Policies Towards Foreign Direct Investment

The GOB states attracting FDI is one of the priorities of the country’s foreign policy, and net inflows of FDI have been included in the list of government performance targets since December 2015.  The GOB also does not have any specific requirements for foreigners wishing to establish a business in Belarus. Investors, whether Belarusian or foreign, reportedly benefit from equal legal treatment and have the same right to conduct business operations in Belarus by incorporating separate legal entities.  However, the existing laws and practices often discriminate against the private sector, including foreign investors, regardless of the country of their origin.

Limits on Foreign Control and Right to Private Ownership and Establishment

The GOB asserts foreign and domestic private entities have the right to establish and own business enterprises and engage in all forms of remunerative activity.  The GOB also states there are no general limits (statutory, de facto, or otherwise) on foreign ownership or control. In reality, however, the GOB establishes such limits on a case-by-case basis.  The limits on foreign equity participation in Belarus are above the average for the 20 countries covered by the World Bank Group’s Investing Across Borders indicators for Eastern Europe and the Central Asia region.  Belarus, in particular, limits foreign equity ownership in service industries. Sectors such as fixed-line telecommunications services, electricity transmission and distribution, and railway freight transportation are closed to foreign equity ownership.  In addition, a comparatively large number of sectors are dominated by government monopolies, including, but not limited to, those mentioned above. Those monopolies, together with the perceived difficulty of obtaining required operating licenses, make it difficult for foreign companies to invest in Belarus.  Another example is that under local law, foreign ownership cannot exceed 30 percent in charter funds of Belarusian insurance companies. Finally, the government may restrict investments in the interests of national security (including environmental protection, historical and cultural values), public order, morality protection, and public health, as well as rights and freedoms of people.

Although the GOB claims that it does not screen, review, or approve FDI, the above practices suggest the opposite.  Belarus retains elements of a Soviet-style command economy, with the President and his administration prescreening and approving all significant (multi-million dollar) foreign investment.

Belarus’ Ministry of Antimonopoly Regulation and Trade is responsible for reviewing transactions for competition-related concerns (whether domestic or international).

Other Investment Policy Reviews

The UN Conference on Trade and Development reviewed Belarus’ investment policy in 2009 and made recommendations regarding the improvement of its investment climate. http://unctad.org/en/Docs/diaepcb200910_en.pdf 

Business Facilitation

Individuals and legal persons can apply for business registration via the web portal of the Single State Register (http://egr.gov.by/egrn/index.jsp?language=en  ) – a resource that includes all relevant information on establishing a business.

Belarus has a regime allowing for a simplified taxation system for small and medium-sized and foreign-owned businesses.

Belarus defines enterprises as follows:

• Micro enterprises – fewer than 15 employees;
• Small enterprises – from 16 to 100 employees;
• Medium-sized enterprises – from 101 to 250 employees.

Belarus’ investment promotion agency is the National Agency of Investments and Privatization (NAIP).  NAIP is tasked with representing the interests of Belarus as it seeks to attract FDI into the country.  The Agency states it is a one-stop shop with services available to all investors, including: organizing fact-finding missions to Belarus, assisting with visa formalities; providing information on investment opportunities, special regimes and benefits, state programs, and procedures necessary for making investment decisions; selecting investment projects; and providing solutions and post-project support, i.e., aftercare.

To maintain an ongoing dialogue with investors, Belarus also has the Foreign Investment Advisory Council (FIAC).  Its activities include, but are not limited to: developing proposals to improve investment legislation; participating in examining corresponding regulatory and legal acts; and approaching government agencies for the purpose of adopting, repealing or modifying the regulatory and legal acts that restrict the rights of investors.  The FIAC is chaired by the Prime Minister of Belarus and includes the heads of government agencies and other state organizations subordinate to the GOB, as well as heads of international organizations and foreign companies and corporations.

Outward Investment

The government does not promote or incentivize outward investment, nor does it restrict domestic investors from investing abroad.  According to government statistics, Belarusian businesses’ outward investments in 2018 totaled USD 5.67 billion.

BITs or FTAs

The GOB maintains foreign entities have the same investment opportunities as Belarusian ones.

Belarus has signed 66 bilateral investment agreements (BITs) with the following states:  Armenia, Austria, Azerbaijan, Bahrain, Bangladesh, Belgium, Bosnia and Herzegovina, Bulgaria, Cambodia, China, Croatia, Cuba, Cyprus, Czech Republic, Denmark, Egypt, Estonia, Finland, France, Georgia, Germany, Great Britain, India (terminated 24 March, 2017), Iran, Iraq, Israel, Italy, Jordan , Democratic People’s Republic of Korea, Republic of Korea, Kuwait, Kyrgyzstan, Laos, Latvia, Lebanon, Libya, Lithuania, Luxembourg, Macedonia, Mexico, Moldova, Mongolia, Netherlands, Oman, Pakistan, Poland, Qatar, Romania, Saudi Arabia, Serbia, Singapore, Slovakia, Slovenia, Sudan, Sweden, Switzerland, Syria, Tajikistan, Turkey, Turkmenistan, Ukraine, United Arab Emirates, United States, Venezuela,Vietnam, and Yemen.

Such agreements routinely provide for:  national or most-favored treatment; minimum standards; and no expropriation for reasons other than for the public benefit on a nondiscriminatory basis, according to the appropriate legal procedure, and on conditions of fair compensation.

Currently Belarus is negotiating or renegotiating BITs with several countries, including the Czech Republic, Hungary, India, Slovenia, and Sri Lanka.

Belarus is party to two regional investment agreements within the framework of the Commonwealth of Independent States (CIS):  the Agreement on Cooperation in the Field of Investment Activities of December 24, 1993, and the Convention on Protection of the Rights of the Investor of March 28, 1997.  Belarus is also a party to the Agreement on Promotion and Reciprocal Protection of Investments in the Member States of the Eurasian Economic Community of December 12, 2008 (other parties are Kazakhstan, Kyrgyzstan, Russia and Tajikistan).  Foreign investments among the members of the Eurasian Economic Union (Armenia, Belarus, Kazakhstan, Kyrgyzstan, and Russia) are governed by Annex 16 to the Treaty on the Eurasian Economic Union signed on May 29, 2014.

According to the GOB, Belarus is also a party to the following agreements:

Free Trade Agreement between the Eurasian Economic Union and its Member States, and the Socialist Republic of Vietnam; Treaty on Eurasian Economic Union; Agreement on Trade in Services and Investment in the Member States of the Common Economic Space of Belarus-Kazakhstan-Russia; Agreement on Promotion and Reciprocal Protection of Investments in the Member States of the Eurasian Economic Community; Convention on Protection of Investor Rights; Partnership and Cooperation Agreement Establishing a Partnership between the European Communities and Their Member States, of the One Part, and Belarus, of the Other Part; and The Energy Charter Treaty.

Belarus is a party to the Agreement between the Government of Republic of Belarus and the Government of the United States of America on Promotion of Capital Investment (24 June 1992).  Belarus and the United States also signed the Agreement between the Republic of Belarus and the United States of America on Stimulation and Protection of Investments (Minsk, 15 January, 1994).  That agreement did not enter into force, however.

Belarus has been a member of the Multilateral Investment Guarantee Agency (MIGA) of the World Bank since December 1992.  In July 2011, Belarus ratified amendments to the Convention on Establishing MIGA and concluded agreements on the legal protection of guaranteed foreign investment and the use of local currency.  According to Belarus’ Economy Ministry, these agreements finalized procedures for Belarus to become a full member of MIGA.

Bilateral Taxation Treaties

Belarus is the successor of the USSR in the Convention between the Union of Soviet Socialist Republics and the United States of America on Matters of Taxation (Washington, June 20, 1973).  In addition, Belarus has 65 such agreements with other countries.

Transparency of the Regulatory System

The government states that its policies are transparent and the implementation of laws is consistent with international norms to foster competition and establish clear rules of the game.  However, independent economic experts note that private sector businesses are often discriminated against in relation to public sector businesses. In particular, SOEs often receive government subsidies, benefits and exemptions, including cheaper loans and debt forgiveness.  Such beneficial treatment is generally unavailable to private sector companies.

According to Belarusian legislation, drafts of laws and regulations pertaining to investment and doing business are subject to public discussion.  Draft legislation is published on government agencies’ websites.

International Financial Reporting Standards (IFRS) have been a part of Belarus’ legislative framework since 2016.  Public-interest entities, which include banks, insurance companies, and public corporations with subsidiary companies are required to publish their financial statements, which comply with IFRS.  Such statements are subject to statutory audit.

IFRS in Belarus can be accessed through the Ministry of Finance at the following links:

• http://www.minfin.gov.by/accounting/inter_standards/docs/71f9f73c3eb44bb2.html  ;
• http://www.minfin.gov.by/accounting/inter_standards/docs/fa70d11e0cb14c56.html  ;
• http://www.minfin.gov.by/accounting/inter_standards/docs/f8f75f4fd1e848df.html  ;
• http://www.minfin.gov.by/accounting/inter_standards/docs/eb7753f40f6f49f0.html  ;
• http://www.minfin.gov.by/accounting/inter_standards/docs/9d4e40da559e40d4.html  .

Belarus has no informal regulatory processes managed by nongovernmental organizations or private sector associations.

International Regulatory Considerations

Belarus is not a WTO member but announced in April 2016 it will step up efforts to join the organization by June 2020.  The Working Party on Belarus’ Accession to the WTO group meets regularly in Geneva and as of January 2019, still needs to hold talks on trade in services with the European Union, the United States, Canada, and Ukraine.  After the completion of bilateral market access talks with WTO member states, Belarus will still have to integrate these agreements into national regulations.

Belarus is a member of the Eurasia Economic Union (EAEU), a political and economic union driven by Russian leadership and modeled after the European Union.  The EAEU’s goal is to ensure the free movement of goods, capital, services, and people across the territories of its five members – Armenia, Belarus, Kazakhstan, Kyrgyzstan, and Russia.  The EAEU envisages common economic policies on customs, foreign trade and investment, technical regulation, competition and antitrust regulation. The Eurasian Economic Commission is the EAEU executive body.  The EAEU has completed free trade agreements with Vietnam, China, and Iran and is in negotiations with Serbia, Singapore, India, Israel, and Egypt.

Legal System and Judicial Independence

The Belarusian legal system is a civil law system with a legal separation of branches and institutions and with the main source of law being legal act, not precedent.  For example, Article 44 of Belarus’ Constitution guarantees the inviolability of property. Article 11 of the Civil Code safeguards property rights. Presidential edicts and decrees, however, typically carry more force than legal acts adopted by the legislature, which risks weakening investor protections and incentives previously passed into law.  There is sometimes a public comment process during drafting of legislation or presidential decrees, but the process is often not transparent or sufficiently inclusive of investors’ concerns. Belarus has a written and consistently applied commercial law, which is broadly codified but contains inconsistencies and is not always considered to be business friendly.

Each of Belarus’ six regions and the capital city of Minsk have economic courts to address commercial and economic issues.  In addition, the Supreme Court has a judicial panel on economic issues. In 2000, Belarus established a judicial panel on intellectual property rights (IPR) protection.  Under the Labor Code, any claims of unfair labor practices are heard by regular civil courts or commissions on labor issues. However, the judiciary’s lack of independence from the executive branch impedes its role as a reliable and impartial mechanism for resolving disputes, whether labor, economic, commercial, or otherwise. According to Freedom House’s 2018 Nations in Transit report, executive authorities can directly influence a judge’s decision-making if their political or economic interests are involved, and such influence usually takes the form of direct instructions from officials.

Laws and Regulations on Foreign Direct Investment

Foreign investment in Belarus is governed by the 2013 laws “On Investments” and “On Concessions,” the 2009 Presidential Decree No. 10 “On the Creation of Additional Conditions for Investment Activity in Belarus,” and other legislation as well as international and investment agreements signed and ratified by Belarus.

The GOB regularly updates the following websites with the latest in laws, rules, procedures and reporting requirements for foreign investors:

http://www.investinbelarus.by/en/  

http://www.economy.gov.by/  

http://president.gov.by/en/official_documents_en/  

Competition and Anti-Trust Laws

The June 3, 2016, presidential edict number 188 authorized the Ministry of Antimonopoly Regulation and Trade to counteract monopolistic activities and promote competition in Belarus’ markets.

Expropriation and Compensation

According to Article 12 of the Investment Code, neither party may expropriate or nationalize investments both directly and indirectly by means of measures similar to expropriation or nationalization, for other purposes than for the public benefit and on a nondiscriminatory basis; according to the appropriate legal procedure; and on conditions of compensation payment.  Belarus has signed 66 bilateral agreements on the mutual protection and encouragement of investments.

In 2018, there was one nationally-reported case of nationalization, however the Belarusian government compensated the Ukrainian owner market value for shares of the Motor Sich aircraft repair factory in Orsha.  In the past five years, there have been no instances of confiscation of business property as a penalty for violations of law.

Post has not received any expropriation claims from U.S. companies, and is not aware of any particularly high-risk sectors prone to expropriation actions.

Dispute Settlement

There were no known investment disputes with American investors in 2018.

ICSID Convention and New York Convention

Belarus is a party to both the International Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID) and the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards.  The GOB states that local courts recognize and enforce foreign arbitral awards in compliance with the above conventions, national laws, and regulations. The enforcement of arbitral awards in Belarus is governed by Chapter 28 of the Code of Commercial Procedure.

Most of the BITs concluded by Belarus include a provision on international investment arbitration as a mechanism for settling investor-state disputes and recognize the binding force of the awards issued in investment arbitrations.  Under Belarusian law, if an international treaty signed by Belarus establishes rules other than those established by local law, the rules of the international treaty shall prevail.

Investor-State Dispute Settlement

Local economic court proceedings normally do not exceed two months.  The term of such proceedings with the participation of foreign persons is normally no longer than seven months, unless established otherwise by an international agreement signed by Belarus.

International Commercial Arbitration and Foreign Courts

Judgments of foreign courts are accepted and enforced if there is a relevant international agreement signed by Belarus.  Courts recognize and enforce foreign arbitral awards. International arbitration is accepted as a means for settling investment disputes between private parties.  In principle, the GOB accepts binding international arbitration of investment disputes between foreign investors and the state, although the Embassy is not aware of any cases where this has been put to the test.  As of 2018, there were three known cases against Belarus pending at the ICSID: two from Russian investors in joint ventures in transport and infrastructure sectors, and one from a Dutch holding company in the banking sector.  The Belarusian Chamber of Commerce and Industry has an International Arbitration Court. The 2013 “Law on Mediation,” as well as codes of civil and economic procedures, established various alternative ways of addressing investment disputes.

Bankruptcy Regulations

Belarus’ 2012 bankruptcy law, related presidential edicts, and government resolutions are not always consistently applied.  Additional legal acts, such as the Civil Code and Code of Economic Procedures, also include certain regulations on bankruptcy-related issues.  Under the bankruptcy law, foreign creditors have the same rights as Belarusian creditors. Belarusian law criminalizes false and intentional insolvency as well as concealing insolvency.  According to the World Bank’s 2019 Doing Business Report, Belarus was ranked 72 in Resolving Insolvency, down from 68 in 2018 and 69 in 2017 (rankings available at http://www.doingbusiness.org/data/exploreeconomies/belarus  )

Investment Incentives

According to the GOB’s Strategy for Attracting FDI, the priority sectors that need FDI include pharmaceuticals; biotechnology; nanotechnologies and nanomaterials; metallurgy; mechanical engineering industry; production of machines, electrical equipment, home appliances and electronics; transport and related infrastructure; agriculture and food industry; information and communication technologies; creation and development of logistics systems; and tourism.  NAIP maintains a database of investment proposals at http://www.investinbelarus.by/en/invest/base/  .  The GOB offers various incentives and programs for FDI depending on the sector and industry.  The below incentives outline the specific incentives that are usually accompanied by preferential tax rates.

Investment Agreement with the Republic of Belarus

The list of major incentives and benefits under an investment agreement includes but is not limited to:

• Allocation of a land plot without auctioning the right to lease it
• Removal of vegetation without compensation during construction
• Full VAT deduction for the purchase of goods, services (works) or property rights
• Exemption from import tariffs and VAT on the imports of production equipment
• Exemption from fees for the right to conclude a land lease
• Exemption from duties for employing foreign nationals
• Exemption from compensation for losses sustained by the agriculture and/or forestry industries due to the use of a land plot under the investment agreement
• Exemption from land tax on land plots in government or private ownership, and from rent on land plots in government ownership, for a period starting from the first day of the month in which the investment agreement came into effect until December 31 of the year following the year in which the last of the facilities scheduled under the investment agreement started operations.

Investment agreements concluded under the decision of the Belarusian Council of Ministers and with the permission of the President of Belarus may offer additional incentives and benefits not expressly provided for in legislation.  Such incentives are provided on a case-by-case basis.

Free Economic Zones

Each of Belarus’ six regions has its own free economic zone (FEZ):  Minsk, Brest, Gomel-Raton, Mogilev, Grodno Invest, and Vitebsk. The tax and regulatory pattern applicable to businesses in these zones is simpler and lower than elsewhere in Belarus.  To become a FEZ resident, an investor needs to make a minimal investment of EUR 1 million, or at least EUR 500,000 provided the entire sum is invested during a three-year period, as well as engage in the production of import-substituting products or goods for export.

In October 2005, the President of Belarus signed the edict that established uniform rules for all FEZs.  The list of main tax benefits for FEZ residents was revised in December 2016 to include certain exemptions from the corporate profit tax (CPT), real estate tax, land tax, and rent on government-owned land plots located within the boundaries of the FEZ, among others.

As of 2017, FEZ residents benefit from a simplified procedure of export-import operations. Resident enterprises are exempt from customs duties and taxes on facilities, construction materials, other equipment used in implementation of their investment projects.  They are also exempt from customs duties and taxes on raw materials and materials used in the process of manufacture of the products sold outside the territory of the Eurasian Economic Union.

Otherwise, FEZ residents pay VAT, excise duties, ecological tax, natural resource extraction tax, state duty, patent duties, offshore duty, stamp duty, customs duties and fees, local taxes and duties, and contributions to the Social Security Fund according to the general guidelines.

For more details please visit:

• FEZ Minsk: http://www.fezminsk.by/en/  
• FEZ Gomel-Raton: http://www.gomelraton.com/en/  
• FEZ Vitebsk: http://www.fez-vitebsk.com/en/  
• FEZ GrondoInvest: https://grodnoinvest.by/en/  
• FEZ Brest: http://fezbrest.com/en/  
• FEZ Mogilev: http://www.fezmogilev.by/  

Great Stone Industrial Park

The Great Stone Industrial Park is a special economic zone of approximately 112.5 square kilometers located adjacent to the Minsk National Airport and Belarusian highway M1, which connects Moscow to Berlin.  Great Stone resident companies also have access to Lithuania’s Klaipeda seaport on the Baltic Sea.  According to a master plan approved in 2013, Great Stone will eventually include production facilities, dormitories and residential areas for workers, offices and shopping malls, and financial and research centers.

Great Stone is primarily a Belarus-China joint venture but any company – regardless of its country of origin – can apply to join the industrial park.  Interested companies must submit either a business project worth at least USD 500,000, to be invested within three years from the moment of the business’ registration; or submit a business project worth at least USD 5 million without any time limit for investment; or submit a business project worth at least USD 500,000 tied to research and development.

As of 2017, Great Stone residents receive, among other preferences, certain exemptions on income tax, real estate and land taxes, and dividend income; the right to import goods, including raw materials, under a preferential customs regime; full VAT repayment on goods used for the design, building, and equipment of facilities in Great Stone; exemptions from environmental compensatory payments; and a preferential entry/exit program allowing Great Stone residents and their employees to stay in Belarus without a visa for up to 180 days.  Great Stone residents are also exempt from any new taxes or fees should the government make future changes to the tax code.

For more information on Great Stone, please visit: https://industrialpark.by/en/home.html  

High Technology Park (HTP)

Created in 2005 to foster development of the IT and software development industry, the High Technology Park (Hi-Tech Park) is a “virtual” legal regime that extends over the entire territory of Belarus.  A physical campus of the HTP is found in the eastern part of Minsk and a satellite campus is located in Hrodna. The legislation behind the HTP was updated in 2017 with the signing of Presidential Decree No. 8 “On the Development of the Digital Economy.”  The decree extended the HTP preferences from 2022 until 2049 and expanded the list of business activities in which HTP residents may engage, including but not limited to: software development; data processing; cryptocurrency and token-related activity; data center services; development and deployment of Internet-of-Things technologies; ICT education; and cybersports.

HTP provides residents beneficial tax preferences, including but not limited to:  exemptions from VAT and CPT on sale of goods or services; exemptions from customs duty and VAT on certain kinds of equipment imported into Belarus for use in investment projects; immovable property tax and land tax benefits with regard to buildings and land within the boundaries of the HTP campuses; and caps on personal income tax at nine percent for employees and five percent for foreign entities.

Foreign nationals who are hired on contract by an HTP resident company, or who are founders of a HTP resident company, or who are employed by such founders, are eligible for visa-free entry into Belarus for a stay of up to 180 days a year.  Foreigners employed by HTP residents are not required to have working permit in Belarus and are entitled to apply for a temporary residence permit for the duration of their contract.

Government agencies are not allowed to inspect the operations of HTP residents without prior consent of the HTP Administration.

For more information on HTP, please visit: http://www.park.by/  

Investment activities in small and medium-sized towns

Small and medium-sized cities/town and rural areas in Belarus are defined by a 2012 presidential decree as settlements with populations under 60,000.  Individual entrepreneurs and legal entitites who work in rural areas, defined as settlements of less than 2,000, receive additional tax benefits and exemptions.

Since July 1, 2012, companies and individual entrepreneurs operating in all rural areas and towns enjoy the following benefits in the first seven years after registration:  exemption from profit tax on the sale of goods, work, and services of a company’s own production; exemption from other taxes and duties, except for VAT, excise tax, offshore duty, land tax, ecological tax, natural resources tax, customs duties and fees, state duties, patent duties, and stamp duty; exemption from mandatory sale of foreign currency received from sale of goods, work, and services of a company’s own production, and from leasing property; no restrictions on insuring risks with foreign insurers; exemption from import tariffs on certain goods brought into Belarus that contribute to the charter fund of a newly established business.  The special legal regime does not apply to banks, insurance companies, investment funds, professional participants in the securities market, businesses operating under other preferential legal regimes (e.g. FEZ or HTP), and certain other businesses.

Performance and Data Localization Requirements

The host government does not mandate local employment.  Foreign investors have the right to invite foreign citizens and stateless persons, including those without permanent residence permits, to work in Belarus provided their labor contracts comply with Belarusian law.  The GOB often imposes various conditions on permission to invest, and pursues localization policies when it deems it appropriate. Other performance requirements are often applied uniformly to both domestic and foreign investors.

According to official Belarusian sources, licenses are not required for data storage.  Law enforcement regulations governing electronic communications do not include any requirements specifically for foreign internet service providers.  Beginning in 2016, internet service providers are required, by law, to maintain all electronic communications for a one-year period.

Real Property

Property rights are enforced by the Civil Code.  Mortgages and liens are available, and the property registry system is reliable.  Investors and/or duly established commercial organizations with the participation of a foreign investor (investors) have the right to rent plots of land for up to 99 years.  According to the Belarusian Land Code, foreign legal persons and individuals are denied land ownership. According to the 2019 World Bank Doing Business Report, Belarus ranked fifth in the world on ease of property registration (http://www.doingbusiness.org/en/data/exploreeconomies/belarus  ).

Intellectual Property Rights

In 2015, Belarus was taken off the USTR’s Special 301 Report Watch List.  As of 2019, Belarus has made progress on improving legislation to protect IPR and prosecute violators.  However, challenges for effective enforcement include a lack of sufficiently qualified officers and limited focus to those areas that have the most impact on the economy.  The United States expects Belarus to continue improving its IPR regime as part of its WTO accession negotiations and will continue to assist Belarus with technical consultations to that end.

According to information provided by Belarus’ National Center of Intellectual Property, the government amended Article 4.5 of the Administrative Code in 2018 to allow greater prosecution of intellectual and industrial property rights violations.  Notably, in 2018 Belarusian law enforcement prosecuted five legal persons for distribution of counterfeit products under Article 9.21 of Belarus’ Administrative Code, based on a request filed by a U.S. company operating in Belarus.

As of February 2019, Belarus’ National Customs Register of IP objects, run by the State Customs Committee, included 70 trademarks whose rights holders were U.S. registered companies.  U.S. registered trademarks account for 23 percent of IP objects secured by the Register.

In 2018, the National Center of Intellectual Property continued discussions with U.S. Broadcast Music, Inc. on an agreement that could help secure the recording rights of U.S. property rights holders and enable the collection of royalties in Belarus.

In 2018, Belarusians paid a total of USD 50 million for using IPR.

Belarus does not appear in the USTR’s Out-of-Cycle Review of Notorious Markets report, nor does it appear in the Special 301 report.

The World Intellectual Property Organization (WIPO) provides 186 Country Profiles, including Belarus.  These profiles are available at: http://www.wipo.int/directory/en  

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

Resources for Rights Holders

Monica Sendor
Economic Officer
tel.+375 (17) 210-1283
e-mail: usembassyminsk@state.gov

Capital Markets and Portfolio Investment

The Belarusian government welcomes portfolio investment and has taken steps to safeguard such investment and ensure a free flow of financial instruments.  The Belarusian Currency and Stock Exchange is open to foreign investors, but it is still largely undeveloped because the government only allows companies to trade stocks if they meet certain but often burdensome criteria.  Private companies must be profitable and have net assets of at least EUR 1 million. In addition, any income from resulting operations is taxed at 24 percent. Finally, the state owns more than 70 percent of all stocks in the country, and the government appears hesitant and unwilling to trade in them freely.  Bonds are the predominant financial instrument on Belarus’ corporate securities market.

In 2001, Belarus joined Article VIII of the IMF’s Articles of Agreement, undertaking to refrain from restrictions on payments and transfers under current international transactions.  Loans are allocated on market terms and foreign investors are able to get them. However, the discount rate of 10 percent (as of March 2019) makes credit too expensive for many private businesses, which, unlike many SOEs, do not receive subsidized or reduced-interest loans.

Since 2016, businesses to buy and sell foreign exchange at the Belarusian Currency and Stock Exchange through their banks.  Belarus used to require businesses to sell 10-20 percent of foreign currency revenues through the Belarusian Currency and Stock Exchange, however in late 2018 the National Bank abolished the mandatory sale rule.

Money and Banking System

Belarus has a central banking system.  The country’s main bank, the National Bank of the Republic of Belarus, represents the interest of the state and is the main regulator of the country’s banking system.  The President of Belarus appoints the Chairperson and Members of the Board of the National Bank, designates auditing organizations to examine its activities, and approves its annual report.

As of March 2019, the banking system of Belarus included 24 commercial banks and three non-banking credit and finance organizations.  According to the National Bank, the share of troubled loans in the banking sector was 12.9 percent in 2018. The country’s five largest commercial banks, all of which have some government share, account for 77 percent of the total assets of the country’s banking sector, totaling the equivalent of some USD 26 billion.  To the best of the Embassy’s knowledge, rules on hostile take-overs are clear, and applied on a non-discriminatory basis.

Foreign Exchange and Remittances

Foreign Exchange Policies

According to the GOB, Belarus’ foreign exchange regulations do not include any restrictions or limitations regarding converting, transferring, or repatriating funds associated with investment.  Foreign exchange transactions related to FDI, portfolio investments, real estate purchasing, and opening bank accounts are carried out without any restrictions. Foreign exchange is freely traded in the domestic foreign exchange market.  Foreign investors can purchase foreign exchange from their Belarusian accounts in Belarusian banks for repaying investments and transferring it outside Belarus without any restrictions.

Since 2015, the Belarusian Currency and Stock Exchange has traded the U.S. dollar, the euro, and the Russian ruble in a continuous double auction regime.  Local banks submit their bids for buying and selling foreign currency into the trading system during the entire period of the trading session. During the trades the bids are honored if and when the specified exchange rates are met.  The average weighted exchange rate of the U.S. dollar, the euro, and the Russian ruble set during the trading session is used by the National Bank as the official exchange rate of the Belarusian ruble versus the above-mentioned currencies from the day on which the trades are made.  The cross rates versus other foreign currencies are calculated based on the data provided by other countries’ central banks or information from Reuters and Bloomberg.  The stated quotation becomes effective on the next calendar day and is valid till the new official exchange rate of the Belarusian ruble versus these foreign currencies comes into force.  The IMF has listed Belarus’ exchange rate regime in the floating exchange rate category.

Remittance Policies

There have not been reports of problems exchanging currency and/or remitting revenues earned abroad.

Sovereign Wealth Funds

Belarus has the State Budget Fund of National Development, which is used for implementing major economic and social projects in the country.

Although SOEs are outnumbered by private businesses, SOEs dominate the economy in terms of assets.  According to independent economic experts, the share of Belarus’ GDP derived from SOEs is at least 75 percent.  Belarus does not consider joint stock companies, even those with 100 percent government ownership of the stocks, to be state-owned and generally refers to them as part of the non-state sector, rendering official government statistics regarding the role of SOEs in the economy as misleading.

According to independent economic media reports, SOEs receive preferential access to government contracts, subsidized credits, and debt forgiveness.  While SOEs are generally subject to the same tax burden and tax rebate policies as their private sector competitors, private enterprises do not have the same preferential access to land and raw materials.  Since Belarus is not a WTO member, it is not a party to the Government Procurement Agreement (GPA).

Privatization Program

Belarus’ privatization program is in practice extremely limited.  There was no privatization of state-controlled companies in 2018, one SOE was bought by private investors in 2017, and there were zero companies or shares privatizatized in 2016.  In early 2019, Belarus’ State Property Committee approved a list of 23 joint stock companies for full or partially privatization in 2019.  The GOB is allowing sale of the government share in these companies on the condition that the purchasing investors preserve existing jobs and production lines. For a list of open-joint stock companies whose shares which are available for privatization, as well as a description of the asset and conditions for privatization, visit: http://www.gki.gov.by/ru/auction-auinf-auishares/  .

Investors interested in assets on the published privatization list are encouraged to forward a brief letter of interest to the State Property Committee.  A special commission reviews offers and makes a recommendation to the President on the process of privatization – via tender, auction, or direct sale. Investors may also send a letter of interest regarding assets that are not on the State Property Committee list and the government will examine such offers.

Additionally, the State Property Committee occasionally organizes and holds privatization auctions.  Many of the auctions organized by the State Property Committee have low demand as the government conditions privatizations with strict requirements, including preserving or creating jobs, continuing in the same line of work or production, or launching a successful business project within a limited period of time, etc.

In 2016, Belarusian joint stocks were allowed trans-border placement of their stocks via issuing depositary receipts.  However, to the Embassy’s knowledge, this instrument of attracting investments has not been put to test in Belarus.

Post continues to develop resources and information on the current state and development of responsible business conduct.

Belarus has effective and non-discriminatory anti-corruption legislation, which includes certain provisions of the Criminal Code and Administrative Code as well as the Law on Public Service and the Law on Combating Corruption.  The latter is the country’s main anti-corruption document and was adopted in 2015. Government organizations directly engaged in anti-corruption efforts are prosecutors’ offices, internal affairs, state security and state control agencies.  However, as noted a pervious section, the country’s judicial system is not independent from the executive branch and is not transparent.

Belarusian anti-corruption law covers family members of government officials and political figures.  The country’s regulations require addressing any potential conflict of interests of parties seeking to win a government procurement contract.  The list of such regulations include the July 13, 2012, law “On public procurement of goods (works, services),” the December 31, 2013, presidential decree “On conducting procurement procedures,” and the March 15, 2012, Council of Ministers resolution on the procurement of goods (works, services).  Some of the same concerns with the independence of the judiciary also apply in the context of corruption. The lack of an independent judiciary means investors have little recourse to deal with corruption concerns.

Bribery is considered a form of corruption and is punishable with a maximum punishment of 10 years in jail and confiscation of property.  Belarus is a party to a number of international anti-corruption conventions and agreements. The Republic of Belarus has consistently ratified and complied with requirements of main international anti-corruption acts, such as the Convention of the Council of Europe 173 On criminal liability for corruption (S 173) (concluded in Strasbourg on 27 January, 1999); the United Nations Convention Against Transnational Organized Crime, signed by Belarus in Palermo on 24 December, 2000, and the United Nations Convention Against Corruption (concluded in New York on 31 October, 2003); and the Civil Law Convention on Corruption (concluded in Strasbourg on 4 November, 1999) (ratified in 2005).  Belarus also signed a number of the intergovernmental agreements to address this problem. In 2004, Belarus signed and ratified the United Nations Convention against Corruption. Belarus is considering joining the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.

In 2019 the Council of Europe’s (COE) Group of States against Corruption (GRECO) publicly declared Belarus non-compliant with GRECO’s anti-corruption standards.  This was GRECO’s first ever declaration of non-compliance.  According to the COE, Belarus failed to address 20 out of 24 recommendations made in 2012; had not authorized the publication of the 2012 report or related compliance reports; and was non-responsive since 2017 to requests from GRECO to organize a high-level mission to Belarus.  The majority of GRECO’s recommendations related to fundamental anti-corruption requirements, such as strengthening the independence of the judiciary and of the prosecution office, as well as increasing the operational autonomy of the law enforcement and limiting immunity protection of certain categories of persons.  However, the COE contends that limited reporting indicates that corruption is particularly alarming higher up in the government hierarchy and in procurement for state-run enterprises.

According to Transparency International’s 2018 Corruption Perception Index, Belarus fell from 68th to 70th of 180 countries in the rankings, tied with Jamaica and the Solomon Islands.  In Belarus’ region, Poland ranked 36th, Lithuania 38th, Latvia 41st, Ukraine 120th, and Russia 138th.

In the Embassy’s estimation, the potential for widespread, politically-inspired violence that would adversely affect foreign property interests is low.

Belarus has a highly skilled and well-educated work force, due to its advanced system of higher and specialized education.  Wages are lower than in Western Europe, the United States, and even Russia.

Belarus has been a member of the International Labor Organisation (ILO) since 1954 and is a party to almost 50 ILO conventions.  In 2004, the ILO made several recommendations regarding workers’ rights to organize and freedom of association. Belarus has not adequately responded to those recommendations by the 2004 ILO Commission of Inquiry.

The Constitution, the Labor Code, and presidential decrees are the main documents regulating the Labor Market in Belarus.  Prior to the 1999 Presidential Decree No. 29, the vast majority of the labor contracts in the country were open-ended work agreements.  Decree No.29 established a new option to employ workers on 1-5 year-long term contracts and to transfer current employees to these new type contracts.  In 2018, almost 90 percent of employees in Belarus were working on term contracts.

The term contract system generally favors the employer.  The employer can choose not to renew a contract upon its expiration without giving the employee an explanation.  Technically, the employer can also refuse an employee’s proposed resignation before the contract term is up, which would then require the employee to argue their case in court.  The employer, on the other hand, can terminate the contract at will. There are several protected employee groups that are exempt from early termination: pregnant women, women with children of up to 3 years old, and single parents with children under 14 years old.  Additionally, the employer is obligated to renew contracts with women on maternity leave and with those employees who have reached pre-pension age at the end of their prior contract (53 years for women and 58 for men.)

Severance pay in the case of reduction in force is 13 weeks of salary, and eight weeks’ notice is required for dismissal.  Normal work hours in Belarus are eight hours per day and 40 hours per week. Belarusian law is stringent in limiting overtime hours.  A non-standard work hour regime is allowed with the condition that the employee is provided with up to seven days of additional annual leave.  In general, employees must be granted at least 24 calendar days of paid leave a year.

There are special provisions on employing foreign citizens who have no permanent residence permit.  Such citizens have to secure a work permit, which can be usually granted only if an unemployed Belarusian citizen cannot perform the required work.  To date, the Embassy has not heard of discriminatory or excessively onerous visa, residence or work permit requirements inhibiting foreign investors, nor of restrictions placed on the numbers or duration of employment of foreign managers brought in to supervise foreign investment projects.  In practice, however, few firms employ significant numbers of foreigners, apart from Russian citizens, who benefit from Russia’s and Belarus’ common employment regulations streamlined under the Eurasian Economic Union arrangement of Russia, Belarus, Kazakhstan, Armenia, and Kyrgyzstan.

In July 2000, President Clinton signed a proclamation withdrawing benefits under the Generalized System of Preferences (GSP) for Belarus.  This decision was based on a 1997 American Federation of Labor-Congress of Industrial Organizations (AFL-CIO) petition to the United States Trade Representative (USTR).  The petition alleged that Belarus was not acting in accordance with the Trade Act of 1974, as amended, regarding internationally recognized worker rights. These include the freedom to form independent trade unions and the right to organize and bargain collectively.  The rights of independent trade unions are often subject to government attack, as documented in the Department of State’s Report on Human Rights Practices for 2018: https://www.state.gov/reports/2018-country-reports-on-human-rights-practices/belarus/

The official unemployment rate in Belarus has been steady in recent years at or just below one percent. Independent analysts claim the unofficial unemployment rate is closer to five percent when taking into account job seekers and unregistered unemployed.

Under Section 5 (Sense of Congress Relating to Sanctions Against Belarus), paragraph C (Prohibition on Loans and Investment) of the Belarus Democracy Act signed by the president on October 20, 2004, no loan, credit guarantee, insurance, financing, or other similar financial assistance should be extended by any agency of the United States government (including the Export-Import Bank and the Overseas Private Investment Corporation) to the Government of Belarus, except with respect to the provision of humanitarian goods and agricultural or medical products.

According to official statistics, Belarus received USD 1.6 billion in FDI (on a net basis) in 2018, up from USD 1.24 billion in FDI in 2017 and USD 1.3 billion in 2016.  Russia (41.7 percent), Cyprus (13.5 percent), China (9.3 percent), Germany (5.5 percent), UAE (3.6 percent), Poland (3.4 percent), Ireland (2.8 percent), Latvia (2.5 percent), the United Kingdom (2.4 percent) and the United States (2.1 percent) are considered the top ten foreign investors in Belarus.   

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

For detailed statistics on foreign direct investments in and outside Belarus for 2010-2018 see the website of Belarus’ National Bank (http://www.nbrb.by/engl/statistics/ForeignDirectInvestments/  ) and Economy Ministry (https://www.economy.gov.by/ru/pezultat-ru/  ).

Table 3: Sources and Destination of FDI

Table 4: Sources of Portfolio Investment

For the latest available statistics on foreign portfolio investments in Belarus see the website of Belrus’ National Bank:  http://www.nbrb.by/engl/statistics/PortfolioInvestment  

Monica Sendor
Economic Officer
46, Starovilenskaya St., Minsk, 220002, Belarus
tel. +375 (17) 210-1283
email: usembassyminsk@state.gov

Policies Towards Foreign Direct Investment

Brunei has an open economy favorable to foreign trade and foreign direct investment (FDI) as the government continues its economic diversification efforts to limit its long reliance on oil and gas exports.

FDI is important to Brunei as it plays a key role in the country’s economic and technological development. Brunei encourages FDI in the domestic economy through various investment incentives offered by the Ministry of Finance and Economy.

Improving Brunei’s Ease of Doing Business ranking has been a focus for the government. The World Bank Ease of Doing Business report indicated that Brunei’s ranking rose 17 spots from 72 in 2017 to 55 out of 190 world economies in 2019.  The significant gain was largely due to removing post-incorporation procedures for starting a business, increasing transparency of the land administration system for property registration, and strengthening minority investor protections.

Brunei amended its laws to make it easier and quicker for entrepreneurs and investors to establish businesses.  The Business License Act (Amendment) of 2016 exempts several business activities (eateries, boarding and lodging houses or other places of public resort; street vendors and stalls; motor vehicle dealers; petrol stations, including places for storing petrol and inflammable material; timber store and furniture factories; and retail shops and workshops) from needing to obtain a business license.  The Miscellaneous License Act (Amendment) of 2015 reduced the wait times for new business registrants to start operations, with low-risk businesses like eateries and shops able to start operations immediately.

Limits on Foreign Control and Right to Private Ownership and Establishment

There is no restriction on foreign ownership of companies incorporated in Brunei.  The Companies Act requires locally incorporated companies to have at least one of the two directors—or if more than two directors, at least two of them—to be ordinarily resident in Brunei, but exemptions may be obtained in some circumstances.  The rate of corporate income tax is the same whether the company is locally or foreign owned and managed.

All businesses in Brunei must be registered with the Registry of Companies and Business Names at the Ministry of Finance.  Foreign investors can fully own incorporated companies, foreign company branches, or representative offices, but not sole proprietorships and partnerships.

More information on incorporation of companies can be found here on the Ministry of Finance: https://www.mofe.gov.bn  .

Other Investment Policy Reviews

The World Trade Organization (WTO) Secretariat prepared a Trade Policy Review of Brunei in December 2014 and a revision in April 2015.

Business Facilitation

As part of Brunei’s effort to attract foreign investment, the government established several facilitating agents including: the Brunei Economic Development Board (BEDB), FDI Action and Support Center (FAST), and Darussalam Enterprise (DARe). These organizations work together to smooth the process of obtaining permits, approvals and licenses. Facilitating services are now consolidated into one government: http://business.gov.bn  .

BEDB, the frontline agency that promotes and facilitates foreign investment into the country, works with FAST to evaluate investment proposals, liaise with government agencies and obtain project approval from the government’s Foreign Direct Investment and Downstream Industry Committee.

Outward Investment

A major share of outward investment is made by the government through its sovereign wealth funds, which are managed by the Brunei Investment Agency (BIA) under the Ministry of Finance.  No data is available on the total investment amount due to a strict policy of secrecy. It is believed that the majority of sovereign wealth funds are invested in foreign portfolio investments and real estate.  The state-owned Brunei National Petroleum Company has also evolved into an outward foreign investor, winning tenders to explore and develop onshore blocks in Myanmar. Despite the limited availability of public information regarding the amount, the funds are generally viewed positively and managed well by BIA.

Brunei is a member of the Association of Southeast Asian Nations (ASEAN), as association of ten Southeast Asian nations, which has Free Trade Agreements (FTA) with Australia, New Zealand, China, India, and South Korea, and a Comprehensive Economic Partnership Agreement with Japan.

Brunei currently has Bilateral Investment Treaties with Bahrain, China, Germany, India, the Republic of Korea, Kuwait, Oman, and Ukraine.  Brunei does not currently have a Bilateral Investment Treaty with the United States.

Brunei served as the ASEAN Coordinator in negotiations for the ASEAN-Australia-New Zealand Free Trade Agreement (AANZFTA), which was signed February 2009 in Thailand and entered into force January 2010.  Brunei is also a negotiating party to the Regional Comprehensive Economic Partnership (RCEP) and a signatory to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

Brunei does not have a Bilateral Taxation Treaty with the United States.  Brunei has signed Tax Information Exchange Agreements with Canada, Iceland, Norway, Finland, Greenland, Sweden, Australia, Denmark and Faroes.  Information on Brunei’s tax exchange agreements and treaties can be found on the Ministry of Finance and Economy: http://www.mofe.gov.bn  .  In 2017, Brunei became a signatory to the Organisation for Economic Co-operation and Development (OECD) multilateral Convention on Mutual Administrative Assistance in Tax Matters.

Transparency of the Regulatory System

Brunei’s regulatory system is generally seen as lacking in transparency.  There is little to no transparency in lawmaking processes, nor is there any available information on whether impact assessments are made prior to proposing regulations.  Each ministry is responsible for coordinating with the Attorney General’s Chambers to draft proposed legislation. Legislation does not receive broad reviews and few outside of the originating ministry are able to provide their input.  The Sultan has final authority to approve proposed legislation. Laws and regulations that are in effect are readily accessible on the Attorney General’s Chambers: http://www.agc.gov.bn  .

International Regulatory Considerations

Brunei is an active member of ASEAN, through which it has concluded FTAs with Australia and New Zealand, China, India, Japan and South Korea.  Brunei became a WTO member in 1995 and a signatory to the General Agreement on Tariffs and Trade (GATT) in 1993.

Legal System and Judicial Independence

Brunei’s constitution does not specifically provide for judicial independence, but in practice the court system operates without government interference.  Brunei’s legal system includes two parallel systems: one based on common law and the other based on Islamic law. In 2016, recognizing the importance of protecting investors’ rights and contract enforcement, Brunei established a Commercial Court.

In 2014, Brunei implemented the first phase of its Sharia Penal Code (SPC), which expanded existing restrictions on minor offenses—such as eating during Ramadan—that are punishable by fines or imprisonment.  On April 3, 2019, Brunei commenced full implementation of its Sharia Penal Code, introducing the possibility of barbaric punishments in certain situations such as stoning to death for rape, adultery, or sodomy, and execution for apostasy, contempt of the Prophet Muhammad, or insult of the Quran.  The punishments require different standards of proof from the common law-based penal code. For example, four pious men must personally witness an act of fornication to support a sentence of stoning.

Laws and Regulations on Foreign Direct Investment

The basic legislation on investment includes the Investment Incentive Order 2001 and the Income Tax (As Amended) Order 2001.  Investment Order 2001 supports economic development in strategically important industrial and economic enterprises and, through the Ministry of Finance and Economy, offers investment incentives through a favorable tax regime.  Although Brunei does not have a stock exchange, government plans to establish a securities market are reportedly under way.

Foreign ownership of companies is not restricted, although under the Companies Act, at least one of two directors of a locally incorporated company must be a resident of Brunei, unless granted an exemption from the appropriate authorities.

Business Registration

All businesses in Brunei must be registered with the Registry of Companies and Business Names at the Ministry of Finance and Economy.  Except for sole proprietorships and partnerships, foreign investors can fully own incorporated companies, foreign company branches, or representative offices.  Foreign direct investments by multinational corporations may not require local partnership in setting up a subsidiary of their parent company in Brunei. However, at least one company director must be a Brunei citizen or permanent resident of Brunei.  Brunei’s “one-stop-shop” website for investments and business start-ups can be found here: http://business.gov.bn  .

The Business License Act (Amendment) of 2016 exempts several business activities (eateries, boarding and lodging houses or other places of public resort; street vendors and stalls; motor vehicle dealers; petrol stations including places for storing petrol and inflammable materials; timber stores and furniture factories; and retail shops and workshops) from needing to obtain a business license.

Competition and Anti-Trust Laws

Brunei does not have any legislation pertaining to the regulation of competition issues.  In 2015, Brunei enacted the Competition Order, to promote and maintain fair and healthy competition to enhance market efficiency and consumer welfare.  The Sultan also announced the establishment of the Competition Commission in 2017 to oversee and act on competition issues that include adjudicating anti-competitive cases and imposing penalties on companies that violate the 2015 Competition Order.  The Order is scheduled to be enforced in phases, starting with the prohibition of anti-competitive agreements and practices.

Expropriation and Compensation

There is no history of expropriation of foreign-owned property in Brunei.  There have been cases of domestically owned private property being expropriated for infrastructure development. Compensation was provided in such cases, and claimants were provided with due process regarding their disputes.

Dispute Settlement

ICSID Convention and New York Convention

Brunei is a member state to the convention on the International Center for Settlement of Investment Disputes (ICSID Convention) and a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention).  Legislation related to dispute settlement is covered under Brunei’s Arbitration Order 2009.

Investor-State Dispute Settlement

In 2016, Brunei’s Supreme Court announced the establishment of a commercial court to deal with business-related cases.  More information about Brunei’s judiciary system is available through the judiciary: http://www.judiciary.gov.bn  .

International Commercial Arbitration and Foreign Courts

In May 2016, Brunei’s Attorney General’s Chambers announced the establishment of the Brunei Darussalam Arbitration Center (BDAC).  BDAC delivers services and administration for arbitration and mediation to fulfill the needs of domestic and international users in relation to commercial disputes, as a resolution alternative to court proceedings.

The International Arbitration Order (IAO) which regulates international and domestic arbitrations came into effect in February 2010.  More information about Brunei’s Attorney General’s Chambers is available here: http://www.agc.gov.bn   .

Bankruptcy Regulations

In 2012, amendments to Brunei’s Bankruptcy Act increased the minimum threshold for declaring bankruptcy from BND 500 to BND 10,000 (USD $368 to USD $7,379) and enabled the trustee to direct the Controller of Immigration to impound and retain the debtor’s passport, certificate of identity, or travel document to prevent the debtor from leaving the country.  The amendment also requires the debtor to deliver all property under the debtor’s possession to the trustee. Information about Brunei’s bankruptcy laws is available on the judiciary’s website: http://www.judiciary.gov.bn  .

Investment Incentives

Companies involved in the exportation of agriculture, forestry, and fishery products can apply for tax relief on export profits.  Tax exemption may be available for pioneer industry companies. For non-pioneer enterprises, the tax relief period is eight years and up to 11 years for pioneer enterprises.

Since 2015, the corporate income tax rate in Brunei has been 18.5 percent.

Sole proprietorships and partnerships are not subject to tax.  Individuals do not pay any capital gains tax, and profits arising from the sale of capital assets are not taxable.  Brunei has double-taxation agreements with the United Kingdom, Indonesia, China, Singapore, Vietnam, Bahrain, Oman, Japan, Pakistan, Malaysia, Hong Kong, Laos, Kuwait, Tajikistan, Qatar, and United Arab Emirates.  Under the Income Tax (Petroleum) Act, a company is subject to taxes of up to 55 percent for any petroleum operation pursuant to production sharing agreements.

Darussalam Assets is a private limited company established in December 2012, under the purview of the Ministry of Finance and Economy to spur the growth of government-linked companies (GLC) through active ownership and management of its GLC portfolio based on commercial principles, in line with Brunei’s 2035 development vision.

Foreign Trade Zones/Free Ports/Trade Facilitation

Muara Port is Brunei’s main seaport with an established free trade zone called the Muara Export Zone (MEZ), which was established to promote and develop Brunei as a trade hub of the region. The establishment of the MEZ was an initial step towards developing other free trade zones in the country.  In Brunei’s 2017 Legislative Council session, the government announced that a 96 hectare area near Muara Port will be designated a free trade zone.

Performance and Data Localization Requirements

The Brunei government seeks to increase the number of Bruneians working in the private sector. Brunei’s Local Business Development Framework seeks to increase the use of local goods and services, train a domestic workforce, and develop Bruneian businesses by placing requirements on all companies operating in the oil and gas industry in Brunei to meet local hiring and contracting targets.  These requirements also apply to information and communication technology firms that work on government projects. The Framework sets local content targets based on the difficulty of the project and the value of the contract, with more flexible local content requirements for projects requiring highly specialized technologies or with a high contract value. In 2019, senior officials stated an intent to extend local hiring targets to additional sectors of the economy.

Expatriate employment is controlled by a labor quota system administered by the Labor Department and the issuance of employment passes by the Immigration Department.  Brunei allows new companies to apply for special approval to expedite the recruitment of expatriate workers in select positions. According to the Ministry of Home Affairs, the special approval is only available to new companies for up to six months, and covers businesses such as restaurants and shops.  The special approval cuts the waiting time for a quota to seven days instead of 21.

Brunei has not announced any specific legislation pertaining to data storage and data localization requirements.

Real Property

Mortgages are recognized and enforced in Brunei; however, only Bruneian citizens can own land property in Brunei.  Foreigners and permanent residents can only hold properties under long-term leases. Most banks are reluctant to grant housing loans to foreigners and permanent residents.  According to the International Monetary Fund (IMF) Brunei country report, Brunei did not attract any foreign direct investment for real estate, rentals, and business activity in 2011 (latest data available).  Brunei’s Department of Economic Planning and Development does not publish FDI data for real estate. Every transfer of ownership in Brunei requires the approval of “His Majesty in Council” which is a council of officials representing the Sultan.  This process can be lengthy and at times opaque.

As of September 2016, the Brunei government announced land code amendments that allowed non-citizens to own properties under the Land Strata Act title for a maximum of 99 years without the means of powers of attorney.  Amendments to the Land Code are being considered to ban past practices of proxy land sales to foreigners and permanent residents using power of attorney and trust deeds. The amendments to the Land Code have made powers of attorney and trust deeds no longer recognized as mechanisms in land transactions involving non-citizens.  The government may grant temporary occupation permits over state land to applicants, for licenses to occupy land for agricultural, commercial, housing or industrial purposes. These licenses are not registered, and are granted for renewable annual terms.

Intellectual Property Rights

Brunei’s intellectual property rights (IPR) protection and enforcement regime is still in development but is increasingly strong and effective.  The country was removed from the U.S. Trade Representative’s Special 301 report in 2013, and has stayed off in recognition of its improving IPR protections, increasing enforcement, and efforts to educate the public about the importance of IPR.

Brunei finalized and adopted the Copyright (Amendment) Order 2013 in December 2013, a development long requested by the U.S. government.  The amendment enhanced enforcement provisions for copyright infringement by increasing the penalties for IP offenses; adding new offenses; strengthening the enforcement powers of the Royal Brunei Police Force and the Ministry of Finance Customs and Excise Department; and allowing for sanctioned private prosecution.  The amendments are designed to deter copyright infringements with fines of BND 10,000 (USD $7,400) to BND 20,000 (USD $14,800) per infringing copy, imprisonment for a term up to five years, or both. The new penalty is up to four times more severe than the previously existing penalty. Enforcement agencies are authorized to enter premises and arrest without warrant, to stop, search, and board vehicles and also to access computerized and digitized data.  The amendments further allow for admissibility of evidence obtained covertly and protect the identity of informants. Statistics on seizures of counterfeit goods are unavailable.

Brunei transferred its Registry of Trademarks from the Attorney General’s Chambers (AGC) to the Brunei Intellectual Property Office in 2013.  The transfer expanded the country’s Patents Registry Office’s (PRO) ability to accept applications for trademarks registration, in addition to patents and industrial designs.

In September 2013, Brunei acceded to the Geneva (1999) Act of the Hague Agreement Concerning the International Registration of Industrial Designs to protect IP from industrial designs, making it the second ASEAN Member country, following Singapore, to accede.  The accession emphasized Brunei’s commitment under the ASEAN Intellectual Property Rights Action Plan 2011 – 2015. Brunei also plans and has publicly committed to acceding to other World Intellectual Property Organization’s (WIPO) treaties including the Madrid Protocol for the International Registration of Marks, the WIPO Performances and Phonograms Treaty

(WPPT), and the UPOV Convention 1991 for the protection of New Varieties of Plants (PV).

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

Resources for Rights Holders

Contact at Mission:

Paul R. Estrada
Political/Economic/Consular Officer
Telephone: +673 238-4616 ext. 2172
Email: EstradaPR@state.gov

Capital Markets and Portfolio Investment

In 2013, Brunei signed a Memorandum of Understanding (MOU) with the Securities

Commission Malaysia (SCM) to boost cooperation in the capital markets.  The MOU was designed to strengthen collaboration in the development of fair and efficient capital markets in the two countries.  It also provided a framework to facilitate greater cross-border capital market activities and cooperation in the areas of regulation as well as capacity building and human capital development, particularly in the area of Islamic capital markets.  In March 2019, the Minister of Finance II budgeted USD 15 million of the 2019/2020 fiscal budget to help launch Brunei’s stock exchange once all preconditions for such a market are met.

Money and Banking System

Brunei has a small banking sector which includes both conventional and Islamic banking.  The Monetary Authority of Brunei Darussalam (AMBD) is the sole central authority for the banking sector, in addition to being the country’s central bank.  Banks in the country have high levels of liquidity, good capital adequacy ratios, and well-managed levels of non-performing loans. A handful of foreign banks have established operations in the country such as Standard Chartered and Bank of China (Hong Kong).  In March 2018, HSBC officially ended its operations in Brunei, after announcing its planned departure from Brunei in late 2016. All banks are under the supervision of AMBD, which has also established a credit bureau that centralizes information on applicants’ credit worthiness.

The Brunei dollar (BND) is pegged to the Singapore dollar, and each currency is accepted in both countries.

Foreign Exchange and Remittances

Foreign Exchange

In June 2013, the Financial Action Task Force (FATF) announced that Brunei is no longer subject to FATF’s monitoring process under its global Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) compliance process.  Brunei’s Mutual Evaluation Report cited Brunei’s significant progress in improving its AML/CFT regime and noted that Brunei had established the legal and regulatory framework to meet its commitments in its Action Plan regarding strategic deficiencies that the FATF identified in June 2011.

Remittance Policies

Any person or company providing services for the transmission of money must be licensed by the Brunei government.  Only Brunei citizens may hold remittance licenses. Local financial institutions, including banks such as Bank Islam Brunei Darussalam (BIBD) and Standard Chartered Bank provide remittance services.  Remittance companies require the customer’s full name, identification number, address, and purpose of the remittance. They are also required to file suspicious transaction reports with the AMBD.

Sovereign Wealth Funds

The Brunei Investment Agency (BIA) manages Brunei’s General Reserve Fund and their external assets.  Established in 1983, BIA’s assets are estimated to be USD 170 billion. BIA’s activities are not publicly disclosed and are ranked the lowest in transparency ratings by the Sovereign Wealth Fund Institute.

Brunei’s state-owned enterprises (SOEs), managed by Darussalam Assets under the Ministry of Finance and Economy, lead key sectors of the economy including oil and gas, telecommunications, transport, and energy generation and distribution.  These enterprises also receive preferential treatment when responding to government tenders. Some of the largest SOE’s include the following:

The telecommunications industry is dominated by government-linked companies Telekom Brunei (TelBru), Data Stream Technologies (DST) Communications, and Progresif Cellular.  Telbru is the sole provider of fixed line telephone and internet services. DST, founded in 1995, and Progresif, which took over from failed telecom company B-Mobile in 2014 and is owned by a government investment fund, provides mobile phone and internet services.  In 2019, the government announced the consolidation of all telecommunications infrastructure in Brunei under a state-owned wholesale network operator called Unified National Networks (UNN).

Royal Brunei Technical Services (RBTS), established in 1988 as a government owned corporation, is responsible for managing the acquisition of a wide range of systems and equipment and maintaining those acquired systems and equipment.

Brunei National Petroleum (PB) is the national oil company owned by the Brunei government.  The company was granted all the mineral rights in eight prime onshore and offshore petroleum blocks, totaling 20,552 sq. km. Currently, the company manages contractors, including Shell, Total, and Petronas, which are exploring the onshore and deep water offshore blocks.

Royal Brunei Airlines started operations in 1974 and is the country’s national carrier.  The airline flies a combination of Boeing and Airbus aircraft.

Privatization Program

Brunei’s Ministry of Transportation and Info-Communication has made corporatization and privatization part of its Strategic Plan, which calls for the Ministry to shift its role from a service provider to a regulatory body with policy-setting responsibilities.  In that role, the Ministry will develop specific policies through corporatization and privatization; establish a regulatory framework and business facilitation. Currently, the Ministry is studying initiatives to privatize a number of state-owned agencies: the Postal Services Department and public transportation services.  These services are not yet completely privatized and there is no timeline for privatization, as the Ministry is still in the process of considering the initiative. Guidelines regarding the role of foreign investors and the bidding process are not yet available.

Responsible business conduct is a relatively new concept in Brunei, and there are no specific government programs encouraging foreign and local enterprises to follow generally accepted corporate social responsibility (CSR) principles.  However, there is broad awareness of CSR among producers and consumers, and individual private and public sector organizations have formalized CSR programs and policies. There are no reporting requirements and no independent nongovernmental organizations (NGOs) in Brunei that promote or monitor CSR.

Since 1982, Brunei has enforced the Emergency (Prevention of Corruption) Act.  In 1984, the Act was renamed the Prevention of Corruption Act (Chapter 131). The Anti-Corruption Bureau (ACB) was established in 1982 for the purpose of enforcing the Act.  The Prevention of Corruption Act provides specific powers to the ACB for the purpose of investigating accusations of corruption. The Act authorizes ACB to investigate certain offences under other written laws, provided such offences were disclosed during the course of ACB investigation.  Corrupt practices are punishable under the Prevention of Corruption Act, which also applies to Brunei citizens abroad. Brunei is a member of the International Association of Anti-Corruption Authorities.

In 2018, Brunei was ranked the 31st of 180 countries worldwide in Transparency International’s corruption perception index.  The ranking is an improvement from its 2016 ranking (41st). U.S. companies do not generally identify corruption as an obstacle to conducting business in Brunei. The level and extent of reported corruption in Brunei is generally low.  In 2018, however, the government charged two former judges with embezzling large sums from the court system. The Sultan has made repeated statements to the effect that corruption is unacceptable.

Apart from the Anti-Corruption Bureau, there are no international, regional, local or NGOs operating in Brunei that monitor corruption.

Brunei has signed and ratified the United Nations Convention against Corruption.

Resources to Report Corruption

Government Point of Contact:

Datin Hajah Elinda Haji C.A. Mohamed
Director
Anti-Corruption Bureau Brunei Darussalam
Old Airport Berakas, BB 3510 Brunei Darussalam
Telephone: +673 238-3575
Fax: +673 238-3193
Email: info.bmr@acb.gov.bn

Brunei is an absolute monarchy and has no recent history of political violence. Sultan Hassanal Bolkiah is an experienced and popular monarch who rules the country as Prime Minister while also retaining the titles of Minister of Finance and Economy, Minister of Defense, and Minister of Foreign Affairs.  The country experienced an uprising in 1962, when it was a British protectorate, which ended through the intervention of British troops. The country has been ruled peacefully under emergency law ever since. Brunei has managed to avoid demands for political reform by making use of its hydrocarbon revenues to provide its citizens with generous welfares and subsidies.

Brunei relies heavily on foreign labor in lower-skill and lower-paying positions, with approximately 25 percent of the labor force coming in from abroad to fulfill specific contracts. The largest percentage of foreign workers work in construction, followed by wholesale and retail trade, and then professional, technical, administrative and support services.  Most unskilled laborers in Brunei are from Bangladesh, Indonesia, and the Philippines, and enter the country on renewable two-year contracts.

The skilled labor pool includes both foreign laborers on short-term visas and Bruneian citizens and permanent residents, who often are well-educated but who generally prefer to work for the government due to generous benefits such as bonuses, education allowances, interest-free loans, and housing allowances.  In 2017, the Labor Force Survey stated that approximately 40.4 percent of the labor force was employed in the public sector. In 2016, the Department of Labor under the Ministry of Home Affairs introduced an improved Foreign Workers License process with stricter policies in an effort to create more employment opportunities for Brunei citizens.     

While Brunei law permits the formation of trade union federations, it forbids affiliation with international labor organizations unless there is consent from the Minister of Home Affairs and the Department of Labor.  Under the Trade Unions Act of 1961, unions must be registered with the government. The government prohibits strikes, and the law makes no explicit provision for the right to collective bargaining. The law prohibits employers from discriminating against workers in connection with union activities, but it does not provide for re-instatement for dismissal related to union activity.

All workers, including civil servants other than those serving in the military and those working as prison guards or police officers, may form and join trade unions of their choice without previous authorization or excessive requirements.  The only active union in the country, which is composed of Brunei Shell Petroleum workers, appears to have had minimal activity in recent years. There are no other active unions or worker organizations.

Various domestic laws prohibit the employment of children under age 16.  Parental consent and approval by the Labor Commission are required for those under age 18.  Female workers under age 18 may not work at night or on offshore oil platforms. The Department of Labor effectively enforces laws related to the employment of children.  There were no reports of violations of child labor laws.

The law does not set a minimum wage, but most employed citizens receive good salaries.  The public sector pay scale covers all workers in government jobs. Wages for employed foreign residents are wide ranging.  Some foreign embassies set minimum wage requirements for their nationals working in the country.

Government data from 2016, the latest data available, indicated approximately 64,390 foreigners lived in the country temporarily, although government officials have publicly stated the number as over 100,000.  Foreign workers receive a mandatory brief on labor rights from the Department of Labor when they sign their contract. The government also inspects workplaces and maintains a telephone hotline for worker complaints.  Immigration law allows prison sentences and caning for workers who overstay their work permits and for workers who fall into irregular status due to their employers’ negligence.

There are no Overseas Private Investment Corporation (OPIC) programs in Brunei.

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

* Host country data available at depd.gov.bn  

Table 3: Sources and Destination of FDI

Brunei’s Department of Economic Planning and Development and IMF Coordinated Direct Investment Survey data are not available.

Table 4: Sources of Portfolio Investment

Brunei’s Department of Economic Planning and Development and IMF Coordinated Portfolio Investment Survey data are not available.

U.S. Embassy Commercial Section
Simpang 336-52-16-9
Jalan Duta BC 4115
(+673) 238-4616
+637 238-4616 ext. 2232
Email: BSBCommercial@state.gov

Policies Toward Foreign Direct Investment

Burma recognizes the value of investment to boost economic growth and development, and it is open to foreign investors.  That said, implementation of liberal investment laws and policies are often slowed and sometimes blocked by local rent-seeking economic actors who benefit from the status quo.  In 2016, Burma passed the Myanmar Investment Law (MIL) to attract more investment from both foreign and domestic businesses. The MIL simplified the rules and regulations for investment to bring Burma more in line with international standards.  The MIL includes a “negative list” of prohibited, restricted, and special sectors. Burma also has three Special Economic Zones (SEZs) in Thilawa, Dawei, and Kyauk Phyu with preferential policies for businesses that locate there, including one-stop-shop service.

The new Companies Law went into effect on August 1, 2018.  Under the new law, foreign investment of up to 35 percent is allowed in domestic companies— which also opens the stock exchange to limited foreign participation.  It also updates and streamlines business regulations.  In tandem with the Companies Law’s entry into force, the government instituted online company registration through “MyCo” (https://www.myco.dica.gov.mm  ).  MyCo also includes a searchable company registry, which should improve transparency on corporate data and ease due diligence research.  The Companies Law makes it easier to start and operate small businesses, and provides the government with tools to enforce corporate governance rules and regulations.

In April 2019, the government awarded licenses to five international insurance firms to offer wholly-foreign-owned life insurance options in the country.

In November 2018, the government created the Ministry for Foreign Investment and Economic Relations (MIFER) to facilitate investment.  The Directorate for Investment and Company Administration (DICA), Burma’s investment promotion agency, was moved from the Ministry of Planning and Finance to MIFER.  One of DICA’s roles is to encourage and facilitate both foreign and local investment by providing information, fostering coordination and networks between investors and continually exploring new opportunities in Burma that would benefit both the nation and the business community.  In addition to DICA, MIFER also oversees the Foreign Economic Relations Department (FERD), which was transferred to MIFER from the Ministry of Planning and Finance.

In May 2018, the Ministry of Commerce issued Notification 25/2018, which opened up the wholesale and retail sector to direct foreign investment.

There is no evidence that the Myanmar Investment Commission (MIC) discriminates against foreign investors.  In June 2017, the MIC announced ten prioritized sectors for foreign and Burmese investors: agriculture and livestock, power, education, health care, logistics, construction for affordable housing, export promotion industries, import substitution industries, aircraft and airports, and establishment of industrial estates and urban areas.

The government engages with chambers of commerce and foreign companies on investment.

Limits on Foreign Control and Right to Private Ownership and Establishment

The Myanmar Investment Law (MIL) went into effect in April 2017 and applies to all investment in Burma, both domestic and foreign.  According to the MIL, some investments require a permit while others do not. The MIL also lists specific sectors where tax incentives are available.  Under the MIL, foreign investors are now able to enter into long-term leases. The MIL revised restrictions on investment to liberalize investment. Section 42 of the MIL lists types of investment activities that only the Union government can undertake; that are not permitted for foreign investors; that are permitted only as a joint-venture with resident citizens or citizen-owned entities; and that are subject to specifically prescribed conditions (e.g. approval from relevant ministries).

When forming or registering a business in Burma, generally two options exist: (i) registration under the new Companies Law or (ii) registration as an MIC-company under the MIL (with registration under the 2014 Special Economic Zone Law for businesses located in a Special Economic Zone as a third option).  Under the MIL, investors involved in the following businesses must still submit a proposal to the MIC and apply for a permit: businesses/investment activities that are strategic for the Union; large, capital-intensive investment projects; projects which have large potential impacts on the environment and local communities; businesses/investment activities that use state-owned land and buildings; and/or businesses/investment activities that the government designates as requiring the submission of a proposal to the MIC.

The State-Owned Economic Enterprises Law, enacted in March 1989, is still in effect today.  It regulates certain investments and economic activities. While the 1989 law stipulated that state-owned enterprises (SOE) have the sole right to carry out a range of economic activities, including teak extraction, oil and gas, banking and insurance, and electricity generation, in practice many of these areas are now open to private sector investment.  For instance, the 2016 Rail Transportation Enterprise Law allows foreign and local businesses to make certain investments in railways, including in the form of public-private partnerships.

More broadly, the MIC, “in the interest of the State,” can make exceptions to the State-Owned Economic Enterprise Law.  The MIC has routinely granted numerous exceptions including through joint ventures or special licenses in the areas of insurance, banking (for domestic investors only), mining, petroleum and natural gas extraction, telecommunications, radio and television broadcasting, and air transport services.

The Burmese military is associated with the Union of Myanmar Economic Holdings, Ltd. (UMEHL) and runs the Myanmar Economic Corporation (MEC), two large conglomerates with many commercial interests. 

Other Investment Policy Reviews

The World Bank’s Doing Business 2019 report includes an analysis of Burma’s investment sectors and business environment, and can be found at:  http://www.doingbusiness.org/data/exploreeconomies/myanmar/  

The World Bank also conducted an enterprise survey of Burma in 2016, the results of which can be found at: http://www.enterprisesurveys.org/data/exploreeconomies/2016/myanmar  

The OECD conducted an investment policy review of Burma in March 2014.  The entire report can be found at: http://www.oecd.org/daf/inv/investment-policy/Myanmar-IPR-2014.pdf .

The World Trade Organization (WTO) conducted a trade policy review of Burma in March 2014.  The entire report can be found at: https://www.wto.org/english/tratop_e/tpr_e/tp393_e.htm  .

Business Facilitation

The Directorate of Investment and Company Administration (DICA) website (http://www.dica.gov.mm/  ) provides information on how to register a business in Burma, which can be done online as of August 2018, or in person at DICA’s offices.  Registration is the first step a businessperson must take before incorporating a company or making an investment in Burma, whether that person is a citizen of Burma or a foreigner.  In accordance with the Companies Law and the Special Companies Act of 1950, a company may register in one of the following forms: as a private or public company by Burmese citizens, as a foreign company or branch of a foreign company, as a joint venture company, or as an association/nonprofit organization.  First steps include checking availability of the company name at DICA or on the online registry, obtaining company registration forms in person or online from DICA, submitting the forms, and paying a company registration fee. The new Companies Law eliminated the need for companies to get a “permit to trade,” removing an obstacle to businesses under the previous version of the law.

The Myanmar Investment Commission (MIC) is responsible for verifying and approving certain investment proposals and regularly issues notifications about sector-specific developments.  The MIC is comprised of representatives and experts from government ministries, departments and governmental and non-governmental bodies. Companies can use the DICA website to retrieve information on requirements for MIC permit applications and submit a proposal to the MIC.  If the proposal meets the criteria, it will be accepted within 15 days. If accepted, the MIC will review the proposal and reach a decision within 90 days. The MIC issued a March 2016 statement granting authority to state and regional investment committees to approve any investment with capital of under USD 5 million.  Such investments no longer require approval from the MIC.

To attract foreign and domestic investors, the MIC has released lists of townships that fall under three different zones: underdeveloped, moderately developed, and adequately developed.  Investors will receive a tax break of seven years, five years, or three years when they make investments in these respective zones. A total of 166 townships fall under the least-developed-zone category.  In 2017, DICA expanded its presence throughout Burma to support companies and promote investment in of all the country’s states and regions.

Outward Investment

Burma does not promote outward investment, but it does not restrict domestic investors from investing abroad.

Burma has signed and ratified bilateral investment agreements with China, India, Japan, South Korea, Laos, Philippines, and Thailand.  It has also signed bilateral investment agreements with Israel and Vietnam although these have not yet entered into force. Burma has engaged in investment treaty negotiations with Bangladesh, China, Hong Kong, Iran, Mongolia, Russia, and Serbia.  Texts of the agreements or treaties that have come into force are available on the UNCTAD website at: http://investmentpolicyhub.unctad.org/IIA/CountryBits/144  .

In 2013, the United States and Burma signed a Trade and Investment Framework Agreement.

Burma does not have a bilateral investment treaty or a free trade agreement with the United States.

Through its membership in ASEAN, Burma is also a party to the ASEAN Comprehensive Investment Agreement, as well as to the ASEAN-Australia-New Zealand Free Trade Agreement, the ASEAN-Korea Free Trade Agreement, and the China-ASEAN Free Trade Agreement, all of which contain an investment chapter that provides protection standards to qualifying foreign investors.

Burma has border trade agreements with Bangladesh, India, China, Laos, and Thailand.

Burma has Avoidance of Double Taxation Agreements with the United Kingdom, Singapore, India, Malaysia, Vietnam and South Korea.

Burma does not have a bilateral taxation treaty with the United States.

Transparency of the Regulatory System

Burma lacks regulatory and legal transparency.  In the past, all regulations were subject to change with no advance or written notice, and without opportunity for public comment.  Some ministries now engage in public consultation before finalizing bills for parliamentary consideration or issuing new regulations and this practice is becoming more widespread.  For instance, the government solicited public comments on the 2016 Investment Law, including the drafting of the rules and regulations, which went through three rounds of public consultations.  While there is no legal requirement to have public consultation, 75 percent of parliamentarians are elected representatives of their constituencies and are expected to respond to public engagement.  An active and vocal civil society also results in more public discourse about proposed legislation and regulations than in the past.

The government of Burma publishes information online on government websites and has established websites through which businesses can access trade information.  The Ministry of Commerce publishes a weekly Commerce Journal and a monthly Trade News booklet, providing trade-related information, and in 2016, launched the National Trade Portal (https://myanmartradeportal.gov.mm/en  ).  The government of Burma publishes new regulations and laws in government-run newspapers and “The State Gazette.”  Burma has issued the annual Citizen Budget in the Burmese language since FY 2015-16. The Ministry of Planning and Finance has published quarterly budget execution reports, six-month-overview-of-budget-execution reports and annual budget execution reports on its website since FY 2015-16.  The Burmese government also publishes its debt obligation report on the Treasury Department’s Facebook page. (See https://www.facebook.com/pages/biz/Treasury-Department-of-Myanmar-777018172438019/  ).  For more information on Burma’s regulatory transparency see http://rulemaking.worldbank.org/data/explorecountries/myanmar  .

As part of the government’s commitment to transparency of its regulatory system, Burma became a candidate country in the Extractive Industries Transparency Initiative in 2014, and in January 2016 Burma’s Extractive Industries Transparency Initiative (EITI) National Coordination Office, a global standard for the promotion of revenue transparency, submitted the country’s first EITI report.  The government announced its new EITI authority, the administrative body for the EITI process, in December 2016. In 2018, the government published its second and third reports for FY 2014/15 and FY 2015/16 FY, and in March 2019 it published its fourth sector report. A forestry sector report is expected in 2019. (See https://eiti.org/myanmar  .)

International Regulatory Considerations

The Ministry of Commerce’s National Trade Portal and Repository contains all of Burma’s laws, processes, forms, and points of contact for trade.  This portal increases transparency in Burma and also meets Burma’s requirements under Articles 12 and 13 of the ASEAN Trade in Goods Agreement.  While Burma is not in compliance with WTO notification requirements, the government developed a WTO notification strategy that should increase the number and quality of notifications. The Trade Portal can be found at: http://www.myanmartradeportal.gov.mm/index.php  .

Legal System and Judicial Independence

Burma’s legal system is a unique combination of customary law, English common law and statutes introduced through the pre-independence India Code, and post-independence Burmese legislation.  Where there is no statute regulating a particular matter, courts are to apply Burma’s general law, which is based on English common law as adopted and modified by Burmese case law.  Every state and region has a High Court, with lower courts in each district and township.   High Court judges are appointed by the President while district and township judges are appointed by the Chief Justice through the Office of the Supreme Court of the Union. The Union Attorney General’s Office law officers (prosecutors) operate sub-national offices in each state, region, district, and township.

The Attorney General enforces standards of due process in the criminal justice system and provides the government’s law officers with a mandate to act as an independent check in the criminal justice system.  The Ministry of Home Affairs, led by a minister appointed by the Commander-in-Chief but reporting to the President, retains oversight of the Myanmar Police Force, which files cases directly with the courts. While foreign companies have the right to bring cases to and defend themselves in local courts, there are concerns about the impartiality and lack of independence of the courts.

In order to address the concerns of foreign investors regarding dispute settlement, the government acceded in 2013 to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”).  In 2016, Burma’s parliament enacted the much-anticipated Arbitration Law, putting the New York Convention into effect and replacing arbitration legislation that was more than 70 years old. Since April 2016, foreign companies can pursue arbitration in a third country.  However, the Arbitration Law does not eliminate all risks. There is still a limited track record of enforcing foreign awards in Burma and inherent jurisdictional risks remain in any recourse to the local legal system. The Arbitration Law however brings Burma’s legislation more in line with internationally accepted standards in arbitration.

Laws and Regulations on Foreign Direct Investment

The MIC plays a leading role in the regulation of foreign investment, and approves all investment projects receiving incentives except those in special economic zones, which are handled by the Central Working Body, set up under the existing Special Economic Zone Law.  Joint ventures between foreign investors and SOEs are the responsibility of the relevant line ministries. There is no evidence that the MIC discriminates against foreign investors.

The MIL outlines the procedures the MIC must take when considering foreign investments.  Investment approvals are made on a case-by-case basis. The MIC evaluates foreign investment proposals and stipulates the terms and conditions of investment permits.  To obtain an investment permit, the investor must submit a proposal in the prescribed form to the MIC, together with supporting documentation, including details of intended activities and the financial credibility of the company/individual; an undertaking not to engage in trading activities; and annual reports for the last two financial years, or copies of the company’s head office’s balance sheet and profit-and-loss account for the last two financial years, notarized by the Burmese Embassy in the country where the company is incorporated.  The MIC accepts or rejects an application within 15 days, and decides whether to approve the proposal within 60 days. The Chairman of the MIC gives the final approval.

The MIC does not record foreign investments that do not require MIC approval.  Joint ventures with military-controlled enterprises require MIC approval and abide by the same rules as other investments.  Many smaller investments may go unrecorded. Once licensed, foreign firms may register their companies locally, use their permits to obtain resident visas, lease cars and real estate, and obtain import and export licenses from the Ministry of Commerce.  Foreign companies may register locally without an MIC license, in which case they are not entitled to receive the benefits and incentives provided for in the MIL. Many import and export licenses requirements have been removed since 2014; for more information see https://www.myanmartradeportal.gov.mm/en/guide-to-import-export  . 

More information on the MIC can be found at: http://www.dica.gov.mm/en/apply-mic-permit  .

Competition and Anti-Trust Laws

A Competition Law was passed on February 24, 2015, and went into effect on February 24, 2017.  The objective of the law is to protect public interest from monopolistic acts, limit unfair competition, and prevent abuse of dominant position and economic concentration that weakens competition.

The law classifies four types of behavior as sanctionable violations: acts restricting competition (applicable to all persons); acts leading to monopolies (applicable only to entrepreneurs); unfair competitive acts (applicable only to entrepreneurs); and business combinations such as mergers.  The law also restricts the production of goods, market penetration, technological development, and investment, although the government may exempt restrictive agreements “if they are aimed at reducing production costs and benefit consumers,” such as reshaping the organizational structure and business model of a business so as to improve its efficiency; enhancing technology and technological advances for the improvement of the quality of goods and service; and promoting competitiveness of small- and medium-sized enterprises.

Burma is not party to any bilateral or regional agreement on anti-trust cooperation.

Expropriation and Compensation

The 2016 MIL prohibits nationalization and states that foreign investments approved by the MIC will not be nationalized during the term of their investment.  In addition, the law guarantees that the government of Burma will not terminate an enterprise without reasonable cause, and upon expiration of the contract, the government of Burma guarantees an investor the withdrawal of foreign capital in the foreign currency in which the investment was made.  Finally, the law states that “the Union government guarantees that it shall not cease an investment enterprise operating under a Permit of the Commission before the expiry of the permitted term without any sufficient reason.”

Dispute Settlement

ICSID Convention and New York Convention

Burma is not a party to the 1965 Convention on the Settlement of Investment Disputes between States and Nationals of other States (ICSID).  In 2016, the Burmese parliament enacted the Arbitration Law, putting the 1958 New York Convention into effect (see international arbitration below).

Investor-State Dispute Settlement

To date, Burma has not been party to any investment dispute.  In addition, Burma has not been party to any dispute settlement proceeding at the WTO.

Under the 2016 Arbitration Law, local courts should recognize and enforce foreign arbitral awards against the government unless a valid ground for refusal to enforce exists.  Valid grounds for refusal include: one or more parties’ inability to conclude an arbitration agreement; the invalidity of the arbitration agreement, lack of due process, the award falls outside the scope of the arbitration agreement; the arbitration was not in compliance with the applicable laws; or the award is not in force or has been set aside.

International Commercial Arbitration and Foreign Courts

The 2016 Arbitration Law is based on the UNCITRAL Model Law (Model Law), addressing arbitration in Burma as well as the enforcement of a foreign award in Burma.  For example, the provisions relating to the definition of an arbitration agreement, the procedure of appointing arbitrator(s) and the grounds for setting aside an award are mirrored in the Arbitration Law and the Model Law; however there are some differences between these two laws.  For instance, while parties are free to decide on the substantive law in an international commercial arbitration, the Arbitration Law provides that arbitrations seated in Burma must adopt Burmese law as the substantive law.  This may create uncertainty as to what can be defined as an international commercial dispute, since parties are allowed to adopt any foreign law as substantive law.  According to the Arbitration Law, foreign arbitral awards can be enforced if they are the result of a commercial dispute and were made at a place covered by international conventions connected to Burma and as notified in the State Gazette by the President.  If the Burmese court is satisfied with the award, it has to enforce it as if it were a decree of a Burmese court. While observers note that there are still issues to be resolved, the Arbitration Law brings Burma’s legislation much closer to international arbitration standards and legislation.

Bankruptcy Regulations

There is no bankruptcy law in Burma.  Existing, antiquated insolvency laws – such as the Insolvency Act of 1910 and the Insolvency Act of 1920 – are rarely used.

Investment Incentives

According to the MIL, investors may enjoy corporate tax exemption for seven, five or three years depending on whether investment takes place in underdeveloped, moderately developed or adequately developed regions, although income tax exemptions shall be granted only to investments in promoted sectors such as agriculture, manufacturing, power generation, etc.  The promoted sectors can be found at the DICA website: https://www.dica.gov.mm/en/investment-promotion  .

MIC permit holders are entitled to tax incentives and the right to use land. With a MIC permit, foreign companies can lease regional government approved land for initial periods of up to 50 years, and with the possibility of two consecutive ten-year extensions.

DICA is officially mandated to coordinate investment promotion under the MIC, although different ministries and agencies promote investment in different sectors (e.g. the Ministry of Tourism promotes responsible tourism investment).  DICA is responsible for encouraging and facilitating foreign investment by providing information, fostering coordination and networks between investors, and continually exploring new opportunities in Burma that would benefit both the nation and the business communities.  DICA’s head office is in Yangon and it has 14 branches throughout the country including Naypyitaw, Mandalay, Taunggyi, Mawlamyaing, Pathein, Monyaw, Dawei, Hpa-an, Bago, Magway, Loikaw, Myitkyina, Sittwe and Hakha. DICA uses seminars, workshops, investment fairs and other events to promote investment, as well as its website: http://www.dica.gov.mm/en  .

Foreign Trade Zones/Free Ports/Trade Facilitation

The Myanmar Economic Zones Law also contains specific investment incentives.  Under the law, investors located in an SEZ may apply for income tax exemption for the first five years from the date of commencement of commercial operations, followed by a reduction of the income tax rate by 50 percent for the succeeding five-year period.  Under the law, if profits during the third five-year period are re‐invested within one year, investors can apply for a 50 percent reduction of the income tax rate for profits derived from such re‐investment.  In August 2015, the Ministry of National Planning and Economic Development issued new rules governing the SEZs, including the establishment of a One-Stop Service Department to ease the approval and permitting of investments in SEZs, incorporate companies, issue entry visas, issue the relevant certificates of origin, collect taxes and duties, and approve employment permits and/or permissions for factory construction and other investments.

Performance and Data Localization Requirements

Foreign investors must recruit at least 25 percent of their skilled employees from the local labor force in the first two years of their investment.  The local employment ratio increases to 50 percent for the third and fourth years, and 75 percent for the fifth and sixth years. The investors are also required to submit a report to MIC with details of the practices and training methods that have been adopted to improve the skills of Burmese nationals.

Foreign investors are not required to use domestic content in goods or technology.  Burma is currently developing laws, rules and regulations on information technology (IT).  It does not have in place requirements for foreign IT providers to turn over source code and/or provide access to surveillance.

Real Property

The MIL provides that any foreign investor may enter into long-term leases with private landlords or – in the case of state-owned land – the relevant government departments or government organizations, if the investor has obtained a Permit or Endorsement issued by the MIC.  Upon issuance of a Permit or an Endorsement, a foreign investor may enter into leases with an initial term of up to 50 years (with the possibility to extend for two additional terms of ten years each). Longer periods of land utilization or land leases may be allowed by the MIC to promote the development of difficult-to-access regions with lower development.

In September 2018, Burma amended the Vacant, Fallow, and Virgin Lands Management Law and required occupants of land considered vacant, fallow or virgin to go to the nearest land records office and register within a six-month period.  The six-month deadline was intended to offer clear title to lands for investment and infrastructure construction. However, controversy exists over which lands were designated as vacant, fallow or virgin and whether the notification or registration period was sufficient.

In January 2016, the government published the approved National Land Use Policy.  The policy includes provisions on ensuring the use of effective environmental and social safeguard mechanisms; improving public participation in decision-making processes related to land use planning; improving public access to accurate information related to land use management; and developing independent dispute resolution mechanisms.  The policy is to be updated every five years as necessary and stipulates that a new national land law will be drafted and enacted using this policy.  The policy also establishes the National Land Use Council. Chaired by the Vice President, the council constitutes the highest authority within the government presiding over land issues, and is intended to ensure the policy and new national land law are implemented and used as a guide for the harmonization of all existing laws relating to land in the country.

A continuing area of concern for foreigners involves investment in large-scale land projects.  Property rights for large plots of land for investment commonly are disputed because ownership is not well established, particularly following a half-century of military expropriations.  It is not uncommon for foreign firms to face complaints from local communities about inadequate consultation and compensation regarding land.

Burma’s parliament passed the Condominium Law in 2016.  The law states that up to 40 percent of condominium units of “saleable floor area” can be sold to foreign buyers.  Condominium owners shall also have the shared ownership of both the land and apartment.  In 2017 the Ministry of Construction pasted the Condominium Rules, implementing and clarifying provisions of the Condominium law.  One clarification per the rules is that state-owned land may be registered as condominium land (Rules 20 and 21).

In accordance with the Transfer of Immovable Property Restriction Law of 1987, mortgages of immovable property are prohibited if the mortgage holder is a foreigner, foreign company or foreign bank.

Intellectual Property Rights

Burma improved its intellectual property rights protection in 2019 by enacting three laws on intellectual property: the Trademark Law, the Industrial Design Law, and the Patent Law.  A fourth law on copyrights has been passed by Parliament but has not yet been signed by the President. The laws improve protections for intellectual property owners by offering legal protections and implementing fines or legal actions in case of infringement.

The Trademark Law introduces a “first-to-file” system from the previous “first-to-use” system.  Trademark holders who previously registered their trademark will need to re-register their marks.  The new law also includes protections for “well-known” trademarks. Geographical indications will also be protected through registration.  In anticipation of passage of the trademark bill, Burma established a single national Intellectual Property Office that will monitor compliance with intellectual property laws and be responsible for developing IPR policy rules and regulations.  In addition, the WTO has delayed required implementation of the Trade-Related Aspects of Intellectual Property (TRIPs) Agreement for Least Developed Nations – including Burma – until 2021.

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

Resources for Rights Holders

For Intellectual Property Rights issues in Burma, please contact:

Kitisri Sukhapinda, Regional IP Attache
U.S. Patent and Trademark Office
American Embassy Bangkok, Thailand
Tel: (662) 205-5913
Email: kitisri.sukhapinda@trade.gov

Information on the American Chamber of Commerce (AmCham) Burma Chapter can be found at: http://www.amchammyanmar.com/  

Information on legal service providers available in Burma can be found at: https://mm.usembassy.gov/u-s-citizen-services/attorneys/

Capital Markets and Portfolio Investment

Burma has very small publicly traded equity and debt markets.  Banks have been the primary buyers of government bonds issued by Burma’s Central Bank, which has established a nascent bond market auction system.  The Central Bank issues government treasury bonds with maturities of two, three, and five years.

The Burmese government opened the Yangon Stock Exchange in 2015, and the first company was listed on March 25, 2016.  As of April 2018, five companies are listed on the exchange. Japan Exchange Group and Japan-based Daiwa Securities Group helped launched the stock exchange, owning a combined 49 percent of the stock exchange, with the remaining 51 percent owned by state-owned Myanma Economic Bank.  In 2013, the Securities Exchange Law came into effect, establishing a securities and exchange commission and helping clarify licensing for securities businesses (such as dealing, brokerage, underwriting, investment advisory and company representation). The Companies Law allows foreign investment of up to 35 percent in domestic companies and allows foreign investment in the stock market.

Money and Banking System

In October 2014, the government awarded limited banking licenses to nine foreign banks – all from the Asia-Pacific region – allowing each bank to set up one branch and provide loans to foreign companies.  All nine banks began operations by the end of October 2015. In mid-December 2015, the Burmese government announced a second round of foreign bank licensing, designed to increase the presence of banks headquartered in a wider variety of countries, and in early March 2016 the Central Bank granted new licenses to banks headquartered in India, South Korea, Taiwan, and Vietnam.  In November 2018, the Central Bank published new guidelines that permit locally licensed foreign banks to offer “any financing services and other banking services” to local corporations. Previously, the thirteen foreign banks in Burma were only allowed to offer export financing and related banking services to foreign corporations. No domestic banks currently have a correspondent bank account with a U.S.-based bank.

The Financial Institution Law was enacted in January 2016 and in July 2017 the Central Bank issued four regulations on capital adequacy ratio, asset classification and provisioning, large exposures and liquidity ratio requirements, aiming to align Burma’s banking standards with international Basel II standards.  Since then Burmese banks have pushed back against the timeline of implementation of these regulations, arguing that special circumstances in Burma’s banking industry warrant special treatment.

Insufficient access to formal sources of credit is one of the most frequently identified obstacles to doing business in Burma, according to numerous business surveys.

Foreign Exchange and Remittances

Foreign Exchange

The Burmese kyat has a free-floating exchange rate.  Starting from February 5, 2019, the Central Bank calculates a market-based reference exchange rate from the volume-weighted average exchange rate of interbank and bank-customer deals during the day.

Remittance Policies

According to the MIL, foreign investors have the right of remittance of foreign currency.  Foreign investors are allowed to remit foreign currency overseas through banks authorized to conduct foreign banking business at the prevailing exchange rate.  Banks began introducing remittance services during 2012 and the volume of such formal transfer is low but growing, according to local bank managers.

Nevertheless, in practice, the transfer of money in or out of Burma has been difficult, as many international banks have been slow to update their internal prohibitions on conducting business in Burma, given the long history of U.S. and European sanctions that had isolated the country.  The majority of foreign currency transactions are conducted through banks in Singapore.

The difficulties presented by the formal banking system are reflected in the continued use of informal sources of finance for loans and remittances by both the public and businesses.  Although these informal sources tend to have higher interest charges, they offer an alternative to the limited loan services offered by banks, which generally provide only short-term credit for trade on a limited basis and require collateral.  Remittances are also often made through a well-developed informal financial network (commonly known as the “Hundi system”).

Burma is a “country of primary money laundering concern” according to the 2017 International Narcotics Control Strategy Report.  According to the report, Burma is not a regional or offshore financial center, and its historically isolated banking sector is just beginning to reconnect to the international financial system.  However, the report notes that Burma’s prolific drug production and lack of financial transparency make it attractive for money laundering. Burma enacted anti-money-laundering laws in 2014 and issued relevant rules in 2015.  Burma’s Financial Intelligence Unit (FIU) is the agency responsible for undertaking investigation and legal action. The FIU is now a part of Burma’s police force under the Ministry of Home Affairs.

The FIU is building its capacity to become an independent unit in line with the recommendations of the Financial Action Task Force.  In July 2016, Burma was delisted from the Financial Action Task Force list. While Burma is still designated as a jurisdiction of “primary money laundering concern” under Section 311 of the USA PATRIOT Act, the U.S. Department of the Treasury issued an administrative exception to this finding in October 2016, similar to waivers issued for certain banks since 2012, thereby allowing corresponding banking relationships with the United States.  For more information on the Department of Treasury exception, please see: https://www.fincen.gov/news/news-releases/fincen-issues-exception-prohibition-imposed-section-311-action-against-burma  

Burma does not engage in currency manipulation tactics.

Sovereign Wealth Funds

Burma does not have a sovereign wealth fund.

Revenue from SOEs contributes about 42 percent of the total revenue of Burma, while SOEs costs amount to 36 percent of expenditures.  In July 2016, the NLD announced 12 economic policies including to reform SOEs and privatize SOEs to enable the private sector to create employment opportunities.  The disaggregate figures of each SOE under the respective ministries are made public in the Burmese language.

Starting in 2012, the government of Burma began taking steps to reduce SOEs’ reliance on government support and to make them more competitive through joint ventures.  This included reducing budget subsidies for financing the raw material requirements of SOEs. The government of Burma has moved in the direction of public private partnerships, corporatization, and privatization.  Burma is not party to the Government Procurement Agreement (GPA) within the framework of the WTO.

SOEs can secure loans at four percent interest rates from state-owned banks, with approval from the cabinet.  Private enterprises, unlike SOEs, are forced to provide land or other real estate as collateral in order to be considered for a loan.  However, SOEs are now subject to stricter financial discipline, as the government has sharply cut direct subsidies to the SOEs while opening markets for competition with the private sector.  Furthermore, the government is removing the easy credit from state banks. SOEs historically had an advantage over private entities in terms of land access since, according to the Constitution, the State owns all the land.

Privatization Program

According to the government of Burma, the private sector accounts for a majority of the country’s GDP, with the State participating in telecommunication services, social and public administration, energy, forestry, construction, and electricity.  The activities of the two military-owned conglomerates of MEHL and MEC are not included in the budget data; while a common sense understanding of “state-owned” would likely include them, these companies are not considered SOEs under Burmese law.

The NLD government has prioritized the privatization of SOEs, largely because many of these entities cost the government money.  In May 2016, the NLD appointed the new members of the Privatization Commission headed by a Vice-President. The Minister of Planning and Finance is the secretary of the commission.  Privatization can take the form of system-sharing, public-private partnership, private-private partnership, franchise, joint-venture, and sales of assets in line with international standards.

Burma’s awareness of corporate social responsibility (CSR) is growing.  However, many local companies (and some international firms) still equate CSR with in-kind donations or charitable contributions.  In recent years the Union of Myanmar Chambers of Commerce and Industry (UMFCCI), Burma’s largest private sector association, has been promoting the United Nations Global Compact and CSR principles in general.

Burma has implemented the OECD Guidelines for Multinational Enterprises.

The elected government has continued to prioritize fighting corruption, and resources have been allocated to facilitate the growth of the Anti-Corruption Commission (ACC) into an institution vested with the authority to lead that fight.  In 2018, the government amended its anti-corruption law to give the ACC greater authority to scrutinize government procurements, and the ACC has used that authority to initiate criminal cases against a few high-ranking and some mid-ranking officials for financial impropriety and abuse of office.  The ACC opened a branch office in Yangon in April 2019, and intends to open a branch in Mandalay in May 2019, as it continues to increase its investigative capacity.

The country, however, still lacks a framework that would effectively support a sustained and systematic fight against corruption.  While there have been efforts to reduce some opportunities for higher-level corruption, the lack of transparency regarding military budgets and expenditures remains a substantial impediment to reforms.  In addition, a large swath of the economy is engaged in illegal activities beyond the control of the government. These include the production, transportation and distribution of narcotics, and the smuggling of jade, gemstones, timber, wildlife, and wildlife products.  There are efforts to promote accountability for government officials, but lack of resources for key government functions, including law enforcement, remains a driver for low-level corruption. In its 2018 Corruption Perceptions Index, Transparency International rated Burma 132 out of 180 countries, a slight decline in ranking from the previous year.  Investors might face corruption when seeking investment permits, during the taxation process, when applying for import and export licenses, and when negotiating land and real estate leases.

The Government of Burma, however, recognizes the importance of fighting corruption as a quintessential part of efforts to improve democratic governance.

Resources to Report Corruption

UN Anticorruption Convention, OECD Convention on Combatting Bribery

Burma signed the UN Anticorruption Convention in 2005, and ratified it December 20, 2012.

Burma is not party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.

Resources to Report Corruption

Anti Corruption Commission
Cluster (1), Sports’ Village, Wunna Theikdi Ward
Nay Pyi Taw
Phone : + 95 67 810 334 7
Email : myanmaracc2014@gmail.com
http://www.accm.gov.mm/acc/index.php?route=common/home  

The government is sensitive to the threat of terrorism and is engaged with international partners on this issue.  There is no evidence to suggest that international terrorist organizations have operational capacity in Burma or are actively targeting Western interests.  Although both Al-Qaeda in the Indian Subcontinent (AQIS) and ISIS in the Philippines (ISIS-P) have called for attacks in Burma as a result of the Rakhine crisis involving the Rohingya people, these calls are so far largely seen as aspirational in nature.  Additionally, crime in Burma is low compared to other countries within the region. While violence or demonstrations rarely target U.S. or other Western interests in Burma, several ethnic armed groups are engaged in ongoing civil conflict with the government of Burma, which occurs almost exclusively in the ethnic states.  On October 15, 2015, the government of Burma and eight ethnic armed groups (EAGs) signed a Nationwide Ceasefire Agreement (NCA).  Two additional armed ethnic groups joined the NCA in February 2018. However, several ethnic armed groups, including the most powerful ones, have not signed the NCA and some signatories continue to fight with the military and other EAGs.

While most of the major cities are quite safe, several areas of the country, particularly the ethnic states, routinely see conflict between the government and EAGs, as well as inter-ethnic violence between EAGs.  One of the ways these conflicts manifest is in the use of landmines and attacks involving improvised explosive devices. These incidents generally target government security forces, but there have been collateral casualties among the civilian population.  The continued use of landmines by the Burmese military and EAGs in the north, northeast, and southeast continue to routinely result in civilian casualties. Civilians have also been killed as a result of clashes between the military and the EAGs, as well as inter-ethnic conflicts.

On August 25, 2017, a Rohingya insurgent group attacked about 30 security outposts in northern Rakhine State.  The government characterized this event as a terrorist attack, and Burmese security forces launched clearance operations throughout northern Rakhine State.  Hundreds of Rohingya villages were burned, and there were widespread, credible allegations of abuses by security forces. An estimated 730,000 Rohingya fled to Bangladesh, and tens of thousands of non-Rohingya are displaced inside Rakhine State.  In November 2017, the U.S. Secretary of State determined that the situation constituted ethnic cleansing. Violence has not spread to other areas of Burma as a result of the crisis in Rakhine State although, as noted above, certain states in Burma continue to experience ethnic or religious violence.  Burma has a minority Muslim population, and violence between Buddhists and Muslims did occur in other parts of the country in 2013 and 2014 following intercommunal violence in Rakhine State in 2012. Since late 2018, there has been a marked increase in violence as a result of the ongoing conflict between the Burmese security forces and fighters from the Arakan Army (AA), an ethnic Rakhine, largely Buddhist, EAG.  A number of townships in northern Rakhine and southern Chin are currently off limits for U.S. government travel due to the violence from this conflict.

In October 2011, the Government of Burma passed the Labor Organization Law, which legalized the formation of trade unions and allows workers to strike.  As of April 2019 roughly 2,900 enterprise level unions had been formed in a variety of industries ranging from garments and textiles to agriculture to heavy industry.  The passage of the Labor Organization Law has engendered a nascent labor movement in Burma, and there is a low, yet increasing, level of awareness of labor issues among workers, employers, and even government officials.

Burma’s labor costs are low, even when compared to most of its Southeast Asian neighbors.  Skilled labor and managerial staff are in high demand and short supply, leading to high turnover.  The military’s nationalization of schools in 1964, its discouragement of English language classes in favor of Burmese, the lack of investment in education by the previous governments of Burma, and the repeated closing of Burmese universities from 1988 to the mid-2000’s have taken a toll on the country’s work force.  Most people in the 15-39-year-old demographic group lack technical skills and English proficiency. In order to address this gap, the government of Burma’s Employment and Skill Development Law entered into effect in December 2013 and is being revised. The law provides for compulsory contributions on the part of employers to a “skill development fund,” although this provision has not been implemented.  According to the government, 70 percent of Burma’s population is employed in agriculture.

According to the World Bank’s 2014 “Ending Poverty and Boosting Prosperity in a Time of Transition” report on Burma, 73 percent of the total labor force in Burma was employed in the informal sector in 2010, or 57 percent excluding agricultural workers.  Casual laborers represented another 18 percent, mainly from the rural areas. Unpaid family workers represent another 15 percent. According to the government’s labor force survey, the informal sector accounts for 75.6 percent.

A new national minimum wage went into effect in May 2018, raising the minimum daily wage from 3,600 kyat (USD 2.40) to 4,800 kyat (USD 3.20).  The minimum wage covers a standard eight-hour work day across all sectors and industries, and applies to all workers except for those in businesses with less than 15 employees.  While the previous minimum wage has been widely implemented, compensation for overtime work is still unclear.

The Burmese government, in an effort to align Burma’s labor regulations with international standards and increase trade and investment in the country, set out to abolish all antiquated labor laws and to introduce new labor laws and regulations.  The government passed a number of labor reforms and amended a range of labor-related laws, such as the 2016 Shops and Establishment Law and the Payment of Wages Law. Parliament passed a new Occupational Safety and Health Law in March 2019 and a Settlement of Labor Disputes Law in May 2019.

In November 2016, the U.S. government reinstated Burma’s Generalized System of Preferences (GSP) trade benefit in recognition of the progress that the government had made in protecting workers’ rights.  The U.S. government reauthorized the GSP program globally in March 2018 through December 31, 2020.

In September 2016, a National Tripartite Dialogue Forum (NTDF) was created to provide a venue for the Ministry of Labor, Immigration and Population to engage with employers and workers, especially in drafting legislation.  The NTDF meets regularly and is currently reviewing a draft of the Labor Organization Law as well as the Employment and Skill Development Law.

In November 2014, the governments of the United States, Burma, Japan, Denmark, and the ILO formally launched the Initiative to Promote Fundamental Labor Rights and Practices in Myanmar (Initiative) and held the third Stakeholder’s Forum in January 2018.  The overarching goal of the Initiative is to promote a culture of compliance with fundamental labor rights. The Initiative is intended to cultivate relationships between business, labor, and civil society stakeholders and the government of Burma.

In May 2013, the Overseas Private Investment Corporation (OPIC) signed an Investment Incentive Agreement with Burma.   OPIC provides political risk insurance, debt financing, and private equity capital to support U.S. investors and their investments. OPIC can provide political risk insurance for currency inconvertibility, expropriation, and political violence for U.S. investments including equity, loans and loan guarantees, technical assistance, leases, and consigned inventory or equipment.  Most recently, in April 2019, OPIC signed an agreement providing USD 8 million in support for a microfinance enterprise in Burma.

In 2014, the Export-Import Bank of the United States (EXIM Bank) announced that it would open for sovereign-backed business in Burma to help finance short-term and medium-term U.S. export sales.  In July 2017 EXIM Bank also authorized long-term transactions in the public sector.

In December 2013, Burma became a member of the World Bank’s Multilateral Investment Guarantee Agency (MIGA), which means that direct foreign investment into the country is eligible for the agency’s investment guarantees.

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

* https://www.dica.gov.mm/sites/dica.gov.mm/files/document-files/yearly_country.pdf  . In 2018, Burma changed its fiscal reporting period from an April to March reporting period to an October to September period.  This amount only represents U.S. FDI between April and September 2018
**Accurate statistical data is limited in Burma, although this capacity is also being developed.

Table 3: Sources and Destination of FDI

* According to http://data.imf.org/CDIS  

Table 4: Sources of Portfolio Investment

Data not available.

Amy E. Roth, Economic Officer
U.S. Embassy/110 University Avenue
Kamayut Township 11041, Rangoon, Burma
Telephone:  95 (0)1 536 509
Email Address: BurmaBusiness@state.gov

As mentioned above, Cambodia has an open and liberal foreign investment regime and actively courts FDI. The primary law governing investment is the 1994 Law on Investment. The government permits 100 percent foreign ownership of companies in most sectors. In a few sectors, such as cigarette manufacturing, movie production, rice milling, gemstone mining and processing, publishing and printing, radio and television, wood and stone carving production, and silk weaving, foreign investment is subject to local equity participation or prior authorization from authorities. There is little or no official discrimination against foreign investors either at the time of initial investment or after investment. Some foreign businesses, however, have reported that they are at disadvantaged vis-a-vis Cambodian or other foreign rivals that engage in acts of corruption or tax evasion or take advantage of Cambodia’s poor regulatory enforcement.

The Council for the Development of Cambodia’s (CDC) is the lead investment promotion agency in Cambodia and is the principal government agency responsible for providing incentives to stimulate investment. Investors are required to submit an investment proposal to either the CDC or the Provincial-Municipal Investment Sub-committee to obtain a Qualified Investment Project (QIP) status depending on capital level and location of the investment question. This agency also facilitates public-private consultation mechanism that is considered to improve investment climate in Cambodia.  The forum acts as a platform for the private sector to raise concerns for the government to solve. More information about investment and investment incentives in Cambodia may be found on the website at: www.cambodiainvestment.gov.kh  .

To facilitate foreign investment, Cambodia has created special economic zones (SEZs). These zones provide companies with ready access to land, infrastructure, and services to facilitate the set-up and operation of businesses. Services provided include utilities, tax services, customs facilitation, and other administrative services designed to support import-export processes. Projects within the SEZs are also offered with incentives such as tax holidays; zero rate value-added tax; and import duty exemption for raw materials, machinery and equipment. The primary authority responsible for SEZs is the Cambodia Special Economic Zone Board (CSEZB).  The largest of these SEZs is located in Sihanoukville and hosts primarily Chinese companies.

Limits on Foreign Control and Right to Private Ownership and Establishment

There are few limitations on foreign control and ownership in Cambodia. Foreign investors may own 100 percent of their investment projects except in the sectors mentioned above. According to Cambodia’s 2003 Amended Law on Investment and related sub-decrees, there are no limitations based on shareholder nationality or discrimination against foreign investors, except in relation to investments in real property or state-owned enterprises. Both the Law on Investment and the Amended Law on Investment state that the majority of interest in land, however, must be held by one or more Cambodian citizens. Pursuant to the Law on Public Enterprise, the Cambodian government must directly or indirectly hold more than 51 percent of the capital or the right to vote in state-owned enterprises. In addition, the Cambodian Bar has periodically taken actions to restrict or impede the work of foreign lawyers or foreign law firms.

Other Investment Policy Reviews

In compliance with World Trade Organization (WTO) requirements, Cambodia conducted its first review of trade policies and practices in November 2011. The second review was conducted on November 21-23, 2017. Cambodia’s full trade policy review report can be found on the WTO website: https://www.wto.org/english/tratop_e/tpr_e/tp464_e.htm  . Cambodia also conducted an Organization for Economic Co-operation and Development investment policy review in 2017.

In response to the WTO trade policy review recommendations, Cambodia completed the following reforms:

• Elimination of the Certificate of Origin requirement for exports to countries where a certificate is not required;
• Implementation of online business registration;
• Adoption of a competitive hiring process for Ministry of Commerce staff;
• Implementation of risk evaluation measures for the Cambodia Import-Export Inspection and Fraud Repression Directorate General (CamControl) and creation of a CamControl risk management unit;
• Enactment of the Law on Public Procurement;
• Enactment of three judicial system laws: the Law on Court Structures, the Law on the Duties and Discipline of Judges and Prosecutors, and the Law on the Organization and Functioning of the Supreme Council of Magistracy;
• Creation of the Commercial Court as a specialized Court of First Instance;
• The creation of a credit bureau;
• Establishment of a Telecom Regulator of Cambodia (TRC); in 2012, the Ministry of Posts and Telecommunication transferred its regulatory role to the TRC;
• Enactment of the Law on Telecommunications in December 2015; and
• Enactment of the Law on Animal Health and Production in February 2016.

Areas of ongoing or planned reforms include a law on Special Economic Zones, amending the Standards Law, and enacting laws on competition, cyber security, food safety, and e-commerce.

Business Facilitation

All businesses are required to register with the Ministry of Commerce (MoC) and the General Department of Taxation (GDT). In January 2016, the Ministry of Commerce launched an online business registration portal that allows all existing and new businesses to register their companies at www.businessregistration.moc.gov.kh  . The link also provides sources of information for various types of business registration documents. Depending on the types of business activities, new businesses are also required to register with other relevant ministries. In addition to registering with the MoC and the GDT, for example, travel agencies must register with the Ministry of Tourism, and private universities must register with the Ministry of Education, Youth and Sport. The GDT also established their E-tax registration that can be found at owp.tax.gov.kh:50005/epaymentowpweb  . The World Bank’s 2019 Ease of Doing Business Report ranks Cambodia 138 of 190 countries globally for the ease of starting a business. The report notes that it includes nine separate procedures and can take up to three months to complete all business, tax, and employment registration processes.

Cambodia’s 1994 Law on Investment created an investment licensing system to regulate the approval process for foreign direct investment and provide incentives to potential investors. The website of the Council for the Development of Cambodia (CDC) provides a list of laws, rules, procedures and regulations, which could be useful for foreign investors. CDC’s website is found here: www.cambodiainvestment.gov.kh  .

Outward Investment

There are no restrictions on domestic citizens investing abroad. A number of local companies have already invested in neighboring countries, particularly Laos and Myanmar, in various sectors including banking, IT services, legal and consulting services, and the entertainment industry.

BITs or FTAs

Cambodia has signed bilateral investment treaties (BITs) with 27 countries: Austria, Bangladesh, Belarus, China, Croatia, Cuba, Czech Republic, Democratic People’s Republic of Korea, France, Germany, Hungary, India, Indonesia (later terminated), Japan, Kuwait, Laos, Malaysia, the Netherlands, Pakistan, the Philippines, the Republic of Korea, Russia, Singapore, Switzerland, Thailand, Turkey, the United Arab Emirates, and Vietnam.  Cambodia does not have a BIT with the United States.

As a member of the Association of Southeast Asian Nations (ASEAN), Cambodia has signed regional investment agreements including the ASEAN Comprehensive Investment Agreement, the ASEAN-Hong Kong Investment Agreement, the ASEAN-India Investment Agreement, the ASEAN-China Investment Agreement, and the ASEAN-Korea Investment Agreement.

Cambodia is also a party to several regional free trade agreements that include provisions to liberalize trade as well as investment.  They include the ASEAN-Australia-New Zealand Free Trade Agreement, the ASEAN-Japan EPA, and ASEAN Framework Agreements with Korea, India, China, and the EU, that include investment provisions.  ASEAN is also a party to the Regional Comprehensive Economic Partnership Agreement (RCEP) that is currently under negotiation.

In July 2006, Cambodia signed a Trade and Investment Framework Agreement (TIFA) with the United States to promote greater trade and investment in both countries and provide a forum to address bilateral trade and investment issues. In January 2019, the fifth TIFA meeting took place in Siem Reap, Cambodia.

Bilateral Taxation Treaties

Cambodia does not have a bilateral taxation treaty with the United States, but has entered into six double taxation agreements with Brunei, China, Indonesia, Singapore, Thailand, and Vietnam. Details of those agreements are available on Cambodia’s General Department of Taxation (GDT) website: www.tax.gov.kh/en/ir.php  .

In the past, Cambodia’s GDT has lacked the capacity to collect taxes on a large scale. As a result, many companies evaded paying salary taxes, value-added taxes, and real estate taxes, despite being required to do so under Cambodian laws. The GDT has taken steps, however, to increase tax revenue both by building capacity within the organization and through better implementation of existing tax laws.

Application of Cambodia’s tax laws, while improving, remains inconsistent. In some cases, foreign investors face greater scrutiny to pay taxes than their domestic counterparts.  In others, the GDT has been criticized for employing audits and assessing large tax obligations for political purposes.

Transparency of the Regulatory System

Numerous issues related to the general lack of transparency in the regulatory regime arise from the lack of legislation and limited capacity of key institutions, further exacerbated by weakness of the court system.  Investors often complain that the decisions of Cambodian regulatory agencies are inconsistent, arbitrary, or motivated by corruption. For example, in May 2016 in what was perceived as a populist move, the government set caps on retail fuel prices, with little consultation with petroleum companies.  Following this development, in April 2017, the National Bank of Cambodia introduced the interest rate cap on loans provided by the microfinance industry with no consultation with the relevant stakeholders at all. Some investors have expressed concern over draft cyber legislation that has not been subject to stakeholder consultations.   

Cambodian ministries and regulatory agencies are not legally obligated to publish the text of proposed regulations before their enactment.  Draft regulations are only selectively available for public consultation with relevant non-governmental organizations (NGOs), private sector or other parties before their enactment.  Approved or passed laws are available on websites of some line Ministries but are not always up to date. The Council of Jurists, the government body reviewing law and regulation, publishes a list of updated laws and regulations on its website at www.coj.gov.kh  .

Under Prakas (sub-decree) 643 of the Ministry of Economy and Finance, enterprises must submit their annual financial statements to be audited by an independent auditor registered with the Kampuchea Institute of Certified Public Accountants and Auditors (KICPAA) provided those enterprises meet two of the following three criteria: (1) annual turnover above KHR 3 billion (approximately USD 750,000); (2) total assets above KHR 2 billion (approximately USD 500,000); and (3) more than 100 employees. QIPs registered with the CDC are also obligated to submit their annual financial statement to be audited by an independent auditor registered with the KICPAA.

International Regulatory Considerations

As a member of the ASEAN since 1999, Cambodia is required to comply with certain rules and regulations with regard to free trade agreements with the 10 ASEAN member states. These include tariff-free importation of information and communication technology (ICT) equipment, harmonizing custom coding, harmonizing the medical device market, as well as compliance with tax regulations on multi-activity businesses, among others.

As a member of the WTO, Cambodia has been drafting new laws and amending existing laws and regulations to comply with WTO rules. Relevant laws and regulations are notified to the WTO legal committee after their adoption. A list of Cambodian legal updates in compliance with the WTO is described in the above section regarding Investment Policy Reviews.

Legal System and Judicial Independence

The Cambodian legal system is primarily based on French civil law. Under the 1993 Constitution, the King is the head of state and the elected Prime Minister is the head of government. Legislative power is vested in a bicameral parliament, while the judiciary makes up the third branch of government. Contractual enforcement is governed by Decree Number 38 D Referring to Contract and Other Liabilities. More information on this decree can be found at www.cambodiainvestment.gov.kh/decree-38-referring-to-contract-and-other-liabilities_881028-2.html  .

Although the Cambodian Constitution calls for an independent judiciary, most investors are generally reluctant to use the Cambodian judicial system because the courts are perceived as unreliable and susceptible to external political influence or bribery. Both local and foreign businesses report problems with inconsistent judicial rulings, corruption, and difficulty enforcing judgments. For these reasons, most commercial disputes are currently resolved through negotiations facilitated by the Ministry of Commerce, the Council for the Development of Cambodia, the Cambodian Chamber of Commerce, or other institutions.

Cambodia adopted a Commercial Arbitration Law in 2006. In 2010, the government provided for the establishment of the National Commercial Arbitration Center (NCAC), the country’s first alternative dispute resolution mechanism, to enable companies to resolve commercial disputes more quickly and inexpensively than through the court system. The NCAC was officially launched in March 2013, but has limited capacity.

Laws and Regulations on Foreign Direct Investment

Cambodia’s 1994 Law on Investment created an investment licensing system to regulate the approval process for foreign direct investment and provide incentives to potential investors. In March 2003, the government simplified licensing and increased transparency and predictability by enacting the Law on the Amendment to the Law on Investment (Amended Law on Investment). Sub-decree No. 111 on the Implementation of the Law on the Amendment to the Law on Investment, issued in September 2005, lays out detailed procedures for registering a QIP, which is entitled to certain taxation incentives, with the CDC and provincial/municipal investment subcommittees.

Information about investment and investment incentives in Cambodia may be found on the CDC’s website: www.cambodiainvestment.gov.kh  .

Competition and Anti-Trust Laws

The government has announced plans to draft a competition law but the law has yet to be enacted. A competition department was established under the Directorate General of CamControl in 2016. The department aims to work on drafting laws and regulations on competition, study, and coordinate with various relevant agencies on local and international competition. The draft law is now reportedly being considered in a technical working group at the Council of Ministers and Council of Jurists.

Expropriation and Compensation

Land rights are a contentious issue in Cambodia, complicated by the fact that most property holders do not have legal documentation of their ownership because of official policies and social upheaval during Khmer Rouge era in the 1970s. Numerous cases have been reported of influential individuals or groups acquiring land titles or concessions through political and/or financial connections and then using force to displace communities to make way for commercial enterprises.

In late 2009, the National Assembly approved the Law on Expropriation, which sets broad guidelines on land-taking procedures for public interest purposes. It defines public interest activities to include construction, rehabilitation, preservation, or expansion of infrastructure projects, and development of buildings for national defense and civil security. These provisions include construction of border crossing posts, facilities for research and exploitation of natural resources, and oil pipeline and gas networks. Property can also be expropriated for natural disasters and emergencies, as determined by the government. Legal procedures regarding compensation and appeals are expected to be established in a forthcoming sub-decree, which is under internal discussion within the technical team of the Ministry of Economy and Finance.

The government has shown willingness to use tax issues for political purposes.  For instance, in 2017, a U.S.-owned independent newspaper had its bank account frozen purportedly for failure to pay taxes. It is believed that, while the company may have had some tax liability, the action taken by Cambodia’s General Department of Taxation, notably an inflated tax assessment, was politically motivated and intended to halt operations. These actions took place at the same time the government took steps to reduce the role of press and independent media in the country as part of a wider anti-democratic crackdown.

Dispute Settlement

ICSID Convention and New York Convention

Cambodia has been a member of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention – also known as the Washington Convention) since 2005. Cambodia is also a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the New York Convention) since 1960.

Investor-State Dispute Settlement

International arbitration is available for Cambodian commercial disputes. In March 2014, the Supreme Court of Cambodia upheld the decision of the Cambodian Court of Appeal, which had ruled in favor of the recognition and enforcement of an arbitral award issued by the Korean Commercial Arbitration Board of Seoul, South Korea. Cambodia became a member of the World Bank’s International Center for Settlement of Investment Disputes in January 2005.

In 2009, the International Center approved a U.S. investor’s request for arbitration in a case against the Cambodian government, and in 2013, the tribunal rendered an award in favor of Cambodia.

International Commercial Arbitration and Foreign Courts

Commercial disputes can also be resolved through the National Commercial Arbitration Center (NCAC), Cambodia’s first alternative dispute resolution mechanism, which was officially launched in March 2013.  Arbitral awards issued by foreign arbitrations are admissible in the Cambodian court system. An example can be drawn from its recognition and enforcement of arbitral award issued by the Korean Commercial Arbitration Board in 2014. 

Bankruptcy Regulations

Cambodia’s 2007 Law on Insolvency was intended to provide collective, orderly, and fair satisfaction of creditor claims from debtor properties and, where appropriate, the rehabilitation of the debtor’s business. The Law on Insolvency applies to the assets of all business people and legal entities in Cambodia. The World Bank’s 2018 Doing Business Report ranks Cambodia 79 out of 190 in terms of the “ease of resolving insolvency.”

In 2012, Credit Bureau Cambodia (CBC) was established in an effort to create a more transparent credit market in the country. CBC’s main role is to provide credit scores to banks and financial institutions and to improve access to credit information.

Investment Incentives

All investments must be registered with the Ministry of Commerce. The Cambodian Law on Investment and the Amended Law on Investment offers varying types of investment incentives for projects that meet specified criteria. Investors seeking an incentive must submit an application to the CDC. Investors who wish to apply are required to pay an application fee of KHR 7 million (approximately USD 1,750), which covers securing necessary approvals, authorizations, licenses, or registrations from all relevant ministries and entities, including stamp duties. Under a 2008 sub-decree, the CDC is required to seek approval from the Council of Ministers for investment proposals that involve capital of USD 50 million or more, politically sensitive issues, the exploration and exploitation of mineral or natural resources, or infrastructure concessions. The CDC is also required to seek approval from the Council of Ministers for investment proposals that will have a negative impact on the environment or the government’s long-term strategy.

Since 2011, tax incentives have been provided for rice farming, paddy rice purchase, and the export of milled rice. Meanwhile QIPs are entitled to receive different incentives such as corporate tax holiday; special depreciation allowance; and import taxes exemption on production equipment, construction materials, and production inputs used to produce exports. Investment projects located in designated special promotion zones or export-processing zones are also entitled to the same incentives. Industry-specific investment incentives, such as a three-year profit tax exemption, may be available in the agriculture and agro-industry sectors. More information about the criteria and investment areas eligible for incentives can be found at the following link: www.cambodiainvestment.gov.kh/investment-scheme/investment-incentives.html  .

Investment activities excluded from incentives are detailed in the September 2005 Sub-Decree on the Implementation of the Amendment to the Law on Investment. These include the following sectors: retail, wholesale, and duty-free stores; entertainment establishments (including restaurants, bars, nightclubs, massage parlors, and casinos); tourism service providers; currency and financial services; press and media-related activities; professional services; and production and processing of tobacco and wood products. Incentives also may not be applied to investments in the production of certain products if the investment is less than USD 500,000. This includes food and beverages; textiles, garments, and footwear; and plastic, rubber, and paper products. Investors are not required to place a deposit guaranteeing their investment except in cases involving a concession contract or real estate development project.

Foreign Trade Zones/Free Ports/Trade Facilitation

To facilitate the country’s development, the Cambodian government has shown great interest in increasing exports via geographically defined special economic zones (SEZs). In December 2005, the government adopted the Sub-Decree on Special Economic Zones to speed up the creation of the zones by detailing the procedures, conditions, and incentives for investors. The Government is also drafting the law on Special Economic Zones, which is now undergoing technical review within the CDC. There are currently 13 special SEZs, which are located in Phnom Penh, Koh Kong, Kandal, Kampot, Sihanoukville, and near the borders of Thailand and Vietnam. The main investment sectors in these zones include garments, shoes, bicycles, food processing, auto parts, motorcycle assembly, and electrical equipment manufacturing. Twelve more SEZs are either planned or now under construction.

Performance and Data Localization Requirements

The Law on Investment permits investors to hire foreign nationals for employment as managers, technicians, or skilled workers if the qualifications and/or expertise are not available in Cambodia. According to the Cambodian Labor Law, the number of foreign employees should not exceed ten percent of the total number of Cambodian employees. In practice, companies can request an increase in this ratio from the Ministry of Labor.

Under Cambodian law, most foreign investments and foreign investors are subject to the following taxes: corporate profits tax (20 percent), tax on individual salaries (0 to 20 percent), withholding taxes (4 to 15 percent), value-added taxes (0 to ten percent), and import duties (0 to 35 percent).

Cambodia does not have any forced localization policy that obligates foreign investors to use domestic contents in goods or technology. Cambodia also does not currently require foreign Information Technology providers to turn over source code. The General Department of Information and Communications Technology (ICT) in the Ministry of Post and Telecommunications oversees ICT-related policy in Cambodia.  As mentioned above, as of early 2019, both cyber and e-commerce legislation were still in draft form. These laws, when finalized, could change data localization requirements.

Real Property

Mortgages exist in Cambodia, and Cambodian banks often require certificates of property ownership as collateral before approving loans. The mortgages recording system, which is handled by private banks, is generally considered reliable.

Cambodia’s 2001 Land Law provides a framework for real property security and a system for recording titles and ownership. Land titles issued prior to the end of the Khmer Rouge regime (1975-79) are not recognized due to the severe dislocations that occurred during that time period. The government is making efforts to accelerate the issuance of land titles, but in practice, the titling system is reported to be cumbersome, expensive, and subject to corruption. The majority of property owners lack documentation proving ownership. Even where title records exist, recognition of legal titles to land has not been uniform, and there are reports of court cases in which judges have sought additional proof of ownership.

Foreigners are constitutionally forbidden to own land in Cambodia; however, the 2001 Land Law allows long and short-term leases to foreigners. Cambodia also allows foreign ownership in multi-story buildings, such as condominiums, from the second floor up. 

Cambodia was ranked 124 out of 190 economies for ease of registering property in the 2019 World Bank Doing Business Report.

Intellectual Property Rights

Infringement of IPR is prevalent in Cambodia. Counterfeit and pirated goods are readily available in local markets and stores, and the enforcement  is weak. IP-infringing goods include counterfeit apparel, footwear, cigarettes, alcohol, pharmaceuticals, consumer goods, and pirated media such as software, music, and books. Although Cambodia is not a major center for the production and export of counterfeit or pirated materials, local businesses report that the problem is growing because of the lack of enforcement. To date, however, Cambodia has not been listed by the Office of the U.S. Trade Representative (USTR) in its annual Special 301 Report, which identifies trading partners that do not adequately protect and enforce IPR.

Cambodia has enacted several laws pursuant to its WTO commitments on intellectual property. Its key IP laws include the Law on Marks, Trade Names and Acts of Unfair Competition (2002), the Law on Copyrights and Related Rights (2003), the Law on Patents, Utility Models and Industrial Designs (2003), the Law on Management of Seed and Plant Breeder’s Rights (2008), the Law on Geographical Indications (2014), and the Law on Compulsory Licensing for Public Health (2018).Cambodia joined WIPO in 1995 and has acceded to a number of international IPR protocols, including the Paris Convention (1998), the Madrid Protocol (2015), the WIPO Patent Cooperation Treaty (2016), The Hague Agreement Concerning the International Registration of Industrial Design (2017), and the Lisbon Agreement on Appellations of Origin and Geographical Indications (2018). Despite this, many of the commitments included in these treaties remain unfulfilled due to Cambodia’s lack of institutional capacity.

To combat the trade in counterfeit goods, the Cambodian Counter Counterfeit Committee (CCCC) was established in 2014 under the Ministry of Interior to investigate claims, seize illegal goods, and prosecute counterfeiters. The Economic Police, Customs, the Cambodia Import-Export Inspection and Fraud Repression Directorate General, and the Ministry of Commerce also have IPR enforcement responsibilities; however, the division of responsibility among each agency is not clearly defined. This causes confusion to rights owners and muddles the overall IPR environment. Although in recent years seizure of counterfeit goods has increased, seizure usually does not occur unless a formal complaint has been made.

For additional information about treaty obligations and points of contact at local IP offices, please see the World Intellectual Property Organization’s country profiles at www.wipo.int/directory/en/details.jsp?country_code=KH  

Capital Markets and Portfolio Investment

In a move designed to address the need for capital markets in Cambodia, the Cambodia Securities Exchange (CSX) was founded in 2011 and started trading in 2012. Though the CSX is one of the world’s smallest securities markets, it has taken steps to increase the number of listed companies, including attracting SMEs. It currently has five listed companies, including the Phnom Penh Water Supply Authority, the Sihanoukville Autonomous Port, and Taiwanese garment manufacturer Grand Twins International.

In September 2017, the National Bank of Cambodia (NBC) adopted a Prakas on Conditions for Banking and Financial Institutions to be listed on the Cambodia Securities Exchange. The Prakas sets additional requirements for banks and financial institutions that intend to issue securities to the public. This includes prior approval from the NBC and minimum equity of KHR 60 billion (approximately USD 15 million).

Cambodia’s bond market is at the beginning stages of development. The regulatory framework for corporate bonds was bolstered in 2017 through the publication of the Prakas on Public Offering of Debt Securities, the Prakas on Accreditation of Bondholders Representative, and the Prakas on Accreditation of Credit Rating Agency.  The country’s first corporate bond was issued in 2018, and a second is expected in 2019. There is currently no sovereign bond market, but the government has stated its intention of making government securities available to investors by 2022.

Money and Banking System

The National Bank of Cambodia (NBC) regulates the operations of banking systems in Cambodia. Foreign banks and branches are freely allowed to register and operate in the country. There are 39 commercial banks, 15 specialized banks (set up to finance specific turn-key projects such as real estate development), 54 licensed microfinance institutions, and seven licensed microfinance deposit taking institutions in Cambodia. NBC has also granted licenses to 11 financial leasing companies and one credit bureau company to improve transparency and credit risk management and encourage more lending to small-and medium-sized enterprise customers.

In November 2018, Moody’s Investor Services affirmed Cambodia’s issuer rating at B2 with a stable outlook. The overall B2 rating was based on Cambodia’s robust GDP growth prospects, macroeconomic stability, and efforts to strengthen government revenue. However, Moody’s cited several potential threats such as a weak institutional framework, low incomes, and the high dollarization of loans and deposits that make Cambodia vulnerable to negative shocks.

Cambodia’s banking sector continues to experience strong growth. The banking sector’s assets, including those of micro-finance institutions (MFIs), rose 20.2 percent year-over-year in 2017 to 135.1 trillion riel (USD 33.8 billion), while capital grew 23.6 percent to 25.7 trillion riel (USD 6.4 billion). Loans and deposits grew 18.3 percent and 24.5 percent respectively, which resulted in a decrease of the loan-to-deposit ration from 114 percent to 110 percent.  The ratio of non-performing loans remained steady at 2.4 percent in 2017.

The government does not use the regulation of capital markets to restrict foreign investment. Banks have been free to set their own interest rates since 1995, and increased competition between local institutions has led to a gradual lowering of interest rates from year to year. However, in April 2017, at the direction of Prime Minister Hun Sen, the NBC capped interest rates on loans offered by MFIs at 18 percent per annum. The move was designed to protect borrowers, many of whom are poor and uneducated, from excessive interest rates.

In March 2016, the NBC doubled the minimum capital reserve requirement for banks to USD 75 million for commercial banks and USD 15 million for specialized banks. Based on the new regulations, deposit-taking microfinance institutions now have a USD 30 million reserve requirement, while traditional microfinance institutions have a USD 1.5 million reserve requirement.

The Cambodian banking system is gradually shifting from a cash-based economy to an electronic payment culture as more financial institutions launch internet or mobile banking and expand their ATM networks. Evidence of the maturation of the financial sector includes the greater number of financial products and services offered, as well as the numbers of people of use them. In 2017, the National Bank of Cambodia measured financial inclusion at 55 percent. In addition, it said the number of depositors increased by 15 percent to 3.5 million, 42 percent of which are female, and the number of borrowers rose 1 percent to 755,000.

In February 2019, the Financial Action Task Force (FATF), an intergovernmental organization whose purpose is to develop policies to combat money laundering, cited Cambodia for being “deficient”  with regard to its anti-money laundering and countering financing of terrorism (AML/CFT) controls and policies. The government has committed to working with FATF to address these deficiencies through a jointly-developed action plan.  Should Cambodia not address the deficiencies, it could risk landing on the FATF “black list,” something that could negatively impact the banking sector and the country’s ability to access the international capital markets.

Foreign Exchange and Remittances

Foreign Exchange

Though Cambodia has its own currency, the riel (denoted as KHR), U.S. dollars are widely in circulation in Cambodia and remain the primary currency for most large transactions. There are no restrictions on the conversion of capital for investors.

Cambodia’s 1997 Law on Foreign Exchange states that there shall be no restrictions on foreign exchange operations through authorized banks. Authorized banks are required, however, to report the amount of any transfer equaling or exceeding USD 100,000 to the NBC on a regular basis.

Loans and borrowings, including trade credits, are freely contracted between residents and nonresidents, provided that loan disbursements and repayments are made through an authorized intermediary. There are no restrictions on the establishment of foreign currency bank accounts in Cambodia for residents.

The exchange rate between the riel and U.S. dollar is governed by a managed float and has been stable at around one USD to KHR 4,000. Daily fluctuations of the exchange rate are low, typically under three percent. The Embassy is not aware of any cases in which investors have encountered obstacles in converting local currency to foreign currency or in sending capital out of the country. In the past several years, the Cambodian government has taken steps to increase general usage of the riel but, as noted above, the country’s economy remains largely dollarized.

Remittance Policies

Article 11 of the Law on the Amendment to the Law on Investment of 2003 states that QIPs can freely remit abroad foreign currencies purchased through authorized banks for the discharge of financial obligations incurred in connection with investments. These financial obligations include:

• Payment for imports and repayment of principal and interest on international loans;
• Payment of royalties and management fees;
• Remittance of profits; and
• Repatriation of invested capital in case of dissolution.

Sovereign Wealth Funds

Cambodia does not have a Sovereign Wealth Fund.

Cambodia currently has 15 state-owned enterprises (SOEs). Cambodian SOEs include Electricite du Cambodge, Sihanoukville Autonomous Port, Telecom Cambodia, Cambodia Shipping Agency, Cambodia Postal Services, Rural Development Bank, Green Trade Company, Printing House, Siem Reap Water Supply Authority, Construction and Public Work Lab, Phnom Penh Water Supply Authority, Phnom Penh Autonomous Port, Kampcheary Insurance, Cambodia Life Insurance, Cambodia Securities Exchange.

In accordance with the Law on General Stature of Public Enterprises, there are two types of commercial SOEs in Cambodia. One type is that the state company’s capital is 100 percent owned by the Government, and another type is a joint-venture in which a majority of capital is owned by the state and a minority by private investors.

Each SOE is under the supervision of a line ministry or government institution and is overseen by a board of directors drawn from among senior government officials. Private enterprises are generally allowed to compete with state-owned enterprises under equal terms and conditions. These entities are also subject to the same taxes and value-added tax rebate policies as private-sector enterprises. SOEs are covered under the law on public procurement, which was promulgated in January 2012, and their financial reports are audited by the appropriate line ministry, the Ministry of Economy and Finance, and the National Audit Authority.

Privatization Program

There are no ongoing privatization programs, nor has the government announced any plans to privatize existing SOEs.

The government does not have policies to promote responsible business conduct (RBC) or corporate social responsibility (CSR). However, there is strong awareness of RBC among larger and multinational companies in the country. U.S. companies, for example, have implemented a wide range of CSR activities to promote skills training, the environment, general health and well-being, and financial education. These programs have been warmly received by both the general public and the government.

A number of economic land concessions in Cambodia have led to high profile land rights cases. The Cambodian government has recognized the problem, but in general, has not effectively and fairly resolved land rights claims. The Cambodian government does not have a national contact point for Organization for Economic Cooperation and Development (OECD) multinational enterprises guidelines and does not participate in the Extractive Industries Transparency Initiative.

Corruption remains a significant issue in Cambodia for investors.  An increase in foreign investment from investors willing to engage in corrupt practices, combined with sometimes opaque official and unofficial investment processes, has served to facilitate an overall rise in corruption, which is reported to already be at high levels.  In its Global Competitiveness Report 2018, the World Economic Forum ranked Cambodia 134th out of 140 countries for incidence of corruption.  Transparency International’s 2018 Corruption Perception index ranked Cambodia 161 of 180 countries globally, the lowest ranking of all ten ASEAN member states.

Those engaged in business have identified corruption, particularly within the judiciary, customs services, and tax authorities, as one of the greatest deterrents to investment in Cambodia. Foreign investors from countries that overlook or encourage bribery have significant advantages over foreign investors from countries that criminalize such activity.

Cambodia adopted an Anti-Corruption Law in 2010 to combat corruption by criminalizing bribery, abuse of office, extortion, facilitation payments, and accepting bribes in the form of donations or promises. Under the law, all civil servants must also declare their financial assets to the government every two years. Cambodia’s Anti-Corruption Unit (ACU), established the same year, has investigative powers and a mandate to provide education and training to government institutions and the public on anti-corruption compliance. Since its formation, the ACU has launched a few high-profile prosecutions against public officials, including members of the police and judiciary. The ACU has also tackled the issue of ghost workers in the government, in which non-existent employees collect salaries. 

The ACU, in collaboration with the private sector, has also established guidelines encouraging companies to create internal codes of conduct prohibiting bribery and corrupt practices. Companies can sign a Memorandum of Understanding (MOU) with the ACU pledging to operate corruption-free and to cooperate on anti-corruption efforts. Since the program started in 2015, more than 80 private companies have signed a MOU with the ACU. In 2018, the ACU completed a first draft of a code of conduct for public officials, which has not yet been finalized.

Despite the passage of the Anti-Corruption Law and the creation of the ACU, enforcement remains weak. Local and foreign businesses report that they must often make informal payments to expedite business transactions. Since 2013, Cambodia has published the official fees for public services, but the practice of paying additional fees remains common. Despite a pay raise in 2016, the minimum salary for administrative civil servants remain below the level required to maintain a suitable quality of life in Cambodia, so public employees remain susceptible to bribes. Furthermore, the process for awarding government contracts is not transparent and is susceptible to corruption.

UN Anticorruption Convention, OECD Convention on Combatting Bribery

Cambodia ratified the UN Convention against Corruption in 2007 and endorsed the Action Plan of the Asian Development Bank / OECD Anti-Corruption Initiative for Asia and the Pacific in 2003. Cambodia is not a party to the OECD Convention on Combating Bribery.

Resources to Report Corruption

Om Yentieng
President, Anti-Corruption Unit
No. 54, Preah Norodom Blvd, Sangkat Phsar Thmey 3, Khan Daun Penh, Phnom Penh
Telephone: +855-23-223-954
Email: info@acu.gov.kh

Preap Kol
Executive Director, Transparency International Cambodia
#13 Street 554, Phnom Penh
Telephone: +855-23-214430
Email: info@ticambodia.org

Foreign companies have been the targets of violent protests in the past, such as the 2003 anti-Thai riots against the Embassy of Thailand and Thai-owned commercial establishments. More recently, there were reports that Vietnamese-owned establishments were looted during a January 2014 labor protest. Authorities have also used force, including truncheons, electric cattle prods, fire hoses, and even gunfire, to disperse protestors. Incidents of violence directed at businesses, however, are rare. The Embassy is unaware of any incidents of political violence directed at U.S. or other non-regional interests.

Nevertheless, political tensions remain. After relatively competitive communal elections in June 2017, where Cambodia’s opposition party won nearly 50 percent of available seats, the government took steps to strengthen its grip on power and eliminated meaningful political activity.  In September 2017, the head of the country’s leading opposition party was arrested and charged with treason, and in November 2017, the same opposition party was banned. In July 2018, Prime Minister Hun Sen won a landslide victory, and his ruling party swept all 125 parliamentary seats, in a national election that was criticized by the United States as being neither free nor fair. The government has also taken steps to limit free speech and stifle independent media, including forcing independent news outlets and radio stations to cease operations. While there are few overt signs the country is growing less secure today, the possibility for insecurity exists going forward, particularly if a large percentage of the population remains disenfranchised.

Cambodia’s economy is primarily focused on four sectors: agriculture, garment production, tourism, and construction. The agricultural sector employees some 60 to 65 percent of the labor force. There are over one million people working in the garment and footwear sector, the majority of whom are women; around 620,000 are employed in the tourism sector; and a further 200,000 people in construction according to Government of Cambodia statistics. Around 1.5 to 2 million Cambodians work abroad – the official statistic is 1.2 million, but most experts estimate the figure far higher. Around 55 percent of the population is under the age of 25. The United Nations has estimated that around 300,000 new job seekers enter the labor market each year.

Given the severe disruption to the Cambodian education system and loss of skilled Cambodians during the 1975-1979 Khmer Rouge period, workers with higher education or specialized skills are few and in high demand. The Cambodia Socio-Economic Survey conducted in 2014 (the latest report available) found that about 36 percent of the labor force had completed a primary education. Only seven percent of the labor force had completed secondary education. The 2015-2016 Global Competitiveness Report of the World Economic Forum (WEF) identified an inadequately educated workforce as one of the most serious problems to doing business in Cambodia. Cambodia ranked 48 out of 137 on labor market efficiency of the WEF 2017-2018. Many middle management positions in the formal garment sector are filled by foreign nationals.

Cambodia’s 2016 Trade Union Law (TUL) erects barriers to the right of association and the rights to organize and bargain freely. The ILO has stated publicly that the law could hinder Cambodia’s obligations to international labor conventions 87 and 98, and has suggested substantial revisions to the law both during the 2017 meeting of the Committee on Application of Standards, and through a Direct Mission sent by the ILO to investigate the law’s implementation. The government has not made any public commitment to amend the law.

Unresolved labor disputes are mediated first on the shop-room floor, after which they are brought to the MOLVT for conciliation. If conciliation fails, then the cases may be brought to the Arbitration Council (AC), an independent state body that interprets labor regulations in collective disputes, such as when multiple employees are dismissed. Since the TUL went into force, AC cases have decreased from over 30 per month to fewer than five, although that number began to increase again in 2019 due to regulatory changes.

The labor code prohibits forced or compulsory labor; establishes 15 as the minimum allowable age for paid work; and sets 18 as the minimum age for anyone engaged in work that is hazardous, unhealthy, or unsafe. The statute also guarantees an eight-hour workday and 48-hour workweek and provides for time-and-a-half pay for overtime or work on an employee’s day off. Enforcement of all labor laws, however, is lax. The labor inspectorate focuses primarily on export-oriented factories in the garment and footwear sector. 

In 2018, Cambodia amended its Labor Law to eliminate severance packages in favor of a “seniority” bonus paid to workers every six months. The amendment was intended to solve the problem of foreign factory owners absconding, leaving behind unpaid salaries and severances. The law and its implementing regulation did not, however, provide clear guidance on how to compensate workers for seniority they had already accrued prior to amendment’s passage.  This remains a point of dispute between workers and company owners, and the precise legal requirements for the timing of seniority payments on back wages remains unclear. 

Cambodia maintains a minimum wage for workers in the garment and footwear sector. The minimum wage for garment workers was set at USD 182 per month in 2019 by the Labor Advisory Committee (LAC), a tripartite group comprised of representatives from the government, labor, and manufacturers. Since 2010, the wage rate for workers in the sector has increased from USD 61 to USD 182. In 2018, the government passed a new Minimum Wage Law, which will for the first time allow minimum wages outside of the garment and footwear sector.  The law has not yet been put into effect.

Cambodia has an agreement with the Overseas Private Investment Corporation (OPIC) to encourage investment. A number of companies in Cambodia have received approval for OPIC financing, including loans to financial institutions for the purposes of microfinance. The BUILD Act, signed into law in October 2018, will consolidate OPIC with USAID’s Development Credit Authority into a new agency: the United States International Development Finance Corporation (DFC). The DFC will maintain many aspects of OPIC’s programs, but with additional tools and flexibility, it is intended to substantially increase the U.S. government’s support for private-sector led development in the world’s least developed countries. The DFC is expected to be operationalized by the end of 2019.

The Export-Import Bank of the United States (Ex-Im Bank) provides financing and insurance for purchases of U.S. exports by private-sector buyers in Cambodia on repayment terms of up to seven years. In 2018, Ex-Im made its first loan to a Cambodian business, facilitating the sale of a grain silo.  Ex-Im support is typically limited to transactions with a commercial bank functioning as an obligor or guarantor. Ex-Im will, however, consider transactions without a bank on a case-by-case basis. Cambodia is also a member of the Multilateral Investment Guarantee Agency of the World Bank, which offers political-risk insurance to foreign investors.

There has been a surge in FDI inflows to Cambodia in recent years. Though FDI goes primarily to infrastructure, including commercial and residential real estate projects, it has also recently favored investments in manufacturing and agro-processing. Cambodia reports its total stock of FDI reached USD 7.1 billion in 2018, up from USD 6.8 billion in 2017.

Investment into Cambodia is dominated by China, and the level of investment from China has surged especially in the last five years. Cambodia reports that its FDI from China reached USD 1.6 billion (year-end 2018), while fixed asset investment from China reached USD 15.3 billion. Taiwan and Hong Kong are also major sources of investment in Cambodia, accounting for USD 614 million and USD 376 million of FDI, respectively, through 2018.

Cambodian investments into other countries are still quite small. Through 2017, the IMF reports a total of USD 367 million of Cambodian investments, with most going to China and Singapore.

NOTE: Discrepancies exists between IMF counterpart country data and the investment figures reported by Cambodia’s official source, the Council for the Development of Cambodia (CDC). In some cases, counterpart country data reports much larger FDI stocks in Cambodia than reported by CDC. In other cases, the data from the Cambodia government is the only source available. Many of Cambodia’s key FDI partners (notably China, Taiwan and Hong Kong) do not report FDI figures to the IMF.

There are also discrepancies in the reported total stock of U.S. FDI in Cambodia. For FDI through 2017, the U.S. government (BEA) reports USD 151 million, the IMF reports USD 110 million, and Cambodia reports only USD 100 million.

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

* Source for Host Country Data: The Council for the Development of Cambodia (CDC) provides official government data on investment in Cambodia, but not all data is published online. See:  www.cambodiainvestment.gov.kh/why-invest-in-cambodia/investment-environment/investment-trend.html 

Table 3: Sources and Destination of FDI

Data retrieved from IMF’s Coordinated Direct Investment Survey database (mirror data, as reported by counterpart economies) presents a much different picture of FDI into Cambodia as compared to that provided by the Cambodian government. For example, Cambodia reports USD 6.8 billion total FDI through year-end 2017 (USD 7.1 through year-end 2018), while the IMF reports only USD 2.8 billion.

Table 4: Sources of Portfolio Investment

N/A – IMF CPIS Data for Cambodia is not available.

David Ryan Sequeira
Economic Officer
U.S. Embassy Phnom Penh
No. 1, Street 96, Sangkat Wat Phnom, Phnom Penh, Cambodia
Phone: (855) 23-728-401
Email: CamInvestment@state.gov

Policies Towards Foreign Direct Investment

China continues to be one of the largest recipients of global FDI due to a relatively high economic growth rate, growing middle class, and an expanding consumer base that demands diverse, high quality products.  FDI has historically played an essential role in China’s economic development. In recent years, due to stagnant FDI growth and gaps in China’s domestic technology and labor capabilities, Chinese government officials have prioritized promoting relatively friendly FDI policies promising market access expansion and national treatment for foreign enterprises through general improvements to the business environment. They also have made efforts to strengthen China’s legal and regulatory framework to enhance broader market-based competition.  Despite these efforts, the on-the-ground reality for foreign investors in China is that the operating environment still remains closed to many foreign investments across a wide range of industries.

In 2018, China issued the nationwide negative list that opened up a few new sectors to foreign investment and promised future improvements to the investment climate, such as leveling the playing field and providing equal treatment to foreign enterprises.  However, despite these reforms, FDI to China has remained relatively stagnant in the past few years. According to MOFCOM, total FDI flows to China slightly increased from about USD126 billion in 2017 to just over USD135 billion in 2018, signaling that modest market openings have been insufficient to generate significant foreign investor interest in the market.  Rather, foreign investors have continued to perceive that the playing field is tilted towards domestic companies. Foreign investors have continued to express frustration that China, despite continued promises of providing national treatment for foreign investors, has continued to selectively apply administrative approvals and licenses and broadly employ industrial policies to protect domestic firms through subsidies, preferential financing, and selective legal and regulatory enforcement.  They also have continued to express frustration over China’s weak protection and enforcement of IPR; corruption; discriminatory and non-transparent anti-monopoly enforcement that forces foreign companies to license technology at below-market prices; excessive cybersecurity and personal data-related requirements; increased emphasis on requirements to include CCP cells in foreign enterprises; and an unreliable legal system lacking in both transparency and rule of law.

China seeks to support inbound FDI through the MOFCOM “Invest in China” website (www.fdi.gov.cn  ).  MOFCOM publishes on this site laws and regulations, economic statistics, investment projects, news articles, and other relevant information about investing in China.  In addition, each province has a provincial-level investment promotion agency that operates under the guidance of local-level commerce departments.

• American Chamber of Commerce China 2019 American Business in China White Paper: https://www.amchamchina.org/policy-advocacy/white-paper/  
• American Chamber of Commerce China 2019 Business Climate Survey: https://www.amchamchina.org/policy-advocacy/business-climate-survey/  
• U.S.-China Business Council’s 2018 China Business Environment Member Survey: https://www.uschina.org/reports/uscbc-2018-member-survey  
• EU Chamber’s 2018 Business Confidence Survey: http://www.europeanchamber.com.cn/en/publications-business-confidence-survey  .
• MOFCOM’s Investment Promotion Website: http://www.fdi.gov.cn/1800000121_10000161_8.html  

Limits on Foreign Control and Right to Private Ownership and Establishment

In June 2018, the Chinese government issued the nationwide negative list for foreign investment that replaced the Foreign Investment Catalogue.  The negative list identifies industries and economic sectors restricted or prohibited to foreign investment. Unlike the previous catalogue that used a “positive list” approach for foreign investment, the negative list removed “encouraged” investment categories and restructured the document to group restrictions and prohibitions by industry and economic sector.  Foreign investors wanting to invest in industries not on the negative list are no longer required to obtain pre-approval from MOFCOM and only need to register their investment.

The 2018 foreign investment negative list made minor modifications to some industries, reducing the number of restrictions and prohibitions from 63 to 48 sectors.  Changes included: some openings in automobile manufacturing and financial services; removal of restrictions on seed production (except for wheat and corn) and wholesale merchandizing of rice, wheat, and corn; removal of Chinese control requirements for power grids, building rail trunk lines, and operating passenger rail services; removal of joint venture requirements for rare earth processing and international shipping; removal of control requirements for international shipping agencies and surveying firms; and removal of the prohibition on internet cafés.  While market openings are always welcomed by U.S. businesses, many foreign investors remain underwhelmed and disappointed by Chinese government’s lack of ambition and refusal to provide more significant liberalization. Foreign investors continue to point out these openings should have happened years ago and now have occurred mainly in industries that domestic Chinese companies already dominate.

The Chinese language version of the 2018 Nationwide Negative List: http://www.ndrc.gov.cn/zcfb/zcfbl/201806/W020180628640822720353.pdf .

Ownership Restrictions

The foreign investment negative list restricts investments in certain industries by requiring foreign companies enter into joint ventures with a Chinese partner, imposing control requirements to ensure control is maintained by a Chinese national, and applying specific equity caps.  Below are just a few examples of these investment restrictions:

Examples of foreign investments that require an equity joint venture or cooperative joint venture for foreign investment include:

• Exploration and development of oil and natural gas;
• Printing publications;
• Foreign invested automobile companies are limited to two or fewer JVs for the same type of vehicle;
• Market research;
• Preschool, general high school, and higher education institutes (which are also required to be led by a Chinese partner);
• General Aviation;
• Companies for forestry, agriculture, and fisheries;
• Establishment of medical institutions; and
• Commercial and passenger vehicle manufacturing.

Examples of foreign investments requiring Chinese control include:

• Selective breeding and seed production for new varieties of wheat and corn;
• Construction and operation of nuclear power plants;
• The construction and operation of the city gas, heat, and water supply and drainage pipe networks in cities with a population of more than 500,000;
• Water transport companies (domestic);
• Domestic shipping agencies;
• General aviation companies;
• The construction and operation of civilian airports;
• The establishment and operation of cinemas;
• Basic telecommunication services;
• Radio and television listenership and viewership market research; and
• Performance agencies.

Examples of foreign investment equity caps include:

• 50 percent in automobile manufacturing (except special and new energy vehicles);
• 50 percent in value-added telecom services (excepting e-commerce);
• 51 percent in life insurance firms;
• 51 percent in securities companies;
• 51 percent futures companies;
• 51 percent in security investment fund management companies; and
• 50 percent in manufacturing of commercial and passenger vehicles.

Investment restrictions that require Chinese control or force a U.S. company to form a joint venture partnership with a Chinese counterpart are often used as a pretext to compel foreign investors to transfer technology against the threat of forfeiting the opportunity to participate in China’s market.  Foreign companies have reported these dictates and decisions often are not made in writing but rather behind closed doors and are thus difficult to attribute as official Chinese government policy. Establishing a foreign investment requires passing through an extensive and non-transparent approval process to gain licensing and other necessary approvals, which gives broad discretion to Chinese authorities to impose deal-specific conditions beyond written legal requirements in a blatant effort to support industrial policy goals that bolster the technological capabilities of local competitors.  Foreign investors are also often deterred from publicly raising instances of technology coercion for fear of retaliation by the Chinese government.

Other Investment Policy Reviews

Organization for Economic Cooperation and Development (OECD)

China is not a member of the OECD.  The OECD Council decided to establish a country program of dialogue and co-operation with China in October 1995.  The most recent OECD Investment Policy Review for China was completed in 2008 and a new review is currently underway.

OECD 2008 report: http://www.oecd.org/daf/inv/investment-policy/oecdinvestmentpolicyreviews-china2008encouragingresponsiblebusinessconduct.htm  .

In 2013, the OECD published a working paper entitled “China Investment Policy: An Update,” which provided updates on China’s investment policy since the publication of the 2008 Investment Policy Review.

• OECD 2013 Update: http://www.oecd.org/china/WP-2013_1.pdf 
• OECD Regulatory Restrictiveness Survey: http://www.oecd.org/investment/fdiindex.htm  

World Trade Organization (WTO)

China became a member of the WTO in 2001.  WTO membership boosted China’s economic growth and advanced its legal and governmental reforms.  The sixth and most recent WTO Investment Trade Review for China was completed in 2018. The report highlighted that China continues to be one of the largest destinations for FDI with inflows mainly in manufacturing, real-estate, leasing and business services, and wholesale and retail trade.  The report noted changes to China’s foreign investment regime that now relies on the nationwide negative list and also noted that pilot FTZs use a less restrictive negative list as a testbed for reform and opening.

• WTO Investment Trade Review for China: https://www.wto.org/english/tratop_e/tpr_e/tp475_e.htm  
• International Monetary Fund (IMF) information on China: http://www.imf.org/external/country/Chn/  
• FDI Statistics from MOFCOM: http://www.fdi.gov.cn/1800000121_10000177_8.html  

Business Facilitation

China made progress in the World Bank’s Ease of Doing Business Survey by moving from 78th in 2017 up to 46th place in 2018 out of 190 economies.  This was accomplished through regulatory reforms that helped streamline some business processes including improvements related to cross-border trading, setting up electricity, electronic tax payments, and land registration.  This ranking, while highlighting business registration improvements that benefit both domestic and foreign companies, does not account for major challenges U.S. businesses face in China like IPR protection and forced technology transfer.

• World Bank Ease of Doing Business: http://www.doingbusiness.org/rankings  
• World Bank Investing Across Borders: http://iab.worldbank.org/data/exploreeconomies/china  

The Government Enterprise Registration (GER), an initiative of the United Nations Conference on Trade and Development (UNCTAD), gave China a low score of 1.5 out of 10 on its website for registering and obtaining a business license.  In previous years, the State Administration for Industry and Commerce (SAIC) was responsible for business license approval. In March 2018, the Chinese government announced a major restructuring of government agencies and created the State Administration for Market Regulation (SAMR) that is now responsible for business registration processes.  According to GER, SAMR’s Chinese website lacks even basic information, such as what registrations are required and how they are to be conducted.

• UNCTAD GER: https://ger.co/  
• SAMR Business Registration Information: http://www.saic.gov.cn/  

The State Council, which is China’s chief administrative authority, in recent years has reduced red tape by eliminating hundreds of administrative licenses and delegating administrative approval power across a range of sectors.  The number of investment projects subject to central government approval has reportedly dropped significantly. The State Council also has set up a website in English, which is more user-friendly than SAMR’s website, to help foreign investors looking to do business in China.

The State Council Information on Doing Business in China: http://english.gov.cn/services/doingbusiness  

The Department of Foreign Investment Administration within MOFCOM is responsible for foreign investment promotion in China, including promotion activities, coordinating with investment promotion agencies at the provincial and municipal levels, engaging with international economic organizations and business associations, and conducting research related to FDI into China.  MOFCOM also maintains the “Invest in China” website.

MOFCOM “Invest in China” Information: http://www.fdi.gov.cn/1800000121_10000041_8.html  

Despite recent efforts by the Chinese government to streamline business registration procedures, foreign companies still complain about the challenges they face when setting up a business.  In addition, U.S. companies complain they are treated differently from domestic companies when setting up an investment, which is an added market access barrier for U.S. companies. Numerous companies offer consulting, legal, and accounting services for establishing wholly foreign-owned enterprises, partnership enterprises, joint ventures, and representative offices in China.  The differences among these corporate entities are significant, and investors should review their options carefully with an experienced advisor before choosing a particular Chinese corporate entity or investment vehicle.

Outward Investment

Since 2001, China has initiated a “going-out” investment policy that has evolved over the past two decades.  At first, the Chinese government mainly encouraged SOEs to go abroad and acquire primarily energy investments to facilitate greater market access for Chinese exports in certain foreign markets.  As Chinese investors gained experience, and as China’s economy grew and diversified, China’s investments also have diversified with both state and private enterprise investments in all industries and economic sectors.  While China’s outbound investment levels in 2018 were significantly less than the record-setting investments levels in 2016, China was still one of the largest global outbound investors in the world. According to MOFCOM outbound investment data, 2018 total outbound direct investment (ODI) increased less than one percent compared to 2017 figures.  There was a significant drop in Chinese outbound investment to the United States and other North American countries that traditionally have accounted for a significant portion of China’s ODI. In some European countries, especially the United Kingdom, ODI generally increased. In One Belt, One Road (OBOR) countries, there has been a general increase in investment activity; however, OBOR investment deals were generally relatively small dollar amounts and constituted only a small percentage of overall Chinese ODI.

In August 2017, in reaction to concerns about capital outflows and exchange rate volatility, the Chinese government issued guidance to curb what it deemed to be “irrational” outbound investments and created “encouraged,” “restricted,” and “prohibited” outbound investment categories to guide Chinese investors.  The guidelines restricted Chinese outbound investment in sectors like property, hotels, cinemas, entertainment, sports teams, and “financial investments that create funds that are not tied to specific investment projects.” The guidance encouraged outbound investment in sectors that supported Chinese industrial policy, such as Strategic Emerging Industries (SEI) and MIC 2025, by acquiring advanced manufacturing and high-technology assets.  MIC 2025’s main aim is to transform China into an innovation-based economy that can better compete against – and eventually outperform – advanced economies in 10 key high-tech sectors, including: new energy vehicles, next-generation IT, biotechnology, new materials, aerospace, oceans engineering and ships, railway, robotics, power equipment, and agriculture machinery. Chinese firms in MIC 2025 industries often receive preferential treatment in the form of preferred financing, subsidies, and access to an opaque network of investors to promote and provide incentives for outbound investment in key sectors.  The outbound investment guidance also encourages investments that promote China’s OBOR development strategy, which seeks to create connectivity and cooperation agreements between China and countries along the Chinese-designated “Silk Road Economic Belt and the 21st-century Maritime Silk Road” through an expansion of infrastructure investment, construction materials, real estate, power grids, etc.

China has 109 Bilateral Investment Treaties (BITs) in force and multiple Free Trade Agreements (FTAs) with investment chapters.  Generally speaking, these agreements cover topics like expropriation, most-favored-nation treatment, repatriation of investment proceeds, and arbitration mechanisms.  Relative to U.S.-negotiated BITs and FTA investment chapters, Chinese agreements are generally considered to be weaker and offer less protections to foreign investors.

A list of China’s signed BITs:

• http://tfs.mofcom.gov.cn/article/Nocategory/201111/20111107819474.shtml  
• http://investmentpolicyhub.unctad.org/IIA/IiasByCountry#iiaInnerMenu  .

The United States and China last held BIT negotiations in January 2017.  China has been in active bilateral investment agreement negotiations with the EU since 2013.  The two sides have exchanged market access offers and have expressed an intent to conclude talks by 2020.  China also has negotiated 17 FTAs with trade and investment partners, is currently negotiating 14 FTAs and FTA-upgrades, and is considering eight further potential FTA and FTA-upgrade negotiations.  China’s existing FTA partners are Maldives, Georgia, ASEAN, Republic of Korea, Pakistan, Australia, Singapore, Pakistan, New Zealand, Chile, Peru, Costa Rica, Iceland, Switzerland, Hong Kong, Macao, and Taiwan.  China concluded its FTAs with Maldives and Georgia in 2017.

China’s signed FTAs:

• http://fta.mofcom.gov.cn/index.shtml  
• http://fta.mofcom.gov.cn/english/index.shtml  

The United States and China concluded a bilateral taxation treaty in 1984.

Transparency of the Regulatory System

In assessing China’s regulatory governance effectiveness, the World Bank Global Indicators of Regulatory Governance gave China a composite score of 1.75 out 5 points.  The World Bank attributed China’s relatively low score to the futility of foreign companies appealing administrative authorities’ decisions, given partial courts; not having laws and regulations in one accessible place that is updated regularly; the lack of impact assessments conducted prior to issuing new laws; and other concerns about public comments and transparency.

World Bank Rule Making Information: http://rulemaking.worldbank.org/en/data/explorecountries/china  

In various business climate surveys, U.S. businesses operating in China consistently cite arbitrary legal enforcement and the lack of regulatory transparency among the top challenges of doing business in China.  These challenges stem from a complex legal and regulatory system that provides government regulators and authorities broad discretion to selectively enforce regulations, rules, and other guidelines in an inconsistent and impartial manner, often to the detriment of foreign investor interests.  Moreover, regulators are often allowed to hinder fair competition by allowing authorities to ignore Chinese legal transgressors while at the same time strictly enforcing regulations selectively against foreign companies.

Another compounding problem is that Chinese government agencies rely on rules and enforcement guidelines that often are not published or even part of the formal legal and regulatory system.  “Normative Documents” (opinions, circulars, notices, etc.), or quasi-legal measures used to address situations where there is no explicit law or administrative regulation, are often not made available for public comment or even published, yet are binding in practice upon parties active in the Chinese market.  As a result, foreign investors are often confronted with a regulatory system rife with inconsistencies that hinders business confidence and generates confusion for U.S. businesses operating in China.

One of China’s WTO accession commitments was to establish an official journal dedicated to the publication of laws, regulations, and other measures pertaining to or affecting trade in goods, services, Trade Related Aspects of Intellectual Property Rights (TRIPS), or the control of foreign exchange.  The State Council’s Legislative Affairs Office (SCLAO) issued two regulations instructing Chinese agencies to comply with this WTO obligation and also issued Interim Measures on Public Comment Solicitation of Laws and Regulations and the Circular on Public Comment Solicitation of Department Rules, which required government agencies to post draft regulations and departmental rules on the official SCLAO website for a 30-day public comment period.  Despite the fact this requirement has been mandated by Chinese law and was part of the China’s WTO accession commitments, Chinese ministries under the State Council continue to post only some draft administrative regulations and departmental rules on the SCLAO website.  When drafts are posted for public comment, the comment period often is less than the required 30 days.

China’s proposed draft regulations are often drafted without using scientific studies or quantitative analysis to assess the regulation’s impact.  When Chinese officials claim an assessment was made, the methodology of the study and the results are not made available to the public. When draft regulations are available for public comment, it is unclear what impact third-party comments have on the final regulation.  Many U.S. stakeholders have complained of the futility of the public comment process in China, often concluding that the lack of transparency in regulation drafting is purposeful and driven primarily by industrial policy goals and other anti-competitive factors that are often inconsistent with market-based principles.  In addition, foreign parties are often restricted from full participation in Chinese standardization activities, potentially providing Chinese competitors opportunity to develop standards inconsistent with international norms and detrimental to foreign investor interests.

In China’s state-dominated economic system, it is impossible to assess the motivating factors behind state action.  The relationships are often blurred between the CCP, the Chinese government, Chinese business (state and private owned), and other Chinese stakeholders that make up the domestic economy.  Foreign invested enterprises perceive that China prioritizes political goals, industrial policies, and a desire to protect social stability at the expense of foreign investors, fairness, and overall rule of law.  These blurred lines are on full display in some industries that have Chinese Self-Regulatory Organizations (SROs) that make licensing decisions. For instance, a Chinese financial institution who is a direct competitor to a foreign enterprise applying for a license may be a voting member of the governing SRO and can either influence other SRO members or even directly adjudicate the application of the foreign license.  To protect market share and competitive position, this company likely has an incentive to disapprove the license application, further hindering fair competition in the industry or economic sector.

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

International Regulatory Considerations

China has been a member of the WTO since 2001.  As part of its accession agreement, China agreed to notify the WTO Committee on Technical Barriers to Trade (TBT Committee) of all draft technical regulations.  Compliance with this WTO commitment is something Chinese officials have promised in previous dialogues with U.S. government officials. The United States remains concerned that China continues to issue draft technical regulations without proper notification to the TBT Committee

Legal System and Judicial Independence

The Chinese legal system is based on a civil law model that borrowed heavily from the legal systems of Germany and France but retains Chinese legal characteristics.  The rules governing commercial activities are found in various laws, regulations, and judicial interpretations, including China’s civil law, contract law, partnership enterprises law, security law, insurance law, enterprises bankruptcy law, labor law, and several interpretations and regulations issued by the Supreme People’s Court (SPC).  While China does not have specialized commercial courts, it has created specialized courts and tribunals for the hearing of intellectual property disputes. In 2014, China launched three intellectual property (IP) courts in Beijing, Guangzhou, and Shanghai. In October 2018, the National People’s Congress approved the establishment of an national-level appellate tribunal within the SPC to hear civil and administrative appeals of technically complex IP cases .

China’s Constitution and various laws provide contradictory statements about court independence and the right of judges to exercise adjudicative power free from interference by administrative organs, public organizations, and/or powerful individuals.  However in practice, courts are heavily influenced by Chinese regulators. Moreover, the Chinese Constitution established that the “leadership of the Communist Party” is supreme, which in practices makes judges susceptible to party pressure on commercial decisions impacting foreign investors.  This trend of central party influence in all areas, not just in the legal system, has only been strengthened by President Xi Jinping’s efforts to consolidate political power and promote the role of the party in all economic activities. Other reasons for judicial interference may include:

• Courts fall under the jurisdiction of local governments;
• Court budgets are appropriated by local administrative authorities;
• Judges in China have administrative ranks and are managed as administrative officials;
• The CCP is in charge of the appointment, dismissal, transfer, and promotion of administrative officials;
• China’s Constitution stipulates that local legislatures appoint and supervise the courts; and
• Corruption may also influence local court decisions.

While in limited cases U.S. companies have received favorable outcomes from China’s courts, the U.S. business community consistently reports that Chinese courts, particularly at lower levels, are susceptible to outside political influence (particularly from local governments), lack the sophistication and educational background needed to understand complex commercial disputes, and operate without transparency.  U.S. companies often avoid challenging administrative decisions or bringing commercial disputes before a local court because of perceptions that these efforts would be futile and for fear of future retaliation by government officials.

Reports of business disputes involving violence, death threats, hostage-taking, and travel bans involving Americans continue to be prevalent.  However, American citizens and foreigners in general do not appear to be more likely than Chinese nationals to be subject to this kind of coercive treatment.  Police are often reluctant to intervene in what they consider internal contract disputes.

Laws and Regulations on Foreign Direct Investment

The legal and regulatory framework in China controlling foreign direct investment activities is more restrictive and less transparent across-the-board compared to the investment frameworks of developed countries, including the United States.  China has made efforts to unify its foreign investment laws and clarify prohibited and restricted industries in the negative list.

On March 17, 2019 China’s National People’s Congress passed the Foreign Investment Law (FIL) that intends to replace existing foreign investment laws.  This law will go into effect on January 1, 2020 and will replace the previous foreign investment framework based on three foreign-invested entity laws: the China-Foreign Equity Joint Venture Enterprise Law, the China-Foreign Cooperative Joint Venture Enterprise Law, and the Foreign-Invested Enterprise (FIE) Law.  The FIL provides a five-year transition period for foreign enterprises established under previous foreign investment laws, after which all foreign enterprises will be subject to similar laws as domestic companies, like the company law, the enterprise law, etc.

In addition to these foreign investment laws, multiple implementation guidelines and other administrative regulations issued by the State Council that are directly derived from the law also affect foreign investment.  Under the three current foreign investment laws, such implementation guidelines include:

• Implementation Regulations of the China-Foreign Equity Joint Venture Enterprises Law;
• Implementation Regulations of the China-Foreign Cooperative Joint Venture Enterprise Law;
• Implementation Regulations of the FIE Law;
• State Council Provisions on Encouraging Foreign Investment;
• Provisions on Guiding the Direction of Foreign Investment; and
• Administrative Provisions on Foreign Investment to Telecom Enterprises.

In addition to the three central-level laws mentioned above, there are also over 1,000 rules and regulatory documents related to foreign investment in China,  issued by government ministries, including:

• the Foreign Investment Negative List;
• Provisions on Mergers and Acquisition (M&A) of Domestic Enterprises by Foreign Investors;
• Administrative Provisions on Foreign Investment in Road Transportation Industry;
• Interim Provisions on Foreign Investment in Cinemas;
• Administrative Measures on Foreign Investment in Commercial Areas;
• Administrative Measures on Ratification of Foreign Invested Projects;
• Administrative Measures on Foreign Investment in Distribution Enterprises of Books, Newspapers, and Periodicals;
• Provision on the Establishment of Investment Companies by Foreign Investors; and
• Administrative Measures on Strategic Investment in Listed Companies by Foreign Investors.

The State Council has yet to provide a timeframe for new implementation guidelines for the Foreign Investment Law that will replace the implementation guidelines under the previous foreign investment system.  While the FIL reiterates existing Chinese commitments in regards to certain elements of the business environment, including IP protection for foreign-invested enterprises, details on implementation and the enforcement mechanisms available to foreign investors have yet to be provided.

In addition to central-level laws and implementation guidelines, local regulators and governments also enact their own regulations, rules, and guidelines that directly impact foreign investment in their geographical area.  Examples include the Wuhan Administration Regulation on Foreign-Invested Enterprises and Shanghai’s Municipal Administration Measures on Land Usage of Foreign-Invested Enterprises.

A Chinese language list of Chinese laws and regulations, at both the central and local levels: http://www.gov.cn/zhengce/  .

FDI Laws on Investment Approvals

Foreign investments in industries and economic sectors that are not explicitly restricted or prohibited on the foreign investment negative list are not subject to MOFCOM pre-approval, but notification is required on proposed foreign investments.  In practice, investing in an industry not on the negative list does not guarantee a foreign investor national treatment in establishing an foreign investment as investors must comply with other steps and approvals like receiving land rights, business licenses, and other necessary permits.  In some industries, such as telecommunications, foreign investors will also need to receive approval from regulators or relevant ministries like the Ministry of Industry and Information Technology (MIIT).

The Market Access Negative List issued December 2018 incorporated the previously issued State Council catalogue for investment projects called the Decision on Investment Regime Reform and the Catalogue of Investment Projects subject to Government Ratification (Ratification Catalogue).  Both foreign enterprises and domestic firms are subject to this negative list and both are required to receive government ratification of investment projects listed in the catalogue.  The Ratification Catalogue was first issued in 2004 and has since undergone various reiterations that have shortened the number of investment projects needed for ratification and removed previous requirements that made foreign investors file for record all investment activities.  The most recent version was last issued in 2016. Projects still needing ratification by NDRC and/or local DRCs include investments surpassing a specific dollar threshold, in industries experiencing overcapacity issues, or in industries that promote outdated technologies that may cause environmental hazards.  For foreign investments over USD300 million, NDRC must ratify the investment. For industries in specific sectors, the local Development and Reform Commission (DRC) is in charge of the ratification.

Ratification Catalogue: http://www.gov.cn/zhengce/content/2016-12/20/content_5150587.htm  

When a foreign investment needs ratification from the NDRC or a local DRC, that administrative body is in charge of assessing the project’s compliance with China’s laws and regulations; the proposed investment’s compliance with the foreign investment and market access negative lists and various industrial policy documents; its national security, environmental safety, and public interest implications; its use of resources and energy; and its economic development ramifications.  In some cases, NDRC also solicits the opinions of relevant Chinese industrial regulators and “consulting agencies,” which may include industry associations that represent Chinese domestic firms. This presents potential conflicts of interest that can disadvantage foreign investors seeking to receive project approval. The State Council may also weigh in on high-value projects in “restricted” sectors.

If a foreign investor has established an investment not on the foreign investment negative list and has received NDRC approval for the investment project if needed, the investor then can apply for a business license with a new ministry announced in March 2018, the State Administration for Market Regulation (SAMR).  Once a license is obtained, the investor registers with China’s tax and foreign exchange agencies. Greenfield investment projects must also seek approval from China’s Ministry of Ecology and Environment and the Ministry of Natural Resources. In several sectors, subsequent industry regulatory permits are required. The specific approvals process may vary from case to case, depending on the details of a particular investment proposal and local rules and practices.

For investments made via merger or acquisition with a Chinese domestic enterprise, an anti-monopoly review and national security review may be required by SAMR if there are competition concerns about the foreign transaction.  The anti-monopoly review is detailed in a later section of this report, on competition policy.

Article 12 of MOFCOM’s Rules on Mergers and Acquisitions of Domestic Enterprises by Foreign Investment stipulates that parties are required to report a transaction to SAMR if:

• Foreign investors obtain actual control, via merger or acquisition, of a domestic enterprise in a key industry;
• The merger or acquisition affects or may affect “national economic security”; or
• The merger or acquisition would cause the transfer of actual control of a domestic enterprise with a famous trademark or a Chinese time-honored brand.

If SAMR determines the parties did not report a merger or acquisition that affects or could affect national economic security, it may, together with other government agencies, require the parties to terminate the transaction or adopt other measures to eliminate the impact on national economic security.  They may also assess fines.

In February 2011, China released the State Council Notice Regarding the Establishment of a Security Review Mechanism for Foreign Investors Acquiring Domestic Enterprises.  The notice established an interagency Joint Conference, led by NDRC and MOFCOM, with authority to block foreign M&As of domestic firms that it believes may impact national security.  The Joint Conference is instructed to consider not just national security, but also “national economic security” and “social order” when reviewing transactions. China has not disclosed any instances in which it invoked this formal review mechanism.  A national security review process for foreign investments was written into China’s new Foreign Investment Law, but with very few details on how the process would be implemented.

Chinese local commerce departments are responsible for flagging transactions that require a national security review when they review them in an early stage of China’s foreign investment approval process.  Some provincial and municipal departments of commerce have published online a Security Review Industry Table listing non-defense industries where transactions may trigger a national security review, but MOFCOM has declined to confirm whether these lists reflect official policy.  In addition, third parties such as other governmental agencies, industry associations, and companies in the same industry can seek MOFCOM’s review of transactions, which can pose conflicts of interest that disadvantage foreign investors.  Investors may also voluntarily file for a national security review.

U.S.  Chamber of Commerce report on Approval Process for Inbound Foreign Direct Investment: http://www.uschamber.com/sites/default/files/reports/020021_China_InvestmentPaper_hires.pdf .

Foreign Investment Law

On March 15, 2019 the National People’s Congress passed the Foreign Investment Law (FIL) that replaced all existing foreign investment laws, including the China-Foreign Joint Venture Law, the Contract Joint Venture Law, and the Wholly Foreign-Owned Enterprises Law.  The FIL is significantly shorter than the 2015 draft version issued for public comment and the text is vague and provides loopholes through which regulators could potentially discriminate against foreign investors. While the law made policy declarations on important issues to U.S. and other foreign investors (e.g.,  equal protection of intellectual property, prohibitions again certain kinds of forced technology transer, and greater market access,), specifics on implementation and enforcement were lacking.  The law goes into effect on January 1, 2020. Many high-level Chinese officials have stated that the implementation guidelines and other corresponding legal changes will be developed prior to the law going into effect.  The content of these guidelines and future corresponding changes to other laws to become consistent with the FIL will largely determine the impact it will have on the investment climate.

Free Trade Zone Foreign Investment Laws

China issued in 2015 the Interim Measures on the National Security Review of Foreign Investment in Free Trade Zones.  The definition of “national security” is broad, covering investments in military, national defense, agriculture, energy, infrastructure, transportation, culture, information technology products and services, key technology, and manufacturing.

In addition, MOFCOM issued the Administrative Measures for the Record-Filing of Foreign Investment in Free Trade Zones, outlining a more streamlined process that foreign investors need to follow to register investments in the FTZs.

Competition and Anti-Trust Laws

China uses a complex system of laws, regulations, and agency specific guidelines at both the central and provincial levels that impacts an economic sector’s makeup, sometimes as a monopoly, near-monopoly, or authorized oligopoly.  These measures are particularly common in resource-intensive sectors such as electricity and transportation, as well as in industries seeking unified national coverage like telecommunication and postal services. The measures also target sectors the government deems vital to national security and economic stability, including defense, energy, and banking.  Examples of such laws and regulations include the Law on Electricity (1996), Civil Aviation Law (1995), Regulations on Telecommunication (2000), Postal Law (amended in 2009), Railroad Law (1991), and Commercial Bank Law (amended in 2003), among others.

Anti-Monopoly Law

China’s Anti-Monopoly Law (AML) went into effect on August 1, 2008.  The National People Congress in March 2018 announced that AML enforcement authorities previously held by three government ministries would be consolidated into a new ministry called the State Administration for Market Regulation (SAMR).  This new agency would still be responsible for AML enforcement and cover issues like concentrations review (M&As), cartel agreements, abuse of dominant market position, and abuse of administrative powers. To fill in some of the gaps from the original AML and to address new commercial trends in China’s market, SAMR has started the process of issuing draft implementation guidelines to clarify enforcement on issues like merger penalties, implementation of abuse of market dominant position, etc.  By unifying antitrust enforcement under one agency, the Chinese government hopes to consolidate guidelines from the three previous agencies and provide greater clarity for businesses operating in China. Generally, the AML enforcement agencies have sought public comment on proposed measures and guidelines, although comment periods can be less than 30 days.

In addition to the AML, the State Council in June 2016 issued guidelines for the Fair Competition Review Mechanism that targets administrative monopolies created by government agents, primarily at the local level.  The mechanism not only requires government agencies to conduct a fair competition review prior to issuing new laws, regulations, and guidelines, to certify that proposed measures do not inhibit competition, but also requires government agencies to conduct a review of all existing rules, regulations, and guidelines, to eliminate existing laws and regulations that are competition inhibiting.  In October 2017, the State Council, State Council Legislative Affairs Office, Ministry of Finance, and three AML agencies issued implementation rules for the fair competition review system to strengthen review procedures, provide review criteria, enhance coordination among government entities, and improve overall competition-based supervision in new laws and regulations. While local government bodies have reported a completed review of over 100,000 different administrative documents, it is unclear what changes have been made and what impact it has had on actually improving the competitive landscape in China.

While procedural developments such as those outlined above are seen as generally positive, the actual enforcement of competition laws and regulations is uneven.  Inconsistent central and provincial enforcement of antitrust law often exacerbates local protectionism by restricting inter-provincial trade, limiting market access for certain imported products, using measures that raise production costs, and limiting opportunities for foreign investment.  Government authorities at all levels in China may also restrict competition to insulate favored firms from competition through various forms of regulations and industrial policies. While at times the ultimate benefactor of such policies is unclear, foreign companies have expressed concern that the central government’s use of AML enforcement is often selectively used to target foreign companies, becoming an extension of other industrial policies that favor SOEs and Chinese companies deemed potential “national champions.”

Since the AML went into effect, the number of M&A transactions reviewed each year by Chinese officials has continued to grow.  U.S. companies and other observers have expressed concerns that SAMR is required to consult with other Chinese agencies when reviewing a potential transaction and that other agencies can raise concerns that are often not related to competition to either block, delay, or force one or more of the parties to comply with a condition in order to receive approval.  There is also suspicion that Chinese regulators rarely approve “on condition” any transactions involving two Chinese companies, thus signaling an inherent AML bias against foreign enterprises.

Under NDRC’s previous enforcement of price-related monopolies, some procedural progress in AML enforcement was made, as they started to release aggregate data on investigations and publicize case decisions.  However, many U.S. companies complained that NDRC discouraged companies from having legal representation during informal discussions or even during formal investigations. In addition, the investigative process reportedly lacked basic transparency or specific best practice guidance on procedures like evidence gathering.  Observers continue to raise concern over the use of “dawn raids” that can be used at any time as a means of intimidation or to prop up a local Chinese company against a competing foreign company in an effort to push forward specific industrial policy goals. Observers also remain concerned that Chinese officials during an investigation will fail to protect commercial secrets and have access to secret and proprietary information that could be given to Chinese competitors.

In prior bilateral dialogues, China committed to strengthening IP protection and enforcement.  However, concerns remain on how China views the intersection of IP protection and antitrust. Previous AML guidelines issued by antitrust regulators for public comment disproportionately impacted foreign firms (generally IP rights holders) by requiring an IP rights holder to license technology at a “fair price” so as not to allow abuse of the company’s “dominant market position.”  Foreign companies have long complained that China’s enforcement of AML serves industrial policy goals of, among other things, forcing technology transfer to local competitors. In other more developed antitrust jurisdictions, companies are free to exclude competitors and set prices, and the right to do so is recognized as the foundation of the incentive to innovate.

Another consistent area of concern expressed by foreign companies deals with the degree to which the AML applies – or fails to apply – to SOEs and other government monopolies, which are permitted in some industries.  While SAMR has said AML enforcement applies to SOEs the same as domestic or foreign firms, the reality is that only a few minor punitive actions have been taken against provincial level SOEs. In addition, the AML explicitly protects the lawful operations of SOEs and government monopolies in industries deemed nationally important.  While SOEs have not been entirely immune from AML investigations, the number of investigations is not commensurate with the significant role SOEs play in China’s economy. The CCP’s proactive orchestration of mergers and consolidation of SOEs in industries like rail, marine shipping, metals, and other strategic sectors, which in most instances only further insulates SOEs from both private and foreign competition, signaling that enforcement against SOEs will likely remain limited despite potential negative impacts on consumer welfare.

Expropriation and Compensation

Chinese law prohibits nationalization of foreign-invested enterprises, except under “special circumstances.”  Chinese laws, such as the Foreign Investment Law, states there are circumstances for expropriation of foreign assets that may include national security or a public interest needs, such as large civil engineering projects.  However, the law does not specify circumstances that would lead to the nationalization of a foreign investment. Chinese law requires fair compensation for an expropriated foreign investment but does not provide details on the method or formula used to calculate the value of the foreign investment.  The Department of State is not aware of any cases since 1979 in which China has expropriated a U.S. investment, although the Department has notified Congress through the annual 527 Investment Dispute Report of several cases of concern.

Dispute Settlement

ICSID Convention and New York Convention

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

Investor-State Dispute Settlement

Chinese officials typically urge private parties to resolve commercial disputes through informal conciliation.  If formal mediation is necessary, Chinese parties and the authorities typically prefer arbitration to litigation.  Many contract disputes require arbitration by the Beijing-based China International Economic and Trade Arbitration Commission (CIETAC).  Established by the State Council in 1956 under the auspices of the China Council for the Promotion of International Trade (CCPIT), CIETAC is China’s most widely-utilized arbitral body in China for foreign-related disputes.  Some foreign parties have obtained favorable rulings from CIETAC, while others have questioned CIETAC’s fairness and effectiveness.

CIETAC also had four sub-commissions located in Shanghai, Shenzhen, Tianjin, and Chongqing.  CCPIT, under the authority of the State Council, issued new arbitration rules in 2012 that granted CIETAC headquarters greater authority to hear cases than the sub-commissions.  As a result, CIETAC Shanghai and CIETAC Shenzhen declared independence from the Beijing authority, issued new rules, and changed their names. This split led to CIETAC disqualifying the former Shanghai and Shenzhen affiliates from administering arbitration disputes, raising serious concerns among the U.S. business and legal communities over the validity of arbitration agreements arrived at under different arbitration procedures and the enforceability of arbitral awards issued by the sub-commissions.  In 2013, the Supreme People’s Court issued a notice clarifying that any lower court that hears a case arising out of the CIETAC split must report the case to the court before making a decision. However, this notice is brief and lacks detail like the timeframe for the lower court to refer and the timeframe for the Supreme People’s Court to issue an opinion.

Beside the central-level arbitration commission, there are also provincial and municipal arbitration commissions that have emerged as serious domestic competitors to CIETAC.  A foreign party may also seek arbitration in some instances from an offshore commission. Foreign companies often encounter challenges in enforcing arbitration decisions issued by Chinese and foreign arbitration bodies.  In these instances, foreign investors may appeal to higher courts.

The Chinese government and judicial bodies do not maintain a public record of investment disputes.  The Supreme People’s Court maintains an annual count of the number of cases involving foreigners but does not provide details about the cases, identify civil or commercial disputes, or note foreign investment disputes.  Rulings in some cases are open to the public.

International Commercial Arbitration and Foreign Courts

Articles 281 and 282 of China’s Civil Procedural Law governs the enforcement of judgments issued by foreign courts.  The law states that Chinese courts should consider factors like China’s treaty obligations, reciprocity principles, basic Chinese law, Chinese sovereignty, Chinese social and public interests, and national security before determining if the foreign court judgment should be recognized.  As a result of this broad criteria, there are few examples of Chinese courts recognizing and enforcing a foreign court judgment. China has bilateral agreements with 27 countries on the recognition and enforcement of foreign court judgments, but not with the United States.

Article 270 of China’s Civil Procedure Law also states that time limits in civil cases do not apply to cases involving foreign investment.  According to the 2012 CIETAC Arbitration Rules, in an ordinary procedure case, the arbitral tribunal shall render an arbitral award within six months (in foreign-related cases) from the date on which the arbitral tribunal is formed.  In a summary procedure case, the arbitral tribunal shall make an award within three months from the date on which the arbitral tribunal is formed.

Bankruptcy Regulations

China’s Enterprise Bankruptcy Law took effect on June 1, 2007 and applies to all companies incorporated under Chinese laws and subject to Chinese regulations.  This includes private companies, public companies, SOEs, foreign invested enterprises (FIEs), and financial institutions.  China’s primary bankruptcy legislation generally is commensurate with developed countries’ bankruptcy laws and provides for reorganization or restructuring, rather than liquidation.  However, due to the lack of implementation guidelines and the limited number of previous cases that could provide legal precedent, the law has never been fully enforced.  Most corporate debt disputes are settled through negotiations led by local governments.  In addition, companies are disincentivized from pursing bankruptcy because of the potential for local government interference and fear of losing control over the bankruptcy outcome.  According to experts, Chinese courts not only lack the resources and capacity to handle bankruptcy cases, but bankruptcy administrators, clerks, and judges all lack relevant experience.

In the October 2016 State Council Guiding Opinion on Reducing Enterprises’ Leverage Ratio, bankruptcy was identified as a tool to manage China’s corporate debt problems.  This was consistent with increased government rhetoric throughout the year in support of bankruptcy.  For example, in June 2016, the Supreme People’s Court issued a notice to establish bankruptcy divisions at intermediate courts and to increase the number of judges and support staff to handle liquidation and bankruptcy issues.  On August 1, 2016, the court also launched a new bankruptcy and reorganization electronic information platform: http://pccz.court.gov.cn/pcajxxw/index/xxwsy  .

The number of bankruptcy cases has continued to grow rapidly since 2015.  According to a National People’s Congress (NPC) official, in 2018, 18,823 liquidation and bankruptcy cases were accepted by Chinese courts, an increase of over 95 percent from last year.  11,669 of those cases were closed, an increase of 86.5 percent from the year before.  The Supreme People’s Court (SPC) reported that in 2017, 9,542 bankruptcy cases were accepted by the Chinese courts, representing a 68.4 percent year-on-year increase from 2016, and 6,257 cases were closed, representing a 73.7 percent year-on-year increase from 2016. The SPC has continued to issue clarifications and new implementing measures to improve bankruptcy procedures.

Investment Incentives

To attract foreign investment, different provinces and municipalities offer preferential packages like a temporary reduction in taxes, resources and land use benefits, reduction in import and/or export duties, special treatment in obtaining basic infrastructure services, streamlined government approvals, research and development subsidies, and funding for initial startups.  Often, these packages stipulate that foreign investors must meet certain benchmarks for exports, local content, technology transfer, and other requirements.  Preferential treatment often occurs in specific sectors that the government has identified for policy support, like technology and advanced manufacturing, and will be specific to a geographic location like a special economic zone (like FTZs), development zone, or a science park.  The Chinese government has also prioritized foreign investment in inland China by providing incentives to invest in seven new FTZs located in inland regions (2017) and offering more liberalizations to foreign investment through its Catalogue of Priority Industries for Foreign Investment in Central and Western China that provides greater market access to foreign investors willing to invest in less developed areas in Central and Western China.

While state subsidies has long been an area that foreign investors have criticized for distorting competition in certain industries, Chinese officials have publicly pledged that foreign investors willing to manufacture products in China can equally participate in the research and development programs financed by the Chinese government.  The Chinese government has also said foreign investors have equal access to preferential policies under initiatives like Made in China 2025 and Strategic Emerging Industries that seek to transform China’s economy into an innovation-based economy that becomes a global leader in future growth sectors.  In these high-tech and advanced manufacturing sectors, China needs foreign investment because it lacks the capacity, expertise, and technological know-how to conduct advanced research or manufacture advanced technology on par with other developed economies.  Announced in 2015, China’s MIC 2025 roadmap has prioritized the following industries: new-generation information technology, advanced numerical-control machine tools and robotics, aerospace equipment, maritime engineering equipment and vessels, advanced rail, new-energy vehicles, energy equipment, agricultural equipment, new materials, and biopharmaceuticals and medical equipment.  While mentions of MIC 2025 have all but disappeared from public discourse, a raft of policy announcements at the national and sub-national level indicate China’s continued commitment to developing these sectors.  Foreign investment plays an important role in helping China move up the manufacturing value chain.  However, there are a large number of economic sectors that China deems sensitive due to broadly defined national security concerns, including “economic security,” which can effectively close off foreign investment to those sectors.

Foreign Trade Zones/Free Ports/Trade Facilitation

China has customs-bonded areas in Shanghai, Tianjin, Shantou, Guangzhou, Dalian, Xiamen, Ningbo, Zhuhai, Fuzhou, and parts of Shenzhen.  In addition to these official duty-free zones identified by China’s State Council, there are also numerous economic development zones and “open cities” that offer preferential treatment and benefits to investors, including foreign investors.

In September 2013, the State Council in conjunction with the Shanghai municipal government, announced the Shanghai Pilot Free Trade Zone that consolidated the geographical area of four previous bonded areas into a single FTZ.  In April 2015, the State Council expanded the pilot to include new FTZs in Tianjin, Guangdong, and Fujian. In March 2017, the State Council approved seven new FTZs in Chongqing, Henan, Hubei, Liaoning, Shaanxi, Sichuan, and Zhejiang, with the stated purpose to integrate these areas more closely with the OBOR initiative – the Chinese government’s plan to enhance global economic interconnectivity through joint infrastructure and investment projects that connect China’s inland and border regions to the rest of the world.  In October 2018, the Chinese government rolled out plans to convert the entire island province of Hainan into an FTZ that will take effect in 2020. This FTZ aims to provide a more open and high-standard trade and investment hub focused on improved rule of law and financial services. In addition to encourage tourism development, the Hainan FTZ will also seek to develop high-tech industries while preserving the ecology of the island. The goal of all China’s FTZs is to provide a trial ground for trade and investment liberalization measures and to introduce service sector reforms, especially in financial services, that China expects eventually to introduce in other parts of the domestic economy.

The FTZs should offer foreign investors “national treatment” for the market access phase of an investment in industries and sectors not listed on the FTZ “negative list,” or on the list of industries and economic sectors restricted or prohibited for foreign investment.  The State Council published an updated FTZ negative list in June 2018 that reduced the number of restrictions and prohibitions on foreign investment from 95 items down to 45. The most recent negative list did not remove many commercially significant restrictions or prohibitions compared to the nationwide negative list also released in June 2018.

Although the FTZ negative list in theory provides greater market access for foreign investment in the FTZs, many foreign firms have reported that in practice, the degree of liberalization in the FTZs is comparable to other opportunities in other parts of China.  According to Chinese officials, over 18,000 entities have registered in the FTZs. The municipal and central governments have released a number of administrative and sector-specific regulations and circulars that outline the procedures and regulations in the zones.

Performance and Data Localization Requirements

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

China also called to restrict the ability of both domestic and foreign operators of “critical information infrastructure” to transfer personal data and important information outside of China while also requiring those same operators to only store data physically in China.  These potential restrictions have prompted many firms to review how their networks manage data. Foreign firms also fear that calls for use of “secure and controllable,” “secure and trustworthy,” etc. technologies will curtail sales opportunities for foreign firms or that foreign companies may be pressured to disclose source code and other proprietary information, putting IP at risk.  In addition, prescriptive technology adoption requirements, often in the form of domestic standards that diverge from global norms, in effect gives preference to domestic firms and their technology. These requirements not only hinder operational effectiveness but also potentially puts in jeopardy IP protection and overall competitiveness of foreign firms operating in China.

Real Property

Foreign companies have long complained that the Chinese legal system, responsible for mediating acquisition and disposition of property, has inconsistently protected the legal real property rights of foreigners.

Urban land is entirely owned by the State.  The State can issue long-term land leases to individuals and companies, including foreigners, subject to many restrictions.  China’s Property Law stipulates that residential property rights will renew automatically, while commercial and industrial grants shall be renewed if the renewal does not conflict with other public interest claims.  A number of foreign investors have reported that their land use rights were revoked and given to developers to build neighborhoods designated for building projects by government officials. Investors often complain that compensation in these cases has been nominal.

In rural China, collectively-owned land use rights are more complicated.  The registration system chronically suffers from unclear ownership lines and disputed border claims, often at the expense of local farmers who are excluded from the process by village leaders making “handshake deals” with commercial interests.  The central government announced in 2016, and reiterated in 2017 and 2018, plans to reform the rural land registration system so as to put more control in the hands of farmers, but some experts remain skeptical that changes will be properly implemented and enforced.

China’s Securities Law defines debtor and guarantor rights, including rights to mortgage certain types of property and other tangible assets, including long-term leases.  Chinese law does not prohibit foreigners from buying non-performing debt, which can only be acquired through state-owned asset management firms. However, in practice, Chinese official often use bureaucratic hurdles that limit foreigners’ ability to liquidate assets, further discouraging foreign purchase of non-performing debt.

Intellectual Property Rights

Following WTO accession, China updated many laws and regulations to comply with the WTO Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) and other international agreements.  However, despite the changes to China’s legal and regulatory regime, some aspects of China’s IP protection regime fall short of international best practices.  In addition, enforcement ineffectiveness of Chinese laws and regulations remains a significant challenge for foreign investors trying to protect their IPR.

Major impediments to effective IP enforcement include the unavailability of deterrent-level penalties for infringement, a lack of transparency, unclear standards for establishing criminal investigations, the absence of evidence production methods to compel evidence from infringers, and local protectionism, among others.  Chinese government officials tout the success of China’s specialized IP courts – including the establishment of a new appellate tribunal within the SPC – as evidence of its commitment to IP protection; however, while this shows a growing awareness of IPR in China’s legal system, civil litigation against IP infringement will remain an option with limited effect until there is an increase in the amount of damages an infringer pays for IP violations.

Chinese-based companies remain the largest IP infringers of U.S. products.  Goods shipped from China (including those transshipped through Hong Kong) accounted for an estimated 87 percent of IPR-infringing goods seized at U.S. borders.  (Note: This U.S.  Customs statistic does not specify where the fake goods were made.)  China imposes requirements that U.S. firms develop their IP in China or transfer their IP to Chinese entities as a condition to accessing the Chinese market, or to obtain tax and other preferential benefits available to domestic companies.  Chinese policies can effectively require U.S. firms to localize research and development activities, practices documented in the March 2018 Section 301 Report released by the Office of the U.S. Trade Representative (USTR).  China remained on the Priority Watch List in the 2019 USTR Special 301 Report, and several Chinese physical and online markets were included in the 2018 USTR Notorious Markets Report.  For detailed information on China’s environment for IPR protection and enforcement, please see the following reports:

• USTR Section 301 Report on China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation: https://ustr.gov/sites/default/files/Section percent20301 percent20FINAL.PDF 
• USTR Update Concerning China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation: https://ustr.gov/sites/default/files/enforcement/301Investigations/301 percent20Report percent20Update.pdf  
• USTR 2019 Special 301 Report (see section on China): https://ustr.gov/about-us/policy-offices/press-office/reports-and-publications/2019/2019-special-301-report  
• USTR’s 2018 National Trade Estimate Report on Foreign Trade Barriers in China (see section on China): https://ustr.gov/sites/default/files/files/Press/Reports/2018 percent20National percent20Trade percent20Estimate percent20Report.pdf 
• USTR’s 2018 Report to Congress on China’s WTO Compliance: https://ustr.gov/sites/default/files/2018-USTR-Report-to-Congress-on-China percent27s-WTO-Compliance.pdf 
• USTR’s 2018 Notorious Market Report (see China): https://ustr.gov/sites/default/files/2018_Notorious_Markets_List.pdf 

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

Capital Markets and Portfolio Investment

China’s leadership has stated that it seeks to build a modern, highly developed, and multi-tiered capital market.  Bank loans continue to provide the majority of credit options (reportedly around 81.4 percent in 2018) for Chinese companies, although other sources of capital, such as corporate bonds, equity financing, and private equity are quickly expanding their scope, reach, and sophistication in China.  In the past three years, Chinese regulators have taken measures to rein in the rapid growth of China’s “shadow banking” sector, which includes vehicles such as wealth management and trust products.  The measures have achieved positive results. The share of trust loans, entrust loans and undiscounted bankers’ acceptances dropped a total of 15.2 percent in total social financing (TSF) – a broad measure of available credit in China, most of which was comprised of corporate bonds. TSF’s share of corporate bonds jumped from a negative 2.31 percent in 2017 to 12.9 percent in 2018. Chinese regulators regularly use administrative methods to control credit growth, although market-based tools such as interest rate policy and adjusting the reserve requirement ratio (RRR) play an increasingly important role.

The People’s Bank of China (PBOC), China’s central bank, has gradually increased flexibility for banks in setting interest rates, formally removing the floor on the lending rate in 2013 and the deposit rate cap in 2015 – but is understood to still influence bank’s interest rates through “window guidance.”  Favored borrowers, particularly SOEs, benefit from greater access to capital and lower financing costs, as they can use political influence to secure bank loans, and lenders perceive these entities to have an implicit government guarantee.  Small- and medium-sized enterprises, by contrast, have the most difficulty obtaining financing, often forced to rely on retained earnings or informal investment channels.

In 2018, Chinese regulators have taken measures to improve financing for the private sector, particularly small, medium and micro-sized enterprises (SMEs).  On November 1, 2018, Xi Jinping held an unprecedented meeting with private companies on how to support the development of private enterprises. Xi emphasized to the importance of resolving difficult and expensive financing problems for private firms and pledged to create a fair and competitive business environment.  He encouraged banks to lend more to private firms, as well as urged local governments to provide more financial support for credit-worthy private companies. Provincial and municipal governments could raise funds to bailout private enterprises if needed. The PBOC increased the relending and rediscount quota of RMB 300 billion for SMEs and private enterprises at the end of 2018.  The government also introduced bond financing supportive instruments for private enterprises, and the PBOC began promoting qualified PE funds, securities firms, and financial asset management companies to provide financing for private companies. The China Banking and Insurance Regulatory Commission’s (CBIRC) Chairman said in an interview that one-third of new corporate loans issued by big banks and two-thirds of new corporate loans issued by small and medium-sized banks should be granted to private enterprises, and that 50 percent of new corporate loans shall be issued to private enterprises in the next three years.  At the end of 2018, loans issued to SMEs accounted for 24.6 percent of total RMB loan issuance. The share dropped 1 percent from 25.6 percent in 2017. Interest rates on loans issued by the six big state-owned banks – Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB), Bank of China (BOC), Agriculture Bank of China (ABC), Bank of Communications and China Postal Savings Bank – to SMEs averaged 4.8 percent, in the fourth quarter of 2018, down from 6 percent in the first quarter of 2018.

Direct financing has expanded over the last few years, including through public listings on stock exchanges, both inside and outside of China, and issuing more corporate and local government bonds.  The majority of foreign portfolio investment in Chinese companies occurs on foreign exchanges, primarily in the United States and Hong Kong.  In addition, China has significantly expanded quotas for certain foreign institutional investors to invest in domestic stock markets; opened up direct access for foreign investors into China’s interbank bond market; and approved a two-way, cross-border equity direct investment scheme between Shanghai and Hong Kong and Shenzhen and Hong Kong that allows Chinese investors to trade designated Hong Kong-listed stocks through the Shanghai and Shenzhen Exchanges, and vice versa.  Direct investment by private equity and venture capital firms is also rising, although from a small base, and has faced setbacks due to China’s capital controls that complicate the repatriation of returns

Money and Banking System

After several years of rapid credit growth, China’s banking sector faces asset quality concerns.  For 2018, the China Banking Regulatory Commission reported a non-performing loans (NPL) ratio of 1.83 percent, higher than the 1.74 percent of NPL ratio reported the last quarter of 2017.  The outstanding balance of commercial bank NPLs in 2018 reached 2.03 trillion RMB (approximately USD295.1 billion).  China’s total banking assets surpassed 268 trillion RMB (approximately USD39.1 trillion) in December 2018, a 6.27 percent year-on-year increase.  Experts estimate Chinese banking assets account for over 20 percent of global banking assets.  In 2018, China’s credit and broad money supply slowed to 8.1 percent growth, the lowest published rate since the PBOC first started publishing M2 money supply data in 1986.

Foreign Exchange and Remittances

Foreign Exchange Policies

While the central bank’s official position is that companies with proper documentation should be able to freely conduct business, in practice, companies have reported challenges and delays in getting foreign currency transactions approved by sub-national regulatory branches.  In 2017, several foreign companies complained about administrative delays in remitting large sums of money from China, even after completing all of the documentation requirements.  Such incidents come amid announcements that the State Administration of Foreign Exchange (SAFE) had issued guidance to tighten scrutiny of foreign currency outflows due to China’s rapidly decreasing foreign currency exchange.  China has since announced that it will gradually reduce those controls, but market analysts expect they would be re-imposed if capital outflows accelerate again.

Under Chinese law, FIEs do not need pre-approval to open foreign exchange accounts and are allowed to retain income as foreign exchange or to convert it into RMB without quota requirements.  Foreign exchange transactions related to China’s capital account activities do not require review by SAFE, but designated foreign exchange banks review and directly conduct foreign exchange settlements.  Chinese officials register all commercial foreign debt and will limit foreign firms’ accumulated medium- and long-term debt from abroad to the difference between total investment and registered capital.  China issued guidelines in February 2015 that allow, on a pilot basis, a more flexible approach to foreign debt within several specific geographic areas, including the Shanghai Pilot FTZ.  The main change under this new approach is to allow FIEs to expand their foreign debt above the difference between total investment and registered capital, so long as they have sufficient net assets.

Chinese foreign exchange rules cap the maximum amount of RMB individuals are allowed to convert into other currencies at approximately USD50,000 each year and restrict them from directly transferring RMB abroad without prior approval from SAFE.  In 2017, authorities further restricted overseas currency withdrawals by banning sales of life insurance products and capping credit card withdrawals at USD5,000 per transaction.  SAFE has not reduced this quota, but during periods of higher than normal capital outflows, banks are reportedly instructed by SAFE to increase scrutiny over individuals’ requests for foreign currency and to require additional paperwork clarifying the intended use of the funds, with the express intent of slowing capital outflows.

China’s exchange rate regime is managed within a band that allows the currency to rise or fall by 2 percent per day from the “reference rate” set each morning.  In August 2015, China announced that the reference rate would more closely reflect the previous day’s closing spot rate.  Since that change, daily volatility of the RMB has at times been higher than in recent years, but for the most part, remains below what is typical for other currencies.  In 2017, the PBOC took additional measures to reduce volatility, introducing a “countercyclical factor” into its daily RMB exchange rate calculation.  Although the PBOC reportedly suspended the countercyclical factor in January 2018, the tool remains available to policymakers if volatility re-emerges.

Remittance Policies

The remittance of profits and dividends by FIEs is not subject to time limitations, but FIEs need to submit a series of documents to designated banks for review and approval.  The review period is not fixed, and is frequently completed within one or two working days of the submission of complete documents.  In the past year, this period has lengthened during periods of higher than normal capital outflows, when the government strengthens capital controls.

Remittance policies have not changed substantially since SAFE simplified some regulations in January 2014, devolving many review and approval procedures to banks.  Firms that remit profits at or below USD50,000 dollars can do so without submitting documents to the banks for review.

For remittances above USD50,000, the firm must submit tax documents, as well as the formal decision by its management to distribute profits.

For remittance of interest and principle on private foreign debt, firms must submit an application form, a foreign debt agreement, and the notice on repayment of the principle and interest.  Banks will then check if the repayment volume is within the repayable principle.

The remittance of financial lease payments falls under foreign debt management rules.  There are no specific rules on the remittance of royalties and management fees.  In August 2018, SAFE raised the reserve requirement for foreign currency transactions from zero to 20 percent, significantly increasing the cost of foreign currency transactions.  The reserve ratio was introduced in October 2015 at 20 percent, which was lowered to zero in September 2017.

The Financial Action Task Force has identified China as a country of primary concern.  Global Financial Integrity (GFI) estimates that over S1 trillion of illicit money left China between 2003 and 2012, making China the world leader in illicit capital flows.  In 2013, GFI estimated that another USD260 billion left the country.

Sovereign Wealth Funds

China officially has only one sovereign wealth fund (SWF), the China Investment Corporation (CIC).  Established in 2007, CIC manages over USD941.4 billion in assets (as of 2017) and invests on a 10-year time horizon.  China’s sovereign wealth is also invested by a subsidiary of SAFE, the government agency that manages China’s foreign currency reserves, and reports directly to the PBOC.  The SAFE Administrator also serves concurrently as a PBOC Deputy Governor.

CIC publishes an annual report containing information on its structure, investments, and returns.  CIC invests in diverse sectors like financial, consumer products, information technology, high-end manufacturing, healthcare, energy, telecommunication services, and utilities.

China also operates other funds that function in part like sovereign wealth funds, including: China’s National Social Security Fund, with an estimate USD341.4 billion in assets; the China-Africa Development Fund (solely funded by the China Development Bank), with an estimated USD5 billion; the SAFE Investment Company, with an estimated USD439.8 billion; and China’s state-owned Silk Road Fund, established in December 2014 with USD40 billion to foster investment in OBOR partner countries.  Chinese SWFs do not report the percentage of their assets that are invested domestically.

Chinese SWFs follow the voluntary code of good practices known as the Santiago Principles and participate in the IMF-hosted International Working Group on SWFs.  The Chinese government does not have any formal policies specifying that CIC invest funds consistent with industrial policies or in government-designated projects, although CIC is expected to pursue government objectives.  The SWF generally adopts a “passive” role as a portfolio investor.

China has approximately 150,000 SOEs which are wholly owned by the state.  Around 50,000 (33 percent) are owned by the central government and the remainder by local governments.  The central government directly controls and manages 96 strategic SOEs through the State-owned Assets Supervision and Administration Commission (SASAC), of which around 60 are listed on stock exchanges domestically and/or internationally.  SOEs, both central and local, account for 30 to 40 percent of total GDP and about 20 percent of China’s total employment.  SOEs can be found in all sectors of the economy, from tourism to heavy industries.

SASAC regulated SOEs: http://www.sasac.gov.cn/n2588035/n2641579/n2641645/c4451749/content.html  .

China’s leading SOEs benefit from preferential government policies aimed at developing bigger and stronger “national champions.”  SOEs enjoy favored access to essential economic inputs (land, hydrocarbons, finance, telecoms, and electricity) and exercise considerable power in markets like steel and minerals.  SOEs have long enjoyed preferential access to credit and the ability to issue publicly traded equity and debt.

During the November 2013 Third Plenum of the 18th Party Congress – a hallmark session that announced economic reforms, including calling for the market to play a more decisive role in the allocation of resources – President Xi Jinping called for broad SOE reforms.  Cautioning that SOEs still will remain a key part of China’s economic system, Xi emphasized improved SOE operational transparency and legal reforms that would subject SOEs to greater competition by opening up more industry sectors to domestic and foreign competitors and by reducing provincial and central government preferential treatment of SOEs.  The Third Plenum also called for “mixed ownership” economic structures, providing greater economic balance between private and state-owned businesses in certain industries, including equal access to factors of production, competition on a level playing field, and equal legal protection.

At the 2018 Central Economic Work Conference, Chinese leaders said in 2019 they will promote a greater role for the market, as well as renewed efforts on reforming SOEs – to include mixed ownership reform.  In delivering the 2019 Government Work Report, Premier Li Keqiang pledged to improve corporate governance, including allowing SOE company boards, rather than SASAC, to appoint senior leadership. 

OECD Guidelines on Corporate Governance

SASAC participates in the OECD Working Party on State Ownership and Privatization Practices (WPSOPP).  Chinese officials have indicated China intends to utilize OECD SOE guidelines to improve the professionalism and independence of SOEs, including relying on Boards of Directors that are independent from political influence.  However, despite China’s Third Plenum commitments in 2013 (i.e., to foster “market-oriented” reforms in China’s state sectors), Chinese officials and SASAC have made minimal progress in fundamentally changing the regulation and business conduct of SOEs.  China has also committed to implement the G-20/OECD Principles of Corporate Governance, which apply to all publicly-listed companies, including listed SOEs.

Chinese law lacks unified guidelines or a governance code for SOEs, especially among provincial or locally-controlled SOEs.  Among central SOEs managed by SASAC, senior management positions are mainly filled by senior CCP members who report directly to the CCP, and double as the company’s Party secretary

The lack of management independence and the controlling ownership interest of the State make SOEs de facto arms of the government, subject to government direction and interference.  SOEs are rarely the defendant in legal disputes, and when they are, they almost always prevail, presumably due to the close relationship with the CCP.  U.S. companies often complain about the lack of transparency and objectivity in commercial disputes with SOEs.  In addition, SOEs enjoy preferential access to a disproportionate share of available capital, whether in the form of loans or equity.

In its September 2015 Guiding Opinions on Deepening the Reform of State-Owned Enterprises, the State Council instituted a system for classifying SOEs as “public service” or “commercial enterprises.”  Some commercial enterprise SOEs were further sub-classified into “strategic” or “critically important” sectors (i.e., with strong national economic or security importance).  SASAC has said the new classification system would allow the government to reduce support for commercial enterprises competing with private firms and instead channel resources toward public service SOEs.

Other recent reforms have included salary caps, limits on employee benefits, and attempts to create stock incentive programs for managers that have produced mixed results.  However, analysts believe minor reforms will be ineffective as long as SOE administration and government policy are intertwined.

A major stumbling block to SOE reform is that SOE regulators are outranked in the CCP party structure by SOE executives, which minimizes SASAC and other government regulators’ effectiveness at implementing reforms.  In addition, SOE executives are often promoted to high-ranking positions in the CCP or local government, further complicating the work of regulators.

During the Third Plenum of the CCP’s 18th Central Committee, in 2013, the CCP leadership announced that the market would play a “decisive role” in economic decision making and emphasized that SOEs needed to focus resources in areas that “serve state strategic objectives.”  However, experts point out that despite these new SOE distinctions, SOEs continue to hold dominant shares in their respective industries, regardless of whether they are strategic, which may further restrain private investment in the economy.  Moreover, the application of China’s Anti-Monopoly Law, together with other industrial policies and practices that are selectively enforced by the authorities, protects SOEs from private sector competition.

China is not a party to the Government Procurement Agreement (GPA) within the framework of the WTO, although Hong Kong is listed.  During China’s WTO accession negotiations, Beijing signaled its intention to join GPA.  And, in April 2018, President Xi announced his intent to join GPA, but no timeline has been given for accession.

Investment Restrictions in “Vital Industries and Key Fields”

The intended purpose of China’s State Assets Law is to safeguard and protect China’s economic system, promoting “socialist market economy” principles that fortify and develop a strong, state-owned economy.  A key component of the State Assets Law is enabling SOEs to play the leading role in China’s economic development, especially in “vital industries and key fields.”  To accomplish this, the law encourages Chinese regulators to adopt policies that consolidate SOE concentrations to ensure dominance in industries deemed vital to “national security” and “national economic security.” This principle is further reinforced by the December 2006 State Council announcement of the Guiding Opinions Concerning the Advancement of Adjustments of State Capital and the Restructuring of State-Owned Enterprises, which called for more SOE consolidation to advance the development of the state-owned economy, including enhancing and expanding the role of the State in controlling and influencing “vital industries and key fields relating to national security and national economic lifelines.”  These guidelines defined “vital industries and key fields” as “industries concerning national security, major infrastructure and important mineral resources, industries that provide essential public goods and services, and key enterprises in pillar industries and high-tech industries.”

Around the time the guidelines were published, the SASAC Chairman also listed industries where the State should maintain “absolute control” (e.g., aviation, coal, defense, electric power and the state grid, oil and petrochemicals, shipping, and telecommunications) and “relative control” (e.g., automotive, chemical, construction, exploration and design, electronic information, equipment manufacturing, iron and steel, nonferrous metal, and science and technology).  China has said these lists do not reflect its official policy on SOEs.  In fact, in some cases, regulators have allowed for more than 50 percent private ownership in some of the listed industries on a case-by-case basis, especially in industries where Chinese firms lack expertise and capabilities in a given technology Chinese officials deemed important at the time.

Parts of the agricultural sector have traditionally been dominated by SOEs.  Current agriculture trade rules, regulations, and limitations placed on foreign investment severely restrict the contributions of U.S. agricultural companies, depriving China’s consumers of the many potential benefits additional foreign investment could provide.  These investment restrictions in the agricultural sectors are at odds with China’s objective of shifting more resources to agriculture and food production in order to improve Chinese lives, food security, and food safety.

Privatization Program

At the November 2013 Third Plenum, the Chinese government announced reforms to SOEs that included selling shares of SOEs to outside investors.  This approach is an effort to improve SOE management structures, emphasize the use of financial benchmarks, and gradually take steps that will bring private capital into some sectors traditionally monopolized by SOEs like energy, telecommunications, and finance.  In practice, these reforms have been gradual, as the Chinese government has struggled to implement its SOE reform vision and often opted to utilize a preferred SOE consolidation approach. In the past few years, the Chinese government has listed several large SOEs and their assets on the Hong Kong stock exchange, subjecting SOEs to greater transparency requirements and heightened regulatory scrutiny.  This approach is a possible mechanism to improve SOE corporate governance and transparency. Starting in 2017, the government began pushing the mixed ownership model, in which private companies invest in SOEs and outside managers are hired, as a possible solution, although analysts note that ultimately the government (and therefore the CCP) remains in full control regardless of the private share percentage.  Over the last year, President Xi and other senior leaders have increasingly focused reform efforts on strengthening the role of the State as an investor or owner of capital, instead of the old SOE model in which the state was more directly involved in managing operations.

General awareness of Responsible Business Conduct (RBC) standards (including environmental, social, and governance issues) is a relatively new concept to most Chinese companies, especially companies that exclusively operate in China’s domestic market.  Chinese laws that regulate business conduct use voluntary compliance, are often limited in scope and are frequently cast aside when RBC priorities are superseded by other economic priorities. In addition, China lacks mature and independent NGOs, investment funds, worker unions, worker organizations, and other business associations that promote RBC, further contributing to the general lack of awareness in Chinese business practices.

The Foreign NGO Law remains a concern for U.S. organizations due to the restrictions on many NGO activities, including promotion of RBC and corporate social responsibility (CSR) best practices.  For U.S. investors looking to partner with a Chinese company or to expand operations by bringing in Chinese suppliers, finding partners that meet internationally recognized standards in areas like labor, environmental protection, worker safety, and manufacturing best practices can be a challenge.  However, the Chinese government has placed greater emphasis on protecting the environment and elevating sustainability as a key priority, resulting in more Chinese companies adding environmental concerns to their CSR initiatives.

In 2014, China signed a memorandum of understanding (MOU) with the OECD to cooperate on RBC initiatives.  This MOU, however, does not require or necessarily mean that Chinese companies will adhere to the OECD Guidelines for Multinational Enterprises.  Industry leaders have pushed for China to comply with OECD guidelines and establish a national contact point or RBC center.  As a result, MOFCOM in 2016 launched the RBC Platform, which serves as the national contact point on RBC issues and supplies information to companies about RBC best practices in China.

In 2014, China participated in the OECD’s RBC Global Forum, including hosting a workshop in Beijing in May 2015.  Policy developments from the workshops included incorporation of human rights into social responsibility guidelines for the electronics industry; referencing the United Nations Guiding Principles on Business and Human Rights; mandating social impact assessments for large footprint projects; and agreeing to draft a new law on public participation in environmental protection and impact assessments.

The MOFCOM-affiliated Chinese Chamber of Commerce of Metals, Minerals, and Chemical Importers and Exporters (CCCMC) also signed a separate MOU with the OECD in October 2014, to help Chinese companies implement RBC policies in global mineral supply chains.  In December 2015, CCCMC released Due Diligence Guidelines for Responsible Mineral Supply Chains, which draw heavily from the OECD Due Diligence Guidelines.  China is currently drafting legislation to regulate the sourcing of minerals, including tin, tungsten, tantalum, and gold, from conflict areas.  China is not a member of the Extractive Industries Transparency Initiative (EITI), but Chinese investors participate in EITI schemes where these are mandated by the host country.

Corruption remains endemic in China.  The lack of an independent press, along with the lack of independence of corruption investigators, who answer to and are managed by the CCP, all hamper the transparent and consistent application of anti-corruption efforts.

Chinese anti-corruption laws have strict penalties for bribes, including accepting a bribe, which is a criminal offense punishable up to life imprisonment or death in “especially serious” circumstances.  Offering a bribe carries a maximum punishment of up to five years in prison, except in cases with “especially serious” circumstances, when punishment can extend up to life in prison.

In August 2015, the NPC amended several corruption-related parts of China’s Criminal Law.  For instance, bribing civil servants’ relatives or other close relationships is a crime with monetary fines imposed on both the bribe-givers and the bribe-takers; bribe-givers, mainly in minor cases, who aid authorities can be given more lenient punishments; and instead of basing punishments solely on the specific amount of money involved in a bribe, authorities now have more discretion to impose punishments based on other factors.

In February 2011, an amendment was made to the Criminal Law, criminalizing the bribing of foreign officials or officials of international organizations.  However, to date, there have not been any known cases in which someone was successfully prosecuted for offering this type of bribe.

In March 2018, the NPC approved the creation of the National Supervisory Commission (NSC), a new government anti-corruption agency that resulted from the merger of the Ministry of Supervision and the CCP’s Central Commission for Discipline Inspection (CCDI).  The NSC absorbed the anti-corruption units of the Supreme People’s Procuratorate, and those of the National Bureau of Corruption Prevention.  In addition to China’s 89 million CCP members, the new commission has jurisdiction over all civil servants and employees of state enterprises, as well as managers in public schools, hospitals, research institutes, and other public service institutions.  Lower-level supervisory commissions have been set up in all provinces, autonomous regions, municipalities, and the Xinjiang Production and Construction Corps.  The NPC also passed the State Supervision Law, which provides the NSC with its legal authorities to investigate, detain, and punish public servants.

The CCDI remains the primary body for enforcing ethics guidelines and party discipline, and refers criminal corruption cases to the NSC for further investigation.

President Xi Jinping’s Anti-Corruption Efforts

Since President Xi’s rise to power in 2012, China has undergone an intensive and large-scale anti-corruption campaign, with investigations reaching into all sectors of the government, military, and economy.  President Xi labeled endemic corruption as an “existential threat” to the very survival of the CCP that must be addressed.  Since then, each CCP annual plenum has touched on judicial, administrative, and CCP discipline reforms needed to thoroughly root out corruption.  Judicial reforms are viewed as necessary to institutionalize the fight against corruption and reduce the arbitrary power of CCP investigators, but concrete measures have emerged slowly.  To enhance regional anti-corruption cooperation, the 26th Asia-Pacific Economic Cooperation (APEC) Ministers Meeting adopted the Beijing Declaration on Fighting Corruption in November 2014.

According to official statistics, from 2012 to 2018 the CCDI investigated 2.17 million cases – more than the total of the preceding ten years.  In 2018 alone, the CCP disciplined around 621,000 individuals, up almost 95,000 from 2017.  However, the majority of officials only ended up receiving internal CCP discipline and were not passed forward for formal prosecution and trial.  A total of 195,000 corruption and bribery cases involving 263,000 people were heard in courts between 2013 and 2017, according to the Supreme People’s Court.  Of these, 101 were officials at or above the rank of minister or head of province.  In 2018, a large uptick of 51 officials at or above the provincial/ministerial level were disciplined by the NSC.  One group heavily disciplined in recent years has been the discipline inspectors themselves, with the CCP punishing more than 7,900 inspectors since late-2012.  This led to new regulations being implemented in 2016 by CCDI that increased overall supervision of its investigators.

China’s overseas fugitive-hunting campaign, called “Operation Skynet,” has led to the capture of more than 5,000 fugitives suspected of corruption.  In 2018 alone, CCDI reported that 1,335 fugitives suspected of official crimes were apprehended, including 307 corrupt officials mainly suspected for graft.  Anecdotal information suggests the Chinese government’s anti-corruption crackdown oftentimes is inconsistently and discretionarily applied, raising concerns among foreign companies in China.  For example, to fight rampant commercial corruption in the medical/pharmaceutical sector, China’s health authority issued “black lists” of firms and agents involved in commercial bribery.  Several blacklisted firms were foreign companies.  Additionally, anecdotal information suggests many Chinese government officials responsible for approving foreign investment projects, as well as some routine business transactions, are slowing approvals to not arouse corruption suspicions, making it increasingly difficult to conduct normal commercial activity.

While central government leadership has welcomed increased public participation in reporting suspected corruption at lower levels, direct criticism of central government leadership or policies remains off-limits and is seen as an existential threat to China’s political and social stability.  Some citizens who have called for officials to provide transparency and public accountability by disclosing public and personal assets, or who have campaigned against officials’ misuse of public resources, have been subject to criminal prosecution.

United Nations Anti-Corruption Convention, OECD Convention on Combating Bribery

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

Resources to Report Corruption

The following government organization receives public reports of corruption:

Anti-Corruption Reporting Center of the CCP Central Commission for Discipline Inspection and the Ministry of Supervision, Telephone Number: +86 10 12388.

The risk of political violence directed at foreign companies operating in China remains low.  Each year, government watchdog organizations report tens of thousands of protests throughout China.  The government is adept at handling protests without violence, but given the volume of protests annually, the potential for violent flare-ups is real.  Violent protests, while rare, have generally involved ethnic tensions, local residents protesting corrupt officials, environmental and food safety concerns, confiscated property, and disputes over unpaid wages.

In recent years, the growing number of protests over corporate M&A transactions has increased, often because disenfranchised workers and mid-level managers feel they were not included in the decision process.  China’s non-transparent legal and regulatory system allows the CCP to pressure or punish foreign companies for the actions of their governments. The government has also encouraged protests or boycotts of products from certain countries, like Korea, Japan, Norway, Canada, and the Philippines, in retaliation for unrelated policy decisions.  Examples of politically motivated economic retaliation against foreign firms include boycott campaigns against Korean retailer Lotte in 2016 and 2017 in retaliation for the decision to deploy the Thermal High Altitude Area Defense (THAAD) to the Korean Peninsula, which led to Lotte closing and selling its China operations; and high-profile cases of gross mistreatment of Japanese firms and brands in 2011 and 2012 following disputes over islands in the East China Sea.  Recently, some reports suggest China has retaliated against some Canadian companies and products as a result of a domestic Canadian legal issue that impacted a large Chinese enterprise.

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

In the past few years, Chinese authorities have detained or arrested several foreign nationals, including American citizens, and have refused to notify the U.S. Embassy or allow access to the American citizens detained for consular officers to visit.  These trends are in direct contravention of recognized international agreements and conventions.

For U.S. companies operating in China, finding adequate human resources remains a major challenge.  Finding, developing, and retaining domestic talent, particularly at the management and highly-skilled technical staff levels, remain difficult challenges often cited by foreign firms.  In addition, labor costs continue to be a concern, as salaries along with other inputs of production have continued to rise. Foreign companies also continue to cite air pollution concerns as a major hurdle in attracting and retaining qualified foreign talent to relocate to China.  These labor concerns contribute to a small, but growing, number of foreign companies relocating from China to the United States, Canada, Mexico, or other parts of Asia.

Chinese labor law does not protect rights such as freedom of association and the right of workers to strike.  China to date has not ratified the United Nations International Labor Organization conventions on freedom of association, collective bargaining, and forced labor, but it has ratified conventions prohibiting child labor and employment discrimination.  Foreign companies often complain of difficulty navigating China’s ever-evolving labor laws, social insurance laws, and different agencies’ implementation guidelines on labor issues. Compounding the complexity, local characteristics and the application by different localities of national labor laws often vary.

Although required by national law, labor contracts are often not used by domestic employers with local employees.  Without written contracts, employees struggle to prove employment, thus losing basic labor rights like claiming severance and unemployment compensation if terminated, as well as access to publicly-provided labor dispute settlement mechanisms.  Similarly, regulations on agencies that provide temporary labor (referred to as “labor dispatch” in China) have tightened, and some domestic employers have switched to hiring independent service provider contractors in order to skirt the protective intent of these regulations.  These loopholes incentivize employers to skirt the law because compliance leads to substantially higher labor costs. This is one of many factors contributing to an uneven playing field for foreign firms that compete against domestic firms that circumvent local labor laws.

Establishing independent trade unions is illegal in China.  The law allows for worker “collective bargaining”; however, in practice, collective bargaining focuses solely on collective wage negotiations – and even this practice is uncommon.  The Trade Union Law gives the All-China Federation of Trade Unions (ACFTU), a CCP organ chaired by a member of the Politburo, control over all union organizations and activities, including enterprise-level unions.  The ACFTU’s priority task is to “uphold the leadership of the Communist Party,” not to protect workers’ rights or improve their welfare. The ACFTU and its provincial and local branches aggressively organize new constituent unions and add new members, especially in large multinational enterprises, but in general, these enterprise-level unions do not actively participate in employee-employer relations.  The absence of independent unions that advocate on behalf of workers has resulted in an increased number of strikes and walkouts in recent years.

ACFTU enterprise unions issue a mandatory employer-borne cost of 2 percent of payroll for membership.  While labor laws do not protect the right to strike, “spontaneous” worker protests and work stoppages occur with increasing regularity, especially in labor intensive and “sunset” industries (i.e., old and declining industries such as low-end manufacturing).  Official forums for mediation, arbitration, and other similar mechanisms of alternative dispute resolution have generally been ineffective in resolving labor disputes in China.  Some localities actively discourage acceptance of labor disputes for arbitration or legal resolution. Even when an arbitration award or legal judgment is obtained, getting local authorities to enforce judgments is problematic.

In the aftermath of the Chinese crackdown on Tiananmen Square demonstrations in June 1989, the United States suspended Overseas Private Investment Corporation (OPIC) programs in China.  OPIC honors outstanding political risk insurance contracts. The Multilateral Investment Guarantee Agency, an organization affiliated with the World Bank, provides political risk insurance for investors in China.  Some foreign commercial insurance companies also offer political risk insurance, as does the People’s Insurance Company of China.

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

*China’s National Bureau of Statistics (90.031 trillion RMB converted at 6.8 RMB/USD estimate)
** Statistics gathered from China’s Ministry of Commerce official data

Table 3: Sources and Destination of FDI

Source: IMF Coordinated Direct Investment Survey (CDIS)

Table 4: Sources of Portfolio Investment

Data not available.

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

Other Useful Online Resources

Chinese Government

• Chinese Embassy in Washington, D.C.: http://www.china-embassy.org/eng  ;
• Ministry of Commerce: http://english.mofcom.gov.cn  
• Invest in China: http://www.fdi.gov.cn/pub/FDI_EN/default.htm  
• National Development and Reform Commission: http://en.ndrc.gov.cn  
• State Administration of Foreign Exchange: http://www.safe.gov.cn  
• State Administration of Taxation: http://www.chinatax.gov.cn/2013/n2925  

United States Government

• U.S. Embassy in Beijing (Doing Business in China) http://beijing.usembassy-china.org.cn/business.html  
• U.S. Department of State travel information: http://travel.state.gov
• U.S. Trade Representative: http://www.ustr.gov  
• U.S. Department of Commerce: http://www.export.gov  
• U.S. Department of the Treasury: http://www.treasury.gov  
• Export Import Bank: http://www.exim.gov  
• Overseas Private Investment Corporation (OPIC): http://www.opic.gov  
• U.S. Trade and Development Agency: http://www.ustda.gov  

Policies Towards Foreign Direct Investment

Hong Kong is the world’s third-largest recipient of foreign direct investment (FDI) according to the United Nations Conference on Trade and Development’s (UNCTAD) World Investment Report 2018. The HKG’s InvestHK encourages inward investment, offering free advice and services to support companies from the planning stage through to the launch and expansion of their business. U.S. and other foreign firms can participate in government financed and subsidized research and development programs on a national treatment basis. Hong Kong does not discriminate against foreign investors by prohibiting, limiting, or conditioning foreign investment in a sector of the economy.

Capital gains are not taxed, nor are there withholding taxes on dividends and royalties. Profits can be freely converted and remitted. Foreign-owned and Hong Kong-owned company profits are taxed at the same rate – 16.5 percent. The tax rate on the first USD 255,000 profit for all companies is currently 8.25 percent. No preferential or discriminatory export and import policies affect foreign investors. Domestic industries receive no direct subsidies. Foreign investments face no disincentives, such as quotas, bonds, deposits, nor other similar regulations.

According to HKG statistics, 3,955 overseas companies had regional operations registered in Hong Kong in 2018. The United States has the largest number with 724. About 35 percent of start-ups in Hong Kong come from overseas.

Hong Kong’s Business Facilitation Advisory Committee is a platform for the HKG to consult the private sector on regulatory proposals and implementation of new or proposed regulations.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign investors can invest in any business and own up to 100 percent of equity. Like domestic private entities, foreign investors have the right to engage in all forms of remunerative activity.

The HKG owns all land in Hong Kong, which the HKG administers by granting long-term leases without transferring title. Expatriates claim that a 15 percent Buyer’s Stamp Duty on all non-permanent-resident and corporate buyers discriminates against them.

The main exceptions to the HKG’s open foreign investment policy are:

Broadcasting – Voting control of free-to-air television stations by non-residents is limited to 49 percent. There are also residency requirements for the directors of broadcasting companies.

Legal Services – Foreign lawyers at foreign law firms may only practice the law of their jurisdiction. Foreign law firms may become “local” firms after satisfying certain residency and other requirements. Localized firms may thereafter hire local attorneys, but must do so on a 1:1 basis with foreign lawyers. Foreign law firms can also form associations with local law firms.

Other Investment Policy Reviews

Hong Kong last conducted the Trade Policy Review in 2018 through the World Trade Organization (WTO). https://www.wto.org/english/tratop_e/tpr_e/g380_e.pdf 

Business Facilitation

The Economic Analysis and Business Facilitation Unit under the Financial Secretary’s Office is responsible for business facilitation initiatives aimed at improving the business regulatory environment of Hong Kong.

The e-Registry (https://www.eregistry.gov.hk/icris-ext/apps/por01a/index ) is a convenient and integrated online platform provided by the Companies Registry and the Inland Revenue Department for applying for company incorporation and business registration. Applicants, for incorporation of local companies or for registration of non-Hong Kong companies, must first register for a free user account, presenting an original identification document or a certified true copy of the identification document. The Companies Registry normally issues the Business Registration Certificate and the Certificate of Incorporation on the same day for applications for company incorporation. For applications for registration of a non-Hong Kong company, it issues the Business Registration Certificate and the Certificate of Registration two weeks after submission.

Outward Investment

As a free market economy, Hong Kong does not promote or incentivize outward investment, nor restricts domestic investors from investing abroad. Mainland China and British Virgin Islands were the top two destinations for Hong Kong’s outward investments in 2017.

Hong Kong has bilateral investment agreements with Australia, Austria, the Belgium-Luxembourg Economic Union, Canada, Chile, Denmark, Finland, France, Germany, Italy, Japan, South Korea, Kuwait, the Netherlands, New Zealand, Sweden, Switzerland, Thailand, the United Kingdom and Association of Southeast Asian Nations (ASEAN). Trade agreements concluded with Australia, Bahrain, Myanmar, Maldives, Mexico, and the United Arab Emirates are currently pending completion of internal procedures by each party concerned. The HKG is currently negotiating agreements with Iran, Turkey and Russia. All such agreements are based on a model text approved by Mainland China through the Sino-British Joint Liaison Group. U.S. firms are generally not at a competitive or legal disadvantage, since Hong Kong’s market is open and its legal system impartial.

Hong Kong has a free trade agreement (FTA) with Mainland China, called the Closer Economic Partnership Arrangement (CEPA). This provides tariff-free export to Mainland China of Hong Kong-origin goods and preferential access for specific services sectors. CEPA has gradually expanded since its signing in 2003. Under the CEPA framework, Hong Kong enjoys liberalized trade in services using a “negative list” that covers 134 service sectors for Hong Kong and grants national treatment to Hong Kong’s 62 service industries. Hong Kong also enjoys most-favored nation treatment, with liberalization measures included in FTAs signed by Mainland China and other countries automatically extended to Hong Kong. In June 2017, Hong Kong and Mainland China signed an investment agreement and an economic and technical cooperation agreement. The investment agreement, effective from January 2018, includes provision of national treatment and non-services investment using a negative list approach.

Hong Kong has FTAs with New Zealand, member states of the European Free Trade Association, Chile, Macau, ASEAN, Georgia, the Maldives, and Australia. These agreements are consistent with the provisions of the WTO. Hong Kong is exploring FTAs with the Pacific Alliance (Chile, Colombia, Mexico and Peru) and the United Kingdom..

The United States does not have a bilateral treaty on the avoidance of double taxation with Hong Kong, but has a Tax Information Exchange Agreement and an Inter-Government Agreement on the Foreign Account Tax Compliance Act with Hong Kong. As of March 2019, the HKG had Comprehensive Avoidance of Double Taxation Agreements with 40 tax jurisdictions. It has signed agreements with fifteen jurisdictions on the automatic exchange of financial account information in tax matters. In September 2018, the Multilateral Convention on Mutual Administrative Assistance in Tax Matters signed by Mainland China entered into force for Hong Kong.

Transparency of the Regulatory System

Hong Kong’s regulations and policies typically strive to avoid distortions or impediments to the efficient mobilization and allocation of capital and to encourage competition. Bureaucratic procedures and “red tape” are transparent and held to a minimum.

In amending or making any legislation, including investment laws, the HKG conducts a three-month public consultation on the issue concerned which then informs the drafting of the bill. Lawmakers discuss draft bills and then vote. Hong Kong’s legal, regulatory, and accounting systems are transparent and consistent with international norms.

Gazette is the official publication of the Hong Kong government. This website https://www.gld.gov.hk/egazette/english/whatsnew/whatsnew.html   is the centralized online location where laws, regulations, draft bills, notices and tenders are published. All public comments received by the HKG are published at the websites of relevant policy bureaus.

The Office of the Ombudsman, established in 1989 by the Ombudsman Ordinance, is Hong Kong’s independent watchdog of public governance.

Public finances are regulated by clear laws and regulations. The Basic Law prescribes that authorities strive to achieve a fiscal balance and avoid deficits. There is a clear commitment by the HKG to publish fiscal information under the Audit Ordinance and the Public Finance Ordinance, which prescribe deadlines for the publication of annual accounts and require the submission of annual spending estimates to the Legislative Council (LegCo). There are few contingent liabilities of the HKG, with details of these items published about seven months after the release of the fiscal budget. In addition, LegCo members have a responsibility to enhance budgetary transparency by urging government officials to explain the government’s rationale for the allocation of resources. All LegCo meetings are open to the public so that the government’s responses are available to the general public.

International Regulatory Considerations

Hong Kong is a member of WTO and Asia-Pacific Economic Co-operation (APEC), adopting international norms. It notifies all draft technical regulations to the WTO Committee on Technical Barriers to Trade and was the first WTO member to ratify the Trade Facilitation Agreement (TFA). Hong Kong has achieved a 100 percent rate of implementation commitments.

Legal System and Judicial Independence

Hong Kong’s common law system is based on the rule of law and the independence of the judiciary. Regulations or enforcement actions are appealable and they are adjudicated in the court system.

Hong Kong’s commercial law covers a wide range of issues related to doing business. Most of Hong Kong’s contract law is found in the reported decisions of the courts in Hong Kong and other common law jurisdictions.

Laws and Regulations on Foreign Direct Investment

Hong Kong’s extensive body of commercial and company law generally follows that of the United Kingdom, including the common law and rules of equity. Most statutory law is made locally. The local court system, which is independent of the government, provides for effective enforcement of contracts, dispute settlement, and protection of rights. Foreign and domestic companies register under the same rules and are subject to the same set of business regulations.

The Hong Kong Code on Takeovers and Mergers (1981) sets out general principles for acceptable standards of commercial behavior.

The Companies Ordinance (Chapter 622) applies to Hong Kong-incorporated companies and contains the statutory provisions governing compulsory acquisitions. For companies incorporated in jurisdictions other than Hong Kong, relevant local company laws apply. Effective from March 2018, the Companies Ordinance requires companies to retain information about significant controllers accurate and up-to-date.

The Securities and Futures Ordinance (Chapter 571) contains provisions requiring shareholders to disclose interests in securities in listed companies and provides listed companies with the power to investigate ownership of interests in its shares. It regulates the disclosure of inside information by listed companies and restricts insider dealing and other market misconduct.

Competition and Anti-Trust Laws

The independent Competition Commission (CC) investigates anti-competitive conduct that prevents, restricts, or distorts competition in Hong Kong. In January 2019, a newly-established Hong Kong Seaport Alliance (HKSA) announced that they had agreed to operate and manage 23 berths, a reported market share of 95 percent, across eight terminals at Kwai Tsing Container Terminal in a bid to deliver more efficient services to carriers and enhance the overall port’s competitiveness.  The CC subsequently launched, as a matter of priority, a probe into whether the HKSA acted in contravention of competition rules. The investigation is still underway.

Expropriation and Compensation

The U.S. Consulate General is not aware of any expropriations in the recent past. Expropriation of private property in Hong Kong may occur if it is clearly in the public interest and only for well-defined purposes such as implementation of public works projects. Expropriations are to be conducted through negotiations, in a non-discriminatory manner in accordance with established principles of international law. Investors in and lenders to expropriated entities are to receive prompt, adequate, and effective compensation. If agreement cannot be reached on the amount payable, either party can refer the claim to the Land Tribunal.

Dispute Settlement

ICSID Convention and New York Convention

The Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention) and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) apply to Hong Kong.  Hong Kong’s Arbitration Ordinance provides for enforcement of awards under the 1958 New York Convention.

Investor-State Dispute Settlement

The U.S. Consulate General is not aware of any investor-state disputes in recent years involving U.S. or other foreign investors or contractors and the HKG. Private investment disputes are normally handled in the courts or via private mediation. Alternatively, disputes may be referred to the Hong Kong International Arbitration Center.

International Commercial Arbitration and Foreign Courts

The HKG accepts international arbitration of investment disputes between itself and investors and has adopted the United Nations Commission on International Trade Law model law for domestic and international commercial arbitration. It has with Mainland China a Memorandum of Understanding modelled on the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) for reciprocal enforcement of arbitral awards.

Under Hong Kong’s Arbitration Ordinance emergency relief granted by an emergency arbitrator before the establishment of an arbitral tribunal, whether in or outside Hong Kong, is enforceable. In January 2018, the Arbitration Ordinance clarified that all disputes over intellectual property rights may be resolved by arbitration.

The Mediation Ordinance details the rights and obligations of participants in mediation, especially related to confidentiality and admissibility of mediation communications in evidence.

Third party funding for arbitration and mediation came into force on February 1, 2019.

Foreign judgments in civil and commercial matters may be enforced in Hong Kong by common law or under the Foreign Judgments (Reciprocal Enforcement) Ordinance, which facilitates reciprocal recognition and enforcement of judgments on the basis of reciprocity. A judgment originating from a jurisdiction that does not recognize a Hong Kong judgment may still be recognized and enforced by the Hong Kong courts, provided that all the relevant requirements of common law are met. However, a judgment will not be enforced in Hong Kong if it can be shown that either the judgment or its enforcement is contrary to Hong Kong’s public policy.

In January 2019, Hong Kong and Mainland China signed a new Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters by the Courts of the Mainland and of Hong Kong to facilitate enforcement of judgments in the two jurisdictions. The arrangement, which is pending implementing legislation, will cover the following key features: contractual and tortious disputes in general; commercial contracts, joint venture disputes, and outsourcing contracts; intellectual property rights, matrimonial or family matters; and judgments related to civil damages awarded in criminal cases.

Bankruptcy Regulations

Hong Kong’s Bankruptcy Ordinance provides the legal framework to enable i) a creditor to file a bankruptcy petition with the court against an individual, firm, or partner of a firm who owes him/her money; and ii) a debtor who is unable to repay his/her debts to file a bankruptcy petition against himself/herself with the court. Bankruptcy offences are subject to criminal liability.

The Companies (Winding Up and Miscellaneous Provisions) (Amendment) Bill, enacted in February 2017, aims to improve and modernize the corporate winding-up regime by increasing creditor protection and further enhancing the integrity of the winding-up process.

The Commercial Credit Reference Agency collates information about the indebtedness and credit history of SMEs and makes such information available to members of the Hong Kong Association of Banks and the Hong Kong Association of Deposit Taking Companies.

Hong Kong’s average duration of bankruptcy proceedings is 0.8 year, ranking 44th in the world for resolving insolvency, according to the World Bank’s Doing Business 2019 rankings.

Investment Incentives

Hong Kong imposes no export performance or local content requirements as a condition for establishing, maintaining, or expanding a foreign investment. There are no requirements that Hong Kong residents own shares, that foreign equity is reduced over time, or that technology is transferred on certain terms. The HKG does not have a practice of issuing guarantees or jointly financing foreign direct investment projects.

The HKG allows a deduction on interest paid to overseas-associated corporations and provides an 8.25 percent concessionary tax rate derived by a qualifying corporate treasury center.

The HKG offers an effective tax rate of around three to four percent to attract aircraft leasing companies to develop business in Hong Kong.

The HKG has set up multiple programs to assist enterprises in securing trade finance and business capital, expanding markets, and enhancing overall competitiveness. These support measures are available to any enterprise in Hong Kong, irrespective of origin.

Hong Kong-registered companies with a significant proportion of their research, design, development, production, management, or general business activities located in Hong Kong are eligible to apply to the Innovation and Technology Fund (ITF), which provides financial support for research and development (R&D) activities in Hong Kong.  Hong Kong Science & Technology Parks (Science Park) and Cyberport are HKG-owned enterprises providing subsidized rent and financial support through incubation programs to early-stage startups.

The HKG offers additional tax deductions for domestic expenditure on R&D incurred by firms. Firms enjoy a 300 percent tax deduction for the first HKD 2 million (USD 255,000) qualifying R&D expenditure and a 200 percent deduction for the remainder. Since 2017, the Financial Secretary has announced over HKD 120 billion (USD 15.3 billion) in funding to support innovation and technology development in Hong Kong.  These funds are largely directed at supporting and adding programs through the ITF, Science Park, and Cyberport.

HKD 20 billion (USD 2.6 billion) has been earmarked for the Research Endowment Fund, which provides research grants to academics and universities.  Another HKD 10 billion (USD 1.3 billion) has been set aside to provide financial incentives to foreign universities to partner with Hong Kong universities and establish joint research projects housed in two research clusters in Science Park, one specializing in artificial intelligence and robotics and the other specializing in biotechnology.  Another HKD 20 billion (USD 2.6 billion) has been appropriated to begin construction on a second, larger Science Park, located on the border with Shenzhen, which is intended to provide a much larger number of subsidized-rent facilities for R&D which are also expected to have special rules allowing Mainland residents to work onsite without satisfying normal immigration procedures.

In September 2018, the HKG launched the Technology Talent Admission Scheme (TechTAS) and the Postdoctoral Hub Program (PHP) to attract non-local talent and nurture local talent. The TechTAS provides a fast-track arrangement for eligible technology companies/institutes to admit overseas and Mainland technology talent to undertake R&D for them in the areas of biotechnology, artificial intelligence, cybersecurity, robotics, data analytics, financial technologies, and material science are eligible for application. The PHP provides funding support to recipients of the ITF as well as incubatees and tenants of Science Park and Cyberport to recruit up to two postdoctoral talents for R&D. Applicants must possess a doctoral degree in a science, technology, engineering and mathematics-related discipline from either a local university or a well-recognized non-local institution.

The HKG plans to set up a USD 256.4 million Re-industrialization Funding Scheme in 2019 to subsidize manufacturers, on a matching basis, setting up smart production lines in Hong Kong.

In May 2018, the Hong Kong Monetary Authority (HKMA) launched the Pilot Bond Grant Scheme with enhanced tax concessions for qualifying debt instruments in order to enhance Hong Kong’s competitiveness in the international bond market.

Foreign Trade Zones/Free Ports/Trade Facilitation

Hong Kong, a free port without foreign trade zones, has modern and efficient infrastructure making it a regional trade, finance, and services center. Rapid growth has placed severe demands on that infrastructure, necessitating plans for major new investments in transportation and shipping facilities, including a planned expansion of container terminal facilities, additional roadway and railway networks, major residential/commercial developments, community facilities, and environmental protection projects. Construction on a third runway at Hong Kong International Airport is scheduled for completion by 2023.

Hong Kong and Mainland China have a Free Trade Agreement Transshipment Facilitation Scheme that enables Mainland-bound consignments passing through Hong Kong to enjoy tariff reductions in the Mainland. The arrangement covers goods traded between Mainland China and its trading partners, including ASEAN members, Australia, Bangladesh, Chile, Costa Rica, Iceland, India, New Zealand, Pakistan, Peru, South Korea, Sri Lanka, Switzerland and Taiwan. As of the end of 2018, the HKG had received 14,935 applications with goods valued at USD 1.2 billion and estimated tariff reduction exceeding USD 81 million.

The HKG launched in December 2018 phase one of the Trade Single Window (TSW) to provide a one-stop electronic platform for submitting ten types of trade documents, promoting cross-border customs cooperation, and expediting trade declaration and customs clearance. Phases two and three are expected to be implemented in 2022 and 2023, respectively.

The latest version of CEPA has established principles of trade facilitation, including simplifying customs procedures, enhancing transparency, and strengthening cooperation.

Performance and Data Localization Requirements

The HKG does not mandate local employment or performance requirements. It does not follow a forced localization policy making foreign investors use domestic content in goods or technology.

Foreign nationals normally need a visa to live or work in Hong Kong. Short-term visitors are permitted to conduct business negotiations and sign contracts while on a visitor’s visa or entry permit. Companies employing people from overseas must demonstrate that a prospective employee has special skills, knowledge, or experience not readily available in Hong Kong.

Hong Kong allows free and uncensored flow of information.  The freedom and privacy of communication is enshrined in Basic Law Article 30. The HKG is required to follow due process and warrant requirements to engage in electronic surveillance or demand most communications records from telecoms providers. The HKG has no requirements for foreign IT providers to turn over source code and does not interfere with data center operations.

Hong Kong does not currently restrict transfer of personal data outside the SAR, but the dormant Section 33 the Personal Data (Privacy) Ordinance would prohibit such transfers unless the personal data owner consents or other specified conditions are met.  The Privacy Commissioner is authorized to bring Section 33 into effect at any time, but it has been dormant since 1995.

Real Property

The Basic Law ensures protection of leaseholders’ rights in long-term leases that are the basis of the SAR’s real property system.  The Basic Law also protects the lawful traditional rights and interests of the indigenous inhabitants of the New Territories. The real estate sector, one of Hong Kong’s pillar industries, is equipped with a sound banking mortgage system. HK ranked 53rd for ease of registering property, according to the World Bank’s Doing Business 2019 rankings.

Land transactions in Hong Kong operate on a deeds registration system governed by the Land Registration Ordinance. The Land Titles Ordinance provides greater certainty on land title and simplifies the conveyancing process.

Intellectual Property Rights

Hong Kong’s commercial and company laws provide for effective enforcement of contracts and protection of corporate rights. Hong Kong has filed its notice of compliance with the Trade-Related Aspects of Intellectual Property Rights (TRIPs) requirements of the WTO. The Intellectual Property Department, which includes the Trademarks and Patents Registries, is the focal point for the development of Hong Kong’s IP regime. The Customs and Excise Department (CED) is the sole enforcement agency for intellectual property rights (IPR). Hong Kong has acceded to the Paris Convention for the Protection of Industrial Property, the Bern Convention for the Protection of Literary and Artistic Works, and the Geneva and Paris Universal Copyright Conventions. Hong Kong also continues to participate in the World Intellectual Property Organization as part of Mainland China’s delegation; the HKG has seconded an officer from CED to INTERPOL in Lyon, France to further collaborate on IPR enforcement.

The HKG devotes significant resources to IPR enforcement. Hong Kong courts have imposed longer jail terms than in the past for violations of Hong Kong’s Copyright Ordinance. CED works closely with foreign customs agencies and the World Customs Organization to share best practices and to identify, disrupt, and dismantle criminal organizations engaging in IP theft that operate in multiple countries. The government has conducted public education efforts to encourage respect for IPR. Pirated and counterfeit products remain available on a small scale at the retail level throughout Hong Kong. CED detected a total of 951 infringement cases in 2018, a four percent increase from 2017. Of these cases, 207 involved internet crime.

Other IPR challenges include end-use piracy of software and textbooks, internet peer-to-peer downloading, and the illicit importation and transshipment of pirated and counterfeit goods from Mainland China and other places in Asia. Hong Kong authorities have taken steps to address these challenges by strengthening collaboration with Mainland Chinese authorities, prosecuting  end-use software piracy, and monitoring suspect shipments at points of entry. It has also established a task force to monitor and crack down on internet-based peer-to-peer piracy.

The Drug Office of Hong Kong imposes a drug registration requirement that requires applicants for new drug registrations make a non-infringement patent declaration. The Copyright Ordinance protects any original copyrighted work created or published anywhere in the world and criminalizes  copying and distribution of protected works for business and circumventing technological protection measures. The Ordinance also provides rental rights for sound recordings, computer programs, films, and comic books; in addition to including enhanced penalty provisions and other legal tools to facilitate enforcement. The law defines possession of an infringing copy of computer programs, movies, TV dramas, and musical recordings (including visual and sound recordings) for use in business as an offense, but provides no criminal liability for other categories of works. In February 2019, the HKG announced that it would introduce to LegCo an amendment bill to implement the Marrakesh Treaty.

The HKG has consulted unsuccessfully with internet service providers and content user representatives on a voluntary framework for IPR protection in the digital environment. It has also failed to pass amendments to the Copyright Ordinance that would enhance copyright protection against online piracy. As of March 2018, the Infringing Website List Scheme established by the Hong Kong Creative Industries Association to clamp down on websites that display pirated content reportedly has deprived infringers of USD 833,000 monthly, or 24 percent of overall monthly advertising revenue, since December 2016.

The Patent Ordinance allows for granting an independent patent in Hong Kong based on patents granted by the United Kingdom and Mainland China. Patents granted in Hong Kong are independent and capable of being tested for validity, rectified, amended, revoked, and enforced in Hong Kong courts. In June 2016, the LegCo passed an “original grant patent” (OPG) bill that,  while retaining the current re-registration system for the granting of standard patents, takes into account the patent systems generally established in regional and international patent treaties. The HKG will implement the OGP system in 2019 upon the completion of all preparatory work.

The Registered Design Ordinance is modeled on the EU design registration system. To be registered, a design must be new and the system requires no substantive examination. The initial period of five years protection is extendable for four periods of five years each, up to 25 years.

Hong Kong’s trademark law is TRIPS-compatible and allows for registration of trademarks relating to services. All trademark registrations originally filed in Hong Kong are valid for seven years and renewable for 14-year periods. Proprietors of trademarks registered elsewhere must apply anew and satisfy all requirements of Hong Kong law. When evidence of use is required, such use must have occurred in Hong Kong. In March 2019, the HKG introduced into LegCo a draft bill to implement the Madrid Protocol. Upon enactment of the bill and completion of other preparatory work, the HKG will liaise with the Mainland to seek application of the Madrid Protocol to Hong Kong beginning in 2022.

Hong Kong has no specific ordinance to cover trade secrets; however, the government has a duty under the Trade Descriptions Ordinance to protect information from being disclosed to other parties. The Trade Descriptions Ordinance prohibits false trade descriptions, forged trademarks, and misstatements regarding goods and services supplied in the course of trade.

The HKG has accepted recommendations from a 2015 report by the Working Group on IP and set aside about USD 3 million in the coming three years to introduce new support measures. In June 2018, a bill expanding from five categories to eight the scope of tax deductions for capital expenditure incurred for the purchase of IP rights came into force.

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

There are no impediments to the free flow of financial resources. Non-interventionist economic policies, complete freedom of capital movement, and a well-understood regulatory and legal environment make Hong Kong a regional and international financial center. It has one of the most active foreign exchange markets in Asia.

Asset and wealth managed in Hong Kong posted a record high of USD 3.1 trillion in 2017 (the latest figure available), with two-thirds of that coming from overseas investors. In order to enhance the competitiveness of Hong Kong’s fund industry, open-ended fund companies as well as onshore and offshore funds are offered a profits tax exemption.

The HKMA’s Infrastructure Financing Facilitation Office (IFFO) provides a platform for pooling the efforts of investors, banks, and the financial sector to offer comprehensive financial services for infrastructure projects in emerging markets. In March 2018, IFFO joined the Global Infrastructure Facility as an advisory partner, contributing to the World Bank Group and international efforts to help make more infrastructure projects bankable.

Under the Insurance Companies Ordinance, insurance companies are authorized by the Insurance Authority to transact business in Hong Kong. As of January 2019, there were 162 authorized insurance companies in Hong Kong, 73 of them foreign or Mainland Chinese companies.

The Hong Kong Stock Exchange’s total market capitalization dropped by 12.0 percent to USD 3.8 trillion in 2018, with 2,315 listed firms at year-end. Hong Kong Exchanges and Clearing Limited, a listed company, operates the stock and futures exchanges. The Securities and Futures Commission, an independent statutory body outside the civil service, has licensing and supervisory powers to ensure the integrity of markets and protection of investors.

No discriminatory legal constraints exist for foreign securities firms establishing operations in Hong Kong via branching, acquisition, or subsidiaries.  Rules governing operations are the same for all firms. No laws or regulations specifically authorize private firms to adopt articles of incorporation or association that limit or prohibit foreign investment, participation, or control.

In 2018, a total of 267 Chinese enterprises had “H” share listings on the stock exchange, with combined market capitalization of USD 761.8 billion. The Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connects allow individual investors to cross trade Hong Kong and Mainland stocks. In December 2018, the ETF Connect, which was planned to allow international and mainland investors to trade in exchange-traded fund products listed in Hong Kong, Shanghai and Shenzhen, was put on hold indefinitely due to “technical issues.”

By the end of 2018, 50 Mainland mutual funds and 17 Hong Kong mutual funds were allowed to be distributed in each other’s markets through the Mainland-Hong Kong Mutual Recognition of Funds scheme. Hong Kong also has mutual recognition of funds programs with Switzerland, France, the United Kingdom, and Luxembourg.

Hong Kong has developed its debt market with the Exchange Fund bills and notes program. Hong Kong Dollar debt stood at USD 236.5 billion by the end of 2018. As of January 2019, RMB 871.2 billion (USD 129.6 billion) of offshore RMB bonds were issued in Hong Kong. Multinational enterprises, including McDonald’s and Caterpillar, have also issued debt. The Bond Connect, a new mutual market access scheme that allows investors from Mainland China and overseas to trade in each other’s respective bond markets, was launched in July 2017.

The HKG requires workers and employers to contribute to retirement funds under the Mandatory Provident Fund (MPF) scheme. Contributions are expected to channel roughly USD five billion annually into various investment vehicles. By the end of 2018, the net asset values of MPF funds amounted to USD 104.2 billion.

Money and Banking System

Hong Kong has a three-tier system of deposit-taking institutions: licensed banks (152), restricted license banks (18), and deposit-taking companies (16). HSBC is Hong Kong’s largest banking group. With its majority-owned subsidiary Hang Seng Bank, HSBC controls more than 40.3 percent of Hong Kong Dollar (HKD) deposits. The Bank of China (Hong Kong) is the second-largest banking group with 13.9 percent of HKD deposits throughout 200 branches. In total, the five largest banks in Hong Kong had more than USD 1.7 trillion in total assets at the end of 2017. Thirty-five U.S. “authorized financial institutions” operate in Hong Kong, and most banks in Hong Kong maintain U.S. correspondent relationships. Full implementation of the Basel III capital, liquidity, and disclosure requirements is expected in 2019.

Credit in Hong Kong is allocated on market terms and is available to foreign investors on a non-discriminatory basis. The private sector has access to the full spectrum of credit instruments as provided by Hong Kong’s banking and financial system. Legal, regulatory, and accounting systems are transparent and consistent with international norms. The HKMA, the de facto central bank, is responsible for maintaining the stability of the banking system and managing the Exchange Fund that backs Hong Kong’s currency. Real Time Gross Settlement helps minimize risks in the payment system and brings Hong Kong in line with international standards.

Banks in Hong Kong have in recent years strengthened anti-money laundering and counter-terrorist financing controls, including the adoption of more stringent customer due diligence (CDD) process for existing and new customers. In September 2016, the HKMA issued a circular stressing that “CDD measures adopted by banks must be proportionate to the risk level and banks are not required to implement overly stringent CDD processes.”

The HKMA welcomes the establishment of virtual banks, which are subject to the same set of supervisory principles and requirements applicable to conventional banks. In May 2018, HKMA issued guidelines on authorization of virtual banks, giving priority to those applicants demonstrating, among other requirements, that they have a credible and viable business plan to provide new customer experience and to promote financial inclusion and fintech development. In March 2019, the HKMA granted three virtual banking licenses, with five more applications under consideration.

In March 2016, the HKMA set up the Fintech Facilitation Office (FFO) to promote Hong Kong as a fintech hub in Asia. Seven banks in Hong Kong have joined an HKMA-led blockchain-based trade finance proof-of-concept to digitize and share trade documents, automate processes and reduce risks and fraud. In 2018, the HKMA signed four fintech co-operation agreements with the regulatory authorities of Switzerland, Poland, Abu Dhabi, and Brazil.

Foreign Exchange and Remittances

Foreign Exchange

Conversion and inward/outward transfers of funds are not restricted. The HKD is a freely convertible currency linked via de facto currency board to the U.S. dollar.  The exchange rate is allowed to fluctuate in a narrow band between HKD 7.75 – HKD 7.85 = USD 1.

Remittance Policies

There are no recent changes to or plans to change investment remittance policies. Hong Kong has no restrictions on the remittance of profits and dividends derived from investment, nor reporting requirements on cross-border remittances. Foreign investors bring capital into Hong Kong and remit it through the open exchange market.

Hong Kong has anti-money laundering (AML) legislation allowing the tracing and confiscation of proceeds derived from drug-trafficking and organized crime. Hong Kong has an anti-terrorism law that allows authorities to freeze funds and financial assets belonging to terrorists. Effective from July 2018, travelers arriving in Hong Kong with currency or bearer negotiable instruments (CBNIs) exceeding HKD 120,000 (USD 15,385) must make a written declaration to the CED. For a large quantity of CBNIs imported or exported in a cargo consignment, an advanced electronic declaration must be made to the CED.

Sovereign Wealth Funds

The Future Fund, Hong Kong’s wealth fund, was established in 2016 with an endowment of USD 28.2 billion. The fund seeks higher returns through long-term investments and adopts a “passive” role as a portfolio investor. About half of the Future Fund has been deployed in alternative assets, mainly global private equity and overseas real estate, over a three-year period. The rest is placed with the Exchange Fund’s Investment Portfolio, which follows the Santiago Principles, for an initial ten-year period. In February 2019, the Financial Secretary announced that an expert team will review the fund’s investment strategies and portfolios to achieve more diversified investments.

Hong Kong has several major HKG-owned enterprises, which are classified as “statutory bodies.” Hong Kong is party to the Government Procurement Agreement (GPA) within the framework of WTO. Annex 3 of the GPA lists as statutory bodies the Housing Authority, Hospital Authority, Airport Authority, Mass Transit Railway Corporation Limited, and the Kowloon-Canton Railway Corporation, which procure in accordance with the agreement.

The HKG provides more than half the population with subsidized housing, along with most hospital and education services from childhood through the university level. The government also owns major business enterprises, including the stock exchange, railway, and airport.

Conflicts occasionally arise between the government’s roles as owner and policy-maker. Industry observers have recommended that the government establish a separate entity to coordinate its ownership of government-held enterprises and initiate a transparent process of nomination to the boards of government-affiliated entities. Other recommendations from the private sector include establishing a clear separation between industrial policy and the government’s ownership function, and minimizing exemptions of government-affiliated enterprises from general laws.

The 2012 Competition Law exempts all but six of the statutory bodies from the law’s purview. While the government’s private sector ownership interests do not materially impede competition in Hong Kong’s most important economic sectors, industry representatives have encouraged the government to adhere more closely to the Guidelines on Corporate Governance of State-owned Enterprises of the Organization for Economic Cooperation and Development (OECD).

Privatization Program

All major utilities in Hong Kong, except water, are owned and operated by private enterprises, usually under an agreement framework by which the HKG regulates each utility’s management.

The Hong Kong Corporate Citizenship Program (HKCCP) organizes a series of activities and seminars and grants awards for good corporate citizenship. Amendments to the Companies Ordinance mandate listed companies and larger private companies to report on their corporate environmental policies and performances. The Hong Kong Stock Exchange adopts a higher standard of disclosure – ‘comply or explain’ – about its environmental key performance indicators for listed companies. In January 2019, the Chinese University of Hong Kong’s Center for Business Sustainability announced results of Hong Kong Business Sustainability Index (HKBSI), which aims to encourage companies in Hong Kong to adopt corporate social responsibility (CSR) as a progressive business model to achieve business sustainability. The results show that there is a heightened awareness of business sustainability and increased efforts to implement CSR practices. Hong Kong is not a member of the OECD, and hence, OECD Guidelines for Multinational Enterprises are not applicable to Hong Kong companies. The HKG, however, commends enterprises for fulfilling their social responsibility. In October 2018, the Chief Secretary stressed in a speech that the entire HKG is moving towards CSR.

Mainland China ratified the United Nations Convention Against Corruption in January 2006, and it was extended to Hong Kong in February 2006. Hong Kong has an excellent track record in combating corruption and U.S. firms have not identified corruption as an obstacle to FDI. The Independent Commission Against Corruption (ICAC) is responsible for combating corruption. A bribe to a foreign official is a criminal act, as is the giving or accepting of bribes, for both private individuals and government employees. Offences are punishable by imprisonment and large fines.

The Hong Kong Ethics Development Center (HKEDC), established by the ICAC, promotes business and professional ethics to sustain a level-playing field in Hong Kong. The International Good Practice Guidance – Defining and Developing an Effective Code of Conduct for Organizations of the Professional Accountants in Business Committee published by the International Federation of Accountants (IFAC) and is in use with the permission of IFAC.

Resources to Report Corruption

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

Simon Pei, Commissioner
Independent Commission Against Corruption
303 Java Road, North Point, Hong Kong
+852-2826-3111
Email: com-office@icac.org.hk

Hong Kong is politically stable, with demonstrations almost always peaceful. The U.S. Consulate General is not aware of recent incidents involving politically motivated damage to projects or installations.

Hong Kong’s unemployment rate stood at 2.8 percent in the fourth quarter of 2018, with the unemployment rate of youth aged 15-19 rising slightly to 8.9 percent. In 2018, skilled personnel working as administrators, managers, professionals, and associate professionals accounted for 40.4 percent of the total working population. At the end of 2018, there were about 381,000 foreign domestic helpers working in Hong Kong. In 2018, about 22,087 foreign professionals came to work in the city. The Employees Retraining Board provides skills re-training for local employees. To address a shortage of highly skilled technical and financial professionals, the HKG seeks to attract qualified foreign and Mainland Chinese workers.

The Employment Ordinance (EO) and the Employees’ Compensation Ordinance prohibit the termination of employment in certain circumstances: 1) Any pregnant employee who has at least four weeks’ service and who has served notice of her pregnancy; 2) Any employee who is on paid statutory sick leave and; 3) Any employee who gives evidence or information in connection with the enforcement of the EO or relating to any accident at work, cooperates in any investigation of his employer, is involved in trade union activity, or serves jury duty may not be dismissed because of those circumstances. Breach of these prohibitions is a criminal offence.

According to the EO, someone employed under a continuous contract for not less than 24 months is eligible for severance payment if: 1) dismissed by reason of redundancy; 2) under a fixed term employment contract that expires without being renewed due to redundancy; or 3) laid off.

Unemployment benefits are income and asset tested on an individual basis if living alone; if living with other family members, the total income and assets of all family members are taken into consideration for eligibility. Recipients must be between the ages of 15-59, capable of work, and actively seeking full-time employment.

Parties in a labor dispute can consult the free and voluntary conciliation service offered by the Labor Department (LD). A conciliation officer appointed by the LD will help parties reach a contractually binding settlement. If there is no settlement, parties can commence proceedings with the Labor Tribunal (LT), which can then be raised to the Court of First Instance and finally the Court of Appeal for leave to appeal. The Court of Appeal can grant leave only if the case concerns a question of law of general public importance.

Local law provides for the rights of association and of workers to establish and join organizations of their own choosing. The government does not discourage or impede the formation of unions. As of 2017, Hong Kong’s 836 registered unions had 904,210 members, a participation rate of about 25.0 percent. Its labor legislation is in line with international laws. Hong Kong has implemented 41 conventions of the International Labor Organization in full and 18 others with modifications. Workers who allege discrimination against unions have the right to a hearing by the Labor Relations Tribunal. Legislation protects the right to strike. Collective bargaining is not protected by Hong Kong law; there is no obligation to engage in it; and it is not widely used. For more information on labor regulations in Hong Kong, please visit the following website: http://www.labour.gov.hk/eng/legislat/contentA.htm   (Chapter 57 “Employment Ordinance”).

In October 2018, new amendments to the EO came into force giving the LT the power to make an order for reinstatement or re-engagement without securing the employer’s approval if it deems an employee has been unreasonably and unlawfully dismissed. If the employer does not reinstate or re-engage the employee as required by the order, the employer must pay to the employee a sum amounting to three times the employee’s average monthly wages up to USD 9,300. The employer commits an offence if he/she willfully and without reasonable excuse fails to pay the additional sum.

Starting from January 2019, male employees with are entitled to five days’ paternity leave (increased from three days).

Effective May 1 2019, the statutory minimum hourly wage rate will increase from USD 4.4 to USD 4.8.

Overseas Private Investment Corporation coverage is not available in Hong Kong. Hong Kong is a member of the World Bank Group’s Multilateral Investment Guarantee Agency.

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

* Source for Host Country Data: Hong Kong Census and Statistics Department

Table 3: Sources and Destination of FDI

Table 4: Sources of Portfolio Investment

Alan Brinker, Consul, Economic Affairs
U.S. Consulate General Hong Kong
26 Garden Road, Central

Policies Towards Foreign Direct Investment

With GDP growth of 5.17 percent in 2018, Indonesia’s young population, strong domestic demand, stable political situation, and well-regarded macroeconomic policy make it an attractive destination for foreign direct investment (FDI). Indonesian government officials welcome increased FDI, aiming to create jobs and spur economic growth, and court foreign investors, notably focusing on infrastructure development and export-oriented manufacturing. However, foreign investors have complained about vague and conflicting regulations,  bureaucratic issues, ambiguous legislation in regards to  tax enforcement, poor existing infrastructure, rigid labor laws, sanctity of contract issues, and corruption.

The Investment Coordination Board, or BKPM, serves as an investment promotion agency, a regulatory body, and the agency in charge of approving planned investments in Indonesia. As such, it is the first point of contact for foreign investors, particularly in manufacturing, industrial, and non-financial services sectors. In July 2018, Indonesia launched the OSS system to streamline 488 licensing and permitting processes through the issuance of Government Regulation No.24/2018 on Electronic Integrated Business Licensing Services. As a new process, OSS implementation is a work in progress and would benefit from greater socialization, especially at the subnational level. Special expedited licensing services are available for investors meeting certain criteria, such as making investments in excess of approximately IDR100 billion (USD7.4 million) or employing 1,000 local workers.

Limits on Foreign Control and Right to Private Ownership and Establishment

Restrictions on FDI are, for the most part, outlined in Presidential Decree No.44/2016, commonly referred to as the Negative Investment List or the DNI. The Negative Investment List aims to consolidate FDI restrictions from numerous decrees and regulations, in order to create greater certainty for foreign and domestic investors. The 2016 revision to the list eased restrictions in a number of previously closed or restricted fields. Previously closed sectors, including the film industry (including filming, editing, captioning, production, showing, and distribution of films), on-line marketplaces with a value in excess of IDR100 billion (USD7.4 million), restaurants, cold chain storage, informal education, hospital management services, and manufacturing of raw materials for medicine, are now open for 100 percent foreign ownership. The 2016 list also raises the foreign investment cap in the following sectors, though not fully to 100 percent: online marketplaces under IDR100 billion (USD7.4 million), tourism sectors, distribution and warehouse facilities, logistics, and manufacturing and distribution of medical devices. In certain sectors, restrictions are liberalized for foreign investors from other ASEAN countries. Though the energy sector saw little change in the 2016 revision, foreign investment in construction of geothermal power plants up to 10 MW is permitted with an ownership cap of 67 percent, while the operation and maintenance of such plants is capped at 49 percent foreign ownership. For investment in certain sectors, such as mining and higher education, the 2016 Negative Investment List is useful only as a starting point, as additional licenses and permits are required by individual ministries. A number of sensitive business areas, involving, for example, alcoholic beverages, ocean salvage, certain fisheries, and the production of some hazardous substances, remain closed to foreign investment or are otherwise restricted.

Foreign investment in small-scale and home industries (i.e. forestry, fisheries, small plantations, certain retail sectors) is reserved for micro, small and medium enterprises (MSMEs) or requires a partnership between a foreign investor and local entity. Even where the 2016 DNI revisions lifted limits on foreign ownership, certain sectors remain subject to other restrictions imposed by separate laws and regulations. In November 2018, the government announced its plans to liberalize further DNI sectors through the XVI economic policy package, before shelving the idea a few weeks later.

In November 2016, Bank Indonesia issued Regulation No.18/2016 on the implementation of payment transaction processing.  The regulation governs all companies providing the following services: principal, issuer, acquirer, clearing, final settlement operator, and operator of funds transfer.  The BI regulation capped foreign ownership of payments companies at 20 percent, though it contained a grandfathering provision.  BI’s July 2017 Regulation No.19/2017 on the National Payment Gateway (NPG) subsequently imposed a 20 percent foreign equity cap on all companies engaging in domestic debit switching transactions.  Firms wishing to continue executing domestic debit transactions are obligated to form partnership agreements with a NPG switching company.

Foreigners may purchase equity in state-owned firms through initial public offerings and the secondary market. Capital investments in publicly listed companies through the stock exchange are not subject to Indonesia’s Negative Investment List.

Other Investment Policy Reviews

The latest World Trade Organization (WTO) Investment Policy Review of Indonesia was conducted in April 2013 and can be found on the WTO website: http://www.wto.org/english/tratop_e/tpr_e/tp378_e.htm .

The most recent OECD Investment Policy Review of Indonesia, conducted in 2010, can be found on the OECD website: http://www.oecd.org/daf/inv/investmentfordevelopment/indonesia-investmentpolicyreview-oecd.htm .

UNCTADs report on ASEAN Investment can be found here: http://www.unctad.org/en/PublicationsLibrary/unctad_asean_air2017d1.pdf .

Business Facilitation

Business Registration

In order to conduct business in Indonesia, foreign investors must be incorporated as a foreign-owned limited liability company (PMA) through the Ministry of Law and Human Rights. Once incorporated, a PMA must register through the OSS system. Upon registration, a company will receive a business identity number (NIB) along with proof of participation in the Workers Social Security Program (BPJS) and endorsement of any Foreign Worker Recruitment Plans (RPTKA).  An NIB remains valid as long as the business operates in compliance with Indonesian laws and regulations. Existing businesses will eventually be required to register through the OSS system. In general, the OSS system simplified processes for obtaining NIB from three days to one day.

Once an investor has obtained a NIB, he/she may apply for a business license. At this stage, investors must: document their legal claim to the proposed project land/location; provide an environmental impact statement (AMDAL); show proof of submission of an investment realization report; and provide a recommendation from relevant ministries as necessary.  Investors also need to apply for commercial and/or operational licenses prior to commencing commercial operations. Previously the business license process averaged 260 days.  Following establishment of the 2018 OSS system, which includes 488 licenses for various ministries/agencies, the process of starting business has been reduced to 20 days according to the World Bank’s 2019 Ease of Doing Business report, which placed Indonesia 73^rd out of the 190 countries surveyed in the report. Special expedited licensing services are also available for investors meeting certain criteria, such as making investments in excess of approximately IDR 100 billion (USD 7.2 million) or employing 1,000 local workers. After obtaining a NIB, investors in some designated industrial estates can immediately start project construction.

Foreign investors are generally prohibited from investing in MSMEs in Indonesia, although the 2016 Negative Investment List opened some opportunities for partnerships in farming and catalog and online retail. In accordance with the Indonesian SMEs Law No. 20/2008, MSMEs are defined as enterprises with net assets less than IDR10 billion (USD0.8 million) or with total annual sales under IDR50 billion (USD 3.7 million). However, the Indonesian Central Bureau of Statistics defines MSMEs as enterprises with fewer than 99 employees. The government provides assistance to MSMEs, including: expanded access to business credit for MSMEs in farming, fishery, manufacturing, creative business, trading and services sectors; a tax exemption for MSMEs with annual sales under IDR 200 million (USD 14.8 million); and assistance with international promotion.

The Ministry of Law and Human Rights’ implementation of an electronic business registration filing and notification system has dramatically reduced the number of days needed to register a company. Foreign firms are not required to disclose proprietary information to the government.

Screening of FDI

BKPM is responsible for issuing “investment licenses” (the term used to encompass both NIB and business licenses) to foreign entities and has taken steps to simplify the application process. The OSS serves as an online portal which allows foreign investors to apply for and track the status of licenses and other services online. The OSS coordinates many of the permits issued by more than a dozen ministries and agencies required for investment approval. In addition, BKPM now issues soft-copy investment and business licenses. While the OSS’s goal is to help streamline investment approvals, investments in the mining, oil and gas, plantation, and most other sectors still require multiple licenses from related ministries and authorities. Likewise, certain tax and land permits, among others, typically must be obtained from local government authorities. Though Indonesian companies are only require to obtain one approval at the local level, businesses report that foreign companies often must additional approvals in order to establish a business.

The Ministry of Home Affairs, the Ministry of Administrative and Bureaucratic Reform, and BKPM issued a circular in 2010 to clarify which government offices are responsible for investment that crosses provincial and regional boundaries. Investment in a regency (a sub-provincial level of government) is managed by the regency government; investment that lies in two or more regencies is managed by the provincial government; and investment that lies in two or more provinces is managed by the central government, or central BKPM. BKPM has plans to roll out its one-stop-shop structure to the provincial and regency level to streamline local permitting processes at more than 500 sites around the country.

Outward Investment

Indonesia’s outward investment is limited, as domestic investors tend to focus on the domestic market. BKPM has responsibility for promoting and facilitating outward investment, to include providing information about investment opportunities in and policies of other countries. BKPM also uses their investment and trade promotion centers abroad to match Indonesian companies with potential investment opportunities. The government neither restricts nor provides incentives for outward investment.

Indonesia has investment agreements with 41countries, including: Algeria, Australia, Bangladesh, Chile, Croatia, Cuba, Czech Republic, Guyana, Iran,  Jamaica, Jordan, Libya, Mauritius, Mongolia, Morocco, Mozambique, Norway, Pakistan, Philippines, Poland, Qatar, Russia, Saudi Arabia, Serbia, Slovak Republic, South Korea, Sri Lanka, Sudan, Suriname, Syria, Sweden, Tajikistan, Thailand, Tunisia, Turkmenistan, Ukraine, United Kingdom, Uzbekistan, Venezuela, Yemen, and Zimbabwe.

In 2014, Indonesia began to abrogate its existing BITs by allowing the agreements to expire. By 2018, 26 BITs had expired, including those with Argentina, Belgium, Bulgaria, Cambodia, China, Denmark, Egypt, France, Finland, Germany, Hungary, India, Italy, Kyrgyzstan, Laos, Malaysia, Netherlands, Norway, Pakistan, Romania, Singapore, Spain, Slovakia, Switzerland, Turkey, and Vietnam. However, Indonesia renewed its BIT with Singapore in October 2018. Indonesia is currently developing a new model BIT that could limit the scope of Investor-State Dispute Settlement provisions.

The ASEAN Economic Community (AEC) arrangement came into effect on January 1, 2016, and was expected to reduce barriers for goods, services and some skilled employees across ASEAN. Under the ASEAN Free Trade Agreement, duties on imports from ASEAN countries generally range from zero to five percent, except for products specified on exclusion lists. Indonesia also provides preferential market access to Australia, China, Japan, Korea, India, Pakistan, and New Zealand under regional ASEAN agreements and to Japan under a bilateral agreement. In accordance with the ASEAN-China Free Trade Agreement (FTA), in August 2012 Indonesia increased the number of goods from China receiving duty-free access to 10,012 tariff lines. Indonesia is also participating in negotiations for the Regional Comprehensive Economic Partnership (RCEP), which includes the 10 ASEAN Member States and 6 additional countries (Australia, China, India, Japan, Korea and New Zealand). In February 2019, RCEP entered the 25^th round of negotiations, which included discussion on trade in goods, trade in services, investment, economic and technical cooperation, intellectual property, competition, dispute settlement, e-commerce, SMEs and other issues. In March 2019, ASEAN and Japan signed the First Protocol to Amend their Comprehensive Economic Partnership Agreement.

Indonesia has been actively engaged in bilateral FTA negotiations. In 2018, Indonesia signed trade agreements with Australia, Chile, and the European Free Trade Association (Iceland, Liechtenstein, Norway, and Switzerland). Indonesia is currently negotiating bilateral trade agreements with the European Union, Iran, Japan, Malaysia, Morocco, Mozambique, South Korea, Tunisia, and Turkey. In addition, Indonesia seeks to initiate trade negotiations with Bangladesh, Sri Lanka, the Gulf Cooperation Council, South Africa, and Kenya.

The United States and Indonesia signed the Convention between the Government of the Republic of Indonesia and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of the Fiscal Evasion with Respect to Taxes on Income in Jakarta on July 11, 1988. This was amended with a Protocol, signed on July 24, 1996. There is no double taxation of personal income.

Transparency of the Regulatory System

Indonesia continues to bring its legal, regulatory, and accounting systems into compliance with international norms, but progress is slow.  Notable developments included passage of a comprehensive anti-money laundering law in late 2010 and a land acquisition law in January 2012. Although Indonesia continues to move forward with regulatory system reforms foreign investors have indicated to still encounter challenges in comparison to domestic investors, and have criticized the current regulatory system in its function to establish clear and transparent rules for all actors.  Certain laws and policies, including the Negative Investment List, establish sectors that are either fully off-limits to foreign investors or are subject to substantive conditions.

Decentralization has introduced another layer of bureaucracy for firms to navigate, resulting in what companies have identified as costly red tape.  Certain business claim that Indonesia encounters challenges in launching bureaucratic reforms due to ineffective management, resistance from vested interests, and corruption. U.S. businesses cite regulatory uncertainty and a lack of transparency as two significant factors hindering operations. Government ministries and agencies, including the Indonesian House of Representatives (DPR), continue to publish many proposed laws and regulations in draft form for public comment; however, not all draft laws and regulations are made available in public fora and it can take years for draft legislation to become law.  Laws and regulations are often vague and require substantial interpretation by the implementers, leading to business uncertainty and rent-seeking opportunities.

U.S. companies note that regulatory consultation in Indonesia is inconsistent, at best, despite the existence of Law No. 12/2011 on the Development of Laws and Regulations and its implementing Government regulation 87/204, which states that the community is entitled to provide oral or written input into draft laws and regulations. The law also sets out procedures for revoking regulations and introduces requirements for academic studies as a basis for formulating laws and regulations. Nevertheless, the absence of a formal consultation mechanism has been reported to lead to different interpretations among policy makers of what is required.

In June 2016, the Jokowi administration repealed 3,143 regional bylaws that overlapped with other regulations and impeded the ease of doing business. However, a 2017 Constitutional Court ruling limited the Ministry of Home Affairs’ authority to revoke local regulations and allowed local governments to appeal the central government’s decision. The Ministry continues to play a consultative function in the regulation drafting stage, providing input to standardize regional bylaws with national laws.

In November 2017, the government issued Presidential Instruction No. 7/2017, which aims to improve the coordination among ministries in the policy-making process. The new regulation requires lead ministries to coordinate with their respective coordinating ministry before issuing a regulation. Presidential Instruction No. 7 also requires Ministries to conduct a regulatory impact analysis and provide an opportunity for public consultation. The presidential instruction did not address the frequent lack of coordination between the central and local governments. Pursuant to various Indonesian economy policy reform packages over the past several years, the government has eliminated 220 regulations as of September 2018. Fifty-one of the eliminated regulations are at the Presidential level and 169 at the ministerial or institutional level.

In July 2018, President Jokowi issued Presidential Regulation No. 54/2018, updating and streamlining the National Anti-Corruption Strategy to synergize corruption prevention efforts across ministries, regional governments, and law enforcement agencies. The regulation focuses on three areas: licenses, state finances (primarily government revenue and expenditures), and law enforcement reform. An interagency team, including KPK, leads the national strategy’s implementation efforts.

In October 2018, the government issued Presidential Regulation No. 95/2018 on e-government that requires all levels of government (central, provincial, and municipal) to implement online governance tools (e-budgeting, e-procurement, e-planning) to improve budget efficiency, government transparency, and the provision of public services.

International Regulatory Considerations

As a member of ASEAN, Indonesia has successfully implemented regional initiatives, including ratification of the legal protocol and becoming one of the first five ASEAN Member States to implement real-time movement of electronic import documents through the ASEAN Single Window, which reduces shipping costs, speeds customs clearance, and reduces opportunities for corruption.  Indonesia has also committed to ratify the ASEAN Comprehensive Investment Agreement (ACIA), ASEAN Framework Agreement on Services (AFAS), and the ASEAN Mutual Recognition Arrangement. Notwithstanding progress made in certain areas, the often-lengthy process of aligning national legislation has caused delays in implementation. The complexity of interagency coordination and/or a shortage of technical capacity are among the challenges being reported.

Indonesia joined the WTO in 1995. Indonesia’s National Standards Body (BSN) is the primary government agency to notify draft regulations to the WTO concerning technical barriers to trade (TBT) and sanitary and phytosanitary standards (SPS); however, in practice, notification is inconsistent.

In December 2017, Indonesia ratified the WTO Trade Facilitation Agreement (TFA). At this point, Indonesia has met 88.7 percent of its commitments to the TFA provisions, including publication and availability information, consultations, advance ruling, review procedure, detention and test procedure, fee and charges discipline, goods clearance, border agency cooperation, import/export formalities, and goods transit.

Legal System and Judicial Independence

Indonesia’s legal system is based on civil law. The court system consists of District Courts (primary courts of original jurisdiction), High Courts (courts of appeal), and the Supreme Court (the court of last resort). Indonesia also has a Constitutional Court. The Constitutional Court has the same legal standing as the Supreme Court, and its role is to review the constitutionality of legislation. Both the Supreme and Constitutional Courts have authority to conduct judicial reviews. Many businesses have noted that the judiciary is susceptible to corruption and influence from outside parties.

Certain companies have claimed that the court system often does not provide the necessary recourse for resolving property and contractual disputes and that cases that would be adjudicated in civil courts in other jurisdictions sometimes result in criminal charges in Indonesia. Judges are not bound by precedent and many laws are open to various interpretations. According to the U.S. industry, corruption also continues to plague Indonesia’s judiciary, with graft investigations involving senior judges and court staff.

A lack of clear land titles has plagued Indonesia for decades, although the land acquisition law No.2/2012 enacted in 2012 included legal mechanisms designed to resolve some past land ownership issues. In addition, companies find Indonesia to have a poor track record on the legal enforcement of contracts, and civil disputes are sometimes criminalized. Government Regulation No. 79/2010 opened the door for the government to remove recoverable costs from production sharing contracts. Indonesia has also required mining companies to renegotiate their contracts of work to include higher royalties, more divestment to local partners, more local content, and domestic processing of mineral ore.

Indonesia’s commercial code, grounded in colonial Dutch law, has been updated to include provisions on bankruptcy, intellectual property rights, incorporation and dissolution of businesses, banking, and capital markets. Application of the commercial code, including the bankruptcy provisions, remains uneven, in large part due to corruption and training deficits for judges, prosecutors, and defense lawyers.

Laws and Regulations on Foreign Direct Investment

FDI in Indonesia is regulated by Law No. 25/2007 (the Investment Law). Under the law, any form of FDI in Indonesia must be in the form of a limited liability company, with the foreign investor holding shares in the company. In addition, the government outlines restrictions on FDI in Presidential Decree No. 44/2016, issued in May 2016, commonly referred to as the 2016 Negative Investment List. It aims to consolidate FDI restrictions in certain sectors from numerous decrees and regulations to provide greater certainty for foreign and domestic investors. The 2016 Negative Investment List enables greater foreign investment in some sectors like film, tourism, logistics, health care, and e-commerce. A number of sectors remain closed to investment or are otherwise restricted. The 2016 Negative List contains a clause that clarifies that existing investments will not be affected by the 2016 revisions. The website of the Investment Coordination Board (BKPM) provides information on investment requirements and procedures: http://www2.bkpm.go.id/ .  Indonesia mandates reporting obligations for all foreign investors through BKPM Regulation No.7/2018.  See section two for Indonesia’s procedures for licensing foreign investment.

Competition and Anti-Trust Laws

The Indonesian Competition Authority (KPPU) implements and enforces the 1999 Indonesia Competition Law. The KPPU reviews agreements, business practices and mergers that may be deemed anti-competitive, advises the government on policies that may affect competition, and issues guidelines relating to the Competition Law. Strategic sectors such as food, finance, banking, energy, infrastructure, health, and education are KPPU’s priorities. In April 2017, the Indonesia DPR began deliberating a new draft of the Indonesian antitrust law, which would repeal the current Law No. 5/1999 and strengthen KPPU’s enforcement against monopolistic practices and unfair business competition.

Expropriation and Compensation

The Indonesian government generally recognizes and upholds the property rights of foreign and domestic investors. The 2007 Investment Law opened major sectors of the economy to foreign investment, while providing investors protection from nationalization, except where corporate crime is involved. However, Indonesian economic nationalism and an oft-stated desire for “self-sufficiency” continues to manifest itself through negotiations, policies, regulations, and laws in way that companies describe as eroding investor value. These include local content requirements, requirements to divest equity shares to Indonesian stakeholders, and requirements to establish manufacturing or processing facilities in Indonesia.

In 2012, the government issued a regulation requiring foreign-owned mining operations to divest majority equity to Indonesian shareholders within 10 years of operational startup using cost of investment incurred, rather than market value, for purposes of divestment valuation. In 2014, with Regulation No. 77/2014, the government eased the foreign ownership restrictions to 60 percent for companies that smelt domestically (40 percent divestment) and 70 percent for companies that operate underground mines (30 percent divestment). However, regulations enacted in 2017 again require foreign-owned miners to gradually divest over ten years 51 percent of shares to Indonesian interests, with the price of divested shares determined based on fair market value and not taking into account existing reserves. The government has indicated it intends the majority-share divestment requirement to supersede Regulation No. 77/2014 and apply to all foreign investors in the sector. Based on the 2009 Mining Law, all mining contracts of work must be renegotiated to alter the terms to more favor the government, including royalty and tax rates, local content levels, domestic processing of minerals, and reduced mine areas. Some mining companies had to reduce the size of their original mining work area without compensation.

In general, Indonesia’s rising resource nationalism advances the idea that domestic interests should not have to pay prevailing market prices for domestic resources. In addition, in the oil and gas sector, the government is increasingly explicit in its policy that expiring production sharing contracts operated by foreign companies be transferred to domestic interests rather than extended. While there is no obligation of compensation under the production sharing contract, this policy has begun to affect the Indonesian business interests of foreign companies.

The Law on Land Acquisition Procedures for Public Interest Development passed in 2011 sought to streamline government acquisition of land for infrastructure projects. The law seeks to clarify roles, reduce the time frame for each phase of the land acquisition process, deter land speculation, and curtail obstructionist litigation, while still ensuring safeguards for land-right holders. The implementing regulations went into effect in 2015. Some reports indicate that the law has reduced land acquisition timelines, with no accusations of illegal government expropriation of land.

Dispute Settlement

ICSID Convention and New York Convention

Indonesia is a member of the International Center for Settlement of Investment Disputes (ICSID) and the United Nations Commission on International Trade Law (UNCITRAL) through the ratification of the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention). Thus, foreign arbitral awards are legally recognized and enforceable in the Indonesian courts; however, some note that these awards are not always enforced in practice.

Investor-State Dispute Settlement

Since 2004, Indonesia has faced seven known Investor-State Dispute Settlement (ISDS) arbitration cases, including those that have been settled and discontinued cases. In 2016, an ICSID tribunal ruled in favor of Indonesia in the arbitration case of British firm Churchill Mining. In March 2019, the tribunal rejected an annulment request from the claimants. In addition, a Dutch arbitration court recently ruled in favor of the Indonesian government in USD 469 million arbitration case against Indian firm Indian Metals & Ferro Alloys.  Two cases involved Newmont Nusa Tenggara under BIT with Netherlands and Oleovest under BIT with Singapore were discontinued.

Indonesia recognizes binding international arbitration of investment disputes in its bilateral investment treaties (BITs). All of Indonesia’s BITs include the arbitration under ICSID or UNCITRAL rules, except the BIT with Denmark. However, in response to an increase in the number of arbitration cases submitted to ICSID, BKPM formed an expert team to review the current generation of BITs and formulate a new model BIT that would more seek to better protect perceived national interests. The Indonesian model BIT is under legal review.

In spite of the cancellation of many BITs, the 2007 Investment Law still provides protection to investors through a grandfather clause. In addition, Indonesia also has committed to ISDS provisions in regional or multilateral agreement signed by Indonesia (i.e. ASEAN Comprehensive Investment Agreement).

International Commercial Arbitration and Foreign Courts

Judicial handling of investment disputes remains mixed. Indonesia’s legal code recognizes the right of parties to apply agreed-upon rules of arbitration. Some arbitration, but not all, is handled by Indonesia’s domestic arbitration agency, the Indonesian National Arbitration Body.

Companies have resorted to ad hoc arbitrations in Indonesia using the UNCITRAL model law and ICSID arbitration rules. Though U.S. firms have reported that doing business in Indonesia remains challenging, there is not a clear pattern or significant record of investment disputes involving U.S. or other foreign investors. Companies complain that the court system in Indonesia works slowly as international arbitration awards, when enforced, may take years from original judgment to payment.

Bankruptcy Regulations

Indonesian Law No. 37/2004 on Bankruptcy and Suspension of Obligation for Payment of Debts is decidedly pro-creditor and the law makes no distinction between domestic and foreign creditors. As a result, foreign creditors have the same rights as all potential creditors in a bankruptcy case, as long as foreign claims are submitted in compliance with underlying regulations and procedures. Monetary judgments in Indonesia are made in local currency.

Investment Incentives

Indonesia provides incentive facilities through fiscal incentives, non-fiscal incentives, and other benefits. Fiscal incentives are in the form of tax holidays, tax allowances, and exemptions of import duties for capital goods and raw materials for investment. As part of the Economic Policy Package XVI, Indonesia issued a modified tax holiday scheme in November 2018 through Ministry of Finance (MOF) Regulation 150/2018, which revokes MOF Regulation 35/2018.  This regulation is intended to attract more direct investment in pioneer industries and simplify the application process through the OSS. The period of the tax holiday is extended up to 20 years; the minimum investment threshold is IDR 100 trillion (USD 7.14 billion), which is a significant reduction from the previous regulation at IDR 500 trillion (USD 35.7 billion). In addition to the tax holiday, depending on the investment amount, this regulation also provides either 25 or 50 percent income tax reduction for the two years after the end of the tax holiday. The following table explains the parameters of the new scheme:

Based on BKPM Regulation 1/2019, the coverage of pioneer sectors was expanded to the digital economy, agricultural, plantation, and forestry, bringing the total to eighteen industries:

1. Upstream basic metals;
2. Oil and gas refineries;
3. Petrochemicals derived from petroleum, natural gas, and coal;
4. Inorganic basic chemicals;
5. Organic basic chemicals;
6. Pharmaceutical raw materials;
7. Semi-conductors and other primary computer components;
8. Primary medical device components;
9. Primary industrial machinery components;
10. Primary engine components for transport equipment;
11. Robotic components for manufacturing machines;
12. Primary ship components for the shipbuilding industry;
13. Primary aircraft components;
14. Primary train components;
15. Power generation including waste-to-energy power plants;
16. Economic infrastructure;
17. Digital economy including data processing; and
18. Agriculture, plantation, and forestry-based processing

Government Regulation No. 9/2016 expanded regional tax incentives for certain business categories in May 2016. Apparel, leather goods, and footwear industries in all regions are now eligible for the tax incentives. In this regulation, existing tax facilities are maintained, including:

• Deduction of 30 percent from taxable income over a six-year period
• Accelerated depreciation and amortization
• Ten percent of withholding tax on dividend paid by foreign taxpayer or a lower rate according to the avoidance of double taxation agreement
• Compensation losses extended from 5 to 10 years with certain conditions for companies that are:

1. 1. Located in industrial or bonded zone;
   2. Developing infrastructure;
   3. Using at least 70 percent domestic raw material;
   4. Absorbing 500 to 1000 laborers;
   5. Doing research and development (R&D) worth at least 5 percent of the total investment over 5 years;
   6. Reinvesting capital; or,
   7. Exporting at least 30 percent of their product.

The government also provides the facility of Government-Borne Import Duty (Bea Masuk Ditanggung Pemerintah /BMDTP) with zero percent import duty to improve industrial competitiveness and public goods procurement in high value added, labor intensive, and high growth sectors. MOF Regulation 209/2018 provides zero import duty for imported raw materials in 36 sectors including plastics, cosmetics, polyester, resins, other chemical materials, machinery for agriculture, electricity, toys, vehicle components, telecommunication, fertilizer, and pharmaceuticals until December 2019.

Research and Development

At present, Indonesia does not have formal regulations granting national treatment to U.S. and other foreign firms participating in government-financed or subsidized research and development programs. The Ministry for Research and Technology and Higher Education handles applications on a case-by-case basis.

Natural Resources

Indonesia’s vast natural resource wealth has attracted significant foreign investment over the last century and continues to offer significant prospects. However, some report that a variety of government regulations have made doing business in the resources sector increasingly difficult, and Indonesia now ranks near the bottom, 70th of 83 jurisdictions in the Fraser Institute’s 2018 Mining Policy Perception Index. In 2012, Indonesia banned the export of raw minerals, dramatically increased the divestment requirements for foreign mining companies, and required major mining companies to renegotiate their contracts of work with the government. The ban on the export of raw minerals went into effect in January 2014. In July 2014, the government issued regulations that allowed, until January 2017, the export of copper and several other mineral concentrates with export duties and other conditions imposed. When the full ban came back into effect in January 2017, the government issued new regulations that again allowed exports of copper concentrate and other specified minerals, but imposed  more onerous requirements. Of note for foreign investors, provisions of the regulations require that to be able to export non-smelted mineral ores, companies with contracts of work must convert to mining business licenses—and thus be subject to prevailing regulations—and must commit to build smelters within the next five years. Also, foreign-owned mining companies must gradually divest over ten years 51 percent of shares to Indonesian interests, with the price of divested shares determined based on fair market value and not taking into account existing reserves. The 2009 mining law devolved the authority to issue mining licenses to local governments, who have responded by issuing more than 10,000 licenses, many of which have been reported to overlap or be unclearly mapped. In the oil and gas sector, Indonesia’s Constitutional Court disbanded the upstream regulator in 2012, injecting confusion and more uncertainty into the natural resources sector. Until a new oil and gas law is enacted, upstream activities are supervised by the Special Working Unit on Upstream Oil and Gas (SKK Migas).

Infrastructure

Since taking office in October 2014, President Jokowi has made infrastructure development a top priority. The government originally announced plans to add 35,000 megawatts of electricity capacity by 2019, but in 2017 revised this target downward to 19,000 megawatts. The Jokowi administration also announced plans to create a maritime nexus, to include the development or expansion of 24 ports and other transportation infrastructure.  The Indonesian government is also implementing a PPP scheme to develop broadband internet access throughout the country as part of its “Palapa Ring” initiative. The initiative, which will install over 12,000 kilometers of fiber optic cable, is divided into three segments.  The western and central segments have been completed, and the eastern segment is expected to be complete by the end of 2019. Following completion of the Palapa Ring, Indonesia plans to deploy high-throughput satellites to connect remote and frontier areas for internet access. Many businesses report that the current institutional arrangement for infrastructure development still suffers from functional overlap, lack of capacity for public-private partnership (PPP) projects in regional governments, lack of solid value-for-money methodologies, crowding out of the private sector by state-owned enterprises (SOEs), legal uncertainty, lack of a solid land-acquisition framework, long-term operational risks for the private sector, unwillingness from stakeholders to be the first ones to test a new policy approach, and, especially, lack of a PPP apex agency. Currently infrastructure development is largely taking place through SOEs, with PPPs having only a marginal share of infrastructure projects.

Foreign Trade Zones/Free Trade/ Trade Facilitation

Indonesia offers numerous incentives to foreign and domestic companies that operate in special trade zones throughout Indonesia. The largest zone is the free trade zone (FTZ) island of Batam, located just south of Singapore. Neighboring Bintan Island and Karimun Island also enjoy FTZ status. Investors in FTZs are exempt from import duty, income tax, VAT, and sales tax on imported capital goods, equipment, and raw materials until the portion of production destined for the domestic market is “exported” to Indonesia, in which case fees are owed only on that portion.  Foreign companies are allowed up to 100 percent ownership of companies in FTZs. Companies operating in FTZs may lend machinery and equipment to subcontractors located outside of the zone for a maximum two-year period.

Indonesia also has numerous Special Economic Zones (SEZs), regulated under Law No. 39/2009, Government Regulation No. 2/2011 on SEZ management, and Government Regulation No. 96/2015. These benefits include a reduction of corporate income taxes for a period of years (depending on the size of the investment), income tax allowances, and expedited or simplified administrative processes for import/export, expatriate employment, immigration, and licensing. As of April 2019, Indonesia has identified twelve SEZs in manufacturing and tourism centers that are operational or under construction, with 20 additional areas proposed as new SEZs. Ten SEZs are operational (though development is sometimes limited) at: 1) Sei Mangkei, North Sumatera; 2) Tanjung Lesung, Banten, 3) Palu, Central Sulawesi; 4) Mandalika, West Nusa Tenggara, 5) Arun Lhokseumawe, Aceh, 6) Galang Batang, Bintan, Riau Islands 7) Tanjung Kelayang, Pulau Bangka, Bangka Belitung Islands; 8) Bitung, North Sulawesi; 9) Morotai, North Maluku; 10) Maloy Batuta Trans Kalimantan, East Kalimantan. Two more SEZs are expected to operate in 2019: Tanjung Api-Api, South Sumatera; and Sorong, Papua. In 2016, the government began the process of transitioning Batam from an FTZ to SEZ in order to provide further investment incentives in Batam. The Indonesian government announced in December 2018 that it plans to transition management of the Batam FTZ to the local government, creating a single regulatory authority on the island. The conversion to an SEZ is expected to be finished in 2019 and will not affect the status of the neighboring FTZs on Bintan and Karimun islands.

Indonesian law also provides for several other types of zones that enjoy special tax and administrative treatment.  Among these are Industrial Zones/Industrial Estates (Kawasan Industri), bonded stockpiling areas (Tempat Penimbunan Berikat), and Integrated Economic Development Zones (Kawasan Pengembangan Ekonomi Terpadu).  Indonesia is home to 97 industrial estates that host thousands of industrial and manufacturing companies.  Ministry of Finance Regulation No. 105/2016 provides several different tax and customs facilities available to companies operating out of an industrial estate, including corporate income tax reductions, tax allowances, VAT exemptions, and import duty exemptions depending on the type of industrial estate.  Bonded stockpile areas include bonded warehouses, bonded zones, bonded exhibition spaces, duty free shops, bonded auctions places, bonded recycling areas, and bonded logistics centers. Companies operating in these areas enjoy concessions in the form of exemption from certain import taxes, luxury goods taxes, and value added taxes, based on a variety of criteria for each type of location. Most recently, bonded logistics centers (BLCs) were introduced to allow for larger stockpiles, longer temporary storage (up to three years), and a greater number of activities in a single area. The Ministry of Finance issued Regulation 28/2018, providing additional guidance on the types of BLCs and shortening approval for BLC applications. By September 2018, Indonesia had designated 59 BLCs in 81 locations, with plans to designate more in eastern Indonesia.  KAPET zones, first announced in a 1996 presidential decree, are eligible for partial tax holidays, certain income tax exemptions and deductions, flexible treatment of amortization of capital and losses, and fiscal loss compensation. In 2018, Ministry of Finance and the Directorate General for Customs and Excise (DGCE) issued regulations (MOF Regulation No. 131/2018 and DGCE Regulation No. 19/2018) to streamline the licensing process for bonded zones.  Together the two regulations are intended to reduce processing times and the number of licenses required to open a bonded zone.

Shipments from FTZs and SEZs to other places in the Indonesia customs area are treated similarly to exports and are subject to taxes and duties.  Under MOF Regulation 120/2013, bonded zones have a domestic sales quota of 50 percent of the preceding realization amount on export, sales to other bonded zones, sales to free trade zones, and sales to other economic areas (unless otherwise authorized by the Indonesian government).  Sales to other special economic areas are only allowed for further processing to become capital goods, and to companies which have a license from the economic area organizer for the goods relevant to their business.

In 2017, the government issued Presidential Regulation 91 on the Acceleration of Business Operations, aiming to reduce and simplify the Indonesian business licensing regime, including in SEZs. Under this regulation, Indonesia has established national, ministerial, provincial and regional task forces to examine inefficiencies in the process of starting a business, including business licensing practices, the availability of one-stop business registration in SEZs and FTZs, and data sharing between different jurisdictions. The Coordinating Ministry for Economic Affairs, which leads implementation of the regulation, reports that all Indonesian provinces, FTZs, and SEZs, and more than 90 percent of regencies (kabupaten) had established one-stop business licensing services by February 2018.  Under the new rules, businesses that apply for a license under a one-stop system must begin setting up within 90 days unless given an extension. The regulation also provides that the central government may take control of business licensing if a local government unduly delays business license issuance. Business and bonded zone licensing is increasingly integrated into Indonesia’s OSS.

Performance and Data Localization Requirements

Performance Requirements

Indonesia expects foreign investors to contribute to the training and development of Indonesian nationals, allowing the transfer of skills and technology required for their effective participation in the management of foreign companies. Generally, a company can hire foreigners only for positions that the government has deemed open to non-Indonesians. Employers must have training programs aimed at replacing foreign workers with Indonesians. If a direct investment enterprise wants to employ foreigners, the enterprise should submit an Expatriate Placement Plan (RPTKA) to the Ministry of Manpower.

Indonesia recently made significant changes to its foreign worker regulations. Under Presidential Regulation No. 20/2018, issued in March 2018, the Ministry of Manpower now has two days to approve a complete RPTKA application, and an RPTKA is not required for commissioners or executives. An RPTKA’s validity is now based on the duration of a worker’s contract (previously it was valid for a maximum of five years). The new regulation no longer requires expatriate workers to go through the intermediate step of obtaining a Foreign Worker Permit (IMTA). Instead, expatriates can use an endorsed RPTKA to apply with the immigration office in their place of domicile for a Limited Stay Visa or Semi-Permanent Residence Visa (VITAS/VBS). Expatriates receive a Limited Stay Permit (KITAS) and a blue book, valid for up to two years and renewable for up to two extensions without leaving the country. Regulation No. 20/2018 also abolished the requirement for all expatriates to receive a technical recommendation from a relevant ministry. However, ministries may still establish technical competencies or qualifications for certain jobs, or prohibit the use of foreign worker for specific positions, by informing and obtaining approval from the Ministry of Manpower. Foreign workers who plan to work longer than six months in Indonesia must apply for employee social security and/or insurance.

Regulation No. 20/2018 provides for short-term working permits (maximum 6 months) for activities such as conducting audits, quality control, inspections, and installation of machinery and electrical equipment. Ministry of Manpower issued Regulation No.10/2018 to implement Regulation 20/2018, revoking its Regulation No. 16/2015 and No. 35/2015. Regulation 10/2018 provides additional details about the types of businesses that can employ foreign workers, sets requirements to obtain health insurance for expatriate employees, requires companies to appoint local “companion” employees for the transfer of technology and skill development, and requires employers to “facilitate” Indonesian language training for foreign workers. Any expatriate who holds a work and residence permit must contribute USD 1,200 per year to a fund for local manpower training at regional manpower offices. The Ministry of Manpower is preparing additional rules listing the specific types of jobs that will be open for foreign workers. Foreign workers will not be eligible for positions not listed in the decree. Some U.S. firms report difficulty in renewing KITASs for their foreign executives. In February 2017, the Ministry of Energy and Natural resources abolished regulations specific to the oil and gas industry, bringing that sector in line with rules set by the Ministry of Manpower.

With the passage of a defense law in 2012 and subsequent implementing regulations in 2014, Indonesia established a policy that imposes offset requirements for procurements from foreign defense suppliers. Current laws authorize Indonesian end users to procure defense articles from foreign suppliers if those articles cannot be produced within Indonesia, subject to Indonesian local content and offset policy requirements. On that basis, U.S. defense equipment suppliers are competing for contracts with local partners. The 2014 implementing regulations still require substantial clarification regarding how offsets and local content are determined. According to the legislation and subsequent implementing regulations, an initial 35 percent of any foreign defense procurement or contract must include local content, and this 35 percent local content threshold will increase by 10 percent every five years following the 2014 release of the implementing regulations until a local content requirement of 85 percent is achieved. The law also requires a variety of offsets such as counter-trade agreements, transfer of technology agreements, or a variety of other mechanisms, all of which are negotiated on a per-transaction basis. The implementing regulations also refer to a “multiplier factor” that can be applied to increase a given offset valuation depending on “the impact on the development of the national economy.” Decisions regarding multiplier values, authorized local content, and other key aspects of the new law are in the hands of the Defense Industry Policy Committee (KKIP), an entity comprising Indonesian interagency representatives and defense industry leadership. KKIP leadership indicates that they still determine multiplier values on a case-by-case basis, but have said that once they conclude an industry-wide gap analysis study, they will publish a standardized multiplier value schedule. According to government officials, rules for offsets and local content apply to major new acquisitions only, and do not apply to routine or recurring procurements such as those required for maintenance and sustainment.

WTO/Trade-Related Investment Measures

Indonesia notified the WTO of its compliance with Trade-Related Investment Measures (TRIMS) on August 26, 1998. The 2007 Investment Law states that Indonesia shall provide the same treatment to both domestic and foreign investors originating from any country. Nevertheless, the government pursues policies to promote local manufacturing that could be inconsistent with TRIMS requirements, such as linking import approvals to investment pledges, or requiring local content targets in some sectors.

Data Localization Requirements

In 2012, Indonesia issued Government Regulation No. 82/2012 requiring certain “public service providers” to establish data storage and disaster recovery centers on Indonesian soil. The regulation went into effect in October 2017 and several ministries have issued data localization regulations, including regulations related to data privacy, peer-to-peer lending, and insurance. As of April 2019, the Indonesian government has prepared a draft amendment to Government Regulation No. 82/2012 that would classify data into three categories: strategic, high-level, and low-level. The draft amendment offers vague definitions of these categories, defining strategic data as data potentially disruptive to the national governance, security, stability of the financial system, and/or other criteria established by law. The proposed amendment would require that “strategic” data be managed, stored, and processed only in Indonesia. The draft regulation would allow high- and low-level data to be managed, stored, and processed overseas so long as it does not reduce the effective implementation of Indonesian legal jurisdiction, subject to technical requirements established by the Ministry of Communications and Information Technology (KOMINFO).  The draft regulation would give financial sector regulators independent authority to identify and set conditions on the treatment of high-level financial data. It remains unclear how the proposed regulation would affect existing data localization requirements and what additional requirements may be imposed if the revised regulation is issued.

Real Property

The Basic Agrarian Law of 1960, the predominant body of law governing land rights, recognizes the right of private ownership and provides varying degrees of land rights for Indonesian citizens, foreign nationals, Indonesian corporations, foreign corporations, and other legal entities. Indonesia’s 1945 Constitution states that all natural resources are owned by the government for the benefit of the people. This principle was augmented by the passage of a land acquisition bill in 2011 that enshrined the concept of eminent domain and established mechanisms for fair market value compensation and appeals. The National Land Agency registers property under Regulation No. 24/1997, though the Ministry of Forestry administers all ‘forest land’. Registration is sometimes complicated by local government requirements and claims, as a result of decentralization. Registration is also not conclusive evidence of ownership, but rather strong evidence of such. Government Regulation No.103/2015 on house ownership by foreigners domiciled in Indonesia allows foreigners to have a property in Indonesia with the status of a “right to use” for a maximum of 30 years, with extensions available for up to 20 additional years.

Intellectual Property Rights

Indonesia is currently on the U.S. Trade Representative’s (USTR) Special 301 priority watch list for intellectual property rights (IPR) protection. According to U.S. stakeholders, Indonesia’s failure to effectively protect intellectual property and enforce IPR laws has resulted in high levels of physical and online piracy. Local industry associations have reported tens of millions of pirated films, music, and software in circulation in Indonesia in recent years, causing potentially billions of dollars in losses.  Indonesian physical markets, such as Pasar Mangga Dua, and online markets Tokopedia, Bukalapak, and IndoXXI.com were included in USTR’s Notorious Markets list in 2018.

Indonesian efforts to enhance IP protection policy were mixed this year. The 2016 Patent Law, continues to be a source of significant concern for IP stakeholders, especially expansive compulsory license provisions and a requirement under Article 20 to produce a patented product in Indonesia within 36 months of the grant of a patent. In July 2018, the Ministry of Law and Human Rights (MLHR) enacted Ministerial Regulation 15/2018, allowing patent holders to request a five-year, renewable exemption from the 36-month local production requirement under Article 20.  However, MLHR issued Ministerial Regulation 39/2018 on December 28, providing new procedures for obtaining compulsory licenses for a variety of patented products. Regulation 39/2018 would allow individuals, government institutions, and patent holders to apply for a compulsory license on three bases: 1) failure to produce a patented product in Indonesia within 36 months; 2) use of a patent in a manner detrimental to the public interest; and 3) where a patent cannot be implemented without utilizing another party’s patent. The new regulation also gives MLHR the discretion to grant compulsory licenses to produce, import, and export patented products needed to remedy human disease in Indonesia and third countries.

MLHR reports that the five-year exemption from local production requirements under Regulation 15/2018 will continue to be available despite the issuance of Regulation 39/2018. The 2016 Patent Law contains several other provisions that some have defined as “concerning”, including a  definition of “invention” that potentially imposes an additional “increased meaningful benefit” requirement for patents on new forms of existing compounds, an expansive national interest test for proposed patent licenses, and disclosure of genetic information and traditional knowledge to promote access and benefit sharing.  The Directorate General for Intellectual Property (DGIP) is currently drafting guidelines on pharmacy, computer, and biotechnology patents for examiners; DGIP plans to release the guidelines in 2019.

DGIP has become more active in its efforts to collect patent annuity fees. On August 16, 2018, DGIP issued a circular letter warning stakeholders that it may refuse to accept new patent applications from rights holders that have not paid patent annuity fee debts. The letter gave rights holders until February 16, 2019, to settle unpaid patent annuity payments. On February 17, 2019, DGIP issued another circular letter on its website to extend the period of time for a patent holder to settle any unpaid annuities for 6 months to August 17, 2019. The U.S. government continues to monitor implementation of this policy with DGIP and industry stakeholders.

Indonesia deposited its instrument of accession to the Madrid Protocol with the World Intellectual Property Organization (WIPO) in October 2017 and issued implementing regulations in June 2018. Under the new rules, Madrid Protocol applicants are required to register their application with DGIP first, and must be Indonesian citizens, domiciled in Indonesia, or have clear industrial or commercial interests in Indonesia. Although the Trademark Law of 2016 expanded recognition of non-traditional marks, Indonesia still does not recognize certification marks. In response to stakeholder concerns over a lack of consistency in treatment of international well-known trademarks, the Supreme Court issued Circular Letter 1/2017, which advised Indonesian judges to recognize cancellation claims for well-known international trademarks with no time limit stipulation.

The Ministry of Finance’s Directorate General for Customs and Excise (DGCE) continued to implement ex officio authorities to investigate shipments of infringing goods in 2018. Under MOF Regulation 40/2018, DGCE launched an online trademark recordation system that enables customs officials to detain a shipment of potentially IP-infringing goods for up to two days in order to inform a registered rights holder of the suspect shipment. Once the rights holder confirms the shipment is suspect, it has four days to file a request to suspend the shipment with the Indonesian Commercial Court. Rights holders are required to provide a monetary guarantee of IDR 100 million (approximately USD 7,700) when they request suspension of a shipment. Despite  business stakeholder concerns, the GOI retained a requirement that only companies with offices domiciled in Indonesia may use the recordation system.

In 2015, DGIP and KOMINFO jointly released implementing regulations under the Copyright Law to provide for rights holders to report websites that offer IP-infringing products and sets forth procedures for blocking IP-infringing sites. Also in 2015, Indonesia’s Creative Economy Agency (BEKRAF) launched an anti-piracy task force with film and music industry stakeholders. BEKRAF reported that the taskforce remained focused on coordinating the review of complaints from industry about infringing websites in 2018. KOMINFO reported that it blocked 442 infringing websites in 2018.

DGIP reports that its directorate of investigation has increased staffing to 187 investigators, including 40 nationwide investigators and 147 staff certified to act as local investigators in 33 provinces when needed for a pending case, and saw the number of investigations double from 16 in 2017 to 36 in 2018. BPOM, Indonesia’s food and drug administration, reported the seizure of more than USD 6.3 billion in counterfeit drugs and cosmetics during the year. Trademark, Patent, and Copyright legislation requires a rights-holder complaint for investigations, and DGIP and BPOM investigators lack the authority to make arrests so must rely on police cooperation for any enforcement action.

Resources for Rights Holders

Additional information regarding treaty obligations and points of contact at local IP offices, can be found at the World Intellectual Property Organization (WIPO) country profile website http://www.wipo.int/directory/en/ .For a list of local lawyers, see: http://jakarta.usembassy.gov/us-service/attorneys.html.

Capital Markets and Portfolio Investment

The Indonesia Stock Exchange (IDX) index has 618 listed companies as of December 2018 with a market capitalization of USD 526 billion. There were 57 initial public offerings in 2018 – the most in 26 years. As of January 2019, domestic entities conducted more than half of total IDX stock trades (65.08 percent). In November 2018, IDX introduced T+2 settlement, with sellers now receiving proceeds within two days instead of the previous standard of three days (T+3).

In 2011, the IDX launched the Indonesian Sharia Stock Index (ISSI), its first index of sharia-compliant companies, primarily to attract greater investment from Middle East companies and investors. In 2017, the IDX introduced the first online sharia stock trading platform. As of December 2018, the ISSI is composed of 403 stocks that are a part of IDX’s Jakarta Composite Index, with a total market cap of USD 275 billion.

Government treasury bonds are the most liquid bonds offered by Indonesia. Treasury bills are less liquid due to their small issue size. Liquidity in BI-issued Sertifikat Bank Indonesia (SBI) is also limited due to the three-month required holding period. The government also issues sukuk (Islamic treasury notes) treasury bills as part of its effort to diversify Islamic debt instruments and increase their liquidity. Indonesia’s sovereign debt as of December 2018 was rated as BBB- by Standard and Poor, BBB by Fitch Ratings and Baa2 by Moody’s.

The Financial Services Supervisory Authority (OJK) began overseeing capital markets and non-banking institutions in 2013, replacing the Capital Market and Financial Institution Supervisory Board, and assumed BI’s supervisory role over commercial banks as of 2014. Foreigners have access to the Indonesian capital markets and are a major source (37.32 percent of government securities) of portfolio investment. Indonesia respects International Monetary Fund (IMF) Article VIII by refraining from restrictions on payments and transfers for current international transactions. Foreign ownership of Indonesian companies may be limited in certain industries as determined by the Negative Investment List.

Money and Banking System

Although there is some concern regarding the operations of the many small and medium sized family-owned banks, the banking system is generally considered sound, with banks enjoying some of the widest interest rate margins in the region. As of May 2018, the 11 top banks had IDR 4,877 trillion (USD 348.3 billion) in total assets. Loans grew 11.5 percent in 2018 compared to 8.1 percent a year earlier. Gross non-performing loans in December 2018 remained at 2.4 percent y-o-y from 2.4 percent the previous year. For 2019, analysts project annual credit growth at 10-12 percent and deposit growth around 8-10 percent for Indonesia’s banking industry.

OJK Regulation No.56/03/2016 has limited bank ownership to no more than 40 percent by any single shareholder, applicable to foreign and domestic shareholders. This does not apply to foreign bank branches in Indonesia. Foreign banks may establish branches if the foreign bank is ranked in the top 200 global banks by assets.  A special operating license is required from OJK in order to establish a foreign branch. The OJK granted an exception in 2015 for foreign banks buying two small banks and merging them. To establish a representative office, a foreign bank must be ranked in the top 300 global banks by assets. In 2017, HSBC, which previously registered as a foreign branch, changed its legal status to a Limited Liability Company and merged with a local bank subsidiary which it had purchased in 2008.

In 2015, OJK eased rules for foreigners to open a bank account in Indonesia. Foreigners can open a bank account with a balance between USD 2,000-50,000 with just their passport. For accounts greater than USD 50,000, foreigners must show a supporting document such as a reference letter from a bank in the foreigner’s country of origin, a local domicile address, a spousal identity document, copies of a contract for a local residence, and/or credit/debit statements.

Foreign Exchange and Remittances

Foreign Exchange

The rupiah (IDR), the local currency, is freely convertible. Currently, banks must report all foreign exchange transactions and foreign obligations to the central bank, Bank Indonesia (BI). With respect to the physical movement of currency, any person taking rupiah bank notes into or out of Indonesia in the amount of IDR 100 million (approximately USD 7,377) or more, or the equivalent in another currency, must report the amount to DGCE. The limit for any person or entity to bring foreign currency bank notes into or out of Indonesia is the equivalent of IDR 1 billion (USD 71,429).

Banks on their own behalf or for customers may conduct derivative transactions related to derivatives of foreign currency rates, interest rates, and/or a combination thereof. BI requires borrowers to conduct their foreign currency borrowing through domestic banks registered with BI. The regulations apply to borrowing in cash, non-revolving loan agreements, and debt securities.

Under the 2007 Investment Law, Indonesia gives assurance to investors relating to the transfer and repatriation of funds, in foreign currency, on:

• capital, profit, interest, dividends and other income;
• funds required for (i) purchasing raw material, intermediate goods or final goods, and (ii) replacing capital goods for continuation of business operations;
• additional funds required for investment;
• funds for debt payment;
• royalties;
• income of foreign individuals working on the investment;
• earnings from the sale or liquidation of the invested company;
• compensation for losses; and
• compensation for expropriation.

U.S. firms report no difficulties in obtaining foreign exchange.

BI began in 2012 to require exporters to repatriate their export earnings through domestic banks within three months of the date of the export declaration form. Once repatriated, there are currently no restrictions on re-transferring export earnings abroad. Some companies report this requirement is not enforced.

In 2015, the government announced a regulation requiring the use of the rupiah in domestic transactions. While import and export transactions can still use foreign currency, importers’ transactions with their Indonesian distributors must now use rupiah, which has impacted some U.S. business operations. The central bank may grant a company permission to receive payment in foreign currency upon application, and where the company has invested in a strategic industry.

Remittance Policies

The government places no restrictions or time limitations on investment remittances. However, certain reporting requirements exist. Banks should adopt Know Your Customer (KYC) principles to carefully identify customers’ profile to match transactions.

Carrying rupiah bank notes of more than IDR 100 million (approximately USD 7,377) in cash out of Indonesia requires prior approval from BI, as well as verifying the funds with Indonesian Customs upon arrival. Indonesia does not engage in currency manipulation.

As of 2015, Indonesia is no longer subject to the intergovernmental Financial Action Task Force (FATF) monitoring process under its on-going global Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) compliance process. It continues to work with the Asia/Pacific Group on Money Laundering (APG) to further strengthen its AML/CTF regime. In July 2018, Indonesia was granted observer status by FATF, a necessary milestone toward becoming a full FATF member.

Sovereign Wealth Funds

Indonesia does not operate a traditional sovereign wealth fund, but several SOEs invest in the domestic market. In 2015, the Finance Ministry authorized one of those SOEs, PT Sarana Multi Infrastruktur (SMI) to manage the assets of the Pusat Investasi Pemerintah (PIP), or Government Investment Center (which had previously been seen as a potential sovereign wealth fund). SMI can use the funds for direct investment in infrastructure financing, the placement of funds in the form of government securities, Bank Indonesia Certificates, and/or other financial instruments in accordance with the provisions of laws. Indonesia does not participate in the IMF’s Working Group on Sovereign Wealth Funds.

Indonesia had 114 state-owned enterprises (SOEs) and 28 subsidiaries divided into 12 sectors as of December 2018, 10 of which contributed more than 85 percent of total SOE profit. Of the 114 SOEs, 17 are listed on the Indonesian stock exchange, and 14 are special purpose entities under the SOE Ministry (BUMN), with one SOE, the Indonesian Infrastructure Guarantee Fund, under the Ministry of Finance. Since mid-2016, the Indonesian government has been publicizing plans to consolidate SOEs into six holding companies based on sector of operations. In November 2017, Indonesia announced the creation of a mining holding company, PT Inalum, the first of the six planned SOE-holding companies.  Information regarding the SOEs can be found at the SOE Ministry website (http://www.bumn.go.id/ ) (Indonesian language only). There are also an unknown number of SOEs owned by regional or local governments. SOEs are present in almost all sectors/industries including banking (finance), tourism (travel), agriculture, forestry, mining, construction, fishing, energy, and telecommunications (information and communications).

In 2018 (the most recent data available), SOE profits increased by 0.01 percent year-on-year to IDR 188 trillion (USD 13.4 billion). As of year-end 2018, SOEs assets stood at IDR 8,092 trillion (USD578 billion) compared to the previous year at IDR 7,210 trillion (USD 515 billion). On December 31, 2018, the 17 listed state-owned companies had a market capitalization of IDR 1,578 trillion (USD 112.7 billion) or 22.46 percent of the total capitalization of shares listed on the IDX stock exchange. Indonesia is not a party to the WTO’s Government Procurement Agreement. Private enterprises can compete with SOEs under the same terms and conditions with respect to access to markets, credit, and other business operations. However, in reality, many sectors report that SOEs receive strong preference for government projects. SOEs purchase some goods and services from private sector and foreign firms. SOEs publish an annual report and are audited by the Supreme Audit Agency (BPK), the Financial and Development Supervisory Agency (BPKP), and external and internal auditors.

Privatization Program

While some state-owned enterprises have offered shares on the stock market, Indonesia does not have an active privatization program.

Indonesian businesses are required to undertake responsible business conduct (RBC) activities under Law 40/2007 concerning Limited Liability Companies. In addition, sectoral laws and regulations have further specific provisions on RBC. Indonesian companies tend to focus on corporate social responsibility (CSR) programs offering community and economic development, and educational projects and programs. This is at least in part caused by the fact that such projects are often required as part of the environmental impact permits (AMDAL) of resource extraction companies, which undergo a good deal of domestic and international scrutiny of their operations. Because a large proportion of resource extraction activity occurs in remote and rural areas where government services are reported to be limited or absent, these companies face very high community expectations to provide such services themselves. Despite significant investments – especially by large multinational firms – in CSR projects, businesses have noted that there is limited general awareness of those projects, even among government regulators and officials.

The government does not have an overarching strategy to encourage or enforce RBC, but regulates each area through the relevant laws (environment, labor, corruption, etc.). Some companies report that these laws  are not always enforced evenly. In 2017, the National Commission on Human Rights launched a National Action Plan on Business and Human Rights in Indonesia, based on the UN Guiding Principles on Business and Human Rights.

The Financial Services Authority (OJK) regulates corporate governance issues, but the regulations and enforcement are not yet up to international standards for shareholder protection.

OECD Guidelines On Corporate Governance Of SOEs

Indonesia does not adhere to the OECD Guidelines for Multinational Enterprises, nor has been recorded  the government encouraging adherence to those guidelines. Many companies claim that the government does not encourage adherence to the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas or any other supply chain management due diligence guidance. Indonesia does participate in the Extractive Industries Transparency Initiative (EITI). Indonesia was suspended by the EITI Board due to a missed deadline for its first EITI report, but the suspension was lifted following publication of its 2012-2013 EITI Report in November 2015.

President Jokowi was elected in 2014 on a strong good-governance platform. However, corruption remains a serious problem according to some U.S. companies, preventing increased FDI. The government has issued detailed directions on combating corruption in targeted ministries and agencies, and the 2018 release of the updated and streamlined National Anti-Corruption Strategy mandates corruption prevention efforts across the government in three focus areas (licenses, state finances, and law enforcement reform). The Corruption Eradication Commission (KPK) was established in 2002 as the lead government agency to investigate and prosecute corruption.  KPK is one of the most trusted and respected institutions in Indonesia, and President Jokowi has continually expressed support for a strong and independent KPK, opposing proposals by legislators to weaken the anti-graft body’s authorities. The KPK has taken steps to encourage companies to establish effective internal controls, ethics, and compliance programs to detect and prevent bribery of public officials. By law, the KPK is authorized to conduct investigations, file indictments, and prosecute corruption cases involving law enforcement officers, government executives, or other parties connected to corrupt acts committed by those entities; attracting the “attention and the dismay” of the general public; and/or involving a loss to the state of at least IDR 1 billion (approximately USD 74,500).The government began prosecuting companies who engage in public corruption under new corporate criminal liability guidance issued in a 2016 Supreme Court regulation, with the first conviction of a corporate entity in January 2019.  Presidential decree No. 13/2018 issued in March 2018 clarifies the definition of beneficial ownership and outlines annual reporting requirements and sanctions for non-compliance.

Indonesia’s ranking in Transparency International’s Corruption Perceptions Index in 2018 improved to 89 out of 180 countries surveyed, compared to 96 out of 180 countries in 2017.  Indonesia’s score of public corruption in the country, according to Transparency International, improved to 38 in 2018 (scale of 0/very corrupt to 100/very clean). At the beginning of President Jokowi’s term in 2014, Indonesia’s score was  34. Indonesia ranks 4^th of the 10 ASEAN countries.

Nonetheless, according to certain reports, corruption remains pervasive despite laws to combat it. Some have noted that KPK leadership, along with the commission’s investigators and prosecutors, are sometimes harassed, intimidated, or attacked due to their anticorruption work. In early 2019, a Molotov cocktail and bomb components were placed outside the homes of two KPK commissioners, and in 2017 unidentified assailants committed an acid attack against a senior KPK investigator. Police have not identified the perpetrators of either attack. The Indonesian National Police and Attorney General’s Office also investigate and prosecute corruption cases; however, neither have the same organizational capacity or track-record of the KPK. Giving or accepting a bribe is a criminal act, with possible fines ranging from USD 3,850 to USD 77,000 and imprisonment up to a maximum of 20 years or life imprisonment, depending on the severity of the charge.

UN Anticorruption Convention, OECD Convention on Combatting Bribery

Indonesia ratified the UN Convention against Corruption in September 2006. Indonesia has not yet acceded to the OECD Anti-Bribery Convention, but attends meetings of the OECD Anti-Corruption Working Group. In 2014, Indonesia chaired the Open Government Partnership, a multilateral platform to promote transparency, empower citizens, fight corruption, and strengthen governance. Several civil society organizations function as vocal and competent corruption watchdogs, including Transparency International Indonesia and Indonesia Corruption Watch.

Resources to Report Corruption

Komisi Pemberantasan Korupsi (Anti-Corruption Commission)
Jln. HR Rasuna Said Kav. C1 Kuningan
Jakarta Selatan 12920
informasi@kpk.go.id

Indonesia Corruption Watch
Jl. Kalibata Timur IV/D No. 6 Jakarta Selatan 12740
Tel: +6221.7901885 or +6221.7994015
Email: info@antikorupsi.org

As in other democracies, politically motivated demonstrations occasionally occur throughout Indonesia, but are not a major or ongoing concern for most foreign investors.

Since the large-scale Bali bombings in 2002 that killed over 200 people, Indonesian authorities have aggressively and successfully continued to pursue terrorist cells throughout the country, disrupting multiple aspirational plots. Despite these successes, violent extremist networks and terrorist cells remain intact and have the capacity to become operational and conduct attacks with little or no warning, as do lone wolf-style ISIL sympathizers.

According to the industry, foreign investors in Papua face certain unique challenges. Indonesian security forces occasionally conduct operations against the Free Papua Movement, a small armed separatist group that is most active in the central highlands region. Low-intensity communal, tribal, and political conflict also exists in Papua and has caused deaths and injuries. Anti-government protests have resulted in deaths and injuries, and violence has been committed against employees and contractors of a U.S. company there.

Travelers to Indonesia can visit the U.S. Department of State travel advisory website for the latest information and travel resources: https://travel.state.gov/content/travel/en/international-travel/International-Travel-Country-Information-Pages/Indonesia.html.

Companies have reported that the Indonesian labor market faces a number of structural barriers, including skills shortages and lagging productivity, restrictions on the use of contract workers, and reduced gaps between minimum wages and average wages. Recent significant increases in the minimum wage for many provinces have made unskilled and semi-skilled labor more costly. In the bellwether Jakarta area, the minimum wage was raised again from IDR 3.3 million (USD 243.4) per month in 2017 to IDR 3.6 million (USD 256.6) per month in 2018. Unions staged largely peaceful protests across Indonesia in 2018 demanding the government increase the minimum wage, decrease the price for basic needs, and stop companies from outsourcing and employing foreign workers. Under the new wage setting policy adopted as part of the 2018 economic stimulus package, annual minimum wage increases will be indexed directly to inflation and GDP growth. Previously, minimum wage adjustments were subject to negotiations between local governments, industry, and unions, and the changes varied widely from year to year and from region to region.

As only about 7.6 percent of the workforce is unionized, the benefits of union advocacy (including increases in minimum wage) do not always filter down to the rest of the workforce. While restrictions on the use of contract workers remain in place, continued labor protests focusing on this issue suggest that government enforcement continues to be lax. Unemployment has remained steady at 5.5 percent. Unemployment tends to be higher than the national average among young people.

Indonesian labor is relatively low-cost by world standards, but inadequate skills training and complicated labor laws combine to make Indonesia’s competitiveness lag behind other Asian competitors. Investors frequently cite high severance payments to dismissed employees, restrictions on outsourcing and contract workers, and limitations on expatriate workers as significant obstacles to new investment in Indonesia.

Employers also note that the skill base provided by the education system is lower than that of neighboring countries, and successive Labor Ministers have listed improved vocational training as a top priority. Labor contracts are relatively straightforward to negotiate but are subject to renegotiation, despite the existence of written agreements. Local courts often side with citizens in labor disputes, contracts notwithstanding. On the other hand, some foreign investors view Indonesia’s labor regulatory framework, respect for freedom of association, and the right to unionize as an advantage to investing in the country. Expert local human resources advice is essential for U.S. companies doing business in Indonesia, even those only opening representative offices.

Minimum wages vary throughout the country as provincial governors set an annual minimum wage floor and district heads have the authority to set a higher rate. Indonesia’s highly fractured and historically weak labor movement has gained strength in recent years, evidenced by significant increases in the minimum wage. As noted above, recent changes to the minimum wage setting system may make the process less dependent on political factors and more aligned with actual changes in inflation and GDP growth. Labor unions are independent of the government. The law, with some restrictions, protects the rights of workers to join independent unions, conduct legal strikes, and bargain collectively. Indonesia has ratified all eight of the core ILO conventions underpinning internationally accepted labor norms. The Ministry of Labor maintains an inspectorate to monitor labor norms, but enforcement is stronger in the formal than in the informal sector. A revised Social Security Law, which took effect in 2014, requires all formal sector workers to participate. Subject to a wage ceiling, employers must contribute an amount equal to 4 percent of workers’ salaries to this plan. In 2015, Indonesia established the Social Security Organizing Body of Employment (BPJS-Employment), a national agency to support workers in the event of work accident, death, retirement, or old age.

A proposed revision to Indonesia’s 2003 labor law may establish more stringent restrictions on outsourcing, currently used by many firms to circumvent some formal-sector job benefits.

Additional information on child labor, trafficking in persons, and human rights in Indonesia can be found online through the following references:

Child Labor Report: https://www.dol.gov/agencies/ilab/resources/reports/child-labor/indonesia .

Trafficking in Persons Report: https://www.state.gov/reports/2019-trafficking-in-persons-report/indonesia/

Human Rights Report: https://www.state.gov/reports/2018-country-reports-on-human-rights-practices/

In 2010, the Overseas Private Investment Corporation (OPIC) updated its 1967 Investment Support Agreement between the United States and Indonesia by adding OPIC products such as direct loans, coinsurance, and reinsurance to the means of OPIC support which U.S. companies may use to invest in Indonesia. OPIC projects in Indonesia cover various sectors, including but not limited to banking, renewable energy, agribusiness, extractive industries, science, health care, and social assistance. Since 1974, OPIC has committed USD 2.35 billion in finance and insurance across 116 projects in Indonesia. Currently, OPIC has seven active projects in Indonesia with total commitment of USD 131.2 million. OPIC’s latest project was financing for Indonesia’s first utility-scale wind power project in 2016.

Indonesia has joined the Multilateral Investment Guarantee Agency (MIGA). MIGA, a part of the World Bank Group, is an investment guarantee agency to insure investors and lenders against losses relating to currency transfer restrictions, expropriation, war and civil disturbance, and breach of contract. In 2018, MIGA provided a guarantee loan to Indonesian state-owned financial institutions and financed a hydroelectric power plant.

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

*Bank of Indonesia, GDP from the host country website is converted into USD with the exchange rate 13.400 for 2018.

*Indonesia Investment Coordinating Board (BKPM), January 2019

There is a discrepancy between U.S. FDI recorded by BKPM and BEA due to differing methodologies. While BEA recorded transactions in balance of payments, BKPM relies on company realization reports. BKPM also excludes oil and gas, non-bank financial institutions, and insurance.

Table 3: Sources and Destination of FDI

Source:  IMF Coordinated Direct Investment Survey for inward investment data. World Investment Report 2018 UNTCAD for outward investment data, country specific data for outward investment is unavailable.

Table 4: Sources of Portfolio Investment

Source: IMF Coordinated Portfolio Investment Survey, 2018. Sources of portfolio investment are not tax havens.

The Bank of Indonesia published comparable data.

Reggie Singh
Economic Section
U.S. Embassy Jakarta
+62-21-50831000
BusinessIndonesia@state.gov

Policies Towards Foreign Direct Investment

Israel is open to foreign investment and the government actively encourages and supports the inflow of foreign capital.

The Israeli Ministry of Economy and Industry’s ‘Invest in Israel’ office serves as the government’s investment promotion agency facilitating foreign investment.  ‘Invest in Israel’ offers a wide range of services including guidance on Israeli laws, regulation, taxes, incentives, and costs, and facilitation of business connections with peer companies and industry leaders for new investors.  ‘Invest in Israel’ also organizes familiarization tours for potential investors and employs a team of advisors for each region of the world.

Limits on Foreign Control and Right to Private Ownership and Establishment

The Israeli legal system protects the rights of both foreign and domestic entities to establish and own business enterprises, as well as the right to engage in remunerative activity.  Private enterprises are free to establish, acquire, and dispose of interests in business enterprises. As part of ongoing privatization efforts, the Israeli government encourages foreign investment in privatizing government-owned entities.

Israel’s policies aim to equalize competition between private and public enterprises, although the existence of monopolies and oligopolies in several sectors stifles competition.  In the case of designated monopolies, defined as entities that supply more than 50 percent of the market, the government controls prices.

Israel does not maintain a centralized investment screening (approval) mechanism for inbound foreign investment.  Investments in regulated industries (e.g. banking and insurance) require approval by the relevant regulator. Investments in certain sectors may require a government license.  Other regulations may apply, usually on a national treatment basis.

Other Investment Policy Reviews

The World Trade Organization (WTO) conducted its fifth and latest trade policy review of Israel in July 2018.  In the past three years, the Israeli government has not conducted any investment policy reviews through the Organization for Economic Cooperation and Development (OECD) or the United Nations Conference on Trade and Development (UNCTAD).  The OECD concluded an Economic Survey of Israel in March 2018.

The 2018 OECD Economic Survey of Israel can be found at http://www.mof.gov.il/Releases/SiteAssets/Pages/OECD18/2018-oecd-economic-survey-Israel.pdf 

Business Facilitation

The Israeli government is fairly open and receptive to companies wishing to register businesses in Israel.  Israel ranked 45th in the “Starting a Business” category of the World Bank’s 2019 Doing Business Report, falling eight places from its 2018 ranking.  Israel continues to institute reforms to make it easier to do business in Israel, but some challenges remain.

The business registration process in Israel is relatively clear and straightforward.  Four procedures are required to register a standard private limited company and take 12 days to complete, on average, according to the Ministry of Finance.  The foreign investor must obtain company registration documents through a recognized attorney with the Ministry of Justice and obtain a tax identification number for company taxation and for value added taxes (VAT) from the Ministry of Finance.  The cost to register a company averages around USD 1,000 depending on attorney and legal fees.

The Israeli Ministry of Economy and Industry’s “Invest in Israel” website provides useful information for companies interested in starting a business or investing in Israel.  The website is http://www.investinisrael.gov.il/Pages/default.aspx  .

Outward Investment

The Israel Export and International Cooperation Institute is an Israeli government agency operating independently, under the Ministry of Economy, that helps facilitate trade and business opportunities between Israeli and foreign companies.  More information on their activities is available at http://www.export.gov.il/eng/About/About/  .

In general, there are no restrictions on Israeli investors seeking to invest abroad.  However, investing abroad may be restricted on national security grounds or in certain countries or sectors where the Israeli government deems such investment is not in the national interest.

Israel has protection of investment agreements with Albania, Argentina, Armenia, Azerbaijan, Belarus, Bulgaria (amending protocol), China, Croatia, Cyprus, Czech Republic, El Salvador, Estonia, Ethiopia, Georgia, Germany, Guatemala, Japan, Kazakhstan, Latvia, Lithuania, Moldova, Mongolia, Montenegro (with Serbia), Burma, Poland, Romania (Amending protocol signed in 2010 but not in force), Serbia (with Montenegro), Slovakia, Slovenia, South Africa (not in force), South Korea, Thailand, Turkey, Turkmenistan, Ukraine, Uruguay, and Uzbekistan.

Israel has free trade agreements with the European Union (EU), European Free Trade Association (a regional trade organization and free trade area consisting of Iceland, Liechtenstein, Norway, and Switzerland), Turkey, Mexico, Canada, Jordan, Egypt, and Mercosur (an economic and political bloc comprising Argentina, Brazil, Paraguay, and Uruguay).  Israel’s free trade agreement with the United Kingdom will come into force only after the United Kingdom exits the European Union. Israel’s free trade agreements with Colombia, Panama, and Ukraine are awaiting ratification by the Knesset (Israeli parliament).​

The United States and Israel signed a free trade agreement in 1985.

Israel has a bilateral tax treaty with United States. Israel signed its Income Tax Treaty with the United States in 1975.

Transparency of the Regulatory System

Israel promotes open governance and has joined the International Open Government Partnership. The government’s policy is to pursue the goals of transparency and active reporting to the public, public participation, and accountability.

Israel’s regulatory system is transparent. Ministries and regulatory agencies give notice of proposed regulations to the public on a government web site: http://www.knesset.gov.il   . The texts of proposed regulations are also published (in Hebrew) on this web site. The government requests comments from the public about proposed regulations.

Israel is a signatory to the WTO Agreement on Government Procurement (GPA), which covers most Israeli government entities and government-owned corporations. Most of the country’s open international public tenders are published in the local press. U.S. companies have recently won a limited number of government tenders, notably in civil aviation. However, government-owned corporations make extensive use of selective tendering procedures. In addition, the lack of transparency in the public procurement process discourages U.S. companies from participating in major projects and disadvantages those that choose to compete. Enforcement of the public procurement laws and regulations is not consistent.

Israel is a member of UNCTAD’s international network of transparent investment procedures. (http://unctad.org/en/pages/home.aspx   ). Foreign and national investors can find detailed information on administrative procedures applicable to investment and income generating operations including the number of steps, name and contact details of the entities and persons in charge of procedures, required documents and conditions, costs, processing time, and legal basis justifying the procedures.

International Regulatory Considerations

Israel is not a member of any major economic bloc but maintains strong economic relations with other economic blocs.

Israeli regulatory bodies in the Ministry of Economy (Standards Institute of Israel), Ministry of Health (Food Control Services), and the Ministry of Agriculture (Veterinary Services and the Plant Protection Service) often adopt standards developed by European standards organizations.  Israel’s adoption of European standards rather than international standards results in the market exclusion of certain U.S. products and added costs for U.S. exports to Israel.

Israel became a member of the WTO in 1995.  The Ministry of Economy and Industry’s Standardization Administration is responsible for notifying the WTO Committee on Technical Barriers to Trade, and regularly does so.

Legal System and Judicial Independence

Israel has a written and consistently applied commercial law based on the British Companies Act of 1948 as amended. The judiciary is independent, but businesses complain about the length of time required to obtain judgments. The Supreme Court is an appellate court that also functions as the High Court of Justice. Israel does not employ a jury system.  Israel established other tribunals to regulate specific issues and disputes in a specific area of law, including labor courts, antitrust issues, and intellectual property related issues.

Laws and Regulations on Foreign Direct Investment

There are few restrictions on foreign investors, except for parts of defense or other industries closed to outside investors on national security grounds.  Foreign investors are welcome to participate in Israel’s privatization program.

Israeli courts exercise authority in cases within the jurisdiction of Israel.  However, if an agreement between involved parties contains an exclusively foreign jurisdiction, the Israeli courts will generally decline to exercise their authority.

Israel’s Ministry of Economy sponsors the web site “Invest in Israel” at www.investinisrael.gov.il  

The Investment Promotion Center of the Ministry of Economy seeks to encourage investment in Israel.  The Center stresses Israel’s high marks in innovation, entrepreneurship, and Israel’s creative, skilled, and ambitious workforce.  The Center also promotes Israel’s strong ties to the United States and Europe.

Competition and Anti-Trust Laws

Israel adopted its comprehensive competition law in 1988.  Israel created the Israel Antitrust Authority (IAA) in 1994 to enforce the competition law.

Expropriation and Compensation

There have been no expropriations of U.S.-owned businesses in Israel in the recent past.  Israeli law requires adequate payment, with interest from the day of expropriation until final payment, in cases of expropriation.

Dispute Settlement

ICSID Convention and New York Convention

Israel is a member of the International Center for the Settlement of Investment Disputes (ICSID) of the World Bank and the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards.  Israel ratified the New York Convention on Recognition and Enforcement of Foreign Arbitral Awards of 1958 in 1959.

Investor-State Dispute Settlement

The Israeli government accepts binding international arbitration of investment disputes between foreign investors and the state.  Israel’s Arbitration Law of 1968 governs both domestic and international arbitration proceedings in the country. The Israeli Knesset amended the law most recently in 2008.  There are no known extrajudicial actions against foreign investors.

International Commercial Arbitration and Foreign Courts

Israel formally institutionalized mediation in 1992 with the amendment of the Courts Law of 1984.  The amendment granted courts the authority to refer civil disputes to mediation or arbitration with party consent.  The Israeli courts tend to uphold and enforce arbitration agreements. Israel’s Arbitration Law predates the United Nations Commission on International Trade Law.

Bankruptcy Regulations

Israeli Bankruptcy Law is based on several layers, some rooted in Common Law, when Palestine was under the British mandate in 1917-1948. Bankruptcy Law in Israel is mostly based on British law enacted in Palestine in 1936 during the British mandate.

Bankruptcy proceedings are based on the bankruptcy ordinance (1980), which replaced the mandatory ordinance enacted in 1936. Therefore, the bankruptcy law in Israel resembles the British law as it was more or less in 1936. Israel ranks 29th in the World Bank’s 2018 Doing Business Report’s “resolving insolvency” category.

Investment Incentives

The State of Israel encourages both local and foreign investment by offering a wide range of incentives and benefits to investors in industry, tourism, and real estate.  Israel’s Ministry of Economy places a priority on investments in hi-tech companies and R&D activities.

Most investment incentives available to Israeli citizens are also available to foreign investors.  Israel’s Encouragement of Capital Investments Law, 5719-1959, outlines Israel’s investment incentive programs.  The Israel Investment Center (IIC) coordinates the country’s investment incentive programs.

For complete information, potential investors should contact:

Investment Promotion Center
Ministry of Economy
5 Bank of Israel Street,
Jerusalem 91036
Tel: 972-2-666-2607
Fax: 972-2-666-2938
Website: www.investinisrael.gov.il  
E-Mail: Investinisrael@moital.gov.il

Israel Investment Center
Ministry of Economy
5 Bank of Israel Street,
Jerusalem 91036 490
http://economy.gov.il/English/About/Units/Pages/IsraelInvestmentCenter.aspx  
Tel: 972-2-666-2236
Fax: 972-2-666-2905

Foreign Trade Zones/Free Ports/Trade Facilitation

Israel has bilateral Qualifying Industrial Zone (QIZ) Agreements with Egypt and Jordan.  The QIZ initiative allows Egypt and Jordan to export products to the United States duty-free, as long as these products contain inputs from Israel (8 percent in the Israel-Jordan QIZ agreement, 10.5 percent in the Israel-Egypt QIZ agreement).  Products manufactured in QIZs must comply with strict rules of origin. More information is available at the Israeli Ministry of Economy’s Foreign Trade Administration website: http://economy.gov.il/English/InternationalAffairs/ForeignTrade
Administration/Pages/RegionalCooperation.aspx  

Israel has one free trade zone, the Red Sea port city of Eilat.  More information on the Eilat Free Zone is available at: http://economy.gov.il/English/Industry/DevelopmentZoneIndustry
Promotion/ZoneIndustryInfo/Pages/EilatNShachoret.aspx  

Performance and Data Localization Requirements

There are no universal performance requirements on investments, but “offset” requirements are often included in sales contracts with the government.  In some sectors, there is a requirement that Israelis own a percentage of a company. Israel’s visa and residency requirements are transparent. The Israeli government does not impose preferential policies on exports by foreign investors.

Real Property

Israel has a modern legal system based on British common law that provides effective means for enforcing property and contractual rights. Courts are independent. Israeli civil procedures provide that judgments of foreign courts may be accepted and enforced by local courts.  The Israeli judicial system recognizes and enforces secured interests in property. A reliable system of recording such secured interests exists. The Israeli Land Administration, which manages land in Israel on behalf of the government, registers property transactions. Registering or obtaining land rights is a cumbersome process and Israel currently ranks 89th in “Registering Property” according to the World Bank’s 2019 Doing Business Report.

Intellectual Property Rights

The Israel Patent Office (ILPO) within the Ministry of Justice is the principal government authority overseeing the legal protection and enforcement of intellectual property rights (IPR) in Israel.  IPR protection in Israel has undergone many changes in recent decades as the Israeli economy has rapidly transformed into a knowledge-based economy.

In recent years, Israel revised its IPR legal framework several times to comply with newly signed international treaties.  Israel took stronger, more comprehensive steps towards protecting IPR, and the government acknowledges that IPR theft costs rights holders millions of dollars per year, reducing tax revenues and slowing economic growth.

The United States removed Israel from the Special 301 Report in 2014 after Israel passed patent legislation that satisfied the remaining commitments Israel made in a Memorandum of Understanding with the United States in 2010 concerning several longstanding issues regarding Israel’s IPR regime for pharmaceutical products. Israel is not included in the Notorious Markets List.

Israel’s Knesset approved Amendment No. 5 to Israel’s Copyright Law of 2007 on January 1, 2019.  The amendment aims to establish measures to combat copyright infringement on the internet while preserving the balance among copyright owners, internet users, and the free flow of information and free speech.

In July 2017, the Israeli Knesset passed the New Designs Bill, replacing Israel’s existing but obsolete ordinance governing industrial design. The bill, which came into force in August 2018, brings Israel into compliance with The Hague System for International Registration of Industrial designs.

Nevertheless, the United States remains concerned with the limitations of Israel’s copyright legislation, particularly related to digital copyright matters and with Israel’s interpretation of its commitment to protect data derived from pharmaceutical testing conducted in anticipation of the future marketing of biological products, also known as biologics.

While Israel has instituted several legislative improvements in recent years, the United States continues to urge Israel to strengthen and improve its IPR enforcement regime.  Israel lacks specialized courts, common in other countries with advanced IPR regimes. General civil or administrative courts in Israel typically adjudicate IPR cases.

IPR theft in Israel is common and relatively sophisticated.  The EU ranks Israel as a “third tier” priority country concerning the level of IPR protection and enforcement.  The EU cites inadequate protection of innovative pharmaceutical products and end-user software piracy as the main issues with IPR enforcement in Israel.

Israel is a member of the World Trade Organization (WTO) and the World Intellectual Property Organization (WIPO).  It is a signatory to the Berne Convention for the Protection of Literary and Artistic Works, the Universal Copyright Convention, the Paris Convention for the Protection of Industrial Property, and the Patent Cooperation Treaty.  Israel was obligated to implement the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) by January 1, 2000, but has failed to do so.

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 Israeli government is supportive of foreign portfolio investment.  The Tel Aviv Stock Exchange (TASE) is Israel’s only public stock exchange.

Financial institutions in Israel allocate credit on market terms.  For many years, banks issued credit to only a handful of individuals and corporate entities, some of whom held controlling interests in banks.  However, in recent years, banks significantly reduced their exposure to large borrowers following the introduction of stronger regulatory restrictions on preferential lending practices.

The primary profit center for Israeli banks are consumer-banking fees.  Various credit instruments are available to the private sector and foreign investors can receive credit on the local market.  Legal, regulatory, and accounting systems are transparent and conform to international norms, although the prevalence of inflation-adjusted accounting means there are differences from U.S. accounting principles.

In the case of publicly traded firms where ownership is widely dispersed, the practice of “cross-shareholding” and “stable shareholder” arrangements to prevent mergers and acquisitions is common, but not directed particularly at preventing potential foreign investment.  Israel has no laws or regulations regarding the adoption by private firms of articles of incorporation or association that limit or prohibit foreign investment, participation, or control.

Money and Banking System

The Bank of Israel (BOI) is Israel’s Central Bank and regulates all banking activity and monetary policy.  In general, Israel has a healthy banking system that offers most of the same services as the U.S. banking system.  Fees for normal banking transactions are significantly higher in Israel than in the United States and some services do not meet U.S. standards.  There are 12 commercial banks and four foreign banks operating in Israel, according to the BOI. Five major banks, led by Bank Hapoalim and Bank Leumi, the two largest banks, dominate Israel’s banking sector.  Bank Hapoalim and Bank Leumi control nearly 60 percent of Israel’s credit market. The State of Israel holds six percent of Bank Leumi’s shares. All of Israel’s other banks are privatized.

Foreign Exchange and Remittances

Foreign Exchange

Israel completed its foreign exchange liberalization process on January 1, 2003, when it removed the last restrictions on the freedom of institutional investors to invest abroad.  The Israeli shekel is a freely convertible currency and there are no foreign currency controls. The BOI maintains the option to intervene in foreign currency trading in the event of movements in the exchange rate not in line with fundamental economic conditions, or if the BOI assesses the foreign exchange market is not functioning appropriately.  Israeli citizens can invest without restriction in foreign markets. Foreign investors can open shekel accounts that allow them to invest freely in Israeli companies and securities. These shekel accounts are fully convertible into foreign exchange. Israel’s foreign exchange reserves totaled USD 115.3 billion at the end of 2018.

Transfers of currency are protected by Article VII of the International Monetary Fund (IMF) Articles of Agreement (http://www.imf.org/External/Pubs/FT/AA/index.htm#art7  )

Remittance Policies

Most foreign currency transactions must be carried out through an authorized dealer. An authorized dealer is a banking institution licensed to arrange, inter alia, foreign currency transactions for its clients.  The authorized dealer must report large foreign exchange transactions to the Controller of Foreign Currency. There are no limitations or significant delays in the remittance of profits, debt service, or capital gains.

Sovereign Wealth Funds

Israel passed legislation to establish the Israel Citizens’ Wealth Fund, a sovereign wealth fund managed by the BOI, in 2014 to offset the effect of natural gas production on the exchange rate.  The BOI expects the fund to begin operating in 2019 and expects it to begin investing money abroad in 2020. The law establishing the fund states that it will begin operating a month after the state’s tax revenues from natural gas exceed USD 275 million (1 billion New Israeli Shekels). Analysts believe tax revenues will not exceed that threshold until at least 2020.

Israel established the Government Companies Authority (GCA) following the passage of the Government Companies Law. The GCA is an auxiliary unit of the Ministry of Finance. It is the administrative agency for state-owned companies in charge of supervision, privatization, and implementation of structural changes.  The Israeli state only provides support for commercial SOEs in exceptional cases. The GCA leads the recruitment process for SOE board members. Board appointments are subject to the approval of a committee, which confirms whether candidates meet the minimum board member criteria set forth by law.

The GCA oversees some 100 companies, including commercial and noncommercial companies, government subsidiaries, and companies under mixed government-private ownership.  Among these companies are some of the biggest and most complex in the Israeli economy, such as the Israel Electric Corporation, Israel Aerospace Industries, Rafael Advanced Defense Systems, Israel Postal Company, Mekorot Israel National Water Company, Israel Natural Gas Lines, the Ashdod, Haifa, and Eilat Port Companies, Israel Railways, Petroleum and Energy Infrastructures and the Israel National Roads Company.  The GCA does not publish a publicly available list of SOEs.

Israel is party to the Government Procurement Agreement (GPA) of the World Trade Organization.

Privatization Program

In late 2014, Israel’s cabinet approved a privatization plan allowing the government to issue minority stakes of up to 49 percent in state-owned companies on the Tel Aviv Stock Exchange over a three-year period, a plan estimated to increase government revenue by USD 4.1 billion. The plan aimed to sell stakes in Israel’s electric company, water provider, railway, post office and some defense-related contractors.  The GCA will likely auction minority stakes in a public bidding process without formal restrictions on the participation of foreign investors. Restrictions on foreign investors could be possible in the case of companies deemed to be of strategic significance.

According to press reports from February 2018, the GCA is in the initial stages of developing a plan to issue some shares of these same government companies. For example, in March 2018, the government agreed to sell Israel Military Industries to Elbit, an Israel headquartered international defense electronics company.  Those same reports said the sale of shares in Israel Aerospace Industries, Mekorot Israel National Water Company, Israel Post, Haifa Port, and Ashdod Port could generate billions of shekels in revenue for the government.

There is awareness of responsible business conduct among enterprises and civil society.  Israel adheres to the OECD Guidelines for Multinational Enterprises and a National Contact Point is operating in the Foreign Trade Administration.  Israel is not a member of the Extractive Industries Transparency Initiative.

Israel’s National Contact Point sits in the Responsible Business Conduct unit in the OECD Department of the Foreign Trade Administration in the Ministry of Economy and Industry.  An advisory committee, including representatives from the Ministries of Economy, Finance, Foreign Affairs, Justice, and the Environment, assist the National Contact Point. The National Contact Point also works in cooperation with the Manufacturer’s Association of Israel, workers’ organizations, and civil society to promote awareness of the guidelines.

Bribery and other forms of corruption are illegal under several Israeli laws and Civil Service regulations.  Israel became a signatory to the OECD Bribery convention in November 2008 and a full member of the OECD in May 2010.  Israel ranks 34 out of 180 countries in Transparency International’s 2018 Corruption Perceptions Index dropping two places from its 2017 ranking.  Several Israeli NGOs focus on public sector ethics in Israel and Transparency International has a local chapter.

Israel is a signatory of the OECD Convention on Combatting Bribery of Foreign Public Officials in International Business Transactions.

The Israeli National Police, state comptroller, Attorney General, and Accountant General are responsible for combating official corruption.  These entities operate effectively and independently and are sufficiently resourced. NGOs that focus on anticorruption efforts operate freely without government interference.

The international NGO Transparency International closely monitors corruption in Israel.

Resources to Report Corruption

Ministry of Justice
Office of the Director General
29 Salah a-Din Street Jerusalem
02-6466533, 02-6466534, 02-6466535
mancal@justice.gov.il

Transparency International Israel
Ms. Ifat Zamir
Tel Aviv University, Faculty of Management
+972 3 640 9176
ifat@ti-israel.org

For the latest safety and security information regarding Israel and the current travel advisory level, see the Travel Advisory for Israel, the West Bank, and Gaza (https://travel.state.gov/content/travel/en/traveladvisories/traveladvisories/israel-west-bank-and-gaza-travel-advisory.html).

The security situation remains complex in Israel and the West Bank, and can change quickly depending on the political environment, recent events, and geographic location.  Terrorist groups and lone-wolf terrorists continue plotting possible attacks in Israel, the West Bank, and Gaza. Terrorists may attack with little or no warning, targeting tourist locations, transportation hubs, markets/shopping malls, and local government facilities.  Violence can occur in Jerusalem and the West Bank without warning. Terror attacks in Jerusalem and the West Bank have resulted in the deaths and injury of U.S. citizens and others. Hamas, a U.S. government-designated foreign terrorist organization, controls security in Gaza.  The security environment within Gaza and on its borders is dangerous and volatile.

The most recent Central Bureau of Statistics data from January 2018 indicates there are nearly 3.9 million people active in the Israeli labor force.  According to a 2018 OECD report, 48 percent of Israeli 25-34-year olds attained a tertiary education. Many university students specialize in fields with high industrial R&D potential, including engineering, computer science, mathematics, physical sciences, and medicine.  According to the Investment Promotion Center, there are more than 135 scientists out of every 100,000 workers in Israel, one of the highest rates in the world. The rapid growth of Israel’s high-tech sector in the late 1990s increased the demand for workers with specialized skills.

The unemployment rate among 25-64 year-olds was 3.6 percent in February 2019, according to the Israeli Central Bureau of Statistics.

According to Israel’s Population and Immigration Authority, at the end of 2018 there were 98,214 foreign workers in Israel, compared with 88,378 at the end of 2017.  There were 16,230 undocumented workers in Israel at the end of 2018, compared with 17,852 at the end of 2017.

The national labor federation, the Histadrut, organizes about one-third of all Israeli workers.  Collective bargaining negotiations in the public sector take place between the Histadrut and representatives from the Ministry of Finance.  The number of strikes has declined significantly as the public sector has gotten smaller. However, strikes remain a common and viable negotiating vehicle in many difficult wage negotiations.

Israel strictly observes the Friday afternoon to Saturday afternoon Jewish Sabbath and special permits must be obtained from the government authorizing Sabbath employment.  At the age of 18, most Israelis are required to perform 2-3 years of national service. Until their mid-40s, Israeli males are required to perform about a month of military reserve duty annually, during which time they receive compensation from national insurance companies.

There is an Overseas Private Investment Corporation (OPIC) agreement between Israel and the United States and OPIC is involved in several projects in Israel.  OPIC provided a USD 250 million construction loan for a 110MW concentrated solar power (CSP) project in the Negev. OPIC also finances projects sponsored by U.S. investors in Israel.  Israel is a member of the Multilateral Investment Guarantee Agency (MIGA).

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

* Source for Host Country Data: https://www.cbs.gov.il/en/mediarelease/Pages/2019/Foreign-Direct-Investment-in-Israel-and-Direct-Investment-Abroad-by-Industries-and-Countries-2015-2017.aspx  

Table 3: Sources and Destination of FDI

Table 4: Sources of Portfolio Investment

Russ Headlee
Economic Officer
U.S. Embassy Jerusalem – Tel Aviv Branch Office
+972 (0)3 519 7547
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Policies Towards Foreign Direct Investment

Malaysia has one of the world’s most trade-dependent economies with exports and imports of goods and services reaching about 130 percent of annual GDP according to the World Trade Organization. The Malaysian government values foreign investment as a driver of continued national economic development, but has been hampered by restrictions in some sectors and an at-times burdensome regulatory regime.  Some of these restrictions may be lifted by the new government in an effort to attract FDI.

In 2009, Malaysia removed its former Foreign Investment Committee (FIC) investment guidelines, enabling transactions for acquisitions of interests, mergers, and takeovers of local companies by domestic or foreign parties without FIC approval. Although the FIC itself still exists, its primary role is to review of investments related to distributive trade (e.g., retail distributors) as a means of ensuring 30 percent of the equity in this economic segment is held by the bumiputera (ethnic Malays and other indigenous ethnicities in Malaysia).

Since 2009, the government has gradually liberalized foreign participation in the services sector to attract more foreign investment. Following removal of certain restrictions on foreign participation in industries ranging from computer-related consultancies, tourism, and freight transportation, the government in 2011 began to allow 100 percent foreign ownership across the following sectors: healthcare, retail, education as well as professional, environmental, and courier services. Some limits on foreign equity ownership remain in place across in telecommunications, financial services, and transportation.

Foreign investments in services, whether in sectors with no foreign equity limits or controlled sub-sectors, remain subject to review and approval by ministries and agencies with jurisdiction over the relevant sectors. A key function of this review and approval process is to determine whether proposed investments meet the government’s qualifications for the various incentives in place to promote economic development goals. Nevertheless, the Ministerial Functions Act grants relevant ministries broad discretionary powers over the approval of specific investment projects. Investors in industries targeted by the Malaysian government often can negotiate favorable terms with ministries, or other bodies, regulating the specific industry. This can include assistance in navigating a complex web of regulations and policies, some of which can be waived on a case-by-case basis. Foreign investors in non-targeted industries tend to receive less government assistance in obtaining the necessary approvals from the various regulatory bodies and therefore can face greater bureaucratic obstacles.

Limits on Foreign Control and Right to Private Ownership and Establishment

The legal framework for foreign investment in Malaysia grants foreigners the right to establish businesses and hold equity stakes across all parts of the economy.  However, despite the progress of reforms to open more of the economy to a greater share of foreign investment, limits on foreign ownership remain in place across many sectors.

Telecommunications

Malaysia began allowing 100 percent foreign equity participation in Applications Service Providers (ASP) in April 2012.  However, for Network Facilities Providers (NFP) and Network Service Provider (NSP) licenses, a limit of 70 percent foreign participation remains in effect.  In certain instances, Malaysia has allowed a greater share of foreign ownership, but the manner in which such exceptions are administered is non-transparent.  Restrictions are still in force on foreign ownership allowed in Telekom Malaysia. The limitation on the aggregate foreign share is 30 percent or five percent for individual investors.

Oil and Gas

Under the terms of the Petroleum Development Act of 1974, the upstream oil and gas industry is controlled by Petroleum Nasional Berhad (PETRONAS), a wholly state-owned company and the sole entity with legal title to Malaysian crude oil and gas deposits.  Foreign participation tends to take the form of production sharing contracts (PSCs). PETRONAS regularly requires its PSC partners to work with Malaysian firms for many tenders. Non-Malaysian firms are permitted to participate in oil services in partnership with local firms and are restricted to a 49 percent equity stake if the foreign party is the principal shareholder.  PETRONAS sets the terms of upstream projects with foreign participation on a case-by-case basis.

Financial Services

Malaysia’s 10-year Financial Sector Blueprint envisages further opening to foreign institutions and investors, but does not contain specific market-opening commitments or timelines.  For example, the services liberalization program that started in 2009 raised the limit of foreign ownership in insurance companies to 70 percent. However, Malaysia’s Central Bank (Bank Negara Malaysia (BNM)), would allow a greater foreign ownership stake if the investment is determined to facilitate the consolidation of the industry.  The latest Blueprint, 2011-2020, helped to codify the case-by-case approach. Under the Financial Services Act passed in late 2012, issuance of new licenses will be guided by prudential criteria and the “best interests of Malaysia,” which may include consideration of the financial strength, business record, experience, character and integrity of the prospective foreign investor, soundness and feasibility of the business plan for the institution in Malaysia, transparency and complexity of the group structure, and the extent of supervision of the foreign investor in its home country.  In determining the “best interests of Malaysia,” BNM may consider the contribution of the investment in promoting new high value-added economic activities, addressing demand for financial services where there are gaps, enhancing trade and investment linkages, and providing high-skilled employment opportunities. BNM, however, has never defined criteria for the “best interests of Malaysia” test, and no firms have qualified.

While there has been no policy change in terms of the 70 percent foreign ownership cap for insurance companies, the government did agree to let a foreign owned insurer maintain a 100 percent equity stake after that firm made a contribution to a health insurance scheme aimed at providing health coverage to lower income Malaysians.

BNM currently allows foreign banks to open four additional branches throughout Malaysia, subject to restrictions, which include designating where the branches can be set up (i.e., in market centers, semi-urban areas and non-urban areas).  The policies do not allow foreign banks to set up new branches within 1.5 km of an existing local bank. BNM also has conditioned foreign banks’ ability to offer certain services on commitments to undertake certain back office activities in Malaysia.

Other Investment Policy Reviews

Malaysia’s most recent Organization for Economic Cooperation and Development (OECD) investment review occurred in 2013.  Although the review underscored the generally positive direction of economic reforms and efforts at liberalization, the recommendations emphasized the need for greater service sector liberalization, stronger intellectual property protections, enhanced guidance and support from Malaysia’s Investment Development Authority (MIDA), and continued corporate governance reforms.

Malaysia also conducted a WTO Trade Policy Review in February 2018, which incorporated a general overview of the country’s investment policies.  The WTO’s review noted the Malaysian government’s action to institute incentives to encourage investment as well as a number of agencies to guide prospective investors.  Beyond attracting investment, Malaysia had made measurable progress on reforms to facilitate increased commercial activity. Among the new trade and investment-related laws that entered into force during the review period were: the Companies Act, which introduced provisions to simplify the procedures to start a company, to reduce the cost of doing business, as well as to reform corporate insolvency mechanisms; the introduction of the goods and services tax (GST) to replace the sales tax; the Malaysian Aviation Commission Act, pursuant to which the Malaysian Aviation Commission was established; and various amendments to the Food Regulations.  Since the WTO Trade Policy Review, however, the new government has already eliminated the GST, and has revived the Sales and Services Tax, which was implemented on September 1, 2018.

http://www.oecd.org/investment/countryreviews.htm  https://www.wto.org/english/tratop_e/tpr_e/tp466_e.htm  

Business Facilitation

The principal law governing foreign investors’ entry and practice in the Malaysian economy is the Companies Act of 2016 (CA), which entered into force on January 31, 2017 and replaced the Companies Act of 1965.  Incorporation requirements under the new CA have been further simplified and are the same for domestic and foreign sole proprietorships, partnerships, as well as privately held and publicly traded corporations. According to the World Bank’s Doing Business Report 2019, Malaysia streamlined the process of obtaining a building permit and made it faster to obtain construction permits; eliminated the site visit requirement for new commercial electricity connections, making getting electricity easier for businesses; implemented an online single window platform to carry out property searches and simplified the property transfer process; and introduced electronic forms and enhanced risk-based inspection system for cross-border trade and improved the infrastructure and port operation system at Port Klang, the largest port in Malaysia, thereby facilitating international trade; and made resolving insolvency easier by introducing the reorganization procedure.  These changes led to a significant improvement of Malaysia’s ranking per the Doing Business Report, from 24 to 15 in one year.

In addition to registering with the Companies Commission of Malaysia, business entities must file: 1) Memorandum and Articles of Association (ie, company charter); 2) a Declaration of Compliance (ie, compliance with provisions of the Companies Act); and 3) a Statutory Declaration (ie, no bankruptcies, no convictions).  The registration and business establishment process takes two weeks to complete, on average. The new government repealed GST and installed a new sales and services tax (SST), which began implementation on September 1, 2018.

Beyond these requirements, foreign investors must obtain licenses.  Under the Industrial Coordination Act of 1975, an investor seeking to engage in manufacturing will need a license if the business claims capital of RM2.5 million (approximately USD 641,000) or employs at least 75 full-time staff.  The Malaysian Government’s guidelines for approving manufacturing investments, and by extension, manufacturing licenses, are generally based on capital-to-employee ratios. Projects below a threshold of RM55,000 (approximately USD 14,100) of capital per employee are deemed labor-intensive and will generally not qualify.  Manufacturing investors seeking to expand or diversify their operations will need to apply through MIDA.

Manufacturing investors whose companies have annual revenue below RM50 million (approximately USD12.8 million) or with fewer than 200 full-time employees meet the definition of small and medium size enterprises (SMEs) and will generally be eligible for government SME incentives.  Companies in the services or other sectors that have revenue below RM20 million (approximately USD5.1 million) or fewer than 75 full-time employees will meet the SME definition.

[Reference]

• http://www.mida.gov.my/home/getting-started/posts/   – The Malaysian Investment Development Authority’s starting point for prospective foreign investors.  Select the “General Guidelines and Facilities” tab.
• http://www.ssm.com.my/en    – The Malaysian Companies Commission homepage for registering sole proprietorships, partnerships, and companies.
• http://www.mdec.my/    – The Malaysia Digital Economy Corporation (MDEC) is responsible for governing the Multimedia Super Corridor (MSC), the initiative to attract investment in information and communications technologies.
• http://www.skmm.gov.my/Sectors/Broadcasting.aspx    – The Malaysian Communications and Multimedia Commission’s page for requirements in the communications sector.
• http://www.moh.gov.my/english.php/pages/view/160    – The Ministry of Health’s FAQs on liberalization of medical services.
• http://www.doingbusiness.org/content/dam/doingBusiness/country/m/malaysia/MYS.pdf 
• http://iab.worldbank.org  
• http://ger.co/how-it-works/information-portals  

Outward Investment

While the Malaysian government does not promote or incentivize outward investment, a number of Government-Linked companies, pension funds, and investment companies do have investments overseas.  These companies include the sovereign wealth fund of the Government of Malaysia, Khazanah Nasional Berhad, KWAP, Malaysia’s largest public services pension fund, and the Employees’ Provident Fund of Malaysia.  Government owned oil and gas firm Petronas also has investments in several regions outside Asia.

As a member of ASEAN, Malaysia is a party to trade agreements with Australia and New Zealand; China; India; Japan; and the Republic of Korea. During the review period, the ASEAN-India Agreement was expanded to cover trade in services. Malaysia also has bilateral FTAs with: Australia; Chile; India; Japan; New Zealand; Pakistan; and Turkey.

Reference: https://www.wto.org/english/tratop_e/tpr_e/s366_sum_e.pdf 

Malaysia has bilateral investment treaties with 36 countries, but not yet with the United States.  Malaysia does have bilateral “investment guarantee agreements  ” with over 70 economies, including the United States. The Government reports that 65 of Malaysia’s existing investment agreements contain Investor State Dispute Settlement (ISDS) provisions.  Malaysia has double taxation treaties with over 70 countries, though the double taxation agreement with the U.S. currently is limited to air and sea transportation.

Transparency of the Regulatory System

In July 2013, the Malaysian Government initiated a National Policy on Development and Implementation of Regulations (NPDIR).  Under this policy, the federal government embarked on a comprehensive approach to minimize redundancies in the country’s regulatory framework.  The benefits to the private sector thus far have largely been reduced licensing requirements, fees, and approval wait-times for construction projects.  The main components of the policy have been: 1) a regulatory impact assessment (a cost-benefit analysis of all newly proposed regulations); and 2) the creation of a regulations guide, PEMUDAH (similar to the role MIDA plays for prospective investors), to aid businesses and civil society organizations in understanding regulatory requirements affecting their organizations’ activities.  Under the NPDIR, the government has committed to reviewing all new regulations every five years to determine with the new regulations need to be adjusted or eliminated.

Despite this effort to make government more accountable for its rules and to make the process more inclusive, many foreign investors continue to criticize the lack of transparency in government decision making.  The implementation of rules on government procurement contracts are a recurring concern. Non-Malaysian pharmaceutical companies claim to have lost bids against bumiputera (ethnic Malay)-owned companies further claiming they’d offered more effective medicines at lower cost.

[Reference]

(http://rulemaking.worldbank.org/  provides data for 185 economies on whether governments publish or consult with public about proposed regulations)

International Regulatory Considerations

Malaysia is one of 10 Member States that constitute the Association of Southeast Asian Nations (ASEAN). On December 31, 2015, the ASEAN Economic Community formally came into existence. For many years ahead of that date, and since, ASEAN’s economic policy leaders have met regularly to discuss promoting greater economic integration within the 10-country bloc.  Although trade within the 10-country bloc is robust, Member States have prioritized steps to facilitate a greater flow of goods, services, and capital. No regional regulatory system is in place. As a member of the WTO, Malaysia provides notification of all draft technical regulations to the Committee on Technical Barriers to Trade.

Legal System and Judicial Independence

Malaysia’s legal system generally reflects English Law in that it consists of written and unwritten laws.  Written laws include the federal and state constitutions as well as laws passed by Parliament and state legislatures.  Unwritten laws are derived from court cases and local customs. The Contract Law of 1950 still guides the enforcement of contracts and resolution of disputes.  States generally control property laws for residences, although the Malaysian government has recently adopted measures, including high capital gains taxes, to prevent the real estate market from overheating.  Nevertheless, through such programs as the Multimedia Super Corridor, Free Commercial Zones, and Free Industrial Zones, the federal government has substantial reach into a range of geographic areas as a means of encouraging foreign investment and facilitating ownership of commercial and industrial property.

In 2007 the judiciary introduced dedicated intellectual property (IP) courts that consist of 15 “Sessions Courts” that sit in each state, and six ‘High Courts’ that sit in certain states (i.e. Kuala Lumpur, Johor, Perak, Selangor, Sabah and Sarawak).  Malaysia launched the IP courts to deter the use of IP-infringing activity to fund criminal activity and to demonstrate a commitment to IP development in support of the country’s goal to achieve high-income status. These lower courts hear criminal cases, and have the jurisdiction to impose fines for IP infringing acts.  There is no limit to the fines that they can impose. The higher courts are designated for civil cases to provide damages incurred by rights holders once the damages have been quantified post-trial. High courts have the authority to issue injunctions (i.e., to order an immediate cessation of infringing activity) and to award monetary damages.

Labor Courts, which the Ministry of Human Resources describes as “a quasi-judicial system that serves as an alternative to civil claims,” provide a means for workers to seek payment of wages and other financial benefits in arrears.  Proceedings are generally informal but conducted in accordance with civil court principles. The High Court has upheld decisions which Labor Courts have rendered.

Certain foreign judgments are enforceable in Malaysia by virtue of the Reciprocal Enforcement of Judgments Act 1958 (REJA).  However, before a foreign judgment can be enforceable, it has to be registered. The registration of foreign judgments is only possible if the judgment was given by a Superior Court from a country listed in the First Schedule of the REJA: the United Kingdom, Hong Kong Special Administrative Region of the People’s Republic of China, Singapore, New Zealand, Republic of Sri Lanka, India, and Brunei.

To register a foreign judgment under the REJA, the judgment creditor has to apply for the same within six years after the date of the foreign judgment. Any foreign judgment coming under the REJA shall be registered unless it has been wholly satisfied, or it could not be enforced by execution in the country of the original Court.

If the judgment is not from a country listed in the First Schedule to the REJA, the only method of enforcement at common law is by securing a Malaysian judgment. This involves suing on the judgment in the local Courts as an action in debt. Summary judgment procedures (explained above) may be used to expedite the process.

Post is not aware of instances in which political figures or government authorities have interfered in judiciary proceedings involving commercial matters.

Laws and Regulations on Foreign Direct Investment

The Government of Malaysia established the Malaysia Investment Development Authority (MIDA) to attract foreign investment and to serve as a focal point for legal and regulatory questions.  Organized as part of the Ministry of International Trade and Industry (MITI), MIDA serves as a guide to foreign investors interested in the manufacturing sector and in many services sectors.  Regional bodies providing support investors include: Invest Kuala Lumpur, Invest Penang, Invest Selangor, the Sabah Economic Development and Investment Authority (SEDIA), and the Sarawak Economic Development Corporation, among others.

As noted, the Ministerial Functions Act authorizes government ministries to oversee investments under their jurisdiction.  Prospective investors in the services sector will need to follow requirements set by the relevant Malaysian Government ministry or agency over the sector in question.

Competition and Anti-Trust Laws

On April 21, 2010, the Parliament of Malaysia approved two bills, the Competition Commission Act 2010 and the Competition Act 2010.  The Acts took effect January 1, 2012. The Competition Act prohibits cartels and abuses of a dominant market position, but does not create any pre-transaction review of mergers or acquisitions.  Violations are punishable by fines, as well as imprisonment for individual violations. Malaysia’s Competition Commission has responsibility for determining whether a company’s “conduct” constitutes an abuse of dominant market position or otherwise distorts or restricts competition.  As a matter of law, the Competition Commission does not have separate standards for foreign and domestic companies. Commission membership consists of senior officials from the Ministry of International Trade and Industry (MITI), the Ministry of Domestic Trade, Cooperatives, and Consumerism (MDTCC), the Ministry of Finance, and, on a rotating basis, representatives from academia and the private sector.

In addition to the Competition Commission, the Acts established a Competition Appeals Tribunal (CAT) to hear all appeals of Commission decisions.   In the largest case to date, the Commission imposed a fine of RM10 million on Malaysia Airlines and Air Asia in September 2013 for colluding to divide shares of the air transport services market.  The airlines filed an appeal in March 2014. In February 2016, the CAT ruled in favor of the airlines in its first-ever decision and ordered the penalty to be set aside and refunded to both airlines.

Expropriation and Compensation

The Embassy is not aware of any cases of uncompensated expropriation of U.S.-held assets, or confiscatory tax collection practices, by the Malaysian government. The government’s stated policy is that all investors, both foreign and domestic, are entitled to fair compensation in the event that their private property is required for public purposes. Should the investor and the government disagree on the amount of compensation, the issue is then referred to the Malaysian judicial system.

Dispute Settlement

ICSID Convention and New York Convention

Malaysia signed the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID) on October 22, 1965, coming into force on October 14, 1966.  In addition, it is a contracting state of the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards since November 5, 1985.

Malaysia adopted the following measures to make the two conventions effective in its territory:

The Convention on the Settlement of Investment Disputes Act, 1966. (Act of Parliament 14 of 1966); the Notification on entry into force of the Convention on the Settlement of Investment Disputes Act, 1966. (Notification No. 96 of March 10, 1966); and the Arbitration (Amendment) Act, 1980. (Act A 478 of 1980).

Although the domestic legal system is accessible to foreign investors, filing a case generally requires any non-Malaysian citizen to make a large deposit before pursuing a case in the Malaysian courts.  Post is unaware of any U.S. investors’ recent complaints of political interference in any judicial proceedings.

References:

• https://icsid.worldbank.org/en/Pages/about/MembershipStateDetails.aspx?state=ST86  
• http://www.newyorkconvention.org/countries  

Investor-State Dispute Settlement

Malaysia’s investment agreements contain provisions allowing for international arbitration of investment disputes.  Malaysia does not have a Bilateral Investment Treaty with the United States.

Post has little data concerning the Malaysian Government’s general handling of investment disputes.  In 2004, a U.S. investor filed a case against the directors of the firm, who constituted the majority shareholders.  The case involves allegations by the U.S. investor of embezzlement by the other directors, and its resolution is unknown.

The Malaysian government has been involved in three ICSID cases — in 1994, 1999, and 2005.  The first case was settled out of court. The second, filed under the Malaysia-Belgo-Luxembourg Investment Guarantee Agreement (IGA), was concluded in 2000 in Malaysia’s favor.  The 2005 case, filed under the Malaysia-UK Bilateral Investment Treaty, was concluded in 2007 in favor of the investor. However, the judgment against Malaysia was ultimately dismissed on jurisdictional grounds, namely that ICSID was not the appropriate forum to settle the dispute because the transaction in question was not deemed an investment since it did not materially contribute to Malaysia’s development. Nevertheless, Malaysian courts recognize arbitral awards issued against the government. There is no history of extrajudicial action against foreign investors.

International Commercial Arbitration and Foreign Courts

Malaysia’s Arbitration Act of 2005 applies to both international and domestic arbitration. Although its provisions largely reflect those of the UN Commission on International Trade Law (UNCITRAL) Model Law, there are some notable differences, including the requirement that parties in domestic arbitration must choose Malaysian law as the applicable law.  Although an arbitration agreement may be concluded by email or fax, it must be in writing: Malaysia does not recognize oral agreements or conduct as constituting binding arbitration agreements.

Many firms choose to include mandatory arbitration clauses in their contracts.  The government actively promotes use of the Kuala Lumpur Regional Center for Arbitration (http://www.rcakl.org.my), established under the auspices of the Asian-African Legal Consultative Committee to offer international arbitration, mediation, and conciliation for trade disputes.  The KLRCA is the only recognized center for arbitration in Malaysia. Arbitration held in a foreign jurisdiction under the rules of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States 1965 or under the United Nations Commission on International trade Law Arbitration Rules 1976 and the Rules of the Regional Centre for Arbitration at Kuala Lumpur can be enforceable in Malaysia.

Bankruptcy Regulations

Malaysia’s Department of Insolvency (MdI) is the lead agency implementing the Insolvency Act of 1967, previously known as the Bankruptcy Act of 1967.  On October 6, 2017, the Bankruptcy Bill 2016 came into force, changing the name of the previous Act, and amending certain terms and conditions. The most significant changes in the amendment include — (1) a social guarantor can no longer be made bankrupt; (2) there is now a stricter requirement for personal service for bankruptcy notice and petition; (3) introduction of the voluntary arrangement as an alternative to bankruptcy; (4) a higher bankruptcy threshold from RM30,000 to RM50,000; (5) introduction of the automatic discharge of bankruptcy; (6) no objection to four categories of bankruptcy for applying a discharge under section 33A (discharge of bankrupt by Certificate of Director General of Insolvency); (7) introduction of single bankruptcy order as a result of the abolishment of the current two-tier order system, i.e. receiving and adjudication orders; (8) creation of the Insolvency Assistance fund.

The distribution of proceeds from the liquidation of a bankrupt company’s assets generally adheres to the “priority matters and persons” identified by the Companies Act of 2016.  After the bankruptcy process legal costs are covered, recipients of proceeds are: employees, secured creditors (i.e., creditors of real assets), unsecured creditors (i.e., creditors of financial instruments), and shareholders.  Bankruptcy is not criminalized in Malaysia. The country ranks 46th on the World Bank Group’s Doing Business Rankings for Ease of Resolving Insolvency.

• http://www.mdi.gov.my/index.php/57-announcements/1182-announcement-on-the-enforcement-date-of-insolvency-act-1967  
• http://www.ssm.com.my/sites/default/files/companies_act_2016/
  aktabi_20160915_companiesact2016act777_0.pdf 
• http://www.doingbusiness.org/data/exploreeconomies/malaysia  

Investment Incentives

The Malaysian Government has codified the incentives available for investments in qualifying projects in target sectors and regions.  Tax holidays, financing, and special deductions are among the measures generally available for domestic as well as foreign investors in the following sectors and geographic areas: information and communications technologies (ICT); biotechnology; halal products (e.g., food, cosmetics, pharmaceuticals); oil and gas storage and trading; Islamic finance; Kuala Lumpur; Labuan Island (off Eastern Malaysia); East Coast of Peninsular Malaysia; Sabah and Sarawak (Eastern Malaysia); Northern Corridor.

The lists of application procedures and incentives available to investors in these sectors and regions can be found at: http://www.mida.gov.my/home/invest-in-malaysia/posts/ 

Foreign Trade Zones/Free Ports/Trade Facilitation

The Free Zone Act of 1990 authorized the Minister of Finance to designate any suitable area as either a Free Industrial Zone (FIZ), where manufacturing and assembly takes place, or a Free Commercial Zone (FCZ), generally for warehousing commercial stock.  The Minister of Finance may appoint any federal, state, or local government agency or entity as an authority to administer, maintain and operate any free trade zone. Currently there are 13 FIZs and 12 FCZs in Malaysia. In June 2006, the Port Klang Free Zone opened as the nation’s first fully integrated FIZ and FCZ, although the project has been dogged by corruption allegations related to the land acquisition for the site. The government launched a prosecution in 2009 of the former Transport Minister involved in the land purchase process, though he was later acquitted in October 2013.

The Digital Free Trade Zone (DFTZ) is an initiative by the Malaysian Government, implemented through MDEC, launched in November 2017 with the participation of China’s Alibaba.  DFTZ aims to facilitate seamless cross-border trading and eCommerce, and enable Malaysian SMEs to export their goods internationally. According to the Malaysian government, the DFTZ consists of two components:

An eFulfilment Hub to help Malaysian SMEs export their goods with the help of leading fulfilment service providers;

An eServices Platform to efficiently manage cargo clearance and other processes needed for cross-border trade

For more information, please visit https://mydftz.com  

Raw materials, products and equipment may be imported duty-free into these zones with minimum customs formalities. Companies that export not less than 80 percent of their output and depend on imported goods, raw materials, and components may be located in these FZs.  Ports, shipping and maritime-related services play an important role in Malaysia since 90 percent of its international trade by volume is seaborne. Malaysia is also a major transshipment center.

Goods sold into the Malaysian economy by companies within the FZs must pay import duties.  If a company wants to enjoy Common External Preferential Tariff (CEPT) rates within the ASEAN Free Trade Area, 40 percent of a product’s content must be ASEAN-sourced. In addition to the FZs, Malaysia permits the establishment of licensed manufacturing warehouses outside of free zones, which give companies greater freedom of location while allowing them to enjoy privileges similar to firms operating in an FZ. Companies operating in these zones require approval/license for each activity. The time needed to obtain licenses depends on the type of approval and ranges from two to eight weeks.

Performance and Data Localization Requirements

Fiscal incentives granted to both foreign and domestic investors historically have been subject to performance requirements, usually in the form of export targets, local content requirements and technology transfer requirements.  Performance requirements are usually written into the individual manufacturing licenses of local and foreign investors.

The Malaysian government extends a full tax exemption incentive of fifteen years for firms with “Pioneer Status” (companies promoting products or activities in industries or parts of Malaysia to which the government places a high priority), and ten years for companies with “Investment Tax Allowance” status (those on which the government places a priority, but not as high as Pioneer Status).  However, the government appears to have some flexibility with respect to the expiry of these periods, and some firms reportedly have had their pioneer status renewed. Government priorities generally include the levels of value-added, technology used, and industrial linkages. If a firm (foreign or domestic) fails to meet the terms of its license, it risks losing any tax benefits it may have been awarded.  Potentially, a firm could lose its manufacturing license. The New Economic Model stated that in the long term, the government intends gradually to eliminate most of the fiscal incentives now offered to foreign and domestic manufacturing investors. More information on specific incentives for various sectors can be found at www.mida.gov.my.

Malaysia also seeks to attract foreign investment in the information technology industry, particularly in the Multimedia Super Corridor (MSC), a government scheme to foster the growth of research, development, and other high technology activities in Malaysia.  However, since July 1, 2018, the Government decided to put on hold the granting of MSC Malaysia Status and its incentives, including extension of income tax exemption period or adding new MSC Malaysia Qualifying Activities in order to review and amend Malaysia’s tax incentives.  While the MSC Malaysia Status Services Incentive has been approved and gazetted on December 31, 2018 and applications are accepted starting on April 2, 2019 for non-Intellectual Property (IP) activities, the MSC Malaysia Status IP Incentive policy is still under review. For further details on incentives, see www.mdec.my.  The Malaysia Digital Economy Corporation (MDEC) approves all applications for MSC status. For more information please visit: https://www.mdec.my/msc-malaysia  

In the services sector, the government’s stated goal is to attract foreign investment in regional distribution centers, international procurement centers, operational headquarter research and development, university and graduate education, integrated market and logistics support services, cold chain facilities, central utility facilities, industrial training, and environmental management.  To date, Malaysia has had some success in attracting regional distribution centers, global shared services offices, and local campuses of foreign universities. For example, GE and Honeywell maintain regional offices for ASEAN in Malaysia. In 2016, McDermott moved its regional headquarters to Malaysia and Boston Scientific broke ground on a medical devices manufacturing facility.

Malaysia seeks to attract foreign investment in biotechnology, but sends a mixed message on agricultural and food biotechnology. On July 8, 2010, the Malaysian Ministry of Health posted amendments to the Food Regulations 1985 [P.U. (A) 437/1985] that require strict mandatory labeling of food and food ingredients obtained through modern biotechnology.  The amendments also included a requirement that no person shall import, prepare or advertise for sale, or sell any food or food ingredients obtained through modern biotechnology without the prior written approval of the Director. There is no ‘threshold’ level on the labeling requirement. Labeling of “GMO Free” or “Non-GMO” is not permitted. The labeling requirements only apply to foods and food ingredients obtained through modern biotechnology but not to food produced with GMO feed.  The labeling regulation was originally scheduled to be enforced beginning in July 2012. However, a Ministry of Health circular published on August 27, 2012 announced that enforcement would be deferred until July 8, 2014. However, there has not been any announcement to date of its enforcement. A copy of the law and regulations respectively can be found at: http://www.biosafety.nre.gov.my/BiosafetyAct2007.shtml, and http://www.biosafety.nre.gov.my/BIOSAFETY percent20REGULATIONS percent202010.pdf.

Malaysia has not implemented measures amounting to “forced localization” for data storage.  Bank Negara Malaysia has amended its recent Outsourcing Guidelines to remove the original data localization requirement and shared that it will similarly remove the data localization elements in its upcoming Risk Management in Technology framework.  The government has provided inducements to attract foreign and domestic investors to the Multimedia Super Corridor, but does not mandate use of onshore providers. Companies in the information and communications technology sector are not required to hand over source code.

Real Property

Land administration is shared among federal, state, and local government.  State governments have their own rules about land ownership, including foreign ownership.  Malaysian law affords strong protections to real property owners. Real property titles are recorded in public records and attorneys review transfer documentation to ensure efficacy of a title transfer.  There is no title insurance available in Malaysia. Malaysian courts protect property ownership rights. Foreign investors are allowed to borrow using real property as collateral. Foreign and domestic lenders are able to record mortgages with competent authorities and execute foreclosure in the event of loan default.  Malaysia ranks 29th (ranked 42nd in 2018) in ease of registering property according to the Doing Business 2019 report, right behind Finland and ahead of Hungary, thanks to changes it made to its registration procedures.

[Reference]

http://www.doingbusiness.org/rankings .

Intellectual Property Rights

In December 2011, the Malaysian Parliament passed amendments to the copyright law designed to, inter alia, bring the country into compliance with the WIPO Copyright Treaty and the WIPO Performance and Phonogram Treaty, define Internet Service Provider (ISP) liabilities, and prohibit unauthorized recording of motion pictures in theaters.  Malaysia subsequently acceded to the WIPO Copyright Treaty and the WIPO Performance and Phonogram Treaty in September 2012. In addition, the Ministry of Domestic Trade, Cooperatives, and Consumerism (MDTCC) took steps to enhance Malaysia’s enforcement regime, including active cooperation with rights holders on matters pertaining to IPR enforcement, ongoing training of prosecutors for specialized IPR courts, and the 2013 reestablishment of a Special Anti-Piracy Taskforce.

In response to trends of rising internet piracy, the interagency Special Anti-Piracy Task Force established a Special Internet Forensics Unit (SIFU) within MDTCC.  The SIFU team’s responsibilities include monitoring for sites suspected of being, or known as, purveyors of infringing content. This organization follows MDTCC’s practice of launching investigations based on information and complaints from legitimate host sites and content providers.  Capacity building remains a priority for the SIFU. Coordination with the Malaysian Communications and Multimedia Commission (MCMC), which has responsibility for overall regulation of internet content, has been improving, according to many rights holders in Malaysia. Our contacts at MDTCC have told Post that the process of developing investigative leads that would support a case for the Attorney General’s Chambers (equivalent to the U.S. Department of Justice) is a work in progress.

Despite Malaysia’s success in improving IPR enforcement, key issues remain, including relatively widespread availability of pirated and counterfeit products in Malaysia, high rates of piracy over the Internet, and continued problems with book piracy.  USTR conducted an Out-of-Cycle Review of Malaysia in 2018 to consider the extent to which Malaysia is providing adequate and effective IP protection and enforcement, including with respect to patents.  During this review, the United States and Malaysia have held numerous consultations to resolve outstanding issues.  In 2019, USTR extended the Out-of-Cycle Review of Malaysia while asking Malaysia to complete actions to fully resolve these concerns in the near term.

The United States continues to encourage Malaysia to accede to the WIPO Budapest Treaty on the International Recognition of the Deposit of Microorganisms for the Purposes of Patent Procedure.  In addition, the United States continues to urge Malaysia to provide effective protection against unfair commercial use, as well as unauthorized disclosure, of undisclosed test or other data generated to obtain marketing approval for pharmaceutical products, and to provide an effective system to address patent issues expeditiously in connection with applications to market pharmaceutical products.

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

Foreigners may trade in securities and derivatives.  Malaysia houses one of Asia’s largest corporate bond markets, and is the largest sukuk (Islamic bond) market in East Asia.  Both domestic and foreign companies regularly access capital in Malaysia’s bond market. Malaysia provides tax incentives for foreign companies issuing Islamic bonds and financial instruments in Malaysia.

Malaysia’s stock market (Bursa Malaysia) is open to foreign investment and foreign corporation issuing shares.  However, foreign issuers remain subject to bumiputera ownership requirements of 12.5 percent if the majority of their operations are in Malaysia.  Listing requirements for foreign companies are similar to that of local companies. There are additional criteria for foreign companies wanting to list in Malaysia including, among others: approval of regulatory authorities of foreign jurisdiction where the company was incorporated, valuation of assets that are standards applied in Malaysia or International Valuation Standards, and the company must have been registered with the Registrar of Companies under the Companies Act 1965 or 2016.

Malaysia has taken steps to promote good corporate governance by listed companies.  Publicly listed companies must submit quarterly reports that include a balance sheet and income statement within two months of each financial quarter’s end and audited annual accounts for public scrutiny within four months of each year’s end. An individual may hold up to 25 corporate directorships.  All public and private company directors are required to attend classes on corporate rules and regulations.

Legislation also regulates equity buybacks, mandates book entry of all securities transfers, and requires that all owners of securities accounts be identified.  A Central Depository System (CDS) for stocks and bonds established in 1991 makes physical possession of certificates unnecessary. All shares traded on the Bursa Malaysia must be deposited in the CDS.  Short selling of stocks is prohibited.

Money and Banking System

International investors generally regard Malaysia’s banking sector as dynamic and well regulated.  Although privately owned banks are competitive with state-owned banks, the state-owned banks dominate the market.  The five largest banks – Maybank, CIMB, Public Bank, RHB, and Ambank – account for an estimated 75 percent of banking sector loans.  According to the World Bank, total banking sector lending for 2017 was 140.27 percent of GDP, and 1.5 percent of the Malaysian banking sector’s loans were non-performing for 2017.

Bank Negara prohibits hostile takeovers of banks, but the Securities Commission has established non-discriminatory rules and disclosure requirements for hostile takeovers of publicly traded companies.

Foreign Exchange and Remittances

Foreign Exchange

In December 2016, the central bank, began implementing new foreign exchange management requirements. Under the policy, exporters are required to convert 75 percent of their export earnings into Malaysian ringgit. The goal of this policy was to deepen the market for the currency, with the goal of reducing exchange rate volatility.  The policy remains in place, with the Central Bank giving case-by-case exceptions. All domestic trade in goods and services must be transacted in ringgit only, with no optional settlement in foreign currency. The Central Bank has demonstrated little flexibility with respect to the ratio of earnings that exporters hold in ringgit. Post is unaware of any instances where the requirement for exporters to hold their earnings in ringgit has impeded their ability to remit profits to headquarters.

Remittance Policies

Malaysia imposes few investment remittance rules on resident companies. Incorporated and individual U.S. investors have not raised concerns about their ability to transfer dividend payments, loan payments, royalties or other fees to home offices or U.S.-based accounts.  Tax advisory firms and consultancies have not flagged payments as a significant concern among U.S. or foreign investors in Malaysia. Foreign exchange administration policies place no foreign currency asset limits on firms that have no ringgit-denominated debt. Companies that fund their purchases of foreign exchange assets with either onshore or offshore foreign exchange holdings, whether or not such companies have ringgit-denominated debt, face no limits in making remittances.  However, a company with ringgit-denominated debt will need approval from the Central Bank for conversions of RM50 million or more into foreign exchange assets in a calendar year.

The Treasury Department has not identified Malaysia as a currency manipulator.

Sovereign Wealth Funds

The Malaysian Government established government-linked investment companies (GLICs) as vehicles to harness revenue from commodity-based industries and promote growth in strategic development areas.  Khazanah is the largest of the GLICs, and the company holds equity in a range of domestic firms as well as investments outside Malaysia. The other GLICs – Armed Forces Retirement Fund (LTAT), National Capital (PNB), Employees Provident Fund (EPF), Pilgrimage Fund (Tabung Haji), Public Employees Retirement Fund (KWAP) – execute similar investments but are structured as savings vehicles for Malaysians.  Khazanah follows the Santiago Principles and participates in the International Forum on Sovereign Wealth Funds

Khazanah was incorporated in 1993 under the Companies Act of 1965 as a public limited company with a charter to promote growth in strategic industries and national initiatives.  As of December 31, 2018, Khazanah reported a 21 percent drop in its net worth and a decline in its “realizable” assets to RM136 billion (from USUSD 39.3 billion to USUSD 32.9 billion).  Khazanah also recorded a pre-tax loss of RM6.27 billion (USUSD 1.52 billion) compared to a pre-tax profit of RM2.89 billion (USUSD 723 million) the previous year. The sectors comprising its major holdings include telecommunications and media, airports, banking, real estate, health care, and the national energy utility.  According to its Annual Review 2019 presentation, in 2018, Khazanah’s mandate and objectives were refreshed, and the company will now pursue its two distinct objectives (commercial vs. strategic) through a dual-fund investment structure: (1) an intergenerational wealth fund to meet its commercial objectives (which will include public and private assets); and (2) a strategic fund to meet its strategic objective (which will include strategic assets and developmental ones).

• https://www.khazanah.com.my/khazanah/files/60/60f2c749-314c-4a89-831a-c28bd45024e6.pdf 
• https://www.khazanah.com.my/getmedia/806f3b69-9bb5-452d-a3fa-ce7e77e612b4/Khazanah-Annual-Review-2019-Presentation-Deck-5-Mar-2019_2.aspx  

State-owned enterprises play a very significant role in the Malaysian economy.  Such enterprises have been used to spearhead infrastructure and industrial projects.  As of July 2017, the government owns approximately 42 percent of the value of firms listed on the Bursa Malaysia through its seven Government-Linked Investment Corporations (GLICs), including a majority stake in a number of companies.  Only a minority portion of stock is available for trading for some of the largest publicly listed local companies. Khazanah, often considered the government’s sovereign wealth fund, owns stakes in companies competing in many of the country’s major industries.  Prime Minister Mahathir chairs Khazanah’s Board of Directors. PETRONAS, the state-owned oil and gas company, is Malaysia’s only Fortune Global 500 firm.

As part of its Government Linked Companies (GLC) Transformation Program, the Malaysian Government embarked on a two-pronged strategy to reduce its shares across a range of companies and to make those companies more competitive.  Among the notable divestments of recent years, Khazanah, the largest Government-Linked Investment Company (GLIC), offloaded its stake in the national car company Proton to DRB-Hicom Bhd in 2012. In 2013, Khazanah divested its holdings in telecommunications services giant Time Engineering Bhd.  In 2015, Khazanah cut its equity ownership of national utility company Tenaga Nasional from 31 percent to 29 percent. Khazanah’s annual report for 2017 noted only that the fund had completed 12 divestments that produced a gain of RM 2.5 billion (USD 625 million). In 2018, Khazanah partially divested its shares in IHH Healthcare Berhad, saw two successful IPOs, and issued USUSD 321 million in exchangeable sukuk.  However, significant losses at domestic companies including at Axiata, Telekom Malaysia, Tenaga Nasional, IHH Healthcare Berhad, CIMB Bank, and Malaysia Airports led to the pre-tax loss of USUSD 1.52 billion the company experienced in 2018. In April 2019, Khazanah sold 1.5 percent of its stake in Tenaga Nasional on Bursa Malaysia, after which Khazanah still owned 27.27 percent of the national electric company.

https://www.khazanah.com.my/getmedia/806f3b69-9bb5-452d-a3fa-ce7e77e612b4/Khazanah-Annual-Review-2019-Presentation-Deck-5-Mar-2019_2.aspx

State-owned enterprises (SOEs), which in Malaysia are called government-linked companies (GLCs), with publicly traded shares must produce audited financial statements every year.  These SOEs must also submit filings related to changes in the organization’s management. The SOEs that do not offer publicly traded shares are required to submit annual reports to the Companies Commission.  The requirement for publicly reporting the financial standing and scope of activities of SOEs has increased their transparency. It is also consistent with the OECD’s guideline for Transparency and Disclosure.  Moreover, many SOEs prioritize operations that maximize their earnings. However, the close relationships SOEs have with senior government officials blur the line between strictly commercial activity pursued for its own sake and activity that has been directed to advance a policy interest.  For example, Petroliam Nasional Berhad (Petronas) is both SOE in the oil and gas sector and the regulator of the industry. Malaysia Airlines (MAS), in which the government previously held 70 percent but now holds 100 percent, required periodic infusions of resources from the government to maintain the large numbers of the company’s staff and senior executives.  The airline is still undergoing a restructuring, and the stated goal of the country’s largest sovereign wealth fund, Khazanah, which holds all of the airline’s shares, is to re-list the airline in early 2019.

Privatization Program

In several key sectors, including transportation, agriculture, utilities, financial services, manufacturing, and construction, Government Linked Corporations (GLCs) continue to dominate the market.  However, the Malaysian Government remains publicly committed to the continued, eventual privatization, though it has not set a timeline for the process and faces substantial political pressure to preserve the roles of the GLCs.  The Malaysian Government established the Public-Private Partnership Unit (UKAS) in 2009 to provide guidance and administrative support to businesses interested in privatization projects as well as large-scale government procurement projects.  UKAS, which used to be a part of the Office of the Prime Minister, is now under the Ministry of Finance. UKAS oversees transactions ranging from contracts and concessions to sales and transfers of ownership from the public sector to the private sector.

Foreign investors may participate in privatization programs, but foreign ownership is limited to 25 percent of the privatized entity’s equity.  The National Development Policy confers preferential treatment to the bumiputera, which are entitled to at least 30 percent of the privatized entity’s equity.

The privatization process is formally subject to public bidding.  However, the lack of transparency has led to criticism that the government’s decisions tend to favor individuals and businesses with close ties to high-ranking officials.

The development of responsible business conduct programs in Malaysia has shifted from a government-led initiative to business-led practices.  In 2006, Malaysian stock market regulator, the Securities Commission, published a Corporate Social Responsibility (CSR) Framework for all publicly listed companies, which are required to disclose their CSR programs in their annual financial reports.  In 2007 the Women, Family and Community Ministry launched the Prime Minister’s CSR’s Awards to encourage the spread of CSR programs. In 2011, the Malaysian Government launched the 1Malaysia Training Plan (SL1M), an employment incentive that allows businesses to double the tax deduction for expenses to hire and train graduates from rural areas or from low-income families.  In 2011, the Board for Corporate Sustainability and Responsibility Malaysia (BCSRM) supplanted the Institute for Corporate Responsibility Malaysia as the focal point for the country’s responsible business conduct programs. The BCSRM is the local affiliate of the World Business Council for Sustainable Development.

Although the Malaysian Government encourages companies to adopt RBC programs, it does not promote adherence to the principles in the OECD Guidelines for Multinational Enterprises or the UN Guiding Principles on Business and Human Rights.  Malaysia is not a member of the Extractive Industries Transparency Initiative.

The Malaysian government established the Malaysian Anti-Corruption Commission (MACC) in 2008 and the Whistleblower Protection Act in 2010.  The Malaysian government considers bribery a criminal act and does not permit bribes to be deducted from taxes. Malaysia’s anti-corruption law prohibits bribery of foreign public officials, permits the prosecution of Malaysians for offense committed overseas, and provides for the seizure of property.

The MACC conducts investigations, but prosecutorial discretion remains with the Attorney General’s Chambers (AGC).  There is no systematic requirement for public officials to disclose their assets and the Whistleblower Protection Act does not provide protection for those who disclose allegations to the media.   In 2015, the Attorney General and Parliament opened investigations into allegations of financial mismanagement at the state development fund 1 Malaysia Development Berhad (1MDB), chaired by then-Prime Minister Najib Razak.  After Najib installed a new Attorney General and removed other ministers, the MACC’s investigation closed in late 2015 and the new Attorney General declared the Prime Minister innocent.

The new government prioritized  anti-corruption efforts in its campaign manifesto. Since taking office in May 2018, it established Royal Commissions of Inquiry into alleged corruption at 1MDB, the Federal Land Development Authority (FELDA), the Council of Trust for the People (MARA), and the Hajj Pilgrims Fund (Tabung Haji), all government or government-linked agenices.  On May 21, 2018 the MACC established a 1MDB taskforce, including the police and central bank. As of April 2019, the government has charged former Prime Minister Najib with 42 counts of money laundering, criminal breach of trust, and abuse of power.

On July 2, 2018, the government announced it was reducing the number of agencies and departments under the Prime Minister’s Department (PMD) from over 90 to only 26 for greater transparency.  Of those reduced, 40 will be re-designated to other ministries, while 10 agencies, offices, and task forces will be abolished. Nine have been given the green light to operate as independent entities, reporting directly to Parliament while five other agencies have been merged.  The Malaysian Anti-Corruption Commission, the Election Commission, Human Rights Commission of Malaysia and the National Audit Department will now report directly to Parliament instead of the PMD

Resources to Report Corruption

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

Datuk Seri Mohd Shukri bin Abdull -Chief Commissioner
Malaysia Anti-Corruption Commission
Block D6, Complex D, Pusat Pentadbiran
Kerajaan Persekutuan, Peti Surat 6000
62007 Putrajaya
+6-1800-88-6000
Email: info@sprm.gov.my

Contact at a “watchdog” organization:

Cynthia Gabriel, Director
The Center to Combat Corruption and Cronyism (C4)
C Four Consultancies Sdn Bhd
A-2-10, 8 Avenue
Jalan Sg Jernih 8/1, Seksyen 8, 46050 Petaling Jaya
Selangor, Malaysia
Email: info@c4center.org

There have been no significant incidents of political violence since the 1969 national elections.  The May 9, 2018 national election led to the first transition of power between coalitions since independence and was peaceful.  In April 2012, the Peaceful Assembly Act took effect, eliminating the need for permits for public assemblies, but outlaws street protests and placing other significant restrictions on public assemblies.  On April 28 2012, the police disrupted a large protest march that took place despite restrictions the government attempted to impose. Subsequent demonstrations and protest marches took place in 2013 and 2014 without disruption.  Following the July 2014 Israeli incursion into Gaza, several Malaysian non-governmental entities organized a boycott of McDonald’s. Over a several week period, protestors picketed at several McDonalds restaurants, at times taunting and harassing employees.  Periodically, Malaysian groups will organize modest protests against U.S. government policies, usually involving demonstrations outside the U.S. embassy. To date, these have remained peaceful and localized, with a strong police presence. Likewise, several non-governmental organizations have organized mass rallies in major cities in peninsular and East Malaysia related to domestic policies that have been peaceful.

Malaysia’s 1.78 million documented and 2-4 million undocumented foreign workers make up over 20 percent of the country’s workforce.  The new Pakatan Harapan coalition government has pledged to reduce Malaysia’s reliance on foreign labor while bringing the nation’s laws up to international standards, and has begun taking steps towards reforming a foreign worker recruitment process accused of corrupt practices and leading workers into debt bondage under the former government.

Malaysia’s shortage of skilled labor is the most frequently mentioned impediment to economic growth cited in numerous studies.  Malaysia has an acute shortage of highly qualified professionals, scientists, and academics. The Embassy has heard from some U.S. companies that the shortage of skilled labor has resulted in more on-the-job training for new hires.

The Malaysian labor market operates at essentially full employment, with unemployment for Malaysians at 3.3 percent as of February 2019.  In an effort to improve the employability of local graduates, the GOM offers additional training modules at public universities in English language skills, presentation techniques, and entrepreneurship.

Malaysia is a member of the International Labor Organization (ILO).  Labor relations in Malaysia are generally non-confrontational. While  a system of government controls strongly discourages strikes and restricts the formation of unions, the new government has created a National Labor Advisory Council – comprised of the Malaysian Trade Unions Congress and Malaysian Employer’s Federation – to increase labor participation in unions.  The government plans to amend its Trade Unions Act and Industrial Relations Act in July 2019 to increase freedom of association in Malaysia. Some labor disputes are settled through negotiation or arbitration by an industrial court and the new Minister of Human Resources has significantly reduced the backlog of industrial court cases over the past nine months.  Malaysian authorities have pledged to move forward with amendments to the country’s labor laws as a means of boosting the economy’s overall competitiveness and combatting forced labor conditions. In its first year in power, the government has outlawed outsourcing companies, improved oversight of employment agencies, and brought the Employment Act, Children and Young Persons Act, and Occupational Safety and Health Act in line with ILO principles.

Although national unions are currently proscribed due to sovereignty issues within Malaysia, there are a number of territorial federations of unions (the three territories being Peninsular Malaysia, Sabah and Sarawak).  The government has prevented some trade unions, such as those in the electronics and textile sectors, from forming territorial federations. Instead of allowing a federation for all of Peninsular Malaysia, the electronics sector is limited to forming four regional federations of unions, while the textile sector is limited to state-based federations of unions, for those states which have a textile industry.  Upcoming changes to the Trade Unions Act should address this issue and allow unions to form. Employers and employees share the costs of the Social Security Organization (SOSCO), which covers an estimated 12.9 million workers and has been expanded to cover foreign workers. No systematic welfare programs or government unemployment benefits exist; however, the Employee Provident Fund (EPF), which employers and employees are required to contribute to, provides retirement benefits for workers in the private sector.  Civil servants receive pensions upon retirement.

The regulation of employment in Malaysia, specifically as it affects the hiring and redundancy of workers remains a notable impediment to employing workers in Malaysia. The high cost of terminating their employees, even in cases of wrongdoing, is a source of complaint for domestic and foreign employers.  The Prime Minister formed an Independent Committee on Foreign Workers to study foreign worker policies. The Committee submitted 40 recommendations for streamlining the hiring of migrant workers and protecting employees from debt bondage and forced labor conditions. The recommendations remain under consideration by the Cabinet.

Some contacts at U.S. companies have reported that the government monitors the ethnic balance among employees and enforces an ethnic quota system for hiring in certain areas.  Race-based preferences in hiring and promotion are widespread in government, government-owned universities and government-linked corporations.

Fulfilling a campaign promise, the new government has increased and standardized the minimum wage across the country to RM 1100 (USD 275), a raise from RM 1,000 (USD 250) in Peninsular Malaysia and RM 920 (USD 230) in East Malaysia.  While campaigning, the government pledged to raise the minimum wage to RM1,500 (USD 375) within five years, although it has faced resistance from employer associations and the business community.

In 2018, the Department of Labor’s Trafficking Victims Protection Reauthorization Act (TVPRA) listing of goods produced with child labor and forced labor included Malaysian palm oil (forced and child labor), electronics (forced labor), and garments (forced labor).  Senior officials across the Malaysian interagency have taken this listing seriously and have been working with the private sector and civil society to address concerns relating to the recruitment, hiring, and management of foreign workers in all sectors of the Malaysian economy, including palm oil and electronics.

Malaysia has a limited investment guarantee agreement with the U.S. under the U.S. Overseas Private Investment Corporation (OPIC) program, for which it has qualified since 1959.  Few investors have sought OPIC insurance in Malaysia.

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

Table 3: Sources and Destination of FDI

Table 4: Sources of Portfolio Investment

Embassy Kuala Lumpur Economic Section
376 Jalan Tun Razak / 50400 Kuala Lumpur Malaysia
+6-03-2168-5153
Email: KualaLumpurEcon@state.gov

Policies toward Foreign Direct Investment

Mongolia generally does not discriminate against foreign investors in general or U.S. investors in particular; however, there are two major exceptions.  First, foreign investors object to the regulatory requirement, nowhere mentioned in the Investment Law, that they invest a minimum of USD100,000 to establish a venture when the Investment Law of Mongolia states that all investors in Mongolia, without reference to nationality, are subject to national treatment.  In contrast, Mongolian investors face no investment minimums. Second, foreign nationals and companies may not own real estate; only Mongolian adult citizens can own real estate. Additionally, while foreign investors may obtain use rights (excluding mining exploration and extraction licenses) for the underlying real estate, these rights last for five years with a one-time five-year renewal.  The government imposes no such restriction on its nationals.  There are also substantial regulations on foreign entities entering Mongolia’s financial service sector.

Limits on Foreign Control and Right to Private Ownership and Establishment

Mongolia’s constitution and related statutes limit the right to own real estate to adult citizens of Mongolia.  However, no formal law exists vesting Mongolia’s pastoral nomadic herders with exclusive rights of pasturage, control of water, or real estate rights.  As such, rural municipalities unofficially recognize that traditional, customary access to these resources by pastoralists must be taken into account before, during, and after other non-resident users, particularly but not exclusively those in the mining sector, can exercise use and ownership rights.  Both foreign and domestic investors have the same rights to establish, sell, transfer, or securitize structures, shares, use rights, companies, and movable property, subject to relevant legislation and related regulations controlling such activities in all sectors. Mongolia generally imposes no statutory or regulatory limits on foreign ownership and control of investments.  The only exception is that the Mining Law of Mongolia allows the Mongolian Government to acquire up to 50 percent of mineral deposits deemed of strategic value to the state by parliament. Investors assert that regulatory discretion allows bureaucrats to exercise de facto control over use of legally granted rights, corporate governance decisions, and ownership stakes.  Finally, Mongolia has no formal or informal investment screening mechanism.

Other Investment Policy Reviews

The Mongolian Government conducted an investment policy review through the United Nations Conference on Trade and Development (UNCTAD) in 2013 and a trade policy review with the World Trade Organization (WTO) in 2014.  Although the Organization for Economic Cooperation and Development (OECD) has not conducted a comprehensive investment policy review of Mongolia, it has completed economic studies on specific aspects of investment and development in Mongolia.

For the UNCTAD Mongolia investment policy review: http://unctad.org/en/pages/PublicationWebflyer.aspx?publicationid=758  .

For the WTO Mongolia investment policy review in the context of a Trade Policy Review: https://www.wto.org/english/tratop_e/tpr_e/tp397_e.htm  .   

For OECD Mongolia reports:  http://www.oecd.org/countries/mongolia  .

Business Facilitation

Consistent with the World Bank’s Doing Business Report, investors report that Mongolia’s business registration process is reasonably efficient and clear.  All enterprises, foreign and domestic, must register with the State Registration Office (SRO: www.burtgel.gov.mn).  Registrants obtain form UB 03-II and other required documents from the website and can submit completed documents by email.  SRO aims at a two-day turnaround for the review and approval process. However, investors report bureaucratic discretion can add weeks or even months to the process and argue more transparent adherence to the relevant laws and regulations would stabilize and streamline registration.  Once approved by SRO, a company must register with the Mongolian General Taxation Authority (GTA: http://en.mta.mn/  ).  Upon hiring its first employees, a company must register with the Social Insurance Agency (https://zasag.mn/en/m/social-insurance/contact  ).  The General Authority for Intellectual Property and State Registration (GAIPSR) reports that notarization is not required for its registration process.

The same ease of opening a business does not apply to closing a business, however.  Foreign investors generally complain about the long delays in the latter process.

Outward Investment

Although the Mongolian Government neither promotes nor incentivizes outward investment, it does not restrict domestic investors from investing abroad.

The United States and Mongolia signed a Bilateral Investment Treaty (BIT) in 1994, with the agreement entering into force in 1997.  The BIT states that the agreement will protect U.S. investors and assist Mongolia in its efforts to develop its economy by creating conditions more favorable for U.S. private investment and thus strengthening the development of the private sector.  More information on the BIT is available from the U.S. Department of State’s website (https://www.state.gov/e/eb/ifd/bit/117402.htm).

In January 2017, the two countries certified completion of their respective applicable legal requirements and procedures for the U.S.-Mongolia Agreement on Transparency in Matters Related to International Trade and Investment (a.k.a., the Transparency Agreement), with a 2023 deadline for full implementation.  The Transparency Agreement sets out clear processes for drafting and commenting on new legislation and regulations and requires strict transparency related to laws involving trade and investment. A copy of the Transparency Agreement is available here: https://ustr.gov/sites/default/files/US-Mongolia%20Transparency%20Agreement-English-Final-As%20Posted.pdf .

Mongolia and the United States have no bilateral tax or free-trade agreements.

Information regarding the various other investment agreements that Mongolia has signed is available from the UNCTAD website: http://investmentpolicyhub.unctad.org/IIA/CountryBits/139#iiaInnerMenu  .

Mongolia’s Taxation Regime

Mongolia’s parliament amended the General Law on Taxation, Corporate income Tax, Value Added Tax, and personal income tax in March 2019.  Among the many changes, industry cites as especially significant a decrease in license transfer tax for land rights. A 2017 change had increased this fee to 30 percent of the gross value of the transfer of land rights involving land possession or usage, including exploration and mining licenses and rights for water, timber, pasturage, and land use in urban areas.  While the new amendments lower the fee to 10 percent of the net rather than gross value, the tax remains a disincentive for investors in Mongolia’s risk-prone resource sector. The amendments also impose a tax of 5 percent on the interest income of commercial Mongolian banks to be paid on loans and debt instruments obtained from local and foreign stock markets, decrease the withholding tax on income provided to non-residents to 15 percent, lower from 20 percent to 5 percent the tax on dividends for foreign investors, and lower from 10 percent to 5 percent the tax on financing obtained through debt instruments from initial and secondary markets.  They also simplify reporting procedures and provide relief for companies experiencing financial difficulties.

Despite these positive changes, the law was not subject to public comment, and industry has complained that parliament approved the law without its input.  This lack of engagement has in instances led to hastily written tax rules. Once such situation concerns Article 16.2 of the Corporate Income Tax (CIT) law, which states, “Taxable income shall be determined by deducting expenses specified in article 12 of this law and amount in excess of expenses determined in stabilization certificate from gross taxable income specified in subparagraphs 8.1.1, 8.1.6-8.1.11, and 9.1.1 of this law and subparagraph 9.1.4 for a bank, non-banking financial institution, and savings and credit cooperative.”  Because non-residents’ income is covered under article 17.2.9 of the CIT law and are not mentioned in this article, tax authorities do not allow them to deduct their expenses when paying taxes. As a result, foreign companies are taxed on their gross income, whereas domestic companies are taxed on their net income.

Industry also has asked that Mongolia’s Value-Added Tax (VAT) be revised in two major areas.  Businesses complain that they may not deduct the value of construction expenses against their VAT bill, which disincentivizes the construction of new facilities.  The VAT law also has not been amended to reflect the modern array of cross border services that it should cover.

Transparency of the Regulatory System

In September 2013, the United States and Mongolia signed the Transparency Agreement.  The agreement marked an important step in developing and broadening the economic relationship between the two countries.  Upon full implementation, the Transparency Agreement will make it easier for U.S. and Mongolian firms to do business by guaranteeing transparency in the formation of trade-related laws and regulations, the conduct of fair administrative proceedings, and measures to address bribery and corruption.  In addition, it provides for commercial laws and regulations to be published in English, improving transparency and making it easier for foreign investors to operate in the country. Parliament ratified the Transparency Agreement in December 2014, the United States and Mongolia certified that their respective applicable legal requirements and procedures were completed in January 2017, and the Transparency Agreement entered into force on March 20, 2017.  Mongolia has five years to implement fully the Transparency Agreement.  A copy of the Transparency Agreement is here: https://ustr.gov/sites/default/files/US-Mongolia%20Transparency%20Agreement-English-Final-As%20Posted.pdf .

The Law on Legislation aligns Mongolia’s legislative processes with its Transparency Agreement obligations.  The law clarifies who has the right to draft legislation, the format of these bills, the respective roles of the Mongolian government and parliament, and the procedures for obtaining and employing public comment on pending legislation.  The Law on Legislation states that law initiators – i.e., members of parliament, the president of Mongolia, or the cabinet of Mongolia – must fulfill the following criteria: (1) provide a clear process for both developing and justifying the need for the draft legislation; (2) set out methodologies for estimating costs to the government related to the draft law’s implementation; (3) evaluate the impact of the legislation on the public once implemented; and (4) conduct public outreach before submitting legislation to the public.  

The Law on Legislation also requires that law initiators obtain public comment by posting draft legislation and required reports evaluating costs and impacts on parliament’s official website (http://forum.parliament.mn/projects?status=Submitted  ) at least 30 days prior to submitting it to parliament.  These posts must explicitly state the time period for public comment and review.  In addition, initiators must solicit comments in writing, organize public meetings and discussions, seek comments through social media, and carry out public surveys.  No more than 30 days after the public comment period ends, the initiator must prepare a matrix of all comments, including those used to revise the legislation as well as those not used, which must be posted on parliament’s official web site.  After passage of a new law, parliament is responsible for monitoring and evaluating both the implementation and impact of the legislation. Despite these legal requirements, law initiators do not generally follow these rules. Parliament may exempt budget and tax legislation from this law as well.

While General Administrative Law (GAL) Article 6 brings Mongolia’s regulatory drafting process into line with its Transparency Agreement obligations, the Mongolian government is not generally enforcing it.  The GAL requires ministries, agencies, and provincial governments to seek public comment by posting draft regulations on their respective websites for at least 30 days and by holding public hearings, following the rules set out in the 2015 Public Hearing Law.  The drafting entity must record, report, and respond to the public comment. The Ministry of Justice and Home Affairs must certify that each regulatory drafting process complies with the GAL before the regulations enter into force. After approval, the relevant government agency must monitor and evaluate the implementation and impact of the regulations.

Businesses complain about a high regulatory burden at the local, or aimag/soum, level.  They note a lack of knowledge among local inspectors, whom they sometimes accuse of overly frequent inspections intended to raise revenue for local municipalities.  Regional tax, health, and safety inspectors in particular have been cited as problematic.

International Regulatory Considerations

Mongolia is not part of any regional economic bloc but often seeks to adapt or adopt European standards and norms in areas such as construction materials, food, and environmental regulations; looks to U.S. standards for activity in the petroleum sector; and adopts a combination of Australian and Canadian standards and norms in the mining sector.  Mongolia also tends to employ World Organisation for Animal Health standards for its animal health regulations. Finally, Mongolia has a tendency to synchronize its veterinary, customs, and transport standards with China’s, its primary trade partner.

Mongolia, a member of the WTO, asserts that it will notify the WTO Committee on Technical Barriers to Trade (TBT) of all draft technical regulations; however, as demonstrated by the failure to notify TBT about changes in the process for using certificates of origin in 2016, Mongolia has not always complied with that commitment.  

Legal System and Judicial Independence

Investors have complained that judges frequently avoid making controversial decisions in business disputes, preferring to delay judgment for as long as possible – sometimes years.  If a decision is made, businesses face similarly long delays in obtaining and executing an enforcement order. In some instances, cases have taken so long that by the time a business had won an enforcement order, the counterparty had already liquidated its assets and closed up.  U.S. businesses complain about similarly long delays with respect to inspection agencies, such as the Tax Dispute Settlement Resolution Council (TDSRC) as well as with other inspection agency panels, especially those related to mineral licenses and health matters.

Mongolia adopted a new regulation in April 2019 that effectively simplifies the president’s ability to remove judges and prosecutors, which the president quickly used to remove judges and prosecutors he and the government alleged were corrupt.  Transparency International wrote of the legislation, “These legal amendments undermine the separation of powers and systems of checks and balances designed to prevent abuse and ensure respect for the rule of law.” Because no major decisions involving international investors have reached the courts since the adoption of these measures, it is difficult to assess their impact on investors.  Investors should focus on whether the government continues to remove judges and prosecutors that show judicial independence as an indicator of whether they can have confidence in an independent judiciary in Mongolia.

Mongolia has adopted a hybrid Civil Law-Common Law system of jurisprudence.  Trial judges may use prior rulings to adjudicate similar cases but have no obligation to respect legal precedent as such.  Mongolian laws, and even their implementing regulations, often lack the specificity needed for consistent interpretation and application.  Experienced and dedicated judges do their best to rule in the spirit of the law in routine matters. However, statutory and regulatory vagueness invites corruption within the underfunded and understaffed judiciary, especially in cases where large sums of money are at stake, or where large foreign citizens or corporations are in court against domestic government agencies or well-connected private Mongolian citizens.

Mongolia has a specialized law for contracts but no dedicated law for commercial activities.  Contractual disputes are usually adjudicated in Mongolia’s district court system. Disputants may appeal cases to the City Court of Ulaanbaatar and ultimately to the Supreme Court of Mongolia.  Mongolia has in place several specialized administrative courts authorized to adjudicate cases brought by citizens against official administrative acts. Disputants may appeal administrative court decisions to higher trial courts.  Mongolia has a Constitutional Court, dedicated to ruling on constitutional issues. The General Executive Agency for Court Decisions (GEACD) enforces court decisions.

The Mongolian constitution specifies that non-judicial elements of the Mongolian government “shall not interfere with the discharge of judicial duties” by the judicial branch.  The Judicial General Council, composed of respected jurists, is charged with the constitutional duty of ensuring the impartiality of judges and independence of the judiciary. The Judicial General Council consists of five members, with three members respectively nominated by the first instance courts, appellate courts, and the Supreme Court, one member by the Bar Association of Mongolia, and one member by the Ministry of Justice and Home Affairs, subject to appointment by the president of Mongolia.  However, the Council lacks official authority to investigate allegations of judicial misconduct or to impose disciplinary measures on judges or other judicial sector personnel.

Laws and Regulations on Foreign Direct Investment

2018 saw no major changes in the 2013 Investment Law of Mongolia.  The Investment Law frames the general statutory and regulatory environment for all investors in Mongolia.  Under the law, foreign investors can access the same investment opportunities as Mongolian citizens and receive the same protections as domestic investors.  Investor residence, not nationality, determines whether an investor is foreign or domestic. The law also provides for a more stable tax environment and provides tax and other incentives for investors.  Accordingly, most investments by private foreign individuals or firms residing in Mongolia need only be registered with the General Authority for Intellectual Property and State Registration (www.burtgel.gov.mn).

The Investment Law offers tax incentives in the form of transferable tax stabilization certificates that give qualifying projects favorable tax treatment for up to 27 years.  Affected taxes may include the corporate income tax, customs duties, value-added tax, and mineral resource royalties.

While foreign investors say they appreciate the intent of the Investment Law, they note it does not always deliver the promised national treatment, specifically in two areas.  First, foreign nationals and companies may not own real estate; only Mongolian adult citizens can own real estate. While foreign investors may obtain use rights for the underlying land, these rights expire after a set number of years, with a limited right of renewal.  Second, foreign investors object to the regulatory requirement that they invest a minimum of $100,000 to establish a venture. Although the Investment Law has no such requirement, Mongolian government regulators have unilaterally imposed it on all foreign investors. In contrast, Mongolian investors are not subject to investment minimums.   

Investors have called on the Mongolian government to revise the law to incorporate their concerns.  

Competition and Anti-Trust Laws

Mongolia’s Agency for Fair Competition and Consumer Protection (AFCCP) reviews domestic transactions for competition-related concerns.  For a description of the AFCCP and its legal and regulatory powers, see the UNCTAD website (http://unctad.org/en/PublicationsLibrary/ditcclp2012d2_Mongolia_en.pdf ) and the AFCCP website (http://www.afccp.gov.mn/  ).

Expropriation and Compensation

Although Mongolia generally respects property rights, the Mongolian government and parliament may exercise eminent domain in the national interest.  Mongolian state entities at all levels are authorized to confiscate or modify land use rights for purposes of economic development, national security, historical preservation, or environmental protection.  However, Mongolia’s constitution recognizes private real property rights and derivative rights, and Mongolian law specifically bars the government from expropriating such assets without payment of adequate, market-based compensation.  Investors express little disagreement with such takings in principle but worry that a lack of clear lines of authority among the central, provincial, and municipal levels of government creates occasions for loss of property rights. For example, the 2006 Minerals Law (amended in 2014) provides no clear division of local, regional, and national jurisdictions for issuances of land use permits and special use rights.  Faced with unclear lines of authority and frequent differences in practices and interpretation of rules and regulations by different levels of government, investors can find themselves unable to fully exercise duly conferred property rights.

Many of the cases alleging expropriation involve court expropriations after criminal trials in which the investors were compelled to appear as “civil defendants” but were not allowed to fully participate in the court proceedings.  In these cases a government official is sometimes convicted of corruption and sentenced to prison, and the trial court judge then orders the foreign civil defendant to surrender a license or pay a tax penalty or fine for having received an alleged favor from the criminal defendant.  In ongoing disputes involving several foreign investors, among them U.S. companies, the courts have taken property or revoked use licenses despite an absence of evidence the property or licenses were illegally obtained.

Investors and the legal community have expressed concerns about an act of parliament they perceive as expropriation.  In June 2016, the Mongolian Copper Company, a privately-held entity, bought 49 percent of Mongolian state-owned Erdenet Mining Corporation from the Russian state-owned company Rostec.  The non-transparent sale of this mining asset generated public controversy. Parliament nullified the transaction in February 2017, and ordered seizure of the Mongolian company’s shares.  In March 2018, Mongolia’s Constitutional Court upheld this taking but ordered the government to compensate the private company. While investors and legal experts do not dispute parliament’s powers under the constitution and statute to nationalize property, they state that parliament has no authority to undo a business transaction between two non-government or foreign parties.  They assert that the court, bending to improper pressure from parliament, delivered a decision inconsistent with Mongolia’s constitution. Consequently, they argue that this taking undermines the sanctity of contracts and may well discourage investment into other projects.

Dispute Settlement

ICSID Convention and New York Convention

Mongolia ratified the Washington Convention and joined the International Centre for Settlement of Investment Disputes (ICSID) in 1991.  It also signed and ratified the New York Convention in 1994. The government of Mongolia has accepted international arbitration in several disputes.

Investor-State Dispute Settlement

The U.S.-Mongolia Bilateral Investment Treaty (BIT) entered into force in 1997 (http://www.state.gov/e/eb/ifd/bit/117402.htm).  Under the BIT, the two countries have agreed to respect international legal standards for state-facilitated property expropriation and compensation matters involving nationals of either country.  The BIT effectively provides an extra measure of protection against financial loss for U.S. nationals doing business in Mongolia. In at least one expropriation case, however, the Mongolian government restored a mining license it had unilaterally modified years previously, but declined to compensate for undisputed financial loss as required by the BIT and independently required by the domestic law specifically cited in rendering the modification.  Under the BIT, such uncompensated expropriation is appealable through arbitration proceedings. However, the cost of arbitration can make it impractical for aggrieved parties.

In disputes involving the Mongolian government, investors report government interference in the dispute resolution process, both administrative and judicial.  Foreign investors describe three general categories of disputes that invite such interference. The first comprises disputes between private parties before a Mongolian government administrative tribunal.  In these cases, investors warn a Mongolian private party may exploit contacts in government, the judiciary, law enforcement, or the prosecutor’s office to coerce a foreign private party to accede to demands.  The second category involves disputes between investors and the Mongolian government directly. In these cases, the Mongolian government may claim a sovereign right to intervene in the business venture, often because the Mongolian government itself is operating a competing state-owned enterprise (SOE) or because officials have undisclosed business interests.  The third category involves Mongolian tax officials or prosecutors levying highly inflated tax assessments against a foreign entity and demanding immediate payment, sometimes in concert with imposition of exit bans on company executives or even the filing of criminal charges.

Investors have reported local courts recognize and enforce arbitral decisions, but that problems exist with enforcement.  The thinly staffed GEACD is charged with implementing the decisions and verdicts of Mongolia’s civil and criminal courts. GEACD employees often live in the jurisdictions in which they work, and are subject to pressure from friends and professional acquaintances.  A complicated chain-of-command and opportunities for conflicts of interest can weaken GEACD’s resolve to execute court judgments on behalf of foreign and domestic interests.

International Commercial Arbitration and Foreign Courts

The Mongolian government has consistently declared it will honor arbitral awards.  The Mongolian government and Canadian uranium mining company Khan Resources settled a high-profile expropriation dispute after a Paris arbitration panel awarded USD104 million to the Canadian company.  The parties settled for USD70 million, which the government of Mongolia paid in May 2016.

To improve Mongolia-based international arbitration, parliament passed a new Arbitration Law in January 2017.  Based on the United Nations Commission on International Trade Law (UNCITRAL), the Arbitration Law provides a clearer set of rules and protections for Mongolia-based arbitration.  The law does not, however, designate any particular organization for use by all disputants, and remains unused by a foreign entity, to our knowledge. Any organization that satisfies specific requirements set out in the law can provide arbitral services.  This change breaks the monopoly on domestic arbitration held by the Mongolian National Chamber of Commerce and Industry, which many investors criticized as politicized, unfamiliar with commercial practices, and too self-interested to render fair decisions.  Foreign investors say they prefer international arbitration but might consider domestic arbitration if the newly established domestic arbitration tribunals are seen to be fair and effective.

The new law also limits the role of Mongolia’s courts in the arbitration process.  Previously, disputants could appeal to Mongolia’s civil courts if the results of “binding arbitration” were not to their liking.  The new arbitration law limits parties to a single appeal only to Mongolia’s Court of Civil Appeals. The Court of Civil Appeals can only reject an arbitration judgment for “serious” procedural failings or discrepancies with official public policy initiatives.  

Bankruptcy Regulations

Mongolia’s Bankruptcy Law defines bankruptcy as a civil matter.  Mongolian law mandates the registration of mortgages and other debt instruments backed by real estate, structures, immovable collateral (mining and exploration licenses and other use rights) and, after March 2017, movable property (cars, equipment, livestock, receivables, and other items of value).  Even though the law allows for securitizing movable and immovable assets, however, local law firms hold that the bankruptcy process remains too vague, onerous, and time consuming to make it practical. Mongolia’s constitution and statutes allow contested foreclosure and bankruptcy only through judicial (rather than administrative) proceedings.  Local business and legal advisors report that proceedings usually require no less than 18 months, with 36 months not uncommon. Investors and legal advisors state that a lengthy appeals process, perceived corruption, and government interference can create years of delay. Moreover, while in court, creditors face suspended interest payments and limited access to the asset.

Investment Incentives

The Mongolian government generally offers the same tax preferences to both foreign and domestic investors.  The government occasionally grants tax exemptions for imports of essential fuel and food products or for imports in certain targeted sectors, such as agriculture or energy.  Such exemptions can apply to Mongolia’s five percent import duty and 10 percent value-added tax (VAT). In addition, the Mongolian government occasionally extends a 10 percent tax credit on a case-by-case basis to investments in key sectors such as mining, agriculture, and infrastructure.  Under the Investment Law, foreign-invested companies properly registered and paying taxes in Mongolia are considered domestic Mongolian entities, thus qualifying for investment incentive packages that, among other benefits, include tax stabilization for a period of years. In 2014 parliament authorized the central bank, the Bank of Mongolia, to waive 7.5 percent of the 10 percent royalty on gold miners pay when selling gold to the Bank of Mongolia and Mongolian commercial banks through 2017.  The Mongolian government has extended this program and continues to underwrite low-interest loans from commercial banks for small- to medium-sized gold mines selling gold to the Bank of Mongolia.

Investors should note the ongoing International Monetary Fund Program has required the Mongolian government to cancel, modify, or suspend some lending schemes and tax incentives.

Foreign Trade Zones/Free Ports/Trade Facilitation

The Mongolian government launched a free trade zone (FTZ) program in 2004.  Two FTZ areas are located along the Mongolia spur of the trans-Siberian highway:  the northern Russia-Mongolia border town of Altanbulag and the southern Chinese-Mongolia border town of Zamiin-Uud.  Both FTZs are relatively inactive, still pending development. A third FTZ is located at the port of entry of Tsagaannuur in the far western province of Bayan-Olgii bordering Russia.  Mongolian officials also suggest that the New Ulaanbaatar International Airport (NUBIA), expected to commence operations in 2019, may host an FTZ. Observers have noted that Mongolia’s FTZ program has failed to prosper due to lack of implementing regulations based on international best practices and insufficient resources to develop human capacity and appropriate on-site infrastructure.  

Performance and Data Localization Requirements

Mongolia does not legally require foreign investors to use local goods, services, or equity, or to engage in substitution of imports.  The government applies the same geographical restrictions to both foreign and domestic investors. Existing restrictions involve border security, environmental concerns, and local use rights.  The government does not impose onerous or discriminatory visa, residence, or work permit requirements on U.S. investors – although foreign and domestic firms must meet certain industry-specific local hire requirements.  Neither foreign nor domestic businesses need to purchase from local sources, export a certain percentage of output, or use foreign exchange to cover exports.

The Mongolian government strongly encourages but does not legally compel domestic sourcing of material inputs, especially for firms engaged in natural resource extraction.  The 2014 amendments to the 2006 Minerals Law of Mongolia state that holders of exploration and mining licenses should preferentially supply extracted minerals at market prices to Mongolian processing facilities and should procure goods and services and hire subcontractors from business entities registered in Mongolia.  Although there are no formal enforcement procedures to ensure local sourcing, investors occasionally report that central, provincial, or municipal governments slow down permitting and licensing until domestic and foreign enterprises make some effort to source locally. Hiring Mongolians essentially becomes a legal necessity considering the Mongolian government requirement that employers seeking work visas for foreign employees demonstrate that their workforces comprise the same percentage of domestic hires suggested in Mongolia’s procurement law.  

Despite pressure to source locally, foreign investors generally set their own export and production targets without concern for government-imposed targets or requirements.  Mongolia does not require technology transfers. The government generally imposes no offset requirements for major procurements. Investors, not the Mongolian government, make arrangements regarding technology, intellectual property, and similar resources, and generally may finance as they see fit.  Except for a currently unenforced provision of the amended Minerals Law of Mongolia requiring mining companies to list 10 percent of the shares of the Mongolian mining company on the Mongolian Stock Exchange, foreign-invested businesses are not required to sell shares to Mongolian nationals. Equity stakes are generally at the discretion of investors, Mongolian or foreign.

In cases where investments are determined to have national impact or raise national security concerns, the Mongolian government may restrict the type of financing that foreign investors may use, their choice of partners, or to whom they sell shares or equity stakes.  Investors and local legal experts note that the system by which the Mongolian government regulates these transactions lacks a clear statutory basis and transparent, predictable regulatory procedures.

Investors can locate and hire workers without using hiring agencies as long as hiring practices follow Mongolia’s Law on Labor.  Mongolian law requires companies to employ Mongolian workers in certain labor categories where it has been determined that a Mongolian can perform the task as well as a foreigner.  This law generally applies to unskilled labor categories and not fields in which a high degree of technical expertise not existing in Mongolia is required.

The Mongolian government has no forced localization policy for data storage; no legal requirements for IT providers to turn over source code or to provide access for surveillance; and no rules or mechanisms for maintaining a certain amount of data storage at facilities within the territory of Mongolia.

Real Property

The Mongolian constitution provides that “the State shall recognize any forms of public and private properties.”  The constitution limits real-estate ownership to adult citizens of Mongolia, though that limitation does not apply to “subsoil,” a term not expressly defined in the constitution.  Mongolian civil law allows private Mongolian citizens or government agencies to assume property ownership or use rights if the current owner or holder of use rights does not use the property or the rights.  In the case of use rights, revocation and assumption is almost always written into the formal agreements covering the rights. Squatters may also under certain circumstances claim effective property ownership of unused structures.

Although foreigners and non-resident investors may own permanent physical structures and obtain use rights to land and resources, only Mongolian citizens may own the surface land, and only in municipalities.  Such land ownership does not include ownership of or access to surface or subsurface resource rights, which remain with state. Outside municipalities, the state owns the land and resources. The state may lease access to those resources to public and private entities, according to the relevant statutes.

Ownership of a structure vests the owner with control over the use rights of the land upon which the structure sits.  Use rights are granted from periods of three to sixty years depending on the particular use right. However, foreign nationals or foreign companies can obtain a land use right for no more than 10 years:  a five-year lease term with a single five-year renewal. Although Mongolia has a well-established register for immovable property – structures and real estate – it lacks a central register for use rights; consequently, investors, particularly those seeking to invest in rural Mongolia, have no easy way to learn who might have conflicting rights.  Complicating matters, Mongolia’s civil law system has yet to develop a formal process for apportioning multiple use rights on adjacent lands or adjudicating disputes arising from conflicting use rights.

Mongolian law allows creditors to recover debts by seizing and disposing of property offered as collateral.  Mongolian law mandates that mortgages and other debt instruments backed by real estate, fixed structures, and other immovable collateral be registered with the Immovable Property Office of the State Registration Office (SRO:  www.burtgel.gov.mn  ).  Mongolian law began allowing movable property (cars, equipment, livestock, receivables, and other items of value) in March 2017 to be registered with SRO as collateral.  Investors report that the immovable property registration system is generally reliable, but the movable property system continues to experience capacity issues and suffers from non-transparent, arbitrary regulations that limit access.  At this point, the Mongolian government has no accurate figure for land with clear titles.

Intellectual Property Rights

Film, television, and digital content from the United States enjoy strong copyright protection in Mongolia, while the music and publishing industry is slowly making progress in reaching licensing agreements with organizations using its content.  Use of pirated software by Mongolian government ministries, as well as by home-use consumers and business, remains a major problem, however.  Patent protection for pharmaceutical and medical device importers is virtually non-existent, with trademark law their only recourse.  Law enforcement continues to prosecute intellectual property (IP) cases, highlighting a willingness by Mongolian prosecutors and police to attack the problem.

Film content from the United States is strongly protected in Mongolia, with unlicensed viewing of such content rare.  Mongolia’s Internet Service Providers (ISPs) quickly block access to internet addresses of offending sites once they are listed by the Intellectual Property Office of Mongolia (IPOM).  The IPOM has worked with Mongolia’s Communication Regulatory Commission (CRC) to shut down more than 600 offending websites, including 28 in 2018.

Pharmaceuticals and medical devices effectively lack patent protection in Mongolia.  Approval of pharmaceuticals for import requires a certificate from the Ministry of Health (MOH), which Mongolia’s customs agency then verifies.  For pharmaceuticals from “Category A” countries (i.e., developed countries including the United States), the MOH accepts FDA or other regulatory health agency approval as equivalent in Mongolia; for other countries, the drug must be accepted and sold in at least three other countries.  The panel also reviews pricing and checks for a Good Manufacturing Practices certificate, but there is no patent linkage system in place.  Even if there were, there is no separate law in Mongolia regarding pharmaceutical patents, and the current backlog of patents is between 18 and 24 months.

While in the past law enforcement has seized trademark-infringing drugs, simply dropping the trademark infringement still allows the importer to bring the drug in despite it being on patent.  This contributes to a high rate of counterfeit drugs.  Medical devices encounter similar problems.

There are trademark infringing areas in Mongolia, including stores that distribute counterfeit apparel.  However, due to a lack of formal complaints by rights holders, law enforcement has not focused on these areas.  Mongolian law treats IPR violations below $19,000 (50 million MNT) as a misdemeanor subject to civil litigation.

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 Mongolian government imposes few restrictions on the flow of capital into and out of any of its markets and, despite previous, unsuccessful attempts to require businesses to channel all transactions through Mongolian commercial banks, has respected IMF Article VIII by imposing no restrictions on payments and transfers for international transactions.

Mongolia’s capital markets remain underdeveloped, with little to no ability to trade futures or derivatives.  The state-owned Mongolian Stock Exchange (MSE: http://mse.mn/en  ) is the primary domestic venue for generating capital and portfolio investments.  The government also has limits on the participation of foreign banks in the financial services sector.  

Money and Banking System

Of the 13 commercial banks currently operating in Mongolia, four large banks are majority owned by both Mongolian and foreign investors.  These banks – Golomt, Khan, Khas, and Trade and Development Bank – collectively hold approximately 77 percent of all banking assets or about $9.7 billion as of end of 2018.  The banks operate branches throughout the country and are regularly audited by one of the big four international accounting firms.  Mongolian commercial banks had rates of non-performing loans averaging 10.4 percent in December 2018, an increase from December 2017’s 8.5 percent.  The four major commercial banks generally follow international standards for prudent capital reserve requirements, have conservative lending policies, up-to-date banking technology, seem generally well-managed, and are open to foreigners opening bank accounts under the same terms as Mongolian nationals.  In addition, foreign investors, including the International Finance Corporation (Khas, Khan) and Goldman Sachs (TDB), have equity stakes in several of these four banks.  While there are no legal prohibitions, the Mongolian government generally discourages majority foreign control of any local commercial bank or foreign establishment of local branch operations.  Mongolia’s commercial banks also face the challenge of maintaining correspondent relations with U.S.-based banks.  Local bankers report that correspondent banks are terminating their Mongolian relationships because of the perceived weak financial regulatory oversight in Mongolia and the corresponding high costs of compliance for the limited revenue generated from the small number of Mongolian transactions.

Foreign Exchange and Remittances

The Mongolian government employs a liberal regime for controlling foreign exchange.  Foreign and domestic businesses report no problems converting or transferring funds aside from occasional, market-driven shortages of foreign reserves; however, some banks have warned of difficulties maintaining their U.S. correspondent banking relationships due to high compliance costs related to Mongolia’s ongoing efforts to improve its anti-money laundering enforcement.  Mongolia’s national currency, the tugrik (denoted as MNT), is fully convertible into a wide array of international currencies with its relative value fluctuating freely.

The 2009 Currency Law of Mongolia requires all domestic transactions be conducted in MNT unless expressly excepted by the Bank of Mongolia.  Regulation prohibits the listing in Mongolia of wholesale or retail prices in any fashion (including as an internal accounting practice) that effectively denominates or otherwise indexes those prices to currencies other than the MNT.  Hedging forward mechanisms available elsewhere to mitigate exchange risk for many national currencies are generally unavailable in Mongolia given the small size of the market. Letters of credit in a variety of currencies are available for trade facilitation.  The Mongolian government has in the past resorted to paying for goods and services with promissory notes that cannot be directly exchanged for other currencies.

Remittance Policies

Businesses report no delays in remitting investment returns or receiving inbound funds.  Most transfers are completed within a few days to a week. However, in response to occasional currency shortages, most often of U.S. dollars, commercial banks can temporally limit the amounts they exchange daily, transmit abroad, or allow to be withdrawn.  Remittances sent abroad are subject to a ten percent withholding tax to cover any potential profit, income, or value-added tax liabilities.

Sovereign Wealth Funds

Mongolia’s Ministry of Finance currently manages two sovereign wealth funds (SWF):  the Fiscal Stabilization Fund and the Future Heritage Fund. Both are to be funded through the diversion of mining sector revenues.  The Fiscal Stabilization Fund is intended to divert revenues that might promote boom and bust cycles of spending; however, Mongolia’s recent fiscal crisis all but depleted this fund.  The Future Heritage Fund, a SWF similar to the Norwegian SWF (Pension Fund Global), is designed to accumulate mining revenues for the future and invest the proceeds exclusively outside Mongolia.  The Ministry of Finance and the IMF project the Future Heritage Fund will start accumulating $104-125 million annually in 2022, coinciding with increased revenues from the Oyu Tolgoi copper and gold mega mine.

The Mongolian government maintains various state owned enterprises (SOEs) in the banking and finance, energy production, mining, and transport sectors.  The Government Agency for Policy Coordination on State Property (PCSP: http://www.pcsp.gov.mn/en  ) manages the non-mining and non-financial assets.  The Ministry of Finance manages the State Bank of Mongolia and the Mongolian Stock Exchange, and SOE Erdenes Mongol holds most of the government’s mining assets.  The PCSP does not provide a complete list of its SOEs. Investors can compete with SOEs, although in some cases an opaque regulatory framework limits both competition and investor penetration.  Both foreign and domestic private investors believe the current government approach to regulating SOEs favors Mongolian SOEs over private enterprises and foreign SOEs. Although many private companies have been created or registered in Mongolia in recent years, including foreign private companies, the Mongolian government has also created several dozen SOEs over the same period.  The 2006 Minerals Law of Mongolia (amended in 2014) and the 2009 Nuclear Energy Law grant the government the right to acquire equity stakes ranging from 34 percent up to 100 percent of certain uranium and rare earth deposits deemed strategic for the nation.

Businesses have cautioned against the growing role of state-owned enterprises in the private sector, which they see as having the potential to crowd out business opportunities and limit investment in a free-market economy driven by an open private sector.  Specifically, they worry the Mongolian government’s desire to maximize local procurement, employment, and revenues may compromise the long-term commercial viability of mining projects.  Investors also question the Mongolian government’s capacity to execute its fiduciary responsibilities as both owner and operator of mines. Observers are concerned that the Mongolian government waives legal and regulatory requirements for state-owned mining companies that it imposes on all others.

Generally, approval for relevant environmental and operating permits for private coal mines in Mongolia takes at least two years.  However, there are indications that the Mongolian government has exempted the Erdenes Tavan Tolgoi mining operations from regulatory requirements imposed on other operations.  Preferential treatment for SOEs creates the appearance that the Mongolian government has one standard for its SOEs and another for foreign-invested and private domestic invested companies, and it also provides SOEs with substantial cost advantages via a more lenient interpretation or outright waiver of legal requirements.

Mongolian SOEs will source from foreign firms only when inputs are not available locally or cannot be produced competitively in Mongolia.  SOEs and private enterprises are under political pressure to source locally as much as possible and often resort to creating local Mongolian shell companies to act as domestic storefronts for foreign-sourced goods.  This unofficial requirement adds inefficiency and cost to serving the Mongolian market. Finally, Mongolia is not yet a party to the WTO Procurement Agreement, although it remains an observer.

Mongolian Compliance with OECD Guidelines on Corporate Governance of SOEs

Mongolian SOEs do not adhere to the OECD Corporate Governance Guidelines for SOEs; however, they are technically required to follow to the same international best practices on disclosure, accounting, and reporting as imposed on private companies.  When SOEs seek international investment and financing, they tend to follow these rules. Many international best practices are not institutionalized in Mongolian law, and SOEs tend to follow existing Mongolian rules. At the same time, foreign-invested firms follow the international rules, causing inconsistencies in corporate governance, management, disclosure, and accounting.

The SOE corporate governance structure is clear on paper:  an independent management answers to an independent board of directors, which reports to the Government Agency for Policy Coordination on State Property (PCSP:  http://www.pcsp.gov.mn/en  ).  In reality, government officials note that management and board of director operations and appointments are subject to political interference.    

Privatization Program

Parliament’s 2016 National Action Plan references privatizing some state-held assets, but the government has yet to identify the specific assets to privatize or the process to implement privatization.  The Mongolian government routinely floats the possibility of privatizing through sales of shares or equity in the Mongolian Stock Exchange, the national air carrier MIAT, the Mongol Post Office, and other properties but so far has sold only 30 percent of the Mongol Post Office to private buyers through an initial public offering on the bourse.  While stating it welcomes foreign participation in privatization efforts, the Mongolian government has not clarified a tendering process for the privatization of state assets not to be sold via the stock exchange. Mongolia has no plans to privatize its power or rail systems. The latter is jointly held with the government of Russia, but the law does allow private firms to build, operate, and transfer new railroads to the state.

The concept and practice of responsible business conduct in Mongolia is still in its infancy.  Most international companies make good faith efforts to work with local communities. The larger firms tend to follow accepted international responsible business conduct practices and underwrite a range of related activities across Mongolia; however, smaller companies, lacking sufficient resources, often limit responsible business conduct actions to the locales in which they work.  Generally, firms adopting responsible business conduct are perceived favorably, at least within the communities in which they operate. Nationally, responses range from praise from politicians to cynical condemnation by certain civil-society groups that allege responsible business conduct is no more than an attempt to buy public approval. Public awareness of responsible business conduct remains limited, with only a few NGOs involved in responsible business conduct promotion or monitoring, and those concentrated on such large projects as the Oyu Tolgoi mega-mine project.

Given Mongolia’s high social-media penetration, businesses may be unaware that discussions regarding their activities could be ongoing on social media sites such as Facebook.  Investors should take care to monitor social media discussions to ensure information about their activities is being portrayed accurately.

Observers generally agree that corruption remains widespread in Mongolia.  Although the law provides criminal penalties for corruption by officials, the government does not always implement the law effectively and corruption continues at all levels.  Private enterprises commonly report instances in which government employees pressure them to pay bribes to transfer use rights, settle disputes, clear customs, ease tax obligations, act on applications, obtain permits, and complete registrations.  Although the constitution and law provide for an independent judiciary, NGOs and private businesses report that judicial corruption and third-party influence continue. Factors contributing to corruption include: conflicts of interest, lack of transparency, limited access to information, an inadequate civil service system, low salaries, and weak government control of key institutions.

Mongolia’s new criminal code, effective July 1, 2017, introduced stricter liability for corruption and corruption-related offenses for public servants and government officials.  These laws extend to the immediate families of government officials. The laws also require government officials to disclose their assets to the Independent Authority Against Corruption (IAAC:  http://www.iaac.mn/home?lang=en  ).  In addition, the government in March 2017 developed a three-year action plan to implement the National Program Combatting Corruption adopted in November 2016.  The Anti-Corruption Law has been bolstered by several amendments since its 2006 passage; however, the government has passed no legislation dedicated to protecting NGOs and others investigating and reporting government corruption.  Although Mongolia has a relatively free press that allows NGOs and reporters to publicize findings, recourse to criminal libel and defamation laws may permit officials accused of corruption to use the threat of criminal prosecution to silence critics.  Finally, Mongolia imposes no statutory requirement on companies to establish internal codes of conduct that, among other things, prohibit bribery of public officials. U.S. and other foreign businesses have reported that they accept the need for and have adopted internal controls, ethics, and compliance programs to detect and prevent bribery of government officials.

The IAAC is the principal agency responsible for investigating corruption, assisted at times by the National Police Agency’s Organized Crime Division.  The IAAC follows a standard operating procedure for ensuring that investigations of corruption allegations are handled correctly. The IAAC has publicly reported on its recent successes, including its reform of the government tender process to permit only electronic tender submissions and the blacklisting of companies violating rules of government procurement.  It airs a weekly awareness program on Mongolian National TV to inform the public of its anti-corruption activities.

In addition, Mongolia has signed and ratified the UN Anticorruption Convention (UNAC:  https://www.unodc.org/unodc/en/corruption/ratification-status.html  ) but not the OECD Anti-Bribery Convention.

The U.S. Embassy in Ulaanbaatar would not recommend any particular industry group or non-profit for vetting of potential local investment partners.  Normally, local legal firms provide such services. A partial list of local legal firms is here: https://mn.usembassy.gov/u-s-citizen-services/arrest-of-a-u-s-citizen/.  

Resources to Report Corruption

Government agencies responsible for combating corruption:

Independent Agency Against Corruption (IAAC)

District 5, Seoul Street 41
Ulaanbaatar, Mongolia 14250
Telephone:  +976-70110251; 976-11-311919
Email:  contact@iaac.mn
Web:  http://www.iaac.mn/home?lang=en  

Local “watchdog” organization:

Transparency International Mongolia
Tur-Od Lkhagvajav, Chairman of the Mongolian National Chapter
Zorig Foundation, 2nd floor
Peace Avenue 17, Sukhbaataar District
Ulaanbaatar, Mongolia
Telephone:  +976 9919 1007; +976 9511 4777; +976 95599714
Email:  lturod@gmail.com
Web: https://www.transparency.org/country/MNG  

The Mongolian political and security environment is characterized largely by peace and stability.  Crime is low in Ulaanbaatar, although there are cases of petty theft and assault. U.S. investors are generally warmly welcomed in Mongolia and by the Mongolian people.

For larger and potentially politically sensitive projects, investors should note that opposition party members of parliament have justified cancellation of contracts on the basis that parliament should have ratified the original decisions.  Given Mongolia’s vibrant democracy, investors into these types of projects should take care to understand whether they have a deal that can survive a change in government party control.

The Mongolian labor pool of nearly 1.4 million workers – of whom 811,500 live in urban areas and 519,800 in rural areas – is generally educated, young, and skilled.  Unskilled labor is abundant but shortages exist in most professional categories requiring advanced degrees or vocational training, including all types of engineers and professional tradespeople in the construction, mining, and services sectors.  Foreign-invested companies address these shortages by providing in-country training to their staff, increasing salaries and benefits to retain employees, or hiring expatriate workers with specific skills and expertise unavailable in Mongolia.

Mongolian labor laws are not particularly restrictive.  Investors can locate and hire workers without using hiring agencies, as long as hiring practices follow the 1999 Law on Labor of Mongolia.  The Law on Labor requires companies to employ Mongolian workers in all labor categories wherever the Ministry of Labor and Social Protection determines a Mongolian can perform the task as well as a foreigner.  This provision generally applies to unskilled labor categories. If an employer seeks to hire a non-Mongolian laborer and cannot obtain a waiver from the Ministry of Labor and Social Protection for that employee, the employer can pay a monthly waiver fee.  Depending on a project’s importance, the Ministry of Labor and Social Protection can exempt employers from 50 percent of the waiver fees per worker. However, employers report difficulty in obtaining waivers, due in part to public perceptions that foreign and domestic companies refuse to hire Mongolians in the numbers that they should.

Because Mongolia’s long, cold winters limit outdoor operations in the infrastructure development, commercial and residential construction, and mining exploration sectors, employers tend to use a higher degree of temporary contract labor than companies that can operate year-round.  The law allows employers and employees to use these short-term contracts.

The Law on Labor allows workers to form or join independent unions and professional organizations of their choosing and protects rights to strike and collective bargaining.  However, some provisions restrict these rights for foreign workers, certain public servants, and workers without formal employment contracts, though all groups have the right to organize.  The law protects the right of workers to participate in trade union activities without discrimination, and the government has protected this right in practice. The law provides for reinstatement of workers fired for union activity, but this provision is not always enforced.  Some employees occasionally face obstacles forming or joining unions, and some employers have taken steps to weaken existing unions. For example, some companies use the portion of employees’ salaries deducted for union dues for other purposes rather than forwarding the monies to the unions.  Some employers have prohibited workers from participating in union activities during working hours, contravening the law. There also have been some violations of collective bargaining rights, as some employers refuse to conclude collective bargaining agreements in contracts.

The Law on Labor allows employers to fire or lay off workers for cause.  Depending on the circumstances, however, severance may be required and workers may seek judicial review of their dismissal.  Investors and legal experts report that Mongolia’s courts usually support employee claims, especially when the plaintiff or defendant is a foreign business.  The statutory severance package requires employers to pay laid off workers one month of the contracted salary, but fired workers receive no severance. Laid off or fired workers are entitled to three months of unemployment insurance from the Social Insurance Agency.

The International Labor Organization (ILO) has expressed concern about child labor practices and variations between Mongolian law and international labor standards.  Authorities report that employers often do not follow the law, requiring minors to work in excess of the permitted hours per week and paying them less than the minimum wage.  The General Agency for Specialized Inspections (GASI: http://eng.inspection.gov.mn/) enforces all labor regulations; however the agency is understaffed.  GASI inspectors are authorized to compel compliance with labor statutes, but its limited capacity, combined with the growing number of privately owned enterprises (over 170,000), limits enforcement.  Additional information on the ILO conventions ratified by Mongolia is available on the ILO website (http://www.ilo.org/dyn/normlex/en/f?p=1000:11200:0::NO:11200:P11200_COUNTRY_ID:103142  ).

Mongolia and the United States do not have a signed trade agreement that covers their respective labor practices.

The United States Overseas Private Investment Corporation (OPIC) offers loans and political risk insurance to U.S. investors active in most sectors of the Mongolian economy, ranging from education to logistic services to finance.  For a list of active OPIC projects in Mongolia, go to: https://www.opic.gov/opic-action/active-opic-projects  .  In addition, OPIC and Mongolia have signed an Investment Incentive Agreement that requires the government of Mongolia to extend national treatment to OPIC-financed projects in Mongolia.  The agreement is available online here: http://photos.state.gov/libraries/mongolia/5/business/1990_OPIC-Investment-Incentive-Agreement-with-Mongolia.pdf .  For example, under this agreement mining licenses of firms receiving an OPIC loan may be pledged as collateral to OPIC, a right not normally bestowed on foreign financial entities.  The U.S. Export-Import Bank (EXIM: www.exim.gov  ) offers programs in Mongolia for short-, medium-, and long-term transactions in the public sector and for short- and medium-term transactions in the private sector.  Mongolia is also a member of the Multilateral Investment Guarantee Agency (MIGA: https://www.miga.org/  ).

South Korea, Canada, the Russian Federation, Japan, China, Poland, Hungary, and Austria have provided investment and trade financing for their firms in Mongolia.  In addition, the European Bank for Reconstruction and Development  and the International Finance Corporation   have supplied significant financial support for Mongolian investments.

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

Table 3: Sources and Destination of FDI*

Note:  The Government of Mongolia has never tracked where the beneficial ownership of a given investment actually terminates.  The government only records where the company claims its domicile. The U.S. Embassy is aware of numerous cases where foreign entities active in Mongolia do not incorporate in their countries of origin but rather do so in third countries, largely for tax mitigation purposes.  Consequently, although Mongolia’s data and the IMF’s, respectively, suggest that much of Mongolia’s investment originates from such places as the Netherlands or Singapore, much of the investment comes from other jurisdictions, including but not limited to the United States, Australia, Canada, Russia, and China.

Table 4: Sources of Portfolio Investment

The Economic and Commercial Section
U.S. Embassy
P.O. Box 341
Ulaanbaatar 14192, Mongolia
Telephone:  +976-7007-6001
Email: Ulaanbaatar-Econ-Comm@state.gov