforces compliance requirements on listed companies and traders.

Officials aim to reach a capitalization of USD 7.8 billion in the next five years and enlist up to 50 new companies.  However, attempts to list additional companies have been stymied by a lack both of public awareness and appetite for portfolio investment, as well as by private and public companies’ unpreparedness to satisfy due diligence requirements that would attract investors.  Proposed privatizations of state-owned companies have also been opposed by the public. Algerian society generally prefers material investment vehicles for savings, namely cash. Public banks, which dominate the banking sector (see below), are required to purchase government securities when offered, meaning they have little leftover liquidity to make other investments.  Foreign portfolio investment is prohibited—the purchase of any investment product in Algeria, whether a government or corporate bond or equity stock, is limited to Algerian residents only.

Money and Banking System

The banking sector is roughly 85 percent public and 15 percent private as measured by value of assets held, and is regulated by an independent central bank.  Publicly available data from private institutions and U.S. Federal Reserve Economic Data show estimated total assets in the commercial banking sector in 2017 were roughly 13.9 trillion dinars (USD 116.7 billion) against 9.2 trillion dinars (USD 77.2 billion) in liabilities.  The central bank had mandated a 12 percent minimum ratio for assets to liabilities until mid-2016, when in response to a drop in liquidity the bank lowered the threshold to8 percent. In August 2017, the ratio was further reduced to 4 percent in an effort to inject further liquidity into the banking system.  The decrease in liquidity was a result of all public banks buying government bonds in the first public bond issuance in more than 10 years; buying at least 5 percent of the offered bonds is required for banks to participate as primary dealers in the government securities market. The bond issuance essentially returned funds to the state that it had parked in funds at local banks during years of excess hydrocarbons profits.  In January 2018, the bank increased the retention ratio from 4 percent to 8 percent, followed by a further increase in February 2019 to a 12 percent ratio in response in anticipation of a rise in bank liquidity due to the government’s non-conventional financing policy, which allows the Treasury to borrow directly from the central bank to pay state debts.

Banks are considered financially healthy, although the IMF and Bank of Algeria have noted moderate growth in non-performing assets, currently estimated between 10-12 percent of total assets.  The quality of service in public banks is generally considered low as generations of public banking executives and workers trained to operate in a statist economy lack familiarity with modern banking practices.  Most transactions are still materialized (non-electronic). Many areas of the country suffer from a dearth of branches, leaving large amounts of the population without access to banking services. ATMs are not widespread, especially outside the major cities, and few accept foreign bank cards.  Outside of major hotels with international clientele, hardly any retail establishments accept credit cards. Algerian banks do issue debit cards, but the system is distinct from any international payment system. In addition, approximately 4.6 trillion dinars (USD 40 billion), or one-third, of the money supply is estimated to circulate in the informal economy.

Foreigners can open foreign currency accounts without restriction, but proof of a work permit or residency is required to open an account in Algerian dinars.  Foreign banks are permitted to establish operations in the country, but they must be legally distinct entities from their overseas home offices. Of the handful of foreign banks with a presence in Algeria, all are engaged exclusively in commercial banking; none offers retail banking services.

In 2015, the Financial Action Task Force (FATF) removed Algeria from its Public Statement, and in 2016 it removed Algeria from the “gray list.”  The FATF recognized Algeria’s significant progress and the improvement in its anti-money laundering/counter terrorist financing (AML/CFT) regime.  The FATF also indicated Algeria has substantially addressed its action plan since strategic deficiencies were identified in 2011.

Foreign Exchange and Remittances

Foreign Exchange

There are few statutory restrictions on foreign investors converting, transferring, or repatriating funds, according to banking executives.  Monies cannot be expatriated to pay royalties or to pay for services provided by resident foreign companies. The difficultly with conversions and transfers results more from the procedures of the transfers rather than the statutory limitations: the process is heavily bureaucratic and requires almost 30 different steps from start to finish.  The slightest misstep at any stage can slow down or completely halt the process. In theory, it should take roughly one month to complete, but in reality, it often takes three to six months. Also, the Algerian government has been known to delay the process as leverage in commercial and financial disputes with foreign companies.

Expatriated funds can be converted to any world currency.  The IMF classifies the exchange rate regime as an “other managed arrangement,” with the central bank pegging the value of the Algerian dinar to a “basket” composed of 64 percent of the value of the U.S. dollar and 36 percent of the value of the euro.  The currency’s value is not controlled by any market mechanism and is set solely by the central bank. As the Central Bank has full control of the official exchange rate of the Dinar, any change in its value could be considered currency manipulation. When dollar-denominated hydrocarbons profits fell starting in mid-2014, the central bank allowed a slow depreciation of the dinar against the dollar over 24 months, culminating in about a 30 percent fall in its value before stabilizing around 110 dinars to USD 1 in late 2016.  However, the dinar lost only about 10 percent of its value against the euro in the same time frame. The government announced in mid-2018 its intention to maintain the exchange rate between 118-119 dinars to USD 1 through 2020. The parallel market rate saw the dinar devalue by more than 3 percent against the dollar between January and April 2019.

Remittance Policies

There have been no recent changes to remittance policies.  Algerian exchange control law remains strict and complex. There are no specific time limitations, although the bureaucracy involved in remittances can often slow the process to as long as six months.  Personal transfers of foreign currency into the country must be justified and declared as not for business purpose. There is no legal parallel market by which investors can remit; however, there is a substantial black market currency exchange system in Algeria.  Exchange rates for the dollar and euro are about 50 percent stronger on the black market than the official rates. With the more favorable informal rates, local sources report that most remittances occur via foreign currency hand-carried into the country. Under central bank regulations revised in September 2016, travelers to Algeria are permitted to enter the country with up to 1,000 euros or equivalent without declaring the funds to customs.  However, any non-resident can only exchange dinars back to a foreign currency with proof of initial conversion from the foreign currency. The same regulations prohibit the transfer of more than 3,000 dinars (USD 26) outside Algeria.

Private citizens may convert up to 15,000 dinars (USD 127) per year for travel abroad.  To do the conversion, they must demonstrate proof of their intention to travel abroad through plane tickets or other official documents.

In April 2019, the Finance Ministry announced the creation of a vigilance committee to monitor and control financial transactions to foreign countries.  It divided operations into three categories relating to 1) imports 2) investments abroad 3) transfer abroad of profits.

Sovereign Wealth Funds

Algeria’s sovereign wealth fund (SWF) is the “Fonds de Regulation des Recettes (FRR).”  The Finance Ministry’s website shows the fund decreased from 4408.2 billion dinars (USD 37.36 billion) in 2014 to 784.5 billion dinars (USD 6.65 billion) in 2016.  Algerian media reported the FRR was spent down to zero as of February 2017. Algeria is not known to have participated in the IMF-hosted International Working Group on SWFs.

More than half of the formal Algerian economy is comprised of state-owned enterprises (SOEs), led by the national oil and gas company Sonatrach, although SOEs are present in all sectors of the economy.  SOEs are so prevalent that a comprehensive public list does not exist; rather all SOEs are amalgamated into a single line of the state budget. SOEs are listed in the official business registry. To be defined as an SOE, a company must be at least 51 percent owned by the state.

Algerian SOEs are generally heavily bureaucratic and may be subject to political influence.  There are competing lines of authority at the mid-levels, and contacts report mid- and upper-level managers are reluctant to make decisions because internal accusations of favoritism or corruption are often used to settle political scores.  Senior management teams at SOEs report to their relevant ministries; CEOs of the larger companies such as Sonatrach, electric and gas utility Sonelgaz, and airline Air Algerie report directly to ministers. Boards of directors are appointed by the state, and the allocation of these seats is considered political.  SOEs are not known to adhere to the OECD Guidelines on Corporate Governance.

Legally, public and private companies compete under the same terms with respect to market share, products and services, and incentives.  In reality, private enterprises assert that public companies sometimes receive more favorable treatment. Private enterprises have the same access to financing as SOEs, but they tend to work more with private banks and they are far less bureaucratic than are their public counterparts.  Public companies generally refrain from doing business with private banks. In 2008, a government directive ordered public companies to work only with public banks. The directive was later officially rescinded, but the effect has held as a self-imposed practice by public companies. SOEs are subject to the same tax burden and tax rebate policies as their private sector competitors, but business contacts report that the government favors SOEs over private sector companies in terms of access to land.

SOEs are subject to budget constraints.  Audits of public companies are conducted by the Court of Auditors, a financially autonomous institution.  A Constitutional revision of Article 192 in March 2016 enshrined the independence of the Court. The constitution explicitly charges it with “ex post inspection of the finances of the state, collectivities, public services, and commercial capital of the state,” as well as preparing and submitting an annual report to the President, heads of both chambers of Parliament, and Prime Minister.  The previous constitution of 1996 had not included the state’s commercial capital in the Court’s mandate, nor had it required its annual report be shared with anyone but the President. Now, the Court makes its audits public on its website, for free.

The Court conducts audits simultaneously but independently from the Ministry of Finance’s year-end reports.  The Court makes its reports available online once they are finalized and delivered to the Parliament, whereas the Ministry withholds publishing year-end reports until after the Parliament and President have approved them.  The Court’s audit reports cover the entire implemented national budget by fiscal year and examine each annual planning budget that is passed by Parliament.

The General Inspectorate of Finance (IGF), the public auditing body under the supervision of the Ministry of Finance, can conduct “no-notice” audits of public companies.  The results of these audits are sent directly to the Minister of Finance, and the offices of the President and Prime Minister. They are not made available publicly. The Court of Auditors and IFG previously had joint responsibility for auditing certain accounts, but they are in the process of eliminating this redundancy.

Privatization Program

There has been very limited privatization of certain projects previously managed by SOEs in the water sector and likely other sectors.  However, the privatization of SOEs remains a highly sensitive issue and has been halted.

Multinational and particularly U.S. firms operating in Algeria are spreading the concept of responsible business conduct (RBC), which has traditionally been less common among domestic firms, with a few notable exceptions.  Companies such as Anadarko, Cisco, Microsoft, Boeing, Dow, and Berlitz have supported programs aimed at youth employment, education, and entrepreneurship. RBC activities are gaining acceptance as a way for companies to contribute to local communities while often addressing business needs, such as a better-educated workforce.  The national oil and gas company, Sonatrach, funds some social services for its employees and supports desert communities near production sites. Still, many Algerian companies view social programs as areas of government responsibility and do not consider such activities in their corporate decision-making process. While state entities welcome foreign companies’ RBC activities, the government does not factor them into procurement decisions, nor does it require companies to disclose their RBC activities.  Algerian laws for consumer and environmental protections exist but are weakly enforced.

Algeria does not adhere to the OECD or UN Guiding Principles and does not participate in the Extractive Industries Transparency Initiative.  Algeria ranks 73/89 for resource governance, and does not comply with rules set for disclosing environmental impact assessments and mitigation management plans, according to the most recent report by National Resource Governance Index.

The current anti-corruption law dates to 2006.  A new bill that would have amended the 2006 law passed the lower chamber of Algeria’s bicameral legislative body in February 2019, but is pending approval by the senate.  If approved, the law would create a financial penal division within the court of Algiers, with a national territorial jurisdiction and whose mission is to research, investigate, prosecute individuals who commit financial offenses of great complexity, and any other offenses related to bribery, tax evasion and avoidance, unlawful financing of associations as well as currency and banking offenses.  It would also provide protection of whistle-blowers reporting acts detrimental to their employment or working conditions.

In 2013, the Algerian government created the Central Office for the Suppression of Corruption (OCRC) to investigate and prosecute any form of bribery in Algeria.  The current number of cases currently being investigated by the OCRC is not available. In 2010, the government created the National Organization for the Prevention and Fight Against Corruption (ONPLC) as stipulated in the 2006 anti-corruption law.  The Chairman and members of this commission are appointed by a presidential decree. The commission studies financial holdings of public officials and carries out studies. Since 2013, the Financial Intelligence Unit has been strengthened by new regulations that have given the unit more authority to address illegal monetary transactions and terrorism funding.  In 2016, the government updated its anti-money laundering and counter-terrorist finance legislation to bolster the authority of the financial intelligence unit to monitor suspicious financial transactions and refer violations of the law to prosecutorial magistrates. Algeria signed the UN Convention Against Corruption in 2003.

The Algerian government does not have a policy that requires private companies to establish internal codes of conduct that prohibit bribery of public officials.  The use of internal controls against bribery of government officials varies by company, with some upholding those standards and others rumored to offer bribes. Algeria is not a participant in regional or international anti-corruption initiatives.  While Algeria does not provide protections to NGOs involved in investigating corruption, there are whistleblower protections for Algerian citizens who report corruption.

International and Algerian economic operators have identified corruption as an obstacle to FDI, indicating that foreign companies with strict compliance standards cannot compete against those companies who can offer special incentives to those making decisions about contract awards.  Economic operators have also indicated that complex bureaucratic procedures are sometimes manipulated by political actors to ensure economic benefits accrue to favored individuals in a non-transparent way. 

Corruption issues recently garnered significant headlines in Algeria.  On April 1, press reported the Prosecutor General’s Office of the Algiers court had opened investigations into corruption and the illegal transfer of capital abroad.  Shortly after, Algeria’s Army Chief of Staff Ahmed Gaid Salah accused unnamed parties of stealing from the Algerian people, and announced the Ministry of Justice’s intention to reopen old corruption cases, including a case regarding corruption in the state hydrocarbons company Sonatrach, though he did not specify which cases.

Resources to Report Corruption

Official government agencies

Central Office for the Suppression of Corruption (OCRC)
Mohamed Mokhtar Rahmani, General Director
Placette el Qods, Hydra, Algiers
Telephone: +213 21 68 63 12
www.facebook.com/263685900503591/  
No email address publicly available

National Organization for the Prevention and Fight Against Corruption (ONPLC)
Tarek Kour, President
14 Rue Souidani Boudjemaa, El Mouradia, Algiers
Telephone: +213 21 23 94 76
Email: contact@onplc.org.dz
www.onplc.org.dz/index.php/  

Watchdog organization:

Djilali Hadjadj
President
Algerian Association Against Corruption (AACC)
Telephone: +213 07 71 43 97 08
Email: aaccalgerie@yahoo.fr
www.facebook.com/215181501888412/  

Beginning on February 22, nationwide peaceful demonstrations against longtime president Abdelaziz Bouteteflika began, with the largest gatherings occurring on Fridays.  The exact number of demonstrators is estimated to be in the millions, though participation varies across city and week. During weekdays, various professional trade groups and student groups have peacefully demonstrated with hundreds to thousands of marchers converging on symbolic points, mainly in Algeria’s large coastal cities.  The demonstrations lead to the April 2 resignation of President Bouteflika.

Prior to February, demonstrations that occurred in Algeria tended to concern housing and other social programs, and were generally limited to tens or a few hundred participants.  While the majority of those small protests were generally peaceful, there were occasional outbreaks of violence that resulted in injuries, sometimes resulting from efforts of security forces to disperse the protests.

Government reactions to public unrest typically include tighter security control on movement between and within cities to prevent further clashes and promises of either greater public expenditures on local infrastructure or increased local hiring for state-owned companies.  During the first several months of 2015, there was a series of protests in several cities in the south of the country against the government’s program to drill test wells for shale gas. These protests were largely peaceful but sometimes resulted in clashes, injury, and rarely, property damage.  Announcements in 2017 that authorities would recommence shale gas exploration have not to date generated protests.

The Algerian government requires all foreign employees of foreign companies or organizations based in Algeria to contact the Foreigners Office of the Ministry of the Interior before traveling in the country’s interior so that the Government can evaluate need for police coordination.  The Algerian government also requires U.S. Embassy employees to request permission and police accompaniment to visit the Casbah in Algiers and to coordinate travel with the government any outside of the Algiers wilaya (province); for this reason U.S. consular services may be limited outside of the Algiers wilaya.

The government’s efforts to reduce terrorism have focused on active security services and social reconciliation and reintegration.  Isolated terrorist incidents still occasionally occur. There have been two major attacks on oil and gas installations in the last 10 years.  In March 2016, terrorists launched a homemade rocket attack on a gas facility in central Algeria that caused limited damage but no casualties.  In January 2013, there was a major attack at a remote oil and gas facility near the town of In Amenas in southeast Algeria (approximately 1,500 kilometers from Algiers) in which nearly 40 people – mostly western energy sector workers, including three Americans – were killed.  Other terrorist attacks claimed by ISIS include an August 2017 suicide attack in Tiaret that killed two police officers and a February 2017 attack that injured two police officers in Constantine. Each of these attacks prompted swift counter-terrorism responses by Algerian security services to uproot the militants responsible for the attacks.

Terrorist attacks usually target Algerian government interests and security forces outside of major cities and mainly in mountainous and remote areas, although attacks in 2017 and 2018 injured and killed police and security forces in the cities of Constantine and Tiaret, and the regions of Sidi Bel Abbas and Annaba.

U.S. citizens living or traveling in Algeria are encouraged to enroll in the Smart Traveler Enrollment Program (STEP) via the State Department’s travel registration website, https://step.state.gov/step, to receive security messages and make it easier to be located in an emergency.

There is a shortage of skilled labor in Algeria in all sectors.  Business contacts report difficulty in finding sufficiently skilled plumbers, electricians, carpenters, and other construction/vocational related areas.  Oil companies report they have difficulty retaining trained Algerian engineers and field workers because these workers often leave Algeria for higher wages in the Gulf.  Some white-collar employers also report a lack of skilled project managers, supply chain engineers, and even of sufficient numbers of office workers with requisite computer and soft skills.

Official unemployment figures are measured by the number of persons seeking work through the National Employment Agency (ANEM), and overall unemployment in 2018 held steady from the previous year, at 11.7 percent.  However, unemployment is significantly higher among certain demographics, including young people (ages 16-24) at 29.1 percent, up 5.2 percentage points from 2017, and college-educated workers, 27.9 percent. Notably, roughly 70 percent of the population is under 30.  Additionally, the International Labor Organization (ILO) estimates that more than one-third of all labor in Algeria is employed in the informal economy. To help train Algerians, including those who did not complete high school, the Ministry of Vocational Training sponsors programs that, according to government figures, offer training to at least 300,000 Algerians annually in various professional programs.

Companies must submit extensive justification to hire foreign employees, and report pressure to hire more locals (even if jobs could be replaced through mechanization) under implied threat of not approving the visa applications for expatriate staff.  There are no special economic zones or foreign trade zones in Algeria.

The constitution provides workers with the right to join and form unions of their choice provided they are citizens.  The country has ratified the International Labor Organization’s (ILO’s) conventions on freedom of association and collective bargaining but failed to enact legislation needed to implement these conventions fully.  The General Union of Algerian Workers (UGTA) is the largest union in Algeria and represents a broad spectrum of employees in the public sectors. The UGTA, an affiliate of the International Trade Union Conference, is an official member of the Algerian “tripartite,” a council of labor, government, and business officials that meets annually to collaborate on economic and labor policy.  The Algerian government chooses to liaise almost exclusively with the UGTA, however unions in the education, health, and administration sectors do meet and negotiate with government counterparts, especially under threat of strike. Collective bargaining is permitted under a law passed in 1990 and modified in 1997, but is not mandatory.

Algerian law provides mechanisms for monitoring labor abuses and health and safety standards, and international labor rights are recognized within domestic law, but are only effectively regulated in the formal economy.  The government has shown an increasing interest in understanding and monitoring the informal economy, and in 2018 partnered with the ILO on workshops and is cooperating with the World Bank on several projects aimed at better quantifying the informal sector.

Sector-specific strikes occur often in Algeria, though general strikes are less common.  The law provides for the right to strike, and workers exercise this right, subject to conditions.  Striking requires a secret ballot of the whole workforce, and the decision to strike must be approved by majority vote of workers at a general meeting.  The government may restrict strikes on a number of grounds, including economic crisis, obstruction of public services, or the possibility of subversive actions.  Furthermore, all public demonstrations, including protests and strikes, must receive prior government authorization. By law, workers may strike only after 14 days of mandatory conciliation or mediation.  The government occasionally offers to mediate disputes. The law states that decisions reached in mediation are binding on both parties. If mediation does not lead to an agreement, workers may strike legally after they vote by secret ballot to do so.  The law requires that a minimum level of essential public services must be maintained, and the government has broad legal authority to requisition public employees. The list of essential services includes services such as banking, radio, and television.  Penalties for unlawful work stoppages range from eight days to two months imprisonment.

In 2018, there were strikes in the beginning of the year, largely in the public health and public education sectors.  Medical residents went on strike demanding higher pay, better working conditions, and male residents sought an exemption from mandatory military service requirements.  After weeks of strikes, the Ministry of Health made some concessions in terms of additional benefits for doctors, and the residents resumed work. Teachers went on strike for higher pay and complained of perceived inequalities in the pay scale.  After weeks of strikes and a closed-door meeting, the Ministry of Education and unions came to an agreement. While the full details of the agreement were not disclosed, teachers noted in broad terms the Ministry expressed a willingness to meet their demands and resumed work.

Stringent labor-market regulations likely inhibit an increase in full-time, open-ended work.  Regulations do not allow for flexibility in hiring and firing in times of economic downturn, for example, employers are generally required to pay severance when laying off or firing workers.  Unemployment insurance eligibility requirements may discourage job seekers from collecting benefits probably due them, and the level of support claimants receive is minimal. Employers must have contributed up to 80 percent of the final year salary into the unemployment insurance scheme in order for them to qualify for unemployment benefits.

The law contains occupational health and safety standards, however enforcement of those standards may be uneven.  There were no known reports of workers dismissed for removing themselves from hazardous working conditions. If workers face such conditions, they are able to file a complaint with the Ministry of Labor, who would then send out labor inspectors to investigate the claim.  While this legal mechanism exists, the high demand for employment in the country gave an advantage to employers seeking to exploit employees.

Because Algerian law does not provide for temporary legal status for migrants, labor standards do not protect economic migrants from sub-Saharan Africa and elsewhere working in the country without legal immigration status, which makes them vulnerable to exploitation.  The law does not adequately cover migrant workers employed primarily in construction and occasionally as domestic workers – however migrant children are protected by law from working.

The Ministry of Labor enforces labor standards, including compliance with the minimum wage regulation and safety standards.  Companies that employ migrant workers or violate child labor laws are subject to fines and potentially even prosecution.

The law prohibits participation by minors in dangerous, unhealthy, or harmful work or in work considered inappropriate because of social and religious considerations – as do Algerian norms and practices.  The minimum legal age for employment is 16, but younger children may work as apprentices with permission from their parents or legal guardian. The law prohibits workers under age 19 from working at night.  While there is currently no list of hazardous occupations prohibited to minors, the government told us a list was being drafted and would be issued by presidential decree. Although specific data was unavailable, children reportedly worked mostly in the informal sector, largely in sales, often in family businesses, and also begging on the streets, or in agricultural work.  There were isolated reports that children were subjected to commercial sexual exploitation.

The Ministry of Labor is responsible for enforcing child labor laws.  There is no single office charged with this task, but all labor inspectors are responsible for enforcing laws regarding child labor.  In 2018, the Ministry of Labor focused one month specifically on investigating child labor violations, and in some cases prosecuted individuals for employing minors or breaking other child-related labor laws.  While the government claims to monitor both the formal and informal sectors, contacts note that in reality, their efforts largely land in the formal economy.

The National Authority of the Protection and Promotion of Children (ONPPE) is an inter-agency organization, created in 2016, which coordinates the protection and promotions of children’s rights.  As a part of its efforts, in 2018 ONPPE held educational sessions for officials from relevant ministries, civil society organizations, and journalists on issues related to children, including child labor and human trafficking.

An Overseas Private Investment Corporation (OPIC) agreement between the U.S and Algeria was signed in June 1990.  In 2005, the Algerian Energy Company entered a deal with Ionics Inc. of Watertown, Massachusetts, in which Ionics agreed to build a water desalination plant and the state water authority took a minority stake in the plant and agreed to purchase the bulk of the clean water produced.  OPIC provided a USD 200 million loan to Ionics, a desalination equipment manufacturer that was later acquired by General Electric. In 2017, GE sold its stake in the Algiers water desalination plant, OPIC’s first and only project in Algeria to date.

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

* Algeria Office of National Statistics: http://www.ons.dz/Au-deuxieme-trimestre-2018-les.html  

* National Agency for Investment Development.

Table 3: Sources and Destination of FDI

No information for Algeria is available on the IMF’s Coordinated Direct Investment Survey (CDIS) website.  Neither World Bank nor Algerian sources break down FDI to and from Algeria by individual countries.

Table 4: Sources of Portfolio Investment

No information for Algeria is available on the IMF’s Coordinated Direct Investment Survey (CDIS) website.  Neither World Bank nor Algerian sources break down FDI to and from Algeria by individual countries.

Amber Oliva
Economic Officer, U.S. Embassy Algiers
5 Chemin Cheikh Bachir El-Ibrahimi, El Biar Algiers, Algeria
Telephone: +213 0770 082 153
Email: Algiers_polecon@state.gov

Policies Towards Foreign Direct Investment

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

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

Limits on Foreign Control and Right to Private Ownership and Establishment

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

Screening of FDI

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

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

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

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

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

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

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

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

Other Investment Policy Reviews

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

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

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

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

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

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

Business Facilitation

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

Outward Investment

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

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

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

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

Transparency of the Regulatory System

In the 2019 World Bank Doing Business report, Brazil ranked 109th out of 190 countries in terms of overall ease of doing business in 2018, an improvement of 16 positions compared to the 2018 report.  According to the World Bank, it takes approximately 20.5 days to start a business in Brazil. Brazil is seeking to streamline the process and decrease the amount to time it takes to open a small or medium enterprise (SME) to five days through its RedeSimples Program.  Similarly, the government has reduced regulatory compliance burdens for SMEs through the continued use of the SIMPLES program, which simplifies the collection of up to eight federal, state, and municipal-level taxes into one single payment.  

The 2019 World Bank study noted that the annual administrative burden for a medium-size business to comply with Brazilian tax codes is an average of 1,958 hours versus 160.7 hours in OECD high-income economies.  The total tax rate for a medium-sized business in Rio de Janeiro is 69 percent of profits, compared to the average of 40.1 percent in the OECD high-income economies. Business managers often complain of not being able to understand complex, and sometimes contradictory, tax regulations, despite their housing large local tax and accounting departments in their companies.  

Tax regulations, while burdensome and numerous, do not generally differentiate between foreign and domestic firms.  However, some investors complain that in certain instances the value-added tax collected by individual states (ICMS) favors locally-based companies that export their goods.  Exporters in many states report difficulty receiving their ICMS rebates when their goods are exported. Taxes on commercial and financial transactions are particularly burdensome, and businesses complain that these taxes hinder the international competitiveness of Brazilian-made products.  

Of Brazil’s ten federal regulatory agencies, the most prominent include:

• ANVISA, the Brazilian counterpart to the U.S. Food and Drug Administration, which has regulatory authority over the production and marketing of food, drugs, and medical devices;
• ANATEL, the country’s telecommunications agency, which handles telecommunications, and licensing and assigning of radio spectrum bandwidth;
• ANP, the National Petroleum Agency, which regulates oil and gas contracts and oversees auctions for oil and natural gas exploration and production, including for offshore pre-salt oil and natural gas;
• ANAC, Brazil’s civil aviation agency;
• IBAMA, Brazil’s environmental licensing and enforcement agency; and
• ANEEL, Brazil’s electric energy regulator that regulates Brazil’s power electricity sector and oversees auctions for electricity transmission, generation, and distribution contracts.

In addition to these federal regulatory agencies, Brazil has at least 27 state-level regulatory agencies and 17 municipal-level regulatory agencies.  

The Office of the Presidency’s Program for the Strengthening of Institutional Capacity for Management in Regulation (PRO-REG) has introduced a broad program for improving Brazil’s regulatory framework.  PRO-REG and the U.S. White House Office of Information and Regulatory Affairs (OIRA) are collaborating to exchange best practices in developing high quality regulations that mandate the least burdensome approach to address policy implementation.  

Regulatory agencies complete Regulatory Impact Analyses (RIAs) on a voluntary basis.  The Senate has approved a bill on Governance and Accountability for Federal Regulatory Agencies (PLS 52/2013 in the Senate, and PL 6621/2016 in the Chamber) that is pending Senate Transparency and Governance Committee approval after the Lower House proposed changes to the text in December 2018.  Among other provisions, the bill would make RIAs mandatory for regulations that affect “the general interest.” PRO-REG is drafting enabling legislation to implement this provision. While the legislation is pending, PRO-REG has been working with regulators to voluntarily make RIAs part of their internal procedures, with some success.  

The Chamber of Deputies, Federal Senate, and the Office of the Presidency maintain websites providing public access to both approved and proposed federal legislation.  Brazil is seeking to improve its public comment and stakeholder input process. In 2004, the GoB instituted a Transparency Portal, a website with data on funds transferred to and from the federal, state and city governments, as well as to and from foreign countries.  It also includes information on civil servant salaries.

In 2018, the Department of State found Brazil to have met its minimum fiscal transparency requirements in its annual Fiscal Transparency Report.  The Open Budget Index ranked Brazil on par with the United States in terms of budget transparency in its most recent (2017) index. The Brazilian government demonstrates adequate fiscal transparency in managing its federal accounts, although there is room for improvement in terms of completeness of federal budget documentation.  Brazil’s budget documents are publically available, widely accessible, and sufficiently detailed. They provide a relatively full picture of the GoB’s planned expenditures and revenue streams. The information in publicly available budget documents is considered credible and reasonably accurate.

International Regulatory Considerations

Brazil is a member of Mercosul – a South American trade bloc whose full members include Argentina, Paraguay, and Uruguay – and routinely implements Mercosul common regulations, but still adheres to Brazilian regulations.

Brazil is a member of the WTO, and the government regularly notifies draft technical regulations, such as agricultural potential barriers, to the WTO Committee on Technical Barriers to Trade (TBT).  

Legal System and Judicial Independence

Brazil has a civil legal system structured around courts at the state and federal level.  Investors can seek to enforce contracts through the court system or via mediation, although both processes can be lengthy.  The Brazilian Superior Court of Justice (STJ) must accept foreign contract enforcement judgments for the judgments to be considered valid in Brazil.  Among other considerations, the foreign judgement must not contradict any prior decisions by a Brazilian court in the same dispute. The Brazilian Civil Code, enacted in 2002, regulates commercial disputes, although commercial cases involving maritime law follow an older, largely superseded Commercial Code.  Federal judges hear most disputes in which one of the parties is the Brazilian State, and also rule on lawsuits between a foreign state or international organization and a municipality or a person residing in Brazil.

The judicial system is generally independent.  The Supreme Federal Court (STF), charged with constitutional cases, frequently rules on politically sensitive issues.  State court judges and federal level judges below the STF are career officials selected through a meritocratic examination process.  The judicial system is backlogged, however, and disputes or trials of any sort frequently require years to arrive at a final resolution, including all available appeals.  Regulations and enforcement actions can be litigated in the court system, which contains mechanisms for appeal depending upon the level at which the case is filed. The STF is the ultimate court of appeal on constitutional grounds; the STJ is the ultimate court of appeal for cases not involving constitutional issues.  

Laws and Regulations on Foreign Direct Investment

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

Brazil does not offer a “one-stop-shop” for international investors.  There have been plans to do so for several years, but nothing has been officially created to facilitate foreign investment in Brazil.  The BCB website offers some useful information, but is not a catchall for those seeking guidance on necessary procedures and requirements.  The BCB’s website in English is: https://www.bcb.gov.br/en#!/home .

Competition and Anti-Trust Laws

The Administrative Council for Economic Defense (CADE), which falls under the purview of the Ministry of Justice, is responsible for enforcing competition laws, consumer protection, and carrying out regulatory reviews of mergers and acquisitions.  Law 12529 from 2011 established CADE in an effort to modernize Brazil’s antitrust review process and to combine the antitrust functions of the Ministry of Justice and the Ministry of Finance into CADE. The law brought Brazil in line with U.S. and European merger review practices and allows CADE to perform pre-merger reviews, in contrast to the prior legal regime that had the government review mergers after the fact.  In October 2012, CADE performed Brazil’s first pre-merger review.

In 2018, CADE conducted 74 formal investigations of cases that allegedly challenged the promotion of the free market.  It also approved 390 merger and/or acquisition requests and rejected an additional 14 requests.

Expropriation and Compensation

Article 5 of the Brazilian Constitution assures property rights of both Brazilians and foreigners that live in Brazil.  The Constitution does not address nationalization or expropriation. Decree-Law 3365 allows the government to exercise eminent domain under certain criteria that include, but are not limited to, national security, public transportation, safety, health, and urbanization projects.  In cases of eminent domain, the government compensates owners in cash.

There are no signs that the current federal government is contemplating expropriation actions in Brazil against foreign interests.  Brazilian courts have decided some claims regarding state-level land expropriations in U.S. citizens’ favor. However, as states have filed appeals to these decisions, the compensation process can be lengthy and have uncertain outcomes.  

Dispute Settlement

ICSID Convention and New York Convention

In 2002, Brazil ratified the 1958 Convention on the Recognition and Enforcement of Foreign Arbitration Awards.  Brazil is not a member of the World Bank’s International Center for the Settlement of Investment Disputes (ICSID).  Brazil joined the United Nations Commission on International Trade Law (UNCITRAL) in 2010, and its membership will expire in 2022.

Investor-State Dispute Settlement

Article 34 of the 1996 Brazilian Arbitration Act (Law 9307) defines a foreign arbitration judgment as any judgment rendered outside the national territory.  The law established that the Superior Court of Justice (STJ) must ratify foreign arbitration awards. Law 9307, updated by Law 13129/2015, also stipulates that a foreign arbitration award will be recognized or executed in Brazil in conformity with the international agreements ratified by the country and, in their absence, with domestic law.  A 2001 Brazilian Federal Supreme Court (STF) ruling established that the 1996 Brazilian Arbitration Act, permitting international arbitration subject to STJ Court ratification of arbitration decisions, does not violate the Federal Constitution’s provision that “the law shall not exclude any injury or threat to a right from the consideration of the Judicial Power.”

Contract disputes in Brazil can be lengthy and complex.  Brazil has both a federal and a state court system, and jurisprudence is based on civil code and contract law.  Federal judges hear most disputes in which one of the parties is the State, and rule on lawsuits between a foreign State or international organization and a municipality or a person residing in Brazil.  Five regional federal courts hear appeals of federal judges’ decisions. The 2019 World Bank Doing Business report found that on average it takes 12.5 procedures and 731 days to litigate a breach of contract.

International Commercial Arbitration and Foreign Courts

Brazil ratified the 1975 Inter-American Convention on International Commercial Arbitration (Panama Convention) and the 1979 Inter-American Convention on Extraterritorial Validity of Foreign Judgments and Arbitration Awards (Montevideo Convention).  Law 9307/1996 provides advanced legislation on arbitration, and provides guidance on governing principles and rights of participating parties. Brazil developed a new Cooperation and Facilitation Investment Agreement (CFIA) model in 2015 (https://concordia.itamaraty.gov.br/ ), but it does not include ISDS mechanisms.  (See sections on bilateral investment agreements and responsible business conduct.)

Bankruptcy Regulations

Brazil’s commercial code governs most aspects of commercial association, while the civil code governs professional services corporations.  In 2005, bankruptcy legislation (Law 11101) went into effect creating a system modeled on Chapter 11 of the U.S. bankruptcy code. Critics of Law 11101 argue it grants equity holders too much power in the restructuring process to detriment of debtholders.  Brazil is drafting an update to the bankruptcy law aimed at increasing creditor rights, but it has not yet been presented in Congress. The World Bank’s 2019 Doing Business Report ranks Brazil 77th out of 190 countries for ease of “resolving insolvency.”

Investment Incentives

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

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

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

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

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

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

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

Industrial Promotion

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

Foreign Trade Zones/Free Ports/Trade Facilitation

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

Performance and Data Localization Requirements

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

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

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

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

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

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

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

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

Real Property

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

Intellectual Property Rights

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

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

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

Capital Markets and Portfolio Investment

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

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

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

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

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

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

Money and Banking System

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

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

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

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

Foreign Exchange and Remittances

Foreign Exchange

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

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

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

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

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

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

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

Remittance Policies

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

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

Sovereign Wealth Funds

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

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

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

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

Privatization Program

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

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

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

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

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

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

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

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

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

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

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

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

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

Resources to Report Corruption

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

* IBGE and BCB data, year-end.

Table 3: Sources and Destination of FDI

Table 4: Sources of Portfolio Investment

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

Policies toward Foreign Direct Investment

The flotation of the EGP in November 2016 and the restart of Egypt’s interbank foreign exchange FX market as part of the IMF program was a first step in restoring investor confidence that immediately attracted increased portfolio investment and should lead to increased FDI over the long term.  The stable macro-economic outlook has allowed Egypt to focus on structural reforms to support strong economic growth. The next phase of reform has included a new investment law, an industrial licensing law, a bankruptcy law and other reforms to reduce regulatory overhang and improve the ease of doing business.  Successful implementation of these reforms could give greater confidence to foreign investors. Egypt’s government has announced plans to further improve its business climate through investment promotion, facilitation, efficient business services, and advocacy of more investor friendly policies.

With a few exceptions, Egypt does not legally discriminate between Egyptian nationals and foreigners in the formation and operation of private companies.  The 1997 Investment Incentives Law was designed to encourage domestic and foreign investment in targeted economic sectors and to promote decentralization of industry away from the Nile Valley.  The law allows 100 percent foreign ownership of investment projects and guarantees the right to remit income earned in Egypt and to repatriate capital.

The new Tenders Law No. 182 of 2018 requires the government to consider both price and best value in awarding contracts and to issue an explanation following refusal of a bid.  Nevertheless, the law contains preferences for Egyptian domestic contractors, who are accorded priority if their bids do not exceed the lowest foreign bid by more than 15 percent. Additionally the new law includes a wide range of reforms, such as establishing new rules in the contracting process on good governance, sustainable development goals, transparency, competition, equal opportunity, and an improved business environment.  Egyptian small- and medium-sized enterprises (SMEs) have the right under the new law to obtain up to 20 percent annually of the Government’s contracts. This aims to achieve a positive return on investment of public expenditures, along with controls to combat corruption.

The Capital Markets Law (Law 95 of 1992) and its amendments, including the most recent in February 2018, and related regulations govern Egypt’s capital markets.  Foreign investors are permitted to buy shares on the Egyptian Stock Exchange on the same basis as local investors.

The General Authority for Investment and Free Zones (GAFI) is an affiliate of the Ministry of Investment and International Cooperation (MIIC) and the principal government body regulating and facilitating investment in Egypt. ”The Investor Service Center (ISC)” is an administrative unit established within GAFI that provides ”one-stop-shop” services, easing the way for global investors looking for opportunities presented by Egypt’s domestic economy and the nation’s competitive advantages as an export hub for Europe, the Arab world, and Africa.

ISC provides a full start-to-end service to investors, including assistance related to company incorporation, establishment of company branches, approval of minutes of Board of Directors and General Assemblies, increase of capital, change of activity, liquidation procedures, and other corporate-related matters.  The Center also aims to issue licenses, approvals, and permits required for investment activities, within 60 days from the date of request submissions. Other services GAFI provides include:

• Advice and support to help in the evaluation of Egypt as a potential investment location;
• Identification of suitable locations and site selection options within Egypt;
• Assistance in identifying suitable Egyptian partners;
• Aftercare and dispute settlement services.​

ISC Branches are expected to be established in all Egyptian governorates.  Egypt maintains ongoing communication with investors through formal business roundtables, investment promotion events (conferences and seminars), and one-on-one investment meetings

Limits on Foreign Control and Right to Private Ownership and Establishment

The Egyptian Companies Law does not set any limitation on the number of foreigners, neither as shareholders nor as managers or board members, except for Limited Liability Companies where the only restriction is that one of the managers should be an Egyptian national.  In addition, companies are required to obtain a commercial and tax license, and pass a security clearance process. Companies are able to operate while undergoing the often lengthy security screening process. Nevertheless, if the firm is rejected, it must cease operations and undergo a lengthy appeals process.  Businesses have cited instances where Egyptian clients were hesitant to conclude long term business contracts with foreign firms that have yet to receive a security clearance. They have also expressed concern about seemingly arbitrary refusals, a lack of explanation when a security clearance is not issued, and the lengthy appeals process.  Although the GoE has made progress in streamlining the business registration process at GAFI, its apparent overall lack of familiarity or experience of Egyptians working closely with foreign nationals has sometimes led to inconsistent and questionable treatment by banks and government officials, thus, delaying registration.

Sector-specific limitations to investment include restrictions on foreign shareholding of companies owning lands in the Sinai Peninsula.  Likewise, the Import-Export Law requires companies wishing to register in the Import Registry to be 51 percent owned and managed by Egyptians.  In 2016, the Ministry of Trade prepared an amendment to the law allowing the registration of importing companies owned by foreign shareholders, but, as of April 2019, the law had not yet been submitted to Parliament.  Nevertheless, the new Investment Law does allow wholly foreign companies, which invest in Egypt to import goods and materials.

Land/Real Estate Law 15 of 1963 explicitly prohibits foreign individual or corporation ownership of agricultural land (defined as traditional agricultural land in the Nile Valley, Delta and Oases).  The ownership of land by foreigners is governed by three laws: Law No. 15 of 1963, Law No. 143 of 1981, and Law No. 230 of 1996.  Law No. 15 stipulates that no foreigners, whether natural or juristic persons, may acquire agricultural land.  Law No. 143 governs the acquisition and ownership of desert land. Certain limits are placed on the number of feddans (one feddan is equal to approximately one hectare) that may be owned by individuals, families, cooperatives, partnerships and corporations.  Partnerships are permitted to own 10,000 feddans. Joint stock companies are permitted to own 50,000 feddans.

Under Law No. 230 non-Egyptians are allowed to own real estate (vacant or built) only under the following conditions:

• Ownership is limited to two real estate properties in Egypt that serve as accommodation for the owner and his family (spouses and minors), in addition to the right to own real estate needed for activities licensed by the Egyptian Government.
• The area of each real estate property does not exceed 4,000 m².
• The real estate is not considered a historical site.

Exemption from the first and second conditions is subject to the approval of the Prime Minister. Ownership in tourist areas and new communities is subject to conditions established by the Cabinet of Ministers.  Non-Egyptians owning vacant real estate in Egypt must build within a period of five years from the date their ownership is registered by a notary public. Non-Egyptians cannot sell their real estate for five years after registration of ownership, unless the consent of the Prime Minister for an exemption is obtained.  http://www.gafi.gov.eg/English/StartaBusiness/Laws-and-  Regulations/Pages/BusinessLaws.aspx  

Other Investment Policy Reviews

The Organization for Economic Cooperation and Development (OECD) signed a declaration with Egypt on International Investment and Multinational Enterprises on July 11, 2007, at which time Egypt became the first Arab and African country to sign the OECD Declaration, marking a new stage in Egypt’s drive to attract more FDI.

The United Nations Conference of Trade Development (UNCTAD) signed in an Investment Policy Review with Egypt in June 1999 that recognized the efforts that the GoE had made to establish an adequate investment regulatory framework and improve the business environment.

The UNCTAD Review pointed out that overcoming the limited involvement of multinational companies in manufacturing sectors with export potential such as food, garments, and electronics, would require policy emphasis on infrastructure investments, promotion of  clusters of related enterprises, and self-sustaining development. Since the publication of its policy review on Egypt, UNCTAD has assisted the government with training diplomats on investment trends, policies, and promotion, and staff on FDI statistics.

Business Facilitation

GAFI’s new ISC was launched in February 2018 at a ceremony attended by President Sisi. The ISC provides a full start-to-end service to the investor as described above.  The new Investment Law also introduces ”Ratification Offices” to facilitate the obtaining of necessary approvals, permits, and licenses within 10 days of issuing a Ratification Certificate.

Investors may fulfill the technical requirements of obtaining the required licenses through these Ratification Offices, directly through the concerned authority, or through its representatives at the Investment Window at GAFI.  The Investor Service Center is required to issue licenses within 60 days from submission. Companies can also register online. MIIC and GAFI have also launched e-establishment, e-signature, and e-payment services to facilitate establishing companies.

Outward Investment

Egypt promotes and incentivizes outward investment.  According to the Egyptian government’s FDI Markets database for the period from January 2003 to February 2019, outward investment indicated that Egyptian companies implemented 241 Egyptian FDI projects.  The estimated total value of these projects, which employed about 48,204 workers, was USD 23.86 billion.

The following countries received the largest amount of Egyptian outward investment in terms of total project value:  United Arab Emirates (UAE), Saudi Arabia, Algeria, Jordan, Germany, Kenya, Libya, Morocco, Sudan, and Ethiopia. The UAE, Saudi Arabia and Algeria accounted for about 28.6 percent of the total amount.

Elsewedy Electric (Elsewedy Cables) was the largest Egyptian company investing abroad, implementing 19 projects with a total investment estimated to be USD 2.1 billion.

Egypt does not restrict domestic investors from investing abroad.

Egypt has signed 115 Bilateral Investment Treaties (BITs), out of which 74 BITs have entered into force.  The full list can be found at http://investmentpolicyhub.unctad.org/IIA.

The U.S.-Egypt Bilateral Investment Treaty provides for fair, equitable, and nondiscriminatory treatment for investors of both nations. The treaty includes provisions for international legal standards on expropriation and compensation; free financial transfers; and procedures for the settlement of investment disputes, including international arbitration.

In addition to BITs, Egypt is also a signatory to a wide variety of other agreements covering trade issues. Egypt joined the Common Market for Eastern and Southern Africa (COMESA) in June 1998.  In June 2001, Egypt signed an Association Agreement (AA) with the European Union (EU), which entered into force on June 1, 2004. The agreement provided immediate duty free access of Egyptian products into EU markets, while duty free access for EU products into the Egyptian market was phased in over a 12-year period ending in 2016.  In 2010, Egypt and the EU completed an agricultural annex to their agreement, liberalizing trade in over 90 percent of agricultural goods.

In July 1999, Egypt and the United States signed a Trade and Investment Framework Agreement (TIFA). The TIFA forum has been an effective forum to discuss tariff and non-tariff barriers and address issues affecting U.S. commercial interests.

Egypt is also a member of the Greater Arab Free Trade Agreement (GAFTA), and a member of the Agadir Agreement with Jordan, Morocco, and Tunisia, which relaxes rules of origin requirements on products jointly manufactured by the countries for export to Europe.  Egypt also has an FTA with Turkey, in force since March 2007, and an FTA with the Mercosur bloc of Latin American nations.

In 2004, Egypt and Israel signed an agreement to take advantage of the U.S. Government’s Qualifying Industrial Zone (QIZ) program.  The purpose of the QIZ program is to promote stronger ties between the region’s peace partners, as well as to generate employment and higher incomes, by granting duty-free access to goods produced in QIZs in Egypt using a specified percentage of Israeli and local input.  Under Egypt’s QIZ agreement, Egypt’s exports to the United States produced in certain industrial areas are eligible for duty-free treatment if they contain a minimum 10.5 percent Israeli content.

The industrial areas currently included in the QIZ program are Alexandria, areas in Greater Cairo such as Sixth of October, Tenth of Ramadan, Fifteenth of May, South of Giza, Shobra El-Khema, Nasr City, and Obour, areas in the Delta governorates such as Dakahleya, Damietta, Monofeya and Gharbeya, and areas in the Suez Canal such as Suez, Ismailia, Port Said, and other specified areas in Upper Egypt.  Egyptian exports to the United States through the QIZ program have mostly been ready-made garments and processed foods. The value of the Egyptian QIZ exports to the United States was approximately USD 877 million in 2018, up 16 percent from 2017.

Egypt has a bilateral tax treaty with the United States. Egypt also has tax agreements with 59 other countries, including UAE, Kuwait, Saudi Arabia, Mauritius, Bahrain, and Morocco.

The Egyptian Parliament passed and the government implemented a value added tax (VAT) in late 2016, which took the place of the General Sales Tax, as part of the IMF loan and economic reform program. Yet, the government decided to postpone the “Stock Market Capital Gains Tax” for three years as of early 2017. In 2016, there were a number of tax disputes between foreign investors and the government, but most of them were resolved through the Tax Department and the Economic Court.

Transparency of the Regulatory System

The Egyptian government has made efforts to improve the transparency of government policy and to support a fair, competitive marketplace.  Nevertheless, improving government transparency and consistency has proven difficult and reformers have faced strong resistance from entrenched bureaucratic and private interests.  Significant obstacles continue to hinder private investment, including the reportedly arbitrary imposition of bureaucratic impediments and the length of time needed to resolve them.  Nevertheless, the impetus for positive change driven by the government reform agenda augurs well for improvement in policy implementation and transparency.

Enactment of laws is the purview of the Parliament, while executive regulations are the domain of line ministries.  Under the Constitution, draft legislation can be presented by the president, the cabinet, and any member of parliament.  After submission, parliamentary committees review and approve, including any amendments.  Upon parliamentary approval, a judicial body reviews the constitutionality of any legislation before referring it to the president for his approval.  Although notice and full drafts of legislation are typically printed in the Official Gazette (similar to the Federal Register in the United States), in practice consultation with the public is limited.  In recent years, the Ministry of Trade and other government bodies have circulated draft legislation among concerned parties, including business associations and labor unions. This has been a welcome change from previous practice, but is not yet institutionalized across the government.

While Egyptian parliaments have historically held “social dialogue” sessions with concerned parties and private or civic organizations to discuss proposed legislation, it is unclear to what degree the current Parliament, seated in January 2016, will adopt a more inclusive approach to social dialogue.  Many aspects of the 2016 IMF program and related economic reforms stimulated parliament to engage more broadly with the public, marking some progress in this respect.

Accounting, legal, and regulatory procedures are transparent and consistent with international norms.  The Financial Regulatory Authority (FRA) supervises and regulates all non-banking financial markets and instruments, including capital markets, futures exchanges, insurance activities, mortgage finance, financial leasing, factoring, securitization, and microfinance.  It issues rules that facilitate market efficiency and transparency. FRA has issued legislation and regulatory decisions on non-banking financial laws which govern FRA’s work and the entities under its supervision. (http://www.fra.gov.eg/jtags/efsa_en/index_en.jsp  )

The criteria for awarding government contracts and licenses are made available when bid rounds are announced.  The process actually used to award contracts is broadly consistent with the procedural requirements set forth by law.  Further, set-aside requirements for small- and medium-sized enterprise (SME) participation in GoE procurement are increasingly highlighted. FRA maintains a centralized website where key regulations and laws are published: http://www.fra.gov.eg/content/efsa_en/efsa_pages_en/laws_efsa_en.htm  

The Parliament, seated in early 2016, and the independent “Administrative Control Authority” both ensure the government’s commitment to follow administrative processes at all levels of government.  Egypt does not have an online equivalent of the U.S. Federal Register and there is no centralized online location for key regulatory actions or their summaries.

The cabinet develops and submits proposed regulations to the president following discussion and consultation with the relevant ministry and informal consultation with other interest groups. Based on the recommendations provided in the proposal, including recommendations by the presidential advisors, the president issues “Presidential Decrees” that function as implementing regulations.  Presidential decrees are published in the “Official Gazette” for enforcement.

The specific government agency or entity responsible for enforcing the regulation works with other departments for implementation across the government.  Not all issued regulations are announced online. Theoretically, the enforcement process is legally reviewable.

Before a government regulation is implemented, there is an attempt to properly analyze and thoroughly debate proposed legislation and rules using appropriate available data.  But there are no laws requiring scientific studies or quantitative analysis of impacts of regulations. Not all public comments received by regulators are made public.

International Regulatory Considerations

In general, international standards are the main reference for Egyptian standards.  According to the Egyptian Organization for Standardization and Quality Control, approximately 7,000 national standards are aligned with international standards in various sectors.  In the absence of international standards, Egypt uses other references which are referred to in Ministerial decrees No. 180//1996 and No. 291//2003, which stipulate that in the absence of Egyptian standards, the producers and importers may use the following:

• European standards (EN)
• U.S. standards (ANSI)
• Japanese standards (JIS)

Egypt is a member of the WTO and participates actively in various committees.  Though Egypt ratified the Trade Facilitation Agreement (TFA) on June 22, 2017 by a vote of Parliament and issuance of presidential decree No. 149/2017, it has still not deposited its formal notification to the WTO. As of April 2019, the Ministry of Foreign Affairs was in the process of notifying the WTO.  Customs officials are reviewing Categories B and C. In March 2019, the Egyptian Customs Authority published an updated draft of the Customs Law on its website in Arabic for public comment. The law includes language for key TFA reforms, including advance rulings, separation of release, Single Window, authorized economic operators, post-clearance audits, e-payments, and more.

Legal System and Judicial Independence

Egypt’s legal system is a civil codified law system based on the French model.  If contractual disputes arise, claimants can sue for remedies through the court system or seek resolution through arbitration.  Egypt has written commercial and contractual laws. The country has a system of economic courts, specializing in private sector disputes, which have jurisdiction over cases related to economic and commercial matters, including intellectual property disputes.  The judiciary is set up as an independent branch of the government.

Regulations and enforcement actions can be appealed through Egypt’s courts, though appellants often complain about the very lengthy judicial process, which can often take years.  To enforce judgments of foreign courts in Egypt, the party seeking to enforce the judgment must obtain an exequatur (a legal document issued by governments allowing judgements to be enforced).  To apply for an exequatur, the normal procedures for initiating a lawsuit in Egypt must be satisfied. Moreover, several other conditions must be satisfied, including ensuring reciprocity between the Egyptian and foreign country’s courts, and verifying the competence of the court rendering the judgment.

Judges in Egypt are said to enjoy a high degree of public trust and are the designated monitors for general elections.  The Judiciary is proud of its independence and can point to a number of cases where a judge has made surprising decisions that run counter to the desires of the regime.  The judge’s ability to loosely interpret the law can sometimes lead to an uneven application of justice.  The system’s slowness and dependence on paper processes hurts its overall competence and reliability.  The executive branch claims to have no influence over the judiciary, but in practice political pressures seem to influence the courts on a case by case basis.  In the experience of the Embassy, judicial decisions are highly appealable at the national level and this appeal process is regularly used by litigants.

Laws and Regulations on Foreign Direct Investment

No specialized court exists for foreign investments. In 2016, the Import-Export Law was revised to allow companies wishing to register in the Import Registry to be 51 percent owned and managed by Egyptians; formerly the law required 100 percent Egyptian ownership and management.  In November 2016, the Supreme Investment Council also announced seventeen presidential decrees designed to spur investment or resolve longstanding issues. These include:

• Forming a “National Payments Council” that will work to restrict the handling of FX outside the banking sector;
• A decision to postpone for three years the capital gains tax on stock market transactions;
• Producers of agricultural crops that Egypt imports or exports will get tax exemptions;
• Five-year tax exemptions for manufacturers of “strategic” goods that Egypt imports or exports;
• Five-year tax exemptions for agriculture and industrial investments in Upper Egypt;
• Begin tendering land with utilities for industry in Upper Egypt for free as outlined by the Industrial Development Authority.

The Ministry of Investment and International Cooperation issued a new Investment Law that was discussed extensively with all stakeholders prior to its mid-2017 release.  New laws regarding Bankruptcy and Companies’ Law were also released in late 2017 and early 2018.

Competition and Anti-Trust Laws

The Egyptian Competition Authority (ECA) is the body tasked with ensuring free competition in the market and preventing anticompetitive practices.  The Authority operates under the Egyptian Competition Law, which covers three categories of violations: (1) cartels; (2) abuse of dominance; and (3) vertical restraints.  The ECA monitors the market, detects anti-competitive practices that are considered violations to the law, and takes measures to stop such violations. The Anti-Trust and Competition Protection Council (ACPC) monitors business practices of companies to ensure they comply with the standards of the free market.  The main challenges to competition in Egypt include a regulatory system that protects established companies and large companies, a significant informal sector, and the lack of availability of reliable information.

Expropriation and Compensation

The Investment Incentives Law provides guarantees against nationalization or confiscation of investment projects under the law’s domain.  The law also provides guarantees against seizure, requisition, blocking, and placing of assets under custody or sequestration. It offers guarantees against full or partial expropriation of real estate and investment project property.  The U.S.-Egypt Bilateral Investment Treaty also provides protection against expropriation. Private firms are able to take cases of alleged expropriation to court, but the judicial system can take several years to resolve a case.

Dispute Settlement

ICSID Convention and New York Convention

Egypt acceded to the International Convention for the Settlement of Investment Disputes (ICSID) in 1971 and is a member of the International Center for the Settlement of Investment Disputes, which provides a framework for the arbitration of investment disputes between the government and foreign investors from another member state, provided the parties agree to such arbitration.  Without prejudice to Egyptian courts, the Investment Incentives Law recognizes the right of investors to settle disputes within the framework of bilateral agreements, the ICSID or through arbitration before the Regional Center for International Commercial Arbitration in Cairo, which applies the rules of the United Nations (UN) Commissions on International Trade Law.

Egypt adheres to the 1958 New York Convention on the Enforcement of Arbitral Awards; the 1965 Washington Convention on the Settlement of Investment Disputes between States and the Nationals of Other States; and the 1974 Convention on the Settlement of Investment Disputes between the Arab States and Nationals of Other States.  An award issued pursuant to arbitration that took place outside Egypt may be enforced in Egypt if it is either covered by one of the international conventions to which Egypt is party or it satisfies the conditions set out in Egypt’s Dispute Settlement Law 27 of 1994, which provides for the arbitration of domestic and international commercial disputes and limited challenges of arbitration awards in the Egyptian judicial system.  The Dispute Settlement Law was amended in 1997 to include disputes between public enterprises and the private sector.

To enforce judgments of foreign courts in Egypt, the party seeking to enforce the judgment must obtain an exequatur.  To apply for an exequatur, the normal procedures for initiating a lawsuit in Egypt, and several other conditions must be satisfied, including ensuring reciprocity between the Egyptian and foreign country’s courts and verifying the competence of the court rendering the judgment.

Egypt has a system of economic courts specializing in private sector disputes that have jurisdiction over cases related to economic and commercial matters, including intellectual property disputes.  Despite these provisions, business and investors in Egypt’s renewable energy projects have reported significant problems resolving disputes with the Government of Egypt.

Investor-State Dispute Settlement

The U.S.-Egypt Bilateral Investment Treaty allows an investor to take a dispute directly to binding third-party arbitration.  The Egyptian courts generally endorse international arbitration clauses in commercial contracts. For example, the Court of Cassation, on a number of occasions, has confirmed the validity of arbitration clauses included in contracts between Egyptian and foreign parties.

A new mechanism for simplified settlement of investment disputes aimed at avoiding the court system altogether has been established.  In particular, the law established a Ministerial Committee on Investment Contract Disputes, responsible for the settlement of disputes arising from investment contracts to which the state, or an affiliated public or private body, is a party.  This is in addition to establishing a Complaint Committee to consider challenges connected to the implementation of Egypt’s Investment Law.  Finally, the decree established a Committee for Resolution of Investment Disputes, which will review complaints or disputes between investors and the government related to the implementation of the Investment Law.  In practice, Egypt’s dispute resolution mechanisms are time-consuming, but broadly effective.  Businesses have, however, reported difficulty collecting payment from the government when awarded a monetary settlement.

Over the past 10 years, there have been several investment disputes involving both U.S. persons and foreign investors.  Most of the cases have been settled, though no definitive number is available. Local courts in Egypt recognize and enforce foreign arbitral awards issued against the government.  There are no known extrajudicial actions against foreign investors in Egypt during the period of this report.

International Commercial Arbitration and Foreign Courts

Egypt allows mediation as a mechanism for alternative dispute resolution (ADR), a structured negotiation process in which an independent person known as a mediator assists the parties to identify and assess options, and negotiate an agreement to resolve their dispute.  GAFI has an Investment Disputes Settlement Center, which uses mediation as an ADR.

The Economic Court recognizes and enforces arbitral awards.  Judgments of foreign courts may be recognized and enforceable under local courts under limited conditions.

In most cases, domestic courts have found in favor of state-owned enterprises (SOEs) involved in investment disputes.  In such disputes, non-government parties have often complained about the delays and discrimination in court processes.

It is recommended that U.S. companies employ contractual clauses that specify binding international (not local) arbitration of disputes in their commercial agreements.

Bankruptcy Regulations

Egypt passed a new bankruptcy law in January 2018, which should speed up the restructuring and settlement of troubled companies.  It also replaces the threat of imprisonment with fines in cases of bankruptcy.

In practice, the paperwork involved in liquidating a business remains convoluted and extremely protracted; starting a business is much easier than shutting one down.  Bankruptcy is frowned upon in Egyptian culture and many businesspeople believe they may be found criminally liable if they declare bankruptcy.

Investment Incentives

The Investment Law 72//2017 provides incentives to investors, including:

General Incentives:

• All investment projects subject to the provisions of the new law enjoy the general incentives provided by it.
• Investors are exempted from the stamp tax, fees of the notarization, registration of the memorandum of incorporation of the companies, credit facilities, and mortgage contracts associated with their business for five years from the date of registration in the Commercial Registry, in addition to the registration contracts of the lands required for a company’s establishment.
• If the establishment is under the provisions of the new investment law, it will benefit from a 2 percent unified custom tax over all imported machinery, equipment, and devices required for the establishment of such a company.

Special Incentive Programs:

• Investment projects established within three years of the date of the issuance of the Investment Law will enjoy a deduction from their net profit, subject to the income tax:
  • 50 percent of the investment costs for geographical region (A) (the regions the most in need of development as well as designated projects in Suez Canal Special Economic Zone and the “Golden Triangle” along the Red Sea between the cities of Safaga, Qena and El Quseer);
  • 30 percent of the investment costs to geographical region (B) (which represents the rest of the republic).
• Provided that such deduction shall not exceed 80 percent of the paid-up capital of the company, the incentive could be utilized over a maximum of seven years.

Additional Incentive Program:

The Cabinet of Ministers may decide to grant additional incentives for investment projects in accordance with specific rules and regulations as follows:

• The establishment of special customs ports for exports and imports of the investment projects.
• The state may incur part of the costs of the technical training for workers.
• Free allocation of land for a few strategic activities may apply.
• The government may bear in full or in part the costs incurred by the investor to invest in utility connections for the investment project.
• The government may refund half the price of the land allocated to industrial projects in the event of starting production within two years from receiving the land.

Other Incentives related to Free Zones according to Investment Law 72/2017:

• Exemption from all taxes and customs duties.
• Exemption from all import/export regulations.
• The option to sell a certain percentage of production domestically if customs duties are paid.
• Limited exemptions from labor provisions.
• All equipment, machinery, and essential means of transport (excluding sedan cars) necessary for business operations are exempted from all customs, import duties, and sales taxes.
• All licensing procedures are handled by GAFI. To remain eligible for benefits, investors operating inside the free zones must export more than 50 percent of their total production.
• Manufacturing or assembly projects pay an annual charge of 1 percent of the total value of their products.
• Excluding all raw materials, storage facilities are to pay 1 percent of the value of goods entering the free zones while service projects pay 1 percent of total annual revenue.
• Goods in transit to specific destinations are exempt from any charges.

Other Incentives related to the Suez Canal Economic Zone (SCZone):

• 100 percent foreign ownership of companies.
• 100 percent foreign control of import/​export activities.
• Imports are exempted from customs duties and sales tax.
• Customs duties on exports to Egypt imposed on imported components only, not the final product.
• Fast-track visa services.
• A full service one-stop shop for registration and licensing.
• Allowing enterprises access to the domestic market; duties on sales to domestic market will be assessed on the value of imported inputs only.

The Ministry of Industry & Foreign Trade and the Ministry of Finance’s Decree No. 719//2007 provides incentives for industrial projects in the governorates of Upper Egypt (Upper Egypt refers to governorates in southern Egypt).  The decree provides an incentive of EGP 15,000 (approximately USD 850) for each job opportunity created by the project, on the condition that the investment costs of the project exceed EGP 15 million (approximately USD 850,000).  The decree can be implemented on both new and ongoing projects.

Foreign Trade Zones/Free Ports/Trade Facilitation

Public and private free trade zones are authorized under GAFI’s Investment Incentive Law.  Free zones are located within the national territory, but are considered to be outside Egypt’s customs boundaries, granting firms doing business within them more freedom on transactions and exchanges.  Companies producing largely for export (normally 80 percent or more of total production) may be established in free trade zones and operate using foreign currency. Free trade zones are open to investment by foreign or domestic investors.  Companies operating in free trade zones are exempted from sales taxes or taxes, and fees on capital assets and intermediate goods. The Legislative Package for the Stimulation of Investment, issued in 2015, stipulated a 1 percent duty paid on the value of commodities upon entry for storage projects and a 1 percent duty upon exit for manufacturing and assembly projects.

There are currently 11 public free trade zones in operation in the following locations: Alexandria, Damietta, East Port Said Port Zone, Ismailia, Qeft, Media Production City, Nasr City, Port Said, Shebin el Kom, and Suez.  Private free trade zones may also be established with a decree by GAFI, but are usually limited to a single project. Export-oriented industrial projects are given priority. There is no restriction on foreign ownership of capital in private free zones.

The Special Economic Zones (SEZ) Law 83//2002 allows establishment of special zones for industrial, agricultural, or service activities designed specifically with the export market in mind.  The law allows firms operating in these zones to import capital equipment, raw materials, and intermediate goods duty free. Companies established in the SEZs are also exempt from sales and indirect taxes, and can operate under more flexible labor regulations.  The first SEZ was established in the northwest Gulf of Suez.

Law 19//2007 authorized creation of investment zones, which require Prime Ministerial approval for establishment.  The government regulates these zones through a board of directors, but the zones are established, built, and operated by the private sector.  The government does not provide any infrastructure or utilities in these zones. Investment zones enjoy the same benefits as free zones in terms of facilitation of license-issuance, ease of dealing with other agencies, etc., but are not granted the incentives and tax/custom exemptions enjoyed in free zones.  Projects in investment zones pay the same tax/customs duties applied throughout Egypt. The aim of the law is to assist the private sector in diversifying its economic activities.

The Suez Canal Economic Zone, a major industrial and logistics services hub announced in 2014, is expected to include upgrades and renovations to ports located along the Suez Canal corridor, including West and East Port Said, Ismailia, Suez, Adabiya, and Ain Sokhna.  The Egyptian government has invited foreign investors to take part in the projects, which are expected to be built in several stages, the first of which is scheduled to be completed by 2020. Reported areas for investment include maritime services like ship repair services, bunkering, vessel scrapping and recycling; industrial projects, including pharmaceuticals, food processing, automotive production, consumer electronics, textiles, and petrochemicals; IT services such as research and development and software development; renewable energy; and mixed use, residential, logistics, and commercial developments.  Website for the Suez Canal Development Project: http://www.sczone.com.eg/English/Pages/default.aspx  

Performance and Data Localization Requirements

Egypt has rules on national percentages of employment and difficult visa and work permit procdeures.  The application of these provisions that restrict access to foreign worker visas has been inconsistent.  The government plans to phase out visas for unskilled workers, but as yet has not done so. For most other jobs, employers may hire foreign workers on a temporary six-month basis, but must also hire two Egyptians to be trained to do the job during that period.  Only jobs where it is not possible for Egyptians to acquire the requisite skills will remain open to foreign workers. The application of these regulations is inconsistent. The Labor Law allows Ministers to set the maximum percentage of foreign workers that may work in companies in a given sector.  There are no such sector-wide maximums for the oil and gas industry, but individual concession agreements may contain language establishing limits or procedures regarding the proportion of foreign and local employees.

No performance requirements are specified in the Investment Incentives Law, and the ability to fulfill local content requirements is not a prerequisite for approval to set up assembly projects.  In many cases, however, assembly industries still must meet a minimum local content requirement in order to benefit from customs tariff reductions on imported industrial inputs.

Decree 184//2013 allows for the reduction of customs tariffs on intermediate goods if the final product has a certain percentage of input from local manufacturers, beginning at 30 percent local content.  As the percentage of local content rises, so does the tariff reduction, reaching up to 90 percent if the amount of local input is 60 percent or above. In certain cases, a minister can grant tariff reductions of up to 40 percent in advance to certain companies without waiting to reach a corresponding percentage of local content.  In 2010, Egypt revised its export rebate system to provide exporters with additional subsidies if they used a greater portion of local raw materials.

Manufacturers wishing to export under trade agreements between Egypt and other countries must complete certificates of origin and local content requirements contained therein.  Oil and gas exploration concessions, which do not fall under the Investment Incentives Law, do have performance standards, which are specified in each individual agreement and which generally include the drilling of a specific number of wells in each phase of the exploration period stipulated in the agreement.

Egypt does not impose localization barriers on IT firms.  Egypt does not make local production a requirement for market access, does not have local content requirements, and does not impose forced technology or intellectual property transfers as a condition of market access.  But there are exceptions where the government has attempted to impose controls by requesting access to a company’s servers located offshore, or request servers to be located in Egypt and thus under the government’s control.

Real Property

The Egyptian legal system provides protection for real and personal property.  Laws on real estate ownership are complex and titles to real property may be difficult to establish and trace.  According to the World Bank’s 2019 Doing Business Report, Egypt ranks 125 of 190 for ease of registering property.

The National Title Registration Program introduced by the Ministry of State for Administrative Development has been implemented in nine areas within Cairo.  This program is intended to simplify property registration and facilitate easier mortgage financing. Real estate registration fees, long considered a major impediment to development of the real estate sector, are capped at no more than EGP 2000 (USD 110), irrespective of the property value.  In November 2012, the government postponed implementation of an enacted overhaul to the real estate tax and as of April 2017 no action has been taken.

Foreigners are limited to ownership of two residences in Egypt and specific procedures are required for purchasing real estate in certain geographical areas.

The mortgage market is still undeveloped in Egypt, and in practice most purchases are still conducted in cash.  Real Estate Finance Law 148//2001 authorized both banks and non-bank mortgage companies to issue mortgages. The law provides procedures for foreclosure on property of defaulting debtors, and amendments passed in 2004 allow for the issuance of mortgage-backed securities.  According to the regulations, banks can offer financing in foreign currency of up to 80 percent of the value of a property.

Presidential Decree 17//2015 permitted the government to provide land free of charge, in certain regions only, to investors meeting certain technical and financial requirements.  This provision expires on April 1, 2020 and the company must provide cash collateral for five years following commencement of either production (for industrial projects) or operation (for all other projects).

The ownership of land by foreigners is governed by three laws: Law 15//1963, Law 143//1981, and Law 230//1996.  Law 15//1963 stipulates that no foreigners, whether natural or juristic persons, may acquire agricultural land.  Law 143//1981 governs the acquisition and ownership of desert land. Certain limits are placed on the number of feddans (one feddan is equal to approximately one hectare) that may be owned by individuals, families, cooperatives, partnerships and corporations.  Partnerships are permitted to own up to 10,000 feddans. Joint stock companies are permitted to own up to 50,000 feddans.

Partnerships and joint stock companies may own desert land within these limits, even if foreign partners or shareholders are involved, provided that at least 51 percent of the capital is owned by Egyptians.  Upon liquidation of the company, however, the land must revert to Egyptian ownership. Law 143 defines desert land as the land lying two kilometers outside city borders. Furthermore, non-Egyptians owning non-improved real estate in Egypt must build within a period of five years from the date their ownership is registered by a notary public.  Non-Egyptians may only sell their real estate five years after registration of ownership, unless the consent of the Prime Minister for an exemption is obtained.

Intellectual Property Rights

Egypt remains on the Special 301 Watch List in 2019.  Egypt’s IPR legislation generally meets international standards, but is weakly enforced.  Shortcomings in the IPR environment include infringements to copyrights and patents, particularly in the pharmaceuticals sector.

Book, music, and entertainment software piracy is prevalent in Egypt, and a significant portion of the piracy takes place online.  American film studios represented by the Motion Pictures Association of America are concerned about the illegal distribution of American movies on regional satellite channels.

Multinational pharmaceutical companies complain that local generic drug-producing companies infringe on their patents.  Delays and inefficiencies in processing patent applications by the Egyptian Patent Office compound the difficulties pharmaceutical companies face in introducing new drugs to the local market.  The government views patent linkage as “a legal violation” against the concept of separation of authorities between the Ministry of Health and the Egyptian Patent Office. As a result, the Ministry of Health has the authority to issue permits for the sale of drugs, but generally issues these permits without cross-checking patent filings.

Eight GoE ministries have the responsibility to oversee IPR concerns: Supply and Internal Trade for trademarks, Higher Education and Research for patents, Culture for copyrights, Agriculture for plants, Communications and Information Technology for copyright of computer programs, Interior for combatting IPR violations, Customs for border enforcement, and Trade and Industry for standards and technical regulations.  Article 69 of Egypt’s 2014 constitution mandates the establishment of a “specialized agency to uphold [IPR] rights and their legal protection.” A National Committee on IPR was temporary established to address IPR matters until a permanent body is established. All IPR stakeholders are represented in the committee, and members meet every two months to discuss issues. The National Committee on IPR is chaired by the Ministry of Foreign Affairs and reports directly to the Prime Minister. As of April 2019, Parliament was drafting a revision of the 2002 IPR law, and was receptive to U.S. government advice and input.

The Egyptian Customs Authority (ECA) handles IPR enforcement at the national border and the Ministry of Interior’s Department of Investigation handles domestic cases of illegal production. The ECA cannot act unless the trademark owner files a complaint.  Moreover, Egypt’s Economic Courts often take years to reach a decision on IPR infringement cases.

ECA’s customs enforcement also tends to focus on protecting Egyptian goods and trademarks. The ECA is taking steps to adopt the World Customs Organization’s (WCO) Interface Public-Members platform, which allows customs officers to detect counterfeit goods by scanning a product’s barcode and checking the WCO trademark database system.

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

Capital Markets and Portfolio Investment

To date, high returns on GoE debt have crowded out Egyptian investment in productive capacity.  The large foreign inflows Egypt witnessed in 2018 have been mostly portfolio capital, which is highly volatile.  Returns on GoE debt have begun to decrease, which could presage investment by Egyptian capital in the real economy

The Egyptian Stock Exchange (EGX) is Egypt’s registered securities exchange.  There are more than 500,000 investors registered to trade on the exchange. Stock ownership is open to foreign and domestic individuals and entities.  The GoE issues dollar-denominated and Egyptian pound-denominated debt instruments. The GoE has developed a positive outlook toward foreign portfolio investment, recognizing the need to attract foreign capital to help develop the Egyptian economy.

The Capital Market Law 95//1992, along with the Banking Law 88//2003, constitutes the primary regulatory frameworks for the financial sector.  The law grants foreigners full access to capital markets, and authorizes establishment of Egyptian and foreign companies to provide underwriting of subscriptions, brokerage services, securities and mutual funds management, clearance and settlement of security transactions, and venture capital activities.  The law specifies mechanisms for arbitration and legal dispute resolution and prohibits unfair market practices. Law 10//2009 created the Egyptian Financial Supervisory Authority (EFSA) and brought the regulation of all non-banking financial services under its authority. In 2017, EFSA became the Financial Regulatory Authority (FRA).

Settlement of transactions takes one day for treasury bonds and two days for stocks.  Although Egyptian law and regulations allow companies to adopt bylaws limiting or prohibiting foreign ownership of shares, virtually no listed stocks have such restrictions.  While a significant number of the companies listed on the exchange have been family-owned or dominated conglomerates, the exchange has gone through a period of major delisting of many companies that do not have sufficient shares or do not meet the management, fiscal, and transparency standards. Free trading of the remaining shares in many of these ventures is increasing, with a 110 percent increase in trade value and a 53 percent increase in trading volume from 2016 to 2017.  Companies are delisted from the exchange if not traded for six months.

The Higher Investment Council extended the suspension of capital gains tax for three years, until 2020 as part of efforts to draw investors back.   In 2017, the government implemented a stamp duty on all stock transactions with a duty of 0.125 percent on all buyers and sellers. Egypt’s stamp duty on stock exchange transactions includes for the first time a 0.3 percent levy for investors acquiring more than a third of a company’s stocks.

Foreign investors can access Egypt’s banking system by opening accounts with local banks, and buying and selling all marketable securities with brokerages.  The government has repeatedly emphasized its commitment to maintaining the profit repatriation system to encourage foreign investment in Egypt, especially since the pound floatation and implementation of the IMF loan program in November 2016.  The current system for profit repatriation by foreign firms requires sub-custodian banks to open foreign and local currency accounts for foreign investors (global custodians), which are exclusively maintained for stock exchange transactions. The two accounts serve as a channel through which foreign investors process their sales, purchases, dividend collections, and profit repatriation transactions using the bank’s posted daily exchange rates.  The system is designed to allow for settlement of transactions in fewer than two days.

The Egyptian credit market, open to foreigners, is vibrant and active. Repatriation of investment profits has become much easier, as there is enough available hard currency to execute FX trades. Since the floatation of the EGP in November 2016, FX trading is considered straightforward, given the reestablishment of the interbank foreign currency trading system.

Money and Banking System

Benefitting from the nation’s increasing economic stability over the past two years, Egypt’s banks have enjoyed both ratings upgrades and continued profitability.  Thanks to economic reforms, a new floating exchange system, and an Investment Law passed in 2017, the project finance pipeline is increasing after a period of lower activity.  Banking competition is improving to serve a largely untapped retail segment and the nation’s challenging, but potentially rewarding, the SME segment. The Central Bank of Egypt (CBE) has mandated that 20 percent of bank loans go to SMEs within the next two years).  Also, with only about a quarter to a third of Egypt’s adult population owning or sharing an account at a formal financial institution (according to press and comments from contacts), the banking sector has potential for growth and higher inclusion, which the government and banks discuss frequently.  A low median income plays a part in modest banking penetration. But the CBE has taken steps to work with banks and technology companies to expand financial inclusion.

Egypt’s banking sector is generally regarded as healthy and well-capitalized due in part to its deposit-based funding structure and ample liquidity—especially since the floatation and restoration of the interbank market.  The CBE estimates that approximately 4.3 percent of the banking sector’s loans are non-performing in 2018. Still, since 2011, a high level of exposure to government debt, accounting for over 40 percent of banking system assets, at the expense of private sector lending, has reduced the diversity of bank balance sheets and crowded out domestic investment.  Given the floatation of the Egyptian Pound and restart of the interbank trading system, Moody’s and S&P have upgraded the outlook of Egypt’s banking system to positive from stable to reflect improving macroeconomic conditions and ongoing commitment to reform.

38 banks operate in Egypt, including several foreign banks. The CBE has not issued a new commercial banking license since 1979.  The only way for a new commercial bank, whether foreign or domestic, to enter the market (except as a representative office) is to purchase an existing bank.  To this end, in 2013, QNB Group acquired National Société Générale Bank Egypt (NSGB). That same year, Emirates NBD, Dubai’s largest bank, bought the Egypt unit of BNP Paribas.  In 2015, Citibank sold its retail banking division to CIB Bank. In 2016 and 2017, Egypt indicated a desire to partially (less than 35 percent) privatize at least one (potentially two) state-owned banks and a total of 23 firms through either expanded or new listings on the Egypt Stock Exchange, though no action has been taken as of early 2018. In March 2019, Egypt began its program to privatize 23 State-Owned Enterprises with a successful minority stake in the Eastern Tobacco Company.

According to the CBE, banks operating in Egypt held EGP 4.216 trillion in total assets at the end of first quarter of 2018, of which approximately 45 percent were held by the largest five banks (the National Bank of Egypt, Banque Misr, the Commercial International Bank, Qatar National Bank Al-Ahli, and the Banque Du Caire). Egypt’s three state-owned banks (Banque Misr, Banque du Caire, and National Bank of Egypt) control nearly 40 percent of banking sector assets.

The chairman of the EGX recently stated that Egypt is allowing, even encouraging, exploration of the use of blockchain technologies across the banking community.  The FRA will review the development and most likely regulate how the banking system adopts the fast-developing blockchain systems into banks’ back-end and customer-facing processing and transactions. Seminars and discussions are beginning around Cairo, including visitors from Silicon Valley, in which leaders and experts are still forming a path forward.  While not outright banning cryptocurrencies, which is distinguished from blockchain technologies, authorities caution against speculation in unknown asset classes.

Alternative financial services in Egypt are extensive, given the large informal economy, estimated to be from 30 to 50 percent of the GDP. Informal lending is prevalent, but the total capitalization, number of loans, and types of terms in private finance is less well known.

Foreign Exchange and Remittances

Foreign Exchange

There has been significant progress in accessing hard currency since the floatation of the EGP and reestablishment of the interbank currency trading system in November 2016.  While the immediate aftermath saw some lingering difficulty of accessing currency, by 2017 most firms operating in Egypt reported having little difficulty obtaining hard currency for business purposes, such as importing inputs and repatriating profits.  In 2016 the Central Bank lifted dollar deposit limits on households and firms importing priority goods which had been in place since early 2015. With net foreign reserves at an all-time high of over USD 44 billion (March 2019), accessing foreign currency is no longer an issue.

Funds associated with investment can be freely converted into any world currency, depending on the availability of that currency in the local market.  Some firms and individuals report that the process takes time. But the interbank trading system works in general and currency is available as the foreign exchange markets continue to react positively to the government’s commitment to macro and structural reform.

The floating exchange rate operates on the principle of market supply and demand: the exchange rate is dictated by availability of currency and demand by firms and individuals.  While there is some reported informal Central Bank window guidance, the rate generally fluctuates depending on market conditions, without direct market intervention by authorities.  In general, the EGP has stabilized within an acceptable exchange rate range, which has increased the foreign exchange market’s liquidity. Since the early days following the floatation, there has been very low exchange rate volatility.

Remittance Policies

The 1992 U.S.-Egypt Bilateral Investment Treaty provides for free transfer of dividends, royalties, compensation for expropriation, payments arising out of an investment dispute, contract payments, and proceeds from sales.

The Investment Incentives Law stipulates that non-Egyptian employees hired by projects established under the law are entitled to transfer their earnings abroad.  Conversion and transfer of royalty payments are permitted when a patent, trademark, or other licensing agreement has been approved under the Investment Incentives Law.

Banking Law 88//2003 regulates the repatriation of profits and capital.  The current system for profit repatriation by foreign firms requires sub-custodian banks to open foreign and local currency accounts for foreign investors (global custodians), which are exclusively maintained for stock exchange transactions.  The two accounts serve as a channel through which foreign investors process their sales, purchases, dividend collections, and profit repatriation transactions using the bank’s posted daily exchange rates. The system is designed to allow for settlement of transactions in fewer than two days, though in practice some firms have reported short delays in repatriating profits, no longer due to availability but more due to processing steps.

Sovereign Wealth Funds

The Cabinet has approved  the establishment of a sovereign wealth fund, which will be charged with investing state funds locally and abroad across asset classes and will be tapped to manage underutilized assets.  The framework of the EGP200 billion sovereign wealth fund was issued in March of 2018. The government is collaborating with regional and European institutions to take part in forming the fund’s sector-specific units.

State and military-owned companies compete directly with private companies in many sectors of the Egyptian economy.  According to Public Sector Law 203//1991, SOEs should not receive preferential treatment from the government, nor should they be accorded any exemption from legal requirements applicable to private companies.  In addition to the SOEs groups, 40 percent of the banking sector’s assets are controlled by three state-owned banks (Banque Misr, Banque du Caire, and National Bank of Egypt). In March 2014, the government announced that nine public holding companies will be placed under an independent sovereign fund.

In an attempt to encourage growth of the private sector, privatization of SOEs and state-owned banks accelerated under an economic reform program that took place from 1991 to 2008. Following the 2011 revolution, third parties have brought cases in court to reverse privatization deals, and in a number of these cases, Egyptian courts have ruled to reverse the privatization of several former public companies.  Most of these cases are still under appeal.

The state-owned telephone company, Telecom Egypt, lost its legal monopoly on the local, long-distance, and international telecommunication sectors in 2005.  Nevertheless, Telecom Egypt held a de facto monopoly until late 2016 because the National Telecommunications Regulatory Authority (NTRA) had not issued additional licenses to compete in these sectors.  In October 2016, NTRA, however, implemented a unified license regime that allows companies to offer both fixed line and mobile networks. The agreement allows Telecom Egypt to enter the mobile market and the three existing mobile companies to enter the fixed line market.  The introduction of Telecom Egypt as a new mobile operator in the Egyptian market will increase competition among operators, which will benefit users by raising the bar on the quality of services as well as improving prices. Egypt is not a party to the WTO’s Government Procurement Agreement.

SOEs in Egypt are structured as individual companies controlled by boards of directors and grouped under government holding companies that are arranged by industry, including Petroleum Products & Gas, Spinning & Weaving; Metallurgical Industries; Chemical Industries; Pharmaceuticals; Food Industries; Building & Construction; Tourism, Hotels & Cinema; Maritime & Inland Transport; Aviation; and Insurance. The holding companies are headed by boards of directors appointed by the Prime Minister with input from the relevant Minister.

Privatization Program

Egypt has made some progress on its program to privatize 23 State-Owned Enterprises (SOEs). The process formally began in March 2019 with a successful public offering of a minority stake in the Eastern Tobacco Company. The long-awaited program had been delayed repotedly due to market conditions.  The government plans to sell 20-30 percent of Banque du Caire’s shares in an initial public offering on the EGX by the end of 2019, according to the Central Bank. Efforts to privatize before had stalled in an environment where the public often associates privatization with poor quality and higher prices.

Egypt’s privatization program is based on Public Enterprise Law 203//1991, which permits the sale of SOEs to foreign entities.  In 1991, Egypt began a privatization program for the sale of several hundred wholly or partially SOEs and all public shares of at least 660 joint venture companies (joint venture is defined as mixed state and private ownership, whether foreign or domestic).  Bidding criteria for privatizations were generally clear and transparent.

Responsible Business Conduct (RBC) programs have grown in popularity in Egypt over the last 10 years.  Most programs are limited to multinational and larger domestic companies as well as the banking sector and take the form of funding and sponsorship for initiatives supporting entrepreneurship and education and other social activities.  Environmental and technology programs are also garnering greater participation. The Ministry of Trade has engaged constructively with corporations promoting RBC programs, supporting corporate social responsibility (CSR) conferences and providing Cabinet-level representation as a sign of support to businesses promoting RBC programming.

A number of organizations and corporations work to foster the development of RBC in Egypt.  The American Chamber of Commerce has an active CSR committee. Several U.S. pharmaceutical companies are actively engaged in RBC programs related to Egypt’s hepatitis-C epidemic.  The Egyptian Corporate Responsibility Center, which is the UN Global Compact local network focal point in Egypt, aims to empower businesses to develop sustainable business models as well as improve the national capacity to design, apply, and monitor sustainable responsible business conduct policies.  In March 2010, Egypt launched an environmental, social, and governance (ESG) index, the second of its kind in the world after India’s, with training and technical assistance from Standard and Poor’s. Egypt does not participate in the Extractive Industries Transparency Initiative. Public information about Egypt’s extractive industry remains limited to the government’s annual budget.

Egypt has a set of laws to combat corruption by public officials, including an Anti-Bribery Law (which is contained within the Penal Code), an Illicit Gains Law, and a Governmental Accounting Law, among others.  Countering corruption remains a long-term focus. There have been cases involving public figures and entities, including the arrests of Alexandria’s deputy governor and the secretary general of Suez on several corruption charges and the investigation into five members of parliament alleged to have sold Hajj visas.  Nevertheless, according to some businesses, corruption laws have not been consistently enforced. Transparency International’s Corruption Perceptions Index ranked Egypt 105 out of 180 in its 2018 survey, an improvement of 12 places from its rank of 117 in 2017. Transparency International also found that approximately 50 percent of Egyptians reported paying a bribe in order to obtain a public service.

Some private companies use internal controls, ethics, and compliance programs to detect and prevent bribery of government officials. There is no government requirement for private companies to establish internal codes of conduct to prohibit bribery.

Egypt ratified the UN Convention against Corruption in February 2005. It has not acceded to the OECD Convention on Combating Bribery or any other regional anti-corruption conventions.

While NGOs are active in encouraging anti-corruption activities, dialogue between the government and civil society on this issue is almost non-existent, the OECD found in 2009 and a trend that continues today.  While government officials publicly asserted they shared civil society organizations’ goals, they rarely cooperated with NGOs, and applied relevant laws in a highly restrictive manner against NGOs critical of government practices.  Media was also limited in its ability to report on corruption, with Article 188 of the Penal Code mandating heavy fines and penalties for unsubstantiated corruption allegations.

U.S. firms have sometimes identified corruption as an obstacle to FDI in Egypt.  Companies might encounter corruption in the public sector in the form of requests for bribes, using bribes to facilitate required government approvals or licenses, embezzlement, and tampering with official documents.  Corruption and bribery are reported in dealing with public services, customs (import license and import duties), public utilities (water and electrical connection), construction permits, and procurement, as well as in the private sector.  Businesses have described a dual system of payment for services, with one formal payment and a secondary, unofficial payment required for services to be rendered.

Resources to Report Corruption

Several agencies within the GoE share responsibility for addressing corruption.  Egypt’s primary anticorruption body is the Administrative Control Authority (ACA), which has jurisdiction over state administrative bodies, SOEs, public associations and institutions, private companies undertaking public work, and organizations to which the state contributes in any form.  In October 2017, Parliament approved and passed amendments to the ACA law, which grants the organization full technical, financial, and administrative authority to investigate corruption within the public sector (with the exception of military personnel/entities).  The law is viewed as strengthening an institution, which was established in 1964.  The ACA appears well funded and well trained when compared with other Egyptian law enforcement organizations.  Strong funding and the current ACA leadership’s close relationship with President Sisi reflect the importance of this organization and its mission. It is too small for its mission (roughly 300 agents) and is routinely over-tasked with work that would not normally be conducted by a law enforcement agency.

The ACA periodically engages with civil society.  For example, it has met with the American Chamber of Commerce and other organizations to encourage them to seek it out when corruption issues arise.

In addition to the ACA, the Central Auditing Authority (CAA) acts as an anti-corruption body, stationing monitors at state-owned companies to report corrupt practices.  The Ministry of Justice’s Illicit Gains Authority is charged with referring cases in which public officials have used their office for private gain.  The Public Prosecution Office’s Public Funds Prosecution Department and the Ministry of Interior’s Public Funds Investigations Office likewise share responsibility for addressing corruption in public expenditures.

Contact information for the government agency responsible for combating corruption:

Minister of Interior
General Directorate of Investigation of Public Funds
Telephone: 02-2792-1395 / 02-2792 1396
Fax: 02-2792-2389

Stability and economic development remain Egypt’s priorities. The GoE has taken measures to eliminate politically-motivated violence, while also limiting peaceful protests and political expression.  Egypt’s presidential elections proceeded without incident in March 2018. Late 2018 and early 2019 saw a relatively low number of small-scale terrorist attacks primarily against security targets in Cairo and elsewhere in the Nile Valley, with some against civilians. Militant groups committed several large-scale attacks in the Western Desert and Sinai in late 2017, and a car bombing in Alexandria in early 2018.  In the Sinai Peninsula, militants affiliated with ISIS have conducted terrorist attacks against military installations and personnel, as well as a prominent religious site targeting civilians. In response, the government launched a comprehensive counterterrorism offensive beginning in early 2018, which is still ongoing. The United States designated three groups – Harakat Sawaad Misr (HASM), Liwaa el Thawra, and ISIS Egypt – as Specially Designated Global Terrorists in 2018, and designated ISIS-Sinai Province as an alias of Ansar Bayt al-Maqdis, which had been designated a Foreign Terrorist Organization in September 2015.

Official statistics put Egypt’s labor force at approximately 29 million, with an official unemployment rate of 10.7 percent as of December 2018, a 0.6 percent decrease since the previous quarter and a continuation of a gradual downward trend since its peak of over 13 percent in 2014.  Women account for some 75 percent of those unemployed, according to a May 2017 statement by Abu Bakr el-Gendy, head of Egypt’s Central Agency for Public Mobilization and Statistics (CAPMAS). Accurate figures are difficult to determine and verify given Egypt’s large informal economy in which some 62 percent of the non-agricultural workforce is engaged, according to ILO estimates.

The government bureaucracy and public sector enterprises are substantially over-staffed compared to the private sector and other international norms.  According to the World Bank, Egypt has the highest number of government workers per capita in the world.  Businesses highlight a mismatch between labor skills and market demand, despite high numbers of university graduates in a variety of fields.  Foreign companies frequently pay internationally competitive salaries to attract workers with valuable skills.

The Unified Labor Law 12//2003 provides comprehensive guidelines on labor relations, including hiring, working hours, termination of employees, training, health, and safety.  The law grants a qualified right for employees to strike, as well as rules and guidelines governing mediation, arbitration, and collective bargaining between employees and employers.   Non-discrimination clauses are included, and the law complies with labor-related International Labor Organization (ILO) conventions regulating the employment and training of women and eligible children. Egypt ratified ILO Convention 182 on combating the Worst Forms of Child Labor in April 2002. On July 2018, Egypt launched the first National Action Plan on combating the Worst Forms of Child Labor. The law also created a national committee to formulate general labor policies and the National Council of Wages, whose mandate is to discuss wage-related issues and national minimum-wage policy, but it has rarely convened and a minimum wage has rarely been enforced in the private sector. .

Parliament adopted a new Trade Unions Law in late 2017, replacing a 1976 law, which experts said was out of compliance with Egypt’s commitments to ILO conventions.  After a March 2016 Ministry of Manpower and Migration (MOMM) directive not to recognize documentation from any trade union without a stamp from the government-affiliated Egyptian Trade Union Federation (ETUF), the new law established procedures for registering independent trade unions, but some of the unions noted that the directorates of the Ministry of Manpower didn’t implement the law and placed restrictions on freedoms of association and organizing for trade union elections.  Executive regulations for trade union elections stipulate a very tight deadline of three months for trade union organizations to legalize their status, and one month to hold elections, which, critics said, restricted the ability of unions to legalize their status or to campaign. On April 3, 2018, the government registered its first independent trade union in more than two years. Under the new law, a trade union or workers’ committee may be formed if 150 employees in an entity express a desire to organize.  Minimum membership thresholds for forming a general trade union are 20,000 and for a trade union federation, 200,000. The new law explicitly bans compulsory membership or the collection of union dues without written consent of the worker and allows members to quit unions. Each union, general union, or federation is registered as an independent legal entity, thereby enabling any such entity to exit any higher-level entity.

The 2014 Constitution stipulated in Article 76 that “establishing unions and federations is a right that is guaranteed by the law.”  Only courts are allowed to dissolve unions. The 2014 Constitution maintained past practice in stipulating that “one syndicate is allowed per profession.”  The Egyptian constitutional legislation differentiates between white-collar syndicates (e.g. doctors, lawyers, journalists) and blue-collar workers (e.g. transportation, food, mining workers). Workers in Egypt have the right to strike peacefully, but strikers are legally obliged to notify the employer and concerned administrative officials of the reasons and time frame of the strike 10 days in advance.  In addition, strike actions are not permitted to take place outside the property of businesses.  The law prohibits strikes in strategic or vital establishments in which the interruption of work could result in disturbing national security or basic services provided to citizens.  In practice, however, workers strike in all sectors, without following these procedures, but at risk of prosecution by the government.

Collective negotiation is allowed between trade union organizations and private sector employers or their organizations.  Agreements reached through negotiations are recorded in collective agreements regulated by the Unified Labor law and usually registered at MOMM.  Collective bargaining is technically not permitted in the public sector, though it exists in practice.  The government often intervenes to limit or manage collective bargaining negotiations in all sectors.

MOMM sets worker health and safety standards, which also apply in public and private free zones and the Special Economic Zones (see below).  Enforcement and inspection, however, are uneven.  The Unified Labor Law prohibits employers from maintaining hazardous working conditions, and workers have the right to remove themselves from hazardous conditions without risking loss of employment.

Egyptian labor laws allow employers to close or downsize operations for economic reasons.  The government, however, has taken steps to halt downsizing in specific cases.  The Unemployment Insurance Law, also known as the Emergency Subsidy Fund Law 156//2002, sets a fund to compensate employees whose wages are suspended due to partial or complete closure of their firm or due to its downsizing.  The Fund allocates financial resources that will come from a 1 percent deduction from the base salaries of public and private sector employees.  According to foreign investors, certain aspects of Egypt’s labor laws and policies are significant business impediments, particularly the difficulty of dismissing employees.  To overcome these difficulties, companies often hire workers on temporary contracts; some employees remain on a series of one-year contracts for more than 10 years. Employers sometimes also require applicants to sign a “Form 6,” an undated voluntary resignation form which the employer can use at any time, as a condition of their employment. Negotiations on drafting a new Labor Law, which has been under consideration in the Parliament for two years, have included discussion of requiring employers to offer permanent employee status after a certain number of years with the company and declaring Form 6 or any letter of resignation null and void if signed prior to the date of termination.

Egypt has a dispute resolution mechanism for workers.  If a dispute concerning work conditions, terms, or employment provisions arises, both the employer and the worker have the right to ask the competent administrative authorities to initiate informal negotiations to settle the dispute. This right can be exercised only within seven days of the beginning of the dispute. If a solution is not found within 10 days from the time administrative authorities were requested, both the employer and the worker can resort to a judicial committee within 45 days of the dispute.  This committee is comprised of two judges, a representative of MOMM and representatives from the trade union, and one of the employers’ associations. The decision of this committee is provided within 60 days. If the decision of the judicial committee concerns discharging a permanent employee, the sentence is delivered within 15 days. When the committee decides against an employer’s decision to fire, the employer must reintegrate the latter in his/her job and pay all due salaries. If the employer does not respect the sentence, the employee is entitled to receive compensation for unlawful dismissal.

Labor Law 12//2003 sought to make it easier to terminate an employment contract in the event of “difficult economic conditions.”  The Law allows an employer to close his establishment totally or partially or to reduce its size of activity for economic reasons, following approval from a committee designated by the Prime Minister.  In addition, the employer must pay former employees a sum equal to one month of the employee’s total salary for each of his first five years of service and one and a half months of salary for each year of service over and above the first five years.  Workers who have been dismissed have the right to appeal. Workers in the public sector enjoy lifelong job security as contracts cannot be terminated in this fashion; however, government salaries have eroded as inflation has outpaced increases.

Egypt has regulations restricting access for foreigners to Egyptian worker visas, though application of these provisions has been inconsistent.  The government plans to phase out visas for unskilled workers, but as yet has not done so. For most other jobs, employers may hire foreign workers on a temporary six-month basis, but must also hire two Egyptians to be trained to do the job during that period.  Only jobs where it is not possible for Egyptians to acquire the requisite skills will remain open to foreign workers. Application of these regulations is inconsistent.

The Overseas Private Investment Corporation (OPIC) is operating in Egypt to provide the capital and risk mitigation tools that investors need to overcome the barriers faced in this region. In 2012, OPIC launched the USD 250 million Egypt Loan Guaranty Facility (ELGF), in partnership with USAID, to support bank lending and stimulate job creation. The ELGF’s main objective is to help SMEs access finance for growth and development, by providing creditors the needed guarantees to help them mitigate loan risks.  This objective goes hand-in-hand with the Central Bank of Egypt’s initiative to support SMEs. The ELGF expands lending to SMEs by supporting local partner banks as they lend to the target segment and increase access to credit for SMEs. The result is the promotion of jobs and private sector development in Egypt. The ELGF and partner banks sign a Guarantee Facility Agreement (GFA) to outline main terms and conditions of credit guarantee. The two bank partners are Commercial International Bank (CIB) and the National Bank of Kuwait (NBK).  USAID has collaborated with OPIC/ELGF and the CIB to provide training to SME owners and managers on the basics of accounting and finance, banking and loan processes, business registration, and other topics that will help SMEs access financing for business growth.

OPIC is affiliated with several renewable energy, oil and gas, and water supply projects in Egypt, as well. Apache Corporation, the largest U.S. investor in Egypt, has supported its natural gas investment with OPIC risk insurance since 2004. In December 2018, the OPIC Board approved a project to provide USD 430 million in political risk insurance to Noble Energy, Inc. to support the restoration, operation, and maintenance of a natural gas pipeline in Egypt and the supply of natural gas through a pipeline from Israel.

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

Measurements of FDI in Egypt vary according to the source and the definitions employed to calculate the figure.  The Central Bank of Egypt records figures on quarterly and annual investment flows based on financial records for Egypt’s balance of payments statistics.  They are reported in the table below. The Ministry of Petroleum maintains statistics on investment in the oil and gas sector (which accounts for the bulk of FDI in Egypt), while GAFI has statistics on all other investments – including re-invested earnings and investment-in-kind.  Statistics are not always current. GAFI’s figures are calculated in EGP at the historical value and rate of exchange, with no allowance for depreciation, and are cumulative starting from 1971.

U.S. firms are active in a wide range of manufacturing industries, producing goods for the domestic and export markets.  U.S. investors include American Express, AIG, Ideal Standard, Apache Corporation, Bechtel, Bristol-Myers Squibb, Cargill, Citibank, Coca-Cola, Devon Energy, Dow Chemical, ExxonMobil, Eveready, General Motors, Guardian Industries, H.J.  Heinz, Johnson & Johnson, Kellogg’s, Mars, Mondelez, Microsoft, Proctor and Gamble, Pfizer, PepsiCo, Pioneer, and Xerox. Leading investors from other countries include BG, ENI-AGIP, BP, Vodaphone, and Shell (in the oil/gas sector), Unilever, Al-Futtaim, (UAE), the M.A. Kharafi Group (Kuwait), and the Kingdom Development Company (Saudi Arabia).

Table 3: Sources and Destination of FDI

Data not available.

Table 4: Sources of Portfolio Investment

Mohamed El Husseiny, Economic Specialist, U.S. Embassy Cairo
02-2797-2323
Elhusseinyma@state.gov

Policies towards Foreign Direct Investment

Morocco actively encourages foreign investment through macro-economic policies, trade liberalization, structural reforms, infrastructure improvements, and incentives for investors.  Law 18-95 of October 1995, constituting the Investment Charter, which can be found online at http://www.usa-morocco.org/Charte.htm  , is the principal Moroccan text governing investment and applies to both domestic and foreign investment (direct and portfolio).  Morocco’s 2014 Industrial Acceleration Plan, a new approach to industrial development based on establishing “ecosystems” that integrate value chains and supplier relationships between large companies and small and medium-sized enterprises (SMEs;), has guided Ministry of Industry policy for the last five years.  The plan runs through 2020. Morocco’s Investment and Export Development Agency (AMDIE) is the primary agency responsible for the development and promotion of investments and exports. The Agency’s website aggregates relevant information for interested investors and includes investment maps, procedures for creating a business, production costs, applicable laws and regulations, and general business climate information, among other investment services.  Further information about Morocco’s investment laws and procedures is available on AMDIE’s website at http://www.amdie.gov.ma/en/  .  For further information on agricultural investments, visit the Agricultural Development Agency (ADA) website (http://www.ada.gov.ma/)   or the National Agency for the Development of Aquaculture (ANDA) website (https://www.anda.gov.ma/  ).

Moroccan legislation governing FDI applies equally to Moroccan and foreign legal entities, with the exception of certain protected sectors.

When Morocco acceded to the OECD Declaration on International Investment and Multinational Enterprises in November 2009, Morocco guaranteed national treatment of foreign investors (i.e., according equal treatment for both foreign and national investors in like circumstances).  The only exception to this national treatment of foreign investors is in those sectors closed to foreign investment (noted below), which Morocco delineated upon accession to the Declaration. Per a Moroccan notice published in 2014, the lead agency on adherence to the Declaration is AMDIE.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign and domestic private entities may establish and own business enterprises, barring some sector restrictions.  While the U.S. Mission is not aware of any economy-wide limits on foreign ownership, Morocco places a 49 percent cap on foreign investment in air and maritime transport companies and maritime fisheries.  Morocco prohibits foreigners from owning agricultural land, though they can lease it for up to 99 years. The Moroccan government holds a monopoly on phosphate extraction through the 95 percent state-owned Office Cherifien des Phosphates (OCP).  The Moroccan state also has a discretionary right to limit all foreign majority stakes in the capital of large national banks, but does not appear to have ever exercised that right. In the oil and gas sector, the National Agency for Hydrocarbons and Mines (ONHYM) retains a compulsory share of 25 percent of any exploration license or development permit.  The Moroccan Central Bank (Bank Al-Maghrib) may use regulatory discretion in issuing authorizations for the establishment of domestic and foreign-owned banks. As set forth in the 1995 Investment Charter, there is no requirement for prior approval of FDI, and formalities related to investing in Morocco do not pose a meaningful barrier to investment. The U.S. Mission is not aware of instances in which the Moroccan government turned away foreign investors for national security, economic, or other national policy reasons.  The U.S. Mission is not aware of any U.S. investors disadvantaged or singled out by ownership or control mechanisms, sector restrictions, or investment screening mechanisms, relative to other foreign investors.

Other Investment Policy Reviews

The World Trade Organization (WTO) 2016 Trade Policy Review (TPR) of Morocco found that the trade reforms implemented since the last TPR in 2009 have contributed to the economy’s continued growth by stimulating competition in domestic markets, encouraging innovation, creating new jobs, and contributing to growth diversification. The WTO 2016 TPR can be found at https://www.wto.org/english/tratop_e/tpr_e/tp429_e.htm   .  The U.S. Mission is not aware of any other investment policy reviews in the past three years.

Business Facilitation

In the World Bank’s 2019 Doing Business Report (http://www.doingbusiness.org/en/data/exploreeconomies/morocco   ), Morocco ranks 60 out of 190 economies worldwide in terms of ease of doing business, rising nine places since the 2018 report.  Since 2012, Morocco has implemented a number of reforms facilitating business registration, such as eliminating the need to file a declaration of business incorporation with the Ministry of Labor, reducing company registration fees, and eliminating minimum capital requirements for limited liability companies.  Morocco maintains a business registration website that is accessible through the various Regional Investment Centers (CRI – Centre Regional d’Investissement at https://rabat.eregulations.org/procedure/4/7?l=fr).  The business registration process is generally streamlined and clear.

Foreign companies may utilize the online business registration mechanism.  Foreign companies, with the exception of French companies, are required to provide an apostilled Arabic translated copy of its articles of association and an extract of the registry of commerce in its country of origin.  Moreover, foreign companies must report the incorporation of the subsidiary a posteriori to the Foreign Exchange Board (Office National de Change) to facilitate repatriation of funds abroad such as profits and dividends. According to the World Bank, the process of registering a business in Morocco takes an average of nine days (significantly less time than the Middle East and North Africa regional average of 21 days).  Including all official fees and fees for legal and professional services, registration costs 3.7 percent of Morocco’s annual per capita income (significantly less than the region’s average of 22.6 percent). Moreover, Morocco does not require that the business owner deposit any paid-in minimum capital.

On December 11, 2018, the lower house of parliament adopted draft law 88-17 on the electronic creation of businesses.  The final implementation decrees are expected to be ready by mid-2019.  The new system will allow the creation of businesses online via an electronic platform managed by the Moroccan Office of Industrial and Commercial Property (OMPIC). Once launched, all procedures related to the creation, registration, and publication of company data will be required to be carried out via this platform.  The creator of the company will be exempt from filing physical documents. A separate decree will determine the list of documents required during the electronic business creation process. A new national commission will monitor the implementation of the new procedures.

The business facilitation mechanisms provide for equitable treatment of women and underrepresented minorities in the economy.  Notably, according to the World Bank, the length of time and cost to register a new business is equal for men and women in Morocco.  The U.S. Mission is not aware of any special assistance provided to women and underrepresented minorities through the business registration mechanisms.  In cooperation with the Moroccan government, civil society, and the private sector, there have been a number of initiatives aimed at improving gender quality in the workplace and access to the workplace for foreign migrants, particularly from sub-Saharan Africa.

Outward Investment

In 2017, Morocco’s FDI in Africa was USD 2.57 billion, representing a 12 percent increase over 2016.  The African Development Bank ranks Morocco as the second biggest African investor in Sub-Saharan Africa, after South Africa, with up to 85 percent of Moroccan FDI going to the region.  The U.S. Mission is not aware of a standalone outward investment promotion agency, though AMDIE’s mission includes supporting Moroccan exporters and investors seeking to invest outside of Morocco. Nor is the U.S. Mission aware of any restrictions for domestic investors attempting to invest abroad.   However, under the Moroccan investment code, repatriation of funds is limited to convertible Moroccan Dirham accounts. Capital controls limit the ability of residents to convert dirham balances into foreign currency or to move funds offshore.

As of March 2019, Morocco has signed bilateral investment treaties (BITs) with 69 countries, of which 51 are in force.  Morocco’s most recent BIT, signed in April of 2018, is with the Republic of the Congo. For more information, please visit https://investmentpolicy.unctad.org/  .

The United States and Morocco signed a BIT on July 22, 1985, but its provisions were subsumed by the investment chapter of the U.S.-Morocco FTA, which entered into force on January 1, 2006.  The BIT’s dispute settlement provisions remained in effect for 10 years after the effective date of the FTA for certain investments and investment disputes that predated the agreement. On January 1, 2016, the dispute settlement provisions of the Morocco-U.S. BIT Articles VI and VII were suspended in their entirety.

Morocco has also signed a quadrilateral FTA with Tunisia, Egypt, Lebanon, and Jordan (under the Agadir Agreement), an FTA with Turkey, an FTA with the United Arab Emirates, the European FTA with Iceland, Liechtenstein, and Norway, and the Greater Arab Free Trade Area agreement (which eliminates certain tariffs among 15 Middle East and North African countries).  The Association Agreement (AA) between the EU and Morocco came into force in 2000, creating a free trade zone in 2012 that liberalized two-way trade in goods. The EU and Morocco developed the AA further through an agreement on trade in agricultural, agro-food, and fisheries products, and a protocol establishing a bilateral dispute settlement mechanism, all of which entered into force in 2012.  However, the legal standing of the agreement’s rules of origin, particularly in regards to fisheries, has come into question in recent years with both sides seeking to resolve the issue.  Following an initial stay on the EU-Morocco agricultural agreement issued by the European Court of Justice in 2016, the European Parliament formally adopted an amended agreement in January 2019. In 2008, Morocco was the first country in the southern Mediterranean region to be granted “advanced status” by the EU, which promotes closer economic integration by reducing non-tariff barriers, liberalizing the trade in services, ensuring the protection of investments, and standardizing regulations in several commercial and economic areas.

On March 3, 2018, Morocco signed an agreement, along with 43 other African states, forming the African Continental Free Trade Area (CFTA) that will seek to establish a market of over 1.2 billion people, with a combined gross product of over USD 3 trillion.  The CFTA is a flagship project of Agenda 2063, the African Union’s long-term vision for an integrated, prosperous, and peaceful Africa. Its entry into force requires ratification by at least 22 member States, including Morocco.

The United States signed an income tax treaty with Morocco in 1977 (a copy of the treaty can be found at https://www.irs.gov/pub/irs-trty/morocco.pdf )

Transparency of the Regulatory System

Morocco is a constitutional monarchy with an elected parliament and a mixed legal system of civil law based primarily on French law, with some influences from Islamic law.  Legislative acts are subject to judicial review by the Constitutional Court. The Constitutional Court has the power to determine the constitutionality of legislation, excluding royal decrees (Dahirs).  Legislative power in Morocco is vested in both the government and the two chambers of Parliament, the Chamber of Representatives (Majlis Al-Nuwab) and the Chamber of Councillors (Majlis Al Mustashareen).  The King can issue royal decrees, which have the force of law. The principal sources of commercial legislation in Morocco are the Code of Obligations and Contracts of 1913 and Law No. 15-95 establishing the Commercial Code.  The Competition Council and the National Authority for Detecting, Preventing, and Fighting Corruption (INPPLC) have responsibility for improving public governance and advocating for further market liberalization. All levels of regulations exist (local, state, national, and supra-national).  The most relevant regulations for foreign businesses depend on the sector in question. Ministries develop their own regulations and draft laws, including those related to investment, through their administrative departments, with approval by the respective minister. Each regulation and draft law is made available for public comment.  Key regulatory actions are published in their entirety in Arabic and usually French in the official bulletin on the website (at http://www.sgg.gov.ma/Accueil.aspx  ) of the General Secretariat of the Government.  Once published, the law is final. Public enterprises and establishments can adopt their own specific regulations provided they comply with regulations regarding competition and transparency.

Morocco’s regulatory enforcement mechanisms depend on the sector in question, and enforcement is legally reviewable.  The National Telecommunications Regulatory Agency (ANRT), for example, created in February 1998 under Law No. 24-96, is the public body responsible for the control and regulation of the telecommunications sector.  The agency regulates telecommunications by participating in the development of the legislative and regulatory framework. Morocco does not have specific regulatory impact assessment guidelines, nor are impact assessments required by law.  Morocco does not have a specialized government body tasked with reviewing and monitoring regulatory impact assessments conducted by other individual agencies or government bodies.

The World Bank’s 2019 Doing Business Report indicates that Morocco implemented reforms in 2018 aimed at reducing regulatory complexity and strengthening legal institutions.  The U.S. Mission is not aware of any informal regulatory processes managed by nongovernmental organizations or private sector associations. The Moroccan Ministry of Finance posts quarterly statistics (compiled in accordance with IMF recommendations) on public finance and debt on their website (https://www.finances.gov.ma/en/Pages/Finances-publiques.aspx?m=ACTIVITIES&p=402  )

International Regulatory Considerations

Morocco joined the WTO since January 1995 and reports technical regulations that could affect trade with other member countries to the WTO.  Morocco is a signatory to the Trade Facilitation Agreement (https://www.tfadatabase.org/members/morocco  ) and has a 92 percent implementation rate of TFA requirements.  European standards are widely referenced in Morocco’s regulatory system.  In some cases, U.S. or international standards, guidelines, and recommendations are also accepted.

Legal System and Judicial Independence

The Moroccan legal system is a hybrid of civil law (French system) and Islamic law, regulated by the Decree of Obligations and Contracts of 1913 as amended, the 1996 Code of Commerce, and Law No. 53-95 on Commercial Courts.  These courts also have sole competence to entertain industrial property disputes, as provided for in Law No. 17-97 on the Protection of Industrial Property, irrespective of the legal status of the parties. According to the European Bank for Reconstruction and Development’s 2015 Morocco Commercial Law Assessment Report, Royal Decree No. 1-97-65 (1997) established commercial court jurisdiction over commercial cases including insolvency.  Although this led to some improvement in the handling of commercial disputes, companies have complained of the lack of training for judges on general commercial matters to remain a key challenge to effective commercial dispute resolution in the country. In general, some report litigation procedures to be time consuming and resource-intensive, and lacking legal requirement with respect to case publishing. Disputes may be brought before one of eight Commercial Courts (located in Rabat, Casablanca, Fes, Tangier, Marrakech, Agadir, Oujda, and Meknes), and one of three Commercial Courts of Appeal (located in Casablanca, Fes, and Marrakech).  There are other special courts such as the Military and Administrative Courts. Title VII of the Constitution provides that the judiciary shall be independent from the legislative and executive branches of government. The 2011 Constitution also authorized the creation of the Supreme Judicial Council, headed by the King, which has the authority to hire, dismiss, and promote judges. Enforcement actions are appealable at the Courts of Appeal, which hear appeals against decisions from the court of first instance.

Laws and Regulations on Foreign Direct Investment

The principal sources of commercial legislation in Morocco are the 1913 Royal Decree of Obligations and Contracts, as amended; Law No. 18-95 that established the 1995 Investment Charter; the 1996 Code of Commerce; and Law No. 53-95 on Commercial Courts.  These courts have sole competence to hear industrial property disputes, as provided for in Law No. 17-97 on the Protection of Industrial Property, irrespective of the legal status of the parties. Morocco’s CRI and AMDIE provide users with various investment related information on key sectors, procedural information, calls for tenders, and resources for business creation.

Competition and Anti-Trust Laws

Morocco’s Competition Law No. 06-99 on Free Pricing and Competition (June 2000) outlines the authority of the Competition Council   as an independent executive body with investigatory powers.  Together with the INPPLC, the Competition Council is one of the main actors charged with improving public governance and advocating for further market liberalization.  Law No. 20-13, adopted on August 7, 2014, amended the powers of the Competition Council to bring them in line with the 2011 constitution.  The Competition Council’s responsibilities include:  (1) making decisions on anti-competition practices and controlling concentrations, with powers of investigation and sanction; (2) providing opinions in official consultations by government authorities; and (3) publishing reviews and studies on the state of competition.  After four years of delays, the Moroccan Government nominated and approved all members of the Competition Council in December of 2018.

Expropriation and Compensation

Expropriation may only occur in the context of public interest for public use by a state entity, although in the past, private entities that are public service “concessionaires,” mixed economy companies, or general interest companies have also been granted expropriation rights.  Article 3 of Law No. 7-81 (May 1982) on expropriation, the associated Royal Decree of May 6, 1982, and Decree No. 2-82-328 of April 16, 1983 regulate government authority to expropriate property. The process of expropriation has two phases. In the administrative phase, the State declares public interest in expropriating specific land, and verifies ownership, titles, and value of the land, as determined by an appraisal.  If the State and owner are able to come to agreement on the value, the expropriation is complete. If the owner appeals, the judicial phase begins, whereby the property is taken, a judge oversees the transfer of the property, and payment compensation is made to the owner based on the judgment. The U.S. Mission is not aware of any recent, confirmed instances of private property being expropriated for other than public purposes (eminent domain), or being expropriated in a manner that is discriminatory or not in accordance with established principles of international law.

Dispute Settlement

ICSID Convention and New York Convention

Morocco is a member of the International Center for Settlement of Investment Disputes (ICSID) and signed its convention in June 1967.  Morocco is also a party to the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards. Law No. 08-05 provides for enforcement of awards made under these conventions.

Investor-State Dispute Settlement

Morocco is signatory to over 60 bilateral treaties recognizing binding international arbitration of trade disputes, including one with the United States.  Law No. 08-05 established a system of conventional arbitration and mediation, while allowing parties to apply the Code of Civil Procedure in their dispute resolution.  Foreign investors commonly rely on international arbitration to resolve contractual disputes. Commercial courts recognize and enforce foreign arbitrations awards. Generally, investor rights are backed by a transparent, impartial procedure for dispute settlement.  There have been no claims brought by foreign investors under the investment chapter of the U.S.-Morocco Free Trade Agreement since it came into effect in 2006. The U.S. Mission is aware of approximately five cases of business disputes over the past ten years involving U.S. investors, three of which were resolved.

Morocco officially recognizes foreign arbitration awards issued against the government.  Domestic arbitration awards are also enforceable subject to an enforcement order issued by the President of the Commercial Court, who verifies that no elements of the award violate public order or the defense rights of the parties.  As Morocco is a member of the New York Convention, international awards are also enforceable in accordance with the provisions of the convention. Morocco is also a member of the Washington Convention for the International Centre for Settlement of Investment Disputes (ICSID), and as such agrees to enforce and uphold ICSID arbitral awards.  The U.S. Mission is not aware of extrajudicial action against foreign investors.

International Commercial Arbitration and Foreign Courts

Morocco has a national commission on Alternative Dispute Resolution (ADR) with a mandate to regulate mediation training centers and develop mediator certification systems.  Morocco seeks to position itself as a regional center for arbitration in Africa, but the capacity of local courts remains a limiting factor. The Moroccan government established the Center of Arbitration and Mediation in Rabat and the Casablanca International Mediation and Arbitration Center (CIMAC).  The U.S. Mission is not aware of any investment disputes involving state owned enterprises (SOEs).

Bankruptcy Regulations

Morocco’s bankruptcy law is based on French law.  Commercial courts have jurisdiction over all cases related to insolvency, as set forth in Royal Decree No. 1-97-65 (1997).  The Commercial Court in the debtor’s place of business holds jurisdiction in insolvency cases. The law gives secured debtors priority claim on assets and proceeds over unsecured debtors, who in turn have priority over equity shareholders.  Bankruptcy is not criminalized. The World Bank’s 2019 Doing Business report ranked Morocco 71 out of 190 economies in “Resolving Insolvency,” a significant improvement from Morocco’s 134th place ranking in 2018.  One contributing factor to this improvement is the Moroccan Government’s revision of the national insolvency code in March of 2018.

Investment Incentives

As set out in the Investment Code (Section 2.4), Morocco offers incentives designed to encourage foreign and local investment.  Morocco’s Investment Charter gives the same benefits to all investors regardless of the industry in which they operate (except agriculture and phosphates, which remain outside the scope of the Charter).  With respect to agricultural incentives, Morocco launched the Plan Maroc Vert (Green Morocco Plan) in 2008 to improve the competitiveness of the agribusiness industry, which has grown to 10 percent of GDP.  This plan offers technical and financial support to federations in the citrus and olive sectors to boost agribusiness value chains.  More information about agricultural subsidies for incentivizing investments and the Plan Maroc Vert can be found at http://www.agriculture.gov.ma/fda  .

Morocco has several free zones offering companies incentives such as tax breaks, subsidies, and reduced customs duties. Free zones aim to attract investment by companies seeking to export products from Morocco. The Ministry of Industry, Investment, Trade, and Digital Economy inaugurated the newest free zone in the Souss-Massa region in November 2018.  Additionally, businesses associated with Casablanca Finance City (CFC) receive a variety of incentives, including exemption from corporate taxes for the first five years after receiving CFC status. For details on CFC eligibility, see CFC’s website (https://casablancafinancecity.com/le-statut-cfc/avantages/?lang=fr).

The Moroccan government launched its “investment reform plan” in 2016 to create a favorable environment for the private sector to drive growth.  The plan included the adoption of investment incentives to support the industrial ecosystem, tax and customs advantages to support investors and new investment projects, import duty exemptions, and a value added tax (VAT) exemption.  AMDIE’s website (http://www.amdie.gov.ma/en/#missions) has more details on investment incentives, but generally these incentives are based on sectoral priorities (i.e. aerospace).  Morocco does not issue guarantees or jointly finance FDI projects, except for some public-private partnerships in fields such as utilities.

Foreign Trade Zones/Free Ports/Trade Facilitation

The government maintains several “free zones” in which companies enjoy lower tax rates in exchange for an obligation to export at least 85 percent of their production.  In some cases, the government provides generous incentives for companies to locate production facilities in the country. The Moroccan government also offers a VAT exemption for investors using and importing equipment goods, materials, and tools needed to achieve investment projects whose value is at least USD 20 million.  This incentive lasts for a period of 36 months from the start of the business.

Performance and Data Localization Requirements

The Moroccan government views foreign investment as an important vehicle for creating local employment.  Visa issuance for foreign employees is contingent upon a company’s inability to find a qualified local employee for a specific position, and can only be issued after the company has verified the unavailability of such an employee with the National Agency for the Promotion of Employment and Competency (ANAPEC).  If these conditions are met, the Moroccan government allows the hiring of foreign employees, including for senior management. According to some reports, the process for obtaining and renewing visas and work permits can be onerous and may take up to six months, except for CFC members, where the processing time is reportedly one week.

The government does not require the use of domestic content in goods or technologies.  The WTO Trade Related Investment Measures’ (TRIMs) database does not indicate any reported Moroccan measures that are inconsistent with TRIMs requirements.  Though not required, tenders in some industries, including solar energy, are written with targets for local content percentages. Both performance requirements and investment incentives are uniformly applied to both domestic and foreign investors depending on the size of the investment.

The Moroccan Data Protection Act (Act 09-08) stipulates that data controllers may only transfer data if a foreign nation ensures an adequate level of protection of privacy and fundamental rights and freedoms of individuals with regard to the treatment of their personal data.  Morocco’s National Data Protection Commission (CNDP) defines the exceptions according to Moroccan law. Local regulation requires the release of source code for certain telecommunications hardware products. However, the U.S. Mission is not aware of any Moroccan government requirement that foreign IT companies should provide surveillance or backdoor access to their source-code or systems.

Real Property

Morocco permits foreign individuals and foreign companies (i.e. companies whose share capital is owned in whole or in part by a foreign individual or company) to own land, but not agricultural land.  Foreigners may acquire agricultural land in order to carry out an investment or other economic project that is not agricultural in nature, subject to first obtaining a certificate of non-agricultural use from the authorities.  Morocco has a formal registration system maintained by the National Agency for Real Estate Conservation, Property Registries, and Cartography (ANCFCC), which issues titles of land ownership.   Approximately 30 percent of land is registered in the formal system, and almost all of that is in urban areas.   In addition to the formal registration system, there are customary documents called moulkiya issued by traditional notaries called adouls.  While not providing the same level of certainty as a title, a moulkiya can provide some level of security of ownership.  Morocco also recognizes prescriptive rights whereby an occupant of a land under the moulkiya system (not lands duly registered with ANCFCC) can establish ownership of that land upon fulfillment of all the legal requirements, including occupation of the land for a certain period of time (10 years if the occupant and the landlord are not related and 40 years if the occupant is a parent).  There are other specific legal regimes applicable to some types of lands, among which:

• Collective lands: lands which are owned collectively by some tribes, whose members only benefit from rights of usufruct;
• Public lands: lands which are owned by the Moroccan State;
• Guich lands: lands which are owned by the Moroccan State, but whose usufruct rights are vested upon some tribes;
• Habous lands: lands which are owned by a party (the State, a certain family, a religious or charity organization, etc.) subsequent to a donation, and the usufruct rights of which are vested upon such party (usually with the obligation to allocate the proceeds to a specific use or to use the property in a certain way).

Morocco’s rating for “Registering Property” improved over the past year, with a ranking of 68 out of 190 countries worldwide in the World Bank’s Doing Business 2019 report, 18 places higher than in 2018.  According to the same report, Morocco made registering property easier by increasing the transparency of the land registry/cadaster and by streamlining administrative procedures.

Intellectual Property Rights

The Ministry of Industry, Trade, Investment, and the Digital Economy oversees the Moroccan Office of Industrial and Commercial Property (OMPIC), which serves as a registry for patents and trademarks in the industrial and commercial sectors.  The Ministry of Communications oversees the Moroccan Copyright Office (BMDA), which registers copyrights for literary and artistic works (including software), enforces copyright protection, and coordinates with Moroccan and international partners to combat piracy.  The Ministry of Communication supported the enactment of new copyright decrees on May 20, 2014, which obligate the police to work on behalf of BMDA to investigate suspected cases of copyright infringement, including the illegal selling/production of unlicensed media and illegal media use on the radio or television.  Additionally, the Ministry of Communication and BMDA formed a national anti-piracy committee responsible for developing a plan for consistent action in combating copyright infringement and counterfeit goods.

In 2016, the Ministry of Communication and World Intellectual Property Organization (WIPO) signed an MOU to expand cooperation to ensure the protection of intellectual property rights (IPR) in Morocco.  The MOU committed both parties to improving the judicial and operational dimensions of Morocco’s copyright enforcement.  Following this MOU, in November 2016, BMDA launched WIPOCOS, a database developed by WIPO for collective management organizations or societies that aims to ensure a timely, transparent, and autonomous distribution of royalties.  Despite of these positive changes, BMDA’s current focus on redefining its legal mandate and relationship with other copyright offices worldwide has appeared to lessen its enforcement capacity.

Law No. 23-13 on Intellectual Property Rights increased penalties for violation of those rights and better defines civil and criminal jurisdiction and legal remedies.  It also set in motion an accreditation system for patent attorneys in order to better systematize and regulate the practice of patent law.  Law No. 34-05, amending and supplementing Law No. 2-00 on Copyright and Related Rights, includes 15 items (Articles 61 to 65) devoted to punitive measures against piracy and other copyright offenses.  These range from civil and criminal penalties to the seizure and destruction of seized copies.  Judges’ authority in sentencing and criminal procedures is proscribed, with little power to issue harsher sentences that would serve as stronger deterrents.

OMPIC enacted a Strategic Plan for 2016-2020 to strengthen the institution’s capacity to carry out its core mandate of granting industrial and commercial property titles and enforcing IPR.  This new strategic plan focuses on promoting quality, transparency, and a service-oriented organizational culture, while underscoring the important role that IPR protection has in promoting innovation under Morocco’s 2014-2020 Industrial Acceleration Plan.

Moroccan authorities appear committed to cracking down on counterfeiting but, due to resource constraints, have chosen to focus enforcement efforts on the most problematic areas, specifically areas with public safety and/or significant economic impact.  In 2017, BMDA brought approximately a dozen court cases against copyright infringers and collected USD 6.1 million in copyright collections.  In 2018, Morocco’s customs authorities seized USD 62.7 million worth of counterfeit items. In 2018, Morocco also created a National Customs Brigade charged with countering the illicit trafficking of counterfeit goods and narcotics.

In 2015, Morocco and the European Union concluded an agreement on the protection of Geographic Indications (GIs), which is currently pending ratification by both the Moroccan and European parliaments.  Should it enter into force, the agreement would grant Moroccan GIs sui generis. The U.S. government continues to urge Morocco to undergo a transparent and substantive assessment process for the EU GIs in a manner consistent with Morocco’s existing obligations, including those under the U.S.-Morocco Free Trade Agreement.

Morocco is not included in the United States Trade Representative (USTR) Special 301 Report or Notorious Markets List.

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

For assistance, please refer to the U.S. Embassy local lawyers’ list ( at https://ma.usembassy.gov/u-s-citizen-services/local-resources-of-u-s-citizens/attorneys/), as well as to the regional U.S. IP Attaché at https://ma.usembassy.gov/u-s-citizen-services/local-resources-of-u-s-citizens/attorneys/.

Capital Markets and Portfolio Investment

Morocco encourages foreign portfolio investment and Moroccan legislation applies equally to Moroccan and foreign legal entities and to both domestic and foreign portfolio investment.  The Casablanca Stock Exchange (CSE), founded in 1929 and re-launched as a private institution in 1993, is one of the few exchanges in the region with no restrictions on foreign participation.  Local and foreign investors have identical tax exposure on dividends (10 percent) and pay no capital gains tax. With a market capitalization of around USD 60 billion and 75 listed companies, CSE is the second largest exchange in Africa (after the Johannesburg Stock Exchange).  CSE authorities have recently invested in several initiatives to encourage more SME listings on the exchange. Short-selling, which could provide liquidity to the market, is not permitted. The Moroccan government initiated the Futures Market Act (Act 42-12) in October 2015 to define the institutional framework of the futures market in Morocco and the role of the regulatory and supervisory authorities. As of March of 2019, futures trading was still pending full implementation.

The Casablanca Stock Exchange demutualized in November of 2015.   This change allowed the CSE greater flexibility, more access to global markets, and better positioned it as an integrated financial hub for the region.  Morocco has accepted the obligations of IMF Article VIII, sections 2(a), 3, and 4, and its exchange system is free of restrictions on making payments and transfers on current international transactions.  Credit is allocated on market terms, and foreign investors are able to obtain credit on the local market.

Money and Banking System

Morocco has a well-developed banking sector, where penetration is rising rapidly and recent improvements in macroeconomic fundamentals have helped resolve previous liquidity shortages.  Morocco has some of Africa’s largest banks, and several are major players on the continent and continue to expand their footprint. The sector has several large, homegrown institutions with international footprints, as well as several subsidiaries of foreign banks.  According to the IMF’s 2016 Financial System Stability Assessment on Morocco at https://www.imf.org/external/pubs/ft/scr/2016/cr1637.pdf , Moroccan banks comprise about half of the financial system with total assets of 140 percent of GDP – up from 111 percent in 2008.  There are 24 banks operating in Morocco (five of these are Islamic “participatory” banks), six offshore institutions, 32 finance companies, 13 micro-credit associations, and nine intermediary companies operating in funds transfer. Among the 19 traditional banks, the top three hold over two-thirds of the banking system’s assets.  The top eight banks comprise 90 percent of the system’s assets (including both on and off-balance sheet items). Foreign (mainly French) financial institutions are majority stakeholders in seven banks and nine finance companies. The financial system also comprises several microcredit associations and financing companies, with combined assets of 10.5 percent of GDP.  Moroccan banks have built up their presence overseas mainly through the acquisition of local banks, thus local deposits largely fund their subsidiaries.

The overall strength of the banking sector has grown significantly in recent years.  Since financial liberalization, credit is allocated freely and the Central Bank (Bank Al-Maghrib) has used indirect methods to control the interest rate and volume of credit.  The banking participation rate is approximately 60 percent, with significant opportunities remaining for firms pursuing rural and less affluent segments of the market. At the start of 2017, Bank Al-Maghrib approved five requests to open Islamic banks in the country.  By mid-2018, over 80 branches specializing in Islamic banking services were operating in Morocco.  The first Islamic bonds (sukuk) were issued in October 2018, and Islamic insurance products (takaful) are expected to launch in mid-2019.

Following an upward trend beginning in 2012, the ratio of non-performing loans (NPL) to bank credit stabilized at 7.5 percent in 2017 at USD 6.5 billion.  According to the most recently available data from the IMF, NPL rates in September 2018 were 7.7 percent.

Morocco’s accounting, legal, and regulatory procedures are transparent and consistent with international norms.  Morocco is a member of UNCTAD’s international network of transparent investment procedures (please visit https://rabat.eregulations.org/procedure/2/2?l=fr for more information).  Bank Al-Maghrib is responsible for issuing accounting standards for banks and financial institutions.  Circular 56/G/2007 issued by Bank Al Maghrib requires that all entities under its supervision use International Financial Reporting Standards (IFRS) for accounting periods that began January 2008.  The Securities Commission is responsible for issuing financial reporting and accounting standards for public companies. Circular No. 06/05 of 2007 reaffirmed the Moroccan Stock Exchange Law (Law No. 52-01), which stipulated that all companies listed on the Casablanca Stock Exchange (CSE), other than banks and similar financial institutions, can choose between IFRS and Moroccan Generally Accepted Accounting Principles (GAAP).  In practice, most public companies are using IFRS.

Legal provisions regulating the banking sector include Law No. 76-03 on the Charter of Bank Al-Maghrib, which created an independent board of directors and prohibits the Ministry of Finance and Economy from borrowing from the Central Bank except in exceptional circumstances.  Law No. 34-03 (2006) reinforced the supervisory authority of Bank Al-Maghrib over the activities of credit institutions. Foreign banks and branches are allowed to establish operations in Morocco and are subject to provisions regulating the banking sector. At present, the U.S. Mission is not aware of Morocco losing correspondent banking relationships.

There are no restrictions on foreigners’ abilities to establish bank accounts.  However, foreigners who wish to establish a bank account are required to open a “convertible” account with foreign currency.  The account holder may only deposit foreign currency into that account; at no time can they deposit dirhams. One issue, reported anecdotally, is that banks in Morocco close accounts without giving appropriate warning

In November 2017, the foreign exchange office (Office des Changes), the Ministry of Economy and Finance (MoEF), the Central Bank, and the Moroccan Capital Market Authority (AMMC) announced a prohibition on the use of cryptocurrencies, noting that they carry significant risks that may lead to penalties.

Foreign Exchange and Remittances

Foreign Exchange

Foreign investments financed in foreign currency can be transferred tax-free, without amount or duration limits.  This income can be dividends, attendance fees, rental income, benefits, and interest. Capital contributions made in convertible currency, contributions made by debit of forward convertible accounts, and net transfer capital gains may also be repatriated.  For the transfer of dividends, bonuses, or benefit shares, the investor must provide balance sheets and profit and loss statements, annexed documents relating to the fiscal year in which the transfer is requested, as well as the statement of extra-accounting adjustments made in order to obtain the taxable income.

A currency-convertibility regime is available to foreign investors, including Moroccans living abroad, who invest in Morocco.  This regime facilitates their investments in Morocco, repatriation of income, and profits on investments. Morocco guarantees full currency convertibility for capital transactions, free transfer of profits, and free repatriation of invested capital, when such investment is governed by the convertibility arrangement.  Generally, the investors must notify the government of the investment transaction, providing the necessary legal and financial documentation. With respect to the cross-border transfer of investment proceeds to foreign investors, the rules vary depending on the type of investment. Investors may import freely without any value limits to traveler’s checks, bank or postal checks, letters of credit, payment cards or any other means of payment denominated in foreign currency.  For cash and/or negotiable instruments in bearer form with a value equal to or greater than USD 10,000, importers must file a declaration with Moroccan Customs at the port of entry. Declarations are available at all border crossings, ports, and airports.

Morocco has achieved relatively stable macroeconomic and financial conditions under an exchange rate peg (60/40 Euro/Dollar split), which has helped achieve price stability and insulated the economy from nominal shocks. In January 2018, the Moroccan Ministry of Economy and Finance, in consultation with the Central Bank, adopted a new exchange regime in which the Moroccan dirham may now fluctuate within a band of ± 2.5 percent compared to the Bank’s central rate (peg).  The change loosened the fluctuation band from its previous ± 0.3 percent.

Remittance Policies

Amounts received from abroad must pass through a convertible dirham account.  This type of account facilitates investment transactions in Morocco and guarantees the transfer of proceeds for the investment, as well as the repatriation of the proceeds and the capital gains from any resale.  AMDIE recommends that investors open a convertible account in dirhams on arrival in Morocco in order to quickly access the funds necessary for notarial transactions.

Sovereign Wealth Funds

Ithmar Capital is Morocco’s investment fund and financial vehicle, which aims to support the national sectorial strategies.  Established in November 2011 by the Moroccan government and supported by the royal Hassan II Fund for Economic and Social Development, the fund initially followed the government’s long-term Vision 2020 strategic plan for tourism.  The fund is currently part of the long-term development plan initiated by the government in different economic sectors. Its portfolio of assets is valued at USD 1.8 billion.

Boards of directors (in single-tier boards) or supervisory boards (in dual-tier boards) oversee Moroccan SOEs.  The Financial Control Act and the Limited Liability Companies Act govern these bodies. The Ministry of Economy and Finance’s Department of Public Enterprises and Privatization monitors SOE governance.  Pursuant to Law No. 69-00, SOE annual accounts are publicly available. Under Law No. 62-99, or the Financial Jurisdictions Code, the Court of Accounts and the Regional Courts of Accounts audit the management of a number of public enterprises.

As of March 2019, the Moroccan Treasury held a direct share in 212 state-owned enterprises (SOEs) and 44 companies.  Several sectors remain under public monopoly, managed either directly by public institutions (rail transport, some postal services, and airport services) or by municipalities (wholesale distribution of fruit and vegetables, fish, and slaughterhouses).  The Office Cherifien des Phosphates (OCP), a public limited company that is 95 percent held by the Moroccan government, is a world-leading exporter of phosphate and derived products. Morocco has opened several traditional government activities using delegated-management or concession arrangements to private domestic or foreign operators, which are generally subject to tendering procedures.  Examples include water and electricity distribution, construction and operation of motorways, and the management of non-hazardous wastes. In some cases, SOEs continue to control the infrastructure while allowing private-sector competition through concessions. SOEs benefit from budgetary transfers from the state treasury for investment expenditures.

Morocco established the Moroccan National Commission on Corporate Governance in 2007.  It prepared the first Moroccan Code of Good Corporate Governance Practices in 2008. In 2011, the Commission drafted a code dedicated to SOEs, drawing on the OECD Guidelines on Corporate Governance of SOEs.  The code, which came into effect in 2012, aims to enhance SOEs’ overall performance. It requires greater use of standardized public procurement and accounting rules, outside audits, the inclusion of independent directors, board evaluations, greater transparency, and better disclosure.  The Moroccan government prioritizes a number of governance-related initiatives including an initiative to help SOEs contribute to the emergence of regional development clusters. The government is also attempting to improve the use of multi-year contracts with major SOEs as a tool to enhance performance and transparency.

Privatization Program

In the Government of Morocco’s 2019 budget, there are plans to revive the privatization program that ended in 2013. The updated annex to Law 38-89 (which authorizes the transfer of publicly held shares to the private sector) includes the list of entities to be privatized.  The state still holds significant shares in the main telecommunications companies, banks, and insurance companies, as well as railway and air transport companies.

Responsible business conduct (RBC) has gained strength in the broader business community in tandem with Morocco’s economic expansion and stability.  Businesses are active in RBC programs related to the environment, local communities, employees, and consumers. The Moroccan government does not have any regulations requiring companies to practice RBC nor gives any preference to such companies.  However, companies generally inform Moroccan authorities of their planned RBC involvement. Morocco joined the UN Global Compact network in 2006. The Compact provides support to companies that affirm their commitment to social responsibility. In 2016, the Ministry of Employment and Social Affairs launched an annual gender equality prize to highlight Moroccan companies that promote women in the workforce.  While there is no legislation mandating specific levels of RBC, foreign firms and some local enterprises follow generally accepted principles, such as the OECD RBC guidelines for multinational companies. NGOs and Morocco’s active civil society are also taking an increasingly active role in monitoring corporations’ RBC performance. Morocco does not currently participate in the Extractive Industries Transparency Initiative (EITI) or the Voluntary Principles on Security and Human Rights, though it has held some consultations aimed at eventually joining EITI.  No domestic transparency measures exist that require disclosure of payments made to governments. There have not been any cases of high-profile instances of private sector impact on human rights in the recent past.

In the 2018 Corruption Perceptions Index published by Transparency International (TI), which can be found at https://www.transparency.org/cpi2018  , Morocco improved by three points from the previous year (from 40 to 43 points) and moved up eight spots in the rankings (from 81st to 73rd out of 180 countries).  According to the 2018 State Department’s Country Report on Human Rights Practices, Moroccan law stipulates criminal penalties for official corruption, but companies have reported that the government does not implement the law effectively.  Per TI’s 2018 report, NGOs assert that corruption and extrajudicial influence weakened judicial independence.

The 2011 constitution mandated the creation of a national anti-corruption entity.  Morocco formally adopted the National Authority for Probity, Prevention, and Fighting Corruption (INPLCC) through a law published in 2015.  The INPLCC did not come into operation until late 2018 when its board was appointed by King Mohammed VI, although a weaker predecessor organization continued in existence until that time.  The INPLCC is tasked with initiating, coordinating, and overseeing the implementation of policies for the prevention and the fight against corruption, as well as gathering and disseminating information on the issue. Additionally, Morocco’s anti-corruption efforts include enhancing the transparency of public tenders and implementation of a requirement that senior government officials submit financial disclosure statements at the start and end of their government service, although their family members are not required to make such disclosures.  Some report that few public officials submitted such disclosures, and there are no effective penalties for failing to comply.  Morocco does not have conflict of interest legislation. In 2018, thanks to the passage of an Access to Information (AI) law, Morocco joined the Open Government Partnership, a multilateral effort to make governments more transparent.

Although the Moroccan government does not require that private companies establish internal codes of conduct, the Moroccan Institute of Directors (IMA) was established in June 2009 with the goal of bringing together individuals, companies, and institutions willing to promote corporate governance and conduct.  IMA published the four Moroccan Codes of Good Corporate Governance Practices.  Some private companies use internal controls, ethics, and compliance programs to detect and prevent bribery of government officials.  Morocco signed the UN Convention against Corruption in 2007 and hosted the States Parties to the Convention’s Fourth Session in 2011.  However, Morocco does not provide any formal protections to NGOs involved in investigating corruption.  Although the U.S. Mission is not aware of cases involving corruption with regard to customs or taxation issues, American businesses report encountering unexpected delays and requests for documentation that is not required under the FTA or standardized shipping norms.

Resources to Report Corruption

Address: Avenue Annakhil, Immeuble High Tech, Hall B, 3eme etage, Hay Ryad-Rabat
Telephone number: +212-5 37 57 86 60
Email address: contact@icpc.ma
Fax: +212-5 37 71 16 73

Note: The official website and contact information has not yet changed to INPLCC

Organization: Transparency International National Chapter
Address: 24 Boulevard de Khouribga, Casablanca 20250
Email Address: transparency@menara.ma
Telephone number: +212-22-542 699
Website: http://www.transparencymaroc.ma/index.php 

Morocco does not have a history of politically motivated violence or civil disturbance.  There has not been any damage to projects and/or installations, which has had a continuing impact on the investment environment.  Demonstrations occur frequently in Morocco and usually center on political or social issues. They can attract thousands of people in major city centers, but most have been peaceful and orderly.

The Moroccan labor market exhibits a gap between many Moroccan university graduates who cannot find jobs commensurate with their education and training, and employers reporting a shortage of skilled candidates.  In education, STEM literacy and industrial skills are not prioritized, and many graduates are unprepared to meet contemporary job market demands. Since 2011, the Moroccan government restructured its employment promotion agency, the National Agency for Promotion of Employment and Skills (ANAPEC), in order to assist new university graduates in preparing for and finding work in the private sector that requires specialized skills.  The Bureau of Professional Training and Job Promotion (OFPPT), Morocco’s main public provider for professional training, also launched the Specialized Institute for Aeronautics and Airport Logistics (ISMALA) in Casablanca in 2013 to offer technical training in aeronautical maintenance.  According to figures released by the government planning agency, unemployment was 9.8 percent at the end of 2018, with unemployment among youth aged 15 to 24 hovering around 40 percent in some urban areas.

The Government of Morocco is pursuing a strategy to increase the number of students in vocational and professional training programs. The government opened 27 such training centers between 2015 and 2018 and nearly doubled the number of students receiving scholarships for training between 2017 and 2018.  In April 2018, the Government of Morocco launched a National Plan for Job Promotion, created after three years of collaboration with government partners involved in employment policy, to support job creation, strengthen the job market, and consolidate regional resources devoted to job promotion. This plan promotes entrepreneurship – especially in the context of regionalization outside the Casablanca-Rabat corridor – to boost youth employment.

Pursuing a forward-leaning migration policy, the Moroccan government regularized the status of over 50,000 sub-Saharans migrants since 2014.  Regularization has provided these migrants with legal access to employment, employment services, and education and vocation training.  The majority of sub-Saharan migrants who benefitted from the regularization program work in call centers and education institutes, if they have strong French or English skills, or domestic work and construction.

According to section VI of the labor law, employers in the commercial, industrial, agricultural, and forestry sectors with ten or more employees must communicate a dismissal decision to the employee’s union representatives, where applicable, at least one month prior to dismissal.  The employer must also provide grounds for dismissal, the number of employees concerned, and the amount of time intended to undertake termination.  With regards to severance pay (article 52 of the labor law), the employee bound by an indefinite employment contract is entitled to compensation in case of dismissal after six months of work in the same company regardless of the mode of remuneration and frequency of payment and wages.  The labor law differentiates between layoffs for economic reasons and firing.  In case of serious misconduct, the employee may be dismissed without notice or compensation or payment of damages.  The employee must file an application with the National Social Security Funds (CNSS) agency of his or her choice, within a period not exceeding 60 days from the date of loss of employment.  During this period, the employee shall be entitled to medical benefits, family allowances, and possibly pension entitlements.  Labor law is applicable in all sectors of employment; there are no specific labor laws to foreign trade zones or other sectors.  More information is available from the Moroccan Ministry of Foreign Affairs Economic Diplomacy unit (https://www.diplomatie.ma/Portals/12/index_test/localhost/diploslack/22.html  ).

Morocco has roughly 20 collective bargaining agreements in the following sectors: Telecommunications, automotive industry, refining industry, road transport, fish canning industry, aircraft cable factory, collection of domestic waste, ceramics, naval construction and repair, paper industry, communication and information, land transport, and banks.  The sectoral agreements that exist to date are in the banking, energy, printing, chemicals, ports, and agricultural sectors.  According to the State Department’s Country Report on Human Rights Practices ( visit https://www.state.gov/reports/2018-country-reports-on-human-rights-practices/), the Moroccan constitution grants workers the right to form and join unions, strike, and bargain collectively, with some restrictions (S 396-429 Labor Code Act 1999, No. 65/99).  The law prohibits certain categories of government employees, including members of the armed forces, police, and some members of the judiciary, from forming and joining unions and from conducting strikes.  The law allows several independent unions to exist but requires 35 percent of the total employee base to be associated with a union for the union to be representative and engage in collective bargaining.  The government generally respected freedom of association and the right to collective bargaining.  Employers limited the scope of collective bargaining, frequently setting wages unilaterally for the majority of unionized and nonunionized workers.  Domestic NGOs reported that employers often used temporary contracts to discourage employees from affiliating with or organizing unions.  Legally, unions can negotiate with the government on national-level labor issues.

Labor disputes (S 549-581 Labor Code Act 1999, No. 65/99) are common, and in some cases, they result in employers failing to implement collective bargaining agreements and withholding wages.  Trade unions complain that the government sometimes uses Article 288 of the penal code to prosecute workers for striking and to suppress strikes.  Labor inspectors are tasked with mediation of labor disputes.  In general, strikes are frequent in heavily unionized sectors such as education and government services, and such strikes can lead to disruptions in government services but usually remain peaceful.  In July 2016, the Moroccan government passed the Domestic Worker Law and the long-debated pension reform bill; the former entered into force in October 2018. The new pension reform legislation is expected to keep Morocco’s largest pension fund, the Caisse Marocaine de Retraites (CMR), solvent until 2028, with an increase in the retirement age from 60 to 63 by 2024, and adjustments in contributions and future allocations.

Chapter 16 of the U.S.-Morocco Free Trade Agreement (FTA) addresses labor issues and commits both parties to respecting international labor standards.

OPIC has a long history of supporting projects in Morocco and has provided finance or insurance support to 22 deals over the past four decades.  Morocco signed an agreement with OPIC in 1961. The agreement was updated in 1995 and ratified by the Moroccan parliament in June 2004. The agreement can be found on OPIC’s website . In August 2013, OPIC provided its consent for a new USD 40 million, eight-year term loan facility with Attijariwafa Bank to support loans to small and medium-sized enterprises (SMEs) in Morocco under a risk-sharing agreement between OPIC and Citi Maghreb. In August 2014, OPIC signed an additional agreement with Attijariwafa and Wells Fargo to provide additional support to SMEs.

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

* Source for Host Country Data: Moroccan GDP data from Bank Al-Maghrib, all other statistics from the Moroccan Exchange Office.  Conflicts in host country and international statistics are likely due to methodological differences

Table 3: Sources and Destination of FDI

Table 4: Sources of Portfolio Investment

Data not available.

Foreign Commercial Service
U.S. Consulate General Casablanca, Morocco
+212522642082
Email: Office.casablanca@trade.gov

Policies Towards Foreign Direct Investment

Foreign direct investment (FDI) has played a significant role in modernizing the Spanish economy during the past 40 years. Attracted by Spain’s large domestic market, export possibilities, and growth potential, foreign companies set up operations in large numbers. Spain’s automotive industry is mostly foreign-owned. Multinationals control half of the food production companies, one-third of chemical firms, and two-thirds of the cement sector. Several foreign investment funds acquired networks from Spanish banks, and foreign firms control about one-third of the insurance market.

The Government of Spain recognizes the value of foreign investment. Spain offers investment opportunities in sectors and activities with significant added value. There have not been any major changes in Spain’s regulations for investment and foreign exchange under the current Spanish Socialist Workers Party (PSOE) administration, which took office in June 2018. Spanish law permits 100 percent foreign ownership in investments (limits apply regarding audio-visual broadcast licenses; see next section), and capital movements are completely liberalized. Due to its degree of openness and the favorable legal framework for foreign investment, Spain has received significant foreign investments in knowledge-intensive activities in the past few years. New FDI into Spain increased by 31.6 percent in 2018 according to Spain’s Industry, Trade, and Tourism Ministry data, continuing the growing path of gross FDI flow into Spain that began significantly in 2014. In 2018, 19.2 percent of total gross investments were investments in new facilities or the expansion of productive capacity, while 59 percent of gross investments were in acquisitions of existing companies. In 2018 the United States had a gross direct investment in Spain of EUR 984 million, accounting for 2.1 percent of total investment and representing a decrease of 52 percent compared to 2017. U.S. FDI stock in Spain stayed relatively steady between 2013 (USD 33.9 billion) to 2017 (USD 33.1 billion).

Limits on Foreign Control and Right to Private Ownership and Establishment

Spain has a favorable legal framework for foreign investors. Spain has adapted its foreign investment rules to a system of general liberalization, without distinguishing between EU residents and non-EU residents. Law 18/1992 of July 1, which established rules on foreign investments in Spain, provides a specific regime for non-EU persons investing in certain sectors: national defense-related activities, gambling, television, radio, and air transportation. For EU residents, the only sectors with a specific regime are the manufacture and trade of weapons or national defense-related activities. For non-EU companies, the Spanish government restricts individual ownership of audio-visual broadcasting licenses to 25 percent. Specifically, Spanish law permits non-EU companies to own a maximum of 25 percent of a company holding a digital terrestrial television broadcasting license; and for two or more non-EU companies to own a maximum of 50 percent in aggregate. In addition, under Spanish law a reciprocity principle applies (art. 25.4 General Audiovisual Law). The home country of the (non-EU) foreign company must have foreign ownership laws that permit a Spanish company to make the same transaction.

Spain is one of the 14 countries of the 28 EU member states that has established mechanisms to evaluate the possible risks of direct foreign investments. The cornerstone on which the control system is structured is the probable impact “on security and public order” of the arrival of foreign capital into Spain. Critical sectors include energy, transport, communications, technology, defense, and data processing and storage, among others.

The Spanish Constitution and Spanish law establish clear rights to private ownership, and foreign firms receive the same legal treatment as Spanish companies. There is no discrimination against public or private firms with respect to local access to markets, credit, licenses, and supplies.

Other Investment Policy Reviews

Spain is a signatory to the convention on the Organization for Economic Co-operation and Development (OECD). Spain is also a member of the World Trade Organization (WTO) and the United Nations Conference on Trade and Development (UNCTAD). Spain has not conducted Investment Policy Reviews with these three organizations within the past three years.

Business Facilitation

For setting up a company in Spain, the two basic requirements include incorporation before a Public Notary and filing with the Mercantile Register (Registro Mercantil). The public deed of incorporation of the company must be submitted. It can be submitted electronically by the Public Notary. The Central Mercantile Register is an official institution that provides access to companies’ information supplied by the Regional Mercantile Registers after January 1, 1990. Any national or foreign company can use it but must also be registered and pay taxes and fees. According to the World Bank’s Doing Business report, the process to start a business in Spain should take about two weeks.

“Invest in Spain” is the Spanish investment promotion agency to facilitate foreign investment. Services are available to all investors.

Useful web sites:

• Companies register: http://www.rmc.es/Home.aspx 
• Companies register for the Madrid region: https://www.rmercantilmadrid.com/RMM/Home/Index.aspx 
• More information on the Mercantile Registry: http://www.rmc.es/ 
• Investment promotion agency: http://www.investinspain.org/invest/es/cabecera/faq-s/establecimiento-de-una-empresa/index.html 

Outward Investment

Among the financial instruments approved by the Spanish Government to provide official support for the internationalization of Spanish enterprise are the Foreign Investment Fund (FIEX), the Fund for Foreign Investment by Small and Medium-sized Enterprises (FONPYME), the Enterprise Internationalization Fund (FIEM), and the Fund for Investment in the tourism sector (FINTUR). The Spanish Government also offers financing lines for investment in the electronics, information technology and communications, energy (renewables), and infrastructure concessions sectors.

Bilateral Taxation Treaties

Spain has concluded bilateral investment agreements with: Hungary (1989), the Czech Republic (1990), Russia (1990), Azerbaijan (1990), Belarus (1990), Georgia (1990), Tajikistan (1990), Turkmenistan (1990), Kirgizstan (1990), Armenia (1990), Slovakia (1990), Argentina (1991), Chile (1991), Tunisia (1991), Egypt (1992), Poland (1992), Uruguay (1992), Paraguay (1993), Philippines (1993), Algeria (1994), Honduras (1994), Pakistan (1994), Kazakhstan (1994), Peru (1994), Cuba (1994), Nicaragua (1994), Lithuania (1994), South Korea (1994), Bulgaria (1995), Dominican Republic (1995), El Salvador (1995), Gabon (1995), Latvia (1995), Malaysia (1995), Romania (1995), Venezuela (1995), Turkey (1995), Lebanon (1996), Ecuador (1996), Costa Rica (1997), Croatia (1997), Estonia (1997), Panama (1997), Slovenia (1998), Ukraine (1998), the Kingdom of Jordan (1999), Trinidad and Tobago (1999), Jamaica (2002), Iran (2002), Montenegro (2002), Bosnia and Herzegovina (2002), Serbia (2002), Nigeria (2002), Guatemala (2002), Namibia (2003), Albania (2003), Uzbekistan (2003), Syria (2003), Equatorial Guinea (2003), Colombia (2005), Macedonia (2005), Morocco (2005), Kuwait (2005), China (2005), the Republic of Moldova (2006), Mexico (2006), Vietnam (2006), Saudi Arabia (2006), Libya (2007), Senegal (2007), Bahrain (2008), the Islamic Republic of Mauritania (2008), Bolivia (2012), South Africa (2013), India (2016), and Indonesia (2016).

Spain and the United States have a Friendship, Navigation and Commerce (FCN) Treaty, and a Bilateral Taxation Treaty (1990), which was amended on January 14, 2013, approved by the United States Senate Foreign Relations Committee on July 16, 2014, and authorized by the Spanish Parliament on December 10, 2014. However, the amended bilateral taxation protocol is pending ratification by the United States Senate before it enters into force.

Transparency of the Regulatory System

On December 2014, the Spanish government launched a transparency website that makes over 500,000 details of public interest freely accessible to all citizens. The website offers details about the central government, public institutions such as the Royal House, the Parliament, the Constitutional Court, the Judicial Power, Ombudsman, the Audit Court, the Central Bank, and the Economic and Social Council, and other organisms such as the European Commission. http://transparencia.gob.es/transparencia/en/transparencia_Home/index.html . Regional and local authorities have developed their own transparency portals and related legislation.

International Regulatory Considerations

Spain modernized its commercial laws and regulations following its 1986 entry into the EU. Its local regulatory framework compares favorably with other major European countries. Bureaucratic procedures have been streamlined and much red tape has been eliminated, although permitting and licensing processes still result in significant delays. The efficacy of regulation at the regional level is uneven. The Market Unity Guarantee Act 20/2013 was adopted in December 2013 with the goal of rationalizing the regulatory framework for economic activities in order to facilitate the free flow of goods and services throughout Spain. It also reinforced coordination among competent authorities and introduced a mechanism to rapidly resolve operators’ problems. With a license from only one of Spain’s 17 regional governments, companies are able to operate throughout the Spanish territory, rather than needing to requests licenses from each region. The measures are designed to reduce business operating costs, improve competitiveness, and attract foreign investment.

Legal System and Judicial Independence

The Spanish judiciary has a well-established tradition of supporting and facilitating the enforcement of both foreign judgments and awards. In fact, the recognition and enforcement of foreign judgments is so well entrenched in the judicial system, that it has not been subject to any relevant modifications (save those imposed by international conventions) since the late nineteenth century, underscoring the strength of the system. For a foreign judgment to be enforced in Spain, an order declaring it is enforceable or exequatur is necessary. Once the exequatur is granted, enforcement itself is quite fast, provided that the assets are identified. Attachment of the assets will be immediate and time for realization will depend on the type of assets. First instance courts are competent for the enforcement of foreign rulings.

Local legislation establishes mechanisms to resolve disputes if they arise. The judicial system is open and transparent, although sometimes slow-moving. Judges are in charge of prosecution and criminal investigation, which permits greater independence. The Spanish prosecution system allows for successive appeals to a higher Court of Justice. The European Court of Justice can hear the final appeal. In addition, the Government of Spain abides by rulings of the International Court of Justice at The Hague.

The number of civil claims has grown significantly over the past decade, due in part to litigation stemming from Spain’s financial crisis, resulting in an increased openness to alternative dispute resolution mechanisms. Although ordinary proceedings are relatively straightforward, due to the significant number of cases within each court, getting to trial can take years. Domestic court decisions are subject to appeal, and the average time taken for a final judgment to be issued by the Court of Appeal can be anywhere from months to years. After this, the decision may still be subject to appeal to the Supreme Court (although the grounds for this appeal are very limited) and this court generally takes between two to three years to issue a decision. Due to the uncertainty surrounding the duration of appeals, disputes involving large companies or significant amounts of money tend to be resolved through arbitration.

Laws and Regulations on Foreign Direct Investment

In 2015, changes to the Personal Income Tax Law affected the transfer of investments outside of Spain by creating a tax on unrealized gains from investment. Spanish tax residents who have resided in Spain for at least 10 out of the previous 15 years are subject to a tax of 19-23 percent if they relocate their holdings or investments outside of Spain—if the market value of the shares held exceeds EUR 4 million or if the individual holds shares of 25 percent or more in a venture whose market value exceeds EUR 1 million.

Some U.S. and other foreign companies operating in Spain say they are disadvantaged by the Tax Administration’s (AEAT) interpretation of Spanish legislation designed to attract foreign investment. In the past several years, AEAT has investigated and disallowed deductions based on operational restructuring at the European level involving a number of U.S.-owned Spanish holding companies for foreign assets (Empresas de Tenencia de Valores Extranjeros or ETVEs), claiming the companies are committing “an abuse of law.” This situation disadvantages FDI in Spain; as a result, many U.S. companies channel their Spanish investments and operations through third countries.

In April 1999, the adoption of royal decree 664/1999 eliminated requirements for government authorization in investments except for those activities directly related to national defense, such as arms production. The decree abolished previous authorization requirements on investments in other sectors deemed to be of strategic interest, such as telecommunications and transportation. It also removed all forms of portfolio investment authorization and established free movement of capital into Spain as well as out of the country. As a result, Spanish law conforms to multi-disciplinary EU Directive 88/361, which prohibits all restrictions of capital movements between Member States as well as between Member States and other countries. The Directive also classifies investors according to residence rather than nationality.

Registration requirements are straightforward and apply equally to foreign and domestic investments. They aim to verify the purpose of the investment and do not block any investment. On September 1, 2016, a new Resolution of the Directorate General for International Trade and Investments at the Ministry of Economy, Industry and Competitiveness came into force. This established new forms for declaration of foreign investments before the Investment Registry, which oblige the investor(s) to declare foreign participation in the company.

Useful websites:

• Legislation: http://www.comercio.gob.es/es-ES/inversiones-exteriores/normativa/Paginas/normativa-textos-legales.aspx 
• Statement of Foreign Investments (Instructions for filing the forms): http://www.comercio.gob.es/en/inversiones-exteriores/declaracion-inversiones-exteriores/Pages/declaracion-inversiones-exteriores.aspx 
• Residency program for investors and entrepreneurs: http://www.comercio.gob.es/en/inversiones-exteriores/programa-residencia-inversores-emprendedores/Pages/default.aspx 
• International Sanctions: http://www.comercio.gob.es/en/inversiones-exteriores/sanciones-internacionales/Pages/sanciones-internacionales.aspx 
• International Agreements: http://www.comercio.gob.es/es-ES/inversiones-exteriores/acuerdos-internacionales/Paginas/acuerdos-internacionales.aspx 
• Statistics: http://www.comercio.gob.es/es-ES/inversiones-exteriores/estadisticas/Paginas/Estad percentC3 percentADsticas-de-Inversiones-Exteriores-DataInvex.aspx 
• Investor Support Center: http://www.comercio.mineco.es/es-ES/inversiones-exteriores/centro-asistencia-inversor-exportador/Paginas/solicitar-apoyo-a-traves-del-cai.aspx 
• National Contact Point for Guidelines: http://www.comercio.mineco.es/es-ES/inversiones-exteriores/punto-nacional-contacto-lineas-directrices/Paginas/El_PNC.aspx 
• Attracting Foreign Investment: http://www.comercio.mineco.es/es-ES/inversiones-exteriores/atraccion-inversiones-extranjeras/Paginas/detalle-atraccion-inversiones-extranjeras.aspx 
• Invest in Spain (investment promotion agency): http://www.investinspain.org/invest/en/index.html 
• Investment aid and incentives in Spain:https://guidetobusinessinspain.com/en/ 

Competition and Anti-Trust Laws

The parliament passed Act 3/2013 on June 4, 2013, by which the entities that regulated energy (CNE), telecoms (CMT), and competition (CNC) merged into a new entity—the National Securities Market and Competition Commission (CNMC). The law attributes practically all of the functions entrusted to the National Competition Commission under the Competition Act 15/2007, of July 3, 2007 (LDC), to the CNMC.

Expropriation and Compensation

Spanish legislation has set up a series of safeguards to prevent the nationalization or expropriation of foreign investments. Since its economic crisis, Spain has altered its renewables policy several times, creating a high degree of regulatory uncertainty and resulting in losses to U.S. companies’ earnings and investments. In December 2012, the government enacted a comprehensive energy sector reform plan in an effort to address a EUR 30 billion energy tariff deficit caused by user rates that were insufficient to cover system costs. In February 2014, Spain’s government announced its plan to cut subsidies for renewable-energy producers, a move that producers decried as a dramatic change to the business environment in which they made their initial investment decisions. Additional reforms in 2014 negatively affected U.S. investors in the solar power sector, with some companies arguing that the legal changes were tantamount to indirect expropriation. As a result of these energy reforms, Spain accumulated more than 30 lawsuits, totaling about EUR 7.6 billion in claims. Spain now faces an array of related international claims for solar photovoltaic and other renewable energy projects. Two international panels have ordered the Government of Spain to compensate companies for losses due to cuts in renewable energy support. In May 2017, the World Bank’s International Center for the Settlement of Investment Disputes (ICSID) arbitration panel ordered the Spanish government to pay 128 million euros to solar thermal investors, and in February 2018, a Swedish arbitration panel awarded a Luxembourg-based investment firm 53 million euros on a similar energy investment case.

Spain registered four new cases with ICSID in 2018, (three of them are related to renewable energy, and one to shares and bonds), and one on February 2019, bringing its total of pending cases to 32 (as of February 2019). By way of comparison, Venezuela has 19 pending cases in ICSID.

Dispute Settlement

ICSID Convention and New York Convention

Spain is a member state to the International Centre for the Settlement of Investment Disputes between States and Nationals of Other States (ICSID) and a signatory to the 1958 Recognition and Enforcement of Foreign Arbitral Awards (New York Convention). Therefore, the recognition and enforcement of awards is straightforward and implies the same guarantees and practicalities sought by the New York Convention and arbitration practitioners worldwide, with the additional advantage of the existence of a court specialized only in arbitration issues.

Investor-State Dispute Settlement

Contractual disputes between U.S persons and Spanish entities are handled accordingly. U.S. citizens seeking to execute American court judgments within Spain must follow the Exequatur procedure established by Spanish law.

International Commercial Arbitration and Foreign Courts

Law 11/2011 of May 2011 (amending Law 60/2003 of December 2003) on Arbitration applies to national and international arbitration conducted in Spanish territory and aims to promote alternative dispute resolution (ADR) methods, particularly arbitration. The Arbitration Act says that the Civil Court and Criminal Court of Justice are competent to recognize foreign arbitral awards. The Spanish Arbitration Act is based on the UNCITRAL Model law.

There are two main arbitration institutions in Spain, the Court of Arbitration of the Official Chamber of Commerce of Madrid (CAM), and the Civil and Commercial Arbitration Court of Madrid (CIMA). Both institutions have modern and flexible rules that facilitate successful arbitration outcomes. The number of cases–both domestic and international– handled by both institutions, has been rapidly increasing over the past years. In particular, proceedings in the CAM are resolved swiftly, allowing the parties to obtain an award in as few as six months. In December 2017, the Chamber of Commerce of Spain, the Chamber of Commerce of Madrid, and the Civil and Commercial Court of Arbitration Court of Madrid signed a memorandum of understanding (MOU) to unify their arbitration activities and to create a unified Arbitration Court to administer international arbitrations. The MOU will create a commission that will settle the bases of this unified international court. In addition, the new institution’s primary objectives will be the resolution of conflicts related to Latin America, under the principles of autonomy, independence, and transparency. Another arbitration organization in Spain is the Barcelona Court of Arbitration (TAB), which offers services in the field of dispute resolution through arbitration or other similar mechanisms such as conciliation.

Bankruptcy Regulations

Spain has a fair and transparent bankruptcy regime. Bankruptcy proceedings are governed by the Bankruptcy Law of 2003, which entered into force on September 1, 2004, and applies to both individuals and companies. The main objective of the law was to ensure the collection of debts by creditors, to promote consensus between the parties by requiring an agreement between debtor and creditor, and for companies, to enable their survival and continuity, if possible. However, given the law’s requirement for agreement between debtor and creditor—primarily banks, many of which refused to negotiate debt reductions—relatively few companies and individuals were able to declare bankruptcy, even at the height of Spain’s economic crisis. To address the issue, in 2014, the government approved a reform of the bankruptcy law to promote Spain’s economic recovery by establishing mediation mechanisms. These reforms—nicknamed the Second Chance Law—aimed to avoid the bankruptcy of viable companies and to preserve jobs by facilitating refinancing agreements through debt write-off, capitalization, and rescheduling. However, even with the new legislation, declaring bankruptcy remains much less prevalent in Spain than in other parts of the world.

Investment Incentives

A range of investment incentives exist in Spain, and they vary according to the authorities granting incentives and the type and purpose of the incentives. The national government provides financial aid and tax benefits for activities pursued in certain industries that are considered priority industries (e.g., mining, technological development, research and development, etc.), given these industries’ potential effect on the nation’s overall economy. Regional governments also provide similar incentives for most of these industries. Financial aid includes both nonrefundable subsidies and interest relief on loans obtained by beneficiaries—or combinations of the two.

The European Union:

Since Spain is a European Union (EU) Member State, potential investors are able to access European aid programs, which provide further incentives for investing in Spain.

The EU provides incentives primarily to projects that focus on economically depressed regions or that benefit the EU as a whole.

The European Investment Bank (EIB) provides guarantees, microfinance, equity investment, and global loans for small and medium enterprises (SMEs) as well as individual loans focused on innovation and skills, energy, and strategic infrastructure. Projects aiming to extend and modernize infrastructure in the health and education sectors may also qualify for EIB support.

The European Investment Fund (EIF) provides venture capital to small and medium-sized enterprises, particularly new firms and technology-oriented businesses, via financial intermediaries. It also provides guarantees to financial institutions (such as banks) to cover their loans to SMEs. The EIF does not grant loans or subsidies to businesses, nor does it invest directly in any firms. Instead, it works through banks and other financial intermediaries. It uses either its own funds or those entrusted to it by the EIB or the EU.

The European Structural and Investment Funds (ESI Funds) include the Funds under the Cohesion Policy (Structural Funds (ERDF and ESF) and the Cohesion Fund), which contribute to enhancing economic, social and territorial cohesion. Most autonomous regions of Spain qualify for structural funds under the EU’s 2014-2020 budget (EUR 454 billion). Investments under the European Regional Development Fund (ERDF) are concentrated in four key priority areas: innovation and research, the digital agenda, support for small and medium-sized enterprises (SMEs) and the low-carbon economy, depending on the category of region. The European Social Fund (ESF)’s Cohesion Fund provides funding for programs aiming to reduce economic and social disparities and to promote sustainable development.

EU financial incentives are routed through major Spanish financial institutions, such as the Instituto de Credito Oficial (ICO) and Banco Bilbao-Vizcaya Argentaria (BBVA); EU financial incentives must also be applied for through the financial intermediary.

The Central Government:

Spain’s central government provides numerous financial incentives for foreign investment, which are designed to complement European Union financing. The Ministry of Economy and Competitiveness (MINECO) assists businesses seeking investment opportunities through the Directorate General for International Trade and Investments and the Directorate General for Innovation and Competitiveness. These Directorates provide support to foreign investors in both the pre- and post-investment phases. Most grants seek to promote the development of select economic sectors; however, while these sectoral subsidies are often preferential, they are not exclusive.

A comprehensive list of incentive programs is available at the website: www.investinspain.org  

Using this tool, companies can access up-to-date information regarding grants available for investment projects. Users can also sign up for the automatic alert system, which provides customized updates as suitable grants or subsidies are published. Applications for these incentives should be made directly with the relevant government agency.

Spain provides some support to SMEs through a national program designed to strengthen innovative business groups and networks and boost their competitiveness. In 2013, Spain passed the “Law of Entrepreneurs,” which established an entrepreneur visa for investors and entrepreneurs. Entrepreneurs may apply for the visa with a business plan that has been approved by the Spanish Commercial Office. Entrepreneurs must also demonstrate the intent to develop the project in Spain for at least one year. Investors who purchase at least EUR 2 million in Spanish bonds or acquire at least EUR 1 million in shares of Spanish companies or Spanish banks deposits may also apply. Foreigners who acquire real estate with an investment value of at least EUR 500,000 are also eligible.

The central government provides financial aid and tax benefits for certain industries that it considers priority sectors given their potential growth resultant effect on the nation’s overall economy. Such activities include, for example: new industrial plants, increases in production capacity, relocations that industries undertake to boost competitiveness, new infrastructure projects, and the extension of projects, which are already mature. Preferred sectors are transportation, energy and environment, and social infrastructure and services. Furthermore, priority activities also include those involving Research &Development (R&D) and innovation—including the acquisition, upgrade and maintenance of scientific-technological equipment for R&D activities, private technology centers, and private centers of innovation support. Regional governments also offer similar incentives for most of these industries. Financial aid includes both nonrefundable subsidies and interest relief on loans obtained by the beneficiaries—or combinations of the two. Companies are classified according to size, which can be a limiting factor in accessing certain types of public aid. According to the current usage, the term “micro” company refers to those employing 0-9 employees, with a turnover of less than EUR 2 million, and with a EUR 2 million limit for total assets. A “small” company has 10-49 employees, a turnover below EUR 10 million, and total assets below EUR 10 million. “Medium” enterprises 50-249 employees, annual turnover not exceeding EUR 50 million, and total assets less than EUR 43 million.

The state-owned financial institution (Instituto de Credito Oficial, ICO), which is attached to the Ministry of Economy and Competitiveness, has the status of State Financial Agency. Its mission is to promote economic activities that contribute to economic growth and development as well as the improved distribution of wealth within Spain. As part of this mission, the ICO seeks to foster the growth of small- and medium-sized companies, to encourage technological innovation and renewable energy projects, and to provide financial relief to those affected by natural disasters. The ICO’s direct financing programs are aimed at financing large-scale investment projects in strategic sectors in Spain, backing large-scale investments by Spanish companies abroad, and supporting projects which are economically, financially, technologically and commercially sound and involve a Spanish interest. The maximum amount that can be applied for is EUR 12.5 million.

Other official bodies that grant aid and incentives:

• Ministry of Finance
• MINCORUR – Ministry of Industry, Trade, and Tourism
• ENISA – National Innovation Company S.A. (under MINCOTUR)
• AXIS ICO Group (under MINECO)
• INVEST IN SPAIN (under MINCOTUR)
• RED.ES (under MINECO)
• IDAE – Institute for Energy Diversification and Saving (under MITECO)
• CERSA – Spanish Guarantee Company S.A. (under MINCOTUR)
• CDTI – Center for Industrial Technological Development (under Ministry of Science, Innovation and Universities)
• Tripartite Foundation for training in employment (under Ministry of Employment and Social Security)
• CESGAR – Spanish Confederation of Mutual Guarantee Companies

The Regional Governments:

Spain’s 17 regional governments, known as autonomous communities, provide additional incentives for investments in their region. Many are similar to the incentives offered by the central government and the EU, but they are not all compatible. Additionally, some autonomous community governments grant investment incentives in areas not covered by state legislation but which are included in EU regional financial aid maps. Royal Decree 899/2007, of July 6 2007, sets out the different types of areas that are entitled to receive aid, along with their ceilings. Each area’s specific aspects and requirements (economic sectors, investments which can be subsidized, and conditions) are set out in the Royal Decrees determining the different areas. Most are granted on an annual basis.

Generally, the regional governments are responsible for the management of each type of investment. This provides a benefit to investors as each autonomous community has a specific interest in attracting investment that enhances its economy. No investment project can receive other financial aid if the amount of the aid granted exceeds the maximum limits on aid stipulated for each approved investment in the legislation defining the eligible areas. Therefore, the subsidy received is compatible with other aid, provided that the sum of all the aid obtained does not exceed the limit established by the legislation of demarcation and EU rules do not preclude the provision of funding (i.e., due to incompatibilities between Structural Funds).

Incentives from national, regional, or municipal governments and the European Union are granted to Spanish and foreign companies alike without discrimination.

Municipalities:

Municipal corporations offer incentives for direct investment by facilitating infrastructure needs, granting licenses, and allowing for the operation and transaction of permits, although these have been reduced significantly due to budget constraints. Municipalities such as Madrid also offer varied support services for potential foreign investors. Local economic development agencies often provide free advice on the local business environment and relevant laws, administrative support, and connections to human capital in order to facilitate the establishment of new businesses. Spain recently made starting a business easier by eliminating the requirement to obtain a municipal license before starting operations and by improving the efficiency of the commercial registry.

Research and Development

Incentives from national, regional or municipal governments and the European Union are granted to Spanish and foreign companies alike without discrimination. The most notable incentives include those aimed at fostering innovation, technological improvement (TI), and research and development (R&D) projects, which have been priorities of the Spanish government in recent years. The Science, Technology and Innovation Law 14/2011, of June 1, 2011, establishes the legal framework for promoting scientific and technical research, experimental development, and innovation in Spain. On February 2013 the Council of Ministers approved, in a combined document, “the Spanish Strategy for Science and Technology and for Innovation” for the 2013-2020 period, the essential purpose of which is to promote the scientific, technological, and business leadership of the country as a whole and to increase the innovation capacities of the Spanish company and the Spanish economy. The beneficiaries may be: individuals, public research agencies, public and private universities, other public R&D centers, public and private health entities and institutions related to or assisted by the National Health System, certified health research institutes, public and private non-profit entities (foundations and associations) engaging in R&D activities, enterprises (including SMEs), state technological centers, state technological and innovation support centers, business groupings or associations (joint ventures, economic interest groupings, industry-wide business associations), innovative business groupings and technological platforms, and organizations supporting technological transfer and technological and scientific dissemination and disclosure.

The aid can take the form of subsidies, loans, venture capital instruments, and other instruments (tax guarantees and incentives).

In 2013, the European Commission implemented Horizon 2020, the largest-ever EU research and innovation program with nearly EUR 80 billion of funding available from 2014 – 2020. The goal of the program is to attract additional private investment to promote breakthroughs and discoveries and take new ideas from the laboratory to the market. Horizon 2020 is open to all EU Member States and seeks to promote public and private collaboration in delivering innovation. EU Members States are eligible for funding on international collaborations; however, Horizon 2020 expressly prohibits funding on international collaboration with advanced economies outside of the EU.

Foreign Trade Zones/Free Ports/Trade Facilitation

Both the mainland and islands (and most Spanish airports and seaports) have numerous free trade zones where manufacturing, processing, sorting, packaging, exhibiting, sampling, and other commercial operations may be undertaken free of any Spanish duties or taxes. Spain’s seven free zone ports are located in Vigo, Cadiz, Barcelona, Santander, Seville, Tenerife, and the Canary Islands—all of which fall under the EU Customs Union, permitting the free circulation of goods within the EU. The entire province of the Canary Islands is a Special Economic Zone (SEZ), offering fiscal benefits that include a reduced corporate tax rate, a reduced Value-Added Tax (VAT) rate, and exemptions for transfer taxes and stamp duties. The Spanish territories of Ceuta and Melilla also offer unique tax incentives; they do not impose a VAT but instead tax imports, production, and services at a reduced rate. Spanish customs legislation also allows companies to have their own free trade areas. Duties and taxes are payable only on those items imported for use in Spain. These companies must abide by Spanish labor laws.

Performance and Data Localization Requirements

Spain does not have performance and localization requirements for investors.

The Spanish Data Protection Agency and the Spanish Police request data from companies, although the companies may refuse unless required by court order.

Real Property

There are generally no restrictions on foreign ownership of real estate. The buyer must fill out a Declaration to the Foreign Investment Register form before buying the property if the funds for the purchase come from a country or territory considered to be a tax haven. The declaration lasts six months. Foreign individuals require an identification card for foreigners (NIE for individuals). Other foreign legal persons require an identification card known as a CIF. Apart from money laundering regulations, no special restrictions or limitations apply to foreign mortgage guarantees and loans.

The Land Register provides evidence of title. The registration system is rigid, formalistic, and functions efficiently. It provides legal certainty to all parties involved in a transaction. Public or private acts that affect the property are included in the land register. The Property Registry is responsible for managing the Land Register. A right or title recorded in the registry prevails over any other right or title. Certain administrative concessions (licenses for individuals to use or develop publicly-owned property for a particular purpose) may also be registered. Anyone who can prove a legitimate interest in the information contained in the register may access the register. It is not possible to make changes to the ownership of the real estate by electronic means. The transfer of real estate or the grant of rights over property should be executed by public deed in front of a notary before being registered with the Land Registry. A registered title includes the plot of land and the buildings attached to the land. Each plot constitutes a registered property. Each registered property is a legal object and has its own separate entry in the registry in which all related data is registered. There are rules that determine whether a parcel of land, a building, farm, spring or other type of property has a separate entry in the registry system.

Lenders generally use mortgages as security. Mortgages are made by public deed and registered at the land registry. Once registered, the mortgage takes priority over the interest of any third party. Anyone with a legitimate interest in a property can find out whether it is mortgaged by consulting the register. Sale and leaseback is another form of real estate financing that has been used by some Spanish financial institutions. These institutions raised finance through the sale of their offices to their clients and subsequently leased them back. The institution raised funds and their clients received a stream of rental income.

Intellectual Property Rights

Spanish law protects intellectual property rights; enforcement is carried out at the administrative and judicial levels. Intellectual property protection has improved in recent years and is generally effective. However, several municipalities struggle to curb the sale of counterfeit apparel. Spanish patent, copyright, and trademark laws all approximate or exceed European Union levels of intellectual property protection. Spain is a party to the Paris Convention, Bern Convention, the Madrid Accord on Trademarks and the Universal Copyright Conventions.

Copyrights

Spanish law extends copyright protection to all literary, artistic, or scientific creations, including computer software. Spain has ratified the World Intellectual Property Organization’s (WIPO) Copyright Treaty (WCT) and the WIPO Phonograms and Performances Treaty (WPPT)—the so-called Internet treaties. In 2006, Spain passed legislation implementing the EU Copyright Term Directive, thereby also making the Internet treaties part of Spanish law. However, the Internet remains a problematic area in terms of respect for intellectual property rights in Spain.

Since its removal from the United States Trade Representative (USTR) Special 301 Watch List in 2012, Spain has undertaken extensive, multi-year reform measures to strengthen its framework for intellectual property rights (IPR) protections. The latest legislative changes to the 1996 Law on Intellectual Property, in force as of March 3, 2019, streamline anti-piracy and anti-counterfeit measures. As a result, Spain now has a stronger legal framework and corresponding criminal procedures to address IPR violations.

Patents

Spanish authorities published a new Patents Law in 2015 (Law 24/2015). It entered into force on April 1, 2017. A non-renewable 20-year period for working patents is available if the patent is used within the first three years. Spain permits both product and process patents. The European Parliament approved regulations to establish a single patent for the European Union (EU) in December 2012. Spain and Italy decided to opt out, however, due to discrepancies with the patent’s linguistic regime (English, French, and German). A special court will be created to resolve disputes arising from the 25 country signatories. Companies or individuals who want to protect their innovations throughout the EU will have to request a patent in three places – in Munich, the headquarters of the European Patent Office, in Spain, and in Italy (compared to the need to do so in 28 different countries currently) – and will be exposed to litigation in many other jurisdictions. Patents will be issued in English, French, or German, although applications may be presented in any official EU language, along with a summary in one of the three aforementioned languages. Although the regulations entered into force on January 20, 2013, the Patent Package will not enter into force until Germany, France, and 10 other Member States have ratified the Agreement on a Unified Patent Court. As of April 2019, 12 countries have ratified the agreement, which will enter into force upon ratification by Germany and the United Kingdom.

Pharmaceutical companies have reported that Spain’s lack of patent harmonization with the majority of European Union Member States has left holders of pharmaceutical process patents with weaker patent protection than required by the World Trade Organization (WTO) Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement. The Spanish government has amended the penal code to stipulate that patent infringers will receive one to three years imprisonment for infringing on protected plant varieties for commercial or agricultural purposes.

Trademarks

Despite high-profile, high-impact raids in 2016 to halt physical sales of counterfeit goods, storefronts selling counterfeit goods have reopened and sales have rebounded. Spanish National Police note that the removal of IP from the EUROPOL Strategic Plan will diminish attention to IP crime in Spain. Purchase and sale of counterfeit items—particularly apparel and accessories on offer by street vendors in tourist areas of major cities and beach towns—noticeably increased over the course of 2018. Spain is listed on USTR’s 2018 Notorious Markets List with specific mention to the Els Limits de La Jonquera market in Girona and tourism centers in Barcelona and Madrid which sell counterfeit goods. Audiences in Spain also stream illegally produced movie and television content. The government has committed to developing a national action plan to combat the problem, which requires coordination with national, regional, and local authorities.

Spanish authorities published a new Trademark law in 2001 (Law 17/2001), which came into effect in July 2002. The Spanish Office of Patents and Trademarks oversees protection for national trademarks. Trademarks registered in the Industrial Property Registry receive protection for a 10-year period from the date of application, which may be renewed. Protection is not granted for generic names, geographic names, those that violate Spanish customs or other inappropriate trademarks. In March 2015, the Spanish parliament passed a reform of the penal code that entered into force in July 2015 (Ley Organica 1/2015). The revised penal code removed the condition that certain intellectual property rights crimes related to the sale of counterfeit items meet a threshold of EUR 400 in order to merit prosecution and changed the procedure for destruction of counterfeit items seized by law enforcement. Counterfeit items may be destroyed once an official report has been made regarding the items, unless a judge formally requests that the items be retained.

The Spanish Tax Agency releases statistics on seizures of counterfeit goods sporadically via its website. In 2017—the most recent data available—Spain confiscated 3.1 million counterfeit products in nearly 3,000 operations.

Businesses may seek a trademark valid throughout the European Union. The Office for Harmonization in the Internal Market (OHIM) for the registration of community trademarks in the European Union started its operations in 1996. Its headquarters are located in Alicante:

Office for Harmonization in the Internal Market (Trade Marks and Designs)
Avenida de Europa, 4
E-03008 Alicante
Tel: (34) 96-513-9100
http://oami.europa.eu/ows/rw/pages/OHIM/contact.en.do  

The World International Property Organization (WIPO, headquartered in Geneva) oversees an international system of registration. Applicants must designate the countries where they wish to obtain protection. However, this system only applies to U.S. firms with an establishment in a country that is a party of the Agreement or the Protocol.

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

Capital Markets and Portfolio Investment

The convergence of monetary policy following the adoption of the euro led to a significant lowering of interest rates; however, the eurozone crisis and the downgrade of Spanish sovereign debt had a negative effect on public financing costs. Foreign investors do not face discrimination when seeking local financing for projects. A large range of credit instruments are available through Spanish and international financial institutions. Many large Spanish companies rely on cross-holding arrangements and ownership stakes by banks rather than pure loans. However, these arrangements do not act to restrict foreign ownership. Several of the largest Spanish companies that engage in this practice are also publicly traded in the U.S. There is a significant amount of portfolio investment in Spain, including by American entities. Spain has an actively traded and liquid stock market.

Money and Banking System

Spain’s domestic housing crisis, which began in 2007, was linked to poor lending practices by Spanish savings banks (cajas de ahorros), many of which were heavily exposed to troubled construction and real estate companies. The government subsequently created a Fund for Orderly Bank Restructuring (FROB) through Royal Decree-law 9/2009 of June 26, which restructured credit institutions with an eye toward bolstering capital and provisioning levels. The number of Spanish financial entities has shrunk significantly since 2009 with 50 entities consolidated into 11 as of March 2019 (Banco Santander, BBVA, Bankinter, Banco Sabadell, CaixaBank, Bankia, Ibercaja Banco, Kutxabank, Liberbank, Abanca, and Unicaja Banco).

Since the financial sector’s peak in 2008, the number of financial institution branches that accept deposits has been reduced by 43.1 percent, according to Bank of Spain and European Central Bank data. Catalonia is the Spanish region most affected by the closure of financial branches, as 55.8 percent of the branches have closed in the past decade. The economic crisis, the wave of mergers and acquisitions, the digitalization of the sector, and the need to reduce costs led to a radical adjustment of the branch network. There were 26,011 financial institution branches at the end of 2018, according to the Bank of Spain, the lowest number since the end of 1980. The sector has also shed nearly 95,000 workers, and downsizing continues as banks reassess profitability. With profit margins narrowing, banks are continuing to downsize, reducing both numbers of employees and branches. Banco Santander plans to close 1,000 branches and lay off more than 3,000 employees over the next two to three years. CaixaBank announced the closure of 800 branches and plans to lay off more than 2,000 employees. BBVA planned the closure of 195 offices, Bankia about 25 offices, and the merger of two medium-sized banks, Unicaja and Liberbank, was estimated to result in layoffs for 3,000 employees and the closure of 200 branches. Early retirement for those over 50 years old has been the mechanism of choice for banks seeking to downsize their workforce. In 2017, two significant banking consolidations occurred. Banco Santander (Spain’s largest bank by market capitalization) acquired Banco Popular in June 2017 after the EU’s Single Resolution Board (SRB)—the centralized banking authority for the EU, established in 2015—deemed Banco Popular as “failing or likely to fail.” Later in June, Bankia agreed to acquire Banco Mare Nostrum—a deal finalized in January 2018, making Bankia Spain’s fourth-largest bank in terms of market capitalization.

In January 2014, Spain cleanly exited its EU aid program, the European Stability Mechanism (ESM), which was used to recapitalize Spanish banks in 2012 and 2013. Spain has made nine voluntary early repayments of its ESM loans; through 2018, Spain had paid back 19.6 billion EUR of the original 41.3 billion EUR loan. These payments have boosted investor confidence in the Spanish economy and have earned praise from EU officials. In November 2015, the Government approved legislation implementing the Law on the Recovery and Resolution of Credit Institutions and Investment Service Companies. The regulation also develops the role of the Orderly Bank Restructuring Fund (Spanish acronym: FROB), as the National Resolution Authority, as well as the contributions of institutions to the National Resolution Fund and the Deposit Guarantee Fund. The flow of credit has been restored and alternative financing mechanisms have been created. The IMF conducted a Financial System Stability Assessment of Spain in August 2017—the first such review since 2012—and deemed that Spain’s financial system has made steady progress strengthening its solvency and reducing nonperforming loans (NPLs) since 2012.

Total assets for the five biggest banks in Spain at the close of 2018 were 2.95 trillion euros:

1. Banco Santander: 1.459 trillion euros
2. Banco Bilbao Vizcaya Argentaria (BBVA): 677 billion euros
3. CaixaBank: 386.6 billion euros
4. Banco Sabadell: 223.2 billion euros
5. Bankia: 205.2 billion euros

Foreign Exchange and Remittances

Foreign Exchange Policies

There are no controls on capital flows. In February 1992, Royal Decree 1816/1991 provided complete freedom of action in financial transactions between residents and non-residents of Spain. Previous requirements for prior clearance of technology transfer and technical assistance agreements were eliminated. The liberal provisions of this law apply to payments, receipts and transfers generated by foreign investments in Spain.

Remittance Policies

Capital controls on the transfer of funds outside the country were abolished in 1991. Remittances of profits, debt service, capital gains, and royalties from intellectual property can all be affected at market rates using commercial banks.

Sovereign Wealth Funds

Spain does not have a sovereign wealth fund or similar entity.

The size of the public enterprise sector in Spain is relatively small. Over the last three decades, the role and importance of state-owned enterprises (SOE) in Spain decreased notably due to the privatization process that started in the early 1980s. The reform of SOE oversight in the 1990s led the government to create the State Holding for Industrial Participations, (Sociedad Estatal de Participaciones Industriales, SEPI). SEPI was created as a public-law entity by decree in 1995; its status was then protected by law in 1996. SEPI has direct majority participation in 15 SOEs, which makes up the SEPI Group, with a workforce of more than 74,000 employees in 2017, and also is a direct minority shareholder in nine SOEs (five of them listed on stock exchanges), and participates indirectly in ownership of more than a hundred companies. Both legislative chambers and any parliamentary group may request the presence of SEPI and SOE representatives to discuss issues related to their performance. SEPI and the SOEs are required to submit economic and financial information to the legislature on a regular basis. The European Union, through specialized committees, also controls SOEs’ performance on issues concerning sector-specific policies and anti-competitive practices. SEPI’s mission is to make profitable its entrepreneurial participations and orient all its activities taking into account the public interest, which makes it responsible for combining the objectives of economic and social profitability. Beyond its initial nature of a mere Agent in charge of industrial policy, SEPI has been consolidated as an instrument for the economic and financial policy, maintaining a close relationship with the budgetary policy.

Corporate Governance of Spain’s SOEs uses criteria based on principles and guidelines from the Organization for Economic Co-operation and Development (OECD). These include the state ownership function and accountability, as well as issues related to performance monitoring, information disclosure, auditing mechanisms and the role of the board in the companies.

• Companies with a Majority Interest:
  Agencia Efe – Cetarsa – Defex (company in liquidation) – Ensa – Grupo Cofivacasa – Grupo Correos – Grupo Enusa – Grupo Hunosa – Grupo Mercasa – Grupo Navantia – Grupo Sepides – Grupo Tragsa – Hipodromo de la Zarzuela – Mayasa – Saeca
• Companies with a Minority Interest:
  Airbus Group, NV – Alestis Aerospace – Enagas – Enresa – Hispasat – Indra – International Airlines Group – Red Electrica Corporacion – Ebro Foods
• Attached companies: RTVE- Corporacion de Radio y Television Espanola
• Reference: http://www.sepi.es/es/sectores  

Privatization Program

As the size of its public enterprise sector is relatively small, Spain does not have a formal privatization program.

Spanish companies consider corporate reputation, competitive advantage, and industry trends to be the major driving forces of responsible business conduct (RBC). Initiatives undertaken by the EU and international organizations have influenced companies’ decision to implement RBC, and companies continue to increasingly adhere to its principles. Associations and fora that bring together the heads of leading corporations, business schools and other academic institutions, NGOs and the media are actively contributing to implementation of RBC in Spain. Although the visibility of RBC efforts is still moderate by international standards, in the last two decades there has been a growing interest in it. Today, almost all of Spain’s largest energy, telecommunications, infrastructure, transport, financial services and insurance companies, among many others, have undertaken RBC projects, and such practices are spreading throughout the economy.

The Spanish government has taken some measures to promote RBC since 2002. The government endorsed the Organization for Economic Co-operation and Development (OECD) Guidelines for Multinational Enterprises, and the national point of contact is the Ministry of Industry, Trade, and Tourism.

Spain has a wide variety of laws, regulations, and penalties to address corruption. The legal regime has both civil and criminal sanctions for corruption, bribery, financial malfeasance, etc. Giving or accepting a bribe is a criminal act. Under Section 1255 of the Spanish civil code, corporations and individuals are prohibited from deducting bribes from domestic tax computations. There are laws against tax evasion and regulations for banks and financial institutions to fight money laundering terrorist financing. In addition, the Spanish Criminal Code provides for jail sentences and hefty fines for corporations’ (legal persons) administrators who receive illegal financing.

The Spanish government continues to build on its already strong measures to combat money laundering. After the European Commission threatened to sanction Spain for failing to bring its anti-money laundering regulations in full accordance with the EU’s Fourth Anti-Money Laundering Directive, in 2018, Spain approved measures to modify its money laundering legislation to comply with the EU Directive. These measures establish new obligations for companies to license or register service providers, including identifying ultimate beneficial owners; institute harsher penalties for money laundering offenses; and create public and private whistleblower channels for alleged offenses.

The General State Prosecutor is authorized to investigate and prosecute corruption cases involving funds in excess of roughly USD 500,000. The Office of the Anti-Corruption Prosecutor, a subordinate unit of the General State Prosecutor, investigates and prosecutes domestic and international bribery allegations. There is also the Audiencia Nacional, a corps of magistrates with broad discretion to investigate and prosecute alleged instances of Spanish businesspeople bribing foreign officials.

Spain enforces anti-corruption laws on a generally uniform basis. Public officials are subjected to more scrutiny than private individuals, but several wealthy and well-connected business executives have been successfully prosecuted for corruption. In 2018, Spanish courts conducted 48 corruption cases involving 205 defendants. The courts issued 63 sentences, with 40 including a full or partial guilty verdict.

There is no obvious bias for or against foreign investors. U.S. firms have rarely identified corruption as an obstacle to investment in Spain, although entrenched incumbents have frequently attempted and at times succeeded in blocking the growth of U.S. franchises and technology platforms in both Madrid and Barcelona. As a result, Spain is among the least welcoming countries in Europe for some of the U.S.’s leading technology companies, such as Airbnb, Uber, and Expedia. Although no formal corruption complaints have been lodged, U.S. companies have indicated that they have been disqualified at times from public tenders based on reasons that these companies’ legal counsels did not consider justifiable.

Spain’s rank in Transparency International’s annual Corruption Perceptions Index improved slightly in 2018, with the country climbing to position 41 (from 42 in 2017); its overall score (58) is one of the lowest among Western European countries. Among the Spanish public, corruption continues to be one of the main concerns, second after unemployment.

Spain is a signatory of the Organization for Economic Co-operation and Development (OECD) Convention on Combating Bribery and the UN Convention Against Corruption. It has also been a member of the Group of States Against Corruption (GRECO) since 1999. OECD has noted concerns about the low level of foreign bribery enforcement in Spain and the lack of implementation of the enforcement-related recommendations. GRECO highlighted the “limited progress made by Spain in adopting 11 of the group’s recommendations from 2013 to combat corruption. GRECO criticized Spain for failing to adopt of a code of conduct in its Congress and Senate, conduct a thorough review of the financial disclosure regime, or establish an enforcement mechanism for when misconduct occurs.

Resources to Report Corruption

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

Resources to Report Corruption

Ministry of Finance
Alcala, 9
28071 Madrid, Spain
34 91 595 8000
https://ssweb.seap.minhap.es/ayuda/consulta/PTransparencia 
informacion.administrativa@minhap.es

Transparency International
National Chapter – Spain
Fundacion Jose Ortega y Gasset
Calle Fortuny, 53, 28010 Madrid
Spain
Telephone: +34 91 700 4105
Email: transparency.spain@transparencia.org.es
Website:http://www.transparencia.org.es/ 

There have been periodic peaceful demonstrations against austerity measures and other social or economic policies. Public sector employees and union members have organized frequent small demonstrations in response to service cuts, privatization, and other government measures.

Spain’s unemployment rate fell to 14.4 percent at the end of 2018, down from 16.5 percent at the beginning of 2018 and marking the lowest level in a decade—down from its peak of 26.9 percent in 2013. The youth unemployment rate fell to 33.5 percent at the end of 2018, an improvement of almost four percentage points from 2017, but still representing 502,900 unemployed people under the age of 25. Despite these gains, in 2018 Spain maintained the EU’s second highest unemployment and youth unemployment rates after Greece. Steady job creation is due, in part, to Spain’s flourishing tourism industry. In 2018, Spain set a new record with more than 82.6 million visitors (a 0.9 percent increase compared to 2017), who spent more than 89.7 billion euros—a 3.1 percent year-over-year increase.

While youth unemployment has fallen substantially, the “lost decade” of extraordinarily high unemployment continues to affect Spain’s socioeconomic development and harms the country’s long-term competitiveness. Spanish economists and politicians across the political spectrum consistently raise concerns about the quality of youth jobs, which are often low-paid, temporary, low-skilled positions that are the first to be terminated in any economic difficulty.

Spain added 566,200 jobs in 2018, lowering its unemployment rate to 14.4 percent, the lowest rate since the fourth quarter of 2008, according to Spain’s National Institute of Statistics (INE). Spain’s economically active population increased by 103,800 people in 2018, totaling 22.8 million people, of whom 19.5 million were employed and 3.3 million unemployed. Several indicators suggest a modest but gradual improvement in Spain’s longer-term employment trends. The 2018 job growth rate rose to nearly three percent from 2.6 percent in 2017; the number of “long-term” unemployed (over a year without work) dropped 17.4 percent from 2017; and over four-fifths of the jobs created in 2018 were full-time positions (476,800 positions)—2.9 percent higher than 2017.

The labor market is divided into permanent workers with full benefits and temporary workers with many fewer benefits. Labor market reform legislation enacted by the parliament in September 2010 aimed to encourage the use of indefinite labor contracts by reducing the number of days of severance pay under these contracts. In January 2011, government, business, and labor union representatives agreed to a pension reform that increases the legal retirement age from 65 to 67 over a 15-year period beginning in January 1, 2013, and gradually increases the number of years of contributions on which pensions are calculated. In 2012 the Spanish government enacted a series of measures to make hiring and firing easier.

Collective bargaining is widespread in both the private and public sectors. A high percentage of the working population is covered by collective bargaining agreements, although only a minority (generally estimated to be about 10 percent) of those covered are actually union members. Under the Spanish system, workers elect delegates to represent them before management every four years. If a certain proportion of those delegates are union-affiliated, those unions form part of the workers’ committees. Large employers generally have individual collective agreements. In industries characterized by smaller companies, collective agreements are often industry-wide or regional. The reforms enacted in 2012 gave business-level agreements primacy over sectoral and regional agreements and made it easier for businesses to opt out of higher-level agreements. They also required collective labor agreements to be renegotiated within one year of expiration.

The Constitution guarantees the right to strike, and this right has been interpreted to include the right to call general strikes to protest government policy.

As Spain is a member of the European Union, Overseas Private Investment Corporation (OPIC) insurance is not offered. Various EU directives, as adopted into Spanish law, adequately protect the rights of foreign investors. Spain is a member of the World Bank’s Multilateral Investment Guarantee Agency (MIGA).

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

*Ministry of Industry, Trade, and Tourism, http://www.comercio.gob.es/es-ES/inversiones-exteriores/informes/Paginas/presentacion.aspx  

Table 3: Sources and Destination of FDI

Table 4: Sources of Portfolio Investment

Elliot Carmean, Economic Officer, tel.: (34) 91 5872399; carmeaner@state.gov
Ana Maria Waflar, Economic Specialist, tel.: (34) 91 5872290; waflarax@state.gov

Policies Towards Foreign Direct Investment

The United Republic of Tanzania, according to Government officials, welcomes foreign direct investment (FDI) as it pursues its industrialization and development agenda.  However, in practice, government policies and actions do not effectively keep and attract investment. The 2018 World Investment Report indicates that FDI flows to Tanzania shrank by 14 percent in 2017 to USD 1.18 billion, a 24 percent decline from 2015.  Some concerns noted by stakeholders included difficulty in hiring foreign workers, reduced profits caused by unfriendly and opaque tax policies, increased local content requirements, regulatory/policy instability, lack of trust between the GoT and the private sector, and mandatory initial public offerings (IPOs) in mining and communication industries.

The United Republic of Tanzania does have framework agreements on investment, and offers various incentives and the services of investment promotion agencies.  Investment is mainly a non-Union matter, thus there are different laws, policies, and practices for the mainland and Zanzibar. However, international agreements on investment are covered as Union matters and therefore apply to both regions. 

The Tanzania Investment Center (TIC) is intended to be a one-stop center for investors, providing services to investors such as permits, licenses, visas, and land.  The Zanzibar Investment Promotion Authority (ZIPA) provides the same function in Zanzibar. In January 2019, the President moved the TIC from the Ministry of Industry, Trade, and Investment (MITI) to the Prime Minister’s Office (PMO) and appointed a Minister of State for Investment in the Prime Minister’s Office.  The move, part of Tanzania’s “2019: The Year of Investment” campaign, aims to improve the business climate by enabling better coordination and reduced bureaucracy. (See Chapter 4 for more information on TIC).

The Government of Tanzania has an ongoing dialogue with the private sector via the Tanzania National Business Council (TNBC), created in 2001.  TNBC meetings are chaired by the President of the United Republic of Tanzania and co-chaired by the head of the Tanzania Private Sector Foundation (TPSF).  Unfortunately, the TNBC has only met twice in the past four years. There is also a Zanzibar Business Council (ZBC) launched in 2005, and Regional Business Councils (RBCs) and District Business Councils (DBCs).  In April 2019, the new Minister of State for Investment announced she was launching a new series of forums with foreign investors, including U.S. investors. 

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign investors generally receive treatment equivalent to domestic investors but limits still persist in a number of sectors.  Tanzania conforms to best practice in several cases. There are no geographical restrictions on location for private establishments with foreign participation or ownership, no limitations on number of foreign entities that can operate in a given sector, and no sectors in which foreign investment approval is required for greenfield FDI and not for domestic companies. 

However, Tanzania discourages foreign investment by imposing limitations on foreign equity ownership or activity in several sectors, including aerospace, agribusiness (fishing), construction, and heavy equipment, travel and tourism, energy and environmental industries, information and communication, and publishing, media, and entertainment.  For example,

• Foreign companies may not provide tourism services like mountain guides, tour guides, car rental, or travel agency services, per the Tourism Act, 2008.
• Per the Merchant Shipping Act of 2003, only citizen-owned ships are authorized to engage in local trade (waiver by ministerial discretion), and the Shipping Agency Act states that only Tanzanians may be licensed as shipping agents.  Port services licenses are solely for citizen-owned Tanzania companies.
• The Fisheries (Amendment) Regulations, 2009 implies onerous conditions for foreigners to fish and export fishery products, and fishing licenses cost three times more for foreigners than locals, and foreigners can only deal with certain fish and fish products.
• Foreign construction contractors can only obtain temporary licenses, per the Contractors Registration Act of 1997, and contractors must commit in writing to leave Tanzania upon completion of the set project.  The Contractors Registration (Amendment) By- Laws, 2004 limit foreign contractors to specified, more complex classes of work.
• Foreign capital participation in the telecommunications sector is limited to a maximum of 75 percent. 
• All insurers require one-third controlling interest by Tanzania citizens, per the Insurance Act.
• The Electronic and Postal Communications (Licensing) Regulations 2011 limits foreign ownership of Tanzanian TV stations to 49 percent, and prohibits foreign capital participation in national newspapers. 
• Mining projects must be at least partially owned by the GoT and “indigenous” companies and hire, or at least favor, local suppliers, service providers, and employees.  (See Chapter 4: Laws and Regulations on FDI for details.). Gemstone mining is limited to Tanzanian citizens with a possible waiver by ministerial discretion. In February 2019, responding to low growth and investment in the sector, the government revised the 2018 Mining (Local Content) Regulations 2018 by reducing the local shareholder requirement from 51 percent to 20 percent.  

Currently, foreigners can invest in stock traded on the Dar es Salaam Stock Exchange (DSE), but only East African residents can invest in government bonds.  East Africans, excluding Tanzanian residents, however, are not allowed to sell government bonds bought in the primary market for at least one year following purchase.

Other Investment Policy Reviews

There have not been any third-party investment policy reviews (IPRs) on Tanzania in the past three years, the most recent OECD report is for 2013.  The World Trade Organization (WTO) published a Trade Policy Review in 2019 on all the East African Community states, including Tanzania. 

WTO – Trade Policy Review: East African Community (2019)
https://www.wto.org/english/tratop_e/tpr_e/tp484_e.htm

OECD – Tanzania Investment Policy Review (2013)
http://www.oecd.org/daf/inv/investment-policy/tanzania-investment-policy-review.htm  

WTO – Secretariat Report of Tanzania
https://www.wto.org/english/tratop_e/tpr_e/s384-04_e.pdf

UNCTAD – Trade and Gender Implications (2018)
https://unctad.org/en/PublicationsLibrary/ditc2017d2_en.pdf

Business Facilitation

The World Bank’s Doing Business 2019 Indicators rank Tanzania 144 out of 190 overall for ease of doing business, and 163rd for ease of starting a business.  There are 10 procedures to open a business, higher than the sub-Saharan average of 7.4. The Business Registration and Licensing Agency (BRELA) issues certificates of compliance for foreign companies, certificates of incorporation for private and public companies, and business name registration for sole proprietor and corporate bodies.  After registering with BRELA, the company must: obtain the taxpayer identification number (TIN) certificate, apply for a business license, apply for the VAT certificate, register for workmen’s compensation insurance, register with the Occupational Safety and Health Authority (OSHA), receive inspection from the Occupational Safety and Health Authority (OSHA), and obtain a Social Security registration number. 

The TIC provides simultaneous registration with BRELA, TRA, and social security (http://tiw.tic.co.tz/  ) for enterprises whose minimum capital investment is not less than USD 500,000 if foreign owned or USD 100,000 if locally owned. 

In May 2018, the government adopted the Blueprint for Regulatory Reforms to improve the business environment and attract more investors.  The reforms, which were developed as a collaborative effort between the Ministry of Industry, Trade and Investment and the private sector, seek to improve the country’s ease of doing business through regulatory reforms and to increase efficiency in dealing with the government and its regulatory authorities.  The Blueprint is largely pending implementation. 

Outward Investment

Tanzania does not promote or incentivize outward investment, and in fact, generally discourages capital flight.  There are restrictions on Tanzanian residents’ participation in foreign capital markets and ability to purchase foreign securities.  Under the Foreign Exchange (Amendment) Regulations 2014 (FEAR), however, there are circumstances where Tanzanian residents may trade securities within the East African Community (EAC).  In addition, FEAR provides some opportunities for residents to engage in foreign direct investment and acquire real assets outside of the EAC.

Tanzania has bilateral investment treaties with 18 countries, and seven investment agreements with regional economic blocs.  On April 1 2019, Tanzania terminated its BIT agreement with Netherlands. The country is also a signatory to global investment instruments such as the International Centre for Settlement of Investment Disputes (ICSID) Convention, the New York Convention, and the UN Guiding Principles on Business and Human Rights.

The U.S. and Tanzania do not have bilateral investment or taxation agreements.  Tanzania is a member of the EAC, which signed a 2008 Trade and Investment Framework Agreement (TIFA) and a 2012 Trade and Investment Partnership (TIP) with the United States.  Under the U.S.-EAC TIP, the U.S. and EAC are seeking to expand trade, investment and dialogue with the private sector.

Transparency of the Regulatory System

Tanzania has formal processes for drafting and implementing rules and regulations.  Generally, after an Act is passed by Parliament, the creation of regulations is delegated to a designated ministry.  In theory, stakeholders are legally entitled to comment on regulations before they are implemented. However, ministries and regulatory agencies do publish a list of anticipated regulatory changes or proposals intended to be adopted/implemented.  There is not a period of time set by law for the text of the proposed regulations to be publicly available. Thus, stakeholders often report that they are either not consulted or given too little time to provide useful comment. Ministries or regulatory agencies do not have the legal obligation to publish the text of proposed regulations before their enactment.  Moreover, the government has increasingly used presidential decree powers to bypass regulatory and legal structures.

In 2016, the President signed the Access to Information Act into law.  In theory, the Act gives citizens more rights to information; however, some claim that the Act gives too much discretion to the GoT to withhold disclosure.  Although information, including rules and regulations, is available on the GoT’s “Government Portal” (https://www.tanzania.go.tz/documents  ), the website is generally not current and incomplete.  Alternatively, rules and regulations can be obtained on the relevant ministry’s website, but many offer insufficient information.

Nominally independent regulators are mandated with impartially following the regulations.  The process, however, has sometimes been criticized as being subject to political influence, depriving the regulator of the independence it is granted under the law. 

Tanzania does not meet the minimum standards for transparency of public finances and debt obligations. 

International Regulatory Considerations

Tanzania is a member of the World Trade Organization (WTO) and its National Enquiry Point (NEP) is the Tanzania Bureau of Standards (TBS).  As the WTO NEP, TBS handles information on adopted or proposed technical regulations, as well as on standards and conformity assessment procedures.  Tanzania is also part of both the EAC and the Southern African Development Community (SADC) and subject to their respective regulations. However, according to the 2016 East African Market Scorecard (most recent), Tanzania is not compliant with several EAC regulations.

Legal System and Judicial Independence

Tanzania’s legal system is based on the English Common Law system. The first source of law is the 1977 Constitution, followed by statutes or acts of Parliament; and case law, which are reported or unreported cases from the High Courts and Courts of Appeal and are used as precedents to guide lower courts.  The Court of Appeal, which handles appeals from mainland Tanzania and Zanzibar, is the highest ranking court, followed by the High Court, which handles civil, criminal and commercial cases. There are four specialized divisions within the High Courts: Labor, Land, Commercial, and Corruption and Economic Crimes.  The Labor, Land, and Corruption and Economic Crimes divisions have exclusive jurisdiction over their respective matters, while the Commercial division does not claim exclusive jurisdiction. The High Court and the District and Resident Magistrate Courts also have original jurisdiction in commercial cases subject to specified financial limitations. 

Apart from the formal court system, there are quasi-judicial bodies, including the Tax Revenue Appeals Tribunal and the Fair Competition Tribunal, as well as alternate dispute resolution procedures in the form of arbitration proceedings.  Judgments originating from countries whose courts are recognized under the Reciprocal Enforcement of Foreign Judgments Act (REFJA) are enforceable in Tanzania. To enforce such judgments, the judgment holder must make an application to the High Court of Tanzania to have the judgment registered. Countries currently listed in the REFJA include Botswana, Lesotho, Mauritius, Zambia, Seychelles, Somalia, Zimbabwe, Swaziland, the United Kingdom, and Sri Lanka.  

The Tanzanian constitution guarantees judicial independence.  Judges are appropriately trained, appointed by the president in consultation with an independent Judicial Service Commission, have secure tenure until retirement at age 60, and are promoted and dismissed in a fair and unbiased manner.  This gives the higher-level courts considerable independence. In 2018, the head of Tanzania’s judiciary, Chief Justice Ibrahim Hamis Juma, publicly warned politicians to stay off his “territory” warning of grave consequences for those who do not. 

Corruption within the judiciary remains a concern, despite President Magufuli’s very public campaign against corruption.  According to the 2017 Afrobarometer Survey, the percentage of Tanzanians who believed that at least some/most/all of the Judiciary were corrupt was 48 percent/17 percent/3 percent, respectively.  The selection and appointment of judges in Tanzania is criticized for its non-transparent nature. The Judiciary Service Commission proposes judges to the President for appointment. However, the criteria and process for candidates is unknown. 

Regulations and enforcement actions are appealable and they are adjudicated in the national court system. 

Laws and Regulations on Foreign Direct Investment

In 2017, new laws/regulations were enacted that may impact the risk-return profile on foreign investments, especially those in the mining industry.  The laws/regulations include the Natural Wealth and Resources (Permanent Sovereignty) Act 2017, Natural Wealth and Resources Contracts (Review and Renegotiation of Unconscionable Terms) Act 2017, Written Laws (Miscellaneous Act) 2017, and Mining (Local Content) Regulations 2018.   The three new acts were introduced by the executive branch under a certificate of urgency, meaning that standard advance publication requirements were waived to expedite passage. As a result, there was minimal stakeholder engagement.

Investors, especially those in natural resources and mining, have expressed concern about the effects of these new laws.  Two of the new laws apply to “natural wealth and resources,” which are broadly defined and not only include oil and gas, but in theory could include wind, sun, and air space.  Investors are encouraged to seek legal counsel to determine the effect these laws may have on existing or potential investments. For natural resource contracts, the laws remove rights to international arbitration and subject contracts, past and present, to Parliamentary review.  More specifically, the law states “Where [Parliament] considers that certain terms …or the entire arrangement… are prejudicial to the interests of the People and the United Republic by reason of unconscionable terms it may, by resolution, direct the Government to initiate renegotiation with a view to rectifying the terms.”  Further, if the GoT’s proposed renegotiation is not accepted, the offending terms are automatically expunged. “Unconscionable” is defined broadly, including catch-all definitions for clauses that are, for example, “inequitable or onerous to the state.” Under the law, the judicial branch does not play a role in determining whether a clause is “unconscionable.”

The Mining (Local Content) Regulations 2018 require that indigenous Tanzanian companies are given first preference for mining licenses.  An ‘indigenous Tanzanian company’ is one incorporated under the Companies Act with at least 51 percent of its equity owned by and 100 percent of its non-managerial positions held by Tanzanians.  Furthermore, foreign mining companies must have at least 5 percent equity participation from an indigenous Tanzanian company and must grant the GoT a 16 percent carried interest. Lastly, foreign companies that supply goods or services to the mining industry must incorporate a joint venture company in which an indigenous Tanzanian company must hold equity participation of at least 20 percent.

The Mining (Local Content) Regulations 2018 also set the timeframe for local content percentages to be raised over the next 10 years which vary by type of good or service provided.  There are immediate requirements to use 100 percent local content for financial, insurance, legal, catering, cleaning, laundry, and security services. All contractors must submit a local content plan to the GoT, which includes provisions to favor local content and meets required local content percentages.  The plan must include five sub plans on employment and training; research and development; technology transfer; legal services; and financial services. The regulations also require contractors to implement bidding procedures to acquire goods and services and to award contracts to indigenous Tanzanian companies if they do not exceed the lowest bidder by more than 10 percent.  There are also regular contractor reporting requirements. Violating these regulations can lead to a fine of up to TZS 500 million or five years imprisonment.      

Competition and Anti-Trust Laws

The Fair Competition Commission (FCC) is an independent government body mandated to intervene, as necessary, to prevent significant market dominance, price fixing, extortion of monopoly rent to the detriment of the consumer, and market instability. The FCC has the authority to restrict mergers and acquisitions if the outcome is likely to create market dominance or lead to uncompetitive behavior.

Expropriation and Compensation

The constitution and investment acts require government to refrain from nationalization.  However, the GoT may expropriate property after due process for the purpose of national interest.  The Tanzanian Investment Act guarantees payment of fair, adequate, and prompt compensation; access to the court or arbitration for the determination of adequate compensation; and prompt repatriation in convertible currency where applicable.  For protection under Tanzania Investment Act, foreign investors require USD 500,000 minimum capital (a local one needs USD 100,000).

GoT authorities do not discriminate against U.S. investments, companies, or representatives in expropriation.  There have been cases of government revocation of hunting concessions that grant land rights to foreign investors, including a U.S.-based company with strategic investor status in 2016.  In late-2018, the GoT expropriated several dormant cashew-processing factories. In the same vein, in early-2019, the GoT reportedly repossessed 16 previously-privatized factories that were not in operation.  At the same time, the government issued a notice to more than 30 businesses, including hotels and other factories, warning them that if they did not present a plan for revitalizing their businesses, the GoT would repossess them too.  The ownership structure of these businesses unconfirmed; however, there are reports that some have foreign ownership. At least one factory with substantial U.S. investment reports that the GoT has blocked the sale of its assets. 

There are numerous examples of indirect expropriation, such as confiscatory tax regimes or regulatory actions that deprive investors of substantial economic benefits from their investments.

Dispute Settlement

ICSID Convention and New York Convention

Tanzania is a member of both the International Centre for Settlement of Investment Disputes (ICSID) and the Multilateral Investment Guarantee Agency (MIGA).  ICSID was established under the auspices of the World Bank by the Convention on the Settlement of Investment Disputes between States and Nationals of Other States.  MIGA is World Bank-affiliated and issues guarantees against non-commercial risk to enterprises that invest in member countries. 

Tanzania is a signatory to the New York Convention on the Recognition and Enforcement of Arbitration Awards.

The highly anticipated Public Private Partnership (PPP) (Amendment) Act, No. 9 of 2018 (the PPP Amendment Act) entered into force in September 2018.  PPP agreements are now subject to local arbitration under the arbitration laws of Tanzania. This provision augments the existing governing law provision which provides that the PPP agreement will be governed by Tanzanian law.  Therefore, in the event of a dispute, the parties must select a local arbitral forum i.e. the National Construction Council or the Tanzania Institute of Arbitrators. Additionally, Section 25A makes provision for PPP projects relating to natural wealth and resources to recognize the provisions under the Natural Wealth and Resources (Permanent Sovereignty) Act, 2017 and the Natural Wealth and Resources (Review and Re-Negotiation of Unconscionable Terms) Act, 2017 (collectively the Natural Wealth Laws).  These provisions include only local arbitration under Tanzanian law will be recognized as well as the right for Parliament to review any agreements in relation to, but not limited to, natural wealth and resources.

Investor-State Dispute Settlement

Investment-related disputes in Tanzania can be protracted.  The Commercial Court of Tanzania operates two sub-registries located in the cities of Arusha and Mwanza.  The sub-registries, however, do not have resident judges. A judge from Dar es Salaam conducts a monthly one-week session at each of the sub-registries.  The government said it intends to establish more branches in other regions including Mbeya, Tanga, and Dodoma, though progress has stagnated. Court-annexed mediation is also a common feature of the country’s commercial dispute resolution system.

Despite legal mechanisms in place, foreign investors have claimed that the GoT sometimes does not honor its agreements.  Additionally, investors continue to face challenges receiving payment for services rendered for GoT projects. One high profile example of such a dispute is that of U.S.-based Symbion Power, which in 2017 filed an application for ICSID arbitration seeking USD 561 million for alleged breach of contract of a purchase power agreement, and the dispute is ongoing.

International Commercial Arbitration and Foreign Courts

On 12 September 2018, the Tanzanian Parliament enacted the Public Private Partnership (Amendment) Bill 2018.  The amendment includes a provision requiring foreign investors to resolve disputes exclusively through Tanzania’s domestic courts, without recourse to international arbitration.  This has been a cause of alarm among international investors. The bill comes just a year after two natural resources legislation handed the Tanzanian government and parliament greater control over mining, oil and gas operations in the country, including the right to renegotiate or remove certain terms from existing contracts.

The Attorney General, Adelarus Kilangi, told Members of Parliament during the passage of the bill that the Tanzanian judicial system was best placed to hear disputes from international investors.  He further commented that the amendments were necessary to counteract the “bias” of international arbitration institutions, such as the International Centre for Settlement of Investment Disputes (ICSID) and the panels of international arbitrators who hear such disputes.

In August 2018, Tanzania Electric Supply Co (Tanesco), wholly owned by the Tanzanian government, lost an appeal against an ICSID award in a long-running case against Standard Chartered Bank and was ordered to pay USD 148 million.  Tanesco is also facing a claim from U.S.-based Symbion Power for USD 561 million. There are at least 22 pending filings of international arbitration against Tanzania. 

Bankruptcy Regulations

According to the 2019 World Bank’s Ease of Doing Business report, it takes an average of three years to conclude bankruptcy proceedings in Tanzania. The recovery rate for creditors on insolvent firms was reported at 20.3 U.S. cents on the dollar, with judgments typically made in local currency.

Investment Incentives

The TIC offers a package of investment benefits and incentives to both domestic and foreign investors without performance requirements.  A minimum capital investment of USD 500,000 if foreign owned or USD 100,000 if locally owned is required. These incentives include:

• Discounts on customs duties, corporate taxes, and VAT paid on capital goods for investments in mining, infrastructure, road construction, bridges, railways, airports, electricity generation, agribusiness, telecommunications, and water services.
• 100 percent capital allowance deduction in the years of income for the above mentioned types of investments – though there is ambiguity as to how this is accomplished.
• No remittance restrictions. The GoT does not restrict the right of foreign investors to repatriate returns from an investment.
• Guarantees against nationalization and expropriation. Any dispute arising between the GoT and investors may be settled through negotiations or submitted for arbitration.
• Allowing interest deduction on capital loans and removal of the five-year limit for carrying forward losses of investors.

Investors may apply for “Strategic Status” or “Special Strategic Status” to receive further incentives.  The criteria used to determine whether an investor may receive these designations are available on TIC’s website (www.tic.co.tz/strategicInvestor  ). 

The government habitually introduces waivers through the Public Finance Act with the aim of attracting investment in certain targeted sectors. In Financial Year 2018/19, the government introduced a VAT exemption for the following items in order to encourage investment: Packaging materials produced for use by local manufacturers of pharmaceutical products; imported animal and poultry feeds additives; and sanitary pads. The government also introduced 100 percent tax amnesty on interest and penalties from July 1 to December 31, 2018 in order to encourage tax compliance among the business community.  

The Export Processing Zones Authority (EPZA) oversees Tanzania’s Export Processing Zones (EPZs) and Special Economic Zones (SEZs).  EPZA’s core objective is to build and promote export-led economic development by offering investment incentives and facilitation services. Minimum capital requirements for EPZ and SEZ investors are USD 500,000 for foreign investors and USD 100,000 for local investors.  Investment incentives offered for EPZs include:

• An exemption from corporate taxes for 10 years.
• An exemption from duties and taxes on capital goods and raw materials.
• An exemption on VAT for utility services and on construction materials.
• An exemption from withholding taxes on rent, dividends, and interests.
• Exemption from pre-shipment or destination inspection requirements.
• SEZs offer similar incentives, excluding the 10 year exemption from corporate taxes.

The Zanzibar Investment Promotion Agency (ZIPA) and the Zanzibar Free Economic Zones Authority (ZAFREZA) offer roughly equivalent incentives as those offered by TIC and EPZA policies.

Foreign Trade Zones/Free Ports/Trade Facilitation

Tanzania’s export processing zones (EPZs) and special economic zones (SEZs) are assigned geographical areas or industries designated to undertake specific economic activities with special regulations and infrastructure requirements.  EPZ status can also be extended to stand-alone factories at any geographical location. EPZ status requires the export of 80 percent or more of the goods produced while SEZ status has no export requirement, allowing manufacturers to sell their goods locally.  As of March 2018, there were 14 designated EPZ/SEZ industrial parks, 10 of which are in development, and 75 stand-alone EPZ factories.

Performance and Data Localization Requirements

The Non-Citizens (Employment Regulation) Act (see Section 12 Labor Policies and Practices below) requires employers to attempt to fill positions with Tanzanian citizens before seeking work permits for foreign employees, and to develop plans to transition to local employees.

In recognition of the fact that the local content (LC) initiative cuts across all economic sectors, the government decided that LC development should take a multi-sector approach, rather than being confined to a single ministry or sector.  In 2015, the government directed the National Economic Empowerment Council (NEEC) to oversee implementation of local empowerment initiatives. The objective of the local content policy is to put local products and services – delivered by businesses owned and operated by Tanzanians – in an advantageous position to exploit opportunities emanating from inbound foreign direct investments.  In 2015, the GoT enacted The Petroleum Act 2015 and, subsequently, issued The Petroleum (Local Content) Regulations 2017. Similarly, in 2017, the GoT amended mining laws, issuing The Mining (Local Content) Regulations 2018. (See Chapter 4: Laws and Regulations on Foreign Direct Investment for more on recent local content laws.)

The GoT requires banks to physically house their computer servers in Tanzania.  In 2016, the GoT launched a USD 94 million national data center (NDC), which is operated by the GoT’s Telecommunications Corporation (TTC).  Under the Tanzania Telecommunications Corporation (TTC) Act 2017, the TTC plans, builds, operates and maintains the “strategic telecommunications infrastructure,” which is defined as transport core infrastructure, data center and other infrastructure that the GoT proclaims “strategic” via official public notice.  It is not yet clear how the law will be implemented and whether telecommunications operators will be required to use the TTC’s data center or provide the TTC greater data access. 

Real Property

All land is owned by the government and procedures for obtaining a lease or certificate of occupancy may be complex and lengthy.  Less than 15 percent of land has been surveyed, and registration of title deeds is handled manually, mainly at the local level. Foreign investors may occupy land for investment purposes through a government-granted right of occupancy (“derivative rights” facilitated by TIC), or through sub-leases from a granted right of occupancy.  Foreign investors may also partner with Tanzanian leaseholders to gain land access.

Land may be leased for up to 99 years, but the law does not allow individual Tanzanians to sell land to foreigners. There are opportunities for foreigners to lease land, including through TIC, which has designated specific plots of land (a land bank) to be made available to foreign investors.  Foreign investors may also enter into joint ventures with Tanzanians, in which case the Tanzanian provides the use of the land (but retains ownership, i.e., the leasehold).

Secured interests in property are recognized and enforced.  Though TIC maintains a land bank, restrictions on foreign ownership may significantly delay investments.  Land not in the land bank must go through a lengthy approval process by local-level authorities, the Ministry of Lands, Housing, Human Settlements Development (MoLHHSD), and the President’s Office to be designated as “general land,” which may be titled for investment and sale.

The MoLHHSD handles registration of mortgages and rights of occupancies and the Office of the Registrar of Titles issues titles and registers mortgage deeds.  Title deeds are recognized as collateral for securing loans from banks. In January 2018, the GoT amended the land law, requiring that loan proceeds secured by mortgaging underdeveloped land be used solely to develop the specific piece of land used as collateral.   The changes apply to general land managed by the MoLHSSD’s Commissioner for Lands, who must receive a report from the lender showing how loan proceeds will be used to develop the land. The law does not apply to village land allocated by village councils, which cannot be mortgaged to a financial institution.

Tanzania’s Registering Property rank in the World Bank’s 2019 Ease of Doing Business report deteriorated from 142 in 2018 to 146 in 2019.  According to the report, it takes eight procedures and 67 days to register property compared the Sub-Saharan Africa average of 53.9 days

Intellectual Property Rights

The GoT’s Copyright Society of Tanzania (COSOTA) is responsible for registration and enforcement of copyrighted materials (e.g., music, film, software), while the registration of trademarks and patents is administered by the Business Registrations and Licensing Agency (BRELA) within the Ministry of Industry and Trade.  It is the responsibility of the rights’ holders to enforce their rights where relevant, retaining their own counsel and advisors. The Fair Competition Commission (FCC) promotes competition, protects consumers against unfair market conduct, and has quasi-judicial powers to determine trademark and patent infringement cases.  The FCC is also tasked with combating the sale of counterfeit merchandise. However, counterfeit human medicines, cosmetics and packaged food materials are handled by the Tanzania Food and Drugs Authority.

Counterfeiting is a growing challenge.  The Confederation of Tanzanian Industries (CTI) reported that between 2010 and 2016, the FCC carried out 138 raids, seized 1,151 containers containing counterfeit products, and identified 1,711 alleged offenders.  Based on this data, the FCC estimated 10 percent of Tanzanian goods are counterfeit. A previous CTI study, however, estimated that upwards of 50 percent of goods in Tanzania may be counterfeit. The ‘hot spots’ for counterfeit goods are Dar es Salaam, Arusha, Mwanza and Mbeya.  Despite its efforts, limited resources make it difficult for the GoT to adequately combat counterfeiting. For additional information about national laws and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/  .

Capital Markets and Portfolio Investment

Tanzania’s Dar es Salaam Stock Exchange (DSE) is a self-listed publicly-owned company.  In 2013, the DSE launched a second tier market, the Enterprise Growth Market (EGM) with lower listing requirements designed to attract small and medium sized companies with high growth potential.  As of December 2017, DSE’s total market capitalization reached USD 10.5 billion, a 20.6 percent increase over the previous year’s figure. The Capital Markets and Securities Authority (CMSA) Act facilitates the free flow of capital and financial resources to support the capital market and securities industry.  Tanzania, however, restricts the free flow of investment in and out of the country, and Tanzanians cannot sell or issue securities abroad unless approved by the CMSA.

Under the Capital Markets and Securities (Foreign Investors) Regulation 2014, there is no aggregate value limitation on foreign ownership of listed non-government securities.  Despite progress, the country’s capital account is not fully liberalized and only foreign individuals or companies from other EAC nations are permitted to participate in the government securities market.  Even with this recent development allowing EAC participation, ownership of government securities is still limited to 40 percent of each security issued.

Tanzania’s Electronic and Postal Communications Act 2010 amended in 2016 by the Finance Act 2016 requires telecom companies to list 25 percent of their shares via an initial public offering (IPO) on the DSE.  Of the seven telecom companies that filed IPO applications with the CMSA, only Vodacom’s application received approval. In 2017, Vodacom planned to offer its shares from March 9 to April 19, but lack of demand required it to extend the offering period to July 28.  Moreover, to spur demand, the GoT opened the IPO to foreign investors who purchased 40 percent of the total shares offered.

As part of the Mining (Minimum Shareholding and Public Offering) Regulations 2016, large scale mining operators were required to float a 30 percent stake on the DSE by October 7, 2018.  On February 24, 2017, however, the GoT surprised the industry by amending the regulations so that the 30 percent stake had to be floated by August 23, 2017, rather than October 7, 2018. However, some mining companies have not listed on the DSE.

Money and Banking System

Finscope’s 2017 Financial Inclusion Report revealed that Tanzania’s financial inclusion rate increased to 65 percent in 2017 from 58 percent in 2013, primarily because of increased mobile phone usage.  However, participation in the formal banking sector still remains low. In 2017, low private sector credit growth and high non-performing loan (NPL) rates were persistent problems. In March 2017, the Bank of Tanzania (BoT) cut its discount rate to 12 percent from 16 percent to boost lending and economic growth, the first time it had cut interest rates since 2013.  In April 2017, the BoT reduced commercial banks’ statutory minimum reserves (SMR) requirement from 10 to 8 percent. These measures did not adequately spur lending, so in August 2017, the BoT reduced its discount rate for the second time from 12 to 9 percent. Despite these measures, private sector credit growth was lower than expected and NPL rates in December 2017 remained more than double the BoT’s targeted 5 percent rate.

In 2018, the BoT continued to address problems in the banking sector.  In January 2018, the BoT closed five community banks for under capitalization and gave an additional three until June 2018 to raise capital.  In its February 14, 2018 Tanzania Country Partnership Framework FY18-FY22, the World Bank reported that Tanzania’s “financial sector is stable despite high nonperforming loans…, which must be addressed.”  In a February 19, 2018 Circular titled “Measures to Increase Credit to Private Sector and Contain Non-Performing Loans,” the BoT issued guidelines to boost lending and reduce NPLs.

As of March 31, 2018, the banking sector was composed of 41 commercial banks, 6 community banks, 5 microfinance banks, 3 development financial institutions, 3 financial leasing companies and 2 credit bureaus. The two largest banks are CRDB Bank and National Microfinance Bank (NMB), which represent almost 30 percent of the market.  Private sector companies have access to commercial credit instruments including documentary credits (letters of credit), overdrafts, term loans, and guarantees. Foreign investors may open accounts and earn tax-free interest in Tanzanian commercial banks.

The Banking and Financial Institution Act 2006 established a framework for credit reference bureaus, permits the release of information to licensed reference bureaus, and allows credit reference bureaus to provide to any person, upon a legitimate business request, a credit report.  Currently, there are two private credit bureaus operating in Tanzania – Credit Info Tanzania Limited and Dun & Bradstreet Credit Bureau Tanzania Limited.

Foreign Exchange and Remittances

Foreign Exchange Policies

Tanzanian regulations permit unconditional transfers through any authorized bank in freely convertible currency of net profits, repayment of foreign loans, royalties, fees charged for foreign technology, and remittance of proceeds. The only official limit on transfers of foreign currency is on cash carried by individuals traveling abroad, which cannot exceed USD 10,000 over a period of 40 days. Investors rarely use convertible instruments.

In 2018 and 2019, the Bank of Tanzania inspected all forex shops in the country and ultimately found that most of them did not meet the requirements of new laws governing the businesses.  As a result, more than ninety percent of the Forex bureaus in country were closed. The government then licensed the commercial banks and Tanzania Post Corporation to open forex shops.

Remittance Policies

There are no recent changes or plans to change investment remittance policies that either tighten or relax access to foreign exchange for investment remittances.

Sovereign Wealth Funds

Tanzania has not established a sovereign wealth fund.

Public enterprises do not compete under the same terms and conditions as private enterprises because they have access to government subsidies and other benefits.  SOEs are active in the power, communications, rail, telecommunications, insurance, aviation, and port sectors. SOEs generally report to ministries and are led by a board.  Typically, a presidential appointee chairs the board, which usually includes private sector representatives. SOEs are not subjected to hard budget constraints. SOEs do not discriminate against or unfairly burden foreigners, though they do have access to sovereign credit guarantees.

As of June 2015, the GoT’s Treasury Registrar reported shares and interests in 215 public parastatals, companies and statutory corporations.  (See http://www.tro.go.tz/index.php/en/2014-12-17-09-13-44/commercial  )

Relevant ministry officials usually appoint SOEs’ board of directors to serve preset terms under what is intended to be a competitive process.  As in a private company, senior management report to the board of directors. Summary financial results for fiscal year 2017 of SOEs are included in the GoT’s consolidated financial statements (CFS) which are available online.  This year, however, the National Audit Office issued an adverse audit opinion, calling CFS accuracy into question.

Privatization Program

The government retains a strong presence in energy, mining, telecommunication services, and transportation.  The government is increasingly empowering the state-owned Tanzania Telecommunications Corporation Limited (TTCL) with the objective of safeguarding the national security, promoting socio-economic development, and managing strategic communications infrastructure.  The government also acquired 51 percent of Airtel Telecommunication Company Limited and became the majority shareholder.  In the past, the GoT has sought foreign investors to manage formerly state-run companies in public-private partnerships, but successful privatizations have been rare.  Though there have been attempts to privatize certain companies, the process is not always clear and transparent. In some instances, the GoT took back control as was the case in 2009-10 when the government nationalized formerly-privatized Tanzania Railways Limited, General Tyre, and Kilimanjaro International Airport based on mismanagement.

In 2010, the GoT enacted the Public Private Partnership (PPP) Act.  According to the act, any ministry, government department or agency, or statutory corporation may act as a PPP procuring authority.  The 2014 amendment of the PPP Act created a new PPP Center to be incorporated in the Office of the Prime Minister through merging the Coordination Unit and the Finance Unit.  It also set up a PPP Technical Committee to recommend PPP projects for approval by the National Investment Steering Committee. In spite of these developments, Tanzania’s Five Year Development Plan (2016-2021) (FYDP II) recognized weaknesses in the PPP legal framework and inadequate understanding and operationalization of PPP concepts as impediments to private sector financing.  As a result, FYDP II calls for an expanded role of the private sector through PPPs. Despite this goal, little progress has been made in this area.

In August 2017, President Magufuli instructed the Minister of Industry, Trade and Investments to revisit the terms of privatization and the ensuing performance of previously privatized companies/assets – most of which took place during the 1990s.  According to the Minister, of 156 privatized companies, 62 were operating normally, 28 were under-performing and 56 were no longer in operation. The GoT, in turn, has implemented a plan to repossess and subsequently retender idle companies/assets.  As a result, according to the Treasury Registrar Office, three companies were repossessed and an additional 12 companies are being considered for similar action by the Attorney General.

Responsible business conduct (RBC) includes respecting human rights, environmental protection, labor relations and financial accountability, and it is practiced by a number of large foreign firms.  Tanzania has laws covering labor and environmental issues. The Employment and Labor Relations Act (ELRA) establishes labor standards, rights and duties, while the Labor Institutions Act (LIA) specifies the government entities charged with administering labor laws.

The GoT’s National Environment Management Council (NEMC) undertakes enforcement, compliance, review and monitoring of environmental impact assessments; performs research; facilitates public participation in environmental decision-making; raises environmental awareness; and collects and disseminates environmental information.  Stakeholders, however, have expressed concerns over whether the NEMC has sufficient funding and capacity to handle its broad mandate.

There are no legal requirements for public disclosure of RBC, and the GoT has not yet addressed executive compensation standards.  Dar es Salaam Stock Exchange (DSE) listed companies, however, must release legally required information to shareholders and the general public.  In addition, the DSE signed a voluntary commitment with the United Nations Sustainable Stock Exchanges Initiative in June 2016, to promote long-term sustainable investments and improve environmental, social and corporate governance.  Tanzania has accounting standards compatible with international accounting bodies.

The Tanzanian government does not usually factor in RBC into procurement decisions.  The GoT is responsible for enforcing local laws, however, the media regularly reports on corruption cases where offenders allegedly avoid sanctions.  There have also been reports of corporate entities collaborating with local governments to carry out controversial undertakings that may not be in the best interest of the local population.

Conflicts between mining companies and neighboring communities have been reported mostly in gold mining areas, leading to intrusion into mining sites and clashes with mining company guards and police.  For example, in June 2017, media reported that villagers invaded Acacia’s North Mara Mine demanding compensation, and leading to the arrest of 66 people and several injuries. Communities often protest the government’s decision to grant mining rights and/or seek compensation over allegations of death, injuries, or environmental damage.

Forty-one Tanzanian entities participate in the United Nations Global Compact Network which focuses on RBC.  Some foreign companies have engaged NGOs that monitor and promote RBC to avoid adversarial confrontations. In addition, some of the multinational mining companies who are signatories to the Voluntary Principles on Security and Human Rights (VPs) have taken the lead and appointed NGOs to conduct programs to mitigate conflicts between the mining companies, surrounding communities, local government officials and the police.

Tanzania is a member of Extractive Industries Transparency Initiative (EITI) since 2009 and in 2015 Tanzania enacted the Extractive Industries Transparency and Accountability Act, which demands that all new concessions, contracts and licenses are made available to the public.  The government produces EITI Reports that disclose revenues from the extraction of its natural resources.

Tanzania has laws and institutions designed to combat corruption and illicit practices.  It is a party to the UN Convention against Corruption, but it is not a signatory to the OECD Convention on Combating Bribery.  Although corruption is still viewed as a major problem, President Magufuli’s focus on anti-corruption has translated into an increased judiciary budget, new corruption cases, and a decline in perceived corruption.  This improvement is partly attributed to instituting electronic services which reduce the opportunity for corruption through human interactions at agencies such as the Tanzania Revenue Authority (TRA), the Business Registration and Licensing Authority (BRELA), and the Port Authority.

Tanzania has three institutions specifically focused on anti-corruption.  The PCCB prevents corruption, educates the public, and enforces the law against corruption.  The Ethics Secretariat and its associated Ethics Tribunal under the President’s office enforces compliance with ethical standards defined in the Public Leadership Codes of Ethics Act 1995.  Lastly, the Economic, Corruption and Organized Crime Court, created in 2016, prosecutes corruption cases. As of April 2017, the Court had registered a total of 25 cases – some of which are high-profile grand corruption cases.

Companies and individuals seeking government tenders are required to submit a written commitment to uphold anti-bribery policies and abide by a compliance program.  These steps are designed to ensure that company management complies with anti-bribery polices.

The GoT is currently implementing its National Anti-Corruption Strategy and Action Plan Phase III (2017-2022) (NACSAP III) which is a decentralized approach focused on broad government participation.  NACSAP III has been prepared to involve a broader domain of key stakeholders including GoT local official, development partners, civil society organization (CSOs), and the private sector. The strategy puts more emphasis on areas that historically have been more prone to corruption in Tanzania such as revenue collection of oil, gas, and natural resources.  Despite the outlined role of the GoT, CSOs, NGOs and media find it increasingly more difficult to investigate corruption in the current political environment. (See Chapter 11)

President Magufuli’s current anti-corruption campaign has affected public discourse about the prevailing climate of impunity, and some officials are reluctant to engage openly in corruption.  Transparency International (TI), which ranks perception of corruption in public sector, gave Tanzania a score of 36 points out of 100 for both 2017 and 2018. The TI ranking, however, improved from 116 out of 180 countries in 2017 to 99 in 2018.

Some critics, however, question how effective the initiative will be in tackling deeper structural issues that have allowed corruption to thrive.  Despite President Magufuli’s focus on anti-corruption, there has been little effort to institutionalize what often appear to be ad hoc measures, a lack of corruption convictions, and persistent underfunding of the country’s main anti-corruption bodies.

Resources to Report Corruption

Contact at government agency responsible for combating corruption:

The Director General
Prevention and Combating of Corruption Bureau
P.O. Box 4865, Dar es Salaam, Tanzania
Tel: +255 22 2150043   Email: dgeneral@pccb.go.tz

Contact at “watchdog” organization:

Executive Director
Legal and Human Rights Centre
P.O. Box 75254, Dar es Salaam, Tanzania
Tel: +255 22 2773038/48   Email: lhrc@humanrights.or.tz

Since gaining independence, Tanzania has enjoyed a relatively high degree of peace and stability compared to its neighbors in the region.  Tanzania has held five national multi-party elections since 1995, the most recent in 2015. Mainland Tanzania government elections have been generally free of political violence.  Elections on the semi-autonomous archipelago of Zanzibar, however, have been marred by political violence several times since 1995.

October 2015 general elections were conducted in a largely open and transparent atmosphere; however, simultaneous elections in Zanzibar were controversially annulled after an opposition candidate declared victory.  A heavily criticized re-run election was held on March 20, 2016 despite an opposition boycott. Since the 2015 election, the GoT has placed several restrictions on political activity, including severely limiting the ability of opposition political parties and civil society organizations to debate issues publicly, or peacefully assemble.  An attempted assassination of opposition politician Tundu Lissu in October 2017 resulted in international calls for investigation; as of May 2018 police had not identified a suspect. Subsequent by-elections in 2017 and 2018 were marred by allegations of irregularities, and instances of political violence, including the unintended police killing of a young woman on apublic bus near a political demonstration.

Over a period of several months in 2017, a string of 43 killings took place; victims included local government officials and police in the southern half of Tanzania’s Pwani region near Dar es Salaam.  Authorities, who referred to the incident as presenting “unprecedented security threats and challenges” established a special police zone in the area and ultimately succeeded in halting the killings after a violent confrontation with the alleged perpetrators.

In addition to monitoring the political climate, foreign investors remain concerned about land tenure issues. Although the government owns all land in Tanzania and oversees the issuance of land leases of up to 99 years, many Tanzanian citizens judge that foreign investors exploit Tanzanian resources, sometimes resulting in conflict between investors and nearby residents. In Arusha, some of these conflicts have led to violence, prompting the GoT to emphasize its commitment to supporting foreign investment while also ensuring the intended benefit of the investments to Tanzanian citizens.

The GoT’s Five Year Development Plan 2016-2021 (FYDP II), which is in its third year of implementation, acknowledges Tanzania’s shortage of skilled labor and the importance of professional training to support industrialization.  The Integrated Labor Force Survey Analytical Report of 2014 found that only 3.6 percent of Tanzania’s 20 million person labor force is highly skilled.  On the regional front, Tanzania, Uganda, Rwanda and Kenya have committed to the EAC’s 2012 Mutual Recognition Agreement of engineers, making for a more regionally competitive engineering market.

In Tanzania, labor and immigration regulations permit foreign investors to recruit up to five expatriates with the possibility of additional work permits granted under specific conditions.

The Non-Citizens (Employment Regulation) Act 2015 introduced stricter rules for hiring foreign workers.  Under the Act, the Labor Commissioner must determine if “all possible efforts have been explored to obtain a local expert” before approving a non-citizen work permit.  In addition, employers must submit “succession plans” for foreign employees, detailing how knowledge and skills will be transferred to local employees.

Non-citizens may be granted two-year work permits, renewable up to five years, while foreign investors may be granted 10 year work permits which may be extended if the investor is deemed to be contributing to the economy and well-being of Tanzanians.  Some stakeholders fear that this provision creates an opening for corruption and arbitrarily prejudicial decisions against foreign investors. Since the passage of the Act, GoT officials have been conducting aggressive “special permit inspections” to verify the validity of work permits.  The process for obtaining work permits remains immensely bureaucratic, opaque at times, and slow.

Mainland Tanzania’s minimum wage, which has not changed since July 2013, is set by categories covering 12 employment sectors. The minimum wage ranges from TZS 100,000 (USD 45) per month for agricultural laborers to TZS 400,000 (USD 180) per month for laborers employed in the mining sector.  Zanzibar’s minimum wage is TZS 300,000 (USD 135), after being increased from TZS 150,000 (USD 68) in April 2017.

Mainland Tanzania and Zanzibar governments maintain separate labor laws. Workers on the mainland have the right to join trade unions.  Any company with a recognized trade union possessing bargaining rights can negotiate in a Collective Bargaining Agreement. As of 2012, unionized workers comprised 13 percent of the formal sector work force.  In the agricultural sector, the country’s largest employment sector, 5-8 percent of the work force is unionized. In the public sector, the government sets wages administratively, including for employees of state-owned enterprises.

Mainland workers have the legal right to strike and employers have the right to a lockout.  The law restricts the right to strike when doing so may endanger the health of the population. Workers in certain sectors are restricted from striking or subject to limitations.  In 2017, the GoT issued regulations that strengthened child labor laws, created minimum one-year terms for certain contracts, expanded the scope of what is considered discrimination, and changed contract requirements for outsourcing agreements.

The labor law in Zanzibar applies to both public and private sector workers.  Zanzibar government workers have the right to strike as long as they follow procedures outlined in the Employment Act of 2005, but they are not allowed to join mainland-based labor unions.  Zanzibar requires a union with 50 or more members to be registered and sets literacy standards for trade union officers. An estimated 40 percent of Zanzibar’s workforce is unionized. (See Chapter 4: Laws and Regulations on Foreign Direct Investment for more on recent local content laws.)

In 1996, the U.S. Overseas Private Investment Corporation (OPIC) signed an incentive agreement with the GoT.  . The current portfolio includes projects in agriculture, energy, microfinance and logistics. OPIC provides financing or insurance to these projects.  In addition, USAID’s Development Credit Authority (DCA) provides guarantees for commercial loans and has active portfolio guarantees with four banks to encourage lending to small and medium sized enterprises.  Tanzania is also a member of the World Bank’s Multilateral Investment Guarantee Agency (MIGA), which offers political risk insurance and technical assistance to attract FDI.

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

* Source for Host Country Data: National Bureau of Statistics (NBS); 2017 GDP: TZS 116,101,908,000,000 (Ex/rate TZS/USD: TZS 2300/USD)

Table 3: Sources and Destination of FDI

Data not available.

Table 4: Sources of Portfolio Investment

Data not available.

Economic Officer
U.S. Embassy Dar es Salaam
686 Old Bagamoyo Road
Msasani, Dar es Salaam
Tel: 255-22-229-4000
drseconomic@state.gov

Policies Toward Foreign Direct Investment

The GOT is working to improve the business climate and attract FDI.  The GOT prioritizes attracting and retaining investment, particularly in the underdeveloped interior regions, and reducing unemployment.  More than 3,350 foreign companies currently operate in Tunisia, and the government has historically encouraged export-oriented FDI in key sectors such as call centers, electronics, aerospace and aeronautics, automotive parts, textile and apparel, leather and shoes, and agro-food and other light manufacturing.  In 2018, the sectors that attracted the most FDI were energy (33 percent), services (22.8 percent), the electrical and electronic industry (18 percent), the mechanical industry (6.6 percent), and agro-food products (4.7 percent). Inadequate infrastructure in the interior regions results in the concentration of foreign investment in the capital city of Tunis and its suburbs (58 percent), the northern coastal region (25.7 percent), and the eastern coastal region (9.7 percent).  Internal western and southern regions attracted only 6.6 percent of foreign investment despite special tax incentives for those regions.

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

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

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

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

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign investment is classified into two categories:

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

Pursuant to the 2016 Investment Law (article 4), a list of sectors outlining which investment categories are subject to government authorization (the “negative list”) was set by decree on May 11, 2018.  The sectors include natural resources; construction materials; land, sea and air transport; banking, finance, and insurance; hazardous and polluting industries; health; education; and telecommunications.  Per the decree, if the relevant government decision-making body does not respond to an investment request within a specified period, typically 60 days, the authorization is automatically granted to the applicant.  The decree went into effect on July 1, 2018.

Other Investment Policy Reviews

• The WTO completed a Trade Policy Review for Tunisia in July 2016.  The report is available here: https://www.wto.org/english/tratop_e/tpr_e/tp441_e.htm  .
• The OECD completed an Investment Policy Review for Tunisia in November 2012.  The report is available here: http://www.oecd.org/daf/inv/investment-policy/tunisia-investmentpolicyreview-oecd.htm  .

Business Facilitation

The World Bank Investing Across Borders initiative affirms that Tunisia has the fewest limits on foreign equity ownership in the Middle East and the North Africa (MENA) region.  The GOT has opened up the majority of the sectors of the economy to foreign capital participation, with the exception of electricity transmission and distribution (http://iab.worldbank.org/data/exploreeconomies/tunisia  ).

The World Bank Doing Business 2019 report ranks Tunisia 63rd in terms of ease of starting a business.  In North Africa, Tunisia ranked ahead of Egypt (109), Algeria (157), and Libya (186) and behind Mauritania (46) and Morocco (34):  http://www.doingbusiness.org/en/data/exploreeconomies/tunisia#DB_sb  .

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

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

The World Bank’s Doing Business 2019 report indicates that business registration takes an average of 8 days and costs about USD 115 (350 Tunisian dinars):   http://www.doingbusiness.org/en/data/exploreeconomies/tunisia#DB_sb  .

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

In the tourism industry, companies must register with the National Office for Tourism at:  http://www.tourisme.gov.tn/pour-investir/prestations-administratives.html.

The central point of contact for established foreign investors and companies is the Foreign Investment Promotion Agency (FIPA):  http://www.investintunisia.tn  .

Outward Investment

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

Tunisia has signed 55 bilateral investment treaties of which 39 are in force: http://investmentpolicyhub.unctad.org/IIA/CountryBits/213#iiaInnerMenu  .

The 2002 Trade and Investment Framework Agreement (TIFA) between Tunisia and the United States remains active.  A meeting of the Bilateral Trade and Investment Council in April 2017 helped promote engagement and cooperative reform efforts.  A Bilateral Investment Treaty (BIT) between Tunisia and the United States entered into force in 1993.

Tunisia has multilateral and bilateral trade agreements with approximately 127 countries, including its neighbors Libya and Algeria.  Tunisia acceded to the Common Market for Eastern and Southern Africa (COMESA) in July 2018. In January 2008, Tunisia’s Association Agreement with the EU went into effect, eliminating tariffs on industrial goods.  Tunisia and the EU are negotiating a full-fledged free-trade agreement, but it has not yet been concluded. In addition, Tunisia is a signatory to the World Bank’s Multilateral Investment Guarantee Agency (MIGA), which offers private sector political risk insurance.  Tunisia is a member of the World Trade Organization and maintains bilateral agreements with Turkey and the member states of the European Free Trade Association (EFTA), as well as a multilateral agreements with other Arab League states.

A 1985 bilateral treaty and a 1989 protocol guarantee U.S. firms freedom from double taxation.

In 2013, the Tunisian Parliament adopted the OECD Multilateral Convention on Mutual Administrative Assistance in Tax Matters.

Transparency of the Regulatory System

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

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

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

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

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

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

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

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

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

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

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

International Regulatory Considerations

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

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

Tunisia has yet to ratify the WTO Trade Facilitation Agreement (TFA) that would improve processes at the port of entry.  However, Tunisia submitted a “Category A” notification in September 2014, which should have required the GOT to implement TFA measures by February 2017.

Legal System and Judicial Independence

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

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

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

Laws and Regulations on Foreign Direct Investment

The 2016 Investment Law directs tax incentives towards regional development promotion, technology and high value-added products, research and development (R&D), innovation, small and medium-sized enterprises (SMEs), and the education, transport, health, culture, and environmental protection sectors.

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

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

Competition and Anti-Trust Laws

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

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

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

Expropriation and Compensation

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

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

Dispute Settlement

ICSID Convention and New York Convention

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

Investor-State Dispute Settlement

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

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

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

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

International Commercial Arbitration and Foreign Courts

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

Bankruptcy Regulations

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

According to the World Bank Doing Business 2019 report, Tunisia’s recovery rate (how much creditors recover from an insolvent firm at the end of insolvency proceedings) is about 52 cents on the dollar, compared to 26.3 cents for MENA and 70.5 cents for OECD high-income countries.

Investment Incentives

Preferential status is usually linked to the percentage of foreign corporate ownership, percentage of production for the export market, and investment location.  The 2016 Investment Law provides investors with a broad range of incentives linked to increased added value, performance and competitiveness, use of new technologies, regional development, environmental protection, and high employability.

To incentivize the employment of new university graduates, the GOT assumes the employer’s portion of social security costs (16 of salary) for the first seven years of the investment, with an extension of up to 10 years in the interior regions.  Investments with high job-creation potential may benefit from the purchase of state-owned land at the price of one Tunisian dinar per square meter. Investors who purchase companies in financial distress may also benefit from tax breaks and social security assistance.  These advantages are determined on a case-by-case basis.

Further benefits are available for offshore investments, such as tax exemptions on profits and reinvested revenues, duty-free import of capital goods with no local equivalents, and full tax and duty exemption on raw materials, semi-finished goods, and services necessary for operation.

On March 9, 2017, the GOT adopted decree #2017-389 on financial incentives to investment in priority sectors, economic performance areas, and regional development.  Investors have to declare their projects through the regional offices of Foreign Investment Promotion Agency (FIPA) and the Agency for the Promotion of Industry and Innovation (APII) to receive incentives.

According to the World Bank’s Doing Business 2019 report, Tunisia’s overall ranking improved to 80 out of 190 countries from 88 the previous year.

Foreign Trade Zones/Free Ports/Trade Facilitation

Tunisia has free-trade zones, officially known as “Parcs d’Activités Economiques,” in Bizerte and Zarzis.  While the land is state-owned, a private company manages the free-trade zones. They enjoy adequate public utilities and fiber-optic connectivity.  Companies established in the free-trade zones are exempt from taxes and customs duties and benefit from unrestricted foreign exchange transactions, as well as limited duty-free entry into Tunisia of inputs for transformation and re-export.  Factories operate as bonded warehouses and have their own assigned customs personnel.

For example, companies in Bizerte’s free-trade zone may rent space for three Euros per square meter annually — a level unchanged since 1996 — plus a low service fee.  Long-term renewable leases, up to 25 years, are subject to a negotiable 3 percent escalation clause. Expatriate personnel are allowed duty-free entry of personal vehicles.  During the first year of operations, companies within the zone must export 100 percent of their production. Each following year, the company may sell domestically up to 30 percent of the previous year’s total volume of production, subject to local customs duties and taxes.  Lease termination has not been a problem, and all companies that desired to depart the zone reportedly did so successfully.

Performance and Data Localization Requirements

Foreign resident companies face restrictions related to the employment and compensation of expatriate employees.  The 2016 Investment Law limits the percentage of expatriate employees per company to 30 percent of the total work force (excluding oil and gas companies) for the first three years and to 10 percent starting in the fourth year.  There are somewhat lengthy renewal procedures for annual work and residence permits, and the GOT has announced its intention to ease them in the future. Although rarely enforced, legislation limits the validity of expatriate work permits to two years.

Central Bank regulations impose administrative burdens on companies seeking to pay for temporary expatriate technical assistance from local revenue.  For example, before it receives authorization to transfer payment from its operations in Tunisia, a foreign resident company that utilizes a foreign accountant must document that the service is necessary, fairly valued, and unavailable in Tunisia.  This regulation hinders a foreign resident company’s ability to pay for services performed abroad.

The host government does not follow “forced localization,” but encourages the use of domestic content.

There are no requirements for foreign information technology (IT) providers to turn over source code that is protected by the intellectual property law; however, they are required to inform the Ministry of Communication Technologies and Digital Economy about encrypted equipment.

Public companies and institutions are prohibited by the Ministry of Communication Technologies and Digital Economy from freely transmitting and storing personal data outside of the country.

Private and public institutions must comply with the recommendations of the National Authority for Personal Data Protection (INPDP) when handling personal data, even if it is business-related.  The National Institute of Office Automation and Micro-computing (INBMI) enforces the rules on local data storage.

Performance Requirements

Until recently, performance requirements were generally limited to investment in the petroleum sector.  Now, such requirements are in force in sectors such as telecommunications and for private sector infrastructure projects on a case-by-case basis.  These requirements tend to be specific to the concession or operating agreement (e.g., drilling a certain number of wells, or producing a certain amount of electricity).

Real Property

Secured interests in property are enforced in Tunisia.  Mortgages and liens are in common use, and the recording system is reliable.

Foreign and/or non-resident investors are allowed to lease any type of land, but can only acquire non-agricultural land.

A large portion of privately held land, especially agriculture land, has no clear title, and the government is investing a great deal of effort to encourage people to clear and register their properties.

Properties legally purchased must be duly registered to ensure they remain the property of their actual owners, even if they have been unoccupied for a long time.

According to the World Bank’s Doing Business 2019 report, registering a property in Tunisia is done in four steps, takes 39 days, and costs around 6.1 percent of the total property cost.

Intellectual Property Rights

Tunisia is a member of the World Intellectual Property Organization (WIPO) and signatory to the United Nations Agreement on the Protection of Patents and Trademarks.  The agency responsible for patents and trademarks is the National Institute for Standardization and Industrial Property (INNORPI — Institut National de la Normalisation et de la Propriété Industrielle).  Tunisia also is party to the Madrid Protocol for the International Registration of Marks. Foreign patents and trademarks should be registered with INNORPI.

Tunisia’s patent and trademark laws are designed to protect owners duly registered in Tunisia.  In the area of patents, foreign businesses are guaranteed treatment equal to that afforded to Tunisian nationals.  Tunisia updated its legislation to meet the requirements of the WTO agreement on Trade-Related Aspects of Intellectual Property (TRIPS).

Copyright protection is the responsibility of the Tunisian Copyright Protection Organization (OTDAV — Office Tunisien des Droits d´Auteurs et des Droits Voisins), which also represents foreign copyright organizations.

If customs officials suspect a copyright violation, they are permitted to inspect and seize suspected goods.  For products utilizing foreign trademarks registered at INNORPI, the Customs Code empowers customs agents to enforce intellectual property rights (IPR) throughout the country.  Tunisian copyright law applies to literary works, art, scientific works, new technologies, and digital works. Its application and enforcement, however, have not always been consistent with foreign commercial expectations.  Print, audio, and video media are particularly susceptible to copyright infringement in Tunisia. Smuggling of illegal items takes place through Tunisia’s porous borders.

The 2009 Intellectual Property law greatly expanded the current scope of protections.  The minimum fine for counterfeiting is 10,000 Tunisian dinars (approximately USD 3,800), and copyright protection is valid for the holder’s lifetime.  Customs agents have the authority to seize suspected counterfeit goods immediately.  Tunisia’s 2014 constitution enshrined intellectual property protection in article 41.

In 2015, the GOT issued a decree defining registration and arbitration procedures for trade and service marks, and establishing a national trademark registry.  The new decree contained provisions governing the registration of trademarks under the Madrid Protocol and included improvements such as the extension of the deadline for opposition to the registration of trademarks, as well as the electronic filing of applications for trademarks registration.

The GOT is currently preparing a new decree to create an IPR Council in charge of drafting a national IPR strategy.

The registration of drugs in Tunisia requires that the product is both registered and marketed in the country of origin.  In 2005, Tunisia removed its restriction on pharmaceutical imports where there are similar generic products manufactured locally.

Resources for Rights Holders

• Peter Mehravari
  Intellectual Property Attaché for the Middle East and North Africa
  U.S. Embassy Kuwait City, Kuwait
  U.S. Department of Commerce Global Markets
  U.S. Patent and Trademark Office
  Telephone: +965 2259 1455
  Email: peter.mehravari@trade.gov
• AmCham Tunisia:  http://www.amchamtunisia.org.tn/  
• Attorneys list:  https://tn.usembassy.gov/u-s-citizen-services/local-resources-of-u-s-citizens/attorneys/

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

Capital Markets and Portfolio Investment

Tunisia’s financial system is dominated by its banking sector, with banks accounting for roughly 85 percent of financing in Tunisia.  Overreliance on bank financing impedes economic growth and stronger job creation. Equity capitalization is relatively small; Tunisia’s stock market provided 13.2 percent of corporate financing in 2017 according to the Financial Market Council annual report.  Other mechanisms, such as bonds and microfinance, contribute marginally to the overall economy.

Created in 1969, the Bourse de Tunis (Tunis stock exchange) listed 82 companies as of December 2018.  The total market capitalization of these companies was USD 8.25 billion. During the last five years, the exchange’s regulatory and accounting systems have been brought more in line with international standards, including compliance and investor protections.  The exchange is supervised and regulated by the state-run Capital Market Board. Most major global accounting firms are represented in Tunisia. Firms listed on the stock exchange must publish semiannual corporate reports audited by a certified public accountant.  Accompanying accounting requirements exceed what many Tunisian firms can, or are willing to, undertake. GOT tax incentives attempt to encourage companies to list on the stock exchange. Newly listed companies that offer a 30 percent capital share to the public receive a five-year tax reduction on profits.  In addition, individual investors receive tax deductions for equity investment in the market. Capital gains are tax-free when held by the investor for two years.

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

Money and Banking System

According to the Central Bank of Tunisia (CBT) annual report on banking supervision published in December 2018, Tunisia hosts 30 banks, of which 23 are onshore and seven are offshore.  Onshore banks include three Islamic banks, two microcredit and SME financing banks, and 18 commercial universal banks. After the fall of the former regime, companies, banks, and real estate that belonged to ousted President Ben Ali’s family were brought under GOT receivership and gradually privatized.

Domestic credit to the private sector provided by banks stood at 68.3 percent of GDP in 2017, per the CBT banking supervision report.  According to the World Bank, this level is higher than the MENA region average 56.7 percent. In the World Bank’s Doing Business 2019 survey, Tunisia’s ranking improved in terms of ease of access to credit from 105 in 2018 to 99 in 2019.  Tunisia’s banking system penetration has grown by 4 percent annually for the past five years. 87percent of banks are located in the coastal regions, with about 41 percent in the greater Tunis area alone.  Tunisia’s banking system activity is mainly within the 23 onshore banks, which accounted for 92 percent of assets, 93 percent of loans, and 97 percent of deposits in 2017. They offer identical services targeting Tunisia’s larger corporations.  Meanwhile, SMEs and individuals often have difficulty accessing bank capital due to high collateral requirements.

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

Government regulations control lending rates.  This prevents banks from pricing their loan portfolios appropriately and incentivizes bankers to restrict the provision of credit.  Competition among Tunisia’s many banks has the effect of lowering observed interest rates; however, banks often place conditions on loans that impose far higher costs on borrowers than interest rates alone.  These non-interest costs may include collateral requirements that come in the form of liens on real estate. Often, collateral must equal or exceed the value of the loan principal. Collateral requirements are high because banks face regulatory difficulties in collecting collateral, thereby adding to costs.  According to the CBT banking supervision report, nonperforming loans (NPLs) were at 13.9 percent of all bank loans in 2017, mostly in the industrial (27 percent) and tourism (18.9 percent) sectors.

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

The GOT recognizes two categories of financial service activity: banking (e.g., deposits, loans, payments and exchange operations, and acquisition of operating capital) and investment services (reception, transmission, order execution, and portfolio management).  Non-resident financial service providers must present initial minimum capital (fully paid up at subscription) of 25 million Tunisian dinars (USD 9.4 million) for a bank, 10 million dinars (USD 3.7 million) for a non-bank financial institution, 7.5 million dinars (USD 2.8 million) for an investment company, and 250,000 dinars (USD 94,450) for a portfolio management company.

Foreign Exchange and Remittances

Foreign Exchange

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

In 2018, the dinar depreciated 8.6 percent against the dollar and 12.9 percent against the Euro.

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

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

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

There are no limits to the amount of foreign currency that visitors can bring to Tunisia to exchange into local currency.  However, amounts exceeding the equivalent of 25,000 dinars (USD 9,445) must be declared to customs at the port of entry.  Non-residents must also report foreign currency imports if they wish to re-export or deposit more than 5,000 dinars (USD 1,890).  Tunisian customs authorities may require currency exchange receipts on exit from the country.

Remittance Policies

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

Sovereign Wealth Funds

By decree #85-2011, the GOT established a sovereign wealth fund, “Caisse des Depots et des Consignations” (CDC), to boost private sector investment and promote small and medium enterprise (SME) development.  It is a state-owned investment entity responsible for independently managing a portion of the state’s financial assets. The CDC was set up with support from the French CDC and the Moroccan CDG (Caisse de Depots et de Gestion) and became operational in early 2012.  The original impetus for the creation of the CDC was to manage assets confiscated from the former ruling family as independently as possible in order to serve the public interest. More information is available about the CDC at www.cdc.tn  .

At the end of 2017, CDC had 6.4 billion dinars (USD 2.6 billion) in assets and 250 million dinars (USD 128 million) in capital.

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

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

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

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

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

Privatization Program

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

In 2011, the GOT confiscated the assets of the former regime.  The list of assets involved every major economic sector. According to the Commission to Investigate Corruption and Malfeasance, a court order is required to determine the ultimate handling of frozen assets.  Since court actions frequently take years — and with the government facing immediate budgetary needs — the GOT allowed privatization bids for shares in Ooredoo (a foreign telecommunications company of which 30 percent of shares were confiscated from the previous regime), Ennakl (car distribution), Carthage Cement (cement), City Cars (car distribution), and Banque de Tunisie and Zitouna Bank (banking).  The government is expected to sell some of its stakes in state-owned banks; however, no clear plan has been adopted or communicated so far due to fierce opposition by labor unions.

Tunisia adopted law #35 in June 2018 to encourage Corporate Social Responsibility (CSR).  The law requires companies to allocate a portion of their budgets to finance CSR projects such as those in sustainable development, green economy, and youth employment.  According to the law, an organization in charge of monitoring CSR projects will be created to ensure that the projects comply with the principles of good governance and sustainable development.  Tunisia is an adherent to the OECD Guidelines for Multinational Enterprises.

Since 1989, the public sector has been subject to a government procurement law that requires labor, environmental, and other impact studies for large procurement projects.  All public institutions are subject to audits by the Court of Auditors (Cour des Comptes).

The Tunisian Central Bank issued a circular in 2011 setting guidelines for sound and prudent business management and guaranteeing and safeguarding the interests of shareholders, creditors, depositors and staff.  The circular also established policies on recruitment, appointment, and remuneration, as well as dissemination of information to shareholders, depositors, market counterparts, regulators, and the general public.

The national point of contact for OECD for Multinational Enterprises guidelines is:

Abdelmajid Mbarek, Director
Ministry of Development, Investment, and International Cooperation
Avenue Mohamed V
1002 Tunis
Telephone: +216 7184 9596
Fax: +216 7179 9069
Email: a.mbarek@mdci.gov.tn

Tunisia has not yet joined the Extractive Industries Transparency Initiative (EITI).  However, Tunisia participated in the 7th world conference of the EITI in Lima, Peru, in 2016.

Per Tunisia’s 2014 constitution, projects related to commercial development of oil, natural gas, or minerals are subject to Parliamentary approval.

U.S. investors report that routine procedures for doing business (customs, transportation, and some bureaucratic paperwork) are often tainted by corrupt practices.  Transparency International’s Corruption Perceptions Index 2018 gave Tunisia a score of 43 out of 100 and a rank of 73 among 180 countries.  Regionally, Tunisia is ranked 7th for transparency among MENA countries and first in North Africa, ahead of Morocco, Algeria, Egypt, and Libya.  Most U.S. firms involved in the Tunisian market do not identify corruption as a primary obstacle to foreign direct investment.

In February 2017, Parliament passed law #2017-10 on corruption reporting and whistleblower protection.  The legislation was a significant step in the fight against corruption, as it establishes the mechanisms, conditions, and procedures for denouncing corruption.  Article 17 of the law provides protection for whistleblowers, and any act of reprisal against them is considered a punishable crime. For public servants, the law also guarantees the protection of whistleblowers against possible retaliation from their superiors.

Following the passage of the access to information and whistleblower protection laws, the government initiated an anti-corruption campaign led by the prime minister.  A series of arrests and investigations targeted well-known businesspersons, politicians, journalists, police officers, and customs officials.  Preliminary charges included embezzlement, fraud, and taking bribes.

In September 2017, the GOT established the Independent Access to Information Commission.  This authority was prescribed in the 2016 Access to Information Law to proactively encourage government agencies to comply with the new law and to adjudicate complaints against the government for failing to comply with the law.

Tunisia’s penal code devotes 11 articles to defining and classifying corruption and assigns corresponding penalties (including fines and imprisonment).  Several other regulations also address broader concepts of corruption. Detailed information on the application of these laws and their effectiveness in combating corruption is not publicly available, and there are no GOT statistics specific to corruption. The Independent Commission to Investigate Corruption, created in 2011, handled corruption complaints from 1987 to 2011.  The commission referred 5 percent of cases to the Ministry of Justice. In 2012, the commission was replaced by the National Authority to Combat Corruption, which has the authority to forward corruption cases to the Ministry of Justice, give opinions on legislative and regulatory anti-corruption efforts, propose policies and collect data on corruption, and facilitate contact between anti-corruption efforts in the government and civil society.

Post-2011 government efforts to combat corruption include:  the seizure and privatization of assets belonging to Ben Ali’s family members; assurances that price controls on food products, gasoline, etc., are respected; enhancement of commercial competition in the domestic market; establishment of a division within the Prime Minister’s Office dedicated to combatting corruption; arrests of corrupt businessmen and officials; and harmonization of Tunisian corruption laws with those of the European Union.

Since 1989, a comprehensive law designed to regulate each phase of public procurement has governed the public sector.  The GOT also established the Higher Commission on Public Procurement (HAICOP) to supervise the tender and award process for major government contracts.  The government publicly supports a policy of transparency. Public tenders require bidders to provide a sworn statement that they have not and will not, either by themselves or through a third party, make any promises or give gifts with a view to influencing the outcome of the tender and realization of the project.  Starting September 2018, the government imposed by decree that all public procurement operations be conducted electronically via a bidding platform called Tunisia Online E-Procurement System (TUNEPS). Despite the law, competition on government tenders appears susceptible to corrupt behavior. Pursuant to the Foreign Corrupt Practices Act (FCPA), the U.S. Government requires that American companies requesting U.S. Government advocacy certify that they do not participate in corrupt practices.

Resources to Report Corruption

Contacts at agencies responsible for combating corruption:

Chawki Tabib
President
The National Anti-Corruption Authority (Instance Nationale de Lutte Contre la Corruption – INLUCC)
71 Avenue Taieb Mhiri, 1002 Tunis Belvédère – Tunisia
Telephone: +216 71 840 401 / Toll Free: 80 10 22 22
Email: contact@inlucc.tn
http://www.inlucc.tn 

“Watchdog” organization:

Achraf Aouadi
President
I WATCH Tunisia
14 Rue d’Irak 1002 Lafayette, Tunisia
Telephone: +216 71 844 226
Email: contact@iwatch.tn

The end of 2019 will bring the country’s second set of parliamentary and presidential elections since its post-revolution constitution was ratified in 2014.  In the eight years since the revolution, Tunisia has made significant progress in the areas of civil society and rights-based reforms, but economic indicators continue to lag and have been a major force driving periodic protests.  While ideological differences with respect to religion dominate much of the political discord, differing economic ideologies — whether Tunisia will follow a statist economic model or a liberal one — have more tangible effects on policy.  The country’s first municipal elections, held in May 2018, were a critical first step in the decentralization process, which should help alleviate some of the economic disparity between the relatively wealthy coastal areas and the relatively poor interior of the country.

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

Tunisia has a highly literate labor force of approximately 4.2 million.  The official 2018 unemployment rate was 15.4 percent; however, unemployment is estimated at 29.2 percent among university graduates and is even higher among degree-holding women.  Official statistics do not count underemployment or provide disaggregated data by geography.

In order to keep the unemployment rate at current levels, 60,000 new private sector jobs must be created each year.  Over the past two decades, the structure of the workforce remained relatively stable, and as of the last quarter of 2018 stood at 14 percent agriculture and fishing, 29.3 percent industrial, and 52 percent commerce and services. Tunisia has successfully developed its industrial sector and created low-skilled employment, although several manufacturers struggle to find qualified technical workers.  During 2018, Tunisia reduced the number of unemployed graduates by 8,500.

The right of labor to organize is protected by law.  Currently, four national labor confederations operate in Tunisia.  The oldest and largest is the General Union of Tunisian Workers (UGTT — Union Générale des Travailleurs Tunisiens). The others include the General Confederation of Tunisian Workers (CGTT — Confederation Générale des Travailleurs Tunisiens), the Tunisian Labor Union (UTT — Union Tunisienne du Travail), created in May 2011, and the Tunisian Labor Organization (OTT — Organisation Tunisienne du Travail), created in August 2013.  UGTT claims about one third of the salaried labor force as members, although more are covered under UGTT-negotiated contracts.  Wages and working conditions are established through triennial collective bargaining agreements between the UGTT, the national employers’ association (UTICA — Union Tunisienne de l’Industrie, du Commerce, et de l’Artisanat), and the GOT.  These tripartite agreements set industry standards and generally apply to about 80 percent of the private sector labor force, regardless of whether individual companies are unionized.

Public Wage Increase:  On October 20, 2018, the GOT and UGTT reached an agreement to increase salaries for SOE employees.  Depending on grades and positions, increases ranged from 205 dinars to 270 dinars per month. Another wage increase agreement for the civil service was reached between the GOT and UGTT on February 7, 2019.  Depending on the job category, increases were from 135 to 180 dinars per month and implemented in several increments.

Private Wage Increase:  Negotiations between the UGTT and the employers union UTICA started March 2018 and concluded in September 2018 with an agreement to increase wages by 6.5 percent over three years.

Minimum Wage Increase:  On July 14, 2018, Prime Minister Youssef Chahed decided to raise the minimum wage (SMIG) by 6 percent retroactively, starting from May 2018 for the 48- and 40-hour work week regimes.  For the 48-hour regime, the minimum wage is 378.56 dinars per month. For the 40-hour regime, it is 323.43 dinars per month.

The minimum wage exceeds the poverty income level of 180 dinars per month.

The Overseas Private Investment Corporation (OPIC) has been active in the Tunisian market since 1963.  OPIC provides political risk insurance and financing to U.S. companies. OPIC has designed a number of investment funds that include Tunisia.  These funds cover, among other sectors, franchising and SME development. OPIC supports private U.S. investment in Tunisia and has sponsored several reciprocal investment missions.  In 2015, OPIC signed a credit guarantee facility agreement totaling USD 50 million with three Tunisian banks to increase access to capital for SMEs.

Table 2: Key Macroeconomic Data, U.S. FDI in Tunisia

*Source: Tunisia’s Foreign Investment Promotion Agency (FIPA) yearend December 2017.

Table 3: Sources and Destination of FDI

*Source: Tunisia’s Foreign Investment Promotion Agency (FIPA) yearend December 2018.

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

Table 4: Sources of Portfolio Investment

*Source: Tunisia’s Foreign Investment Promotion Agency (FIPA) yearend December 2018.

*Tunisia was not covered by the IMF’s Coordinated Portfolio Investment Survey (CPIS).

Embassy Tunis Commercial Section
Commercial Officer
U.S. Embassy Tunis, Les Berges du Lac, 1053, Tunisia
Telephone: +216 71 107 000
Email: TunisCommercial@state.gov

Policies Towards Foreign Direct Investment

Ugandan authorities vocally welcome FDI, and Uganda’s legal regime generally facilitates FDI.  A new Investment Code Act (new ICA) came into force in February 2019. The new ICA defines investment more broadly, to include both FDI and portfolio investment.  It also includes international development agencies and companies incorporated in Uganda but with foreign ownership or control in the “foreign investor” category. The new ICA abolishes restrictions on technology transfer and on repatriation of funds by foreign investors.  It establishes new incentives for investment, and grandfathers in old incentives.

Uganda’s laws do not discriminate against foreign investors per se.  Some provisions of the new ICA may discourage FDI, however. Investors must obtain a license from the Uganda Investment Authority (UIA) before investing.  The new ICA establishes a minimum threshold value of USD 250,000 for FDI and a yet-to-be-specified minimum threshold value for portfolio investment. The Ugandan authorities can alter these minimums at any time, thereby creating potential uncertainty for investors.  Additionally, investment licenses may carry specific performance conditions, such as requiring investors to permit the UIA to monitor operations, or to employ or train Ugandan citizens or use Ugandan goods and services to the greatest extent possible. Further, the Ugandan government may revoke investment licenses of entities that “tarnish the good repute of Uganda as an attractive base for investment.”  The government has yet to revoke any investor license on this ground.

Sending a possibly chilling signal to would-be foreign investors, in early 2019, the government accused South African telecoms giant MTN of conspiring with foreigners to commit treason, deported several of its top foreign executives, and reportedly pressured it to list on the Ugandan stock exchange and sell at least 20 percent of its equity to Ugandans.  In a seemingly arbitrary manner, the government also raised the fee for renewal of MTN’s license from USD 100 million to USD 118 million.

The UIA facilitates investment by granting licenses to foreign investors, as well as promoting, facilitating, and supervising investments in Uganda.  It provides a “one stop” shop online where investors can apply for a license, pay fees, register businesses, apply for land titles, and apply for tax identification numbers.  In practice, investors may also need to liaise with other authorities to complete legal requirements. The UIA also triages complaints from foreign investors. The UIA’s website (www.ugandainvest.go.ug  ) and the Business in Development Network Guide to Uganda (www.bidnetwork.org  ) provide information on the laws and reporting requirements for foreign investors.

In practice, investors often bypass the UIA after facing delays, poorly enforced regulations, and corruption.  For larger investments, companies have reported that political support from a high-ranking Ugandan official is a prerequisite.

President Museveni hosts an annual investors’ round table to consult a select group of both foreign and local investors on increasing investment in Uganda, occasionally including U.S. investors.  Every Ugandan embassy has a trade and investment desk charged with advertising investment opportunities in the country. In January 2019, the government conducted a workshop to train its diplomats on investment promotion.

Limits on Foreign Control and Right to Private Ownership and Establishment

With the exception of land, foreigners have the right to own property, establish businesses, and make investments.  The new ICA eliminates all obligations and restrictions regarding technology transfer, intellectual property, and repatriation of funds.  Ugandan law permits foreign investors to acquire domestic enterprises and to establish green field investments. The Companies Act of 2010 permits the registration of companies incorporated outside of Uganda.

As detailed above, all investors must secure a license from the UIA.  The Ugandan authorities evaluate investment proposals based on a number of criteria, including potential for generation of new earnings; savings of foreign exchange; the utilization of local materials, supplies and services; the creation of employment opportunities in Uganda; the introduction of advanced technology or upgrading of indigenous technology; and the contribution to locally or regionally balanced socioeconomic development.

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

Uganda’s petroleum laws already impel foreign oil companies to preference local goods and labor where available, with the Minister of Energy authorized to determine the extent of required local content.

Other Investment Policy Reviews

• The United Nations Commission on Trade and Development (UNCTAD) issued its World Investment Report, 2018, available at: https://unctad.org/en/pages/PublicationWebflyer.aspx?publicationid=2130  
• The International Monetary Fund issued an Article IV Consultation and Review in 2019, and its concluding statement is available at: www.imf.org/en/News/Articles/2019/02/14/mcs021419-uganda-staff-concluding-statement-of-the-2019-article-iv-mission  

Business Facilitation

The UIA one-stop shop website assists in registering businesses and investments.  In practice, investors and business may need to liaise with multiple authorities to set up shop, and the UIA lacks the capacity to play a robust and proactive business facilitation role.  According to the 2018 World Bank Doing Business report, business registration takes an average of 24 days.

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

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

Outward Investment

The GOU does not promote or incentivize outward investment, nor restrict domestic investors from investing abroad.

Uganda has bilateral investment protection treaties with the following countries:  BLEU (Belgium-Luxembourg Economic Union), China, Cuba, Denmark, Egypt, Eritrea, France, Germany, Italy, Netherlands, Nigeria, South Africa, Switzerland, United Kingdom, and Zimbabwe.

Although the countries of the East African Community (EAC) agreed on a text for an Economic Partnership Agreement (EPA) with the European Union (EU) in October 2014, the parties have yet to ratify the agreement.

Uganda does not have a bilateral investment protection treaty, nor a free trade agreement, with the United States.

The United States has Trade and Investment Framework Agreements (TIFAs) with the EAC and the Common Market for Eastern and Southern Africa (COMESA), both organizations to which Uganda belongs.  In 2015, the United States and the EAC also signed a Cooperation Agreement to increase trade-related capacity in the region and deepen economic ties. Within the EAC, the slow pace of regulatory reform, lack of harmonization, non-tariff barriers, and bureaucratic inefficiencies still hamper the free movement of goods, capital, and people among member states.

In March 2018, Uganda signed the Treaty Establishing the African Continental Free Trade Area (AfCFTA).

Uganda does not have a tax treaty with the U.S., but has bilateral taxation treaties with the following countries:  Denmark, India, Mauritius, Netherlands, Norway, South Africa, United Kingdom, and Italy.

In 2018, the government introduced new taxes on social media and mobile money transactions, largely seen as regressive by analysts and widely criticized by the telecom industry.  Early analysis suggests that the taxes are having a deleterious effect on both financial inclusion and technological innovation.

Uganda imposes a 15 percent withholding tax on “every person or company who derives any dividend, interest, royalty, rent, natural resource payment, or management charge from sources in Uganda.”  The URA also charges an 18 percent value-added tax (VAT) on business transactions conducted with a foreign firm.  URA does not allow companies to offset this foreign service tax against their withholding tax, effectively charging a 33 percent tax on all foreign services.  This tax disproportionately impacts U.S. businesses offering software and cloud services.

Transparency of the Regulatory System

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

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

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

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

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

Uganda’s court system and Inspector General of Government ensure governmental adherence to the administrative process, although anecdotal reports suggest that corruption significantly undermines the judiciary’s oversight role.

Public finances are generally transparent and budget documents are available online.  However, the government’s significant use of supplementary and classified budget accounts undermines parliamentary and public oversight of public finances.  Some analysts believe that Uganda’s growing public debt burden is higher than official government reports indicate.

International Regulatory Considerations

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

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

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

Legal System and Judicial Independence

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

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

Laws and Regulations on Foreign Direct Investment

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

Competition and Anti-Trust Laws

Uganda does not have any specialized laws or institutions dedicated to competition-related concerns, although the regular courts occasionally handle disputes with competition elements.

Expropriation and Compensation

The constitution guarantees the right to property for all persons, domestic and foreign.  It also prohibits the expropriation of property, except when in the “national interest” as eminent domain, and preceded by compensation to the owner at fair market value.  In March 2019, the government announced plans to table a new land amendment bill to facilitate large infrastructure projects while respecting the constitutionally protected rights of landowners.  Details and the timeline for passage of the controversial bill remain unclear. Some observers considered the government’s pressure in early 2019 on telecoms giant MTN to sell at least 20 per cent of its equity to Ugandans to be a form of expropriation.

Dispute Settlement

ICSID Convention and New York Convention

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

Investor-State Dispute Settlement

Pursuant to the Arbitration and Conciliation Act, the courts and government in theory accept binding arbitration with foreign investors and between private parties.  In practice, the overall challenges of the judiciary are likely to impede full enforcement. There is no recent history of prominent extrajudicial action against foreign investors.  Uganda has not been involved in any investment disputes with a U.S person in the last ten years; however, U.S. firms do complain about serious corruption in the award of government tenders.

International Commercial Arbitration and Foreign Courts

Ugandan law provides for arbitration and mediation of civil disputes.  The legal framework on arbitration includes the Arbitration and Conciliation Act and Commercial Court Division Mediation Rules.  Litigants must first submit all civil disputes to mediation before a court-appointed mediator. CADER is a statutory institution that facilitates the mediation and operates based on the UNCITRAL Arbitration rules.

Most investment disputes in Uganda are resolved through unrecorded private arbitration.  The Foreign Judgments Reciprocal Enforcement Act enables the recognition and enforcement of judgments and awards made by foreign courts.

There is no evidence that Ugandan courts favor state owned enterprises when arbitrating or adjudicating disputes.

Bankruptcy Regulations

The Bankruptcy Act of 1931, the Insolvency Act of 2011, as well as the Insolvency Regulations of 2013 generally align Uganda’s legal framework on insolvency with international standards.   Uganda ranked 112 out of 190 countries for resolving insolvency in the 2019 World Bank Doing Business Report. Uganda averages 39.3 cents on the dollar for recoveries, well above the sub-Saharan average of 20 cents per dollar.  Bankruptcy is not criminalized.

Investment Incentives

The government is still formulating new investment incentives after the enactment of the new ICA.  The Public Private Partnership Act of 2015 creates a legal framework for the government to partner with private investors, both local and foreign, in financing investment in key sectors.  The government has undertaken joint ventures with foreign investors in key sectors such as oil and gas and infrastructure.

Foreign Trade Zones/Free Ports/Trade Facilitation

The Uganda Free Zones Authority (UFZA) (https://freezones.go.ug/  ) regulates free trade zones, which offer a range of tax advantages.  The government’s process in awarding free zone status is not transparent, however.  There have been reports that corrupt individuals in government are allocating free trade zones in return for bribes.  UFZA has issued 20 Free Zone Licenses to 17 developers and three operators. In the first half of 2018-2019, the government estimates the value of exports through Free Zones at USD 93.6 million.

Performance and Data Localization Requirements

The new ICA does not impose any direct requirements regarding local employment and does not specify mandatory numbers for local employment in management positions.  The broadness of its provisions, however, arguably leaves the door open for enforcement of local employment requirements. The Petroleum Exploration, Development, and Production Act and the Petroleum Refining, Conversion, Transmission, and Midstream Storage Act may require investors in the oil sector to contribute to the creation of a local skilled Ugandan workforce.  Bureaucratic hurdles and inconsistent enforcement can make obtaining visas and work permits for foreign workers an onerous and expensive process. Foreign investors must have a license to invest in Uganda.

The government regularly moots local content laws.  Uganda’s petroleum laws already impel foreign oil companies to preference local goods and labor where available, with the Minister of Energy authorized to determine the extent of required local content.  The new ICA provides for broad performance requirements, but is vague on enforcement action.

While there are no general requirements for foreign information technology (IT) providers to give the government any source code or information related to encryption, the National Information Technology Authority Act allows the Minister for Information, Communication and Technology to order an IT provider to submit any information to the National Information Technology Authority (NITA).  Similarly, the Computer Misuse Act allows the government to “compel a service provider…to co-operate and assist the competent authorities in the collection or recording of traffic data in real time, associated with specified communication transmitted by means of a computer system.” These regulatory powers apply to all IT providers, both foreign and local. There are no measures to prevent or unduly impede companies from freely transmitting customer or other business-related data outside of Uganda.  In 2017, however, the Bank of Uganda interpreted Uganda’s cyber security legislation as providing it with the mandate to require financial institutions to relocate their data centers to Uganda to provide the government with access to customers’ digital financial information. Citing customer privacy concerns, financial firms remain in negotiations with the Bank of Uganda over this policy.

Real Property

Land rights are complicated in Uganda, and present a significant barrier to investment.  Uganda enforces property rights through the courts. The Mortgage Act and regulations make provisions for mortgages, sub-mortgages, trusts, and other forms of lien.  However, due to widespread corruption and administrative red tape, investors frequently struggle with the integrity of land transactions and recording systems.

Foreigners cannot own land directly and may only acquire leases.  Such leases cannot exceed 99 years. However, foreign investors can create a Ugandan-based firm to purchase and own real estate.

The Land Act provides for four forms of land tenure:  freehold, customary, “Mailo” (a form of freehold) and leasehold.  Freehold, leasehold, and Mailo tenure owners hold registered titles, while customary or indigenous communal landowners – who account for up to 80 percent of all landowners – do not.  Ugandan law provides for the acquisition of prescriptive rights by individuals who settle onto land (squatters) and whose settlement on such land is unchallenged by the owner for at least twelve years.

Intellectual Property Rights

Ugandan law provides for the protection of intellectual property rights (IPR), but the enforcement mechanisms are weak.  The country particularly lacks the capacity to prevent piracy and counterfeit distribution. As a result, theft and infringement of IPR is common and widespread.  Uganda does not track seizures of counterfeit goods or prosecutions of IPR violations. Agriculture experts estimate some 20 percent of agriculture products under copyright in Uganda are counterfeit.

In November 2018, Parliament passed the Genetic Engineering Regulatory Bill of 2018, which currently awaits presidential assent before coming into force.  While the new law provides for the registration of IPR in biotechnology, it makes the proprietor or an individual developer of genetically engineered material strictly liable for any damage, harm, inconvenience or loss caused to the environment, community livelihood, indigenous knowledge systems or technologies.  While the law is a positive development for IPR, the strict liability clauses are likely to discourage innovation.

Uganda is not included in the United States Trade Representative (USTR) Notorious Markets List or Special 301 Report.

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

Capital Markets and Portfolio Investment

The government generally welcomes foreign portfolio investment and has put in place a legal and institutional framework to manage such investments.  The Capital Markets Authority (CMA) licenses brokers and dealers and oversees the Uganda Securities Exchange (USE), which is now trading the stock of 18 companies.  Liquidity remains constrained to enter and exit sizeable positions on the USE. Capital markets are open to foreign investors and there are no restrictions for foreign investors to open a bank account in Uganda.  The government imposes a 15 percent withholding tax on interest and dividends. Foreign-owned companies may trade on the stock exchange, subject to some share issuance requirements. The government IMF Article VIII and refrains from restricting payments and transfers for current international transactions.  Credit is allocated on market terms and foreign investors are able to access credit. However, the private sector remains crowded out of domestic debt markets due to extensive domestic government borrowing.

Money and Banking System

Formal banking participation remains low, with twenty percent of Ugandans having access to deposits in bank accounts.  While only some five million Ugandans hold bank accounts, some 22 million use mobile money transfers to accomplish basic financial transactions.  In 2018, the government imposed new taxes on the use of mobile money, resulting in a drop in mobile money transactions. Uganda’s banking and financial sector is generally healthy, though non-performing loans remain a problem.  According to the Bank of Uganda’s latest Financial Stability Report 2018, Uganda’s non-performing loan rate stood at 4.4 percent at the end of June 2018, while total bank assets grew to USD 7.3 billion from USD 6.8 billion year over year.  Competitiveness and innovation are steadily increasing in Uganda’s banking sector, but lending to the private sector is still relatively low, largely because of perceived high risk (limited collateral) among potential borrowers, and the government crowding out the private sector in the bond market.  The Bank of Uganda regulates the banking sector. Foreign banks may establish branches in Uganda. Uganda does not have restrictions on a foreigner’s ability to establish a bank account.

Foreign Exchange and Remittances

Foreign Exchange

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

Remittance Policies

There are no restrictions for foreign investors on remittances to and from Uganda.  The Financial Intelligence Authority and Bank of Uganda may delay remittances if investigating money laundering concerns or terrorist finance.

Sovereign Wealth Funds

In 2015, the government established the Uganda Petroleum Fund to receive and manage all government revenues from the oil and gas sector.  By law, the government must spend a portion of proceeds from the fund on oil-related infrastructure, with parliament appropriating the remainder of revenues through the normal budget procedure.  In early 2019, the Auditor General found that the government had already made significant withdrawals from the fund without parliamentary approval as required by law.

Uganda has thirty State Owned Enterprises (SOEs).  There is no formally published list of SOEs and detailed information on the ownership of SOEs, their total assets, total net income, or number of people employed is not accessible to the public.  SOEs do not get special financing terms and are subject to hard budget constraints. According to the Ugandan Revenue Authority Act, they have the same tax burden as the private sector. According to the Land Act, private enterprises have the same access to land as SOEs.  One notable exception is the Uganda National Oil company (UNOC), which receives proprietary exploration data on new oil discoveries in Uganda. UNOC can then sell this information to the highest bidder in the private sector to generate income for its operations.

Privatization Program

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

Awareness of responsible business conduct varies greatly among corporate actors in Uganda.  No organizations formally monitor respect for Corporate Social Responsibility (CSR). CSR is not a requirement for an investor to obtain an investment license and CSR programs are voluntary.  While government officials make statements encouraging CSR, there is no formal government program to monitor, require, or encourage CSR. In practice, endemic corruption means that well-connected companies can enjoy impunity for harmful practices.  Regulations on human and labor rights, and consumer and environmental protection are inconsistently enforced. Several nongovernmental organizations attempt to name-and-shame companies engaged in nefarious practices, with differing degrees of success.

Uganda’s capacity and political will to regulate mineral trade across its borders remains weak.  Credible organizations allege Uganda’s mineral trade relies on conflict minerals from neighboring countries, especially from the eastern Democratic Republic of Congo.  In 2018, gold surpassed coffee as Uganda’s main export, although Uganda has no significant domestic gold deposits. Non-governmental sources allege that a single well-connected gold refinery that sources gold from conflict areas in neighboring countries accounts for the jump in Uganda’s gold exports.

Uganda announced in 2019 that it would join the Extractive Industry Transparency Initiative, but has not yet finalized its membership.  Uganda has also not formally adopted the Voluntary Principles on Security and Human Rights.

Uganda has generally adequate laws to combat corruption, and an interlocking web of anti-corruption institutions.  However, endemic corruption remains a very serious problem and a major obstacle to investment. Transparency International ranked Uganda 149 out of 180 countries in its 2018 Corruption Perception Index.  While anti-corruption laws extend to family members of officials and political parties in most cases, in practice many well-connected individuals enjoy de facto impunity for corrupt acts. The government does not require companies to adopt specific internal procedures to detect and prevent bribery of government officials.  While Uganda has signed and ratified the UN Anticorruption Convention, it is not yet party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. Uganda does not provide protection for non–governmental organizations investigating corruption, and some organizations in fact allege government harassment.  U.S. firms consistently identify corruption a major hurdle to business and investment. Corruption in procurement processes remains a particular problem.

Resources to Report Corruption

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

Justice Irene Mulyagonja
Inspector General of Government
Inspectorate of Government
Jubilee Insurance Centre, Plot 14, Parliament Avenue, Kampala
Telephone:  +256-414-344-219
Website:  www.igg.go.ug  

Contact at “watchdog” organization:

Anti-Corruption Coalition Uganda
Cissy Kagaba
Telephone:  +256-414-535-659
Email:  kagabac@accu.or.ug
Website:  http://accu.or.ug  

Public Procurement and Disposal of Public Assets Authority (PPDA)
UEDCL Towers Plot 39 Nakasero Road
P.O. Box 3925, Kampala Uganda
Telephone:  +256-414-311100
Email:  info@ppda.go.ug
Website: https://www.ppda.go.ug/  

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

Over seventy percent of Ugandans derive their livelihoods from agriculture.  Formal employment remains low, as do skill and education levels. With figures ranging from five to 80 percent, youth unemployment statistics in Uganda can vary significantly depending on the source and definition of employment.  However, there is consensus that Uganda’s young population faces major unemployment, underemployment, and overwhelming informal employment.

Statistics on the number of foreign/migrant workers are not publicly available.  There are acute shortages of skilled and specialized laborers, especially in the trades.

While there are no explicit provisions requiring the hiring of nationals, there are broad standards requiring investors to contribute to the creation of local employment.  The Petroleum Exploration, Development, and Production Act of 2013 and the Petroleum Refining, Conversion, Transmission, and Midstream Storage Act of 2013 both require investors to contribute to the development of a skilled local workforce.  Foreign nationals must obtain a work permit from the Ministry of Internal Affairs.

Ugandan labor laws specify procedures for termination of employment and for termination payments.  Depending on the employee’s duration of employment, employers are required to notify an employee two weeks to three months prior to the termination date.  Employees terminated without notice are entitled to severance wages. Ugandan law only differentiates between termination with notice (or payment in lieu of notice) and summary dismissal (termination without notice).  Summary dismissal applies when the employee fundamentally violates his/her terms of employment. Uganda does not provide unemployment insurance or any other social safety net programs for terminated workers.

Current law requires employers to contribute ten percent of an employee’s gross salary to the National Social Security Fund (NSSF).  The Uganda Retirement Benefits Regulatory Authority Act of 2011, which provides a framework for the establishment and management of retirement benefits schemes for both the public and private sectors, has created an enabling environment for liberalization of the pension sector.

The Employment Act of 2006 does not allow waivers of labor laws for foreign investors.

Ugandan law allows workers, except members of the armed forces, to form and join independent unions, bargain collectively, and conduct legal strikes.  The National Organization of Trade Unions (NOTU) has 20 member unions. Its rival, the Central Organization of Free Trade Unions (COFTU), also has 20 union members.  Union officials estimate that nearly half of employees in the formal sector belong to unions. In 2014, the Government of Uganda created the Industrial Court (IC) to arbitrate labor disputes.

Uganda ratified all eight ILO fundamental conventions enshrining labor and other economic rights and partially adopted these conventions into the 1995 Constitution, which stipulates and protects a wide range of economic rights.

Despite these legal protections, many Ugandans work in unsafe environments due to poor enforcement and the limited scope of the labor laws.  Labor laws do not protect domestic, agricultural, and informal sector workers.

OPIC is currently working on several projects in Uganda.  The potential for continued OPIC participation in projects in Uganda is very good.  OPIC has a bilateral agreement with the government of Uganda, which was executed in 1965 and remains in effect (https://www.opic.gov/sites/default/files/docs/africa/bL_uganda.PDF  )

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

* Source for Host Country Data: Uganda Bureau of Statistics Statistical Abstract 2018

Table 3: Sources and Destination of FDI

Source: IMF’s Coordinated Portfolio Investment Survey (CPIS) site (cpis.imf.org)

Table 4: Sources of Portfolio Investment

Data not available.

Seth Miller
Economic and Commercial Officer
U.S. Embassy Kampala, Ggaba Road, Kampala
Telephone: +256 (0) 414-306-240 (office)
Email: MillerSA@state.gov