France welcomes foreign investment and has a stable business climate that attracts investors from around the world. The French government devotes significant resources to attracting foreign investment through policy incentives, marketing, overseas trade promotion offices, and investor support mechanisms. France has an educated population, first-rate universities, and a talented workforce. It has a modern business culture, sophisticated financial markets, a strong intellectual property rights regime, and innovative business leaders. The country is known for its world-class infrastructure, including high-speed passenger rail, maritime ports, extensive roadway networks, a dense network of public transportation, and efficient intermodal connections. High-speed (3G/4G) telephony is nearly ubiquitous, and France has begun its 5G roll-out in key metropolitan cities.
In 2021, the United States was the leading foreign investor in France in terms of new jobs created (10,118) and second in terms of new projects invested (247). The total stock of U.S. foreign direct investment in France reached $91 billion. More than 4,500 U.S. firms operate in France, supporting over 500,000 jobs, making the United States the top foreign investor overall in terms of job creation.
Following the election of French President Emmanuel Macron in May 2017, the French government implemented significant labor market and tax reforms. By relaxing the rules on companies to hire and fire employees, the government cut production taxes by 15 percent in 2021, and corporate tax will fall to 25 percent in 2022. Surveys of U.S. investors in 2021 showed the greatest optimism about the business operating environment in France since 2008. Macron’s reform agenda for pensions was derailed in 2018, however, when France’s Yellow Vest protests—a populist, grassroots movement for economic justice—rekindled class warfare and highlighted wealth and, to a lesser extent, income inequality.
The onset of the pandemic in 2020 shifted Macron’s focus to mitigating France’s most severe economic crisis in the post-war era. The economy shrank 8.3 percent in 2020 compared to the year prior, but with the help of unprecedented government support for businesses and households, economic growth reached seven percent in 2021. The government’s centerpiece fiscal package was the €100 billion ($110 billion) France Relance plan, of which over half was dedicated to supporting businesses. Most of the support was accessible to U.S. firms operating in France as well. The government launched a follow-on investment package in late 2021 called “France 2030” to bolster competitiveness, increase productivity, and accelerate the ecological transition.
Also in 2020, France increased its protection against foreign direct investment that poses a threat to national security. In the wake of the health crisis, France’s investment screening body expanded the scope of sensitive sectors to include biotechnology companies and lowered the threshold to review an acquisition from a 25 percent ownership stake by the acquiring firm to 10 percent, a temporary provision set to expire at the end of 2022. In 2020, the government blocked at least one transaction, which included the attempted acquisition of a French firm by a U.S. company in the defense sector. In early 2021, the French government threated to block the acquisition of French supermarket chain Carrefour by Canada’s Alimentation Couche-Tard, which eventually scuttled the deal.
Key issues to watch in 2022 are: 1) the impact of the war in Ukraine and measures by the EU and French government to mitigate the fallout; 2) the degree to which COVID-19 and resulting supply chain disruptions continue to agitate the macroeconomic environment in France and across Europe, and the extent of the government’s continued support for the economic recovery; and 3) the creation of winners and losers resulting from the green transition, the degree to which will be largely determined by firms’ operating models and exposure to fossil fuels.
1. Openness To, and Restrictions Upon, Foreign Investment
France welcomes foreign investment. In the current economic climate, the French government sees foreign investment as a means to create additional jobs and stimulate growth. Investment regulations are simple, and a range of financial incentives are available to foreign investors. Surveys of U.S. investors in 2021 showed the greatest optimism about the business operating environment in France since 2008. U.S. companies find France’s good infrastructure, advanced technology, and central location in Europe attractive. France’s membership in the European Union (EU) and the Eurozone facilitates the efficient movement of people, services, capital, and goods. However, notwithstanding recent French efforts at structural reform, including a reduction in corporate and production tax, and advocacy for a global minimum tax within the European Union, perceived disincentives to investing in France include the persistently high tax environment, ongoing labor law rigidity, and a shortage of skilled labor.
France is among the least restrictive countries for foreign investment. With a few exceptions in certain specified sectors, there are no statutory limits on foreign ownership of companies. Foreign entities have the right to establish and own business enterprises and engage in all forms of remunerative activity.
France maintains a national security review mechanism to screen high-risk investments. French law stipulates that control by acquisition of a domiciled company or subsidiary operating in certain sectors deemed crucial to France’s national interests relating to public order, public security and national defense are subject to prior notification, review, and approval by the Economy and Finance Minister. Other sectors requiring approval include energy infrastructure; transportation networks; public water supplies; electronic communication networks; public health protection; and installations vital to national security. In 2018, four additional categories – semiconductors, data storage, artificial intelligence and robotics – were added to the list requiring a national security review. For all listed sectors, France can block foreign takeovers of French companies according to the provisions of the 2014 Montebourg Decree.
On December 31, 2019 the government issued a decree to lower the threshold for vetting of foreign investment from outside Europe from 33 to 25 percent and then lowered it again to 10 percent on July 22, 2020, a temporary provision to prevent predatory investment during the COVID-19 crisis. This lower threshold is set to expire at the end of 2022. The decree also enhanced government-imposed conditions and penalties in cases of non-compliance and introduced a mechanism to coordinate the national security review of foreign direct investments with the European Union (EU Regulation 2019/452). The new European rules entered into force on October 11, 2020. The list of strategic sectors was also expanded to include the following activities listed in the EU Regulation 2019/452: agricultural products, when such products contribute to national food supply security; the editing, printing, or distribution of press publications related to politics or general matters; and R&D activities relating to quantum technologies and energy storage technologies. Separately, France expanded the scope of sensitive sectors on April 30, 2020, to include biotechnology companies.
Procedurally, the Minister of Economy, Finance, and Recovery has 30 business days following the receipt of a request for authorization to either: 1) declare that the investor is not required to obtain such authorization; 2) grant its authorization without conditions; or 3) declare that an additional review is required to determine whether a conditional authorization is sufficient to protect national interests. If an additional review is required, the Minister has an additional 45 business days to either clear the transaction (possibly subject to conditions) or prohibit it. The Minister is further allowed to deny clearance based on the investor’s ties with a foreign government or public authority. The absence of a decision within the applicable timeframe is a de facto rejection of the authorization.
The government also expanded the breadth of information required in the approval request. For example, a foreign investor must now disclose any financial relationship with or significant financial support from a State or public entity; a list of French and foreign competitors of the investor and of the target; or a signed statement that the investor has not, over the past five years, been subject to any sanctions for non-compliance with French FDI regulations.
In 2020, the government blocked at least one transaction—the attempted acquisition of a French firm by a U.S. company in the defense sector. In early 2021, the French government blocked the acquisition of French supermarket chain Carrefour by Canada’s Alimentation Couche-Tard on the basis that it was a threat to France’s food security and national sovereignty.
Business France is a government agency established with the purpose of promoting new foreign investment, expansion, technology partnerships, and financial investment. Business France provides services to help investors understand regulatory, tax, and employment policies as well as state and local investment incentives and government support programs. Business France also helps companies find project financing and equity capital. The agency unveiled a website in English to help prospective businesses that are considering investments in the French market (https://www.businessfrance.fr/en/invest-in-France). The U.S. Embassy in Paris also collaborated with Business France to create a map of U.S. investment in each region of France (https://investinfrance.fr/wp-content/uploads/2017/08/Entreprises-americaines.pdf).
In addition, France’s public investment bank, Bpifrance, assists foreign businesses to find local investors when setting up a subsidiary in France. It also supports foreign startups in France through the government’s French Tech Ticket program, which provides them with funding, a resident’s permit, and incubation facilities. Both business facilitation mechanisms provide for equitable treatment of women and minorities.
President Macron prioritized innovation early in his five-year mandate. In 2017, he launched a €10 billion ($11 billion) fund to back disruptive innovation in energy, the digital sector, and the climate transition by privatizing state-owned enterprises and introduced a four-year tech visa for entrepreneurs to come to France. He also introduced tax reforms that would tax capital gains, interest and dividends at a flat 30 percent, instead of the existing top rate of 45 percent.
In June 2020, the French government introduced a new €1.2 billion ($1.3 billion) plan to support French startups, concentrating on the health, quantum, artificial intelligence, and cybersecurity sectors. The plan included the creation of a €500 million ($550 million) investment fund to help startups overcome the COVID-19 crisis and continue to innovate. It also comprised a “French Tech Sovereignty Fund” launched in December 2020 by France’s public investment bank Bpifrance, with an initial commitment of €150 million ($165 million).
In October 2021, President Macron unveiled a €34 billion ($37.4billion) innovation investment strategy between 2022 and 2027, which mirrors the priorities of the European Commission’s investments in digital innovation and decarbonisation. France will invest by 2030 in breakthrough innovation in a wide variety of areas, including small nuclear fission reactors, green hydrogen production facilities, the production of two million electric and hybrid vehicles every year, research on developing France’s first low-carbon airplane, healthy and sustainable foods, and 20 drugs for cancer and chronic diseases as well as the development of new medical devices. Major industrial groups are encouraged to work with startups, which will also benefit from funding under this new plan. This plan comes on top of the €20 billion ($22 billion) from the 2021 Fourth Future Investment Program. A new Secretary General for Investment was appointed in January 2022 to ensure the coordination of these two innovation programs.
France’s sectors that traditionally attracted the most investment include aeronautics, agro-foods, digital, nuclear, rail, auto, chemicals and materials, forestry, eco-industries, shipbuilding, health, luxury, and extractive industries. However, Business France and Bpifrance are particularly interested in attracting foreign investment in the tech sector. The French government has developed the “French Tech” initiative to promote France as a location for start-ups and high-growth digital companies. French Tech offices have been established in 17 French cities and over 100 cities globally, including New York, San Francisco, Los Angeles, Shanghai, Hong Kong, Vietnam, Moscow, and Berlin. French Tech has special programs to provide support to startups at various stages of their development. The latest effort has been the creation of the French Tech 120 Program, which provides financial and administrative support to some 123 most promising tech companies. In 2019, €5 billion ($5.9 billion) in venture funding was raised by French startups, an increase of nearly threefold since 2015. Venture capital investment in French startups has doubled from €5.1 billion ($5.6 billion) in 2020 to over €10 billion ($11 billion) in 2021.
In March 2021, France launched, with the support of the European Commission and other member states, the Scale-Up Europe initiative bringing together over 300 start-up and scale-up founders, investors, researchers, and corporations, with the goal of creating 10 tech giants each valued at more than €100 billion ($110 billion) by 2030. French authorities supported the Scale-up Europe initiative designed to promote businesses across Europe to expand beyond their local and European markets. As part of that initiative, on February 8, 2022, France inaugurated a new European Investment Fund designed to increase European venture capital funds’ capacity to provide late-stage funding to EU-based start-ups and scale-ups. France and Germany have each committed €1 billion ($1.1 billion), along with €500 million ($565 million) from the European Investment Bank.
The website Guichet Enterprises (https://www.guichet-entreprises.fr/fr/) is designed to be a one-stop website for registering a business. The site, managed by the National Institute of Industrial Property (INPI), is available in both French and English although some fact sheets on regulated industries are only available in French on the website.
French firms invest more in the United States than in any other country and support approximately 765,100 American jobs. Total French investment in the United States reached $314.9 billion in 2020. France was still our tenth largest trading partner with approximately $115.7 billion in bilateral trade in 2021. The business promotion agency Business France also assists French firms with outward investment, which it does not restrict.
3. Legal Regime
The French government has made considerable progress in the last decade on the transparency and accessibility of its regulatory system. The government generally engages in industry and public consultation before drafting legislation or rulemaking through a regular but variable process directed by the relevant ministry. However, the text of draft legislation is not always publicly available before parliamentary approval. U.S. firms may also find it useful to become members of industry associations, which can play an influential role in developing government policies. Even “observer” status can offer insight into new investment opportunities and greater access to government-sponsored projects.
To increase transparency in the legislative process, all ministries are required to attach an impact assessment to their draft bills. The Prime Minister’s Secretariat General (SGG for Secretariat General du Gouvernement) is responsible for ensuring that impact studies are undertaken in the early stages of the drafting process. The State Council (Conseil d’Etat), which must be consulted on all draft laws and regulations, may reject a draft bill if the impact assessment is inadequate.
After experimenting with new online consultations, the Macron Administration is regularly using this means to achieve consensus on its major reform bills. These consultations are often open to professionals as well as citizens at large. Another innovation is to impose regular impact assessments after a bill has been implemented to ensure its maximum efficiency, revising, as necessary, provisions that do not work in favor of those that do.
Over past decades, major reforms have extended the investigative and decision-making powers of France’s Competition Authority. On April 11, 2019, France implemented the European Competition Network (ECN) Directive, which widens the powers of all European national competition authorities to impose larger fines and temporary measures. The Authority publishes its methodology for calculating fines imposed on companies charged with abuse of a dominant position. It issues specific guidance on competition law compliance, and government ministers, companies, consumer organizations, and trade associations now have the right to petition the authority to investigate anti-competitive practices. While the Authority alone examines the impact of mergers on competition, the Minister of the Economy retains the power to request a new investigation or reverse a merger transaction decision for reasons of industrial development, competitiveness, or saving jobs. The Competition Authority continues to simplify takeover and merger notifications with online procedures via a dedicated platform in 2020 and updated guidelines in English released on January 11, 2021. Since January 2021, the Competition Authority has a new President, Benoît Cœuré, who intends to focus on the impact of the Cloud on all sectors of the French economy.
France’s budget documents are comprehensive and cover all expenditures of the central government. An annex to the budget also provides estimates of cost sharing contributions, though these are not included in the budget estimates. Last September, the French government published its first “Green Budget,” as an annex to the 2021 Finance Bill. This event attests to France’s strong commitment, notably under the OECD-led “Paris Collaborative on Green Budgeting” (which France joined in December 2017), to integrate “green” tools into the budget process. In its spring report each year, the National Economic Commission outlines the deficits for the two previous years, the current year, and the year ahead, including consolidated figures on taxes, debt, and expenditures. Since 1999, the budget accounts have also included contingent liabilities from government guarantees and pension liabilities. The government publishes its debt data promptly on the French Treasury’s website and in other documents. Data on nonnegotiable debt is available 15 days after the end of the month, and data on negotiable debt is available 35 days after the end of the month. Annual data on debt guaranteed by the state is published in summary in the CGAF Report and in detail in the Compte de la dettepublique. More information can be found at: https://www.imf.org/external/np/rosc/fra/fiscal.htm
France was the first country to include extra-financial reporting in its 2001 New Economic Regulations Law. To encourage companies to develop a social responsibility strategy and limit the negative externalities of globalized trade, the law requires French companies with more than 500 employees and annual revenues above €100 million ($106 million) to report on the social and environmental consequences of their activities and include them in their annual management report. A 2012 decree on corporate social and environmental transparency obligations requires portfolio management companies to incorporate environmental, social, and governance (ESG) criteria in their investment process.
France’s 2015 Law on Energy Transition for Green Growth strengthened mandatory carbon disclosure requirements for listed companies and introduced carbon reporting for institutional investors. It requires investors (defined as asset owners and investment managers) to disclose in their annual investor’s report and on their website how they factor ESG criteria and carbon-related considerations into their investment policies. The regulation concerns all asset classes: listed assets, venture capital, bonds, physical assets, etc.
France is a founding member of the European Union, created in 1957. As such, France incorporates EU laws and regulatory norms into its domestic law. France has been a World Trade Organization (WTO) member since 1995 and a member of GATT since 1948. While developing new draft regulations, the French government submits a copy to the WTO for review to ensure the prospective legislation is consistent with its WTO obligations. France ratified the Trade Facilitation Agreement in October 2015 and has implemented all of its TFA commitments.
French law is codified into what is sometimes referred to as the Napoleonic Code, but is officially the Code Civil des Français, or French Civil Code. Private law governs interactions between individuals (e.g., civil, commercial, and employment law) and public law governs the relationship between the government and the people (e.g., criminal, administrative, and constitutional law).
France has an administrative court system to challenge a decision by local governments and the national government; the State Council (Conseil d’Etat) is the appellate court. France enforces foreign legal decisions such as judgments, rulings, and arbitral awards through the procedure of exequatur introduced before the Tribunal de Grande Instance (TGI), which is the court of original jurisdiction in the French legal system.
France’s Commercial Tribunal (Tribunal de Commerce or TDC) specializes in commercial litigation. Magistrates of the commercial tribunals are lay judges, who are well known in the business community and have experience in the sectors they represent. Decisions by the commercial courts can be appealed before the Court of Appeals. France’s judicial system is procedurally competent, fair, and reliable and is independent of the government.
The judiciary – although its members are state employees – is independent of the executive branch. The judicial process in France is known to be competent, fair, thorough, and time-consuming. There is a right of appeal. The Appellate Court (courd’appel) re-examines judgments rendered in civil, commercial, employment or criminal law cases. It re-examines the legal basis of judgments, checking for errors in due process and reexamines case facts. It may either confirm or set aside the judgment of the lower court, in whole or in part. Decisions of the Appellate Court may be appealed to the Highest Court in France (cour de cassation).
The French Financial Prosecution Office (Parquet National Financier, or PNF), specialized in serious economic and financial crimes, was set up by a December 6, 2013 law and began its activities on February 1, 2014.
Foreign and domestic private entities have the right to establish and own business enterprises and engage in all sorts of remunerative activities. U.S. investment in France is subject to the provisions of the Convention of Establishment between the United States of America and France, which was signed in 1959 and remains in force. The rights it provides U.S. nationals and companies include: rights equivalent to those of French nationals in all commercial activities (excluding communications, air transportation, water transportation, banking, the exploitation of natural resources, the production of electricity, and professions of a scientific, literary, artistic, and educational nature, as well as certain regulated professions like doctors and lawyers). Treatment equivalent to that of French or third-country nationals is provided with respect to transfer of funds between France and the United States. Property is protected from expropriation except for public purposes; in that case it is accompanied by payment that is just, realizable and prompt.
Major reforms have extended the investigative and decision-making powers of France’s Competition Authority. France implemented the European Competition Network, or ECN Directive, on April 11, 2019, allowing the French Competition Authority to impose heftier fines (above €3 million / $3.3 million) and temporary measures to prevent an infringement that may cause harm. The Authority issues decisions and opinions mostly on antitrust issues, but its influence on competition issues is growing. For example, following a complaint in November 2019 by several French, European, and international associations of press publishers against Google over the use of their content online without compensation, the Authority ordered the U.S. company to start negotiating in good faith with news publishers over the use of their content online. On December 20, 2019, Google was fined €150 million ($177 million) for abuse of dominant position. Following an in-depth review of the online ad sector, the Competition Authority found Google Ads to be “opaque and difficult to understand” and applied in “an unfair and random manner.” On November 17, 2021, the Competition Authority brokered a “pioneering” five-year deal between the CEOs of Google and French news agency Agence France-Presse for the search giant to pay for the French news agency’s content. The deal covers the entirety of the EU and follows 18 months of negotiations. It is the first such deal by a news agency under Article 15 of the 2019 European directive creating a neighboring right for the benefit of press agencies and press publishers when online services reproduce press publications in search engine results. France was the first EU member state to implement Article 15 through its July 24, 2019 law, which came into force on October 24, 2019.
Additional U.S. firms also continue to fall under review of the Competition Authority. For example, it fined Apple $1.3 billion on March 16, 2020, for antitrust infringements involving the restriction of intra-brand competition and the rarely used French law concept of “abuse of economic dependency.”
The Competition Authority launches regular in-depth investigations into various sectors of the economy, which may lead to formal investigations and fines. The Authority publishes its methodology for calculating fines imposed on companies charged with abuse of a dominant position. It issues specific guidance on competition law compliance. Government ministers, companies, consumer organizations and trade associations have the right to petition the authority to investigate anti-competitive practices. While the Authority alone examines the impact of mergers on competition, the Minister of the Economy retains the power to request a new investigation or reverse a merger transaction decision for reasons of industrial development, competitiveness, or saving jobs.
A new law on Economic Growth, Activity and Equal Opportunities (known as the “Macron Law”), adopted in August 2016, vested the Competition Authority with the power to review mergers and alliances between retailers ex-ante (beforehand). The law provides that all contracts binding a retail business to a distribution network shall expire at the same time. This enables the retailer to switch to another distribution network more easily. Furthermore, distributors are prohibited from restricting a retailer’s commercial activity via post-contract terms. The civil fine incurred for restrictive practices can now amount to up to five percent of the business’s revenue earned in France.
In accordance with international law, the national or local governments cannot legally expropriate property to build public infrastructure without fair market compensation. There have been no expropriations of note during the reporting period.
France has extensive and detailed bankruptcy laws and regulations. Any creditor, regardless of the amount owed, may file suit in bankruptcy court against a debtor. Foreign creditors, equity shareholders and foreign contract holders have the same rights as their French counterparts. Monetary judgments by French courts on firms established in France are generally made in euros. Not bankruptcy itself, but bankruptcy fraud – the misstatement by a debtor of his financial position in the context of a bankruptcy – is criminalized. Under France’s bankruptcy code managers and other entities responsible for the bankruptcy of a French company are prevented from escaping liability by shielding their assets (Law 2012-346). France has adopted a law that enables debtors to implement a restructuring plan with financial creditors only, without affecting trade creditors. France’s Commercial Code incorporates European Directive 2014/59/EU establishing a framework for the recovery and resolution of claims on insolvent credit institutions and investment firms. In the World Bank’s 2020 Doing Business Index, France ranked 32nd of 190 countries on ease of resolving insolvency.
The Bank of France, the country’s only credit monitor, maintains files on persons having written unfunded checks, having declared bankruptcy, or having participated in fraudulent activities. Commercial credit reporting agencies do not exist in France.
4. Industrial Policies
Following the election of President Emmanuel Macron in May 2017, the French government implemented significant labor market and tax reforms. By relaxing the rules on companies to hire and fire employees and by offering investment incentives, Macron improved the operating environment in France, based on surveys of U.S. investors.
However, with the onset of the pandemic, Macron put an end to his planned pension reforms and introduced his overhaul of France’s unemployment insurance in stages throughout 2021. Under his new plan, employees must work longer to qualify for unemployment benefits: they are required to work at least six of the last 25 months, instead of four of the last 28 months under previous rules. Furthermore, employees under 57 years of age, earning €4,500 ($4,952) in pre-tax monthly wages, will see their benefits decrease by 30 percent after the seventh month of unemployment. The other major aspect of this reform mandates that the rules for calculating unemployment benefits are based on an average monthly income from work rather than the number of days worked, as was the case previously. The purpose is to ensure unemployment benefits never exceed the amount of the average monthly net salary (which is currently the case for some beneficiaries).
In 2021, the government’s focus shifted to mitigating France’s most severe economic crisis in the post-war era. The economy shrank 8.3 percent in 2020 compared to the year prior as a result of the COVID-19 pandemic. In response, the government implemented extensive direct fiscal support to households and businesses in 2020 and 2021. The “France Relaunch” recovery program was mainly comprised of loan guarantees, unemployment schemes that support workers’ wages, subsidies to vulnerable sectors, investment in green and developing technologies, production tax cuts and other tax benefits, and funding for research and development. The cost of the emergency measures was around €70 billion ($76.9 billion) in 2020 (2.9 percent of 2019 GDP), according to the national accounts. In 2021, the measures reached €64 billion ($70.3 billion), or 2.6 percent of 2019 GDP. The government’s agenda aims to bolster competitiveness, increase productivity, and accelerate the ecological transition.
In addition, the authorities announced a new investment plan to 2030 in October 2021. The plan, called “France 2030,” allocates €30 billion ($33 billion) over five years and aims to complement France Relance recovery plan. “France 2030” targets further investment in the energy sector (€8 billion/$8.8 billion), as well as the health (€7 billion/$7 billion) and transport sectors (€4 billion/$4.4 billion). The permanent production tax cuts (€10 billion annually), included in France Relance, bring the estimated level of support to around 7.1 percent of 2019 GDP for the period 2020-27.
Both “France Relaunch” and “France 2030” fiscal packages support France’s green transition, the “decarbonization of the French economy,” and the “French green hydrogen plan.” Measures include the energy renovation of public buildings, private housing, social housing, and the operating premises of VSEs (Very Small Enterprises) and SMEs (Small and Medium Enterprises); support for the rail sector in order to renovate the national network and develop freight; development of green hydrogen; support for public transport and the use of bicycles; aid for industrial companies to invest in equipment that emits less CO2; and support for the green transition of agricultural.
“France 2030” supports the transformation of France’s automotive, aerospace, digital, green industry, biotechnology, culture, and healthcare sectors. Its objectives include the development of small-scale nuclear reactors, becoming a leader in green hydrogen (hydrogen made using renewable energy sources), producing two million electric and hybrid vehicles, and decarbonizing France’s industry by reducing greenhouse gas emissions by 35 percent relative to 2015. Of the plan’s €30 billion ($33.8 billion) to be invested over the five years, €3-4 billion ($3.4-4.5 billion) will be spent beginning in 2022. Additionally, one-third of France’s €100 billion ($106 billion) “France Relance” pandemic recovery package is allocated to the ecological transition, including energy sector related investments. The plan also targets green technology, including the development of a hydrogen economy. With approximately two thirds of its electricity coming from nuclear power, France supports the use of nuclear energy to meet near-term emissions reductions targets. Of the developed economies, France has one of the lowest rates of greenhouse gas emissions per capita and per unit of GDP due to its reliance on nuclear power. France aims to phase out fossil fuels over the next decade, shut down the last of its coal plants by 2022, and end public financial support for fossil fuels and natural gas by 2025 and 2035, respectively. In October 2020, France announced it would phase out export guarantees for foreign projects involving fossil fuels by 2035.
France’s “Ma Prime Renov” scheme allocates €1.4 billion to homeowners to finance insulation, heating, ventilation, or energy audit works for single-family house or apartments in collective housing. Such investment will finance the thermal renovation of 400,000 households. To guarantee quality standards, the renovation projects must be carried out by companies with a label classified as “recognized as guarantor of the environment.”
Former PM Jean Castex presented in March 2022 France’s “Resilience Plan” to support households and businesses affected by sanctions associated with the Russia-Ukraine conflict. The first portion of the plan provides support for specific sectors impacted directly by the conflict: fisheries, agriculture and livestock, transportation and trucking, and construction. There are also non-sectoral support targeting exporting firms and energy-intensive companies, plus continued state-guaranteed loans and delayed tax collection for companies facing higher energy costs and exports difficulties. The additional measures in the “Resilience Plan” will cost the government an additional €5-6 billion ($5.5-6.6 billion), on top of previously-implemented measures that include a gas price cap (€10 billion/ $11 billion), electricity price cap (€8 billion/ $8.8 billion), and energy cheques and inflation offsets (€2 billion/ $2.2 billion).
France is subject to all EU free trade zone regulations. These allow member countries to designate portions of their customs’ territory as duty-free, where value-added activity is limited. France has several duty-free zones, which benefit from exemptions on customs for storage of goods coming from outside of the European Union. The French Customs Service administers them and provides details on its website (http://www.douane.gouv.fr). French legal texts are published online at http://legifrance.gouv.fr.
In September 2018, President Macron announced the extension of 44 Urban Free Zones (ZFU) in low-income neighborhoods and municipalities with at least 10,000 residents. The program provides incentives for employers, who have created 600 new jobs since 2016. Incentives include exemption from payment of payroll taxes and certain social contributions for five years, financed by €15 million ($17.7 million) a year in State funds.
While there are no mandatory performance requirements established by law, the French government will generally require commitments regarding employment or R&D from both foreign and domestic investors seeking government financial incentives. Incentives like PAT regional planning grants (Prime d’Amenagement du Territoire pour l’Industrie et les Services) and related R&D subsidies are based on the number of jobs created, and authorities have occasionally sought commitments as part of the approval process for acquisitions by foreign investors.
The French government imposes the same conditions on domestic and foreign investors in cultural industries: all purveyors of movies and television programs (i.e., television broadcasters, telecoms operators, internet service providers and video services) must contribute a percentage of their revenues toward French film and television productions. They must also abide by broadcasting cultural content quotas (minimum 40 percent French, 20 percent EU).
The 2018 Directive on audio-visual media services, implemented in France by a December 21, 2020 government decree, requires streaming services exceeding a certain revenue threshold to contribute 20 or 25 percent of their revenues in France to the development of French and European production, depending on how quickly they show movies after their theatrical release. For example, Netflix has signed the agreement under the new windowing rules and will benefit from having access to movies 15 months after their theatrical release. Other streaming services such as Disney Plus will have a 17-month window for new films. Netflix, Amazon, Disney Plus, and Apple TV Plus signed in December 2021 an agreement with France’s broadcasting authority CSA to start investing 20 percent of their annual revenues in French content.
5. Protection of Property Rights
Real property rights are regulated by the French civil code and are uniformly enforced. The World Bank’s Doing Business Index ranks France 32nd of 190 on registering property. French civil-law notaries (notaires) – highly specialized lawyers in private practice appointed as public officers by the Justice Ministry – handle residential and commercial conveyance and registration, contract drafting, company formation, successions, and estate planning. The official system of land registration (cadastre) is maintained by the French public land registry under the auspices of the French tax authority (Direction Generale des Finances PubliquesorDGFiP), available online at http://www.cadastre.gouv.fr. Mortgages are widely available, usually for a 15-year period.
France is a strong defender of intellectual property rights (IPR). Under the French system, patents and trademarks protect industrial property, while copyrights protect literary/artistic property. By virtue of the Paris Convention , U.S. nationals have a priority period following filing of an application for a U.S. patent or trademark in which to file a corresponding application in France: twelve months for patents and six months for trademarks.
Counterfeiting is a costly problem for French companies, and the government of France maintains strong legal protections and a robust enforcement mechanism to combat trafficking in counterfeit goods — from copies of luxury goods to fake medications — as well as the theft and illegal use of IPR. The French Intellectual Property Code has been updated repeatedly over the years to address this challenge, most recently in 2019 with the implementation of the so-called Action Plan for Business Growth and Transformation or PACTE Law (Plan d’Action pour la Croissance et la Transformation des Entreprises). This law reinforced France’s anti-counterfeiting legislation and implemented EU Directive 2015/2436 of the Trademark Reform Package. It increased the Euro amount for damages to companies that are victims of counterfeiting and extends trademark protection to smartcard technology, certain geographic indications, plants, and agricultural seeds. The legislation also increased the statute of limitations for civil suits from three to ten years and strengthened the powers of customs officials to seize fake goods sent by mail or express freight. France also adopted legislation in 2019 to implement EU Directive 2019/790 on Copyright and Related Rights in the Digital Single Market.
The government also reports on seizures of counterfeit goods. On February 22, 2021, the government launched a new French customs action plan to combat counterfeiting for the 2021-2022 calendar year. Customs seizures in France have increased from 200,000 in 1994 to 5.64 million in 2020, and a record 9.1 million in 2021 (+ 62.5 percent compared to 2020). This new action plan focuses on improved intelligence gathering, investigation, litigation, and cooperation between all the stakeholders involved, including the Customs Office, which investigates fraud cases; the National Institute of Industrial Property, which oversees patents, trademarks, and industrial design rights; and France’s top private sector anti-counterfeiting organization, UNIFAB.
France has robust laws against online piracy. A law on the regulation and protection of public access to cultural works in the digital era approved by Parliament on September 29, 2021 established the Regulatory Authority for Audiovisual and Digital Communication (ARCOM) from the merger of the French Audiovisual Authority (CSA) and the French digital piracy agency HADOPI (High Authority for the Dissemination of Artistic Works and the Protection of Rights on Internet or Haute Autorite pour la Diffusion des Œuvres et la Protection des droits sur Internet). The HADOPI element of ARCOM administers a “graduated response” system of warnings and fines and has taken enforcement action against several online pirate sites. HADOPI traditionally cooperates closely with the U.S. Patent and Trademark Office (USPTO) including pursuing voluntary arrangements to single out awareness about intermediaries that facilitate or fund pirate sites. The new law grants ARCOM wider investigative powers to close down mirror sites, as well as blacklist and block access to websites that repeatedly infringe on copyrights. The bill also introduces a fast-track remedy to prevent the illegal broadcast of sporting events. The establishment of this new authority was delayed by the COVID-19 pandemic, and the new authority was finally established in January 2022. The government also issued an order on May 12, 2021, enforcing in France the EU Directive on Copyright and Related Rights in the Digital Single Market (CDSM), which holds content-sharing platforms liable for the unauthorized communication of copyrighted content. The United States will continue to monitor ways this legislation may impact U.S. stakeholders.
France does not appear on USTR’s 2020 Special 301 Report. USTR’s 2020 Notorious Market report continues to list France as host to illicit streaming and copyright infringement websites. For additional information about national laws and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/.
6. Financial Sector
There are no administrative restrictions on portfolio investment in France, and there is an effective regulatory system in place to facilitate portfolio investment. France’s open financial market allows foreign firms easy access to a variety of financial products, both in France and internationally. France continues to modernize its marketplace; as markets expand, foreign and domestic portfolio investment has become increasingly important. As in most EU countries, France’s listed companies are required to meet international accounting standards. Some aspects of French legal, regulatory, and accounting regimes are less transparent than U.S. systems, but they are consistent with international norms. Foreign banks are allowed to establish branches and operations in France and are subject to international prudential measures. Under IMF Article VIII, France may not impose restrictions on the making of payments and transfers for current international transactions without the (prior) approval of the Fund.
Foreign investors have access to all classic financing instruments, including short-, medium-, and long-term loans, short- and medium-term credit facilities, and secured and non-secured overdrafts offered by commercial banks. These assist in public offerings of shares and corporate debt, as well as mergers, acquisitions and takeovers, and offer hedging services against interest rate and currency fluctuations. Foreign companies have access to all banking services. Most loans are provided at market rates, although subsidies are available for home mortgages and small business financing.
Euronext Paris (also known as Paris Bourse) is part of a regulated cross-border stock exchange located in six European countries. Euronext Growth is an alternative exchange for medium-sized companies to list on a less regulated market (based on the legal definition of the European investment services directive), with more consumer protection than the Marché Libre still used by a couple hundred small businesses for their first stock listing. A company seeking a listing on Euronext Growth must have a sponsor with status granted by Euronext and prepare a French language prospectus for a permit from the Financial Markets Authority (Autorité des Marchés Financiers or AMF), the French equivalent of the U.S. Securities and Exchange Commission. Small and medium-size enterprises (SMEs) may also list on Enternext, a subsidiary of the Euronext Group created in 2013. The bourse in Paris also offers Euronext Access, an unregulated exchange for start-ups.
France’s banking system recovered gradually from the 2008-2009 global financial crises and passed the 2018 stress tests conducted by the European Banking Authority. In the context of the COVID-19 outbreak, the European Banking Authority (EBA) launched an EU-wide stress test exercise in January 2021 and published its results in July 2021. The results of the stress tests confirmed the resilience of the French banking system over the entire time horizon of the exercise (2021-2023), despite using a particularly severe macroeconomic and financial scenario, which envisages a prolongation of the crisis between 2021 and 2023. A new EBA EU-wide stress test will be carried out in 2023.
Four French banks were ranked among the world’s 20 largest as of the end of 2020 (BNP Paribas SA; Crédit Agricole Group, Société Générale SA, Groupe BPCE). The assets of France’s top five banks totaled $7.7 trillion in 2020. Acting on a proposal from France’s central bank, Banque de France, in March 2020, the High Council for Financial Stability (HCSF) instructed the country’s largest banks to decrease the “countercyclical capital buffer” from 0.25 percent to zero percent of their bank’s risk-weighted assets, thereby increasing liquidity to help mitigate the impact of the pandemic-induced recession. As of January 2022, HCSF maintained the zero percent countercyclical capital buffer but with the intention of normalizing it to its pre-crisis level at its next meeting.
Banque de France is a member of the Eurosystem, which groups together the European Central Bank (ECB) and the national central banks of all countries that have adopted the euro. Banque de France is a public entity governed by the French Monetary and Financial Code. The conditions whereby it conducts its missions on national territory are set out in its Public Service Contract. The three main missions are monetary strategy; financial stability, together with the High Council of Financial Stability (HCSF) which implements macroprudential policy; and the provision of economic services to the community. In addition, it participates in the preparation and implementation of decisions taken centrally by the ECB Governing Council.
Foreign banks can operate in France either as subsidiaries or branches but need to obtain a license. Credit institutions’ licenses are generally issued by France’s Prudential Authority (Autorité de ContrôlePrudentiel et de Résolution or ACPR) which reviews whether certain conditions are met (e.g. minimum capital requirement, sound and prudent management of the bank, compliance with balance sheet requirements, etc.). Both EU law and French legislation apply to foreign banks. Foreign banks or branches are additionally subject to prudential measures and must provide periodic reports to the ACPR regarding operations in France, including detailed reports on their financial situation. At the EU level, the ‘passporting right’ allows a foreign bank settled in any EU country to provide their services across the EU, including France. There are about 944 credit institutions authorized to carry on banking activities in France; the list of foreign banks is available on this website: https://www.regafi.fr/spip.php?page=results&type=advanced&id_secteur=3&lang=en&denomination=&siren=&cib=&bic=&nom=&siren_agent=&num=&cat=01-TBR07&retrait=0
France has no sovereign wealth fund per se (none that use that nomenclature) but does operate funds with similar intents. The Public Investment Bank (Bpifrance) supports small and medium enterprises (SMEs), larger enterprises (Entreprises de Taille Intermedaire), and innovating businesses with over €36 billion ($39.6 billion) assets under management. The government strategy is defined at the national level and aims to fit with local strategies. Bpifrance may hold direct stakes in companies, hold indirect stakes via generalist or sectorial funds, venture capital, development or transfer capital. In November 2020, Bpifrance became a member of the One Planet Sovereign Wealth Funds (OPSWF) international initiative, which federates international sovereign wealth funds mobilized to contribute to the transition towards a more sustainable economy. Bpifrance stepped up its support for the ecological and energy transition, aiming to reach nearly €6 billion ($6.6 billion) per year by 2023.
7. State-Owned Enterprises
The 11 listed entities in which the French State maintains stakes at the federal level are Aeroports de Paris (50.63 percent); Airbus Group (10.92 percent); Air France-KLM (28.6 percent); EDF (83.88 percent), ENGIE (23.64 percent), Eramet (27.13 percent), La Française des Jeux (FDJ) (20.46 percent), Orange (a direct 13.39 percent stake and a 9.60 percent stake through Bpifrance), Renault (15.01 percent), Safran (11.23 percent), and Thales (25.67 percent). Unlisted companies owned by the State include SNCF (rail), RATP (public transport), CDC (Caisse des depots et consignations) and La Banque Postale (bank). In all, the government maintains majority and minority stakes in 88 firms in a variety of sectors.
Private enterprises have the same access to financing as SOEs, including from state-owned banks or other state-owned investment vehicles. SOEs are subject to the same tax burden and tax rebate policies as their private sector competitors. SOEs may get subsidies and other financial resources from the government.
France, as a member of the European Union, is party to the Agreement on Government Procurement (GPA) within the framework of the World Trade Organization. Companies owned or controlled by the state behave largely like other companies in France and are subject to the same laws and tax code. The Boards of SOEs operate according to accepted French corporate governance principles as set out in the (private sector) AFEP-MEDEF Code of Corporate Governance. SOEs are required by law to publish an annual report, and the French Court of Audit conducts financial audits on all entities in which the state holds a majority interest. The French government appoints representatives to the Boards of Directors of all companies in which it holds significant numbers of shares, and manages its portfolio through a special unit attached to the Ministry for the Economy and Finance Ministry, the shareholding agency APE (Agence de Participations de l’Etat). The State as a shareholder must set an example in terms of respect for the environment, gender equality and social responsibility. The report also highlighted that the State must protect its strategic assets and remain a shareholder in areas where the general interest is at stake.
In 2021, the French Government increased to 29.9 percent its existing 14.3 percent stake in the Air France-KLM group in a deal that injected €4 billion ($4.5 billion) into Air France and its Holding Company under the European State aid Temporary Framework. This recapitalization, through a mix of new shares and hybrid debt, constrains the group from taking more than a 10 percent stake in any competitor until three-quarters of that aid is repaid. It follows a €7 billion ($7.7 billion) bailout the government provided earlier in 2020. The French Government has pledged to reduce its stake to the pre-crisis level of 14.3 percent by the end of 2026.
The government was due to privatize many large companies in 2019, including ADP and ENGIE in order to create a €10 billion ($11 billion) fund for innovation and research. However, the program was delayed because of political opposition to the privatization of airport manager ADP, regarded as a strategic asset to be protected from foreign shareholders. The government succeeded in selling in November 2019 a 52 percent stake in gambling firm FDJ. The government continues to maintain a strong presence in some sectors, particularly power, public transport, and defense industries.
8. Responsible Business Conduct
The business community has general awareness of standards for responsible business conduct (RBC) in France. The country has established a National Contact Point (NCP) for the OECD Guidelines for Multinational Enterprises, coordinated and chaired by the Directorate General of the Treasury in the Ministry for the Economy and Finance. Its members represent State Administrations (Ministries in charge of Economy and Finance, Labor and Employment, Foreign Affairs, Ecology, Sustainable Development and Energy), six French Trade Unions (CFDT, CGT, FO, CFE-CGC, CFTC, UNSA) and one employers’ organization, MEDEF.
The NCP promotes the OECD Guidelines in a manner that is relevant to specific sectors. When specific instances are raised, the NCP offers its good offices to the parties (discussion, exchange of information) and may act as a mediator in disputes, if appropriate. This can involve conducting fact-finding to assist parties in resolving disputes, and posting final statements on any recommendations for future action with regard to the Guidelines. The NCP may also monitor how its recommendations are implemented by the business in question. In April 2017, the French NCP signed a two-year partnership with Global Compact France to increase sharing of information and activity between the two organizations.
In France, corporate governance standards for publicly traded companies are the product of a combination of legislative provisions and the recommendations of the AFEP-MEDEF code (two employers’ organizations). The code, which defines principles of corporate governance by outlining rules for corporate officers, controls and transparency, meets the expectations of shareholders and various stakeholders, as well as of the European Commission. First introduced in September 2002, it is regularly updated, adding new principles for the determination of remuneration and independence of directors, and now includes corporate social and environmental responsibility standards. The latest amendments in February 2019 tackle the remuneration and post-employment benefits of Chief Executive Officers and Executive Officers: 60 percent variable remuneration based on quantitative objectives and 40 percent on quality objectives, including efforts in the corporate social responsibility.
Also relating to transparency, the EU passed a new regulation in May 2017 to stem the trade in conflict minerals and, in particular, to stop conflict minerals and metals from being exported to the EU; to prevent global and EU smelters and refiners from using conflict minerals; and to protect mine workers from being abused. The regulation goes into effect January 1, 2021, and will then apply directly to French law.
France has played an active role in negotiating the ISO 26000 standards, the International Finance Corporation Performance Standards, the OECD Guidelines for Multinational Enterprises, and the UN Guiding Principles on Business and Human Rights. France has signed on to the Extractive Industries Transparency Initiative (EITI), although, it has not yet been fully implemented. Since 2017, large companies based in France and having at least 5,000 employees are now required to establish and implement a corporate plan to identify and assess any risks to human rights, fundamental freedoms, workers’ health, safety, and risk to the environment from activities of their company and its affiliates.
The February 2017 “Corporate Duty of Vigilance Law” requires large companies to set up, implement, and publish a “vigilance plan” to identify risks and prevent “serious violations” of human rights, fundamental freedoms, and serious environmental damage.
In 2021, France enacted a Climate and Resilience Law covering consumption and food, economy and industry, transportation, housing, and strengthening sanctions against environmental violations. The production and work chapter aligns France’s national research strategy with its national low carbon and national biodiversity strategies. All public procurement must consider environmental criteria. To protect ecosystems, the law amends several mining code provisions, including the requirement to develop a responsible extractive model. The law translates France’s multi-year energy program into regional renewable energy development objectives, creates the development of citizen renewable energy communities, and requires installation of solar panels or green roofs on commercial surfaces, offices, and parking lots. The consumption chapter requires an environmental sticker and inscription to better inform consumers of a product or service’s impact on climate. The law bans advertising of fossil fuels by 2022 and advertising of the most carbon-emitting cars (i.e., those that emit more than 123 grams of carbon dioxide per kilometer) by 2028. The law also empowered local authorities with mechanisms to reduce paper advertisements and regulate electronic advertising screens in shop windows. Large- and medium-sized stores (i.e., those with over 400 square meters of sales area) must devote 20 percent of their sales area to bulk sales by 2030. In the agriculture sector, the law sets annual emissions reduction levels concerning nitrogen fertilizers; failure to meet these objectives will trigger a tax beginning in 2024. The law’s transportation chapter extends France’s 2019 Mobility law by creating 33 low-emission zones in urban areas that have more than 150,000 inhabitants by the end of 2024, and bans cars manufactured before 1996 in these large cities. In the top 10 cities that regularly exceed air quality limits on particulates, the law will ban vehicles that have air quality certification stickers of above a certain level. The law requires regions to offer attractive fares on regional trains, bans domestic flights when there is train transportation of less than 2.5 hours, requires airlines to conduct carbon offsetting for domestic flights beginning in 2022, and creates carpool lanes. The law creates a road ecotax starting in 2024, prohibits the sale of new cars that emit more than 95 gram of carbon dioxide per kilometer by 2030 and of new trucks, buses, and coaches with 95 gCO2/km emissions by 2040, and provides incentives to develop bicycle paths, parking areas, and rail and waterway transport.
The Climate and Resilience Law’s housing chapter seeks to accelerate the environmental renovation of buildings. Starting in 2023, owners of poorly insulated housing must undertake energy renovation work if they want to increase rent rates. The law forbids leasing non-insulated housing beginning in 2025 and bans leasing any type of poorly insulated housing beginning in 2028. It also provides information, incentives, and control mechanisms empowering tenants to demand landlords conduct energy renovation work. Beginning in 2022, the law requires an energy audit, including proposals, when selling poorly insulated housing. All households will have access to a financing mechanism to pay the remaining costs of their renovation work via government-guaranteed loans. The law regulates the laying of concrete, mandates a 50 percent reduction in the rate of land use by 2030, requires net zero land reclamation by 2050, and prohibits the construction of new shopping centers that lead to modifying natural environment. The law aims to protect 30 percent of France’s sensitive natural areas and supports local authorities in adapting their coastal territories against receding coastlines. The law’s final chapter focuses on environmental violations and reinforces sanctions for environmental damage, such as long-term degradation to fauna and flora (up to three years in prison and a €250,000 ($273,000) fine), as well as for the general offense of environmental pollution and “ecocide” (up to 10 years in prison and a €4.5 million ($4.9 million) fine or up to 10 times the profit obtained by the individual committing the environmental damage). The chapter uses the term “ecocide” to refer to the most serious cases of environmental damage, although the term is not defined in the law. Even if pollution has not occurred, these penalties apply as long as the individual’s behavior is considered to have put the environment in “danger.”
In line with President Macron’s campaign promise to clean up French politics, the French parliament adopted in September 2017 the law on “Restoring Confidence in Public Life.” The new law bans elected officials from employing family members, or working as a lobbyist or consultant while in office. It also bans lobbyists from paying parliamentary, ministerial, or presidential staff and requires parliamentarians to submit receipts for expenses.
France’s “Transparency, Anti-corruption, and Economic Modernization Law,” also known as the “Loi Sapin II,” came into effect on June 1, 2017. It brought France’s legislation in line with European and international standards. Key aspects of the law include: creating a new anti-corruption agency; establishing “deferred prosecution” for defendants in corruption cases and prosecuting companies (French or foreign) suspected of bribing foreign public officials abroad; requiring lobbyists to register with national institutions; and expanding legal protections for whistleblowers. The Sapin II law also established a High Authority for Transparency in Public Life (HATVP). The HATVP promotes transparency in public life by publishing the declarations of assets and interests it is legally authorized to share publicly. After review, declarations of assets and statements of interests of members of the government are published on the High Authority’s website under open license. The declarations of interests of members of Parliament and mayors of big cities and towns, but also of regions are also available on the website. In addition, the declarations of assets of parliamentarians can be accessed in certain governmental buildings, though not published on the internet.
France is a signatory to the OECD Anti-Bribery Convention. The U.S. Embassy in Paris has received no specific complaints from U.S. firms of unfair competition in France in recent years. France ranked 22rd of 180 countries on Transparency International’s (TI) 2021 corruption perceptions index. See https://www.transparency.org/country/FRA.
The Central Office for the Prevention of Corruption (Service Central de Prevention de la Corruption or SCPC) was replaced in 2017 by the new national anti-corruption agency – the Agence Francaise Anticorruption (AFA). The AFA is charged with preventing corruption by establishing anti-corruption programs, making recommendations, and centralizing and disseminating information to prevent and detect corrupt officials and company executives. The French anti-corruption agency guidelines can be found here: https://www.agence-francaise-anticorruption.gouv.fr/files/2021-03/French%20AC%20Agency%20Guidelines%20.pdf. The AFA will also administrative authority to review the anticorruption compliance mechanisms in the private sector, in local authorities and in other government agencies.
Contact information for Agence Française Anti-corruption (AFA):
Director: Charles Duchaine
23 avenue d’Italie
Tel : (+33) 1 44 87 21 14
Contact information for Transparency International’s French affiliate:
Transparency International France
14, passage Dubail
Tel: (+33) 1 84 16 95 65;
10. Political and Security Environment
France is a politically stable country. Large demonstrations and protests occur regularly (sometimes organized to occur simultaneously in multiple French cities); these can result in violence. When faced with imminent business closures, on rare occasions French trade unions have resorted to confrontational techniques such as setting plants on fire, planting bombs, or kidnapping executives or managers.
From mid-November 2018 through 2019, Paris and other cities in France faced regular protests and disruptions, including “Gilets Jaunes” (Yellow Vest) demonstrations that turned violent, initiated by discontent over high cost of living, gas, taxes, and social exclusion. In the second half of 2019, most demonstrations were in response to President Macron’s proposed unemployment and pension reform. Authorities permitted peaceful protests. During some demonstrations, damage to property, including looting and arson, in popular tourist areas occurred with reckless disregard for public safety. Police response included water cannons, rubber bullets and tear gas.
Between 2012 and 2021, 271 people have been killed in terrorist attacks in France, including the January 2015 assault on the satirical magazine Charlie Hebdo, the November 2015 coordinated attacks at the Bataclan concert hall, national stadium, and streets of Paris, and the 2016 Bastille Day truck attack in Nice. While the terrorist threat remains high, the threat is lower than its peak in 2015. Terrorist attacks have since been smaller in scale. Security services remained concerned with lone-wolf attacks, carried out by individuals already in France, inspired by or affiliated with ISIS. French security agencies continue to disrupt plots and cells effectively. Despite the spate of recent small-scale attacks, France remains a strong, stable, democratic country with a vibrant economy and culture. Americans and investors from all over the world continue to invest heavily in France.
11. Labor Policies and Practices
France’s has one of the lowest unionized work forces in the developed world (between 8-11 percent of the total work force). However, unions have strong statutory protections under French law that give them the power to engage in sector- and industry-wide negotiations on behalf of all workers. As a result, an estimated 98 percent of French workers are covered by union-negotiated collective bargaining agreements. Any organizational change in the workplace must usually be presented to the unions for a formal consultation as part of the collective bargaining process.
The number of apprenticeships in France peaked in 2021, at 718,000 (+37 percent compared with 2020), including 698,000 in the private sector, according to February 2, 2022 Labor Ministry figures. Apprenticeships, like vocational training, have been placed under the direct management of the government via a newly created agency called France Compétences. The government claims growth of apprenticeship and reform of vocational training help to explain the drop to from eight percent in 2020 to 7.4 percent in 2021.
During the COVID-19 crisis, France’s partial unemployment scheme, which allows firms to retain their employees while the government continues to pay a portion of their wages, expanded dramatically in scope and size and kept unemployment at pre-crisis levels (between eight and nine percent). The reform of unemployment insurance was launched in stages in November 2017 and twice postponed because of the COVID-19 pandemic. Labor Minister Elizabeth Borne presented on March 2, 2021, the last measures of the government’s final decree on unemployment insurance. These final measures include a new method for calculating the daily reference wage and the introduction of a tax on short-term contracts. In spite of strong labor union opposition, the government was able to enforce its reform in November 2021. Earlier measures of the reform, in place since January 1, 2021, cover a 30 percent cut in benefits of higher wage earners and an increase from one to four months of the threshold for recharging rights to unemployment benefits once they have ended. This reform is designed to tackle two issues: 1) ensuring that the jobless do not make more money from unemployment benefits than by working; and 2) reducing the deficit of France’s unemployment insurance system UNEDIC. The deficit is expected to turn to surplus by the end of 2022, according to an October 22, 2021 report by UNEDIC, due to the end of the government COVID-19 partial unemployment scheme and as a consequence of the unemployment insurance reform. Pension reform has been delayed until after the April 2022 presidential elections.
13. Foreign Direct Investment and Foreign Portfolio Investment Statistics
Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
French Statistical source*
USG or international statistical source
USG or International Source of Data: BEA; IMF; Eurostat; UNCTAD, Other
* French Source : INSEE database for GDP figures and French Central Bank (Banque de France) for FDI figures. Accessed on March 21, 2022.
Table 3: Sources and Destination of FDI
Direct Investment from/in France Economy Data 2020
From Top Five Sources/To Top Five Destinations (U/S. Dollars, Millions)
Inward Direct Investment
Outward Direct Investment
“0” reflects amounts rounded to +/- USD 500,000.
Source: Bank of France.
Note: These figures represent the stock of foreign direct investment (FDI), not the annual flow of FDI. The United States was the second top investor by number of projects recorded in 2021 but remained in first place for jobs generated (10,118).
As Europe’s largest economy, Germany is a major destination for foreign direct investment (FDI) and has accumulated a vast stock of FDI over time. Germany is consistently ranked as one of the most attractive investment destinations based on its stable legal environment, reliable infrastructure, highly skilled workforce, and world-class research and development.
An EU member state with a well-developed financial sector, Germany welcomes foreign portfolio investment and has an effective regulatory system. Capital markets and portfolio investments operate freely with no discrimination between German and foreign firms. Germany has a very open economy, routinely ranking among the top countries in the world for exports and inward and outward foreign direct investment.
Foreign investment in Germany mainly originates from other European countries, the United States, and Japan, although FDI from emerging economies (and China) has grown in recent years. The United States is the leading source of non-European FDI in Germany. In 2020, total U.S. FDI in Germany was $162 billion. The key U.S. FDI sectors include chemicals ($8.7 billion), machinery ($6.5 billion), finance ($13.2 billion), and professional, scientific, and technical services ($10.1 billion). From 2019 to 2020, the industry sector “chemicals” grew significantly from $4.8 billion to $8.7 billion. Historically, machinery, information technology, finance, holding companies (nonbank), and professional, scientific, and technical services have dominated U.S. FDI in Germany.
German legal, regulatory, and accounting systems can be complex but are generally transparent and consistent with developed-market norms. Businesses operate within a well-regulated, albeit relatively high-cost, environment. Foreign and domestic investors are treated equally when it comes to investment incentives or the establishment and protection of real and intellectual property. Germany’s well-established enforcement laws and official enforcement services ensure investors can assert their rights. German courts are fully available to foreign investors in an investment dispute. New investors should ensure they have the necessary legal expertise, either in-house or outside counsel, to meet all national and EU regulations.
The German government continues to strengthen provisions for national security screening of inward investment in reaction to an increasing number of high-risk acquisitions of German companies by foreign investors, particularly from China, in recent years. German authorities screen acquisitions by foreign entities acquiring more than 10 percent of voting rights of German companies in critical sectors, including health care, artificial intelligence, autonomous vehicles, specialized robots, semiconductors, additive manufacturing, and quantum technology, among others. Foreign investors who seek to acquire at least 10 percent of voting rights of a German company in one of those fields are required to notify the government and potentially become subject to an investment review. Furthermore, acquisitions by foreign government-owned or -funded entities will now trigger a review.
German authorities are committed to fighting money laundering and corruption. The government promotes responsible business conduct and German SMEs are aware of the need for due diligence.
1. Openness To, and Restrictions Upon, Foreign Investment
The German government and industry actively encourage foreign investment. U.S. investment continues to account for the largest share of Germany’s FDI. The 1956 U.S.-Federal Republic of Germany Treaty of Friendship, Commerce and Navigation affords U.S. investors national treatment and provides for the free movement of capital between the United States and Germany. As an OECD member, Germany adheres to the OECD National Treatment Instrument and the OECD Codes of Liberalization of Capital Movements and of Invisible Operations. The Foreign Trade and Payments Act and the Foreign Trade and Payments Ordinance provide the legal basis for the Federal Ministry for Economic Affairs and Climate Action (MEC) to review acquisitions of domestic companies by foreign buyers and to assess whether these transactions pose a risk to the public order or national security (for example, when the investment pertains to critical infrastructure). For many decades Germany has experienced significant inbound investment, which is widely recognized as a considerable contributor to Germany’s growth and prosperity. The investment-related challenges facing foreign companies are broadly the same as those that face domestic firms, e.g., relatively high tax rates and energy costs, stringent environmental regulations, and labor laws that complicate hiring and dismissals. Germany Trade and Invest (GTAI), the country’s economic development agency, provides extensive information for investors: https://www.gtai.de/gtai-en/invest
Under German law, a foreign-owned company registered in the Federal Republic of Germany as a GmbH (limited liability company) or an AG (joint stock company) is treated the same as a German-owned company. There are no special nationality requirements for directors or shareholders.
Companies seeking to open a branch office in Germany without establishing a new legal entity, (e.g., for the provision of employee placement services, such as providing temporary office support, domestic help, or executive search services), must register and have at least one representative located in Germany.
While there are no economy-wide limits on foreign ownership or control, Germany maintains an elaborate mechanism to screen foreign investments based on national security grounds. The legislative basis for the mechanism (the Foreign Trade and Payments Act and Foreign Trade and Payments Ordinance) has been amended several times in recent years to tighten parameters of the screening as technological threats evolve, particularly to address growing interest by foreign investors in both Mittelstand (mid-sized) and blue-chip German companies. Germany amended its investment screening mechanism May 1, 2021 and has now fully implemented the EU Screening Directive. With the amendment, firms must notify MEC of foreign investments and MEC can then screen investments in sensitive sectors and technologies if the buyer plans to acquire 10 percent or more of the company’s voting rights and may be required, regardless, for a non-EU company acquiring more than 25 percent of voting rights (https://www.bmwi.de/Redaktion/EN/Artikel/Foreign-Trade/investment-screening.html).
In the screening process, MEC considers “stockpile acquisitions” by the same investor in a German company or “atypical control investments” where an investor secures additional influence in company operations via side contractual agreements. MEC can also factor in combined acquisitions by multiple investors if all are controlled by one foreign government. The total time for the screening process, depending on the sensitivities of the investment, may take up 10 to 12 months. BMWK – Investment screening (bmwi.de)
The World Bank Group’s “Doing Business 2020” Index provides additional information on Germany’s investment climate. [Note: this report is no longer updated]. The American Chamber of Commerce in Germany publishes results of an annual survey of U.S. investors in Germany (“AmCham Germany Transatlantic Business Barometer.” https://www.amcham.de/publications).
Before engaging in commercial activities, companies and business operators must register in public directories, the two most significant of which are the commercial register (Handelsregister) and the trade office register (Gewerberegister).
Applications for registration at the commercial register (www.handelsregister.de) are electronically filed in publicly certified form through a notary. The commercial register provides information about all relevant relationships between merchants and commercial companies, including names of partners and managing directors, capital stock, liability limitations, and insolvency proceedings. Registration costs vary depending on the size of the company. According to the World Bank’s Doing Business Report 2020, the median duration to register a business in Germany is eight days, though some firms have experienced longer processing times.
Micro-enterprises: fewer than 10 employees and less than €2 million annual turnover or less than €2 million in balance sheet total.
Small enterprises: fewer than 50 employees and less than €10 million annual turnover or less than €10 million in balance sheet total.
Medium-sized enterprises: fewer than 250 employees and less than €50 million annual turnover or less than €43 million in balance sheet total.
U.S.-based exporters seeking to sell in Germany (e.g., via commercial platforms) are required to register with one specific tax authority in Bonn, which can lead to significant delays due to capacity issues.
Germany’s federal government provides guarantees for investments by Germany-based companies in developing and emerging economies and countries in transition in order to insure them against political risks. In order to receive guarantees, the investment must have adequate legal protection in the host country. The Federal Government does not insure against commercial risks. In 2020, the government issued investment guarantees amounting to €900 million for investment projects in 13 countries, with the majority of those in China and India.
3. Legal Regime
Germany has transparent and effective laws and policies to promote competition, including antitrust laws. The legal, regulatory, and accounting systems are complex but transparent and consistent with international norms.
Public consultation by federal authorities is regulated by the Joint Rules of Procedure, which specify that ministries must consult early and extensively with a range of stakeholders on all new legislative proposals. In practice, laws and regulations in Germany are routinely published in draft form for public comment. According to the Joint Rules of Procedure, ministries should consult the concerned industries’ associations, consumer organizations, environmental, and other NGOs. The consultation period generally takes two to eight weeks.
The German Institute for Standardization (DIN), Germany’s independent and sole national standards body representing Germany in non-governmental international standards organizations, is open to German subsidiaries of foreign companies.
As a member of the European Union, Germany must observe and implement directives and regulations adopted by the EU. EU regulations are binding and enter into force as immediately applicable law. Directives, on the other hand, constitute a type of framework law that Member States transpose via their respective legislative processes. Germany regularly adheres to this process.
EU Member States must transpose directives within a specified time period. Should a deadline not be met, the Member State may suffer the initiation of an “infringement procedure,” which could result in steep fines. Germany has a set of rules that prescribe how to break down any payment of fines devolving to the Federal Government and the federal states (Länder). Both bear part of the costs. Payment requirements by the individual states depend on the size of their population and the respective part they played in non-compliance. In 2020, the Commission opened 28 new infringement cases against Germany; at year-end, 79 total infringement cases remained open against Germany.
In accordance with WTO membership requirements, the Federal Government notifies draft technical regulations to the WTO Committee on Technical Barriers to Trade (TBT) through the Federal Ministry of Economic Affairs and Energy.
German law is stable and predictable. Companies can effectively enforce property and contractual rights. Germany’s well-established enforcement laws and official enforcement services ensure investors can assert their rights. German courts are fully available to foreign investors in an investment dispute.
The judicial system is independent, and the government does not interfere in the court system. The legislature sets the systemic and structural parameters, while lawyers and civil law notaries use the law to shape and organize specific situations. Judges are highly competent and impartial. International studies and empirical data have attested that Germany offers an effective court system committed to due process and the rule of law.
In Germany, most important legal issues and matters are governed by comprehensive legislation in the form of statutes, codes, and regulations. Primary legislation in the area of business law includes:
the Civil Code (Bürgerliches Gesetzbuch, abbreviated as BGB), which contains general rules on the formation, performance, and enforcement of contracts and on the basic types of contractual agreements for legal transactions between private entities;
the Commercial Code (Handelsgesetzbuch, abbreviated as HGB), which contains special rules concerning transactions among businesses and commercial partnerships;
the Private Limited Companies Act (GmbH-Gesetz) and the Public Limited Companies Act (Aktiengesetz), covering the two most common corporate structures in Germany – the ‘GmbH’ and the ‘Aktiengesellschaft’; and
the Act on Unfair Competition (Gesetz gegen den unlauteren Wettbewerb, abbreviated as UWG), which prohibits misleading advertising and unfair business practices.
Apart from the regular courts, which hear civil and criminal cases, Germany has specialized courts for administrative law, labor law, social law, and finance and tax law. Many civil regional courts have specialized chambers for commercial matters. In 2018, the first German regional courts for civil matters (in Frankfurt and Hamburg) established Chambers for International Commercial Disputes, introducing the possibility to hear international trade disputes in English. Other federal states are currently discussing plans to introduce these specialized chambers as well. In November 2020, Baden-Wuerttemberg opened the first commercial court in Germany with locations in Stuttgart and Mannheim, with the option to choose English– language proceedings.
The Federal Patent Court hears cases on patents, trademarks, and utility rights related to decisions by the German Patent and Trademarks Office. Both the German Patent Office (Deutsches Patentamt) and the European Patent Office are headquartered in Munich.
In the case of acquisitions of critical infrastructure and companies in sensitive sectors, the threshold for triggering an investment review by the government is 10 percent. The Federal Ministry for Economic Affairs and Climate Action may review acquisitions of domestic companies by foreign buyers, regardless of national security concerns, where investors seek to acquire at least 25 percent of the voting rights to assess whether these transactions pose a risk to the public order or national security of the Federal Republic of Germany.
In 2021, the Federal Ministry for Economic Affairs and Climate Action screened 306 foreign acquisitions and prohibited none. MEC officials told Post the mere prospect of rejection has caused foreign investors to pull out of prospective deals in sensitive sectors in the past. All national security decisions by the Ministry can be appealed in administrative courts.
There is no general requirement for investors to obtain approval for any acquisition unless the target company poses a potential national security risk, such as operating or providing services relating to critical infrastructure, is a media company, or operates in the health sector. The Federal Ministry for Economic Affairs and Climate Action may launch a review within three months after obtaining knowledge of the acquisition; the review must be concluded within four months after receipt of the full set of relevant documents. An investor may also request a binding certificate of non-objection from the Federal Ministry for Economic Affairs and Climate Action in advance of the planned acquisition to obtain legal certainty at an early stage.
If the Federal Ministry for Economic Affairs and Climate Action does not open an in-depth review within two months from the receipt of the request the certificate is deemed as granted. During the review, MEC may ask to submit further documents. The acquisition may be restricted or prohibited within three months after the full set of documents has been submitted.
The German government has continuously amended domestic investment screening provisions in recent years to transpose the relevant EU framework and address evolving security risks. An amendment in June 2017 clarified the scope for review and gave the government more time to conduct reviews, in reaction to an increasing number of acquisitions of German companies by foreign investors with apparent ties to national governments. The amended provisions provide a clearer definition of sectors in which foreign investment can pose a threat to public order and security, including operators of critical infrastructure, developers of software to run critical infrastructure, telecommunications operators or companies involved in telecom surveillance, cloud computing network operators and service providers, and telematics companies, and which are subject to notification requirements. The new rules also extended the time to assess a cross-sector foreign investment from two to four months, and for investments in sensitive sectors, from one to three months, and introduced the possibility of retroactively initiating assessments for a period of five years after the conclusion of an acquisition. Indirect acquisitions such as those through a Germany- or EU-based affiliate company are now also explicitly subject to the new rules.
With further amendments in 2020, Germany implemented the 2019 EU Screening Regulation.
The amendments a) introduced a more pro-active screening based on “prospective impairment” of public order or security by an acquisition, rather than a de facto threat, b) consider the impact on other EU member states, and c) formally suspend transactions during the screening process.
Furthermore, acquisitions by foreign government-owned or -funded entities now trigger a review, and the healthcare industry is now considered a sensitive sector to which the stricter 10% threshold applies. In May 2021, a further amendment entered into force, which introduced a list of sensitive sectors and technologies (like the current list of critical infrastructures), including artificial intelligence, autonomous vehicles, specialized robots, semiconductors, additive manufacturing, and quantum technology. Foreign investors who seek to acquire at least 10% of ownership rights of a German company in one those fields must notify the government and potentially become subject to an investment review. The screening can now also consider “stockpiling acquisitions” by the same investor, “atypical control investments” where an investor seeks additional influence in company operations via side contractual agreements, or combined acquisitions by multiple investors, if all are controlled by one foreign government.
The Ministry for Economic Affairs and Climate Action provides comprehensive information on Germany’s investment screening regime on its website in English:
The German government ensures competition on a level playing field based on two main legal codes:
The Law against Limiting Competition (GesetzgegenWettbewerbsbeschränkungen– GWB) is the legal basis for limiting cartels, merger control, and monitoring abuse. State and Federal cartel authorities are in charge of enforcing anti-trust law. In exceptional cases, the Minister for Economic Affairs and Climate Action can provide a permit under specific conditions.
A June 2017 amendment to the GWB expanded the reach of the Federal Cartel Office (FCO) to include internet and data-based business models; the FCO has shown an interest in investigating large internet firms. A February 2019 FCO investigation found that Facebook had abused its dominant position in social media to harvest user data. Facebook challenged the FCO’s decision in court, but in June 2020, Germany’s highest court upheld the FCO’s action. In March 2021, the Higher Regional Court in Düsseldorf referred the case to the European Court of Justice for guidance. The FCO has continued to challenge the conduct of large tech platforms, particularly with regard to the use of user data. Another FCO case against Facebook, initiated in December 2020, regards the integration of the company’s Oculus virtual reality platform into its broader platform, creating mandatory registration of Facebook accounts for all Oculus users.
In 2021, a further amendment to the GWB, known as the Digitalization Act, entered into force codifying tools that allow greater scrutiny of digital platforms by the FCO, in order to “better counteract abusive behavior by companies with paramount cross-market significance for competition.” The law aims to prohibit large platforms from taking certain actions that put competitors at a disadvantage, including in markets for related services or up and down the supply chain – even before the large platform becomes dominant in those secondary markets. To achieve this goal, the amendments expand the powers of the FCO to act earlier and more broadly. Due to the relatively modest number of German platforms, the amendments will primarily affect U.S. companies. The Cartel Office commenced investigations against four U.S. platforms – Alphabet/Google, Amazon, Meta/Facebook and Apple – in 2021 to assess whether they fall under the scope of the new legislation. In January 2022, the competition authority determined Alphabet/Google will be subject to abuse control measures under the scope of the new law but has not yet announced remedies. The three other investigations are still ongoing.
While the focus of the GWB is to preserve market access, the Law against Unfair Competition seeks to protect competitors, consumers, and other market participants against unfair competitive behavior by companies. This law is primarily invoked in regional courts by private claimants rather than by the FCO.
German law provides that private property can be expropriated for public purposes only in a non-discriminatory manner and in accordance with established principles of constitutional and international law. There is due process and transparency of purpose, and investors in and lenders to expropriated entities are entitled to receive prompt, adequate, and effective compensation.
The Berlin state government is currently reviewing a petition for a referendum submitted by a citizens’ initiative calling for the expropriation of residential apartments owned by large corporations. At least one party in the governing coalition officially supports the proposal. Certain long-running expropriation cases date back to the Nazi and communist regimes.
German insolvency law, as enshrined in the Insolvency Code, supports and promotes restructuring. If a business or the owner of a business becomes insolvent, or a business is over-indebted, insolvency proceedings can be initiated by filing for insolvency; legal persons are obliged to do so. Insolvency itself is not a crime, but deliberately filing late for insolvency is.
Under a regular insolvency procedure, the insolvent business is generally broken up in order to recover assets through the sale of individual items or rights or parts of the company. Proceeds can then be paid out to creditors in the insolvency proceedings. The distribution of monies to creditors follows detailed instructions in the Insolvency Code.
Equal treatment of creditors is enshrined in the Insolvency Code. Some creditors have the right to claim property back. Post-adjudication preferred creditors are served out of insolvency assets during the insolvency procedure. Ordinary creditors are served on the basis of quotas from the remaining insolvency assets. Secondary creditors, including shareholder loans, are only served if insolvency assets remain after all others have been served. Germany ranks fourth in the global ranking of “Resolving Insolvency” in the World Bank’s Doing Business Index, with a recovery rate of 79.8 cents on the dollar.
In December 2020, the Bundestag passed legislation implementing the EU Restructuring Directive to modernize and make German restructuring and insolvency law more effective.
The Bundestag also passed legislation granting temporary relief to companies facing insolvency due to the COVID-19 pandemic, including temporary suspensions from the obligation to file for insolvency under strict requirements. This suspension expired in May 2021.
4. Industrial Policies
Federal and state investment incentives – including investment grants, labor-related and R&D incentives, public loans, and public guarantees – are available to domestic and foreign investors alike. Different incentives can be combined. In general, foreign and German investors must meet the same criteria for eligibility.
Germany’s Climate Action Program provides targeted support for research and development into climate-friendly technologies, through which it aims to build on Germany’s position as a leading provider and a lead market for such technology. The Energy and Climate Fund, which is scheduled to reach a volume of $220 billion (200 billion euros) by 2026, is the main instrument for financing Germany’s energy transition and climate action measures. It facilitates investments in climate protection and security of supply.
The federal government also funds a program offering subsidized loans or nonrepayable cash grants to support the purchase of equipment leading to energy savings. Up to 45 percent of energy efficiency expenditures by large enterprises and 55 percent of expenditures by SMEs are eligible for coverage under the program.
There are currently two free ports in Germany operating under EU law: Bremerhaven and Cuxhaven. The duty-free zones within the ports also permit value-added processing and manufacturing for EU-external markets, albeit with certain requirements. All are open to both domestic and foreign entities. In recent years, falling tariffs and the progressive enlargement of the EU have eroded much of the utility and attractiveness of duty-free zones.
In general, there are no discriminatory export policies or import policies affecting foreign investors: no requirements for local sourcing, export percentage, or local or national ownership. In some cases, however, there may be performance requirements tied to an incentive, such as creation of jobs or maintaining a certain level of employment for a prescribed length of time.
Visa, residence, and work permit procedures for foreign investors are non-discriminatory and, for U.S. citizens (as investors or employees), generally liberal. No restrictions exist on the numbers of foreign managers brought in to supervise foreign investment projects. Work permits for managers can be granted for a maximum of three years and permits can only be renewed after a six-month “cooling off period.”
There are no general localization requirements for data storage in Germany. However, the invalidation of the Privacy Shield by the European Court of Justice in July 2020 in the Schrems II case has led not only to increased calls for localized data storage in Germany but also to greater scrutiny by the German data protection commissioners of U.S. service providers handling German user data. In recent years, German and European cloud providers have also sought to market the domestic location of their servers as a competitive advantage.
5. Protection of Property Rights
The German Government adheres to a policy of national treatment, which considers property owned by foreigners as fully protected under German law. In Germany, mortgage approvals are based on recognized and reliable collateral. Secured interests in property, both chattel and real, are recognized and enforced. According to the World Bank’s Doing Business Report, it takes an average of 52 days to register property in Germany.
The German Land Register Act dates to 1897. The land register mirrors private real property rights and provides information on the legal relationship of the estate. It documents the owner, rights of third persons, as well as liabilities and restrictions. Any change in property of real estate must be registered in the land registry to make the contract effective. Land titles are now maintained in an electronic database and can be consulted by persons with a legitimate interest.
Germany has a robust regime to protect intellectual property rights (IPR). Legal structures are strong and enforcement is good. Nonetheless, internet piracy and counterfeit goods remain issues, and specific infringing websites are occasionally included in USTR’s Notorious Markets List. Germany has been a member of the World Intellectual Property Organization (WIPO) since 1970. The German Central Customs Authority annually publishes statistics on customs seizures of counterfeit and pirated goods. The statistics for 2020 are available at
Germany is party to the major international IPR agreements: the Berne Convention for the Protection of Literary and Artistic Works, the Paris Convention for the Protection of Industrial Property, the Universal Copyright Convention, the Geneva Phonograms Convention, the Patent Cooperation Treaty (PCT), the Brussels Satellite Convention, the Rome Convention for the Protection of Performers, Producers of Phonograms and Broadcasting Organizations, and the World Trade Organization (WTO) Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). Many of the latest developments in German IPR law are derived from European legislation with the objective to make applications less burdensome and allow for European IPR protection.
The following types of protection are available:
Copyrights: National treatment is granted to foreign copyright holders, including remuneration for private recordings. Under the TRIPS Agreement, Germany grants legal protection for U.S. performing artists against the commercial distribution of unauthorized live recordings in Germany. Germany is party to the World Intellectual Property Organization (WIPO) Copyright Treaty and WIPO Performances and Phonograms Treaty, which came into force in 2010. Most rights holder organizations regard German authorities’ enforcement of IP rights as effective. In 2008, Germany implemented the EU Directive (2004/48/EC) on IPR enforcement with a national bill, thereby strengthening the privileges of rights holders and allowing for improved enforcement action. Germany implemented the Digital Single Market Directive with the “Act to Adapt Copyright Law to the Requirements of the Digital Single Market,” which entered into force on June 7, 2021. This new law implemented necessary changes to the German Copyright Act. As part of the implementing legislation parliament passed the new Copyright Service Provider Act, which entered into force on August 1, 2021.
Trademarks: National treatment is granted to foreigners seeking to register trademarks at the German Patent and Trade Mark Office. Protection is valid for a period of ten years and can be extended in ten-year periods. It is possible to register for trademark and design protection nationally in Germany or for an EU Trade Mark and/or Registered Community Design at the EU Intellectual Property Office (EUIPO). These provide protection for industrial design or trademarks in the entire EU market. Both national trademarks and European Union Trade Marks (EUTMs) can be applied for from the U.S. Patent and Trademark Office (USPTO) as part of an international trademark registration system, or the applicant may apply directly for those trademarks from EUIPO at https://euipo.europa.eu/ohimportal/en/home.
Patents: National treatment is granted to foreigners seeking to register patents at the German Patent and Trade Mark Office. Patents are granted for technical inventions that are new, involve an inventive step, and are industrially applicable. However, applicants having neither a domicile nor an establishment in Germany must appoint a patent attorney in Germany as a representative filing the patent application. The documents must be submitted in German or with a translation into German. The duration of a patent is 20 years from the patent application filing date. Patent applicants can request accelerated examination under the Global Patent Prosecution Highway (GPPH) when filing the application, provided that the patent application was previously filed at the USPTO and that at least one claim had been determined to be patentable. There are a number of differences between U.S. and German patent law, including the filing systems (“first-inventor-to-file” versus “first-to-file”, respectively), which a qualified patent attorney can explain to U.S. patent applicants. German law also offers the possibility to register designs and utility models.
A U.S. applicant may file a patent in multiple European countries through the European Patent Office (EPO), which grants European patents for the contracting states to the European Patent Convention (EPC). The 38 contracting states include the entire EU membership and several additional European countries; Germany joined the EPC in 1977. It should be noted that some EPC members require a translation of the granted European patent in their language for validation purposes. The EPO provides a convenient single point to file a patent in as many of these countries as an applicant would like: https://www.epo.org/applying/basics.html. U.S. applicants seeking patent rights in multiple countries can alternatively file an international Patent Coordination Treaty (PCT) application with the USPTO.
Trade Secrets: Trade secrets are protected in Germany by the Law for the Protection of Trade Secrets, which has been in force since April 2019 and implements the 2016 EU Directive (2016/943). According to the law, the illegal accessing, appropriation, and copying of trade secrets, including through social engineering, is prohibited. Explicitly exempt from the law is “reverse engineering” of a publicly available item, and appropriation, usage, or publication of a trade secret to protect a “legitimate interest,”, including journalistic research and whistleblowing. The law requires companies implement “adequate confidentiality measures” for information to be protected as a trade secret under the law. Owners of trade secrets are entitled to omission, compensation, and information about the culprit, as well as the destruction, return, recall, and ultimately the removal of the infringing products from the market.
As an EU member state with a well-developed financial sector, Germany welcomes foreign portfolio investment and has an effective regulatory system. Capital markets and portfolio investments operate freely with no discrimination between German and foreign firms. Germany has a very open economy, routinely ranking among the top countries in the world for exports and inward and outward foreign direct investment. As a member of the Eurozone, Germany does not have sole national authority over international payments, which are a shared task of the European Central Bank and the national central banks of the 19 member states, including the German Central Bank (Bundesbank). A European framework for national security screening of foreign investments, which entered into force in April 2019, provides a basis under European law to restrict capital movements into Germany because of threats to national security. Global investors see Germany as a safe place to invest. German sovereign bonds continue to retain their “safe haven” status.
Listed companies and market participants in Germany must comply with the Securities Trading Act, which bans insider trading and market manipulation. Compliance is monitored by the Federal Financial Supervisory Authority (BaFin) while oversight of stock exchanges is the responsibility of the state governments in Germany (with BaFin taking on any international responsibility). Investment fund management in Germany is regulated by the Capital Investment Code (KAGB), which entered into force on July 22, 2013. The KAGB represents the implementation of additional financial market regulatory reforms, committed to in the aftermath of the global financial crisis. The law went beyond the minimum requirements of the relevant EU directives and represents a comprehensive overhaul of all existing investment-related regulations in Germany with the aim of creating a system of rules to protect investors while also maintaining systemic financial stability.
Although corporate financing via capital markets is on the rise, Germany’s financial system remains mostly bank-based. Bank loans are still the predominant form of funding for firms, particularly the small- and medium-sized enterprises that comprise Germany’s “Mittelstand,” or mid-sized industrial market leaders. Credit is available at market-determined rates to both domestic and foreign investors, and a variety of credit instruments are available. Legal, regulatory, and accounting systems are generally transparent and consistent with international banking norms. Germany has a universal banking system regulated by federal authorities; there have been no reports of a shortage of credit in the German economy. After 2010, Germany banned some forms of speculative trading, most importantly “naked short selling.” In 2013, Germany passed a law requiring banks to separate riskier activities such as proprietary trading into a legally separate, fully- capitalized unit that has no guarantee or access to financing from the deposit-taking part of the bank. Since the creation of the European single supervisory mechanism (SSM) in November 2014, the European Central Bank directly supervises 21 banks located in Germany (as of January 2022), among them four subsidiaries of foreign banks.
Germany has a modern and open banking sector characterized by a highly diversified and decentralized, small-scale structure. As a result, it is extremely competitive, profit margins notably in the retail sector are low, and the banking sector is considered “over-banked” and in need of consolidation. The country’s “three-pillar” banking system consists of private commercial banks, cooperative banks, and public banks (savings banks/Sparkassen and the regional state-owned banks/Landesbanken). This structure has remained unchanged despite marked consolidation within each “pillar” since the financial crisis in 2009. By the end of 2020 the number of state banks (Landesbanken) had dropped from 12 to 6, savings banks from 446 in 2007 to 377, and cooperative banks from 1,234 to 818. Two of the five large private-sector banks have exited the market (Dresdner, Postbank). The balance sheet total of German banks dropped from 304 percent of GDP in 2007 to 192 percent of year-end 2020 GDP with banking sector assets worth €9.1 trillion. Market shares in corporate finance of the banking groups remained largely unchanged (all figures for end of 2021): commercial banks 25.5 percent (domestic 16.2 percent, foreign banks 9.3 percent), savings banks 31.2 percent, credit cooperative banks 22 percent, regional Landesbanken 9.3 percent, and development banks/building and loan associations/mortgage banks 12 percent.
Germany’s retail banking sector is healthy and well capitalized in line with ECB rules on bank capitalizations. The sector is dominated by globally active banks, Deutsche Bank (Germany’s largest bank by balance sheet total) and Commerzbank (fourth largest bank), with balance sheets of €1.32 trillion and €507 billion respectively (2020 figures). Commerzbank received €18 billion in financial assistance from the federal government in 2009, for which the government took a 25 percent stake in the bank (now reduced to 15.6 percent). Merger talks between Deutsche Bank and Commerzbank failed in 2019. The second largest of the top ten German banks with €595 billion of assets per year-end 2020 is DZ Bank, the central institution of the Cooperative Finance Group (after its merger with WGZ Bank in July 2016), followed by German branches of large international banks (UniCredit Bank, ING-Diba), development banks (KfW Group, NRW Bank), and state banks (LBBW, Bayern LB, Helaba, NordLB).
EUR bn (December 31, 2020)
Deutsche Bank AG
DZ Bank AG
Unicredit Bank AG
J.P. Morgan AG
ING Holding Deutschland GmbH
DKB Deutsche Kreditbank AG
German credit institutions’ operating business proved robust in 2020 despite the prolonged low interest rate environment and the coronavirus pandemic. Operating income rose by €1.8 billion (+1.5 percent) on the year to €120.5 billion. In 2020 German credit institutions reported however a pre-tax profit of only €14.3 billion, coming in below the long-term average of €17.6 billion and significantly lower than the average of the post-financial crisis years (2010 to 2018) of €25.4 billion. Their 2020 net interest income of €81.1 billion remained below the long-term average of €87.2 billion. Credit risk provisioning rose significantly due to the impact of the coronavirus pandemic on economic activity, reaching €5.3 billion or 0.8 percent of big banks’ annual average lending portfolio. The banking sector’s average return on equity before tax in 2020 slipped to 2.71 percent (after tax: 1.12 percent) (with savings banks and credit cooperatives generating a higher return, and big banks a negative return).
The German government does not currently have a sovereign wealth fund or an asset management bureau.
7. State-Owned Enterprises
The formal term for state-owned enterprises (SOEs) in Germany translates as “public funds, institutions, or companies,” and refers to entities whose budget and administration are separate from those of the government, but in which the government has more than 50 percent of the capital shares or voting rights. Appropriations for SOEs are included in public budgets, and SOEs can take two forms, either public or private law entities. Public law entities are recognized as legal personalities whose goal, tasks, and organization are established and defined via specific acts of legislation, with the best-known example being the publicly-owned promotional bank KfW (Kreditanstalt für Wiederaufbau). KfW’s mandate is to promote global development. The government can also resort to ownership or participation in an entity governed by private law if the following conditions are met: doing so fulfills an important state interest, there is no better or more economical alternative, the financial responsibility of the federal government is limited, the government has appropriate supervisory influence, and yearly reports are published.
Government oversight of SOEs is decentralized and handled by the ministry with the appropriate technical area of expertise. The primary goal of such involvement is promoting public interests rather than generating profits. The government is required to close its ownership stake in a private entity if tasks change or technological progress provides more effective alternatives, though certain areas, particularly science and culture, remain permanent core government obligations. German SOEs are subject to the same taxes and the same value added tax rebate policies as their private- sector competitors. There are no laws or rules that seek to ensure a primary or leading role for SOEs in certain sectors or industries. Private enterprises have the same access to financing as SOEs, including access to state-owned banks such as KfW.
The Federal Statistics Office maintains a database of SOEs from all three levels of government (federal, state, and municipal) listing a total of 19,009 entities for 2019, or 0.58 percent of the total 3.35 million companies in Germany. SOEs in 2019 had €646 billion in revenue and €632 billion in expenditures. Forty-one percent of SOEs’ revenue was generated by water and energy suppliers, 12 percent by health and social services, and 11 percent by transportation-related entities. Measured by number of companies rather than size, 88 percent of SOEs are owned by municipalities, 10 percent are owned by Germany’s 16 states, and two percent are owned by the federal government.
The Federal Ministry of Finance is required to publish a detailed annual report on public funds, institutions, and companies in which the federal government has direct participation (including a minority share) or an indirect participation greater than 25 percent and with a nominal capital share worth more than €50,000. The federal government held a direct participation in 106 companies and an indirect participation in 401 companies at the end of 2019 (per the Ministry’s April 2021 publication of full-year 2019 figures), most prominently Deutsche Bahn (100 percent share), Deutsche Telekom (32 percent share), and Deutsche Post (21 percent share). Federal government ownership is concentrated in the areas of infrastructure, economic development, science, administration/increasing efficiency, defense, development policy, and culture. As the result of federal financial assistance packages from the federally-controlled Financial Market Stability Fund during the global financial crisis of 2008/9, the federal government still has a partial stake in several commercial banks, including a 15.6 percent share in Commerzbank, Germany’s second largest commercial bank. In 2020, in the wake of the COVID-19 pandemic, the German government acquired shares of several large German companies, including CureVac, TUI, and Lufthansa in an attempt to prevent companies from filing for insolvency or, in the case of CureVac, to support vaccine research in Germany.
The 2021 annual report (with 2019 data) can be found here:
Publicly-owned banks constitute one of the three pillars of Germany’s banking system (cooperative and commercial banks are the other two). Germany’s savings banks are mainly owned by the municipalities, while the so-called Landesbanken are typically owned by regional savings bank associations and the state governments. Given their joint market share, about 40 percent of the German banking sector is thus publicly owned. There are also many state-owned promotional/development banks which have taken on larger governmental roles in financing infrastructure. This increased role removes expenditures from public budgets, particularly helpful considering Germany’s balanced budget rules, which took effect for the states in 2020.
Germany does not have any privatization programs currently. German authorities treat foreigners equally in privatizations of state-owned enterprises.
8. Responsible Business Conduct
In December 2016, the Federal Government passed the National Action Plan for Business and Human Rights (NAP), applying the UN Guiding Principles for Business and Human Rights to the activities of German companies though largely voluntary measures. A 2020 review found most companies did not sufficiently fulfill due diligence measures and in 2021 Germany passed the legally binding Human Rights Due Diligence in Supply Chains Act. From 2023, the act will apply to companies with at least 3,000 employees with their central administration, principal place of business, administrative headquarters, a statutory seat, or a branch office in Germany. From 2024 it will apply to companies with at least 1000 employees. The 2021 coalition agreement between the SPD, the Greens party, and the Free Democrats Party (FDP) committed to revising the NAP in line with the Supply Chains Act. Germany promoted EU-level legislation during its 2020 Council of the European Union presidency and the EU Commission published a legislative proposal in 2022.
Germany adheres to the OECD Guidelines for Multinational Enterprises; the National Contact Point (NCP) is housed in the Federal Ministry of Economic Affairs and Climate Action. The NCP is supported by an advisory board composed of several ministries, business organizations, trade unions, and NGOs. This working group usually meets once a year to discuss all Guidelines-related issues. The German NCP can be contacted through the Ministry’s website: https://www.bmwi.de/Redaktion/EN/Textsammlungen/Foreign-Trade/national-contact-point-ncp.html.
There is general awareness of environmental, social, and governance issues among both producers and consumers in Germany, and surveys suggest that consumers increasingly care about the ecological and social impacts of the products they purchase. In order to encourage businesses to factor environmental, social, and governance impacts into their decision-making, the government provides information online and in hard copy. The federal government encourages corporate social responsibility (CSR) through awards and prizes, business fairs, and reports and newsletters. The government also organizes so-called “sector dialogues” to connect companies and facilitate the exchange of best practices and offers practice days to help nationally as well as internationally operating small- and medium-sized companies discern and implement their entrepreneurial due diligence under the NAP. To this end it has created a website on CSR in Germany (http://www.csr-in-deutschland.de/EN/Home/home.html in English). The German government maintains and enforces domestic laws with respect to labor and employment rights, consumer protections, and environmental protections. The German government does not waive labor and environmental laws to attract investment.
Social reporting is currently voluntary, but publicly listed companies frequently include information on their CSR policies in annual shareholder reports and on their websites.
Civil society groups that work on CSR include Amnesty International Germany, Bund für Umwelt und Naturschutz Deutschland e. V. (BUND), CorA Corporate Accountability – Netzwerk Unternehmensverantwortung, Forest Stewardship Council (FSC), Germanwatch, Greenpeace Germany, Naturschutzbund Deutschland (NABU), Sneep (Studentisches Netzwerk zu Wirtschafts- und Unternehmensethik), Stiftung Warentest, Südwind – Institut für Ökonomie und Ökumene, TransFair – Verein zur Förderung des Fairen Handels mit der „Dritten Welt“ e. V., Transparency International, Verbraucherzentrale Bundesverband e.V., Bundesverband Die Verbraucher Initiative e.V., and the World Wide Fund for Nature (WWF, known as the “World Wildlife Fund” in the United States).
The government has an ambitious national climate strategy which, by law, requires the reduction of greenhouse gas emissions 65 percent by 2030, 88 percent by 2040, and the achievement of complete carbon neutrality by 2045. It also aims to source 100 percent of its electricity from renewables by 2035. To achieve this objective it is investing heavily in renewables and implementing a combination of carrots and sticks for private companies to spur investment and deter continued use of climate-polluting energy sources. The country earmarked $220 billion (€200 billion) to fund industrial transformation through 2026, including climate protection, hydrogen technology, and expansion of its electric vehicle charging network. It is also removing bureaucratic hurdles for renewable projects. States must designate two percent of their land for onshore wind energy, and solar energy panels will be mandatory on new commercial buildings. Germany also intends to phase out coal “ideally” by 2030, although Russia’s February 2022 further invasion of Ukraine could lead to a delay as the government seeks alternatives to Russian oil and gas. The government aims to increase domestic rail freight transport by 25 percent, as moving freight by rail instead of trucks emits far fewer greenhouse gases, and it will advocate for EU legislation to encourage rail travel and greener forms of transport throughout the bloc. Germany is part of the EU’s greenhouse gas Emissions Trading System, which sets a price on carbon emissions from power stations, energy-intensive industries (e.g., oil refineries, steelworks, and producers of iron, aluminum, cement, paper and glass), and intra-European commercial aviation. It also instituted a national emissions trading system to cover the transport and building heating sectors in 2021.
The Global Green Growth Institute ranked Germany fourth globally in its 2020 Green Growth Index. Germany ranked fifth in the category “Natural capital protection,” which takes factors such as environmental quality and biodiversity protection into consideration, and second in “Green economic opportunities,” which measures green investment, green trade, green employment, and green innovation. In 2021, Germany launched a $1 billion fund aimed at halting global biodiversity loss and providing long-term financial support for protected areas across Africa, Asia, and South America. The new government plans to significantly increase Germany’s financial commitment to global biodiversity and promote “an ambitious new global framework” at the April 2022 UN Biodiversity Conference.
Public procurement policies include environmental and green growth considerations such as resource efficiency, pollution abatement, and climate resilience. The German Environment Agency has formulated clear requirements and recommendations for climate change mitigation at public agencies, including their procurement policies, and it has an environmental management system in place certified according to the EU Eco-Management and Audit System. The federal government and 11 of Germany’s federal states have committed to achieving greenhouse gas-neutral administration.
Among industrialized countries, Germany ranks 10th out of 180, according to Transparency International’s 2021 Corruption Perceptions Index. Some sectors including the automotive industry, construction sector, and public contracting, exert political influence and political party finance remains only partially transparent. Nevertheless, U.S. firms have not identified corruption as an impediment to investment in Germany. Germany is a signatory of the OECD Anti-Bribery Convention and a participating member of the OECD Working Group on Bribery.
Over the last two decades, Germany has increased penalties for the bribery of German officials, corrupt practices between companies, and price-fixing by companies competing for public contracts. It has also strengthened anti-corruption provisions on financial support extended by the official export credit agency and has tightened the rules for public tenders. Government officials are forbidden from accepting gifts linked to their jobs. Most state governments and local authorities have contact points for whistleblowing and provisions for rotating personnel in areas prone to corruption. There are serious penalties for bribing officials and price fixing by companies competing for public contracts.
To prevent corruption, Germany relies on the existing legal and regulatory framework consisting of various provisions under criminal law, public service law, and other rules for the administration at both federal and state levels. The framework covers internal corruption prevention, accounting standards, capital market disclosure requirements, and transparency rules, among other measures.
According to the Federal Criminal Office, in 2020, 50.6 percent of all corruption cases were directed towards the public administration (down from 73 percent in 2018), 33.2 percent towards the business sector (down from 39 percent in 2019), 13.4 percent towards law enforcement and judicial authorities (up from 9 percent in 2019), and 2 percent to political officials (unchanged compared to 2018).
Parliamentarians are subject to financial disclosure laws that require them to publish earnings from outside employment. Disclosures are available to the public via the Bundestag website (next to the parliamentarians’ biographies) and in the Official Handbook of the Bundestag. Penalties for noncompliance can range from an administrative fine to as much as half of a parliamentarian’s annual salary. In early 2021, several parliamentarians stepped down due to inappropriate financial gains made through personal relationships to businesses involved in the procurement of face masks during the initial stages of the pandemic.
Donations by private persons or entities to political parties are legally permitted. However, if they exceed €50,000, they must be reported to the President of the Bundestag, who is required to immediately publish the name of the party, the amount of the donation, the name of the donor, the date of the donation, and the date the recipient reported the donation. Donations of €10,000 or more must be included in the party’s annual accountability report to the President of the Bundestag.
State prosecutors are generally responsible for investigating corruption cases, but not all state governments have prosecutors specializing in corruption. Germany has successfully prosecuted hundreds of domestic corruption cases over the years, including large– scale cases against major companies.
Media reports in past years about bribery investigations against Siemens, Daimler, Deutsche Telekom, Deutsche Bank, and Ferrostaal have increased awareness of the problem of corruption. As a result, listed companies and multinationals have expanded compliance departments, tightened internal codes of conduct, and offered more training to employees.
Germany was a signatory to the UN Anti-Corruption Convention in 2003. The Bundestag ratified the Convention in November 2014.
Germany adheres to and actively enforces the OECD Anti-Bribery Convention which criminalizes bribery of foreign public officials by German citizens and firms. The necessary tax reform legislation ending the tax write-off for bribes in Germany and abroad became law in 1999.
Germany participates in the relevant EU anti-corruption measures and signed two EU conventions against corruption. However, while Germany ratified the Council of Europe Criminal Law Convention on Corruption in 2017, it has not yet ratified the Civil Law Convention on Corruption.
There is no central government anti-corruption agency in Germany. Federal states are responsible for fighting corruption.
Due to Germany’s federal state structure, original responsibility in the area of anti-corruption lies with the individual federal states. Further information, in particular contact persons for corruption prevention, can be found on the websites of state level law enforcement (police) or the ombudsmen of the cities, districts and municipalities.
These offices, special telephone numbers or web-based contact options also offer whistleblowers or interested citizens the opportunity to contact them anonymously in individual federal states.
(The Federal Ministry of the Interior’s website provides further information on corruption prevention regulations and integrity regulations at the federal level.)
Claimants can contact “watchdog” organizations such as Transparency International for more information:
Hartmut Bäumer, Chair
Transparency International Germany
Alte Schönhauser Str. 44, 10119 Berlin
+49 30 549 898 0
The Federal Criminal Office publishes an annual report on corruption: “Bundeslagebild Korruption” – the latest one covers 2020.
Overall, political acts of violence against either foreign or domestic business enterprises are extremely rare. Most protests and demonstrations, whether political acts of violence against either foreign or domestic business enterprises or any other cause or focus, remain peaceful. However, minor attacks by left-wing extremists on commercial enterprises occur. These extremists justify their attacks as a means to combat the “capitalist system” as the “source of all evil.” In the foreground, however, concrete connections such as “anti-militarism” (in the case of armament companies), “anti-repression” (in the case of companies for prison logistics or surveillance technology), or the supposed commitment to climate protection (companies from the raw materials and energy sector) are usually cited. In several key instances in larger cities with a strained housing market (low availability of affordable housing options), left-wing extremists target real estate companies in connection with the defense of autonomous “free spaces” and the fight against “anti-social urban structures.” Isolated cases of violence directed at certain minorities and asylum seekers have not targeted U.S. investments or investors.
11. Labor Policies and Practices
The German labor force is generally highly skilled, well-educated, and productive. Before the economic downturn caused by COVID-19, employment in Germany had risen for 13 consecutive years and reached an all-time high of 45.3 million workers in 2019. As a result of the COVID-19 pandemic, employment fell to 44.8 million in 2020 and remained stagnant in 2021 at 44.79 million workers. The pandemic had a disproportionate impact on female workers, who comprise most employees in the tourism, restaurant, retail, and beauty industries.
Unemployment has fallen by more than half since 2005, and, in 2019, reached the lowest average annual value since German reunification. In 2019, around 2.34 million people were registered as unemployed, corresponding to an unemployment rate of 5.2 percent, according to German Federal Employment Agency calculations. Using internationally comparable data from the European Union’s statistical office Eurostat, Germany had an average annual unemployment rate of 3.2 percent in 2019, the second lowest rate in the European Union. For the pandemic year 2020, the Federal Employment Agency reported an average unemployment rate of 5.9 percent and an average 2.7 million unemployed. In 2021, employment recovered despite the persistent pandemic, with the unemployment rate falling to 5.7 percent and the total number of unemployed dropping by 82,000. However, long-term effects on the labor market and the overall economy due to COVID-19 are not yet fully observable. All employees are by law covered by federal unemployment insurance that compensates for lack of income for up to 24 months. A government-funded temporary furlough program (“Kurzarbeit”) allows companies to decrease their workforce and labor costs with layoffs and has helped mitigate a negative labor market impact in the short term. At its peak in April 2020, the program covered more than six million employees. By December 2021 the number had decreased considerably to 790,000 but remained a key government tool to cope with the impact of COVID-19 on the labor market. The government, through the national employment agency, has spent more than €22 billion on this program, which it considers the main tool to keep unemployment low during the COVID-19 economic crisis. The government extended the program for all companies already meeting its conditions in March 2022 until the end of June 2022.
Germany’s average national youth unemployment rate was 6.9 percent in 2020, the lowest in the EU. The German vocational training system has garnered international interest as a key contributor to Germany’s highly skilled workforce and its sustainably low youth unemployment rate. Germany’s so-called “dual vocational training,” a combination of theoretical courses taught at schools and practical application in the workplace, teaches and develops many of the skills employers need. Each year there are more than 500,000 apprenticeship positions available in more than 340 recognized training professions, in all sectors of the economy and public administration. Approximately 50 percent of students choose to start an apprenticeship. The government promotes apprenticeship opportunities, in partnership with industry, through the “National Pact to Promote Training and Young Skilled Workers.”
An element of growing concern for German business is the country’s decreasing population, which (absent large-scale immigration) will likely shrink considerably over the next few decades. Official forecasts at the behest of the Federal Ministry of Labor and Social Affairs predict the current working-age population will shrink by almost three million between 2010 and 2030, resulting in an overall shortage of workforce and skilled labor. Labor bottlenecks already constrain activity in many industries, occupations, and regions. The government has begun to enhance its efforts to ensure an adequate labor supply by improving programs to integrate women, elderly, young people, and foreign nationals into the labor market. The government has also facilitated the immigration of qualified workers.
Germans consider the cooperation between labor unions and employer associations to be a fundamental principle of their social market economy and believe this collaboration has contributed to the country’s resilience during economic and financial crises. Insofar as job security for members is a core objective for German labor unions, unions often show restraint in collective bargaining in weak economic times and often can negotiate higher wages in strong economic conditions. In an international comparison, Germany is in the lower midrange with regards to strike numbers and intensity. All workers have the right to strike, except for civil servants (including teachers and police) and staff in sensitive or essential positions, such as members of the armed forces.
Germany’s constitution, federal legislation, and government regulations contain provisions designed to protect the right of employees to form and join independent unions of their choice. The overwhelming majority of unionized workers are members of one of the eight largest unions — largely grouped by industry or service sector — which are affiliates of the German Trade Union Confederation (Deutscher Gewerkschaftsbund, DGB). Several smaller unions exist outside the DGB. Overall trade union membership has, however, been in decline over the last several years. In 2021, total DGB union membership amounted to 5.9 million. IG Metall is the largest German labor union with 2.2 million members, followed by the influential service sector union Ver.di (1.9 million members).
The constitution and enabling legislation protect the right to collective bargaining, and agreements are legally binding to the parties. In 2020, 52 percent of non-self-employed workers were covered by a collective wage agreement.
By law, workers can elect a works council in any private company employing at least five people. The rights of the works council include the right to be informed, to be consulted, and to participate in company decisions. Works councils often help labor and management settle problems before they become disputes and disrupt work. In addition, “co-determination” laws give the workforce in medium-sized or large companies (corporations, limited liability companies, partnerships limited by shares, co-operatives, and mutual insurance companies) significant voting representation on the firms’ supervisory boards. This co-determination in the supervisory board extends to all company activities.
From 2010 to 2020, real wages grew yearly by 1.4 percent on average. As a result of the COVID-19 pandemic, real wages fell in 2020 by 1.1 percent over the previous year, ending a six-year period of real wage increases. Job losses and enrollment in the government’s temporary furlough program (at 70 percent of previous wage levels) were the drivers of this reduction. In 2021 employment picked up again and nominal wages increased by 3.1 percent. Inflation in 2021 of 3.1 percent resulted in another year of real wage reduction of 0.1 percent.
13. Foreign Direct Investment and Foreign Portfolio Investment Statistics
Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source*
USG or international statistical source
USG or International Source of Data: BEA; IMF; Eurostat; UNCTAD, Other
Host Country Gross Domestic Product (GDP) ($M USD)
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment
Outward Direct Investment
“0” reflects amounts rounded to +/- USD 500,000.
Hungary continues to recover from the COVID-19 pandemic and now faces rising inflation and economic uncertainty due to Russia’s war in Ukraine. Despite a growing deficit and energy prices, as well as a continued skilled labor shortage and corruption concerns, ratings agencies in 2021 maintained Hungary’s sovereign debt at BBB, two notches above investment grade, with a stable outlook. In December 2021, the Finance Ministry forecasted 5.9 percent economic growth and a 4.9 percent budget deficit for 2022. Analysts since then have revised their forecasts and project 2 percentage points lower economic growth for this year.
Hungary, an EU member since 2004, currently has a population of 9.7 million and a GDP of $155 billion. Fellow EU member states and the United States are Hungary’s most important trade and investment partners, although Asian influence is growing; foreign direct investment (FDI) from Asian sources was five percent of total FDI in 2019 and now accounts for over 30 percent of new foreign direct investment in 2020.
Macroeconomic indicators were generally strong before the COVID-19 pandemic, with GDP growing by 4.9 percent in 2019. Following a 5.1 percent pandemic-induced contraction in 2020, Hungary’s GDP increased by 6.4 percent in 2021. As the Government of Hungary (GOH) increased spending to support the economy and other priorities, the 2021 budget deficit reached approximately 7.5 percent of GDP, which pushed up public debt close to 80 percent of GDP.
Hungary’s central location in Europe and high-quality infrastructure have traditionally made it an attractive destination for Foreign Direct Investment (FDI). Between 1989 and 2019, Hungary received approximately $97.8 billion in FDI, mainly in the banking, automotive, software development, and life sciences sectors. The EU accounts for 89 percent of all in-bound FDI. The United States is the largest non-EU investor, whereas in terms of annual investment, South Korea was the largest investor overall in 2021. The GOH actively encourages investments in manufacturing and other sectors promising high added value and/or employment, such as research and development, defense, and service centers.
Despite these advantages, Hungary’s regional economic competitiveness has declined in recent years. Since early 2016, multinationals have identified shortages of qualified labor, specifically technicians and engineers, as the largest obstacle to investment in Hungary. In certain industries, such as finance, energy, telecommunication, pharmaceuticals, and retail, unpredictable sector-specific tax and regulatory policies have favored national and government-linked companies. Additionally, persistent corruption and cronyism continue to plague the public procurement sector. According to Transparency International’s (TI) 2021 Corruption Perceptions Index, Hungary placed 73rd worldwide and ranked 26th out of the 27 EU member states, outperforming only Bulgaria.
Analysts remain concerned that the GOH may intervene in certain priority sectors to unfairly promote domestic ownership at the expense of foreign investors. In September 2016, Prime Minister (PM) Viktor Orban announced that at least half of the banking, media, energy, and retail sectors should be in Hungarian hands. Since then, observers note that through various tax changes the GOH has pushed several foreign-owned banks out of Hungary. GOH efforts have helped increase Hungarian ownership in the banking sector to close to 60 percent, up from 40 percent in 2010. In the energy sector, foreign-owned companies’ share of total revenue fell from 70 percent in 2010 to below 50 percent by 2022. Foreign media ownership has decreased drastically as GOH-aligned businesses have consolidated control of Hungary’s media landscape: the number of media outlets owned by GOH allies increased from around 30 in 2015 to nearly 500 in 2018. In November 2018, the owners of 476 pro-GOH media outlets, constituting between 80 and 90 percent of all media, donated those outlets to the Central European Press and Media Foundation (KESMA) run by individuals with ties to the ruling Fidesz party.
Ostensibly in response to the COVID crisis, the Hungarian government has had uninterrupted state-of-emergency (SOE) powers since November 2020 with authority to bypass Parliament and govern by decree. Parliament passed the first SOE legislation in March 2020 as part of its COVID-19 pandemic response; this legislation did not have a sunset clause, and the government repealed it in June 2020. The GOH passed a second SOE law in November 2020, this time for a 90-day period. Following the expiration of the first 90-day term, the Parliament extended the SOE in February, May, September and most recently in December 2021 – until June 2022 – without any support from opposition parties. As part of the emergency measures, the GOH extended measures for national security screening of foreign investments from December 31, 2020, until December 31, 2022, and may extend this deadline further.
1. Openness To, and Restrictions Upon, Foreign Investment
Hungary’s government actively courts FDI; net annual FDI in 2020 amounted to $3.2 billion, and gross FDI totaled $98.1 billion. EU countries account for approximately 89 percent of all FDI in Hungary in terms of direct investors and 62 percent in terms of ultimate controlling parent investor. In terms of ultimate investor – i.e., country of origin – the United States was the second largest investor after Germany in 2019. In terms of direct investor location, Germany was the largest investor, followed by the Netherlands, Austria, Luxembourg, and then the United States; approximately 450 U.S. companies maintain a presence in Hungary. Most U.S. investment falls within the automotive, software development, and life sciences sectors. According to Hungarian Investment Promotion Agency (HIPA) data, U.S. foreign direct investment produced more jobs in Hungary in 2020 than investment from any other country.
Total cumulative FDI from Asian sources has doubled since 2010, accounting for over five percent of total FDI stock in 2019. According to HIPA, South Korea, Japan, China, India, and other Asian countries accounted for about 40 percent of the value of new foreign investment projects in Hungary in 2020 and in 2021, with $3.1 billion in investments creating 3,500 jobs.
The GOH has implemented tax changes to increase Hungary’s regional competitiveness and attract investment; the government reduced the personal income tax rate to 15 percent in 2016, the corporate income tax rate to 9 percent in 2017, the employer-paid welfare contribution to 13 percent in 2021, and employers’ payroll tax to 13 percent. Hungary’s Value-Added Tax (VAT), however, is the highest in Europe at 27 percent. As of 2016, the GOH streamlined the National Tax and Customs authority (NAV) procedure to offer fast-track VAT refunds to customers categorized as “low-risk.” In 2020 Hungary committed to join the OECD Global Minimum Tax Agreement with a 10-year transitionary period.
Government policies have resulted in some foreign investors selling their stakes to the government or state-owned enterprises in other sectors, including banking and energy. Many foreign companies have expressed displeasure with the unpredictability of Hungary’s tax regime, its retroactive nature, slow response times, and the volume of legal and tax changes. According to the European Commission (EC), a series of progressively tiered taxes implemented in 2014 disproportionately penalized foreign businesses in the telecommunications, tobacco, retail, media, and advertisement industries, while simultaneously favoring Hungarian companies. Following EC infringement procedures, the GOH phased out most discriminatory tax rates by 2015 and replaced them with flat taxes. Another 2014 law required retail companies with over $53 million in annual sales to close if they report two consecutive years of losses. Retail businesses claimed the GOH specifically set the threshold to target large foreign retail chains. The EC likewise determined that the law was discriminatory and launched an infringement procedure in 2016, leading the GOH to repeal the law in November 2018.
In 2017, the GOH passed a regulation that gives the government preemptive rights to purchase real estate in World Heritage areas. The rule has been used to block the purchase of real estate by foreign investors in the most desirable areas of Budapest. In April 2020 the GOH issued a decree that levied sector-specific taxes on the banking and retail sectors to fund COVID-19 pandemic economic support. This progressive tax on retail grocery outlets is structured such that it applies mainly to large foreign retail firms. In December 2021, the Parliament fast-tracked a legislation to increase the retail tax and compelled retail chains with an annual revenue over $310 million to offer their food items nearing expiry date to a state-owned nonprofit company, introducing another measure which hits only foreign-owned retailers.
The GOH publicly declared its intention to reduce foreign ownership in the banking sector in 2012. Accordingly, various GOH initiatives have reduced foreign ownership from about 70 percent in 2008 to 40.5 percent by the end of 2020. These initiatives included a 2010 bank tax; a 2012 financial transaction tax levied on all cash withdrawals; and regulations enacted between 2012-2015 that obligated banks to retroactively compensate borrowers for interest rate increases on foreign currency-denominated mortgage loans, even though these increases were spelled out in the original contracts with customers and had been permitted by Hungarian law.
While the pharmaceutical industry is competitive and profitable in Hungary, multinational enterprises complain of numerous financial and procedural obstacles, including high taxes on pharmaceutical products and operations, prescription directives that limit a doctor’s choice of drugs, and obscure tender procedures that negatively affect the competitiveness of certain drugs. Pharmaceutical companies also complain about the lengthy procedure to accept innovative medications in the national reimbursement system, making business planning challenging for them.
The Hungarian Investment Promotion Agency (HIPA), under the authority of the Ministry of Foreign Affairs and Trade, encourages and supports inbound FDI. HIPA offers company and sector-specific consultancy, recommends locations for investment, acts as a mediator between large international companies and Hungarian firms to facilitate supplier relationships, organizes supplier training, and maintains active contact with trade associations. Its services are available to all investors. For more information, see: https://hipa.hu/main.
Foreign investors generally report a productive dialogue with the government, both individually and through business organizations. The American Chamber of Commerce (AmCham) enjoys an ongoing high-level dialogue with the GOH and the government has adopted many AmCham policy recommendations in recent years. In 2017, the government established a Competitiveness Council, now chaired by the Minister of Finance, which includes representatives from multinationals, chambers of commerce, and other stakeholders, to increase Hungary’s competitiveness. Many U.S. and foreign investors have signed MOUs with the GOH to facilitate one-on-one discussions and resolutions to any pending issues. The GOH has regularly consulted foreign businesses and business associations as it has developed economic support measures during the pandemic. For more information, see: HYPERLINK “https://kormany.hu/kulgazdasagi-es-kulugyminiszterium/strategiai-partnersegi-megallapodasok” HYPERLINK “https://kormany.hu/kulgazdasagi-es-kulugyminiszterium/strategiai-partnersegi-megallapodasok” https://kormany.hu/kulgazdasagi-es-kulugyminiszterium/strategiai-partnersegi-megallapodasok and https://www.amcham.hu/.
The U.S.-Hungary Business Council (USHBC) – a private, non-profit organization established in 2016 – aims to facilitate and maintain dialogue between American corporate executives and top government leaders on the U.S.-Hungary commercial relationship. Most significant U.S. investors in Hungary have joined USHBC, which hosts roundtables, policy conferences, briefings, and other major events featuring senior U.S. and Hungarian officials, academics, and business leaders. For more information, see: https://www.us-hungarybusinesscouncil.com/ .
Foreign ownership is permitted except for certain “strategic” sectors including farmland and defense-related industries which require special government permits. As part of its economic measures during the COVID-19 pandemic, the GOH passed a decree which requires foreign investors to seek approval for foreign investments in Hungary.
Foreign law firms and auditing companies must sign a cooperation agreement with a Hungarian company to provide services on Hungarian legal or auditing issues. According to the Land Law, only private Hungarian citizens or EU citizens resident in Hungary with a minimum of three years of experience working in agriculture or holding a degree in an agricultural discipline can purchase farmland. Eligible individuals are limited to purchasing 300 hectares (741 acres). All others may only lease farmland. Non-EU citizens and legal entities are not allowed to purchase agricultural land. All farmland purchases must be approved by a local land committee and Hungarian authorities, and local farmers and young farmers must be offered a right of first refusal before a new non-local farmer is allowed to purchase the land. For legal entities and those who do not fulfill these requirements, the law allows the lease of farmland up to 1200 hectares for a maximum of 20 years. The GOH has invalidated any pre-existing leasing contract provisions that guaranteed the lessee the first option to purchase, provoking criticism from Austrian farmers. Austria has reported the change to the European Commission, which initiated an infringement procedure against Hungary in 2014. In March 2018, the European Court of Justice ruled that the termination of land use contracts violated EU rules, opening the way for EU citizens who lost their land use rights to sue the GOH for damages.
The GOH passed a national security law on investment screening in 2018 that requires foreign investors seeking to acquire more than a 25-percent stake in a Hungarian company in certain sensitive sectors (defense, intelligence services, certain financial services, electric energy, gas, water utility, and electronic information systems for governments) to seek approval from the Interior Ministry. The Ministry has up to 60 days to issue an opinion and can only deny the investment if it determines that the investment is designed to conceal an activity other than normal economic activity. In 2020, as part of the measures to mitigate the economic effects of the COVID-19 pandemic, the GOH passed an additional regulation requiring foreign investors to seek approval from the Ministry of Innovation and Technology (MIT) for greenfield or expansion of existing investments. Some observers have suggested this law could be used to disadvantage foreign firms or deny them access to the Hungarian market.
Hungary has not had any third-party or independent civil organization investment policy reviews in the last five years.
In 2006, Hungary joined the EU initiative to create a European network of “point of single contact” through which existing businesses and potential investors can access all information on the business and legal environment, as well as connect to Hungary’s investment promotion agency. In recent years, the government has strengthened investor relations, signed strategic agreements with key investors, and established a National Competitiveness Council to formulate measures to increase Hungary’s economic competitiveness.
The registration of business enterprises is compulsory in Hungary. Firms must contract an attorney and register online with the county-level courts of justice operating as courts of registration. Registry courts must process applications to register limited liability and joint-enterprise companies within 15 workdays, but the process is usually complete within three workdays. If the Court fails to act within the given timeframe, the new company is automatically registered. If the company chooses to use a template corporate charter, registration can be completed in a one-day fast track procedure. Registry courts provide company information to the Tax Authority (NAV), eliminating the need for separate registration. The Court maintains a computerized registry and electronic filing system and provides public access to company information. The minimum capital requirement for a limited-liability company is HUF 3,000,000 ($8,500); for private limited companies HUF 5,000,000 ($14,300), and for public limited companies HUF 20,000,000 ($57,100). Foreign individuals or companies can establish businesses in Hungary without restrictions.
Hungarian business facilitation mechanisms offer no special preference or assistance for them in establishing a company.
Outward investment is mainly in manufacturing, pharmaceuticals, services, finance and insurance, and science and technology. The stock of total Hungarian investment abroad amounted to $36.8 billion in 2019. There is no restriction in place for domestic investors to invest abroad. The GOH announced in early 2019 that it would like to increase Hungarian investment abroad and it is considering incentives to promote such investment.
3. Legal Regime
Generally, legal, regulatory, and accounting systems are consistent with international and EU standards. However, some executives in Hungarian subsidiaries of U.S. companies express concerns about a lack of transparency in the GOH’s policy-making process and an uneven playing field in public tendering. In recent years, there has been an uptick in the number of companies, including major U.S. multinational franchises and foreign owners of major infrastructure, reporting pressure to sell their businesses to government-affiliated investors. Those that refuse to sell report an increase in tax audits, fines, and spurious regulatory challenges and court cases. SMEs increasingly report a desire to either remain small (and therefore “under the radar” of these government-affiliated investors) or relocate their businesses outside of Hungary.
For foreign investors, the most relevant regulations stem from EU directives and the laws passed by Parliament to implement them. Laws in Parliament can be found on Parliament’s website (https://www.parlament.hu/en/web/house-of-the-national-assembly). Legislation, once passed, is published in a legal gazette and available online at www.magyarkozlony.hu . The GOH can issue decrees, which also have national scope, but they cannot be contrary to laws enacted by Parliament. Local municipalities can create local decrees, limited to the local jurisdiction.
As a result of the COVID-19 crisis, in March 2020, the Parliament passed a bill that established a state of emergency (SOE) in Hungary, allowing the GOH to govern by decree without parliamentary approval. The GOH used this decree to levy new sector-specific taxes, to take control of a Hungarian company that had been in an ownership dispute with the GOH, and to reallocate competencies and tax collection duties from an opposition-led municipality to a county-level body led by the ruling Fidesz party.
Hungarian financial reporting standards are in line with the International Accounting Standards and the EU Fourth and Seventh Directives. The accounting law requires all businesses to prepare consolidated financial statements on an annual basis in accordance with international financial standards. The government does not promote or require environmental, social, and governance (ESG) disclosure for companies operating in Hungary.
The GOH rarely invites interested parties to comment on draft legislation. Civil society organizations have complained about a loophole in the current law that allows individual Members of Parliament to submit legislation and amendments without public consultation. The average deadline for submitting public comment is often very short, usually less than one week. The Act on Legislation and the Law Soliciting Public Opinion, both passed by Parliament in 2010, govern the public consultation process. The laws require the GOH to publish draft laws on its webpage and to give adequate time for all interested parties to give an opinion on the draft. However, implementation is not uniform, and the GOH often fails to solicit public comments on proposed legislation.
The legislation process – including key regulatory actions related to laws – are published on the Parliament’s webpage. Explanations attached to draft bills include a short summary on the aim of the legislation, but regulators only occasionally release public comments.
Regulatory enforcement mechanisms include the county and district level government offices, whose decisions can be challenged at county-level courts. The court system generally provides efficient oversight of the GOH’s administrative processes.
Hungary’s budget was widely accessible to the general public, including online through the Parliament and Finance Ministry websites and the Legal Gazette. The government made budget documents, including the executive budget proposal, the enacted budget, and the end-of-year report publicly available within a reasonable period of time. Modifications to a current budget, which in 2021 were quite substantial because of the pandemic, are not consolidated with the initial budget law and do not include economic analysis of the effects of those modifications. Information on debt obligations was publicly available, including online through the Hungarian Central Bank ( https://www.mnb.hu/en ) and Hungarian State Debt Manager’s (https://akk.hu/ ) websites.
All EU regulations are directly applicable in Hungary, even without further domestic measures. If a Hungarian law is contrary to EU legislation, the EU rule takes precedence. As a whole, labor, environment, health, and safety laws are consistent with EU regulations. Hungary follows EU foreign trade and investment policy, and all trade regulations follow EU legislation. Hungary participates in the WTO as an EU Member State.
The Hungarian legal system is based on continental European (German-French and Roman law) traditions. Contracts are enforced by ordinary courts or – if stipulated by contract – arbitration centers. Investors in Hungary can agree with their partners to turn to Hungarian or foreign arbitration courts.
Apart from these arbitration centers, there are no specialized courts for commercial cases; ordinary courts are entitled to judge any kind of civil case. The Civil Code of 2013 applies to civil contracts.
The Hungarian judicial system includes four tiers: district courts (formerly referred to as local courts); courts of justice (formerly referred to as county courts); courts of appeal; and the Curia (the Hungarian Supreme Court). Hungary also has a Constitutional Court that reviews cases involving the constitutionality of laws and court rulings. There are no special commercial courts, but first level public administration and labor cases are judged only by the county level courts of justices.
Although the GOH has criticized court decisions on several occasions, ordinary courts are considered to generally operate independently under largely fair and reliable judicial procedures. Recently, an increasing number of current and former judges have raised concerns about growing GOH influence over the court system and intimidation of judges by court administration. The European Commission’s 2021 Rule of Law Report, issued in July 2021, cited judicial independence in Hungary as a source of concern. Most business complaints about the court system pertain to the lengthy proceedings rather than the fairness of the verdicts. The GOH has said it hopes to improve the speed and efficiency of court proceedings with an updated Civil Procedure Code that entered into force in January 2018.
Regulations and law enforcement actions pertaining to investors may be appealed at ordinary courts or at the Constitutional Court.
Hungarian law protects property and investment. The Hungarian state may expropriate property only in exceptional cases where there is a public interest; any such expropriations must be carried out in a lawful way, and the GOH is obliged to make immediate and full restitution for any expropriated property, without additional stipulations or conditions.
The GOH passed a national security law on investment screening in 2018 that requires foreign investors seeking to acquire more than a 25 percent stake in a Hungarian company in certain “sensitive sectors” (defense, intelligence services, certain financial services, electric energy, gas, water utility, and electronic information systems for governments) to seek approval from the Interior Ministry. (Please see above section on limits on foreign control for more details). Based on this law, in April 2021 the Interior Ministry blocked Austria’s Vienna Insurance Group from buying Dutch insurer Aegon’s Hungarian subsidiary. In February 2022 the European Commission decided the blocked sale violated EU rules, but by that time the GOH and VIG agreed that the state would acquire a 45 percent stake in Aegon. Additionally, in 2020, as part of the measures to mitigate the economic effects of the COVID-19 pandemic, the GOH passed another regulation requiring foreign investors to seek approval from the Ministry of Innovation and Technology (MIT) for greenfield or expansion of existing investments.
There is no primary website or “one-stop shop” which compiles all relevant laws, rules, procedures, and reporting requirements for investors. The Hungarian Investment Promotion Agency (HIPA), however, facilitates establishment of businesses and provides guidance on relevant legislation.
The Hungarian Competition Authority, tasked with safeguarding the public interest, enforces the provisions of the Hungarian Competition Act, and EU competition law also binds Hungary. The Competition Authority is empowered to investigate suspected violations of competition law, order changes to practices, and levy fines and penalties. According to the Authority, since 2010 the number of competition cases has decreased, but they have become more complex. Out of more than 60 cases in 2021, only a few minor cases pertained to U.S.-owned companies. Hungarian law does not consider conflict of interest to be a criminal offense. Citing evidence of conflict of interest and irregularities, in December 2017 the European Anti-Fraud Office (OLAF) recommended opening a criminal investigation into a high-profile $50 million EU-funded public procurement project, but Hungarian authorities declined to prosecute the case.
Hungary’s Constitution provides protection against uncompensated expropriation, nationalization, and any other arbitrary action by the GOH except in cases of threat to national security. In such cases, immediate and full compensation is to be provided to the owner. There are no known expropriation cases where the GOH has discriminated against U.S. investments, companies, or representatives. There have been some complaints from other foreign investors within the past several years that expropriations have been improperly executed and without proper remuneration. Parties involved in these cases turned to the domestic legal system for dispute settlement.
There is no recent history of official GOH expropriations.
ICSID Convention and New York Convention
Hungary is a signatory to the International Centre for the Settlement of Investment Disputes (ICSID Convention), proclaimed in Hungary by Law 27 of 1978. Hungary also is a signatory to the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention), proclaimed in Hungary by Law 25 of 1962. There is not specific legislation providing for enforcement other than the two domestic laws proclaiming the New York and ICSID Conventions. According to Law 71 of 1994, an arbitration court decision is equally binding to that of a court ruling.
Investor-State Dispute Settlement
Settlement of Investment Disputes (ICSID) and to UN’s 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Under the New York Convention, Hungary recognizes and enforces rulings of the International Chamber of Commerce’s International Court of Arbitration.
Hungary shares no Bilateral Investment Treaty or Free Trade Agreement with the United States. Since 2000 Hungary has been the respondent in 16 known investor-State arbitration claims, although none of these involve U.S. investors.
Local courts recognize and enforce foreign arbitral awards against the GOH.
International Commercial Arbitration and Foreign Courts
In the last few years, parties have increasingly turned to mediation to settle disputes without engaging in lengthy court procedures. Law 60 of 2017 on domestic arbitration procedures is based on the UNCITRAL Model Law.
Investment dispute settlement clauses are frequently included in investment contract between the foreign enterprise and GOH. Hungarian law allows the parties to set the jurisdiction of any courts or arbitration centers. The parties can also agree to set up an ad hoc arbitration court. The law also allows investors to agree on settling investment disputes by turning to foreign arbitration centers, such as the International Centre for Settlement of Investment Disputes (ICSID), UNCITRAL’s Permanent Court of Arbitration (PCA), or the Vienna International Arbitral Centre. In Hungary, foreign parties can turn to the Hungarian Chamber of Commerce and Industry arbitration court, which has its own rules of proceedings (HYPERLINK “https://mkik.hu/en/court-of-arbitration” HYPERLINK “https://mkik.hu/en/court-of-arbitration” https://mkik.hu/en/court-of-arbitration ) and in financial issues to the Financial and Capital Market’s arbitration court. Local courts recognize and enforce foreign or domestic arbitral awards. An arbitral ruling may only be annulled in limited cases, and under special conditions.
Domestic courts do not favor State-owned enterprises (SOEs) disproportionately. Investors can expect a fair trial even if SOEs are involved and in case of an unfavorable ruling, may elevate the case to the European Court of Justice (ECJ). Investors do not generally complain about non-transparent or discriminatory court procedures.
The Act on Bankruptcy Procedures, Liquidation Procedures, and Final Settlement of 1991, covers all commercial entities except banks (which have their own regulatory statutes), trusts, and State-owned enterprises, and brought Hungarian legislation in line with EU regulations. Debtors can initiate bankruptcy proceedings only if they have not sought bankruptcy protection within the previous three years. Within 90 days of seeking bankruptcy protection, the debtor must call a settlement conference to which all creditors are invited. Majority consent of the creditors present is required for all settlements. If agreement is not reached, the court can order liquidation. The Bankruptcy Act establishes the following priorities of claims to be paid: 1) liquidation costs; 2) secured debts; 3) claims of the individuals; 4) social security and tax obligations; 5) all other debts. Creditors may request the court to appoint a trustee to perform an independent financial examination. The trustee has the right to challenge, based on conflict of interest, any contract concluded within 12 months preceding the bankruptcy.
The debtor, the creditors, the administrator, or the Criminal Court may file liquidation procedures with the court. Once a petition is filed, regardless of who filed it, the Court notifies the debtor by sending a copy of the petition. The debtor has eight days to acknowledge insolvency. If the insolvency is acknowledged, the company declares if any respite for the settlement of debts is requested. Failure to respond results in the presumption of insolvency. The Court may allow up to of 30 days for the debtor to settle the debt upon request. If the Court finds the debtor insolvent, it appoints a liquidator.
Bankruptcy itself is not criminalized unless it is made in a fraudulent way, deliberately, and in bad faith to prevent the payment of debts.
Law 122 of 2011 obliges banks and credit institutions to establish and maintain the Central Credit Information System to assess creditworthiness of businesses and individuals to facilitate prudent lending (HYPERLINK “http://www.bisz.hu ” HYPERLINK “http://www.bisz.hu” http://www.bisz.hu ).
4. Industrial Policies
Hungary has a well-developed incentive system for investors, the cornerstone of which is a special incentive package for investments over a certain value (typically over EUR 10 million or $11 million). The incentives are designed to benefit investors who establish manufacturing facilities, logistics facilities, regional service centers, R&D facilities, and bioenergy facilities, or those who make tourism industry investments. Incentive packages may consist of cash subsidies, development tax allowances, training subsidies, and job creation subsidies. The incentive system is compliant with EU regulations on competition and state aid and is administered by the Hungarian Investment Promotion Agency (HIPA) and managed by the Ministry of Innovation and Technology (MIT) and the Ministry of Foreign Affairs and Trade (MFAT). The government provides non-refundable subsidies to foreign investments in less developed areas and certain sectors including research and development, innovation, and high-tech manufacturing, based on case-by-case government decisions. In 2020, the GOH extended additional incentives or support to foreign investments as part of its economic response to the pandemic. For more information please see: https://hipa.hu/additional-favourable-changes-in-the-non-refundable-cash-incentives-system .
In 2017 Hungary introduced a new Renewable Energy Support Scheme (METAR) – replacing the former feed-in tariff system (KAT) – in which producers of renewable energy can bid for state subsidies, paid as a premium over the market reference price. Newly established renewable energy producing facilities from 0.5 to 1 MW can apply for a feed-in premium in addition to the market price, and over 1 MW the support level is set through competitive auctions. Applicants can be companies with a registered office in the EU, the EEA or the Energy Community, Hungarian branch offices of foreign companies and Hungarian business entities or municipalities, but the tender is only available to projects located in Hungary. Since the first METAR tender in 2019, the Hungarian Energy Authority has launched six successful tenders, each time generating a significant interest and oversubscription from bidders. For more information on the METAR scheme, please see: HYPERLINK “http://www.mekh.hu/information-on-the-renewable-energy-support-system” http://www.mekh.hu/information-on-the-renewable-energy-support-system
Foreign trade zones were eliminated because of EU accession.
Hungary does not mandate the hiring of local employees. The number of work permits issued for third-country nationals is limited by law, but in recent years, this limit was well above the actual number of registered third-country employees. Residency and work permits are issued by the Immigration Office and the local labor offices.
As of 2021, investments in certain strategic sectors including the military, intelligence, public utilities, financial services, and electronic information systems require investment permits issued by the Ministry of Interior; in other key sectors, the Ministry for Innovation and Technology issues permits. There are no laws in place requiring the fulfilment of special labor force related conditions to get investment permits. However, in certain cases, the GOH has established retention of workforce as a condition to award state grants to investors.
Hungary has no forced data localization policy. Foreign IT providers do not need to turn over source code or provide access to encryption. Hungary follows EU rules on transfer of personal data outside the economy. Storage of personal data is regulated by a data protection law and falls under the authority of a Data Protection Ombudsman.
There are no general performance requirements for investors in Hungary. However, investors may receive government subsidies in the event they meet certain performance criteria, such as job creation or investment minimums, which are available to all enterprises registered in Hungary and are applied on a systematic basis. To comply with EU rules, the GOH no longer grants tax holidays based on investment volume. There is no requirement that investors must purchase from local sources, but the EU Rule of Origin applies. Investors are not required to disclose proprietary information to the GOH as part of the regulatory process.
Hungary, as an EU Member State, follows the General Data Protection Regulation (GDPR) on transmitting data outside of the EU and local data storage requirements. The National Authority for Data Protection and Freedom of Information is responsible for enforcing GDPR rules.
5. Protection of Property Rights
Hungary maintains a reliable land registry, which provides public information for anyone on the ownership, mortgage, and usufruct rights of a real estate or land parcel. Secured interests in property (mortgages), both moveable and real, are recognized and enforced but there is no title insurance in Hungary.
Please see the section on Limits on Foreign Control and Right to Private Ownership and Establishment for information regarding restrictions on purchasing farm landfarmland.
Hungarian law allows acquisitive prescription for unoccupied real property if the user of the property occupies it continuously for at least 15 years. Real estate and land purchase contracts must be countersigned by an attorney registered in Hungary.
Hungary has an adequate legal structure for protecting intellectual property rights (IPR), although sentences for civil and criminal IPR infringement cases are not usually adequately harsh to serve as a deterrent. There has been no new major IPR legislation passed over the last year. According to some representatives of the pharmaceutical and software industries, enforcement could be improved if the Prosecutor General’s Office were to establish specialized IPR units. The most common IPR violations in Hungary include the sale of imported counterfeit goods, including pharmaceuticals and Internet-based piracy. Most counterfeit goods sold in Hungary are of Chinese origin.
Hungary acceded to the European Patent Convention in 2003 and has accordingly amended the Hungarian Patent Act. Hungary is a party to the World Trade Organization’s (WTO’s) Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) and many other major international IPR agreements, including some administered by the World Intellectual Property Organization (WIPO), such as the Berne Convention, the Paris Convention, the WIPO Copyright Treaty, and the WIPO Performance and Phonograms Treaty. As an EU Member State, Hungary is required to implement EU Directives and so is party to the EU Information Society Directive and EU Enforcement Directive, among others.
The United States and Hungary signed a Comprehensive Bilateral Intellectual Property Rights Agreement in 1993 that addresses copyright, trademarks, and patent protection.
In 2010, the U.S. Patent and Trademark Office (USPTO) and the Hungarian Intellectual Property Office (HIPO) launched a pilot program to facilitate patent recognition between the United States and Hungary. In 2012 the USPTO and HIPO signed a Memorandum of Understanding to further streamline and expedite bilateral patent recognition. More details about this Patent Processing Highway (PPH) program can be found on HIPO’s website at www.hipo.gov.hu/English/szabadalom/pph/ .
Hungary is not included in the U.S. Trade Representative’s (USTR’s) Special 301 Report or the Notorious Markets List.
For additional information about treaty obligations and points of contact at local IP offices, please see WIPO’s country profiles at HYPERLINK “http://www.wipo.int/directory/en/” HYPERLINK “http://www.wipo.int/directory/en/” http://www.wipo.int/directory/en/ .
Resources for Rights Holders
6. Financial Sector
The Hungarian financial system offers a full range of financial services with an advanced information technology infrastructure. The Hungarian Forint (HUF) has been fully convertible since 2001, and both Hungarian financial market and capital market transactions are fully liberalized. The Capital Markets Act of 2001 sets out rules on securities issues, including the conversion and marketing of securities. As of 2007, separate regulations were passed on the activities of investment service providers and commodities brokers (2007), on Investment Fund Managing Companies (2011), as well as on Collective Investments (2014), providing more sophisticated legislation than those in the Capital Markets Act. These changes aimed to create a regulatory environment where free and available equity easily matches with the best investment opportunities. The 2016 modification of the Civil Code removed remaining obstacles to promote collection of public investments in the course of establishing a public limited company.
The Budapest Stock Exchange (BSE) re-opened in 1990 as the first post-communist stock exchange in the Central and Eastern European region. Since 2010, the BSE has been a member of the Central and Eastern Europe (CEE) Stock Exchange Group. In 2013, the internationally recognized trading platform Xetra replaced the previous trading system. In 2021, the BSE has 23 members and 139 issuers. The issued securities are typically shares, investment notes, certificates, corporate bonds, mortgage bonds, government bonds, treasury bills, and derivatives. In December 2021, the BSE had a market capitalization of $30.2 billion, and the average monthly equity turnover volume amounted to $2.1 billion. The most traded shares are OTP Bank, pharmaceutical company Richter, MOL, Magyar Telekom, and 4iG.
Financial resources flow freely into the product and factor markets. In line with IMF rules, international currency transactions are not limited and are accessible both in domestic and foreign currencies. Individuals can hold bank accounts in either domestic or foreign currencies and conduct transactions in foreign currency. Since March 2020, commercial banks introduced real time bank transfers for domestic currency transactions.
Commercial banks provide credit to both Hungarian and foreign investors at market terms. Credit instruments include long-term and short-term liquidity loans. All banks publish total credit costs, which includes interest rates as well as other costs or fees.
There are no rules preventing a foreigner or foreign firm from opening a bank account in Hungary. Valid personal documents (i.e., a passport) are needed and as of 2015, when the Foreign Account Tax Compliance Act (FATCA) came into force, also a declaration of whether the individual is a U.S. citizen. Banks have not discriminated against U.S. citizens in opening bank accounts based on FATCA.
The Hungarian banking system has strengthened over the past few years, and the capital position of banks is generally adequate even in the challenging economic environment created by COVID-19. Following several years of deleveraging after the 2008 crisis, the banking system is mainly deposit funded. The penetration of the banking system decreased slightly in 2019 due to a relatively high GDP growth rate. The sector’s total assets amounted to 92.6 percent of GDP.
The Hungarian banking system is healthy, and banks have a stable capital position. The loan-to-deposit ratio has been gradually decreasing from its 160 percent peak in 2009 after the financial crisis to 85 percent in 2015 and has been fluctuating between this value and a 92.4 percent peak in 2019. In spring 2020, during the first wave of the COVID-19 in Hungary, it reached 91.6 percent but decreased to 81.7 percent by the end of the year. The liquidity cover ratio was 160 percent in the first wave of COVID-19, then climbed to 220.8 percent by the end of the year. In response to the COVID-19 crisis, the Central Bank restructured and expanded its monetary policy tools to provide liquidity to the financial sector through currency swaps, fixed-rate loans, and exemptions from minimum reserve requirements. The Central Bank also introduced instruments to influence short- and long-term term yields. It offered low-interest loans through commercial banks to the SME sector and launched a government securities purchase program on the secondary market.
The ratio of non-performing loans (NPLs) decreased from a high of 18 percent in 2013 to 3.3 percent in 2021 as a result of portfolio cleaning, the improving economic environment, and increased lending. The banking sector became profitable after several years of losses between 2010 and 2015, reaching a return on equity (ROE) record high of 16.8 percent in 2017. Since then, ROE has decreased close to zero in 2020 as a result of the pandemic but recovered to 11.6 percent by the end of 2021. The banking sector’s total assets exceeded 112 percent of GDP in 2021, of which 73 percent were held by five banks. The largest bank in Hungary is OTP Bank, which is mostly Hungarian-owned and controls about 25 percent of the market.
Hungary has a modern two-tier financial system and a developed financial sector. Between 2000 and 2013, the Hungarian Financial Supervisory Authority (PSZAF) served as a consolidated financial supervisor, regulating all financial and securities markets. PSZAF, in conjunction with the MNB, managed a strong two-pillar system of control over the financial sector, producing stability in the market, effective regulation, and a system of checks and balances. In 2013, the MNB absorbed the PSZAF and over the past few years has efficiently strengthened its supervisory role over the financial sector and established a customer protection system.
In accordance with the GOH’s stated goal of reducing foreign ownership in the financial sector, the proportion of foreign banks’ total assets in the financial sector decreased to about 40 percent in 2019, down from a peak of 70 percent before the 2008-2009 financial crisis. Following the sale of Budapest Bank and merge with the other Hungarian-owned banks and the Hungarian Savings’ Bank network, it has fallen to about 40 percent by 2021. Foreign banks are subject to central bank uniform regulations and prudential measures, which are applied to Hungary’s entire financial market without discrimination. On March 2, 2020, MNB launched an immediate e-transfer system up to a maximum of HUF 10 million (about $32,000) for domestic transactions in HUF. Commercial banks have extensive direct correspondent banking relationships and are capable of transferring domestic or foreign currencies to most banks outside of Hungary. Since 2018, however, the cashing of U.S. checks is no longer possible. No loss or jeopardy of correspondent banking relations has been reported.
Recent regulations restrict foreign currency loans to only those that earn income in foreign currency, an effort to eliminate the risk of exchange rate fluctuations. Foreign investors continue to have equal – if not better – access to credit on the global market, apart from special GOH credit concessions such as small business loans.
The Hungarian forint (HUF) has been convertible for essentially all business transactions since January 1, 1996, and foreign currencies are freely available in all banks and exchange booths. Act 93 of 2001 on Foreign Exchange Liberalization lifted all remaining foreign exchange restrictions and allowed free movement of capital in line with EU regulations. Hungary complies with all OECD convertibility requirements and IMF Article VIII.
Hungary’s EU accession agreement dictates that Hungary must adopt the Euro once it meets the relevant criteria. The GOH has not set a specific target date even though Hungary meets most of the necessary fiscal and financial criteria. According to the Ministry of Finance, Hungary’s economic performance should mirror the Eurozone average more closely before adapting the Euro.
Short-term portfolio transactions, hedging, short, and long-term credit transactions, financial securities, assignments and acknowledgment of debt may be carried out without any limitation or declaration. While the Forint remains the legal tender in Hungary, parties may settle financial obligations in a foreign currency. Many Hungarians took out mortgages denominated in foreign currency prior to the global financial crisis and suffered when the Forint depreciated against the Swiss Franc and the Euro. Despite strong pressure, the Hungarian Supreme Court ruled that there is nothing inherently illegal or unconstitutional in loan agreements that are foreign currency denominated, upholding existing contract law. New consumer loans, however, are denominated in Forints only, unless the debtor receives regular income in a foreign currency.
Market forces determine the value of the Hungarian Forint. Analysts note that the MNB’s consistently low interest rates have contributed to a nearly 30 percent decline in the value of the of the Forint against the Euro since 2010.
Sovereign Wealth Funds
Hungary does not maintain a sovereign wealth fund.
8. Responsible Business Conduct
Hungary encourages multinational firms to follow the OECD Guidelines for Multinational Enterprises, which promotes a due diligence approach to responsible business conduct (RBC). The government has established a National Contact Point (NCP) in the Ministry of Finance for stakeholders to obtain information or raise concerns in the context of RBC. The Hungarian NCP has organized events to promote OECD guidelines among the business community, trade unions, government agencies, and NGOs. Members of the Hungarian NCP include representatives of the Ministries of Finance, Foreign Affairs and Trade, Innovation and Technology, and Agriculture. The Hungarian NCP submits annual reports to the OECD Investment Commission, except for 2020 when its activity was strongly impacted by the COVID-19 pandemic. For more information, see: http://oecd.kormany.hu/a-magyar-nemzeti-kapcsolattarto-pont .
In recent years, the Hungarian NCP has organized several conferences, the last one in January 2020, to promote RBC and OECD guidelines. It announced in 2017 its intention to formulate a new National Action Plan on Businesses and Human Rights. According to the first National Corporate Social Responsibility (CSR) Action Plan formulated in 2015, key RBC priorities of the GOH included the employment of discriminated, disadvantaged, and disabled groups, environmental protection, and the expansion of sustainable economy. Hungary’s NCP peer review is scheduled in 2023. The Hungarian Public Relations Association, CSR Hungary, and other NGOs are involved in elaborating the second National Action Plan. The Hungarian NCP reviews complaints from trade unions against multinational companies’ subsidiaries operating in Hungary and coordinates with relevant NPCs of the multinational company’s home country. RBC does not typically play a role in GOH procurement decisions, although the 2015 Public Procurement Act integrates concepts of CSR, responsible business conduct, and good practice.
Several NGOs and business associations promote RBC and CSR. The one with the most members, CSR Hungary Forum, created in 2006, established an annual award and trademark in 2008 to recognize business CSR efforts; others include the Hungarian Public Relations Association, “Kovet.”
According to a 2018 survey conducted by CSR Hungary, 60 percent of businesses have a CSR policy and 44 percent of businesses attribute a CSR orientation to increased competitiveness. However, only about 34 percent of multinational and SOEs and 9 percent of SMEs report formally formulating a CSR action plan. According to a 2021 study on corporate social responsibility in Hungary, stakeholder pressure is weak, and they expect increased state-level intervention in CSR issues.
In 2017, Hungary’s independent agencies for labor rights protection, consumer protection, cultural heritage protection, and environment protection were merged into relevant ministries and county-level government offices. Environmental NGOs criticized the transformation of the system and warned about the lack of independent agencies.
In January 2020, the GOH approved and published its new long-term energy strategy and an EU-required National Energy and Climate Plan – both of which focused heavily on decarbonization and sustainable climate policy. According to the documents, Hungary aims to reduce its carbon emissions by at least 40 percent by 2030 (compared to the 1990 level), an additional 10 percent by 2040, and achieve carbon neutrality by 2050. Given that Hungary emits 33 percent less CO2 than it did in 1990, the real cut would be seven percent in the next eight years and 17 percent in the next 20 years. The seven percent cut would be easily achieved with the phase-out of the lignite coal fired Matra Power Plant by 2025. Experts have noted that the plan to have Hungary cut the remaining 50 percent (to achieve carbon neutrality) in the 2040-2050 period is an ambitious goal. Although in December 2020, the GOH committed itself to the new EU goal (“Fit for 55”) of reducing carbon emissions by 55 percent by 2030, the details of achieving the more ambitious goal are to be worked out. The GOH estimates the total costs of Hungary achieving climate neutrality by 2050 at $145 billion.
Private sector contributions to reach the climate goals include increasing Hungary’s solar power capacity from the currently available more than 2000 MW to 6000 MW by 2030 and to 10,000 MW by 2040. In energy efficiency, the GOH’s aim is to limit Hungary’s total final energy demand on the 2005 level by 2030. To reach this goal, the GOH introduced a tax incentive for businesses investing into energy efficiency. Although the GOH strategies stress the great potential in decreasing the energy demand of households, so far there have been only limited efforts.
Despite the February 2021 ruling of the European Court of Justice saying that Hungary had “systematically and persistently” breached legal limits on air pollution, the GOH still has failed to take any efficient measures to deal with the problem. Although the GOH maintains an extensive system of national parks and nature reserves, there are no other government policies, or regulatory incentives helping to preserve biodiversity. The second National Climate Change Strategy adopted in 2018 contains the National Adaptation Strategy which is based on the climate vulnerability assessment of ecosystem and industrial sectors.
Although Hungary’s Public Procurement Act of 2015 allows the government to consider environmental and green growth aspects, the GOH has not yet issued a decree governing the detailed rules of green procurements. Hungary is one of the five EU member states without a national action plan on green public procurements according to the State Audit Office. In April 2021, Hungary’s Public Procurement Authority launched a sustainability working group and in September 2021 issued a Green Codex to provide some guidelines on green procurements.
The Hungarian Ministry of Justice and the Ministry of Interior are responsible for combating corruption. Although a legal framework exists to support their efforts, critics have asserted that the government has done little to combat grand corruption and rarely investigates cases involving politically connected individuals, even when recommended to do so by the European Antifraud Office (OLAF). Hungary is a party to the UN Anticorruption Convention and the OECD Anti-Bribery Convention and has incorporated their provisions into the penal code, as well as subsequent OECD and EU requirements on the prevention of bribery. Parliament passed the Strasbourg Criminal Law Convention on Corruption of 2002 and the Strasbourg Civil Code Convention on Corruption of 2004. Hungary is a member of GRECO (Group of States against Corruption), an organization established by members of Council of Europe to monitor the observance of their standards for fighting corruption. GRECO’s reports on evaluation and compliance are confidential unless the Member State authorizes the publication of its report. For several years, the GOH has kept confidential GRECO’s most recent compliance reports on prevention of corruption with respect to members of parliament, judges, and prosecutors, and a report on transparency of party financing.
Following calls from the opposition, NGOs, and other GRECO Member States, and a March 2019 visit by senior GRECO officials to Budapest, the GOH agreed to publish the reports in August 2019. The reports revealed that Hungary failed to meet 13 out of 18 recommendations issued by GRECO in 2015; assessed that Hungary’s level of compliance with the recommendations was “globally unsatisfactory,” and concluded that the country would therefore remain subject to GRECO’s non-compliance procedure. The compliance report on transparency of party financing noted some progress but added that “the overall picture is disappointing.” A November 2020 GRECO report came to the same conclusion, adding that Hungary had made no progress since the prior year on implementing anticorruption recommendations for MPs, judges, and prosecutors.
In December 2016, the GOH withdrew its membership in the international anti-corruption organization the Open Government Partnership (OGP). Following a letter of concern by transparency watchdogs to OGP’s Steering Committee in summer 2015, OGP launched an investigation into Hungary and issued a critical report. The OGP admonished the GOH for its harassment of NGOs and urged it to take steps to restore transparency and to ensure a positive operating environment for civil society. The GOH, only the second Member State to be reprimanded by the organization, rejected the OGP report conclusions and withdrew from the organization.
In recent years, the GOH has amplified its attacks on NGOs including transparency watchdogs, accusing them of acting as foreign agents and criticizing them for allegedly working against Hungarian interests. Observers assess that this anti-NGO rhetoric endangered the continued operation of anti-corruption NGOs crucial to promoting transparency and good governance in Hungary. In 2017 and 2018, Parliament passed legislations that many civil society activists criticized for placing undue restrictions on NGOs. In its June 2018 and November 2021 rulings, the European Court of Justice found both legislations in conflict with EU law.
Transparency International (TI) is active in Hungary. TI’s 2021 Corruption Perceptions Index rated Hungary 73 out of 180 countries. Out of the 27 EU member states, Hungary ranked 26th, outperforming only Bulgaria. TI has noted that state institutions responsible for supervising public organizations were headed by people loyal to the ruling party, limiting their ability to serve as a check on the actions of the GOH. TI and other watchdogs note that data on public spending remains difficult to access since the GOH amended the Act on Freedom of Information in 2013 and 2015. Moreover, according to watchdogs and investigative journalists, the GOH, state agencies, and SOEs are increasingly reluctant to answer questions related to public spending, resulting in lengthy court procedures to receive answers to questions. Even if the court orders the release of data, by the time it happens, the data has lost significance and has a weaker impact, watchdogs warn. In some cases, even when ordered to provide information, state agencies and SOEs release data in nearly unusable or undecipherable formats.
U.S. firms – along with other investors – identify corruption as a significant problem in Hungary. According to the World Economic Forum’s 2017 Global Competitiveness Report, businesses considered corruption as the second most important obstacle to making a successful business in Hungary.
State corruption is also high on the list of EC concerns with Hungary. The European Anti-Fraud Office (OLAF) has found high levels of fraud in EU-funded projects in Hungary and has levied fines and withheld development funds on several occasions. Over the past few years, the EC has suspended payments of EU funds several times due to irregularities in Hungary’s procurement system.
TI and other anti-corruption watchdogs have highlighted EU-funded development projects as the largest source of corruption in Hungary. A TI study found indications of corruption and overpricing in up to 90 percent of EU-funded projects. Reports by Corruption Research Center (CRCB) from April and May 2020 found – after analyzing more than 240,000 public procurement contracts from 2005-2020 – that companies owned by individuals with links to senior government officials enjoy preferential treatment in public tenders and face less competition than other companies. The studies also revealed that the share of single-bidder public procurement contracts was over 40 percent in 2020, and that the corruption risk reached its highest level since 2005. In a March 2022 report CRCB found that in the 2011-2021 period, more than 20 percent of the EU-funded public contracts were won by 42 companies owned by 12 entrepreneurs closely affiliated with the government. In 2020, a year which was particularly difficult for many businesses because of the Covid-crisis, this small group of entrepreneurs won almost one-third of the EU-funded public tenders.
Hungary has legislation in place to combat corruption. Giving or accepting a bribe is a criminal offense, as is an official’s failure to report such an incident. Penalties can include confiscation of assets, imprisonment, or both. Since Hungary’s entry into the EU, legal entities can also be prosecuted. Legislation prohibits members of parliament from serving as executives of state-owned enterprises. An extensive list of public officials and many of their family members are required to make annual declarations of assets, but there is no specified penalty for making an incomplete or inaccurate declaration. It is common for prominent politicians to be forced to amend declarations of assets following revelations in the press of omission of ownership or part-ownership of real estate and other assets in asset declarations. Politicians are not penalized for these omissions.
Transparency advocates claim that Hungarian law enforcement authorities are often reluctant to prosecute cases with links to high-level politicians. For example, they reported that, in November 2018, Hungarian authorities dropped the investigation into $50 million in EU-funded public lighting tenders won by a firm co-owned by a relative of the prime minister, despite concerns raised by OLAF about evidence of conflict of interest and irregularities involving the deal. According to media reports, OLAF concluded that several of the tenders were won due to what it considered organized criminal activity. In December 2021, the Prosecutor General’s Office charged a senior government politician for accepting bribes to influence cases at the request of the president of the Court Bailiff Chamber. The senior government official resigned immediately but kept his position as an MP and was left at large for the time of the investigation.
Annual asset declarations for the family members of public officials are not public and only parliamentary committees can investigate them if there is a specified suspicion of fraud. Transparency watchdogs warn that this makes the system of asset declarations inefficient and easy to circumvent as politicians can hide assets and revenues in their family members’ names.
The Public Procurement Act of 2015 initially included broad conflict of interest rules on excluding family members of GOH officials from participating in public tenders, but Parliament later amended the law to exclude only family members living in the same household. While considered in line with the overarching EU directive, the law still leaves room for subjective evaluations of bid proposals and tender specifications to be tailored to favored companies.
While public procurement legislation is in place and complies with EU requirements, private companies and watchdog NGOs expressed concerns about pervasive corruption and favoritism in public procurements in Hungary. According to their criticism, public procurements in practice lack transparency and accountability and are characterized by uneven implementation of anti-corruption laws. Additionally, transparency NGOs calculate that government-allied firms have won a disproportionate percentage of public procurement awards. The business community and foreign governments share many of these concerns. Multinational firms have complained that competing in public procurements presents unacceptable levels of corruption and compliance risk. A 2019 European Commission study found that Hungary had the second-highest rate (40 percent) of one-bidder EU funded procurement contracts in the European Union. In addition, observers have raised concerns about the appointments of Fidesz party loyalists to head quasi-independent institutions such as the Competition Authority, the Media Council, and the State Audit Office. Because it is generally understood that companies without political connections are unlikely to win public procurement contracts, many firms lacking such connections do not bid or compete against politically connected companies.
The GOH does not require private companies to establish internal codes of conduct.
Generally, larger private companies and multinationals operating in Hungary have internal codes of ethics, compliance programs, or other controls, but their efficacy is not uniform.
Resources to Report Corruption
GOH Office Responsible for Combatting Corruption:
National Protective Service
General Director Zoltan Bolcsik
Phone: +36 1 433 9711
Fax: +36 1 433 9751
Transparency International Hungary
Falk Miksa utca 30. 4/2
Phone: +36 1 269 9534
Fax: +36 1 269 9535
10. Political and Security Environment
The security environment is relatively stable. Politically motivated violence or civil disturbance is rare. Violent crime is low, with street crimes the most frequently reported crimes in the country. Political violence is not common in Hungary. The transition from communist authoritarianism to capitalist democracy was negotiated and peaceful, and free elections have been held consistently since 1990.
11. Labor Policies and Practices
Hungary’s civilian labor force of 4.7 million is highly educated and skilled. Literacy exceeds 98 percent and about two-thirds of the work force has completed secondary, technical, or vocational education. Hungary’s record low 3.3 percent unemployment rate at the end of 2019 increased to 3.8 percent in December 2021 as a result of the pandemic, but it is lower than the EU average of 7.3 percent. Hungary’s employment rate for the population aged 15-64 years was 73.9 percent in 2021, higher than the EU average of 68.3 percent. Hungary is particularly strong in engineering, medicine, economics, and science training, although emigration of Hungarians from these sectors to other EU member states has increased in recent years. In the first wave of the COVID-19 pandemic, out-migration temporarily declined but resumed during the second half of 2020.
Multinationals increasingly cite a skilled labor shortage as their biggest challenge in Hungary and note that Hungarian vocational institutions and universities need to adapt more quickly to changes in the marketplace. An increasing number of young people are attending U.S.- and European-affiliated business schools in Hungary. Foreign language skills, especially in English and German, are becoming more widespread, yet Hungary still has the lowest level of foreign language proficiency in the EU. According to 2018 data, only 37 percent of working-age Hungarians speak at least one foreign language, while the EU average is 66 percent.
As the unemployment rate has declined, certain sectors have begun to face shortages of skilled and highly educated employees. As Hungarians increasingly seek work abroad, shortages of highly educated and skilled labor are negatively affecting growth in certain regions and industries. In addition, declining OECD Program of International Student Assessment (PISA) scores may signal that the workforce is losing its ability to learn new skills and adapt to changing market conditions. The government is attempting to address labor shortage by increasing the minimum wage, offering retraining programs, incentivizing employment of young mothers and pensioners by lowering employer-paid welfare contributions, and reforming the education and vocational training system. Shortages of skilled workers, particularly in the IT, financial, and manufacturing sectors, are more acute in the northwest and central regions of the country. In the eastern half of the country, unemployment levels are above average, even though the cost of labor is lower. Wages in Hungary are still significantly lower than those in Western Europe, despite the recent increase in minimum wage. Average Hungarian labor productivity is lower than the EU average but exceeds that of other Central and Eastern European economies.
In 2016, the government, trade unions, and employer representatives signed a three-year agreement to increase the minimum wage for unskilled and skilled workers. The deal also included a more than 50-percent cut in the business tax for large companies from 19 percent to 9 percent as of 2017, as well as gradually lowering the payroll tax from 21.5 percent in 2016 by 2 percent each year, down to 15.5 percent as of July 2020, to offset increasing labor costs. In subsequent years the parties signed annual minimum wage agreements which increased the minimum wage by 8 percent in 2020, by 3.6 percent in 2021, and as of January 2022, by 20 percent. The GOH also facilitates the employment of workers from neighboring countries, primarily ethnic Hungarian minority communities in those countries. The GOH requires hiring of nationals in certain strategic sectors and some areas of public administration.
Labor law stipulates a severance payment in case of lay-off, as well as under certain conditions for an employee terminating a work contract. The government pays unemployment benefits for three months and offers the services of local employment offices. The GOH did not extend this benefit beyond the normal three months during the pandemic. Labor laws are uniform and there are no waivers available to attract or retain investment. Collective bargaining is increasingly common in large companies, education, public transport, retail, and medical services.
The 2012 changes to the Labor Law transferred some collective bargaining rights from trade unions to work councils (Although work councils have a similar mission to those of labor unions, each firm has its own work council, and thus lacks the collective reach of an industry-wide trade union). Hungary’s trade union membership rate is below 10 percent, while the EU average is 25 percent. About 20 percent of businesses have a collective bargaining agreement on labor conditions and benefits, well below the EU average of about 80 percent. During the COVID-19 pandemic the government passed regulations that allow businesses to unilaterally terminate collective bargaining agreements, which led to a few strikes, which have been resolved by negotiations. Beginning in 2021, the GOH decreased state support to trade unions and implemented budget changes to allow discretional funding to each trade union, which replaced the previously uniform system. Hungary has ratified all eight International Labor Organization (ILO) core conventions.
Labor dispute resolution includes mediation as well as court procedures. Employees, however, typically agree with employers outside court or mediation procedures. In 2019, a six-day strike at Audi Hungary was resolved with an agreement between employers and employees for a 15- to 20-percent wage increase. The success of this high-profile strike has led to a series of short-term strikes, or threats of strikes, at other companies. Most of these strikes have been resolved quickly with wage increase concessions from management and changes in overtime payment and conditions. All recent strikes have been peaceful and complied with Hungarian labor laws.
Hungary has been a member of the ILO since 1955. Hungary’s labor law and practice are in line with international labor standards. Discussions between the ILO and the GOH are ongoing on certain provisions of the 2012 modification of Hungary’s labor law, including the freedom of expression, registration of trade unions, and minimum level of public service in case of strike.
Hungary passed amendments to its Labor Code in December 2018 that increased the amount of overtime an employer can request and gives employers up to three years to reconcile and pay for overtime. These highly unpopular changes led to a series of large protests throughout Hungary and currently are being reviewed by the European Commission. As a part of its COVID-19 economic response plan, the government decreed in 2020 that employers can implement flexible working hours and a 24-month working time frame to calculate overtime without prior agreement from the employee or union. Local labor organizations complained that the move rolled back hard-won concessions from the 2018 labor reform and that certain businesses abuse overtime possibilities to compensate for shutdowns during the COVID-19 pandemic.
The constitution and laws prohibit discrimination based on race, sex, gender, disability, language, sexual orientation and gender identity, infection with HIV or other communicable diseases, or social status. The labor code provides for the principles of equal treatment. The government failed to enforce these regulations effectively. Penalties were not commensurate with those under laws related to civil rights.
Observers asserted that discrimination in employment and occupation occurred with respect to Roma, women, persons with disabilities, and LGBTQI+ persons. According to NGOs, there was economic discrimination against women in the workplace, particularly against job seekers older than 50 and those who were pregnant or had returned from maternity leave. The country does not mandate equal pay for equal work. A government decree requires companies with more than 25 employees to reserve 5 percent of their work positions for persons with physical or mental disabilities. While the decree provides fines for noncompliance, many employers generally paid the fines rather than employ persons with disabilities. The National Tax and Customs Authority issued “rehabilitation cards” to persons with disabilities, which granted tax benefits for employers employing such individuals.
Roma were the country’s largest ethnic minority. According to the 2011 census, approximately 315,000 persons (3 percent of the population) identified themselves as Roma. A University of Debrecen study published in 2018, however, estimated there were 876,000 Roma in the country, or approximately 9 percent of the country’s population. There were approximately 1,300 de facto segregated settlements in the country where Roma constituted the majority of the population. Romani communities are not socially integrated with broader Hungarian society and are characterized by considerably lower indicators on most socioeconomic measures than the majority population. Conditions for the community deteriorated since the collapse of communism in 1989-90 but were rooted in centuries of social exclusion. Lacking advanced education and employment skills, many Roma occupied the margins of society and experienced long-term unemployment, which bred a cycle of poverty and welfare dependence.
Iceland is an island country located between North America and Europe in the Atlantic Ocean, near the Arctic Circle with an advanced economy that centers around three primary sectors: fisheries, tourism, and aluminum production. Until recently, U.S. investment in Iceland has mostly been concentrated in the aluminum sector, with Alcoa and Century Aluminum operating plants in Iceland. However, U.S. portfolio investments in Iceland have been steadily increasing in recent years. Iceland’s convenient location between the United States and Europe, its high levels of education, connectivity, and English proficiency, and a general appreciation for U.S. products make Iceland a promising market for U.S. companies. Furthermore, Americans made up a third of the tourist population that visited Iceland in 2021.
There is broad recognition within the Icelandic government that foreign direct investment (FDI) is a key contributor to the country’s economic revival after the 2008 financial collapse. As part of its investment promotion strategy, the Icelandic government operates a public-private agency called “Invest in Iceland” that facilitates foreign investment by providing information to potential investors and promoting investment incentives. Iceland has identified the following “key sectors” in Iceland; tourism; algae culture; data centers; and life sciences. Iceland offers incentives to foreign investors in certain industries.
Tourism has been a growing force behind Iceland’s economy in the past decade, with opportunities for investors in high-end tourism, including luxury resorts and hotels. The number of tourists in Iceland grew by more than 400 percent between 2010 and 2018, reaching more than 2.3 million in 2018. However, tourism in Iceland contracted in 2019, and the COVID-19 pandemic has had drastic effects on tourism, and the overall economy. The government implemented measures to bolster the tourism economy, thus avoiding mass bankruptcies in the sector, and has committed to building out tourism-related infrastructure.
The startup and innovation communities in Iceland are flourishing, with the IT and biotech sectors growing fast, particularly pharmaceuticals and wellness, gaming, and aquaculture. Iceland’s IT sector spans all areas of the digital economy. The Icelandic energy grid derives 99 percent of its power from renewable resources, making it uniquely attractive for energy-dependent industries. For instance, the data center industry in Iceland is expanding.
Iceland is working by the 2018 Climate Acton Plan, which was updated in 2020, and is designed to achieve Iceland’s national climate goals of making the country carbon neutral by 2040 and to cut greenhouse gas emissions by 40 percent by 2030 under the Paris Agreement.
1. Openness To, and Restrictions Upon, Foreign Investment
The government of Iceland maintains an open investment climate. The Act on Incentives for Initial Investments, which came into force in 2015, is intended to “promote initial investment in commercial operations, the competitiveness of Iceland and regional development by specifying what incentives are permitted in respect of initial investments in Iceland, and how they should be used.” The Act does not apply to investments in airports, energy production, financial institutions, insurance operations, or securities. For more information, see the English translation of the act: (https://www.stjornarradid.is/leit/$LisasticSearch/Search/?SearchQuery=Act+on+incentives+for+initial+investments+in+Iceland).
As part of its investment promotion strategy, the Icelandic government operates a public-private agency called “Invest in Iceland” that facilitates foreign investment by providing information to potential investors and promotes investment incentives. There is a debate, however, within Iceland over balancing energy intensive FDI with the environmental impact associated with certain projects. That said, energy-intensive industries long dominated by aluminum smelting, have expanded to include silicon production plants and data centers. For further resources see: (http://www.invest.is/doing-business/incentives-and-support).
Tourism has been a growing force behind Iceland’s economy in the past decade, with opportunities for investors in high-end tourism, including luxury resorts and hotels. The number of tourists in Iceland grew by more than 400 percent between 2010 and 2018, reaching more than 2.3 million in 2018. However, tourism in Iceland contracted in 2019 with visitors falling just below 2 million, which can be largely attributed to the fall of Icelandic budget airline WOW Air. The COVID-19 pandemic has had drastic effects on tourism, as well as on Iceland’s overall economy, which contracted by 7.1 percent in 2020, according to Statistics Iceland. Less than half a million tourists visited Iceland in 2020, with the number of tourists reaching 700,000 in 2021. Stakeholders in the industry have been generally optimistic for 2022, with hotels reporting good booking positions for the spring and summer seasons.
Isavia, a public company that handles the operation and development of Keflavik International Airport has embarked on $1-2 billion capital works project to expand the airport. Projects include extension of buildings, baggage screening and baggage handling systems, self-check in stations, waiting areas and retail/dining areas, check-in areas, bag-drop off areas, security areas, airbridges/gates for remote stands, re-modelling of existing terminal, de-icing platforms, new runway, new taxiway, and a new ATC tower.
The startup and innovation communities in Iceland are flourishing, with IT and biotech startups seeking investors. Foreign investment in the fisheries sector is restricted, as well as in the energy sector (hydropower and geothermal exploitation rights other than for personal use and energy processing and transportation are limited to Icelandic citizens and legal persons, and individuals and legal persons who reside in the European Economic Area). The wind energy sector is growing in Iceland, and the legal framework is still being developed for that sector.
The 1991 Act on “foreign investments for commercial purposes” limits foreign ownership of fishing rights and fish processing companies (only Icelandic citizens or companies that are controlled by Icelandic citizens and have less than 25 percent foreign shareholders can own or control fishing companies); of hydropower and geothermal exploitation rights other than for personal use and energy processing and transportation (only Icelandic citizens and legal persons, and individuals and legal persons who reside in the European Economic Area (EEA) can hold those rights); and of aviation operators (Icelandic ownership of aviation companies needs to be at least 51 percent, and this does not apply to individuals and legal persons that have EEA citizenship). The law further stipulates that foreign states, sub-national governments, or other foreign authorities are prohibited from investing in Iceland for commercial purposes, although the Minister of Culture and Business Affairs may grant exemptions. The responsibility to inform the relevant ministry of both new investments and investments in companies that the party in question has already invested in lies with the investor, or with the Icelandic company that the foreign individual or entity invested in (this does not apply to EEA citizens or residents).
However, the 1991 Act does not stipulate how foreign investment is screened or monitored by relevant authorities, only that the Minister of Culture and Business Affairs handles permits and monitors the execution of this legislation. The Minister can block foreign investments if s/he considers it a “threat to national security or goes against public policy, public safety or public health or if there are serious economic, societal or environmental complications in specific industries or in specific areas, that is likely to persist…” The law further states that the “Minister has the authority to stop foreign investment in systematically important companies if such investment entails systematic risk.” If an investment has already taken place, the Minister of Tourism, Industries, and Innovation has the authority to compel the foreign person or entity in question to sell.
Iceland has been a World Trade Organization (WTO) member since 1995 and a member of GATT since 1968. The WTO conducted its fifth Trade Policy Review of Iceland in 2017 (https://www.wto.org/english/tratop_e/tpr_e/tp461_e.htm). The review notes that “with a small population and limited natural resources, apart from energy and fish, trade remains important, but the range of exports is limited to tourism, fish and fish products, and aluminum and products thereof. Therefore, the country remains vulnerable to shocks, including the appreciation of the ISK, overheating of the economy, and Brexit. Furthermore, despite uncertainties relating to Brexit, as growth picks up in the EU, Iceland’s main trading partner, opportunities for trade in goods and services should continue to improve.”
The Organization for Economic Cooperation and Development (OECD) and UN Cooperation for Trade and Development (UNCTAD) have not conducted Investment Policy Reviews for Iceland.
Services offered by Invest in Iceland, a public-private agency that promotes and facilitates foreign investment in Iceland, are free of charge to all potentialforeign investors (http://www.invest.is). Invest in Iceland can provide information on investment opportunities in Iceland; collect data on the business environment, arrange site visits and plan contacts with local authorities; arrange meetings with local business partner and professional consultants; influence legislation and lobby on behalf of foreign investors (https://www.invest.is/at-your-service/what-we-do). Invest in Iceland offers detailed information on how to establish a company on its website (http://www.invest.is/doing-business/establishing-a-company). Its sister agencies, Business Iceland (formerly Promote Iceland) (https://www.businessiceland.is/) and Film in Iceland (http://www.filminiceland.com), aim to enhance Iceland’s reputation as a tourist destination and as a destination for filming movies and television productions.
The Icelandic Government along with other stakeholders promote exports of Icelandic goods and services through the public-private agency Islandsstofa, also known as Business Iceland (https://www.businessiceland.is/). Business Iceland assists Icelandic businesses in the main industry sectors to export products and services, including fisheries (seafood and technology), agricultural produce (including organic lamb meat), high-tech products and solutions (software, prosthetics, etc.), and services (tourism). Business Iceland has been very active in the United States and Canada in recent years. A trade commissioner represents the Icelandic Ministry of Foreign Affairs in New York, facilitating exports to the United States and promoting business relations between the two countries. Business Iceland also promotes exports to the U.K., Northern and Southern Europe, and more recently to Asia (China and Japan).
Iceland imposed capital controls following the economic collapse in late 2008, which largely prevented Icelandic investors and pensions funds from investing outside of Iceland. The government lifted capital controls on March 14, 2017.
3. Legal Regime
The regulatory system is transparent, although bureaucratic delays can occur. All proposed laws and regulations are published in draft form for the public record and are open for comment. Icelandic laws regulating business practices are consistent with those of most OECD member states. Iceland’s laws are generally based on European Union directives as a result of Iceland’s membership in the European Economic Area (EEA), which legally obligates it to adopt EU directives and law concerning the four freedoms of the EU: free movement of goods, services, persons, and capital.
The Competition Authority is responsible for enforcing anti-monopoly regulations and promoting effective competition in business activities. This includes eliminating unreasonable barriers and restrictions on freedom in business operations, preventing monopolies and limitations on competition, and facilitating new competitors’ access to the market. The Consumer Agency holds primary responsibility for market surveillance of business operators, transparency of the markets with respect to safety and consumers’ legal rights, and enforcement of legislation concerning protection of consumers’ health, legal, and economic rights. For more information see the Competition Authority’s website (https://en.samkeppni.is/) and the Consumer Agency website (https://www.neytendastofa.is/English).
The Icelandic Parliament (Althingi) consists of a single chamber of 63 members; a simple majority is required for ordinary bills to become law. All bills are introduced in the parliament in draft form. Draft laws and regulations are open to public comment and are published in full on the parliament’s web page (http://www.stjornartidindi.is) and on the websites of the relevant ministries (often in English). Invest in Iceland also maintains an information portal website that includes information on industry sectors, the business climate, and incentives that foreign investors may find useful (http://www.invest.is).
Ministries or regulatory agencies develop bills, which are available to the general public. Ministries or regulatory agencies publish the text of the proposed regulations before their enactment on a unified website (https://www.stjornartidindi.is/). Ministries or regulatory agencies solicit comments on proposed regulation form the general public. Laws and regulations are published on both the parliament’s website (https://www.althingi.is/) and separate website managed by the Ministry of Justice (https://www.stjornartidindi.is/).
The OECD published a report on Iceland in September 2019. One of the findings of the report was that regulatory barriers were high in Iceland. “Regulation should be more commensurate with the needs of a small open economy. Product market regulation is stringent and the administrative burden for start-ups is high, holding back investment and innovation. Restrictions to foreign direct investment are among the highest of the OECD, dampening employment and productivity gains through international knowledge transfer. The government should set up a comprehensive action plan for regulatory reform, prioritizing reforms that foster competition, level the playing field between domestic and foreign firms and attract international investment” (http://www.oecd.org/economy/iceland-economic-snapshot/). The Government of Iceland has worked to reduce the regulatory burden since the report was published. OECD conducted an economic survey of Iceland in 2021. The key findings are as follows: “the pandemic-related collapse of foreign tourism and international travel, which account for almost a fifth of GDP, highlighted the need to diversify the economy. Iceland needs to improve resilience and find new drivers of productivity and employment growth, in particular given the objective of emission reductions. Boosting skills across the population is hence the top priority, along with reforms to strengthen competitive forces.”
The Iceland Chamber of Commerce operates an independent arbitration institute, the Nordic Arbitration Centre (NAC). The NAC provides for a dispute resolution mechanism, allowing parties to solve their dispute efficiently and safely. Both the arbitration process and the Arbitral Tribunals final awards are strictly confidential. There have been no known cases of discrimination against U.S. investors. For more information visit the Iceland Chamber of Commerce’s website (https://www.chamber.is/arbitration).
Icelandic laws regulating business practices are generally consistent with other OECD members. Iceland’s laws are generally based on EU directives as a result of Iceland’s membership in the EEA, which legally obligates it to adopt EU directives and law concerning four freedoms of the EU: free movement, goods, services, persons, and capital.
Iceland has been a member of the World Trade Organization (WTO) since January 1, 1995. Iceland and the United States signed a Trade and Investment Framework Agreement (TIFA) in January 2009.
The Icelandic civil law system enforces property rights, contractual rights, and the means to protect these rights. The Icelandic court system is independent from the parliament and government. Foreign parties must abide by the same rules as Icelandic parties, and they enjoy the same privileges in court; there is no discrimination against foreign parties in the Icelandic court system. When trade or investment disputes are settled, the settlement is usually remitted in the local currency.
Iceland has a three-tier judicial system; eight District Courts (Héraðsdómstólar), the Court of Appeal (Landsréttur), and the Supreme Court (Hæstiréttur Íslands). All court actions commence at the District Courts, and conclusions can then be appealed to the Court of Appeal. In special cases the conclusions of the Court of Appeal can be referred to the Supreme Court. A new public agency, the Judicial Administration (Dómstólasýsla), along with the Court of Appeal (Landsréttur) began operating on January 1, 2018.
The Landsdómur is a special high court or impeachment court tohandle cases where members of the Cabinet of Iceland are suspected of criminal behavior. The Landsdómur has 15 members — five supreme court justices, a district court president, a constitutional law professor, and eight people chosen by parliament every six years. The court assembled for the first time in 2011 to prosecute a former Prime Minister for alleged gross misconduct in the events leading up to the 2008 financial crisis. He was found guilty of failing to hold regular cabinet meetings during the crisis but was not convicted of gross misconduct.
Icelandic laws regulating and protecting foreign investments are consistent with OECD and EU standards. As Iceland is a member of the EEA, most EU commercial legislation and directives are in effect in Iceland. The major law governing foreign investment is the 1996 Act on Investment by Non-residents in Business Enterprises, which grants national treatment to non-residents of the EEA. The law dictates that foreign ownership of businesses is generally unrestricted, except for limits in the fishing, energy, and aviation sectors. Icelandic law also restricts the ability of non-EEA citizens to own land, but the Minister of Culture and Business Affairs may waive this. The managers and the majority of the board of directors in an Icelandic enterprise must be domiciled in Iceland or another EEA member state, although exemptions from this provision can be granted by the Minister of Culture and Business Affairs.
Iceland has no automatic screening process for investments that trigger national security concerns (similar to the Committee on Foreign Investment in the United States), although bidders in privatization sales may have to go through a pre-qualification process to verify that the bidder has the financial strength to participate. Investors that intend to hold more than 10 percent of shares (“active” shareholders) in financial institutions are subject to approval from the Central Bank of Iceland (http://en.fme.is/).
Competition Law no. 44/2005 is currently in place to promote competition and to prevent unreasonable barriers on economic operations. Depending on the turnover of the companies in question, the Icelandic Competition Authority is notified of mergers and acquisitions. The Authority may annul mergers or set conditions to prevent monopolies and limitations on competition. For more information see the Competition Authority’s website: (https://en.samkeppni.is/).
The Constitution of Iceland stipulates that no one may be obliged to surrender their property unless required by the government to serve a public interest, and that such a measure shall be provided for by law and full compensation be paid. A special committee is appointed every five years to review and proclaim the legality of expropriation cases. If the committee proclaims a case to be legal, it will negotiate an amount of compensation with the appropriate parties. If an amount cannot be agreed upon, the committee determines a fair value after hearing the case of all parties.
The Icelandic government has never expropriated a foreign investment. However, some private investors described actions by the Icelandic government before and during the October 2008 financial crisis (related to the takeover of three major banks and offshore krona assets) as a type of indirect expropriation (www.cb.is).
The 1991 Act on Bankruptcy states that “the provisions of this Act on the right to obtain a license of financial reorganization or for composition with creditors, and on bankruptcy, shall only apply to a debtor who is a natural person if the debtor’s legal domicile is in Iceland and the debtor is not exempted from the jurisdiction of the courts of Iceland. The provisions of this Act shall however be applied to Icelandic nationals not having their legal domicile in Iceland if they are exempted from the jurisdiction of the courts of other states. Where the debtor is a company or an institution the provisions of this Act on his right to obtain a license of financial reorganization or for composition with creditors, or on bankruptcy, shall only apply if the following conditions are fulfilled: in the case of a registered company, if its registered venue is in Iceland, and in the case of an unregistered company, if its venue is on Iceland according to its articles or as provided for by law, or in the nature of the matter. The same shall apply, as applicable, to institutions.” For more information, refer to the Act on Bankruptcy (https://www.government.is/publications/legislation/lex/2018/01/15/Act-on-Bankruptcy-etc.-No.-21-1991/).
4. Industrial Policies
Iceland welcomes foreign direct investment. Iceland has, through the public-private agency Invest in Iceland, identified the following “key sectors” in Iceland: algae culture; data centers; life sciences; and tourism. Iceland “focuses on favorable environment for businesses in general, including low corporate tax, availability of land and efficiency in a European legislative framework.” Iceland offers a reimbursement scheme in the film industry. Authorities reimburse 25 percent of cost incurred during the production of television programs and films in Iceland. For more information visit (www.invest.is).
The 2015 Act on Incentives for Initial Investments in Iceland implemented to “promote initial investment in commercial operations, the competitiveness of Iceland and regional development by specifying what incentives are permitted in respect to initial investments in Iceland and how they should be used.” For more information see the English translation of the act (https://www.government.is/topics/business-and-industry/incentives-and-investment-agreements/).
There is significant debate regarding the appropriate types and level of FDI in Iceland, particularly within the energy sector and with regard to job creation and the environmental impact associated with certain projects. Historically, foreign investment has been in energy-intensive industries, such as aluminum smelting, although investments in tourism, life sciences, and information technology have grown as a proportion of total FDI in recent years.
Subsidiaries of foreign companies are able to participate in government-subsidized research and development programs, but only to cover R&D costs that are borne in Iceland. For further information see (http://en.rannis.is).
Iceland follows the EU General Data Protection Regulation and is a member of the U.S.-EU Privacy Shield arrangement for transatlantic data transfers. The Icelandic Data Protection Authority (DPA) monitors the implementation of Regulation 2016/679 of the European Parliament and of the Council on the protection of natural persons with regard to the processing of personal data and on the free movement of such data, and of the Act on Data Protection and the Processing of Personal Data no. 90/2018. DPA’s law-enforcement work includes “monitoring data controllers and ensuring that they take appropriate security measures, in accordance with law.” For more information see the Icelandic Data Protection Authority’s website (https://www.personuvernd.is/information-in-english/).
5. Protection of Property Rights
Only Icelandic citizens and foreign citizens that have permanent residency in Iceland can acquire the right to own or use real property in Iceland, including fishing and hunting rights, water rights, or other real property rights, whether by free assignation or enforcement measures, marriage, inheritance, or deed of transfer. However, special rules apply for citizens of the EEA. The Minister of Justice may grant exemption from these conditions based on application showing the need of ownership for business activities. The Minister’s permission is not necessary if leasing real property for less than three years or when the party involved enjoys rights in Iceland under the rules of the EEA. For more information, please see the Act on the Right of Ownership and Use of Real Property (https://www.government.is/Publications/Legislation/Lex/?newsid=353f66b8-f153-11e7-9421-005056bc4d74).
Property rights are generally enforced in Iceland. There is good access to mortgages and other financing to purchase real property in Iceland from commercial banks, pension funds and private lenders.
Iceland adheres to key international agreements on property rights. Trademarks, copyrights, trade secrets, and industrial designs are all protected under Icelandic law. Iceland is a signatory of the Paris Convention for the Protection of Industrial Property, the Patent Cooperation Treaty (PCT), and of the European Patent Convention (EPC). For further information see (https://europa.eu/youreurope/business/running-business/intellectual-property/patents/iceland/index_en.htm). Iceland is also a member of the European Patent Organization, the World Intellectual Property Organization (WIPO), and a party to most WIPO-administered agreements. 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/).
The Icelandic Intellectual Property Office’s (ISIPO) is a government agency under the auspices of the Minister of Industries and Innovation. The institution was established on July 1, 1991 and assumed responsibility for the patent and trademark department from the Ministry of Industries. In 2019, ISIPO, which used to be called the Icelandic Patent Office, took up its current name, the Icelandic Intellectual Property Office. ISIPO’s scope of operation is defined by Advertisement no. 187/1991 and Regulation no. 188/1991. ISIPO is responsible for “issues relating to patents, trademarks, design protection, municipal emblems, and other comparable rights as provided for by law, regulations, and international agreements on the protection of intellectual property rights in the field of industry.” For more information visit, the ISIPO webpage in English (https://www.isipo.is/).
Illegal downloading and distribution of films and TV shows has decreased in recent years due to widespread access to international streaming services, such as Netflix and Disney Plus. Purchasing cheap, counterfeit consumer goods on Chinese websites, namely AliEpxress.com is popular in Iceland, although that trend has declined somewhat due to increasing fees imposed by Iceland Post on incoming international deliveries. Customs seize counterfeit products if found and contact the owner of the intellectual property who then decides whether to press charges against the importer. If the owner of the intellectual property does not want to take legal actions, customs clears the items and send them to the importer. Iceland Revenue and Customs has on a few occasions seized counterfeit consumer goods that led to charges being pressed against the importer, including shipments containing counterfeit Nike shoes and Arco designer lamps in 2014. Iceland Revenue and Customs participated in the United Nations Office on Drugs and Crime’s campaign against counterfeit products in 2014 (https://www.tollur.is/embaettid/frettir/frett/2014/03/13/Althjodlegt-atak-gegn-eftirlikingum/).
Iceland is not listed in the USTR’s 2021 Special 301 Report, but the country is listed in the Notorious Markets for Piracy and Counterfeiting 2021 Report, as Iceland reportedly hosts servers for hosting provider FlokiNET.
6. Financial Sector
Capital controls were lifted in March 2017 after more than eight years of restricting the free movement of capital. New foreign currency inflows fall under the Rules on Special Reserve Requirements for new Currency Inflows, no. 223/2019 which took effect on March 6, 2019, and replaced the older Rules no. 490/2016 on the same subject. The rules contain provisions on the implementation of special reserve requirements for new foreign currency inflows, including the special reserve base, holding period, special reserve ratio, settlement currency, and interest rates on deposit institutions’ capital flow accounts with the Central Bank of Iceland and Central Bank certificates of deposit. For more information see the Central Bank of Iceland’s website (https://www.cb.is).
Foreign portfolio investment has increased significantly over the past few years in Iceland after being dormant in the years following the economic crash. U.S. investment funds have been particularly active on the Icelandic stock exchange. The Icelandic stock exchange operates under the name Nasdaq Iceland. Companies listed on Nasdaq Iceland are reported on its website (http://www.nasdaqomxnordic.com/hlutabref/Skrad-fyrirtaeki/iceland). The private sector has access to financing through the commercial banks and pensions funds.
The IMF 2019 Article IV Consultation report states that “the de jure exchange rate arrangement is free floating, and the de facto exchange rate arrangement under the IMF classification system is floating. In the period from November 2018 to October 31, 2019, the Central Bank of Iceland (CBI) intervened in the foreign exchange market on 14 of the 248 working days. The CBI publishes daily data on its foreign exchange intervention with a lag. Iceland has accepted the obligations under Article VIII, Sections 2(a), 3, and 4 and maintains no exchange restrictions subject to Fund jurisdiction under Article VIII, Section 2(a). Iceland continues to maintain certain measures that constitute exchange restrictions imposed for security reasons based on UN Security Council Resolutions.” (https://www.imf.org/en/Publications/CR/Issues/2019/12/19/Iceland-2019-Article-IV-Consultation-Press-Release-and-Staff-Report-48891).
The Central Bank of Iceland is an independent institution owned by the State and operates under the auspices of the Prime Minister. Its objective is to promote price stability, financial stability, and sound and secure financial activities. The bank also maintains international reserves and promotes a safe, effective financial system, including domestic and cross-border payment intermediation.
The Icelandic banking sector is generally healthy. The Central Bank of Iceland has since the financial collapse of 2008 introduced stringent measures to ensure that the financial system remains “safe, stable, and effective.” For more information see the Central Bank webpage (https://www.cb.is/financial-stability/). There are three commercial banks in Iceland, Landsbankinn, Islandsbanki, and Arion Bank. The Government of Iceland took over operations of the banks during the financial collapse in September and October 2008. Landsbankinn (formerly known as Landsbanki Islands) is still government-owned, while the Government of Iceland is in the process of privatizing Islandsbanki (formerly known as Glitnir). Arion Bank (formerly known as Kaupthing Bank) has been privatized and is listed on the Icelandic stock exchange Nasdaq Iceland. There is one investment bank in Iceland, Kvika, which is listed on Nasdaq Iceland. Icelandic pension funds offer loans and mortgages and are active investors in Icelandic companies. There are no foreign banks operating in Iceland.
All companies have access to regular commercial banking services in Iceland. Establishing a bank account in Iceland requires a local personal identification number known as a “kennitala.” Foreign nationals should contact Registers Iceland for more information on how to register in Iceland (https://www.skra.is/english/).
The Government of Iceland has proposed establishing a sovereign wealth fund, called the National Fund of Iceland. The bill to establish the fund has not passed through Parliament. The stated purpose of the fund is “to serve as a sort of disaster relief reserve for the nation, when the Treasury suffers a financial blow in connection with severe, unforeseen shocks to the national economy, either due to a plunge in revenues or the cost of relief measures that the government has considered unavoidable to undertake.”
7. State-Owned Enterprises
The Icelandic Government owns wholly or majority shares in 40 companies, including systematically important companies such as energy companies, the Icelandic National Broadcasting Service (RUV) and Iceland Post. Other notable SOEs are Landsbankinn (one of three commercial banks in Iceland), Isavia (public company that operates Keflavik International Airport), and ATVR (the only company allowed to sell alcohol to the general public). Here you can find a list of SOEs (https://www.stjornarradid.is/verkefni/rekstur-og-eignir-rikisins/felog-i-eigu-rikisins/). Total assets of SOEs in 2020 amounted to 5,735 billion ISK (approx. $44.3 billion) and SOEs employed around 5,100 people that same year. In terms of assets and equity, Landsbankinn (one of three commercial banks in Iceland) is the largest SOE in Iceland, and Isavia employs the most people.
State-owned enterprises (SOEs) generally compete under the same terms and conditions as private enterprises, except in the energy production and distribution sector. Private enterprises have similar access to financing as SOEs through the banking system.
As an OECD member, Iceland adheres to the OECD Guidelines on Corporate Governance. The Iceland Chamber of Commerce in Iceland, NASDAQ OMX Iceland and the Confederation of Icelandic Employers have issued guidelines that mirror the OECD Guidelines on Corporate Governance. Iceland is party to the Government Procurement Agreement (GPA) within the framework of the World Trade Organization (WTO).
For SOEs operating within the private sector in a competitive environment, the general guideline from the Icelandic government is that all decisions of the board of the SOE should ensure a level playing field and spur competition in the market.
In the midst of the banking crisis, the state, through the Financial Supervisory Authority (FME), took over Iceland’s three largest commercial banks, which collapsed in October 2008, and subsequently took over several savings banks to allow for uninterrupted banking services in the country. The government has started the privatization process of Islandsbanki, and currently owns 42.5 percent shares in the bank. The Bank Shares Management Company, established by the state in 2009, manages state-owned shares in financial companies.
The government of Iceland has acquired stakes in many companies through its ownership of shares in the banks; however, it is the policy of the government not to interfere with internal or day-to-day management decisions of these companies. Instead, in 2009, the state established the Bank Shares Management Company to manage the state-owned shares in financial companies. The board of this entity, consisting of individuals appointed by the Minister of Finance, appoints a selection committee, which in turn chooses the State representative to sit on the boards of the various companies.
While most energy producers are either owned by the state or municipalities, there is free competition in the energy market. That said, potential foreign investment in critical sectors like energy is likely to be met by demands for Icelandic ownership, either formally or from the public. For example, a Canadian company, Magma Energy, acquired a 95 percent stake in the energy production company HS Orka in 2010, but later sold a 33.4 percent stake to the Icelandic pension funds in the face of intense public pressure.
Iceland’s universal healthcare system is mainly state-operated. However, few legal restrictions to private medical practice exist; private clinics are required to maintain an agreement regarding payment for services with the Icelandic state, a foreign state, or an insurance company.
Icelandic authorities are currently in the process of privatizing Islandsbanki, one of Iceland’s three commercial banks. Authorities sold 35 percent shares in Islandsbanki in 2021, and 22.5 percent earlier this year. The government currently owns 42.5 percent in the bank. The government of Iceland currently owns 99.8 percent in Landsbankinn and has no immediate plans to privatize it. The government took ownership of the banks when the Icelandic banking system collapsed in 2008. Minister of Finance and Economic Affairs, Bjarni Benediktsson, has publicly declared his intentions to sell all government of Iceland shares in Islandsbanki, but wants the government to remain a large shareholder in Landsbankinn, with around 40 percent of shares.
8. Responsible Business Conduct
As an OECD member, Iceland adheres to the OECD Guidelines for Multinational Enterprises. The Ministry for Culture and Business Affairs houses Iceland’s National Contact Point for the Guidelines, charged with promoting the due diligence approach of the Guidelines to the business community and to facilitate the resolution of any disputes arising in the context of the Guidelines ( https://www.stjornarradid.is/verkefni/atvinnuvegir/vidskipti/almenn-vidskiptamal/ ).
Business Iceland (formerly Promote Iceland), which is a public-private agency responsible for promoting Iceland’s export sectors abroad, has signed the United Nations’ Global Compact (GC) and raises awareness of corporate social responsibility in Iceland. Festa, a non-profit organization which promotes sustainable development and corporate social responsibility, has over 120 associated members, including some of Iceland’s largest companies, public organizations, universities, and municipalities ( www.samfelagsabyrgd.is/festa ). Gagnsaei, an NGO affiliated with Transparency International, is active in Iceland and is a voice against corruption ( www.transparency.is ). There is a general awareness of corporate social responsibility among producers, companies, and consumers.
There was a high-profile case in 2018 and 2019 surrounding a private employment agency which has now been declared bankrupt, that allegedly mistreated migrant Romanian workers by failing to pay salaries and provide housing as per agreement. This case caused outrage in Iceland and many union and workers’ association leaders voiced their concerns in the media and stated that mistreatment of workers would not be tolerated. The Directorate of Labor fined the company in 2019 for failing to register workers adequately.
As an OECD member state, Iceland adheres to the OECD Due Diligence Guidance recommendations to help companies respect human rights and avoid contributing to conflict through their mineral purchasing decisions and practices. The Icelandic economy does not have a mining industry, other than extracting rocks and gravel for construction purposes. In 2013, former Icelandic Prime Minister Sigmundur David Gunnlaugsson issued a joint statement with the other Nordic Prime Ministers to reaffirm their support to the Extractive Industry Transparency Initiative (EITI).
Iceland’s 2018 Climate Acton Plan, which was updated in 2020, is designed to achieve national climate goals of making the country carbon neutral by 2040 and cutting greenhouse gas emissions by 40 percent by 2030 under the Paris Agreement. The MIT Technology Review’s Green Future Index ranked Iceland first out of 76 economies in 2021. The MIT report stated that Iceland has been “a global leader in geothermal energy for decades” and has constructed the world’s largest direct air capture CO2 capture and storage plant.
Isolated cases of corruption have been known to occur but are not an obstacle to foreign investment in Iceland or a recognized issue of concern in the government. In 2021 Iceland ranked 13 out of 180 economies on the Transparency International’s Corruption Perceptions Index. Iceland has signed the UN Convention against Corruption. Iceland is a member of the OECD Convention on Combatting Bribery.
The Council of Europe body Group of States Against Corruption (GRECO) published its fifth evaluation report on Iceland on April 12, 2018. GRECO found that Iceland had no dedicated government-wide policy plan on anti-corruption and that its agency and institution-specific codes of conduct were not sufficiently detailed and were often implemented in an ad hoc manner. For more information, see the GRECO report (https://rm.coe.int/fifth-evaluation-round-preventing-corruption-and-promoting-integrity-i/16807b8218). The Icelandic Parliament introduced a new law in 2020 on measures against conflict of interests for ministers, assistance to ministers, director generals at ministries, and ambassadors, concerning receiving gifts, additional job positions, and supervision of the aforementioned law.
In the wake of the financial collapse in Iceland in 2008, a Code of Conduct for Staff in the Government Offices of Iceland was established in 2012, “with the purpose of promoting professional methods and of confidence in public administration.” The code of conduct addresses workplace relations and procedures; behavior and conduct; conflicts of interest and shared interests; communication with the media, public and surveillance bodies; and responsibility and monitoring for Government Offices staff. For more information see the Government of Iceland’s website (https://www.government.is/ministries/prime-ministers-office/code-of-conduct-for-staff/). The code does not extend to family members of officials or political parties.
Contact at the government agency or agencies are responsible for combating corruption:
Ministry of Justice
Solvholsgata 7, 101 Reykjavik, Iceland
Politically motivated violence in Iceland is rare, and Iceland consistently ranks among the world’s safest countries. The World Bank’s Worldwide Governance Indicator on Political Stability and Absence of Violence placed Iceland in the top 97th percentile rank of all countries worldwide in 2020 (http://info.worldbank.org/governance/wgi/Home/Reports). In early 2014, frustration among voters regarding the then-governing Progressive Party-Independence Party coalition government’s withdrawal of Iceland’s accession bid to the European Union led to the largest protests since the financial collapse; these protests did not include violence. Non-violent protests led to a governmental reorganization and early elections following the 2016 “Panama Papers” scandal. A subsequent government, composed of the Independence Party, Bright Future, and the Reform Party, took office in early 2017 and collapsed within a year. The current coalition government, composed of the Independence Party, Progressive Party, and the Left-Green Movement, assumed power in November 2017 and began its second term November 28, 2021.
There have been individual cases of politically motivated vandalism of foreign holdings in recent years, directed primarily at the aluminum industry.
11. Labor Policies and Practices
The labor force in Iceland is highly skilled and educated. The labor force consisted of 208,900 people aged between 16 and 74 years old at the end of 2021 according to Statistics Iceland. Of them, 199,700 people were employed and 9,200 unemployed at the end of 2021. According to Statistics Iceland, the unemployment rate was 4.4 percent in December 2021, while the Directorate of Labor reported 4.9 percent unemployment for the same month. Foreign labor plays a large role in unskilled and semi-skilled sectors such as tourism and construction. In December 2021, 38,000 immigrants were employed in Iceland, according to Statistics Iceland. Women in Iceland are almost on par with men when it comes to labor participation, with 77.2 percent of women being active on the job market, compared to 79 percent of men, according to Statistics Iceland. The Icelandic population is highly educated, with 33.3 percent of 16-to-74-year old’s having tertiary/university education.
Icelandic Labor Laws are taken seriously in Iceland, and there are no waivers to attract or retain investment. The labor unions and Directorate of Labor conduct spot inspections on worksites to monitor legal compliance. The labor market is highly unionized, with 91.9 percent of the workforce members of trade unions in 2020, according to Statistics Iceland.
Icelandic labor unions are decentralized and not politically affiliated. Collective bargaining power, in both the public and the private sectors, rests with individual labor unions. The law does not establish a minimum wage, but the minimum wages negotiated in collective bargaining agreements apply automatically to all employees in those occupations, including foreign workers, regardless of union membership. While the agreements can be either industry-wide, sector-wide, or in some cases firm-specific, the type of position defines the negotiated wage levels. The government has sometimes imposed mandatory mediation to avert or end strikes in key economic sectors such as healthcare or fisheries.
According to collective bargaining agreements, the standard work week is 37.5 hours, or 7.5 hours a day. Employees have the right to take a 15-minute paid break within the standard workday. Lunch, either 30 or 60 minutes, is then added to the standard workday. The law requires that employers compensate work exceeding eight hours per day as overtime. Collective bargaining agreements determine the terms of overtime pay, but they do not vary significantly across unions. The law limits the total hours a worker may work, including overtime, to 48 hours a week on average during each four-month period. Typical holiday and shift-work rates are 40 percent above the standard shift rate and may be up to 45 percent more if total work hours exceed full-time employment. The law entitles workers to 11 hours of rest in each 24-hour period and one full day off each week. Under specially defined circumstances, employers may reduce the 11-hour rest period to no fewer than eight hours, but they must then compensate workers with corresponding rest time later. They may also postpone a worker’s day off, but the worker must receive the corresponding rest time within 14 days.
Outside terminating an employee, employers are by law prohibited from making unilateral amendments to hiring contracts. Companies are mandated to report mass layoffs to the Directorate of Labor. Terminated employees retain the same rights to severance benefits regardless of whether they were part of a mass layoff or fired. For further information, see the Directorate of Labor website (https://vinnumalastofnun.is/en).
The COVID-19 crisis had a massive impact on Ireland’s economy and its effects will continue in 2022. The Irish government implemented varying degrees of lockdown measures in response to the COVID-19 pandemic from the onset in March 2020, including restrictions to close non-essential businesses and services for extended periods of time. Unemployment (including COVID-19 related temporary unemployment) peaked at 28.1 percent in April 2020. Ireland’s official unemployment rate remained around 5 percent (currently at 5.2 percent as of February 2022) due to the unprecedented pandemic related government assistance programs to businesses and workers furloughed due to COVID-19. Over the past two years, the government sustained a level of unprecedented deficit spending to combat the pandemic. Despite the prolonged difficulties caused by COVID-19, Ireland’s economy performed extremely well with GDP growth of 13.5 percent recorded in 2021 following growth of 5.9 percent in 2020. Most of this growth can be attributed to export focused industries (technology, pharmaceutical, and other large multinational companies headquartered in Ireland) while the domestic economy struggled with temporary business closures due to the restrictions. Russia’s invasion of Ukraine exasperated Ireland’s growing inflation concerns with fuel and gas price rises leading to price increases across all sectors, which could dampen consumer spending and confidence and could result in lower-than-expected growth for 2022.
The Irish government actively promotes foreign direct investment (FDI) and has had considerable success in attracting investment, particularly from the United States. There are over 950 U.S. subsidiaries in Ireland operating primarily in the following sectors: chemicals, biosciences, pharmaceutical and medical devices; computer hardware and software; internet and digital media; electronics, and financial services.
One of Ireland’s many attractive features as an FDI destination is its favorable 12.5 percent corporate tax (in place since 2003), the second lowest in the European Union (EU). Ireland signed the OECD Inclusive Framework Agreement, which institutes minimum corporate tax rate of 15 percent when implemented. Firms routinely note that they come to Ireland primarily for the high quality and flexibility of the English-speaking workforce; the availability of a multilingual labor force; cooperative labor relations; political stability; and pro-business government policies and regulators. Additional positive features include a transparent judicial system; transportation links; proximity to the United States and Europe; and Ireland’s geographic location making it well placed in time zones to support investment in Asia and the Americas. Ireland benefits from its membership of the EU and a barrier-free access to a market of almost 500 million consumers. In addition, the clustering of existing successful industries has created an ecosystem attractive to new firms. The United Kingdom’s (UK) departure from the EU, or Brexit, on January 1, 2021, leaves Ireland as the only remaining English-speaking country in the EU and may make Ireland even more attractive as a destination for FDI.
The Irish government treats all firms incorporated in Ireland on an equal basis. Ireland’s judicial system is transparent and upholds the sanctity of contracts, as well as laws affecting foreign investment. Conversely, Ireland’s ability to attract investment are often marred by relatively high labor and operating costs (such as for energy); skilled-labor shortages; licensing and permitting challenges (e.g., for zoning, rezoning, project permissions, etc.) Eurozone-risk; infrastructure in need of investment (such as in transportation, affordable housing, energy and broadband internet); high income tax rates; uncertainty in EU policies on some regulatory matters; and absolute price levels among the highest in Europe.
New data centers must meet new requirements regarding location, energy consumption and energy storage as Ireland’s electricity system struggles to meet demand for energy.
A formal national security screening process for foreign investment in line with the EU framework is expected to be in place by late 2022, though the original date was 2020 but delayed due to the pandemic. At present, investors looking to receive government grants or assistance through one of the four state agencies responsible for promoting foreign investment in Ireland are often required to meet certain employment and investment criteria.
Ireland uses the euro as its national currency and enjoys full current and capital account liberalization.
The government recognizes and enforces secured interests in property, both chattel and real estate. Ireland is a member of the World Intellectual Property Organization (WIPO) and a party to the International Convention for the Protection of Intellectual Property.
Several state-owned enterprises (SOEs) operate in Ireland in the energy, broadcasting, and transportation sectors. All of Ireland’s SOEs are open to competition for market share.
While Ireland has no bilateral investment treaties, the United States and Ireland have shared a Friendship, Commerce, and Navigation Treaty since 1950 that provides for national treatment of U.S. investors. The two countries have also shared a Tax Treaty since 1998, supplemented in December 2012 with an agreement to improve international tax compliance and to implement the U.S. Foreign Account Tax Compliance Act (FATCA).
1. Openness To, and Restrictions Upon, Foreign Investment
The Irish government actively promotes FDI, a strategy that has fueled economic growth since the mid-1990s. The principal goal of Ireland’s investment promotion has been employment creation, especially in technology-intensive and high-skill industries. More recently, the government has focused on Ireland’s international competitiveness by encouraging foreign-owned companies to enhance research and development (R&D) activities and to deliver higher-value goods and services.
U.S. companies are attracted to Ireland as an exporting sales and support platform to the EU market of almost 500 million consumers and other global markets. Ireland is a successful FDI destination for many reasons, including a currently low corporate tax rate of 12.5 percent for all domestic and foreign firms (Ireland is party to the October 2021 OECD deal on a global minimum corporate tax that will set the tax rate to 15 percent); a well-educated, English-speaking workforce; the availability of a multilingual labor force; cooperative labor relations; political stability; and pro-business government policies and regulators. Ireland also benefits from a transparent judicial system; good transportation links; proximity to the United States and Europe, and the drawing power of existing companies operating successfully in Ireland (a so-called “clustering” effect).
The stock of American FDI in Ireland stood at USD 390 billion in 2020, more than the U.S. total for Brazil, Russia, India, China, and South Africa (the so-called BRICS countries) combined. There are approximately 900 U.S. subsidiaries currently in Ireland employing roughly 190,000 people and supporting work for another 152,000. This figure represents a significant proportion of the 2.51 million people employed in Ireland. U.S. firms operate primarily in the following sectors: chemicals, biosciences, pharmaceuticals and medical devices, computer hardware and software, web and digital media; electronics, and financial services.
U.S. investment has been particularly important to the growth and modernization of Irish industry over the past thirty years, providing new technology, export capabilities, management and manufacturing best practices, and employment opportunities. Ireland has more recently become an important R&D center for U.S. firms in Europe, and a magnet for U.S. internet and digital media investment. Industry leaders like Google, Amazon, eBay, PayPal, Meta (Facebook), Twitter, LinkedIn, Electronic Arts and cybersecurity firms like Tenable, Forcepoint, AT&T Cybersecurity, McAfee use Ireland as the hub or important part of their respective European, and sometimes Middle Eastern, African, and/or Indian operations.
Factors that challenge Ireland’s ability to attract investment include relatively high labor and operating costs (such as for energy); sporadic skilled-labor shortages; the fall-out from the COVID-19 pandemic; and sometimes-deficient infrastructure (such as in transportation, energy and broadband quality). Ireland also suffers from housing and high-quality office space shortages; and absolute price levels that are among the highest in Europe. The American Chamber of Commerce in Ireland has called for greater attention to a “skills gap” in the supply of Irish graduates to the high technology sector. It also has asserted that relatively high personal income tax rates can make attracting talent from abroad difficult.
In 2013, Ireland became the first country in the Euro zone to exit a financial bailout program from the EU, European Central Bank, and International Monetary Fund (EU/ECB/IMF, or so-called Troika). Compliance with the terms of the Troika program came at a substantial economic cost with gross domestic product (GDP) stagnation and austerity measures, while dealing with high unemployment (which hit 15 percent). Strong economic progress followed through government-backed initiatives to attract investment and stimulate job creation and employment.
Despite the prolonged difficulties caused by the COVID-19 pandemic, Ireland’s economic performance continued to be the best in the Euro zone in 2021 with an estimated 13.5 percent growth, achieved on the back of strong exports from the food, pharmaceutical and med-tech sectors and other large multinational companies headquartered in Ireland. The domestic economy struggled with temporary business closures due to the restrictions. With Ireland’s official unemployment rate at 5.2 percent in February 2022, employers are expecting a tight labor market over the next year. Ireland’s sovereign debt remains attractive to investors exemplifying international confidence in Ireland’s economic progress.
The UK’s exit from the EU (Brexit) in 2021, leaves Ireland as the only remaining English-speaking country in the bloc. The UK is now a non-EU member which shares a land border with Ireland. The December 2020 Brexit agreement dictates the future trading relationship between the UK and the EU and will likely affect Ireland’s future economic performance. The agreement allows for tariff-free Ireland to Great Britain (England, Scotland, and Wales) trade but comes with increased customs procedures. Existing Ireland – Northern Ireland trade continues unimpeded (aka, the Northern Ireland Protocol). While some disruption has been noticed in the supply chain of retail and agricultural sectors (due to their traditional use of the UK “land-bridge” to move products to and from the EU), Irish companies have generally been able to find alternate routes (i.e., using ferries from Ireland directly to continental Europe), though this has raised costs in some sectors. The EU and UK are in ongoing discussions to ensure the Northern Ireland Protocol remains.
With Brexit, Ireland has lost a close EU ally on policy matters, particularly free trade and business friendly open markets. Ireland continues to be heavily dependent on the UK as an export market and source especially for food products, and the full effect of Brexit may yet hit sectors such as food and agri-business with disruptions to supply chains and increased red-tape. Irish trade with its EU colleagues has already seen a dramatic switch to direct shipping rather than using Great Britain as a land-bridge for trucking products. Some UK-based firms (including U.S. firms) have moved headquarters or opened subsidiary offices in Ireland to facilitate ease of business with other EU countries. The Irish Department of Finance and the Central Bank of Ireland (CBI) estimate Brexit will cut Ireland’s economic growth modestly in the near term, but such models are complicated with the effect of the COVID-19 pandemic and Russia’s invasion of Ukraine.
Six government departments and organizations have responsibility to promote investment into Ireland by foreign companies:
The Industrial Development Authority of Ireland (IDA Ireland) has overall responsibility for promoting and facilitating FDI in Ireland. IDA Ireland is also responsible for attracting foreign financial and insurance firms to Dublin’s International Financial Services Center (IFSC). IDA Ireland maintains seven U.S. offices (in New York, NY; Boston, MA; Chicago, IL; Mountain View, CA; Irvine, CA; Atlanta, GA; and Austin, TX), as well as offices throughout Europe and Asia.
Enterprise Ireland (EI) promotes joint ventures and strategic alliances between indigenous and foreign companies. The agency assists entrepreneurs establish in Ireland and assists foreign firms that wish to establish food and drink manufacturing operations in Ireland. EI has six existing offices in the United States (Austin, TX; Boston, MA; Chicago, IL; New York, NY; San Francisco, CA; and Seattle, WA and has offices in Europe, South America, the Middle East, and Asia.
Shannon Group (formerly the Shannon Free Airport Development Company) promotes FDI in the Shannon Free Zone (SFZ) and owns properties in the Shannon region as potential green-field investment sites. Since 2006, the responsibility for investment by Irish firms in the Shannon region has passed to Enterprise Ireland while IDA Ireland remains responsible for FDI in the region.
Udaras na Gaeltachta (Udaras) has responsibility for economic development in those areas of Ireland where the predominant language is Irish. Udaras works with IDA Ireland to promote overseas investment in these regions.
Department of Foreign Affairs (DFA) has responsibility for economic messaging and supporting the country’s trade promotion agenda as well as diaspora engagement to attract investment.
Department of Enterprise, Trade and Employment (DETE) supports the creation of jobs by promoting the development of a competitive business environment where enterprises can operate with high standards and grow in sustainable markets.
Irish law allows foreign corporations (registered under the Companies Act 2014 or previous legislation and known locally as a public limited company (plc)) to conduct business in Ireland. Any company incorporated abroad that establishes a branch in Ireland must file certain papers with the Companies Registration Office (CRO). A foreign corporation with a branch in Ireland has the same standing in Irish law for purposes of contracts, etc., as a domestic company incorporated in Ireland. Private businesses are not competitively disadvantaged to public enterprises with respect to access to markets, credit, and other business operations.
No barriers exist to participation by foreign entities in the purchase of state-owned Irish companies. Residents of Ireland may, however, be given priority in share allocations over all other investors. There are no recent examples of this, but Irish residents did receive priority in share allocations in the 1998-sale of the state-owned telecommunications company Eircom. The government privatized the national airline Aer Lingus through a stock market flotation in 2005 but chose to retain about a one-quarter stake. At that time, U.S. investors purchased shares in the sale. The International Airlines Group (IAG) purchased the government’s remaining stake in the airline in 2015, and subsequently took an overall controlling interest which it continues to hold.
Citizens of countries other than Ireland and EU member states can acquire land for private residential or industrial purposes. In the past, all non-EU nationals needed written consent from the Department of Agriculture, Food and the Marine before acquiring an interest in land zoned for agricultural use but these limitations no longer exist. There are many equine stud farms and racing facilities owned by foreign nationals. No restrictions exist on the acquisition of urban land.
Ireland does not yet have formal investment screening legislation in place. Draft legislation has been submitted to the Dail (Irish parliament) which is expected to be enacted during 2022. (The bill was partially delayed due to the government’s efforts to respond to the COVID-19 pandemic.) As a member of the EU, Ireland is required to implement any common EU investment screening regulations or directives such as the EU Framework.
There were no third-party investment policy reviews in the past five years.
All firms must register with the Companies Registration Office (CRO) online at www.cro.ie. The CRO, as well as registering companies, can also register a business/trading name, a non-Ireland based foreign company (external company), or a limited partnership. Any firm or company registered under the Companies Act 2014 becomes a body corporate as and from the date mentioned in its certificate of incorporation. The CRO website permits online data submission. Firms must submit a signed paper copy of this online application to the CRO, unless the applicant company has already registered with www.revenue.ie (the website of Ireland’s tax collecting authority, the Office of the Revenue Commissioners).
The Ireland pages in the following link gives the most up-to-date information:
Enterprise Ireland assists Irish firms in developing partnerships with foreign firms mainly to develop and grow indigenous firms.
3. Legal Regime
Ireland’s judicial system is transparent and upholds the sanctity of contracts, as well as laws affecting foreign investment. These laws include:
The Companies Act 2014 which contains the basic requirements for incorporation in Ireland;
The 2004 Finance Act which introduced tax incentives to encourage firms to set up headquarters in Ireland and to conduct R&D;
The Mergers, Takeovers and Monopolies Control Act of 1978 which sets out rules governing mergers and takeovers by foreign, and domestic firms;
The Competition (Amendment) Act of 1996 which amends and extends the Competition Act of 1991 and the Mergers and Takeovers (Control) Acts of 1978 and 1987, and sets out the rules governing competitive behavior; and,
The Industrial Development Act (1993) which outlines the functions of IDA Ireland.
The Companies Act (2014), with more than 1,400 sections and 17 Schedules, is the largest-ever Irish statute. The Act consolidated and reformed all Irish company law for the first time in over 50 years.
In addition, numerous laws and regulations pertain to employment, social security, environment protection and taxation, with many of these keyed to EU regulations and directives.
Ireland has been a member of the EU since 1973. As a member, it incorporates all EU legislation into national legislation and applies all EU regulatory standards and rules. Ireland is a member of the World Trade Organization (WTO) and follows all WTO procedures
Ireland’s legal system is common law. Courts are presided over by judges appointed by the President of Ireland (on the advice of the government). The Commercial Court is a designated court of the High Court which deals with commercial disagreements between businesses where the value of the claim is at least €1 ($1.2) million. The Commercial Court also oversees cases on intellectual property rights, including trademarks and trade secrets.
Ireland treats all firms incorporated in Ireland on an equal basis. With only a few exceptions, no constraints prevent foreign individuals or entities from ownership or participation in private firms/corporations. The most significant of these exceptions is that, in common with other EU countries, Irish airlines must be at least 50 percent owned by EU residents to have full access to the single European aviation market. Citizens of countries other than Ireland and EU member states can acquire land for private residential or industrial purposes.
In the past, one of Ireland’s many attractive features as an FDI destination was its low corporate tax rate. Since 2003, the headline corporate tax rate was 12.5 percent, one of the lowest in the EU. In 2014, the government announced firms would no longer be able to incorporate in Ireland without also being tax resident. Prior to this, firms could incorporate in Ireland and be tax resident elsewhere, making use of a tax avoidance arrangement colloquially known as the “Double Irish” to reduce tax liabilities. The Irish government is party to the OECD’s Base Erosion and Profit Sharing (BEPS) negotiations and ratified the BEPS Multilateral Instrument in January 2019. The government implemented a Knowledge Development Box (KDB), effective 2016, which is consistent with OECD guidelines. The KDB allows for the application of a tax rate of 6.25 percent on profits arising to certain intellectual property assets that are the result of qualifying research and development activities carried out in Ireland.
In October 2021, Ireland signed up to the OECD Inclusive Framework Agreement and will raise its corporate tax rate to 15 percent when implemented.
The Competition and Consumer Protection Commission (CCPC) is an independent statutory body with a dual mandate to enforce competition and consumer protection law in Ireland. The CPCC was established in 2014, following the amalgamation of the National Consumer Agency and the Competition Authority. The CPCC enforces Irish and EU competition law in Ireland. It has the power to conduct investigations and can take civil or criminal enforcement action if it finds evidence of breaches of competition law.
The CPCC is given enforcement powers by the Competition Act of 2002, subsequently amended and extended by the Competition Act 2006. The Act introduced criminal liability for anti-competitive practices, increased corporate liability for violations, and outlined available defenses. Most tax, labor, environment, health and safety, and other laws are compatible with EU regulations, and they do not adversely affect investment. The government publishes proposed drafts of laws and regulations to solicit public comment, including those by foreign firms and their representative trade associations. Bureaucratic procedures are transparent and reasonably efficient, in line with the general pro-business approach of the government.
The Irish Takeover Panel Act of 1997 gives the ‘Irish Takeover Panel’ responsibility for monitoring and supervising takeovers and other relevant corporate transactions. The minority squeeze-out provisions in the legislation, allows a bidder who holds 80 percent of the shares of the target firm (or 90 percent for firms with securities on a regulated market) to compel the remaining minority shareholders to sell their shares. There are no reports that the Irish Takeover Panel Act has prevented foreign takeovers, and, in fact, there have been several high-profile foreign takeovers of Irish companies in the banking and telecommunications sectors in the past. Although not recent, Babcock & Brown (an Australian investment firm) acquired the former national telephone company, Eircom in 2006 which it subsequently sold to Singapore Technologies Telemedia in 2009.
The EU Directive on Takeovers provides a framework of common principles for cross-border takeover bids, creates a level playing field for shareholders, and establishes disclosure obligations throughout the EU. Irish legislation fully implemented the directive in 2006, though the Irish Takeover Panel Act 1997 had already incorporated many of its principles.
Companies must notify the CCPC of mergers over a certain financial threshold for review as required by the Competition Act 2002, as amended (Competition Act).
The government normally expropriates private property only for public purposes in a non-discriminatory manner and in accordance with established principles of international law. The government condemns private property in accordance with recognized principles of due process.
The Irish courts provide a system of judicial review and appeal where there are disputes brought by owners of private property subject to a government action.
There is no specific domestic body for handling investment disputes apart from the judicial system. The Irish Constitution, legislation, and common law form the basis for the Irish legal system. DETE has primary responsibility for drafting and enforcing company law. The judiciary is independent, and litigants are entitled to trial by jury in commercial disputes.
ICSID Convention and New York Convention
Ireland is a member of the International Center for the Settlement of Investment Disputes (ICSID) and a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, meaning local courts must enforce international arbitration awards under appropriate circumstances.
Some U.S. business representatives have occasionally called into question the transparency of Irish government tenders. According to some U.S. firms, lengthy procedural decisions often delay the procurement tender process. Unsuccessful bidders have expressed concerns over difficulties receiving information on the rationale behind the tender outcome. In addition, some successful bidders have experienced delays in finalizing contracts, commencing work on major projects, obtaining accurate project data, and receiving compensation for work completed, including through conciliation and arbitration processes. Some successful bidders have also subsequently found that the original tenders may not have accurately described conditions on the ground.
Investor-State Dispute Settlement
Ireland treats all firms incorporated in Ireland on an equal basis. Ireland’s legal system is common law and Ireland’s courts apply Irish and EU legislation. All disputes are dealt with judicially. In the past ten years, we are not aware of any investment disputes involving U.S. investors nor of any extrajudicial action against foreign investors.
International Commercial Arbitration and Foreign Courts
Ireland’s judicial court system is used to settle all investor disputes. Investment disputes involving U.S. or other foreign investors in Ireland are extremely rare. There were no known instances of SOE investment disputes in the past five years.
The Companies Act 2014 is the most important body of law dealing with commercial and bankruptcy law, which Irish courts consistently apply. Irish company bankruptcy legislation gives creditors a strong degree of protection.
4. Industrial Policies
Three Irish organizations – IDA Ireland (IDA), EI, and Udaras – have regulatory authority for administering grant aid to investors for capital equipment, land, buildings, training, and R&D. Foreign and domestic business enterprises seeking grant aid from these organizations must submit detailed investment proposals. These proposals typically include information on fixed assets (capital), labor, and technology/R&D components, and establish targets using criteria such as sales, profitability, exports, and employment. The submitted information is business confidential, and each investment proposal is subject to an economic appraisal before support is offered or denied.
Ireland’s investment agencies and foreign investors jointly establish employment creation targets, which usually serve as the basis for performance requirements. The agencies only pay grant aid after the foreign investors have attained externally audited performance targets. Grant-aid agreements generally have a repayment term of five years after the date on which the last installment is paid. Parent companies of the investor generally must also guarantee repayment of the government grant if the grant-aided company closes before an agreed time period elapses, normally ten years after the grant was paid. There are no requirements foreign investors must procure locally or allow nationals to own shares.
The EU Regional Aid Guidelines (RAGs) in place from 2022- 2027, govern the maximum grant-aid the Irish government can provide to firms/businesses which are graded based on the regional location. The differences in the various aid ceilings reflect the relative development status of business/infrastructure in regions outside the greater Dublin area.
Investors are generally free, subject to planning permission, to choose the location of their investment, however IDA has actively encouraged investment in regions outside Dublin since the 1990s. Investment regionalization has been government policy since 2001. IDA set out its plan to secure 800 investments and generate 50,000 new jobs by 2025 in its Driving Recovery and Sustainable Growth 2021 – 2024 strategy. IDA’s goal is to locate over half of all new FDI investments outside the two main urban centers of Dublin and Cork. IDA has developed regional hubs to facilitate clusters of activity around the country. In the past IDA has supported construction of business parks in counties Galway and Louth, to encourage biotechnology sector activity in those counties.
There are no restrictions on participation by foreign firms in government-financed and/or -subsidized R&D programs on a national basis. In fact, the government strongly encourages and incentivizes (via a partial tax break) foreign companies to conduct R&D as part of its national strategy to build a more knowledge-intensive, innovation-based economy. Science Foundation Ireland (SFI), the state science agency, has been responsible for administering Ireland’s R&D funding since 2000. Under its current strategy, SFI annually invests over USD 200 million in R&D activities. SFI targets leading researchers in Ireland and overseas to promote the development of biotechnology, information and communications technology; and energy. SFI has specific research centers of excellence – hubs that draw researchers from all of Ireland’s universities together for research on specific themes.
The U.S.-Ireland Research and Development Partnership (UIRDP), launched in 2006, is a unique initiative involving funding agencies across three jurisdictions: the United States, Ireland, and Northern Ireland (NI). Under the program, a ‘single-proposal, single-review’ mechanism is facilitated by the National Science Foundation and National Institutes of Health in the United States, which accept submissions from tri-jurisdictional (U.S., Ireland, and NI) teams for existing funding programs. All proposals submitted under the auspices of UIRDP must have significant research involvement from researchers in all three jurisdictions. In 2015, the UIRDP program topics expanded to include agricultural research; and in 2019 cybersecurity research was also incorporated as a topic.
A key aspect of government support is a tax credit on the cost of eligible research, development, and innovation (RDI) activity; and on buildings used for RDI activity. A tax credit of 25 percent is subject to certain conditions and is available for R&D activities carried out in a wide variety of science and technology areas such as software development, engineering, food and beverage production, medical devices, pharmaceuticals, financial services; agriculture and horticulture. Some U.S. firms have already used these tax credits to build and operate R&D facilities.
The Irish government’s Knowledge Development Box (KDB), introduced in 2016, also offers a lower tax rate for certain R&D activities carried out in Ireland.
The government established Shannon duty-free Processing Zone under legislation in 1957. Firms operating in the area were at the time entitled to taxation and duty-free benefits not available elsewhere in Ireland. Nowadays, all firms in Ireland are treated equally and the Shannon Free Zone (SFZ) as it is now called, continues to operate albeit without any additional tax benefits.
All firms operating in the SFZ area have the same investment opportunities and tax incentives as indigenous Irish companies. More than 150 companies operate within the 254-hectare business park.
U.S. companies are located in SFZ include: Benex (Becton Dickinson), Connor-Winfield, Digital River, Enterasys Networks, Extrude Hone, GE Capital Aviation Services, GE Money, Sensing, Genworth Financial, Intel, Illinois Tool Works, Kwik-Lok, Lawrence Laboratories (Bristol Myers Squibb), Le Bas International, Magellan Aviation Services, Maidenform, Melcut Cutting Tools (SGS Carbide Tools), Mentor Graphics, Phoenix American Financial Services, RSA Security, Shannon Engine Support (CFM International), SPS International/Hi-Life Tools (Precision Castparts Corp), Sykes Enterprises, Symantec, Travelsavers Corp, Viking Pump, Western Well Tool, Xerox, and Zimmer Biomet.
The Shannon Group currently operates the SFZ, as well as Shannon Airport.
Visa, residence, and work permit procedures for foreign investors are non-discriminatory and, for U.S. citizens (as investors or employees), generally liberal. No restrictions exist on the numbers of, and duration of employment for, foreign managers brought in to supervise foreign investment projects, though all work permits must be renewed annually. There are no discriminatory export policies or import policies affecting foreign investors.
The government does not force data-localization, nor does it require foreign information technology providers to turn over source code and/or provide access to surveillance (e.g., backdoors into hardware and software, or encryption keys). There are no rules on maintaining minimum amounts of data storage in Ireland. Many U.S. firms already operate, and are planning for additional, data centers in Ireland. Future construction of new data centers may face additional planning restrictions particularly to access the power grid. In November 2021, Ireland’s energy regulator, the Commission for Regulation of Utilities (CRU), announced new requirements regarding location, energy consumption, and energy storage for future data centers connecting to the power grid.
5. Protection of Property Rights
The government recognizes and enforces secured interests in property, both chattel and real estate. The Department of Justice and Equality (DJE) administers a reliable system of recording such security interests through the Property Registration Authority (PRA) and Registry of Deeds. The PRA registers a person’s interest in property on a public register. All property buyers must since 2010 register their acquisition with the PRA.
Ireland also operates a document registration system through the Registry of Deeds in which deeds (as distinct from titles) may be registered, priority obtained, and third parties placed on notice of the existence of documents of title. An efficient, non-discriminatory legal system is accessible to foreign investors to protect and facilitate acquisition and disposition of all property rights.
Ireland is a member of the World Intellectual Property Organization (WIPO) and party to many of its treaties, including the Berne Convention, the Paris Convention, the Patent Cooperation Treaty, the WIPO Copyright Treaty, and the WIPO Performances and Phonograms Treaty.
Legislation enacted in 2000 brought Irish intellectual property rights (IPR) law into compliance with Ireland’s obligations under the WTO Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement. The legislation gave Ireland one of the most comprehensive legal frameworks for IPR protection in Europe. It also addressed several TRIPs inconsistencies in prior Irish copyright law that had concerned foreign investors, including the absence of a rental right for sound recordings, the lack of an anti-bootlegging provision, and low criminal penalties that failed to deter piracy. The legislation provides for stronger penalties on both the civil and criminal sides, but it does not include minimum mandatory sentencing for IPR violations. As part of this comprehensive legislation, revisions were also made to non-TRIPS conforming sections of Irish patent law.
Specifically, the IPR legislation addressed two outstanding concerns of many foreign investors in the previous legislation:
The compulsory licensing provisions of the previous 1992 Patent Law were inconsistent with the “working” requirement prohibition of TRIPs Articles 27.1 and the general compulsory licensing provisions of Article 31; and,
Applications processed after December 20, 1991 did not previously conform to the non-discrimination requirement of TRIPs Article 27.1.
The government continues to crack down on the sale of illegal cigarettes smuggled into the country by international and local organized criminal groups. High taxation on tobacco products makes illegal trade in counterfeit and untaxed cigarettes highly lucrative. Ireland became the first European country, and fourth globally, to enact legislation on plain packaging for tobacco products via The Public Health (Standardized Packaging of Tobacco) Act in 2015. In practice, all tobacco packaging is devoid of branding, and health warnings cover nearly the entire box with only the producer/product name otherwise visible. The legislation has been in force since September 2018.
The Irish government has transcribed the 2012 EU Copyright and Related Rights Regulations into law. This legislation makes it possible for copyright holders to seek court injunctions against firms, such as internet service providers (ISPs) or social networks, whose systems host copyright-infringing material. Irish courts ensure any remedy provided will uphold the freedom of ISPs to conduct their business. The legislation ensures that the government cannot mandate any ISP to carry out monitoring of information. The legislation also ensures that measures implemented are “fair and proportionate” and not “unnecessarily complicated or costly.” The law also states that the Courts must respect the fundamental rights of ISP customers, including the customers’ right to protection of personal data and the freedom to receive or impart information.
The government enacted the Copyright and Other Intellectual Property Law Provisions Act in 2019. The legislation improves provision for copyright and other IPR protection in the digital era, and its enables rights holders to better enforce their IPR in the courts.
Ireland implemented the EU’s 2019 Copyright in the Digital Single Market directive in November 2021.
Ireland is not included on the U.S. Trade Representative’s (USTR’s) Special 301 Report or the Notorious Markets List.
Capital markets and portfolio investments operate freely with no discrimination between Irish and foreign firms. In some instances, development authorities and commercial banks facilitate loan packages to foreign firms with favorable credit terms. All loans are offered on market terms. There was limited credit available, especially to small and medium-sized enterprises (SMEs), after the financial crisis of 2008. Bank balance sheets have since improved with lending levels increasing as the health of the economy improved. The government established the Strategic Banking Corporation of Ireland (SBCI) to ensure SMEs had access to credit available at market terms. Irish legal, regulatory, and accounting systems are transparent and consistent with international norms and provide a secure environment for portfolio investment. The current capital gains tax rate is 33 percent (since December 2012).
Euronext, an EU-based grouping of stock exchange operators in 2018 acquired and operates the Irish Stock Exchange (ISE), now known as Euronext Dublin.
The Irish banking sector, like many worldwide, came under intense pressure in 2007 and 2008 following the collapse of Ireland’s construction industry and the end of Ireland’s property boom. A number of Ireland’s financial lenders were severely under-capitalized and required government bailouts to survive. The government, fearing a flight of private investments, introduced temporary guarantees (still in operation) to personal depositors in 2008 to ensure that deposits remained in Ireland. Anglo Irish Bank (Anglo), a bank heavily involved in construction and property lending, failed and was resolved by the government. The government subsequently took majority stakes in several other lenders, effectively nationalized two banks and acquired a significant proportion of a third. The National Asset Management Agency (NAMA), established in 2009, acquired most of the property-related loan books of the Irish banks (including Anglo) at a fraction of their book value.
The government, with its increased exposure to bank debts and a rising budget deficit, had difficulty in placing sovereign debt on international bond markets following the economic crash of 2008. Ireland sought and got assistance from the Troika (International Monetary Fund (IMF), EU and European Central Bank (ECB)) in November 2010. A rescue package of $110 (€85) billion, with $88 (€67.5) billion of this provided by the Troika, was agreed to cover government deficits and costs related to the bank recapitalizations.
The government then took effective control of Allied Irish Bank (AIB), following a further recapitalization by the end of 2010. The government took into state control, and then resolved, two building societies, Irish Nationwide Building Society and Educational Building Society. The government helped re-capitalize Irish Life and Permanent (the banking portion of which was spun off and now operates under the name Permanent TSB) and the Bank of Ireland (BOI).
Irish banks were forced to deleverage their non-core assets in line with Troika bailout program recommendations and were effectively limited to service domestic banking demand. BOI succeeded in remaining non-nationalized by realizing capital from the sale of non-essential portfolios and by imposing some targeted burden sharing with some of its bondholders. The government has been actively selling down its stake in BOI since 2021 and its holding has declined to below 6 percent. The government also signaled its to fully sell off its AIB shareholding by mid-2022.
Soon after it exited the Troika program in 2013, Ireland re-entered sovereign debt markets. International financing rates continued to fall to record lows for Irish debt, and Ireland was able to fully repay all of its IMF loans by securing bond sales at less expensive rates. Ireland also paid off some bilateral loans extended to it by Denmark and Sweden ahead of schedule in 2017. Currently, Ireland is placing its sovereign debt at very low interest rates in line with other nations.
Ireland’s retail banking sector rebounded from the crisis and is now healthy and well capitalized in line with ECB rules on bank capitalizations. The stock of non-performing loans on bank balance sheets remains high; and banks continue to divest themselves of these loans through bundle sales to investors. Ulster Bank, part of the UK-based NatWest Banking group and Ireland’s third largest retail bank, announced its withdrawal from retail banking in Ireland.
KBC Bank also announced its withdrawal of services in Ireland in late 2022/early 2023. The move by the two banks is expected to create an unprecedented demand for new accounts with the remaining banks. The two banks are actively selling off portfolios of loan books and mortgages, but up to a million customers will need to find an alternative bank for daily business and credit card facilities.
The Central Bank of Ireland (CBI) is responsible for both central banking and financial regulation. The CBI is a member of the European System of Central Banks (ESCB), whose primary objective is to maintain price stability in the euro area.
There are a large number of U.S. banks with operations in Ireland, many of whom are located in Dublin’s International Financial Services Center (IFSC) Dublin. The IFSC originally functioned somewhat like a business park for financial services firms. U.S. banks located in Ireland provide a range of financial services to clients in Europe and worldwide. These firms include State Street, Citigroup, Merrill Lynch, Wells Fargo, JP Morgan, and Northern Trust. The regulation of the international banks operating throughout Ireland falls under the jurisdiction of the CBI.
Ireland is part of the Eurozone, and therefore does not have an independent monetary policy. The ECB formulates and implements monetary policy for the Eurozone and the CBI implements that policy at the national level. The Governor of the CBI is a member of the ECB’s Governing Council and has an equal say as other ECB governors in the formulation of Eurozone monetary and interest rate policy. The CBI also issues euro currency in Ireland, acts as manager of the official external reserves of gold and foreign currency, conducts research and analysis on economic and financial matters, oversees the domestic payment and settlement systems, and manages investment assets on behalf of the State.
Ireland uses the euro as its national currency and enjoys full current and capital account liberalization. Foreign exchange is easily available at market rates. Ireland is a member of the Financial Action Task Force (FATF).
There are no restrictions or significant reported delays in the conversion or repatriation of investment capital, earnings, interest, or royalties, nor are there any announced plans to change remittance policies. Likewise, there are no limitations on the import of capital into Ireland.
The National Treasury Management Agency (NTMA) is the asset management bureau of the government. NTMA is responsible for day-to-day funding for government operations normally through the sale of sovereign debt worldwide. NTMA is also responsible for investing Irish government funds, such as the national pension funds, in financial instruments worldwide.
Ireland suspended issuing sovereign debt upon entering the Troika bailout program in 2010 but has been successfully placing Irish debt since Ireland’s 2013 exit from the Troika program,
The NTMA also has oversight of the National Asset Management Agency (NAMA), the agency established to take on, and dispose of, the property-related loan books of Ireland’s bailed-out banks.
The Ireland Strategic Investment Fund (ISIF) established in 2014 has the statutory mandate to invest on a commercial basis to support economic activity and employment in Ireland. The dual objective mandate of the ISIF – investment return and economic impact – requires all its investments to generate returns as well as having a positive (i.e., job-creating) economic impact in Ireland. The ISIF has assisted some small and medium sized enterprises during Ireland’s economic revival.
8. Responsible Business Conduct
A growing awareness of corporate social responsibility (CSR) in Ireland is mainly driven by independent organizations and multinational corporations. According to “Business in the Community–Ireland,” an organization at the forefront of promoting CSR in Ireland, many of the participant firms believe CSR-oriented policies can play a major role in rebuilding Ireland’s corporate reputation. Companies advertise their participation in such programs as the Fairtrade Certification Mark. The American Chamber of Commerce in Ireland has also released its own report documenting the widespread CSR efforts of American affiliate firms in the country.
The government promotes responsible business conduct in Ireland. Its national action plan “Towards Responsible Business – Ireland’s National Plan on Corporate Social Responsibility 2017- 2020″ aims to support businesses in Ireland to create sustainable jobs; embed responsible practices in the marketplace; embrace diversity and promote responsible workplaces; and encourage enterprises to consider their businesses’ impacts on the environment. It gives effect to the UN Guiding Principles on Business and Human Rights and sets out the Irish government’s commitments to promoting responsible business practice at home and overseas. DETE maintains a web page www.csrhub.ie for information on all aspects of CSR in Ireland.
In November 2021, the government released its Climate Action Plan which detailed the actions required to achieve a 51 percent emissions reduction target by 2030 and a goal of net-zero emissions by 2050, as set out in the Climate Act 2021. The plan will be updated annually to ensure alignment with Ireland’s legally binding economy-wide carbon budgets and sectoral ceilings. The Climate Action Plan lays out sector specific targets to achieve these goals, with the largest reduction slated to come from the energy sector (62-81 percent reduction). Some of the actions outlined in the action plan to meet the energy decarbonization targets include a review of policy for large energy users, such as data centers, incentivizing demand side flexibility, and developing supportive policies for wind, solar, and micro generation.
Security of energy supply continues to be an issue in Ireland which has been further complicated by Russia’s invasion of Ukraine. Ireland is highly dependent on imports of oil and natural gas. While renewable energy, mainly from onshore wind turbines, is growing, Ireland must still import gas, through interconnectors from the UK. Eirgrid, the national grid operator, said Ireland could face electricity shortages over the next five winters unless base load production (from gas or coal) is increased to ensure that intermittent supply from renewables is supplemented.
The Taoiseach (Prime Minister) and the IDA have highlighted the importance of Ireland’s green credentials and climate improvement plans in attracting future investment from international financial services firms. The IDA said Ireland aims to be a global leader in the area of green or sustainable finance. Taoiseach Micheál Martin said sustainable finance remains “a top priority” within the government’s financial services agenda, and Ireland was “uniquely positioned” to benefit from significant global investment in fintech due to the country’s track record for foreign direct investment, entrepreneurial culture and existing number of international financial services firms.
Corruption is not a serious problem for foreign investors in Ireland. The principal Irish legislation relating to anti-bribery and corruption is the Criminal Justice (Corruption Offences) Act of 2018. The Act consolidates all previous legislation for the prevention of corruption. The legislation makes it illegal for Irish public servants to accept bribes. The Ethics in Public Office Act, 1995, provides for the written annual disclosure of interests of people holding public office or employment.
The law on corruption in Ireland gives effect in domestic law to the OECD Anti-Bribery Convention and other conventions concerning criminal corruption and corruption involving officials of the European Union and officials of EU member states. Irish legislation ensures there are strong penalties in place with prison terms of up to ten years and an ‘unlimited’ fine, for those found guilty of offenses under the Act, including convictions of bribery of foreign public officials by Irish nationals and companies that takes place outside of Ireland.
Irish police (An Garda Siochana, or Garda) investigate all allegations of corruption. The Director of Public Prosecutions is responsible for preparing files for prosecution, on detection of sufficient evidence of criminal activity. The government has, in the past, convicted a small number of public officials for corruption and/or bribery. In 1996, Ireland established the Criminal Asset Bureau (CAB), an independent body responsible for seizing illegally acquired assets. CAB has the powers to focus on the illegally acquired assets of criminals involved in organized crime by identifying criminally acquired assets of persons and taking the appropriate action to deny such people of these assets. Any CAB action is primarily taken through the application of the Proceeds of Crime Act, 1996 legislation. Ireland is a member of the Camden Asset Recovery Inter-Agency Network (CARIN).
UN Anticorruption Convention, OECD Convention on Combatting Bribery
Ireland signed the UN Convention on Corruption in December 2003 and ratified it in 2011. Ireland is also a participating member of the OECD Working Group on Bribery.
Resources to Report Corruption
Government agency responsible for combating corruption:
Department of Justice and Equality, Crime and Security Directorate
94 St. Stephen’s Green
Telephone: + 353 1 602-8202
Contact at Transparency International:
69 Middle Abbey St
Telephone: +353 1 554 3938
10. Political and Security Environment
There has been no significant spillover of violence from Northern Ireland since the ceasefires of 1994 and the signing and implementation of the Good Friday Agreement (GFA) in 1998. The cessation of violence in Northern Ireland led to increased business investment and confidence in Northern Ireland which also benefited Ireland. The GFA designated funding to develop cross-border cooperation on R&D collaboration, create energy and transportation infrastructure linkages, and for participation in joint trade missions. No violence related to the situation in Northern Ireland has been specifically directed at U.S. citizens or firms located in Ireland.
There have been some incidents of criminal terrorism and gangland violence attributed to cross-border groups believed to be involved in the black market. There is considerable Garda and Police Service Northern Ireland (PSNI) cooperation to stem any illegal activity.
There have been no recent incidents involving politically motivated damage to foreign investment projects and/or installations in Ireland. There were some instances of damage to U.S. military assets transiting Shannon Airport in 2003 and later in 2011 by a small number of Irish citizens opposed to wars in Iraq and Afghanistan. In 2017, two anti-war activists defaced a U.S. aircraft with graffiti. The Garda arrested two peace protesters as they attempted to gain illegal access to Shannon airport runways in 2019. Other than these incidences of anti-military acts, there have been no acts against U.S. firms or private interests in Ireland.
11. Labor Policies and Practices
Ireland’s population reached 5.01 million in April 2021 an increase of 34,000 on 2020 levels. Net migration in the year to April 2021 was 11,200 persons. The total number of persons employed at the end of 2020 was 2.28 million, but this increased to 2.51 million by the end of 2021 as COVID-19 restrictions relaxed and employers began hiring. Employment opportunities continue to attract inward migrations particularly for employees with language skills.
The onset of the COVID-19 pandemic brought with it three lockdowns of the economy (in April, October and December 2020) with maximum restrictions on movements and a sharp rise in the numbers receiving temporary government employment supports. Temporary government unemployment supports (pandemic unemployment payments) were put in place to keep employees linked to their employers to assist in a rapid return to operations following the lockdowns. The COVID-19 adjusted unemployment rate for Ireland stood at 27.0 percent (with an underlying unemployment rate of 7.2 percent) in February 2021. In the year since, most of those claiming temporary unemployment payments have returned to work and by February 2022 the traditional unemployment rate stood at 5.2 percent with the COVID-adjusted rate at 7.0 percent. The Central Bank of Ireland forecasts Ireland’s unemployment rate will average of 5.8 percent in 2022 before declining to 5.3 percent in 2023.
Average hourly labor costs in Ireland increased by 2.0 percent in 2020. During
2021, average industrial earnings increased by 2.1 percent to 989 euro (USD 1,170) per week. The government mandated minimum wage rate was increased by 0.30 euro to 10.50 euro ($12.40) per hour from January 2022, with lower rates set for younger and less experienced workers.
The government regulates the Irish labor force less than governments in most continental EU countries. The 2.633 million workforce has a high degree of flexibility, mobility, and education. There is relative gender balance in the workforce, with 1,328,100 males and 1,177,900 females employed in 2021. The gender balance reflects a societal change and government support that facilitated a surge in female employment from the mid-1980s. There are no restrictions on the hiring of non-national labor, and many firms, especially in the technology sector, hire young professionals with a diverse range of language and technology skills.
Ireland, since the mid-1990’s, is an attractive destination for foreign investment due to the availability of a young, highly educated workforce. The removal of tuition fees for third level (university) education in 1995 resulted in a rapid increase of third-level qualified graduates. While tuition fees are paid by the government, students must still pay registration fees, currently capped at 3,000 euro ($ 3,600) per academic year. The availability of highly educated and qualified potential employees in Ireland is an attractive feature for employers looking to locate in the EU and has been a significant factor in attracting the already large number of multinational companies located in Ireland. Over 60 percent of new third-level students in Ireland undertake business, engineering, computer science, or science courses. The focus of government strategy has shifted to upgrading skills and increasing the number of workers in technology-intensive, high-value sectors to ensure the availability of an educated workforce.
The onset of the COVID-19 pandemic introduced mass teleworking to Ireland. The huge change in work practice came almost overnight and despite the immense change, workers and their employers seem to have adapted well. Key to Ireland’s teleworking success was the access to good broadband services. Adequate broadband is already available in most urban areas while the government’s national broadband plan to bring high speed broadband to all areas is still rolling out. It is likely that these plans may be accelerated to get earlier delivery of broadband services in more rural parts of the island. The government is expected to enact legislation giving rights to employees to seek remote working opportunities from their employers.
The Irish system of industrial relations is voluntary. Employers and employees generally agree on pay levels and conditions of employment through collective bargaining. There are generally good industrial relationships and very few industrial disputes. There were just three labor disputes in 2021 down from seven in 2020. (Note: Pandemic measures are likely to have affected the number of disputes in 2020 and 2021. End note). A series of agreements between the government and public service labor unions in place since 2010 have in general reduced public service labor disputes.
Employers typically resist trade union demands for mandatory trade/labor union recognition in the workplace. While the Irish Constitution guarantees the right of citizens to form associations and unions, Irish law also affirms the right of employers to withhold union recognition and to deal with employees on an individual basis. One quarter of all workers are unionized but there is much higher participation by public sector workers in unions. The government estimates up to 80 percent of workers in foreign-owned firms do not belong to unions. This may reflect more attractive pay, benefits, and conditions by these employers compared with domestic firms. DETE explicitly addressed the country’s collective bargaining rights through an amendment of existing legislation in the Industrial Relations (Amendment) Act 2015.
The Portuguese economy bounced back from the pandemic, expanding by 4.9 percent in 2021 after an 8.4 percent contraction the prior year, benefitting from EU fiscal and monetary stimulus and a very high vaccination rate. The labor market has shown remarkable resiliency, with unemployment at 6 percent in January 2022, down from 7 percent a year before. GDP is expected to grow again by an estimated 5 percent in 2022, despite the economic shocks from the Russian war against Ukraine
The country will have a chance to boost its economic recovery, deploying more than €16 billion in EU grants and credit expected to fund state coffers between 2021 and 2026. It is expected these funds will be allocated in support of energy and digital transitions.
Increased flows of fossil fuels contributed to a 40 percent jump in trade in goods and services between Portugal and the United States to a record $10 billion in 2021. However, bilateral trade remains lop-sided with a large U.S. trade deficit of around $2.2 billion. Many U.S. companies nvest in business/service delivery centers in Portugal, taking advantage of Portugal’s relatively low-cost, talented, and multilingual labor force.
The country continues to push to improve market attractiveness. Portugal’s export and FDI promotion agency (AICEP) celebrated a record €2.7 billion of contracted FDI in 2021, double that locked-in during the last (2019) high mark. Portugal’s metalworking, auto component, and machinery industries predominate the recent FDI trends, accounting for about 30 percent of the contracted flows, according to the Government.
Portugal’s tech startup scene is thriving, featuring at least six fast-growing firms with ‘Portuguese-U.S. DNA’ that achieved ‘unicorn’ status with valuations above $1 billion– Outsystems, Talkdesk, Feedzai, Remote, SwordHealth and Anchorage. These high-tempo firms are flourishing after tapping into opportunities in the U.S. startup ecosystem that provides not only funding but also knowhow, networks, and customers, ultimately producing jobs on both sides of the Atlantic.
Established in 2012, Portugal’s “Golden Visa” program gives fast-track residence permits to foreign investors who meet certain conditions, such as making substantial capital transfers or certain real estate acquisitions. Between 2012 and February 2022, Portugal issued 10,442 ‘Golden Visas’, representing €6.2 billion of investment, of which more than €5.6 billion went to real estate. Chinese nationals have been the main beneficiaries of the special program for residence permits, accounting for almost 50 percent (5,066) of the 10,442 total, followed by Brazilians with 1,072. Russian citizens were assigned 431 Golden visas since 2012. As of January 2022, Portugal modified the “Golden Visa” program to restrict the purchase of real estate to regions outside urban hotspots such as Lisbon, Porto, and overbuilt areas of the popular Algarve with the aim of boosting rural investment. Loopholes in the program appear to be enabling urban purchases in any event. On March 28, the European Commission urged member states to immediately repeal existing investor citizenship schemes, which the Commission claimed pose inherent risks.
In terms of risks, the independent Portuguese data protection agency (CNPD) has targeted U.S. companies by issuing a succession of judicial opinions warning against the use of U.S. technology firms – including Cloudflare, Respondus, and Amazon Web Services (AWS), arguing that as they are headquartered in the United States and therefore subject to U.S. law, by definition, they have inadequate data privacy standards. CNPD has not found any specific wrongdoing by any U.S. technology firm but bases its rulings on the grounds that a target company is headquartered in the United States. On March 25, President Biden and EU Commission President von der Leyen announced a deal in principle on the Trans-Atlantic Data Privacy Framework, which will supplement the U.S.-EU Privacy Shield Framework (Privacy Shield). However, it remains to be seen how this new Trans-Atlantic Data Privacy Framework will affect EU-U.S. data flows in Portugal.
Portugal ranks second highest in terms of PRC investments in Europe (in relation to GDP). These investments are predominantly in the premier Portuguese companies, which the PRC leverages to reach other markets in Europe, Latin America, and Africa. Portugal’s investment screening regime was established in 2014, but the Government of Portugal has never strictly enforced it.
Despite the security risks, the Government continues to allow investments by and collaboration with untrusted vendors in 5G and Artificial Intelligence (AI). Huawei is using its educational and gender-equity programs to increase influence with high achieving students and access to key technology policymakers in the Government and private sector. The PRC is also attempting to gain a foothold in Portuguese 5G, AI, solar, and related infrastructure industries.
Portugal’s public debt, estimated at 127percent of GDP at the end of 2021, remains an issue, particularly if there is a shift in the benign monetary and sovereign risk sentiment that enabled Lisbon to enjoy issuing debt at record low prices in the last few years. The pace of corporate and household indebtedness has also increased.
Portugal’s primary trading partners are Spain, France, Germany, the United Kingdom, and the United States. Portugal suffers an acute brain drain, with high emigration rates among professionals leaving for higher paying careers in Switzerland, France, the UK, and elsewhere.
Beyond Europe, Portugal maintains significant links with Portuguese-speaking countries including Brazil, Angola, Mozambique, Cape Verde, and Guinea-Bissau. Portugal has one of the lowest fertility rates in Europe and net immigration (from Ukraine, Brazil, and other Portuguese-speaking countries) has prevented a fall in population.
Russia’s invasion of Ukraine will impact the Portuguese growth curve. Except for grain imports from Ukraine, energy intermediate goods, and liquified natural gas (LNG) imports from Russia, the country’s trade and investment relationship with both countries is limited. In LNG specifically, Russia accounted for 15 percent of imports, well below the 45 percent EU average. However, Portugal is a net importer of energy products, fully dependent on outside supply of crude and refined fossil fuels. It also imports natural gas for energy and generation, which acts as a key complement to the fast-growing renewable energy footprint of its solar, wind and hydro power assets. The country’s commercial balance will be negatively impacted by a long period of high global energy prices.
Portugal’s low installed solar capacity of about 7 percent of the energy mix is expected to reach 8 GW of solar capacity, or 27 percent of the mix by 2030. The Government is promoting significant investments in wind and solar energy development to meet its target of 47 percent energy from renewables by 2030. By 2021 the country reduced its external energy dependence by 9 percentage points (from 2005), seeking greater supply security by increasing domestic energy generation and reducing the consumption of primary energy by 17 percent. The Government has also talked about plans to launch a 2-5 GW offshore wind auction this summer (without providing details), in hopes of speeding up the deployment of large-scale offshore wind capacity to reduce energy dependence on Russia.
Portugal’s path to a carbon neutral economy includes incentives for energy efficiency; promoting diversification of energy sources; increasing electrification; reinforcing and modernizing infrastructure; developing more interconnections; market stability for investors; reconfiguring and digitalizing the market; incentives for research and innovation, promoting low-carbon processes, products and services; and improving energy services and information for consumers.
1. Openness To, and Restrictions Upon, Foreign Investment
The Government of Portugal (GOP) actively pursues and protects foreign investment, seeing it as a driver of economic growth, with a very positive attitude toward foreign direct investment (FDI). Portuguese law is based on non-discrimination principles, meaning foreign and domestic investors are subject to the same rules. Foreign investment is not subject to any special registration or notification to any authority, with exception of a few specific activities.
The Portuguese Agency for Foreign Investment and Commerce (AICEP) is the lead for promotion of trade and investment. AICEP is responsible for attracting FDI, global promotion of Portuguese brands, and export of goods and services. It is the primary point of contact for investors with projects over € 25 million or companies with a consolidated turnover of more than € 75 million. For foreign investments not meeting these thresholds, AICEP will make a preliminary analysis and direct the investor to assistance agencies such as the Institute of Support to Small- and Medium- Sized Enterprises and Innovation (IAPMEI), a public agency within the Ministry of Economy that provides technical support, or to AICEP Capital Global, which offers technology transfer, incubator programs, and venture capital support. AICEP does not favor specific sectors for investment promotion. It does, however, provide a “Prominent Clusters” guide on its website, where it advocates investment in Portuguese companies by sector. Additionally, Portugal has introduced the website Simplex, designed to help navigate starting a business.
The Portuguese government maintains regular contact with investors through the Confederation of Portuguese Business (CIP), the Portuguese Commerce and Services Confederation (CCP), the Portuguese Chamber of Commerce and Industry (CCIP) and other industry associations.
There are no legal restrictions in Portugal on foreign investment. To establish a new business, foreign investors must follow the same rules as domestic investors, including mandatory registration and compliance with regulatory obligations for specific activities. There are no nationality requirements and no limitations on the repatriation of profits or dividends.
Non-resident shareholders must obtain a Portuguese taxpayer number for tax purposes. EU residents may obtain this number directly from the tax administration (in person or by means of an appointed proxy); non-EU residents must appoint a Portuguese resident representative to handle matters with tax authorities.
Portugal enacted a national security investment review framework in 2014 which gave the Council of Ministers authority to block specific foreign investment transactions that would compromise national security. Reviews can be triggered on national security grounds in strategic industries like energy, transportation, and communication. Investment reviews can be conducted in cases where the purchaser acquiring control is an individual or entity not registered in an EU member state. In such instances, the review process is overseen by the relevant Portuguese Ministry based on the assets in question. Portugal has yet to activate its investment screening mechanism.
Portuguese government approval is required in the following sensitive sectors: defense, water management, public telecommunications, railways, maritime transportation, and air transport. Any economic activity that involves the exercise of public authority also requires government approval; private sector companies can operate in these areas only through a concession contract.
Portugal additionally limits foreign investment with respect to the production, transmission, and distribution of electricity, the production of gas, the pipeline transportation of fuels, wholesale services of electricity, retailing services of electricity and non-bottled gas, and services incidental to electricity and natural gas distribution. Concessions in the electricity and gas sectors are assigned only to companies with headquarters and effective management in Portugal.
Investors wishing to establish new credit institutions or finance companies, acquire a controlling interest in such financial firms, and/or establish a subsidiary must have authorization from the Bank of Portugal (for EU firms) or the Ministry of Finance (for non-EU firms). Non-EU insurance companies seeking to establish presence in Portugal must post a special deposit and financial guarantee and must have been authorized for such activity by the Ministry of Finance for at least five years.
In the past five years, the Government has not undergone any third-party investment policy reviews (IPRs) through a multilateral organization such as the OECD, WTO, UNCTAD, or UN Working Group on Business and Human Rights.
To combat the perception of a cumbersome regulatory environment, the government has created ‘cutting red tape’ measures described in the website Simplex (simplex.gov.pt) that details steps taken since 2005 to reduce bureaucracy, and the Empresa na Hora (“Business in an Hour”) program that facilitates company incorporations by citizens and non-citizens.
In 2007, the government established AICEP, a promotion agency for investment and foreign trade that also manages industrial parks and provides business location solutions for investors through its subsidiary AICEP Global Parques.
Established in 2012, Portugal’s “Golden Visa” program gives fast-track residence permits to foreign investors who meet certain conditions, such as making substantial capital transfers, creating and certain real estate acquisitions. Between 2012 and February 2022, Portugal issued 10,442 ‘Golden Visas’, representing €6.2 billion of investment, of which more than €5.6 billion went to real estate. Chinese nationals have been the main beneficiaries of the special program for residence permits, accounting for almost 50 percent (5,066) of the 10,442 total, followed by Brazilians with 1,072. Russian citizens were assigned 431 Golden visas since 2012. As of January 2022, Portugal modified the “Golden Visa” program to restrict the purchase of real estate to regions outside urban hotspots such as Lisbon, Porto and overbuilt areas of the popular Algarve with the aim of boosting rural investment. Loopholes in the program appear to be enabling urban purchases in any event. On March 28, the European Commission urged member states to immediately repeal existing investor citizenship schemes, which the Commission claimed pose inherent risks.
Other measures implemented to help attract foreign investment include the easing of some labor regulations to increase workplace flexibility and EU-funded programs.
Portuguese citizens can alternatively register a business online through the “Citizen’s Portal” available at Portal do Cidadão. Companies must also register with the Directorate General for Economic Activity (DGAE), the Tax Authority (AT), and with the Social Security administration. The government’s standard for online business registration is a two to three day turnaround, but the online registration process can take as little as one day.
Portugal defines an enterprise as micro-, small-, and medium-sized based on its headcount, annual turnover, or the size of its balance sheet. To qualify as a micro-enterprise, a company must have fewer than 10 employees and no more than €2 million in revenues or €2 million in assets. Small enterprises must have fewer than 50 employees and no more than €10 million in revenues or €10 million in assets. Medium-sized enterprises must have fewer than 250 employees and no more than €50 million in revenues or €43 million in assets. The Small- and Medium-Sized Enterprise (SME) Support Institute (IAPMEI) offers financing, training, and other services for SMEs based in Portugal.
More information on laws, procedures, registration requirements, and investment incentives for foreign investors in Portugal is available at AICEP’s website.
The Portuguese government does not restrict domestic investors from investing abroad. On the contrary, it promotes outward investment through AICEP’s customer managers, export stores and its external commercial network that, in cooperation with the diplomatic and consular network, are operating in about 80 markets. AICEP provides support and advisory services on the best way of approaching foreign markets, identifying international business opportunities for Portuguese companies, particularly SMEs.
3. Legal Regime
The government of Portugal employs transparent policies and effective laws to foster competition, and the legal system welcomes FDI on a non-discriminatory basis, establishing clear rules of the game. Legal, regulatory, and accounting systems are consistent with international norms. Public finances and debt obligations are transparent, with data regularly published by the Bank of Portugal, the IGCP debt management agency, and the Ministry of Finance. Regulations drafted by ministries or agencies must be approved by Parliament and, in some cases, by European authorities. All proposed regulations are subject to a 20-to-30-day public consultation period during which the proposed measure is published on the relevant ministry or regulator’s website. Only after ministries or regulatory agencies have conducted an impact assessment of the proposed regulation can the text be enacted and published. The process can be monitored and consulted at the official websites of Parliament and the Official Portuguese Republic Journal. Ministries or regulatory agencies report the results of the consultations through a consolidated response published on the website of the relevant ministry or regulator.
Rule-making and regulatory authorities exist across sectors including energy, telecommunications, securities markets, financial, and health. Regulations are enforced at the local level through district courts, on the national level through the Court of Auditors, and at the supra-national level through EU mechanisms including the European Court of Justice, the European Commission, and the European Central Bank. The OECD, the European Commission, and the IMF also publish key regulatory actions and analysis. UTAO, the Parliamentary Technical Budget Support Unit, is a nonpartisan body composed of economic and legal experts that support parliamentary budget deliberations by providing the Budget Committee with quality analytical reports on the executive’s budget proposals. In addition, the Portuguese Public Finance Council conducts an independent assessment of the consistency, compliance with stated objectives, and sustainability of public finances, while promoting fiscal transparency.
The legal, regulatory, and accounting systems are transparent and consistent with international norms. Since 2005, all listed companies must comply with International Financial Reporting Standards as adopted by the European Union (“IFRS”), which closely parallels the U.S. GAAP-Generally Accepted Accounting Principles. Portugal’s Competition Authority enforces adherence to domestic competition and public procurement rules. The European Commission further ensures adhesion to EU administrative processes among its member states.
Public finances are generally deemed transparent, closely scrutinized by Eurostat and monitored by an independent technical budget support unit, UTAO, and the Supreme Audit Institution ‘Tribunal de Contas.’ Over the last decades, Portugal has also consolidated within the State accounts many state-owned enterprises, making budget analysis more accurate.
Portugal has been a member of the EU since 1986, a member of the Schengen area since 1995, and joined the Eurozone in 1999. With the Treaty of Lisbon’s entry into force in 2009, trade policy and rules on foreign direct investment became mostly EU competencies, as part of the bloc’s common commercial policy. The European Central Bank is the central bank for the euro and determines monetary policy for the 19 Eurozone member states, including Portugal. Portugal complies with EU directives regarding equal treatment of foreign and domestic investors. Portugal has been a member of the World Trade Organization since 1995.
The Portuguese legal system is a civil law system, based on Roman law. The hierarchy among various sources of law is as follows: (i) Constitutional laws and amendments; (ii) the rules and principles of general or common international law and international agreements; (iii) ordinary laws enacted by Parliament; (iv) instruments having an effective equivalent to that of laws, including approved international conventions or decisions of the Constitutional Court; and (v) regulations used to supplement and implement laws. The country’s Commercial Company Law and Civil Code define Portugal’s legal treatment of corporations and contracts. Portugal has a Supreme Court and specialized family courts, labor courts, commercial courts, maritime courts, intellectual property courts, and competition courts. Regulations or enforcement actions are appealable, and are adjudicated in national Appellate Courts, with the possibility to appeal to the European Court of Justice. The judicial system is independent of the executive branch and the judicial process procedurally competent, fair, and reliable. Regulations and enforcement actions are appealable.
The Bank of Portugal defines FDI as “an act or contract that obtains or increases enduring economic links with an existing Portuguese institution or one to be formed.” A non-resident who invests in at least 10 percent of a resident company’s equity and participates in the company’s decision-making is considered a foreign direct investor. Current information on laws, procedures, registration requirements, and investment incentives for foreign investors in Portugal is available at AICEP’s website.
The domestic agency that reviews transactions for competition-related concerns is the Portuguese Competition Authority and the international agency is the European Commission’s Directorate General for Competition. Portuguese law specifically prohibits collusion between companies to fix prices, limit supplies, share markets or sources of supply, discriminate in transactions, or force unrelated obligations on other parties. Similar prohibitions apply to any company or group with a dominant market position. The law also requires prior government notification of mergers or acquisitions that would give a company more than 30 percent market share in a sector, or mergers or acquisitions among entities whose total sales exceeded €150 million during the preceding financial year. The Competition Authority has 60 days to determine if the merger or acquisition can proceed. The European Commission may claim authority on cross-border competition issues or those involving entities large enough to have a significant EU market share.
Under Portugal’s Expropriation Code, the government may expropriate property and its associated rights if it is deemed to support the public interest, and upon payment of prompt, adequate, and effective compensation. The code outlines criteria for calculating fair compensation based on market values. The decision to expropriate as well as the fairness of compensation can be challenged in national courts.
Portugal’s Insolvency and Corporate Recovery Code defines insolvency as a debtor’s inability to meet commitments as they fall due. Corporations are also considered insolvent when their liabilities clearly exceed their assets. A debtor, creditor or any person responsible for the debtor’s liabilities can initiate insolvency proceedings in a commercial court. The court assumes the key role of ensuring compliance with legal rules governing insolvency proceedings, with particular responsibility for ruling on the legality of insolvency and payment plans approved by creditors. After declaration of insolvency, creditors may submit their claims to the court-appointed insolvency administrator for a specific term set for this purpose, typically up to 30 days. Creditors must submit details regarding the amount, maturity, guarantees, and nature of their claims. Claims are ranked as follows: (i) claims over the insolvent’s estate, i.e. court fees related to insolvency proceedings; (ii) secured claims; (iii) privileged claims; (iv) common, unsecured claims; and (v) subordinated claims, including those of shareholders.
4. Industrial Policies
The Portuguese government offers investment incentives that can be tailored to individual investors’ needs and capital, based on industry, investment size, and project sustainability, including grants, tax credits and deferrals, access to loans, and reduced cost of land. Investment agency AICEP actively recruits investors across the globe, intermediating the terms on a case-by-case basis for the larger investments. The Autonomous Regions of Madeira and the Azores also offer investment incentives. Since Portugal is an EU Member, potential investors may be able to access European funds, providing further incentives. Such support has been used by Portugal to co-finance key investments in the areas of research and development, information and communications technology, transport, water, solid waste, energy efficiency and renewable energy, urban regeneration, health, education, and culture.
In 2020, Portugal merged ‘PME Investmentos’ and the ‘Instituição Financeira de Desenvolvimento’ (IFD) to create the Banco Português de Fomento. The IFD is a national promotion bank tasked with providing credit to companies, managing State-guarantee schemes and supporting companies by helping them strengthen their capital structure, exports, and internationalization. It manages a €200 million co-investment fund. Through Portugal Ventures, a state-financed private equity company, the government has a risk capital arm that finances the growth of the Portuguese entrepreneurship ecosystem. This entity is part of the public business sector, operating under the same terms and conditions that apply to private companies and subject to the general domestic and community competition rules. As a venture capital firm, its funds are under the supervision of the Portuguese Securities Market Commission, CMVM.
The pandemic-response 2022-2026 Recovery and Resiliency Plan (RRP) devotes over €180 million to finance hydrogen and renewable gases investment projects, to be allocated to proposed capex via a competitive bidding process. The Government also offers a wide range of incentives for clean energy and sustainability via the Environmental Fund, attributing grants to projects that include electric charging points and purchase of low emission vehicles, namely public transport operators. As the portfolio of renewable energy choices quickly improves its commercial attractivity without need for public support, particularly solar, Portugal is shifting the focus of incentives to up and coming technologies, namely hydrogen.
Portugal has one foreign trade zone (FTZ)/free port in the Autonomous Region of Madeira, established in 1987. Continued operation of the International Business Centre of Madeira’s corporate tax regime is authorized by EU rules on incentives granted to member states. Industrial and commercial activities, international service activities, trust and trust management companies, and offshore financial branches are all eligible. Companies established in the foreign trade zone/free port enjoy import- and export-related benefits, financial incentives, tax incentives for investors and companies.
In December 2020, the European commission said that companies on the island of Madeira illegally benefitted from tax cuts under the FTZ, as they failed to meet the key requirement of contributing to the region’s growth. Portugal was asked to reimburse funds deemed incompatible with EU state aid rules, plus interest, from companies that failed to meet the conditions, the Commission said in a statement.
Under EU rules, company profits benefitting from income tax reductions must originate exclusively from substantive activities carried out in Madeira and these companies must create and maintain jobs in Madeira, conditions the Commission is concerned Portuguese authorities may have failed to respect.
Portugal does not impose performance requirements or mandate specific local employment conditions for foreign investors. Qualification standards for investment incentives are applied uniformly to domestic and foreign investors. There is a high level of labor mobility between Portugal and other EU member states. To work in Portugal, non-EU foreign nationals must be sponsored for a work permit by a Portuguese employer. An investor may also obtain permission to reside and work via the ‘Golden Visa’ scheme. There are no nationality-related restrictions that affect a foreign national’s ability to serve in senior management or on a board of directors. Foreign or expatriate workers with appropriate work authorizations are entitled to the same rights and subject to the same laws as employees with Portuguese citizenship.
While Portugal does not force data localization, according to the Portuguese Data Protection Law (pursuant to the EU’s 1995 Data Protection Directive) “data controllers,” i.e., people or corporations that process personal data, must register with the National Commission for Data Protection (CNPD). Data transfers outside the EU are only allowed if the recipient country or company ensures an adequate level of protection. Portugal is subject to new rules stipulated in the EU’s General Data Protection Regulation.
There are no requirements for foreign IT providers to turn over source code and/or provide access to encryption; the same rules apply to foreign IT providers as apply to national providers.
Data transfers to other countries within the EU do not require prior authorization from the CNPD. However, data transfers to countries outside the EU can only take place in compliance with the Data Protection Law, meaning the receiving state must also provide an adequate level of protection to personal data. If the receiving state does not ensure an adequate level of protection, the CNPD can authorize the transfer under specific conditions, as outlined in Act 67/98. CNPD can also authorize a transfer or a set of transfers of personal data to a receiving state that does not provide an adequate level of protection only if the controller provides adequate safeguards to protect the privacy and fundamental rights and freedoms of individuals. As members of the EU, business entities operating in Portugal are asked to comply with the bloc’s General Data Protection Regulation (GDPR).
CNPD issued a set of orders for private firms to halt or refrain from data transfers to the United States, implying that U.S. technology companies subject to sending data to the United States may risk being non-compliant with EU General Data Protection Regulation (GDPR), justifying the enforcement with a narrow interpretation of the Schrems II decision and Privacy Shield invalidation.
Generally, there are no excessively onerous visa, residence, work permit, or similar requirements inhibiting mobility of foreign investors and their employees.
5. Protection of Property Rights
Portugal reliably enforces property rights and interests. The Portuguese Constitution ensures the right to private property and grants Parliament the power to establish rules on the renting of property, the determination of property in the public domain, and the rules of land management and urban planning. The Civil Code of 1967 provides the right to absolute and full ownership, which can be restricted by mortgage, liens, or other security interests. Additional laws have established or modified rules on time-sharing, condominiums, and land registration.
Property registration can be undertaken online at Predial Online. Foreign investors can directly own/purchase property freehold or leasehold, to build industrial and commercial premises or can purchase through a real estate company.
If legally purchased property is unoccupied, Portuguese law allows ownership to revert to other owners, including squatters, through an adverse domain process set out in Chapter VI of the Portuguese Civil Code (CCP), Article 1287.
Intellectual property rights (IPR) infringement and theft are uncommon in Portugal. It is fairly easy for investors to register copyrights, industrial property, patents, and designs with Portugal’s Institute of Industrial Property (INPI) and the Inspectorate-General of Cultural Activities (IGAC). Intellectual property can be registered online for a small fee. For more details, consult: https://inpi.justica.gov.pt/Servicos and https://www.igac.gov.pt/.
The Portuguese government became party to the World Trade Organization’s (WTO’s) Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) and provisions of the General Agreement on Tariffs and Trade (GATT) in 2003. Portuguese legislation for the protection of IPR has been consistent with WTO rules and EU directives since 2004. The Arbitration Centre for Industrial Property, Domain Names, and Company Names (ARBITRARE) was established in 2009 to facilitate voluntary arbitration of IPR disputes in English or Portuguese, and in 2012, the government created an IPR court with two judges. In 2019, Portugal brought into force a new industrial property package of legislation, enhancing the protection of a wide range of IPR, including patents, geographical indications, trademarks and designs. See more at https://wipolex.wipo.int/en/members/profile/PT .
Portugal is a participant in the eMAGE and eMARKS projects, which provide multilingual access to databases of trademarks and industrial designs. Portugal’s Food and Economic Security Authority (ASAE), in partnership with other national law enforcement agencies, provides statistics on seizures of counterfeit goods at: https://www.asae.gov.pt/inspecao-fiscalizacao/resultados-operacionais.aspx .
Portugal is not included in the U.S. Trade Representative’s (USTR’s) Special 301 Report or Notorious Markets List.
The Portuguese stock exchange is managed by Euronext Lisbon, part of the NYSE Euronext Group, which grants listed companies access to a global and diversified pool of investors. The Portuguese Stock Index-20 (PSI20) is Portugal’s benchmark index representing the largest (only 19, not 20) and most liquid companies listed on the exchange. The Portuguese stock exchange offers a diverse product portfolio: shares, funds, exchange traded funds, bonds, and structured products, including warrants and futures.
The Portuguese Securities Market Commission (CMVM) supervises and regulates securities markets, and is a member of the Committee of European Securities Regulators and the International Organization of Securities Commissions. Additional information on CMVM can be found here: http://www.cmvm.pt/en/Pages/homepage.aspx .
Portugal respects IMF Article VIII by refraining from placing restrictions on payments and transfers for current international transactions. Credit is allocated on market terms, and foreign investors are eligible for local market financing. Private sector companies have access to a variety of credit instruments, including bonds.
Portugal has 145 credit institutions, of which 61 are banks. Portugal’s banking assets totaled €431 billion at the end of June 2021. Portuguese banks’ non-performing loan portfolios improved markedly since the global financial crisis. Total loans stood at around €244 billion in mid-2021, 4.3 percent of which constitute non-performing loans, above the Eurozone average of around 2.2 percent.
Banks’ return on equity was 4.6 percent in the first half of 2021 versus 0.3 percent the year before. In terms of capital buffers, the Common Equity Tier 1 ratio stabilized at 15.3 percent as of June 2021.
Foreign banks are allowed to establish operations in Portugal. In terms of decision-making policy, a general ‘four-eyes policy,’ with two individuals approving actions, must be in place at all banks and branches operating in the country, irrespective of whether they qualify as international subsidiaries of foreign banks or local banks. Foreign branches operating in Portugal are required to have such decision-making powers that enable them to operate in the country, but this requirement generally does not prevent them from having internal control and rules governing risk exposure and decision-making processes, as customary in international financial groups.
No restrictions exist on a foreigners’ ability to establish a bank account and both residents and non-residents may hold bank accounts in any currency. However, any transfers of €10,000 or more must be declared to Portuguese customs authorities. See more at: https://www.bportugal.pt/ .
The Ministry of Labor, Solidarity, and Social Security manages Portugal’s Social Security Financial Stabilization Fund (FEFSS), with total assets of around €22 billion. It is not a Sovereign Wealth Fund (SWF) and does not subscribe to the voluntary code of good practices (Santiago Principles), or participate in the IMF-hosted International Working Group on SWFs. Among other restrictions, Portuguese law requires that at least 25 percent of the fund’s assets be invested in Portuguese public debt, and limits FEFSS investment in equity instruments to that of EU or OECD members. FEFSS acts as a passive investor and does not take an active role in the management of portfolio companies.
7. State-Owned Enterprises
There are currently over 40 major state-owned enterprises (SOEs) operating in Portugal in the banking, health care, transportation, water, and agriculture sectors. Caixa Geral de Depositos (CGD) has revenues greater than one percent of GDP. The bank has the largest market share in customer deposits, commercial loans, mortgages, and many other banking services in the Portuguese market.
Parpublica is a government holding company for several smaller SOEs, providing audits and reports on these. More information can be found at: http://www.parpublica.pt/. The activities and accounts of Parpublica are fully disclosed in budget documents and audited annual reports. In addition, the Ministry of Finance publishes an annual report on SOEs through a specialized monitoring unit (UTAM) that presents annual performance data by company and sector: In 2020, Parpublica managed assets totaling €11 billion, employs 4,400 workers and the net income of the holding was €80 million.
When SOEs are wholly owned, the government appoints the board, although when SOEs are majority-owned the board of executives and non-executives’ nomination depends on the negotiations between government and the remaining shareholders, and in some cases on negotiations with EU authorities as well.
According to Law No. 133/2013, SOEs must compete under the same terms and conditions as private enterprises, subject to Portuguese and EU competition laws. Still, SOEs often receive preferential financing terms from private banks.
In 2008 Portugal’s Council of Ministers approved resolution no. 49/2007, which defined the Principles of Good Governance for SOEs according to OECD guidelines. The resolution requires SOEs to have a governance model that ensures the segregation of executive management and supervisory roles, to have their accounts audited by independent entities, to observe the same standards as those for companies publicly listed on stock markets, and to establish an ethics code for employees, customers, suppliers, and the public. The resolution also requires the Ministry of Finance’s Directorate General of the Treasury and Finances to publish annual reports on SOEs’ compliance with the Principles of Good Governance. Credit and equity analysts generally tend to criticize SOEs’ over-indebtedness and inefficiency, rather than any poor governance or ties to government.
Portugal launched an aggressive privatization program in 2011 as part of its EU-IMF-ECB bailout, including SOEs in the air transportation, land transportation, energy, communications, and insurance sectors. Foreign companies have been among the most successful bidders in these privatizations since the program’s inception. The bidding process was public, transparent, and non-discriminatory to foreign investors. On July 2, 2020, the government of Portugal nationalized a 71.7 percent stake in energy company Efacec, controlled by Angola’s Isabel dos Santos, given its strategic importance for the economy, in a move aimed at ending legal uncertainty and facilitating the sale of her shares. On February 24, 2022, the government approved the sale of Efacec to Portuguese group DST, which pledged to inject €81 million to strengthen the firm’s capital structure.
In December 2021, the European Commission approved a €2.55 billion state aid package for Portugal’s State-owned air carrier TAP. In exchange, the airline is executing a restructuring plan, reducing its workforce, and implementing pay cuts. It also pledged to reduce its fleet by twelve aircraft to 88 by the end of 2021. The plan expects TAP to produce €1.3 billion in operating cost reductions per year by 2025 and return TAP Portugal to profitability by 2023-2024. Infrastructure Minister Pedro Nuno Santos has flagged that the Government will look for private investors and there already several interested parties.
8. Responsible Business Conduct
There is strong awareness of responsible business conduct in Portugal and broad acceptance of the need to consider the community among the key stakeholders of any company. The Group of Reflection and Support for Business Citizenship (GRACE) was founded in 2000 by a group of companies, primarily multinational enterprises, to expand the role of the Portuguese business community in social development.
The Ministry of Economy and AICEP encourage foreign and local enterprises to observe the due diligence approach of the OECD Guidelines for Multinational Enterprises, and both agencies jointly comprise the National Contact Point (NCP) to provide support for mediating disputes that may arise regarding the Guidelines. The Portuguese Business Ethics Association (APEE) is dedicated to promoting corporate social responsibility and works in collaboration with the Ministry of Economy’s Directorate-General of Economic Activities. It promotes events like Social Responsibility Week and celebrates protocols and agreements with companies to ensure they follow responsible business conduct principles incorporated into the labor code.
Portugal’s Competition Authority both encourages and enforces competition rules, including ethical business practices. The Competition Authority operates a leniency program for companies that self-identify lapses. There have not been any high profile, controversial instances of private sector impact on human rights. The Portuguese government enforces domestic laws effectively and fairly through the domestic courts system, and through the supra-national European Court of Human Rights. Within its constitution, Portugal states that constitutional precepts concerning fundamental rights must be interpreted and observed in harmony with the Universal Declaration of Human Rights.
The Portuguese legal and regulatory framework on corporate governance includes not only regulations and recommendations from the Portuguese Securities Market Commission (CMVM), but also specific legal provisions from the Portuguese Companies Code and the Portuguese Securities Code. CMVM promotes sound corporate governance for listed companies by setting out a group of recommendations and regulations on the standards of corporate governance. CMVM regulations are binding for listed companies.
Non-governmental organizations also promote awareness of environmental and good governance issues in business. These include Quercus Portugal, which publishes guidelines and organizes events to promote environmental responsibility in business practices, and Transparencia e Integridade Associacao Civica (TIAC), which produces reports on corruption on everything from soccer match-fixing to conflicts of interest in public and private enterprise. TIAC also allows whistle-blowers to anonymously submit reports of corruption through their website.
Portugal represents a success story in fighting child labor from its supply chain, as the public and private sector came together decisively to eradicate child labor issues from the 1990’s. However, Portugal remains a source, transit, and destination country for men, women, and children subjected to forced labor trafficking. In 2019, a series of large COVID-19 outbreaks unveiled how groups of migrant workers at berry farms were subject to poor housing and sanitary conditions.
Portugal does not participate in the Extractive Industries Transparency Initiative (EITI) or the Voluntary Principles on Security and Human Rights. The country’s two main umbrella unions, CGTP-Confederação Geral dos Trabalhadores Portugueses and UGT-União Geral dos Trabalhadores, also regularly denounce and combat non-compliant business practices, particularly related to labor rights violations.
Portugal potentially holds some of the largest lithium reserves in Europe and is preparing to advance with battery-grade ore mining. While some recognize the role of lithium for energy transition, several NGOs issued negative opinions of planned mine projects, warning about open-pit methods that will provoke dust, noise, and detonations around the clock, damaging the lifestyle and health of local population. Environmentalists also warn about the risks to local species such as water moles, the Iberian wolf and river mussels. In January 2020, 14 civil society and environmental associations signed a national manifest against Portugal’s mining plans
Portugal’s national climate strategy aims to reach net zero emissions by 2050. In its 2021-2030 National Energy and Climate plan, Portugal sets out goals for decarbonization, energy efficiency, energy security, internal energy markets and research, innovation, and competitiveness. Portugal’s installed solar capacity is now about 7 percent of the energy mix and is expected to reach 8 GW of solar capacity, or 27 percent of the energy mix by 2030. The Government is promoting significant investments in wind and solar energy development to meet its target of 47 percent energy from renewables by 2030. Portugal reduced its external energy dependence by 9.1 percentage points in 2021 versus 2005, increasing domestic energy generation and reducing the consumption of primary energy by 17 percent, ensuring greater supply security. Portugal’s path to a carbon neutral economy includes: incentives for energy efficiency; promoting diversification of energy sources; increasing electrification; reinforcement and modernization of infrastructure; development of interconnections; market stability for investors; reconfiguration and digitalization of the market; incentives for research and innovation, promotion of low-carbon processes, products and services; and improved energy services and information for consumers.
When it comes to public procurement and instruments for the State to accelerate the climate transition, Portugal has a ‘once-in-a-generation chance’ to boost its efforts. The country can use around €16.6 billion in European Union (EU) pandemic response funds expected to flow to state coffers between 2021 and 2026 to support its Recovery and Resilience Plan (RRP), of which the government will allocate 47 percent to efforts that help climate objectives. Public procurement and investment policies dictate that large infrastructure, industrial, mining, and other environmentally sensitive initiatives require the approval of impact assessment studies, supervised and assessed by the Portuguese Agency for the Environment (APA), before moving forward.
U.S. firms do not identify corruption as an obstacle to foreign direct investment. Portugal has made legislative strides toward further criminalizing corruption. The government’s Council for the Prevention of Corruption, formed in 2008, is an independent administrative body that works closely with the Court of Auditors to prevent corruption in public and private organizations that use public funds. Transparencia e Integridade Associacao Civica, the local affiliate of Transparency International, also actively publishes reports on corruption and supports would-be whistleblowers in Portugal.
In 2010, the country adopted a law criminalizing violation of urban planning rules and increasing transparency in political party funding. In 2015, Parliament unanimously approved a revision to existing anti-corruption laws that extended the statute of limitations for the crime of trading in influence to 15 years, and criminalized embezzlement by employees of state-owned enterprises with a prison term of up to eight years. The laws extend to family members of officials and to political parties.
Despite being seen as generally aligned with the best international practices in terms of preventing and combating corruption, a June 2019 interim report by the Council of Europe’s Group of States against Corruption (GRECO) concluded that only one of the fifteen recommendations contained in GRECO´s Fourth Round Evaluation Report had been implemented satisfactorily or dealt in a satisfactory manner by Portugal at end-2019 in terms of compliance with GRECO anti-corruption recommendations addressed to lawmakers, judges and prosecutors.
Portugal ranked 32nd out of 180 countries in Transparency International (TI)’s 2021 Corruption Perception Index (CPI), an improvement of one position from the previous year.
Portugal approved a national anti-corruption strategy in December 2021. This legislative package includes a working group that prepares a national report, revises the whistle-blower protection framework, fraud-proofs legislation, improves public procurement processes, reinforces the transparency of political party financing, and ensures that companies have corruption prevention plans in place.
Portugal has laws and regulations to counter conflict-of-interest in awarding contracts or government procurement. Parliamentarians are required to declare their income, assets, and interests to the Authority for Transparency attached the Constitutional Court.
The Portuguese government encourages (and in some cases requires) private companies to establish internal codes of conduct that, among other things, prohibit bribery of public officials. Most private companies use internal controls, ethics, and compliance programs to detect and prevent bribery of government officials. As described above, the Competition Authority operates a leniency program for companies that self-identify infringements of competition rules, including ethical lapses.
Portugal has ratified and complies with both the UN Convention against Corruption and the OECD Anti-Bribery Convention.
Contact at the government agency or agencies that are responsible for combating corruption:
Council for the Prevention of Corruption
Avenida da Republica,
651050-189, Lisbon, Portugal
+351 21 794 5138
Contact at “watchdog” organization:
Transparency International –
Transparencia e Integridade Associacao Civica
Rua dos Fanqueiros,
+351 21 8873412
10. Political and Security Environment
Since the 1974 Carnation Revolution, Portugal has had a long history of peaceful social protest. Portugal experienced its largest political rally since its revolution in response to proposed budgetary measures in 2012. Public workers, including nurses, doctors, teachers, aviation professionals, and public transportation workers organized peaceful demonstrations periodically in protest of insufficient economic support, low salary levels, and other measures.
11. Labor Policies and Practices
Numerous labor reform packages aimed at improving productivity were implemented after the 2011 bailout, but overall labor productivity remains a challenge. The annualized monthly minimum wage increased stands at €823.
After the difficulties of the eurozone debt crisis, when many Portuguese migrated out of the country along with some resident migrants, net-migration became positive again in 2017 and has strengthened since. The largest communities of workers come from Brazil, Cape Verde, Romania, Ukraine, UK, China, France, Italy, Angola, Guinea-Bissau, Nepal and India. In the Southern Algarve region, the tourism sector employs most of the migrant workers. Alentejo and the coastal regions of central Portugal, with their intensive agriculture sectors, host substantial Asian workers’ communities, especially from Bangladesh.
Employers are allowed to conduct collective dismissals linked to adverse market or economic conditions, or due to technological advancement, but must provide advance notice and severance pay. Depending on the seniority of each employee, an employer must provide between 15 to 75 days of advance notice, and pay severance ranging from 12 days’ to one month’s salary per year worked. Employees may challenge termination decisions before a Labor Court. Labor laws are uniformly applicable and enforced, including in Portugal’s foreign trade zone/free port in the Autonomous Region of Madeira.
Collective bargaining is common in Portugal’s banking, insurance, and public administration sectors. More information is available at the Directorate General for Labor Relations site.
Portugal has labor dispute resolution mechanisms in place through Labor Courts and Arbitration Centers. Labor strikes are not violent and of short duration. Labor laws are not waived in order to attract or retain investment.
Portugal is a member of the International Labor Organization (ILO), and has ratified all eight Fundamental Conventions as well as all four Governance (Priority) Conventions.
The Labor Code caps the work schedule at eight hours per day, and 40 hours per week. The public sector employee workweek, with certain exclusions, was capped at 35 hours in July 2016. Employees are entitled to at least 22 days of annual leave per year. Employers must pay employees a Christmas and vacation bonus, both equivalent to one month’s salary.
Gender pay gap inequality in Portugal worsened from 10.9 percent in 2019 to 11.4 percent in 2020, which is still better than the average EU difference (13 percent), according to Eurostat data. Portugal has shown progress in developing gender equality and gender mainstreaming policies, according to European Institute for Gender Equality (EIGE). The 2030 National Strategy on Gender Equality, aligned with the UN Sustainable Development Goals, established a plan to: promote gender equality; tackle violence against women and domestic violence; and, combat discrimination on the grounds of sexual orientation, gender identity and sexual characteristics.
Portugal’s Fraud Management and Economics Observatory estimates that the informal economy is worth about 27 percent of GDP, according to its last available analysis in 2015. The President of the Observatory said in 2020 that the weight of the informal economy has likely “increased significantly” with the onset of the pandemic.
Spain is open to foreign investment and actively seeks additional investment as a key component of its COVID-19 recovery. After six years of growth (2014-2019), Spain’s GDP fell 11 percent in 2020 – the worst performance in the Eurozone – due in large part to high COVID-19 infection rates, a strict three-month lockdown, border closures, and pandemic-related restrictions that decimated its tourism and hospitality sectors. By building on healthy fundamentals and fueled by up to 140 billion euros in Next Generation EU recovery funds, Spain rebounded with 5.1 percent GDP growth in 2021, and unemployment improved to 13.3 percent. Economic activity is expected to return to its pre-crisis level in 2023, though Russia’s unprovoked war in Ukraine could threaten the recovery by pushing up energy prices, compounding supply chain disruptions, and stoking inflation. Service-based industries, particularly those related to tourism, and energy-intensive industries remain most vulnerable to the economic shock. Spain’s key economic risks are high public debt levels and ballooning pension costs for its aging population, though these areas are targets for government reforms.
Despite COVID-19’s economic shock, Spain’s excellent infrastructure, well-educated workforce, large domestic market, access to the European Common Market, and leadership on renewable energy make it an appealing foreign investment destination. Spanish law permits up to 100 percent foreign ownership in companies, and capital movements are completely liberalized. According to Spanish data, in 2021, foreign direct investment flow into Spain was EUR 28.8 billion, 17.7 percent more than in 2020. Of this total, EUR 1.6 billion came from the United States, the fifth largest investor in Spain in new foreign direct investment. Foreign investment is concentrated in the energy, real estate, financial services, engineering, and construction sectors.
Spain aims to use its Next Generation EU recovery funds to transform the Spanish economy, especially through digitalization and greening of the economy, to achieve long-term increases in productivity and growth. Full financing is contingent on additional economic reforms beyond labor reform. Spain’s credit ratings remain stable, and issuances of public debt – especially for green bonds – have been oversubscribed, reflecting strong investor appetite for investment in Spain. However, small- and medium-sized enterprises (SMEs), which account for more than 99 percent of Spanish businesses and have been acutely impacted by the COVID-19 pandemic, still have some difficulty accessing credit and rely heavily on bank financing. Small firms also experience more challenges accessing EU recovery funds.
1. Openness To, and Restrictions Upon, Foreign Investment
Foreign direct investment (FDI) played a significant role in modernizing the Spanish economy during the past 40 years. Foreign companies set up operations in large numbers to take advantage of Spain’s large domestic market, export possibilities, and growth potential. Spain’s automotive industry is mostly foreign-owned, and multinationals control half of the food production companies, one-third of chemical firms, and two-thirds of the cement sector. Foreign firms control about one-third of the insurance market.
The Government of Spain recognizes the value of foreign investment and sees it as a key part of its post COVID-19 economic recovery. U.S. FDI is especially attractive as Spain looks to deepen its transatlantic ties after Russia’s full-scale invasion of Ukraine. Spain offers investment opportunities in sectors and activities with significant added value. Spanish law permits 100 percent foreign ownership in investments (limits apply regarding audio-visual broadcast licenses and strategic sectors of the economy; see next section), and capital movements are completely liberalized. Due to its openness and the favorable legal framework for foreign investment, Spain has received significant foreign investments in knowledge-intensive activities.
New FDI into Spain increased by 17.7 percent in 2021 compared to 2020 when the COVID-19 pandemic reduced FDI, according to data from Spain’s Ministry of Industry, Trade, and Tourism. In 2020, acquisitions of existing companies were the predominant form of foreign investment, representing 42.7 percent of the total, compared to 17.8 percent of new greenfield and brownfield investments. In 2021 the United States, as ultimate beneficial owner, had a gross direct investment in Spain of EUR 4.2 billion, accounting for 14.5 percent of total investment and representing an increase of 1.5 percent compared to 2020. According to the latest available Spanish data, U.S. FDI stock in Spain totaled about $88.6 billion in 2019.
Spain has a favorable legal framework for foreign investors. The Spanish Constitution and Spanish law establish clear rights to private ownership, and foreign firms receive the same legal treatment as Spanish companies. There is no discrimination against public or private firms with respect to local access to markets, credit, licenses, and supplies.
Spain adapted its foreign investment rules to a system of general liberalization, and its inbound investment screening mechanism is focused on protecting national security. Law 18/1992, which established rules on foreign investments in Spain, provides a specific regime for non-EU persons investing in defense, aerospace, gambling, television, and radio. For EU investors, the only sectors with a specific regime are the manufacture and trade of weapons or national defense-related activities. For non-EU investors, the Spanish government restricts individual ownership of audio-visual broadcasting licenses to 25 percent. Specifically, Spanish law permits non-EU companies to own a maximum of 25 percent of a company holding a digital terrestrial television broadcasting license; and for two or more non-EU companies to own a maximum of 50 percent in aggregate. In addition, under Spanish law a reciprocity principle applies (art. 25.4 General Audiovisual Law). The home country of the (non-EU) foreign company must have foreign ownership laws that permit a Spanish company to make the same transaction in the audio-visual sector.
The Spanish government issued new regulations on foreign investment in March 2020 that stipulate prior authorization for foreign investments in critical sectors. Prior approval is also required if the foreign investor is controlled directly or indirectly by the government of another country, if the investor has invested or participated in sectors affecting the security, public order, or public health in another EU Member State, or if administrative or judicial proceedings have been initiated against the investor for exercising illegal or criminal activities. Failure to request authorization for a transaction is a serious infringement of the law. These new regulations are outlined below (see Laws and Regulations on Foreign Direct Investment).
Spain is a signatory to the convention on the Organization for Economic Co-operation and Development (OECD). Spain is also a member of the World Trade Organization (WTO) and the United Nations Conference on Trade and Development (UNCTAD). Spain has not undergone Investment Policy Reviews with these three organizations within the past three years.
To set up a company in Spain, the two basic requirements include incorporation before a Public Notary and filing a public deed with the Mercantile Register (RegistroMercantil). The public deed of incorporation of the company can be submitted electronically by the Public Notary. The Central Mercantile Register is an official institution that provides access to companies’ information supplied by the Regional Mercantile Registers after January 1, 1990. Any national or foreign company can use it but must also be registered and pay taxes and fees. According to the World Bank’s Doing Business report, it takes on average about two weeks to start a business in Spain.
“Invest in Spain” is the Spanish investment promotion agency to facilitate foreign investment. Services are available to all investors. It has partner offices in five major U.S. cities.
Among the financial instruments approved by the Spanish Government to provide official support for the internationalization of Spanish enterprise are the Foreign Investment Fund (FIEX), the Fund for Foreign Investment by Small and Medium-sized Enterprises (FONPYME), the Enterprise Internationalization Fund (FIEM), and the Fund for Investment in the Tourism Sector (FINTUR). The Spanish Government also offers financing lines for investment in the electronics, information technology and communications, energy (renewables), and infrastructure concessions sectors.
3. Legal Regime
There is transparency throughout the rule making process at all levels of government. The Spanish government launched a transparency website in 2014 that makes more than 500,000 items of public interest freely accessible to all citizens (http://transparencia.gob.es/transparencia/en/transparencia_Home/index.html). The website offers details about the central government, public institutions such as the Royal House, the Parliament, the Constitutional Court, the Judicial Power, the Ombudsman, the Audit Court, the Central Bank, and the Economic and Social Council, and other organisms such as the European Commission. Regional and local authorities have developed their own transparency portals and related legislation. Spain’s Boletin Oficial de Estado (https://www.boe.es/) publishes key regulatory actions.
Many large established Spanish companies have not yet fully adopted environmental, social, and governance (ESG) criteria, though companies are increasingly committed to making positive impact on society. New companies, especially startups, tend to incorporate ESG values into their operations from the start, acting with transparency and adopting innovative, modern technologies for continuous improvement. Several official Spanish certifications recognized at European and global level accredit companies that meet ESG and CSR criteria, such as Norma SGE21, B Corp Spain, and SDG Certificate (AENOR.) To promote transparency in the disclosure of non-financial information and its impact on corporate governance of companies, the Spanish government published Law 11/2018 on non-financial and diversity matters (https://www.boe.es/boe/dias/2018/12/29/pdfs/BOE-A-2018-17989.pdf). The law reinforces requirements that companies disclose relevant information about their management in five areas: environment; social impact and workers’ rights; respect for human rights; fight against corruption and bribery; and impact on society.
Spain is a member of the European Union, and its local regulatory framework compares favorably with other major European countries, although permitting and licensing processes may result in significant delays. The efficacy of regulation at the regional level is uneven. With a license from only one of Spain’s 17 regional governments or two enclaves, companies can operate throughout Spanish territory. The measures are designed to reduce business operating costs, improve competitiveness, and attract foreign investment.
The Spanish judiciary has a well-established tradition of supporting and facilitating the enforcement of both foreign judgments and awards. For a foreign judgment to be enforced in Spain, an order declaring it is enforceable or exequatur is necessary. Once the order is granted, enforcement itself is quite fast, provided that the assets are identified. First instance courts are responsible for the enforcement of foreign rulings.
Local legislation establishes mechanisms to resolve disputes if they arise. Spain’s civil (Roman-based) judicial system is fair and accessible, although sometimes slow-moving. Investigating judges are in charge of the criminal investigation, assuring independence from the executive branch of the government. The Spanish judicial system allows for successive appeals to a higher court.
The number of civil claims has grown significantly over the past decade, due in part to litigation stemming from Spain’s financial 2008 crisis, resulting in an increased openness to alternative dispute resolution mechanisms. Although ordinary proceedings are relatively straightforward, due to the significant number of cases within each court, it can take years for a case to come to trial. Domestic court decisions are subject to appeal, and the average time taken for a final judgment to be issued by the Court of Appeal can be anywhere from months to years. A decision may still be subject to appeal to the Supreme Court (although the grounds for appeal are quite limited), a process that generally takes two to three years to produce a final ruling. Due to the uncertainty surrounding the duration of appeals, disputes involving large companies or significant amounts of money tend to be resolved through arbitration.
The Spanish government issued new regulations on foreign investment in March 2020 (Royal Decrees 8/2020, 11/2020, and 34/2020) that require prior authorization for foreign investors seeking to acquire more than a 10 percent stake in the following critical sectors:
critical infrastructures, both physical and virtual (energy industries, transportation, water, healthcare, communications, media, data storage and processing, aerospace, defense, financial services, and sensitive installations)
critical technology and dual-use products;
essential supplies (energy, hydrocarbons, electricity, raw materials and food and agriculture value chains);
sectors with sensitive information such as personal data or with capacity to control such information and;
Purchases of less than 10 percent are also subject to authorization if they result in participation in the control or management of the company. Under these new Royal Decrees, foreign investments in any industry must also receive prior approval if the foreign investor is controlled directly or indirectly by the government of another country; if the investor has invested or participated in sectors affecting the security, public order, or public health in another EU Member State; or if administrative or judicial proceedings have been initiated against the investor for exercising illegal or criminal activities. Investments less than EUR 1 million are exempted, and investments between EUR 1 and 5 million are subject to a simplified review.
Spanish law conforms to multi-disciplinary EU Directive 88/361, which prohibits all restrictions of capital movements between Member States as well as between Member States and other countries. The Directive also classifies investors according to residence rather than nationality. However, Royal Decree 34/2020 also temporarily requires residents of the European Union and European Free Trade Association to receive prior approval for investments into companies listed in Spain or investments exceeding EUR 500 million. This temporary requirement has been extended several times and is valid until December 31, 2022.
Registration requirements are straightforward and apply equally to foreign and domestic investments. They aim to verify the purpose of the investment, not block any investment. On September 1, 2016, a resolution established new forms for declaration of foreign investments before the Investment Registry, which oblige the investor(s) to declare foreign participation in the company.
In 2015, changes to the Personal Income Tax Law affected the transfer of investments outside of Spain by creating a tax on unrealized gains from investment. Residents who have resided in Spain for at least 10 of the previous 15 years are subject to a tax of 19-23 percent if they relocate their holdings or investments outside of Spain if the market value of the shares held exceeds EUR 4 million or if the individual holds 25 percent or more shares in a venture whose market value exceeds EUR 1 million.
A Protocol to the 1990 Income Tax Convention between the United States and Spain entered into force in November 2019. The Protocol significantly reduces taxes on interest, royalties, certain direct dividends, and capital gains. It also provides for mandatory binding arbitration to streamline dispute resolutions between the two countries’ tax administrations.
Spain’s digital services tax on companies, approved in January 2021, was dropped as of January 2022 in response to the OECD/G20’s multilateral agreement during international tax negotiations. Spain will credit amounts paid in excess of the global minimum tax from January 2022 against future taxes owed.
The parliament passed Act 3/2013 on June 4, 2013, by which the entities that regulated energy (CNE), telecoms (CMT), and competition (CNC) merged into a new entity: the National Securities Market Commission (CNMC). The law attributes practically all functions entrusted to the National Competition Commission under the Competition Act 15/2007, of July 3, 2007 (LDC), to the CNMC. The CNMC’s website (https://www.cnmv.es/Portal/home.aspx) provides information to the public about major cases.
Spanish legislation set up safeguards to prevent the nationalization or expropriation of foreign investments. Since the 2008 economic crisis, Spain has altered its renewables policy several times, creating regulatory uncertainty and resulting in losses to U.S. companies’ earnings and investments. As a result, Spain accumulated more than 32 lawsuits, totaling about EUR 7.6 billion in claims. Spain now faces an array of related international claims for solar photovoltaic and other renewable energy projects. Spain registered one case with ICSID in 2021 related to renewable energy generation.
Spain has a fair and transparent bankruptcy regime. In 2014, the government approved a reform of the bankruptcy law to promote Spain’s economic recovery by establishing mediation mechanisms. These reforms – nicknamed the Second Chance Law – aimed to avoid the bankruptcy of viable companies and preserve jobs by facilitating refinancing agreements through debt write-off, capitalization, and rescheduling. However, declaring bankruptcy remains less prevalent in Spain than in other parts of the world.
4. Industrial Policies
A range of investment incentives exist in Spain, and they vary according to the authorities granting incentives and the type and purpose of the incentives. The national government provides financial aid and tax benefits for activities pursued in certain priority industries (e.g., mining, technological development, research and development, etc.), given these industries’ potential effect on the nation’s overall economy. Regional governments also provide similar incentives. Financial aid includes both nonrefundable subsidies and interest relief on loans obtained by beneficiaries, or combinations of the two.
Because Spain is a European Union Member State, potential investors can access European aid programs, which provide further incentives for investing in Spain. Spain’s central government provides numerous financial incentives for foreign investment, which are designed to complement EU financing. The Ministry of Industry, Trade, and Tourism assists businesses seeking investment opportunities through the Directorate General for International Trade and Investments and the ICEX Spain Export and Investment office. These offices support foreign investors in both the pre- and post-investment phases. Most grants seek to promote the development of select economic sectors; however, while these sectoral subsidies are often preferential, they are not exclusive.
The Ministry for the Ecological Transition and Demographic Challenge, through the Institute for Energy Diversification and Saving (IDAE), makes grants to promote renewable installations for the production of energy, both thermal and electrical. These grants, financed by the European Regional Development Fund (ERDF), are executed through calls for proposals made by the IDAE in each autonomous community/regional government. The grants are non-refundable and are governed by the principle of competitive competition with the aim of optimizing their application as widely as possible.
In 2013, Spain passed the “Law of Entrepreneurs,” which established an entrepreneur visa for investors and entrepreneurs. Entrepreneurs may apply for the visa with a business plan approved by the Spanish Commercial Office. Entrepreneurs must demonstrate the intent to develop the project in Spain for at least one year. Investors who purchase at least EUR 2 million in Spanish bonds or acquire at least EUR 1 million in shares of Spanish companies or Spanish banks deposits may also apply. Foreigners who acquire real estate with an investment value of at least EUR 500,000 are also eligible.
Spain’s 17 regional governments, known as autonomous communities, provide additional incentives for investments in their region. Many are similar to the incentives offered by the central government and the EU, but they are not all compatible. Additionally, some autonomous community governments grant investment incentives in areas not covered by state legislation, but which are included in EU regional financial aid maps. Royal Decree 899/2007 sets out the areas entitled to receive aid, along with their ceilings. Each area’s specific aspects and requirements (economic sectors, investments which can be subsidized, and conditions) are established in the Royal Decrees. Most are granted on an annual basis.
Incentives from national, regional, or municipal governments and the European Union are granted to Spanish and foreign companies alike without discrimination. The most notable incentives include those aimed at fostering innovation, technological improvement, and research and development projects.
Both the mainland and islands (and most Spanish airports and seaports) have free trade zones where manufacturing, processing, sorting, packaging, exhibiting, sampling, and other commercial operations may be undertaken free of any Spanish duties or taxes. Spain’s seven free zone ports are located in Vigo, Cadiz, Barcelona, Santander, Seville, Tenerife, and Las Palmas de Gran Canaria – all of which fall under the EU Customs Union, permitting the free circulation of goods within the EU. The entire province of the Canary Islands is a Special Economic Zone (SEZ), offering fiscal benefits that include a reduced corporate tax rate, a reduced Value-Added Tax (VAT) rate, and exemptions for transfer taxes and stamp duties. The Spanish enclaves of Ceuta and Melilla also offer unique tax incentives; they do not impose a VAT but instead tax imports, production, and services at a reduced rate. Spanish customs legislation also allows companies to have their own free trade areas. Duties and taxes are payable only on those items imported for use in Spain. These companies must abide by Spanish labor laws.
Spain does not have performance and localization requirements for investors. The Spanish Data Protection Agency and the Spanish Police request data from companies, although the companies may refuse unless required by court order.
5. Protection of Property Rights
There are generally no restrictions on foreign ownership of real estate. The buyer must fill out a Declaration to the Foreign Investment Register form before buying the property if the funds for the purchase come from a country or territory considered to be a tax haven. The declaration lasts six months. Foreign individuals require an identification card for foreigners (NIE). Other foreign legal persons require an identification number known as a NIF. Apart from money laundering regulations, no special restrictions or limitations apply to foreign mortgage guarantees and loans.
The Land Register provides evidence of title and legal certainty to all parties involved in a transaction. Public or private acts that affect the property are included in the land register. The Property Registry is responsible for managing the Land Register. A right or title recorded in the registry prevails over any other right or title. Certain administrative concessions (licenses for individuals to use or develop publicly owned property for a particular purpose) may also be registered. Anyone who can prove a legitimate interest in the information contained in the register may access the register. It is not possible to make changes to the ownership of the real estate by electronic means. The transfer of real estate or the grant of rights over property should be executed by public deed in front of a notary before being registered with the Land Registry. A registered title includes the plot of land and the buildings attached to the land. Each plot constitutes a registered property. Each registered property is a legal object and has its own separate entry in the registry in which all related data is registered. There are rules that determine whether a parcel of land, a building, farm, spring, or other type of property has a separate entry in the registry system.
Lenders generally use mortgages as security. Mortgages are made by public deed and registered at the land registry. Once registered, the mortgage takes priority over the interest of any third party. Anyone with a legitimate interest in a property can find out whether it is mortgaged by consulting the register. Sale and leaseback are another form of real estate financing that has been used by some Spanish financial institutions. These institutions raised financing through the sale of their offices to their clients and subsequently leased them back. The institution raised funds and their clients received a stream of rental income.
Spanish law protects intellectual property rights (IPR), and enforcement is carried out at the administrative and judicial levels. In Spain, IPR is separated into industrial property, which refers to industry and innovative activity (patents and trademarks), and intellectual property, which focuses on the rights of creators. Spanish patent, copyright, and trademark laws all approximate or exceed EU standards for IPR protection. Spain is a member of the World Intellectual Property Organization (WIPO) and party to many of its treaties, including the Berne Convention, the Paris Convention, the Madrid Accord on Trademarks, the WIPO Copyright Treaty, and the WIPO Phonograms and Performances Treaty.
Since its removal from the U.S. Trade Representative’s (USTR’s) Special 301 Watch List in 2012, Spain has undertaken extensive, multi-year reform measures to strengthen its framework for IPR protections. The latest legislative changes to the 1996 Law on Intellectual Property, in force as of March 2019, streamline anti-piracy and anti-counterfeit measures. As a result, Spain now has a stronger legal framework and corresponding criminal procedures to address IPR violations.
USTR removed Spain from its Notorious Markets List in 2020. Although physical and online marketplaces for counterfeit goods persist in Spain, Spanish authorities continue to make significant regulatory, legal, and enforcement progress in protecting IPR, and Spain is now ranked 11th out of 50 countries in the U.S. Chamber of Commerce’s IPR protection index.
Spanish authorities published a new Patents Law in 2015 (Law 24/2015), which entered into force in April 2017. A non-renewable 20-year period for working patents is available if the patent is used within the first three years. Spain permits both product and process patents. Patents can be awarded by the Spanish Office of Patents and Trademark (OEPM), a Spanish autonomous region via an Industrial Property Regional Information Center, or the European Patent Office.
Spanish law extends copyright protection to all literary, artistic, or scientific creations, including computer software.
Amendments to the 2001 Trademark Law (17/2001), which amend the regulations for the 2001 law, entered in force in April 2019. OEPM oversees protection for national trademarks. Trademarks registered in the Industrial Property Registry receive protection for a 10-year period from the date of application and may be renewed. Protection is not granted for generic names, names that violate Spanish customs, or other inappropriate trademarks. The Spanish parliament passed a reform of the penal code that entered into force in July 2015 (Ley Organica 1/2015). The revised penal code removed the condition that certain IPR crimes related to the sale of counterfeit items meet a threshold of EUR 400 in order to merit prosecution, and it changed the procedure for destruction of counterfeit items seized by law enforcement. Counterfeit items may now be destroyed once an official report is filed unless a judge formally requests the items be retained.
Businesses may seek a trademark valid throughout the EU via the Office for Harmonization in the Internal Market (OHIM), which is located in Alicante:
The Spanish government welcomes all forms of investment, including portfolio investment, and actively courts foreign investment as part of its COVID-19 recovery plan. Foreign investors do not face discrimination when seeking local financing for projects. Credit is allocated on market terms, and foreign investors are eligible to receive credit in Spain. A large range of credit instruments are available through Spanish and international financial institutions. Many large Spanish companies rely on cross-holding arrangements and ownership stakes by banks rather than pure loans. However, these arrangements do not restrict foreign ownership. Several of the largest Spanish companies that engage in this practice are also publicly traded in the United States. There is a significant amount of portfolio investment in Spain, including by U.S. entities. Spain has an actively traded and liquid stock market, the IBEX 35.
In 2019, the United States and Spain amended their bilateral tax agreement to prevent double taxation of each other’s nationals and firms and to improve information sharing between tax authorities.
Spain has accepted the obligations of Article VIII, Sections 2, 3, and 4, and maintains an exchange rate system free of restrictions on payments and transfers for current international transactions, other than restrictions notified to the Fund under Decision No. 144 (52/51).
In January 2021, Spain’s new Financial Transactions Tax (FTT) or “Tobin tax,” entered into force. The FTT is an indirect tax of 0.2 percent on the acquisition of Spanish companies with a market capitalization of at least EUR 1 million EUR. The financial intermediary executing the transaction – not the seller or acquirer of the shares – pays the tax.
There were about 50 commercial bank branches per 100,000 adults in Spain in 2019, down from 104 in 2007 but still more than twice the eurozone average, according to the IMF. There are 20,421 financial institution branches as of December 2021, after having closed 2,488 offices in 2021, according to the Bank of Spain. Spain’s domestic housing crisis, which began in 2007, was linked to poor lending practices by Spanish savings banks. The government subsequently created a Fund for Orderly Bank Restructuring (FROB) through Royal Decree-law 9/2009, which restructured credit institutions to bolster capital and provisioning levels. The number of Spanish financial entities dropped significantly since 2009 through consolidation as banks have faced increased capital requirements and shrinking profit margins.
The COVID-19 pandemic adversely affected the outlook for Spanish banks, though the government’s income support measures, fiscal support for ailing firms, and loan guarantees helped reduce the pressure on the sector. Slim profit margins for the Spanish financial sector are also likely to persist, however, due to slowing growth, low (or negative) interest rates, and nonperforming loans (NPLs). The NPL ratio in Spain – 4.3 percent in December 2021 – was a marked improvement from 2014 levels. The sector has capital buffers to absorb the unexpected losses associated with this crisis, though there is significant disparity between institutions. Spanish financial institutions have significantly higher capital levels than the minimum regulatory requirements, which can be used to absorb unexpected losses from the economic fallout of pandemic. Total profit for the Spanish banking system was about EUR 19.8 billion euros in 2021, compared to the losses of 5.5 billion registered in 2020.
The Bank of Spain, Spain’s central bank, is a member of the euro system and the European System of Central Banks. Within the framework of the Single Supervisory Mechanism (SSM), the Bank of Spain and European Central Bank (ECB) jointly supervise the Spanish banking system.
Foreign banks can establish themselves in Spain and are subject to the same conditions as Spanish banks to access the Spanish financial system. Foreign banks with authorization in another EU member state do not need to get authorization from the Bank of Spain to establish a branch or representative office in Spain.
The National Securities Market Commission (CNMV) is responsible for the supervision and inspection of Spanish securities markets. Since its creation in 1988, the CNMV’s regime has been updated to adapt to the evolution of financial markets and to introduce new measures to protect investors.
Total assets for the five biggest banks in Spain at the end of 2021 were EUR 3.3 trillion:
To open a bank account as a non-resident, a foreigner needs a proof of identity, proof of address in Spain, and proof of employment status or where the funds originated. All documents that are not in Spanish or issued by Spanish authorities must be translated into Spanish.
Spain does not have a sovereign wealth fund or similar entity. Spain was among the top ten receiving countries for sovereign wealth investments, attracting EUR 2.8 billion between October 2020 and December 2021.
7. State-Owned Enterprises
Spain’s public enterprise sector is relatively small, and the role and importance of state-owned enterprises (SOE) decreased since the privatization process started in the early 1980s. The reform of SOE oversight in the 1990s led the government to create the State Holding for Industrial Participations (SEPI) in 1995. SEPI has direct majority participation in 15 SOEs, which make up the SEPI Group, with a workforce of more than 78,000 employees. It is a direct minority shareholder in nine SOEs (five of them listed on stock exchanges) and participates indirectly in ownership of more than one hundred companies. Either legislative chamber and any parliamentary group may request the presence of SEPI and SOE representatives to discuss issues related to their performance. SEPI and the SOEs are required to submit economic and financial information to the legislature on a regular basis. The European Union, through specialized committees, also controls SOEs’ performance on issues concerning sector-specific policies and anti-competitive practices.
Companies with a majority interest: Agencia Efe, Cetarsa, Ensa, Grupo Cofivacasa, Grupo Correos, Grupo Enusa, Grupo Hunosa, Grupo Mercasa, Grupo Navantia, Grupo Sepides, GrupoTragsa, Hipodromodo la Zarzuela, Mayasa, Saeca, Defex (in liquidation)
Companies with a minority interest: Airbus Group, Alestis Aerospace, Enagas, Enresa, Hispasat, Indra, International Airlines Group, Red Electrica Corporacion, Ebro Foods
Attached companies: RTVE, Corporacion de Radio y Television Espanola
SEPI also has indirect participation in more than 100 subsidiaries and other investees of the majority companies, which make up the SEPI Group.
Corporate Governance of Spain’s SOEs uses criteria based on OECD principles and guidelines. These include the state ownership function and accountability, as well as issues related to performance monitoring, information disclosure, auditing mechanisms, and the role of the board in the companies.
Spain does not have a formal privatization program.
8. Responsible Business Conduct
Although the visibility of responsible business conduct (RBC) efforts is still moderate by international standards, it has garnered growing interest over the last two decades. Today, almost all of Spain’s largest energy, telecommunications, infrastructure, transportation, financial services, and insurance companies, among many others, undertake RBC projects, and such practices are spreading throughout the economy.
Spain enforces domestic and EU laws and regulations to protect human rights, labor rights, consumer protection, and environmental protections. Spain endorsed the OECD Guidelines for Multinational Enterprises and supports the Montreux Document on Private Military and Security Companies. The national point of contact is the Ministry of Industry, Trade, and Tourism.
Spain’s Climate Change and Energy Transition Law (Law 7/2021) entered into force in May 2021. The law sets a goal of reaching climate neutrality by 2050 and establishes renewable energy, energy efficiency, and greenhouse gas (GHG) emission reduction national targets that align with those established in Spain’s Integrated National Energy and Climate Plan. It sets the following targets for 2030:
23 percent reduction of GHG emissions compared to 1990;
42 percent of final energy consumption from renewable energy sources;
74 percent of electricity generation from renewable energy sources; and
39.5 percent reduction of the country’s primary energy consumption.
By 2050, Spain expects to generate 100 percent of its electricity from renewable sources. The law allows the Council of Ministers to raise (but not lower) Spain’s targets periodically, with the first review expected in 2023.
Law 7/2021 also restricts the future exploitation of fossil fuel deposits in Spain by prohibiting new hydrocarbon exploration and extraction projects, though a new oil and gas exploitation concession may still be awarded if a company with a valid exploration license applied for an exploitation concession prior to the date when Law 7/2021 entered into force. In addition, the law states that existing hydrocarbon research or exploitation concessions will not be extended beyond December 31, 2042, effectively ending fossil fuel production beyond this date. Fossil fuel producers with existing concessions must submit a plan to convert their drilling platforms to produce cleaner types of energy, such as renewables and geothermal, five months before the concession expires. The law also prohibits the use of high-volume hydraulic fracturing (fracking) for any project and bans new permits for radioactive mining, such as uranium mining. It ends tax benefits for fossil fuel producers, except if producers demonstrate a strong social and economic interest or if there is a lack of technological alternatives. The law introduces provisions that promote renewable gases, including biogas, biomethane, and hydrogen, and allows for annual targets for renewable gas penetration in natural gas sales and consumption.
Law 7/2021 stipulates that all new passenger cars and light commercial vehicles must have 0g CO2/km emissions by 2040, with the goal of achieving a decarbonized fleet of passenger cars and light commercial vehicles by 2050. To advance this goal, the government approved a Strategic Project for the Recovery and Economic Transformation (PERTE) of Electric Vehicles to mobilize EUR 24 billion (roughly EUR 3.4 billion of public funding and EUR 19.7 billion of private investment) for electric vehicle manufacturing.
Spain’s Ecological Public Procurement Plan (2018-2025) applies to state administrators, public entities, and social security managing bodies, and responds to the need to incorporate ecological criteria in public procurement. The plan aims to promote the acquisition of goods, works, and services with the least environmental impact; promote the Spanish Circular Economy Strategy; and promote environmental clauses in public procurement. It prioritizes 20 goods, including construction and building management, electricity supply, cleaning products, HVAC systems, and printing equipment.
Spain has a variety of laws, regulations, and penalties to address corruption. The legal regime has both civil and criminal sanctions for corruption, bribery, financial malfeasance, etc. Giving or accepting a bribe is a criminal act. Under Section 1255 of the Spanish civil code, corporations and individuals are prohibited from deducting bribes from domestic tax computations. There are laws against tax evasion and regulations for banks and financial institutions to fight money laundering terrorist financing. In addition, the Spanish Criminal Code provides for jail sentences and hefty fines for corporations’ (legal persons) administrators who receive illegal financing.
The Spanish government continues to build on its already strong measures to combat money laundering. After the European Commission threatened to sanction Spain for failing to bring its anti-money laundering regulations into full accordance with the EU’s Fourth Anti-Money Laundering Directive, in 2018, Spain approved measures to modify its money laundering legislation to comply with the EU Directive. These measures establish new obligations for companies to license or register service providers, including identifying ultimate beneficial owners; institute harsher penalties for money laundering offenses; and create public and private whistleblower channels for alleged offenses.
The General State Prosecutor is authorized to investigate and prosecute corruption cases involving funds in excess of roughly USD 500,000. The Office of the Anti-Corruption Prosecutor, a subordinate unit of the General State Prosecutor, investigates and prosecutes domestic and international bribery allegations. The Audiencia Nacional, a corps of magistrates has broad discretion to investigate and prosecute alleged instances of Spanish businesspeople bribing foreign officials.
Spain enforces anti-corruption laws on a generally uniform basis. Public officials are subjected to more scrutiny than private individuals, but several wealthy and well-connected business executives have been successfully prosecuted for corruption. In 2021, Spanish courts arraigned 344 defendants involved in 53 corruption cases. The courts issued 65 sentences, with 44 including a full or partial guilty verdict.
There is no obvious bias for or against foreign investors. U.S. firms rarely identify corruption as an obstacle to investment in Spain, although entrenched incumbents have frequently attempted and at times succeeded in blocking the growth of U.S. franchises and technology platforms in both Madrid and Barcelona.
Spain’s rank in Transparency International’s annual Corruption Perceptions Index fell slightly in 2021 to position 34; its overall score (61) is lower than that of many other Western European countries.
Spain is a signatory to the OECD Convention on Combating Bribery and the UN Convention Against Corruption. It has also been a member of the Group of States Against Corruption (GRECO) since 1999. Spain has made progress addressing OECD concerns about the low level of foreign bribery enforcement in Spain and the lack of implementation of the enforcement-related recommendations. In a 2021 report, GRECO highlighted that of the group’s 11 recommendations to combat corruption from 2013, six had been fully implemented, four had been partly implemented, and one had not been implemented.
National Chapter – Spain
Fundacion Jose Ortega y Gasset-Marañón
Calle Fortuny, 53
28010 Madrid, Spain
Telephone: +34 91 700 4105
10. Political and Security Environment
There are periodic peaceful demonstrations calling for salary and pension increases and other social or economic reforms. Public sector employees and union members organize frequent small demonstrations in response to service cuts, privatization, and other government measures. Demonstrations and civil unrest in Catalonia have resulted in vandalism and damage to store fronts and buildings in Barcelona and other cities. Some regional business leaders have expressed concern that disturbances could negatively affect business operations and investments in the region.
11. Labor Policies and Practices
The COVID-19 pandemic and public health crisis derailed progress on reducing Spain’s stubbornly high unemployment rate, which peaked at 26.9 percent in 2013 after the European financial crisis. At the end of 2021, unemployment stood at 13.3 percent, among the highest unemployment rates in the EU. The figure, however, excludes about 100,000 workers who were enrolled in temporary government furlough schemes established to provide income support for workers who lost their jobs during the pandemic. The youth unemployment rate decreased to 30.7 percent in 2021, from the 40.1 percent in 2020, representing 452,000 unemployed people under the age of 25. Spain’s economically active population totaled 23.3 million people, of whom 20.2 million were employed and 3.1 million unemployed. Foreign nationals comprised 15.3 percent of Spain’s workforce (3,094,900 people) in 2021.
Spain approved a landmark labor reform law in 2022 that satisfies EU requirements to unlock subsequent tranches of European recovery funds. Key components include:
Elimination of temporary contracts except for periods of high demand and temporary substitution of workers: The reform allows for two types of temporary contracts: structural, to respond to temporary increases in demand for up to one year, and substitution, to cover workers’ absences due to medical and parental leave.
Permanent-intermittent contracts: The reform’s limitations on temporary contracts will push employers to use a permanent-intermittent contract, which provides firms flexibility to use seasonal workers and allows seasonal workers to earn seniority for the entire duration of the employment relationship – not just the time of services provided.
Limits on training contracts: The goal of this measure is to reduce the share of Spanish young people employed on temporary contracts. It defines two broad types of educational contracts, including for students under 30 who work part-time while studying for a period of up to two years, and for professional trainees who are seeking work experience toward specific certifications.
Workers sector-wide will receive the same benefits: Firms must now apply the appropriate sector-wide labor agreement to the service a subcontractor performs, such as cleaning, maintenance, or information support, rather than the firm-level labor agreement.
Restoration of indefinite agreements between firms and unions: Expired labor agreements will now stay in effect until they are replaced.
Establishment of permanent state-backed furloughs (ERTEs) and stronger fraud-fighting measures: The reform establishes a permanent furlough scheme to protect workers in firms or sectors facing significant structural economic changes that require workers to retrain and find new employment. The measures strengthen fines for firms “overusing” temporary contracts.
The labor market is mainly divided into permanent workers with full benefits and temporary workers with many fewer benefits. In the event of dismissal for an objective reason (e.g., economic reasons), severance pay is available to the worker and amounts to 20 days’ wages per year of service with a maximum of 12 months’ wages. A worker dismissed for disciplinary reasons is not entitled to severance pay. For termination of a fixed term contract (either its term expiration or completion of the work), the worker is entitled to a severance payment of 12 days per year of service. Under Spanish Labor law, an employee may bring a claim against the employer for unfair dismissal within 20 days of receiving a termination letter.
Mechanisms for preventing and resolving individual labor disputes in Spain are developed by labor laws and alternative dispute resolution (ADR) systems through collective bargaining agreements. Each of Spain’s 17 autonomous communities has a different ADR system at different levels generally dealing with collective disputes. Spanish law stipulates that, before taking individual labor disputes to court in search of a solution, parties must first attempt to reach agreement through conciliation or mediation.
The Spanish Public Employment Service (SEPE) under the Ministry of Labor and Social Economy administers unemployment benefits called the Contributory Unemployment Protection. This benefit protects those who can and wish to work but become unemployed temporarily or permanently, or those whose normal working day is reduced by a minimum of 10 percent and a maximum of 70 percent.
Collective bargaining is widespread in both the private and public sectors. A high percentage of the working population is covered by collective bargaining agreements, although only a minority (generally estimated to be about 10 percent) of those covered are union members. Large employers generally have individual collective bargaining agreements, while smaller companies use industry-wide or regional agreements. As a result of the recent labor reform, sectoral-level agreements currently hold primacy over business-level agreements.
The Constitution guarantees the right to strike, and this right has been interpreted to include the right to call general strikes to protest government policy.
The informal or underground economy costs Spain an estimated EUR 270 billion, or about 25 percent of GDP as of 2020. The informal economy is most common in sectors such as construction or retail that tend to use more cash in commercial transactions. In July 2021, the Spanish Parliament approved an anti-fraud law (Law 11/2021) to prevent and combat tax fraud, lower the limit for cash payments to EUR 1,000 between professionals and EUR 2,500 between individuals, and prohibit tax amnesties.
Sweden is generally considered a highly favorable investment destination. Sweden offers an extremely competitive, open economy with access to new products, technologies, skills, and innovations. Sweden also has a well-educated labor force, outstanding communication infrastructure, and a stable political environment, which makes it a choice destination for U.S. and foreign companies. Low levels of corporate tax, the absence of withholding tax on dividends, and a favorable holding company regime are additional incentives for doing business in Sweden.
Sweden’s attractiveness as an investment destination is tempered by a few structural business challenges. These include high personal and VAT taxes. In addition, the high cost of labor, rigid labor legislation and regulations, a persistent housing shortage, and the general high cost of living in Sweden can present challenges to attracting, hiring, and maintaining talent for new firms entering Sweden. Historically, the telecommunications, information technology, healthcare, energy, and public transport sectors have attracted the most foreign investment. However, manufacturing, wholesale, and retail trade have also recently attracted increased foreign funds.
Overall, investment conditions remain largely favorable. In the World Economic Forum’s 2019 Competitiveness Report, Sweden was ranked eight out of 138 countries in overall competitiveness and productivity. The report highlighted Sweden’s strengths: human capital (health, education level, and skills of the population), macroeconomic stability, and technical and physical infrastructure. Bloomberg’s 2021 Innovation Index ranked Sweden fifth among the most innovative nations on earth; a pattern reinforced by Sweden ranked second on the European Commission’s 2021 European Innovation Scoreboard and second on the World Intellectual Property Organization/INSEAD 2021 Global Innovation Index. Also in 2021, Transparency International ranked Sweden as one of the most corruption-free countries in the world – fourth out of 180. Sweden is perceived as a creative place with interesting research and technology. It is well equipped to embrace the Fourth Industrial Revolution with a superior IT infrastructure and is seen as a frontrunner in adopting new technologies and setting new consumer trends. U.S. and other exporters can take advantage of a test market full of demanding, highly sophisticated customers.
The COVID-19 pandemic considerably impacted the Swedish economy, but following several fiscal stimulus packages, a successful vaccination rollout, and a relaxation of pandemic-related restrictions, Sweden’ economy has recovered fully to pre-pandemic levels with no notable impact on the investment climate. Climate and the environment are a central concern for the Swedish government, political parties across the political spectrum, businesses, and the public at large. Successive Swedish governments have actively lobbied for ambitious action to protect the environment and to curb greenhouse gases within a multilateral, internationally binding framework and by welcoming research, innovation, and investment within the fields of climate and the environment.
1. Openness To, and Restrictions Upon, Foreign Investment
There are no laws or practices that discriminate or are alleged to discriminate against foreign investors, including and especially U.S. investors, by prohibiting, limiting, or conditioning foreign investment in a sector of the economy (either at the pre-establishment (market access) or post-establishment phase of investment). Until the mid-1980s, Sweden’s approach to direct investment from abroad was quite restrictive and governed by a complex system of laws and regulations. Sweden’s entry into the European Union (EU) in 1995 largely eliminated all restrictions. Restrictions to investment remain in the defense and other sensitive sectors, as addressed in the next section “Limits on Foreign Control and Right to Private Ownership and Establishment.”
The Swedish Government recognizes the need to further improve the business climate for entrepreneurs, education, and the flow of research from lab to market. Swedish authorities have implemented a number of reforms to improve the business regulatory environment and to attract more foreign investment. In addition, Sweden introduced supplementary provisions to the EU Regulation on Foreign Direct Investments (adopted in March 2019), which entered into force November 1, 2020. Sweden is in the process of drafting its domestic Investment Screening Regime, and the government commission report has been circulated for comments. A final comprehensive regime is expected to enter into force in 2023. In the meantime, Sweden does however have the obligation and ability to review and prevent investments that pose national security threats.
There are very few restrictions on where and how foreign enterprises can invest, and there are no equity caps, mandatory joint-venture requirements, or other measures designed to limit foreign ownership or market access. However, Sweden does maintain some limitations in a select number of situations:
Accountancy: Investment in the accountancy sector by non-EU-residents cannot exceed 25 percent.
Legal services: Investment in a corporation or partnership carrying out the activities of an “advokat,” a lawyer, cannot be done by non-EU residents.
Air transport: Foreign enterprises may be restricted from access to international air routes unless bilateral intergovernmental agreements provide otherwise.
Air transport: Cabotage is reserved to national airlines.
Maritime transport: Cabotage is reserved to vessels flying the national flag.
Defense: Restrictions apply to foreign ownership of companies involved in the defense industry and other sensitive areas.
On January 1, 2020, Sweden enacted new regulations giving Swedish armed forces and security services authority to deny or revoke operating licenses to mobile radio providers that threaten national security.
Swedish company law provides various ways a business can be organized. The main difference between these forms is whether the founder must own capital and to what extent the founder is personally liable for the company’s debt. The Swedish Act (1992:160) on Foreign Branches applies to foreign companies operating through a branch and also to people residing abroad who run a business in Sweden. A branch must have a president who resides within the European Economic Area (EEA). All business enterprises in Sweden (including branches) are required to register at the Swedish Companies Registration Office, Bolagsverket. An invention or trademark must be registered in Sweden in order to obtain legal protection. A bank from a non-EEA country needs special permission from the Financial Supervisory Authority, Finansinspektionen, to establish a branch in Sweden. Sweden also adheres to EU regulations on investment screening and approval mechanisms for inbound foreign investment.
Sweden has in the past five years not undergone an investment policy review (IPRs) by the World Trade Organization (WTO), the United Nations Committee on Trade and Development (UNCTAD), the United Nations Working Group on Business and Human Rights, or the Organization for Economic Cooperation and Development (OECD). In the past five years, Sweden has not undergone a review of investment policy-related concerns by civil society organizations, including those based in the host country or in third countries.
Business Sweden’s Swedish Trade and Invest Council is the investment promotion agency tasked with facilitating business. The services of the agency are available to all investors.
All forms of business enterprise, except for sole traders, have to be registered with the Swedish Companies Registration Office, Bolagsverket, before starting operations. Sole traders may apply for registration in order to be given exclusive rights to the name in the county where they will be operating. Online applications to register an enterprise can be made at https://www.bolagsverket.se/en and are open to foreign companies. The process of registering an enterprise is clear and can take a few days or up to a few weeks, depending on the complexity and form of the business enterprise. All business enterprises, including sole traders, need also to be registered with the Swedish Tax Agency, Skatteverket, before starting operations. Relevant information and guides can be found at http://www.skatteverket.se. Depending on the nature of business, companies may need to register with the Environmental Protection Agency, Naturvårdsverket, or, if real estate is involved, the county authorities. Non-EU/EEA citizens need a residence permit, obtained from the Swedish Board of Migration, Migrationsverket, in order to start up and/or run a business. A compilation of Swedish government agencies that work with registering, starting, running, expanding and/or closing a business can be found at http://www.verksamt.se.
The Government of Sweden has commissioned the Swedish Exports Credit Guarantee Board (EKN) to promote Swedish exports and the internationalization of Swedish companies. EKN insures exporting companies and banks against non-payment in export transactions, thereby reducing risk and encouraging the expansion of operations. As part of its export strategy presented in 2015, the Swedish Government has also launched Team Sweden to promote Swedish exports and investment. Team Sweden is tasked with making export market entry clear and simple for Swedish companies and consists of a common network for all public initiatives to support exports and internationalization.
The Government does not generally restrict domestic investors from investing abroad. The only exceptions are related to matters of national security and national defense; the Inspectorate of Strategic Products (ISP) is tasked with control and compliance regarding the sale and export of defense equipment and dual-use products. ISP is also the National Authority for the Chemical Weapons Convention and handles cases concerning targeted sanctions.
3. Legal Regime
As an EU member, Sweden has altered its legislation to comply with the EU’s stringent rules on competition. The country has made extensive changes in its laws and regulations to harmonize with EU practices, all to avoid distortions in, or impediments to the efficient mobilization and allocation of investment. The institutions of the European Union are publicly committed to transparent regulatory processes. The European Commission has the sole right of initiative for EU regulations and publishes extensive, descriptive information on many of its activities. More information can be found at: http://ec.europa.eu/atwork/decision-making/index_en.htm;http://ec.europa.eu/smart-regulation/index_en.htm.
There are no informal regulatory processes managed by nongovernmental organizations or private sector associations. Nongovernmental organizations and private sector associations may submit comments to government draft bills. The submitted comments are made public in the public consultation process.
Rule-making and regulatory authority on a national level exists formally in the legislative branch, the Riksdag. As a member of the EU, a growing proportion of legislation and regulation stem from the EU. These laws apply in some case directly as national law or are put before the Riksdag to be enacted as national law. The executive branch, the Government of Sweden, and its various agencies draft laws and regulations that are put before the Riksdag and are adopted on a national level when they enter into force. Municipalities may draft regulations that are within their spheres of competence. These regulations apply at the respective municipality only and may vary between municipalities.
Sweden is in principle supportive of the creation of an EU-wide environmental, social, and governance (ESG) taxonomy for sustainable activities. The EU taxonomy is a classification system, establishing a list of environmentally sustainable economic activities to help the EU scale up sustainable investment and implement the European green deal. The ambition is that the EU taxonomy would provide companies, investors, and policymakers with appropriate definitions for which economic activities can be considered environmentally sustainable. In this way, the taxonomy is believed to create security for investors, protect private investors from greenwashing, help companies to become more climate-friendly, mitigate market fragmentation, and help shift investments where they are most needed.
Draft bills and regulations, which include investment laws, are made available for public comment through a public consultation process, along the lines of U.S. federal notice and comment procedures. Current and newly adopted legislation can be found at the Swedish Parliament’s homepage and in the various government agencies dealing with the relevant regulation: http://www.riksdagen.se/sv/dokument-lagar/. Key regulatory actions are published at Lagrummet: https://lagrummet.se/. Lagrummet serves as the official site for information on Swedish legislation and provides information on legislation in the public domain, all statutes currently in force, and information on impending legislation. “Post och Inrikes Tidningar” serves in certain aspects a similar role as the Federal Register in the U.S., through which public notifications are published. The proclamations of “Post och Inrikes Tidningar” can be found at the Swedish Companies Registration Office (Bolagsverket): https://poit.bolagsverket.se/poit/PublikPoitIn.do.
The judicial branch and various agencies are tasked with regulation oversight and/or regulation enforcement. The Swedish Parliamentary Ombudsmen, known as the Justitieombuds-männen (JO), are tasked to make sure that public authority complies with the law and follows administrative processes. They also investigate complaints from the general public.
Regulations are reviewed on the basis of scientific and/or data-driven assessments. The principle of public access to official documents, offentlighetsprincipen, governs the availability of the results of studies that are conducted by government entities and furthermore to comments made by government entities. The principle provides the Swedish public with the right to study public documents as specified in the Freedom of the Press Act.
As an EU-member, Sweden complies with EU-legislation in shaping its national regulations.
If a national law, norm, or standard is found to be in conflict with EU-law, then the national law is altered to be in compliance with EU-law. Sweden adheres to the practices of WTO and coordinates its actions in regard to WTO with other EU-member countries as the EU-countries have a common trade policy.
Sweden’s legal system is based on the civil law tradition, common to Europe, and founded on classical Roman law, but has been further influenced by the German interpretation of this tradition. Swedish legislation and Swedish agencies provide guidance on whether regulations or enforcement actions are appealable and adjudicated in the national court system. Swedish courts are independent and free of influence from other branches of government, including the executive. Sweden has a written commercial law and contractual law and there are specialized courts, such as commercial and civil courts. The Swedish courts are divided into:
Courts of general jurisdiction (the District Courts, the Courts of Appeal, and the Supreme Court) which have jurisdiction with respect to civil and criminal cases;
Administrative courts (County Administrative Courts, Administrative Courts of Appeal, and the Supreme Administrative Court) which have jurisdiction with respect to issues of public law, including taxation;
Specialist courts for disputes within certain legal areas such as labor law, environmental law and market regulation.
Sweden is a signatory to the New York Convention on Recognition and Enforcement of Foreign Arbitral Law; foreign awards may be enforced in Sweden regardless of which foreign country the arbitral proceedings took place. The main source of arbitration law in Sweden is the Swedish Arbitration Act, which contains both procedural and substantive regulations. Sweden is a party to the Lugano and the Brussels Conventions, and, by its membership of the EU, Sweden is also bound by the Brussels Regulation on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters. An arbitral award is considered final and is not subject to substantive review by Swedish courts. However, arbitral awards may be challenged for reasons set out in the Arbitration Act. An award may, for example, be set aside after a challenge because of procedural errors, which are likely to have influenced the outcome.
During the 1990s, Sweden undertook significant deregulation of its markets. In a number of areas, including the electricity and telecommunication markets, Sweden has been on the leading edge of reform, resulting in more efficient sectors and lower prices. Nevertheless, a number of practical impediments to direct investments remain. These include a fairly extensive, though non-discriminatory, system of permits and authorizations needed to engage in many activities and the dominance of a few very large players in certain sectors, such as construction and food wholesaling. Foreign banks, insurance companies, brokerage firms, and cooperative mortgage institutions are permitted to establish branches in Sweden on equal terms with domestic firms, although a permit is required. Swedes and foreigners alike may acquire shares in any company listed on NASDAQ OMX.
Sweden’s taxation structure is straightforward and corporate tax levels are low. In 2013, Sweden lowered its corporate tax from 26.3 percent to 22 percent in nominal terms and lowered it again to 21.4 percent in 2019. The effective rate can be even lower as companies have the option of making deductible annual appropriations to a tax allocation reserve of up to 25 percent of their pretax profit for the year. Companies can make pre-tax allocations to untaxed reserves, which are subject to tax only when utilized. Certain amounts of untaxed reserves may be used to cover losses. Due to tax exemptions on capital gains and dividends, as well as other competitive tax rules such as low effective corporate tax rates, deductible interest costs for tax purposes, no withholding tax on interest, no stamp duty or capital duties on share capital, and an extensive double tax treaty network, Sweden is among Europe’s most favorable jurisdictions for holding companies. Unlisted shares are always tax-exempt, meaning there is no qualification time or minimum holding of votes or capital. Listed shares are exempt if the holding represents at least 10 percent of the voting rights (or is contingent on the holder’s business) and the shares are held for at least one year. As part of a COVID-19 stimulus package, the government lowered the payroll tax for persons aged 19-23 from 31.42 percent to 19.73 percent. The lower rate is temporary and applies until March 31, 2023.
Personal income taxes are among the highest in the world. Since public finances have improved due to extensive consolidation packages to reduce deficits, the government has been able to reduce tax pressure as a percentage of GDP. Though well below the national average in the EU area, public debt, as a share of GDP, rose to approximately 40 percent as a result of the enactment of several fiscal stimulus packages which aimed to boost the economy in the COVID-19 pandemic. Early 2022 figures indicate public debt will fall below 40 percent by the end of 2022. Significant tax increases in the near future remain unlikely. One particular focus of the Swedish government has been tax reductions to encourage employers to hire the long-term unemployed.
Dividends paid by foreign subsidiaries in Sweden to their parent company are not subject to Swedish taxation. Dividends distributed to other foreign shareholders are subject to a 30 percent withholding tax under domestic law, unless dividends are exempt or taxed at a lower rate under a tax treaty. Tax liability may also be eliminated under the EU Parent Subsidiary Directive. Profits of a Swedish branch of a foreign company may be remitted abroad without being subject to any other tax than the regular corporate income tax. There is no exit taxation and no specific rules regarding taxation of stock options received before a move to Sweden. Instead, cases of double taxation are solved by applying tax treaties and cover not only moves within the EU but all countries, including the United States.
There is no primary or “one-stop-shop” website that provides relevant laws, rules, procedures, and reporting requirements for investors. Business Sweden, Sweden’s official trade and investment organization, is the investment promotion agency tasked with developing business in Sweden. The services of the agency are available to all investors.
As an EU member, Sweden has altered its legislation to comply with the EU’s stringent rules on competition. The competition law rules are contained in the Swedish Competition Act (2008:579), which entered into force in November 2008. The fundamental antitrust provisions have been the same since 1993. The Swedish Competition Authority (SCA) is the main enforcement authority of the Swedish Competition Act. The agency adheres to transparent norms and procedures, which are made available on its homepage: Konkurrensverket | Välfärd genom väl fungerande marknaderSwedish Competition Authority | Welfare through well-functioning markets. SCA decisions can be appealed to the administrative courts. This can be done by submitting a written appeal to the Swedish Competition Authority within three weeks from the day the applicant received the SCA’s initial decision.
Private property is only expropriated for public purposes, in a non-discriminatory manner, with fair compensation, and in accordance with established principles of international law.
The Swedish legislation on bankruptcy is found in a number of laws that came into force in different periods of time and to serve different purposes. The main laws on insolvency are the Bankruptcy Act (1987:672) and the Company Reorganization Act (1996:764), but the Preferential Rights of Creditors Act (1970:979), the Salary Guarantee Act (1992:497), and the Companies Act (1975:1385) are equally important. In 2010, Sweden strengthened its secured transactions system through changes to the Rights of Priority Act that give secured creditors’ claims priority in cases of debtor default outside bankruptcy. According to data collected by the World Bank’s 2020 Doing Business Report, resolving insolvency takes two years on average and costs nine percent of the debtor’s estate, with the most likely outcome being that the company will be sold as a going concern. The average recovery rate is 78 cents on the dollar. Globally, Sweden ranked 17 of 190 economies on the ease of resolving insolvency in the Doing Business 2020 report.
4. Industrial Policies
The Swedish government offers certain incentives to set up a business in targeted depressed areas. Loans are available on favorable terms from the Swedish Agency for Economic and Regional Growth, Tillväxtverket, and from regional development funds. A range of regional support programs, including location and employment grants, low rent industrial parks, and economic free zones are available. Regional development support is concentrated in the lightly populated northern two-thirds of the country. In addition, EU grant and subsidy programs are generally available only for nationals and companies registered in the EU, usually on a national treatment basis. The Swedish government does not have a practice of issuing guarantees or jointly financing direct investment projects.
Sweden has foreign trade zones with bonded warehouses in the ports of Stockholm, Gothenburg, Malmö, and Jönköping. Goods may be stored indefinitely in these zones without customs clearance, but they may not be consumed or sold on a retail basis. Permission may be granted to use these goods as materials for industrial operations within a free trade zone. The same tax and labor laws apply to foreign trade zones as to other workplaces in Sweden. There are no Special Economic Zones in Sweden.
As an EU Member State, Sweden adheres to the EU’s General Data Protection Directive (GDPR) (95/46/EC) which spells out strict rules concerning the processing of personal data. Businesses must tell consumers that they are collecting data, what they intend to use it for, and to whom it will be disclosed. Data subjects must be given the opportunity to object to the processing of their personal details and to opt-out of having them used for direct marketing purposes. This opt-out should be available at the time of collection and at any point thereafter. GDPR entered into force on May 18, 2018 – and it is a Regulation, i.e. directly applicable in member states.
The EU-U.S. Privacy Shield Frameworks were designed by the U.S. government (Department of Commerce) and the European Commission to provide companies on both sides of the Atlantic with a mechanism to comply with data protection requirements when transferring personal data from the European Union to the United States in support of transatlantic commerce. The European Court of Justice (ECJ) in a July 16 ruling in the Schrems II case invalidated the legal basis for the U.S. Department of Commerce-managed EU-U.S. Privacy Shield framework (“Privacy Shield”) and imposed substantial burdens on parties using standard contractual clauses (SCCs). Subsequent guidance from the European Data Protection Board (EDPB) threatens to impose additional obstacles to use of the SCCs to transfer personal data to the United States. The United States continues to engage the European Commission to develop a new Privacy Shield mechanism and to ensure SCCs can be used for data transfers to the United States. For further information and guidance on the Privacy Shield Framework, please see: Privacy Main Page, Office of Privacy and Open Government, U.S. Department of Commerce (doc.gov)
The Swedish Authority for Privacy Protection, Integritetsskyddsmyndigheteten, works to prevent encroachment upon privacy through information and by issuing directives and codes of statutes. Integritetsskyddsmyndigheteten (IMY) also handles complaints and carries out inspections. By examining government bills, IMY ensures that new laws and ordinances protect personal data in an adequate manner. Further guidance and information are available in English on their website at Swedish Authority for Privacy Protection | IMY. There are no measurements that prevent or unduly impede companies from freely transmitting customer or other business-related data outside Sweden’s territory. Sweden imposes no performance requirements on presumptive foreign investors.
In general, there is no government policy that requires the hiring of nationals. There are no excessively onerous visa, residence, work permit, or similar requirements inhibiting mobility of foreign investors and their employees. Sweden does not follow “forced localization,” the policy in which foreign investors must use domestic content in goods or technology and there are no requirements for foreign IT providers to turn over source code and/or provide access to encryption.
Various municipal-level agencies and business associations have targeted U.S. cloud service providers in Sweden. These entities have claimed that any information processed by a U.S. cloud provider is subject to U.S. government scrutiny through the CLOUD Act, limiting customers’ privacy. This perception has adversely impacted U.S. cloud service providers’ sales in Sweden and given local cloud service firms an unfair advantage in the market. In addition, this perception has spurred a two-year government project to examine the options for the development of a Swedish government cloud, effectively halting U.S. cloud service sales as customers await the investigation’s outcome. However, due to the COVID-19 pandemic, the government’s investigation report was delayed. The final part of the report was released on December 15, 2021. The report proposed that the government initiates an assignment to establish a coordinated state IT operation start on 1 January 2023. Final reporting of the assignment must take place no later than 30 June 2024. The ordinance on coordinated government IT operations and necessary changes the authorities’ instructions shall enter into force on 1 July 2024.
5. Protection of Property Rights
Swedish law generally provides for adequate protection of real property. Mortgages and liens exist, and the recording system is reliable. Almost all land has clear title and unoccupied property ownership cannot revert to other owners. Financial mechanisms are available in Sweden for securitization of properties for lending purposes and have been in use since the early 1990s. Nordic banks account for the vast majority of secured lending transactions. The Swedish Financial Supervisory Authority, Finansinspektionen, can provide further information regarding the regulations involved with securitization of properties at https://www.fi.se/en/.
As a member of the European Union, Sweden adheres to a series of multilateral conventions on industrial, intellectual, and commercial property.
Patents: Protection in all areas of technology may be obtained for 20 years. Sweden is a party to the Patent Cooperation Treaty and the European Patent Convention of 1973; both entered into force in 1978.
Copyrights: Sweden is a signatory to various multilateral conventions on the protection of copyrights, including the Berne Convention of 1971, the Rome Convention of 1961, and the WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). Swedish copyright law protects computer programs and databases. Between 2005-2008, Sweden gained notoriety as a safe haven for internet piracy due to rapid internet connection speeds, a lag in implementing EU Directives, and weak enforcement efforts. In 2009, however, Sweden implemented the EU’s Intellectual Property Rights Enforcement Directive (IPRED) 2004/48/EC and increased its enforcement against internet piracy and, a few years later, also saw the conviction of the operators behind the Pirate Bay.org, a notorious BitTorrent tracker for illegal file sharing, and an increase in legal file sharing. Legislative measures combined with added resources for enforcement and the emergence of successful legal alternatives have all contributed to a substantial increase in music and film distribution by legal means since 2010. In 2016, Sweden set up a Specialist Court for IPR-related cases, to further increase efficiency by pooling specialist competence. In 2020, severe copyright infringement was added to the criminal code, giving police and prosecutors additional enforcement tools, and increasing the maximum penalty for such crimes to six years imprisonment.
Trademarks: Sweden protects trademarks under a specific trademark act (1960:644) and is a signatory to the 1989 Madrid Protocol.
Trade secrets: Proprietary information is protected under Sweden’s patent and copyright laws unless acquired by a government ministry or authority, in which case it may be made available to the public on demand.
Designs: Sweden is a party to the Paris Convention and the Locarno Agreement and designs are protected by the Swedish Design Protection Act, as well as the Council Regulation on Registered and Unregistered Designs. Protection under the act lasts for renewable terms of one, or several five-year periods with a maximum protection of 25 years.
Sweden is not included in USTR’s Special 301 Report or Notorious Markets List.
For additional information about national laws and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en.
6. Financial Sector
Credit is allocated on market terms and is made available to foreign investors in a non-discriminatory fashion. The private sector has access to a variety of credit instruments. Legal, regulatory, and accounting systems are transparent and consistent with international norms. NASDAQ-OMX is a modern, open, and active forum for domestic and foreign portfolio investment. It is Sweden’s official stock exchange and operates under specific legislation. Furthermore, the Swedish government is neutral toward portfolio investment and Sweden has a fully capable regulatory system that encourages and facilitates portfolio investments.
Several foreign banks, including Citibank, have established branch offices in Sweden, and several niche banks have started to compete in the retail bank market. The three largest Swedish banks are Skandinaviska Enskilda Banken (SEB), Svenska Handelsbanken, and Swedbank. Nordea is the largest foreign bank and largest bank in Sweden, while Danske Bank is the second largest foreign bank and the fifth largest bank in Sweden. A deposit insurance system was introduced in 1996, whereby individuals received protection of up to SEK 250,000 (USD 29,250) of their deposits in case of bank insolvency. On December 31, 2010, the maximum compensation was raised to the SEK equivalent of 100,000 euro.
The banks’ activities are supervised by the Swedish Financial Supervisory Authority, Finansinspektionen, http://www.fi.se, to ensure that standards are met. Swedish banks’ financial statements meet international standards and are audited by internationally recognized auditors only. The Swedish Bankers’ Association, http://www.bankforeningen.se, represents banks and financial institutions in Sweden. The association works closely with regulators and policy makers in Sweden and Europe. Sweden is not part of the Eurozone; however, Swedish commercial banks offer euro-denominated accounts and payment services.
On July 1, 2014, Sweden signed the Foreign Account Tax Compliance Act (FATCA) agreement with the U.S. Financial institutions in Sweden are now obligated to submit information in accordance with FATCA to the Swedish Tax Agency. In February 2015, the Swedish Parliament decided on new laws and regulations needed to implement FATCA. The Parliamentary decision means the government’s proposals in Bill 2014/15:41 were adopted, including for example, the introductions of:
a new law on the identification of reportable accounts with respect to the agreement;
changes to tax procedure act;
new legislation on the exchange of information with respect to the agreement; and
consequential amendments to the Income Tax Act and other laws.
Foreign banks or branches offering financial services must have an authorization from the Swedish Financial Supervisory Authority, Finansinspektionen, to conduct operations. As part of the authorization application process, FI reviews the firm’s capital situation, business plan, owners, and management. Parts of the firm’s daily operations may also require authorization from FI. The applicable regulatory code can be found at http://www.fi.se/en/our-registers/search-fffs/2009/20093/.
There are no reported losses of correspondent banking relationships in the past three years and there are no current correspondent banking relationships that are in jeopardy. Foreigners have the right to open an account in a bank in Sweden provided he/she can identify him/herself and the bank conducts an identity check. The bank cannot require the person to have a Swedish personal identity number or an address in Sweden.
Sweden does not maintain a sovereign wealth fund or similar entity.
Sweden effectively and fairly enforces domestic laws in relation to human rights, labor rights, consumer protection, environmental protections, and other laws/regulations intended to protect individuals from adverse business impacts. There are no alleged/reported human or labor rights concerns relating to RBC that foreign businesses should be aware of, as for example, alleged instances of forced and/or child labor in domestic supply chains, forced evictions of indigenous peoples, or arrests of and violence against environmental defenders.Sweden has put in place corporate governance, accounting, and executive compensation standards to protect shareholders. Sweden is a member of the Extractive Industries Transparency Initiative (EITI).Sweden is one of seventeen states that have finalized The Montreux Document on Private Military and Security Companies. It is a supporter of and participant in International Code of Conduct for Private Security Service Providers’ Association (ICoCA).
Representatives of the Sámi people have repeatedly requested meaningful consultation on issues that relate to mining, wind, and other projects proposed for their areas. One area of focus is the proposed Gállok (Kallak) iron ore mine in a traditional reindeer herding area. UN Human Rights Council special rapporteurs urged against a license for the open pit mine, which they noted would create significant and irreversible risks to Sámi lands, resources, culture, and livelihoods. The Sámi also express concern about the lack of good-faith consultations and the failure to obtain the free, prior, and informed consent of the Sámi. Sweden adopted a new law in January 2022, which requires consultations with the Sámi on issues that affect their interests. The law takes effect March 2022 at the national level, but local and regional consultations will not be required for another two years. In 2020, Sweden’s supreme court ruled that Sámi hunting rights lost in 1993 should be restored to the Sámi village Girjas Sameby. The ruling has been interpreted as a move to restore lost land resource rights to the Sámi.
Sweden adopted in January 2018 a Climate Policy Framework consisting of three pillars: revised climate policy targets, a climate law binding future governments to targets set by Parliament, and a Climate Policy Council. Sweden’s long-term climate target is to achieve zero net GHG emissions by 2045 and to reach negative emissions after that (i.e., emissions lower than what nature absorbs and/or the amount of GHG emissions Sweden curbs abroad through funding climate projects in other countries). To achieve that, remaining emissions within Sweden need to be at least 85 percent lower than emissions in 1990. The climate law requires the Swedish government to present a climate policy action plan to Parliament at the beginning of each quadrennial parliamentary cycle and to report to Parliament on its implementation each year. The national Climate Policy Council – an independent, interdisciplinary expert body comprised of scholars and experts from a broad range of society – is tasked with evaluating how well government policy is aligned with the 2045 goal.
Sweden also has a framework in place to safeguard biodiversity and a sustainable environment referred to as “Sweden’s environmental goals.” The environmental goal system consists of a generational goal, 16 environmental quality goals and milestones in the areas of waste, biodiversity, hazardous substances, sustainable urban development, air pollution and climate. Sweden’s environmental goals are the national implementation of the environmental dimension of the global sustainability goals. The framework can be found here: https://www.sverigesmiljomal.se/miljomalen/
There are regulatory incentives implemented by the Swedish government to achieve policy outcomes that preserve biodiversity, clean air, or other desirable ecological benefits.
Public procurement policies in Sweden include environmental and green growth considerations such as resource efficiency, pollution abatement, and climate resilience. Sweden refers to its implemented procurement policy framework as “sustainable public procurement” and it includes not only the impact on the environment, but also a broader definition of sustainability, which includes the social and economic dimensions. More information can be found at The National Public Procurement Agency (Upphandlingsmyndigheten): https://www.upphandlingsmyndigheten.se/en/sustainable-public-procurement/
Investors have an extremely low likelihood of encountering corruption in Sweden. While there have been cases of domestic corruption at the municipal level, most companies have high anti-corruption standards, and an investor would not typically be put in the position of having to pay a bribe to conduct business.
There are cases of Swedish companies operating overseas that have been charged with bribing foreign officials; however, these cases are relatively rare. Although Sweden has comprehensive laws against corruption, and ratified the 1997 OECD Anti-bribery Convention, in June of 2012, the OECD Anti-Bribery Working Group has given an unfavorable review of Swedish compliance to the dictates of that Convention. The group faulted Sweden for not having a single conviction of a Swedish company for bribery in the last eight years, for having unreasonably low fines, and for not re-framing their legal system so that a corporation could be charged with a crime. Swedish officials object to the review, claiming that lack of convictions is not proof of prosecutorial indifference, but rather indicative of high standards of ethics in Swedish companies. In 2019, the OECD Anti-Bribery Working Group repeated its recommendations and urged Sweden to follow them. Over the last five years, two high-profile cases have involved Swedish companies. Telia Company’s operations in Uzbekistan received considerable public attention and cost the CEO and other senior officials their jobs. Telia Company was in the process of divesting its operations in Uzbekistan following a probe by the U.S. Department of Justice (DOJ) pertaining to illegal payments. In September 2017, Telia Company reached an agreement to pay $965.8 million to settle U.S. and European criminal and civil charges that the company had paid bribes to win business in Uzbekistan. In December 2019, Ericsson reached an agreement with the Department of Justice to pay more than $1 billion to resolve a foreign corrupt practices case which involved bribing government officials, falsifying books and records, and failing to implement reasonable internal accounting controls. The resolutions covered criminal conduct in Djibouti, China, Vietnam, Indonesia, and Kuwait. Ericsson also entered into a three-year Deferred Prosecution Agreement (DPA) with the DOJ. As part of this resolution, Ericsson agreed to engage an independent compliance monitor for three years. The monitor’s main responsibilities include reviewing Ericsson’s compliance with the terms of the settlement and evaluating Ericsson’s progress in implementing and operating its enhanced compliance program and accompanying controls as well as providing recommendations for improvements.Sweden does not have a specific agency devoted exclusively to anti-corruption, but a number of agencies cooperate together. A list of Sweden’s Public and Private Anti-Corruption Initiatives can be found at https://www.ganintegrity.com/portal/country-profiles/sweden.
UN Anticorruption Convention, OECD Convention on Combatting Bribery
The National Anti-Corruption Group at the Swedish Police, Nationella anti-korruptionsgruppen, handles the investigation of corruption offenses and is engaged in prevention efforts. Corruption claims can be reported to the Group by calling +46 114 14.
Sweden is politically stable, and no changes are expected.
11. Labor Policies and Practices
In 2021, there were 5,602,000 people aged 15–74 years in the labor force, not seasonally adjusted. There were 2,952,000 men and 2,650,000 women in the labor force. The relative labor force participation rate was 74.5 percent. This rate was 77.3 percent for men and 71.7 percent for women. Sweden’s labor force of 5.6 million is disciplined, well educated, and highly skilled. Approximately 68 percent of the Swedish labor force is unionized, although membership is declining. Swedish unions have helped to implement business restructuring to remain competitive, and strongly favor employee education and technical advancements. Management- labor cooperation is generally excellent and non-confrontational. The National Mediation Office, which mediates labor disputes in Sweden, reported in its summary findings for 2020 that no working day was lost due to a strike in Sweden in 2020.
Foreign/migrant workers are covered by Swedish and EU labor laws. Labor laws are not waived in order to attract or retain investment. In general, there is no government policy that requires the hiring of nationals.
Sweden has a Co-determination at Work Act, which provides for labor representation on the boards of corporate directors once a company has reached more than 25 employees. This law also requires management to negotiate with the appropriate union, or unions prior to implementing certain major changes in company activities. It calls for a company to furnish information on many aspects of its economic status to labor representatives. Labor and management usually find this system works to their mutual benefit. The Co-determination at Work Act and the Employment Protection Act together set the rules for the adjustment employment to respond to fluctuating market conditions. Severances and layoffs are based on seniority and are conducted in consultation with unions. Unemployment insurance and other social safety net programs are available for workers laid off for economic reasons. Government-sponsored training programs to facilitate the transition for unemployed persons into areas reporting labor shortages are available, but their scope is targeted.
The cost of doing business in Sweden is generally comparable to most OECD countries, though some country-specific cost advantages are present. Overall salary costs have become increasingly competitive due to relatively modest wage increases over the last decade and a favorable exchange rate. This development is even more pronounced for highly qualified personnel and researchers.
There is no fixed minimum wage by legislation. Instead, wages are set by collective bargaining by sector. The traditionally low-wage differential has increased in recent years as a result of increased wage setting flexibility at the company level. Still, Swedish unskilled employees are relatively well paid, while well-educated Swedish employees are relatively less well paid compared to those in competitor countries. The average increases in real wages in recent years have been high by historical standards, in large part due to price stability. Even so, nominal wages in recent years have been slightly above those in competitor countries, about 2 percent annually. Employers must pay social security fees of about 31.5 percent. The fee consists of statutory contributions for pensions, health insurance, and other social benefits.
Sweden has ratified most International Labor Organization (ILO) conventions dealing with worker’s rights, freedom of association, collective bargaining, and the major working conditions and occupational safety and health conventions. More information on Sweden’s labor agreements and legislation in English can be found on the Swedish Trade Union Confederation’s website at http://www.lo.se/english/startpage.
An amended Labor law was agreed upon in June 2021. The amendments to the law are proposed to enter into force on June 30, 2022. The amendments to the Labor law will give employers greater flexibility to manage their workforce based on the skills needed for their business and improve predictability at various stages in a dismissal process. Employees will in return get more predictability regarding different employment conditions and forms of employment. Employers may, among other things, have an increased opportunity to make exceptions from the order of ending employment contracts, as Swedish labor laws are based on seniority. The rules for dismissal for personal reasons are made clearer in the amended law and the employer does not bear the wage cost in the event of dismissal disputes. At the same time, there will be a better balance between employees with different employment conditions.
Sweden is a member of the European Union (EU). The EU impacts Sweden’s trade relationship with the United States in that the EU has a common trade policy for all member countries.
A study conducted by the Swedish Tax Authority in 2020 assessed the size of the informal economy in Sweden to be 2.3 percent as share of GDP (2006 figure) and the share had remained largely constant in the last thirteen years.
13. Foreign Direct Investment and Foreign Portfolio Investment Statistics
Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source*
USG or international statistical source
USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Foreign Direct Investment
Host Country Statistical source*
USG or international statistical source
USG or international Source of data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions)
* Source for Host Country Data: Statistics Sweden (SCB).
Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment
Outward Direct Investment
“0” reflects amounts rounded to +/- USD 500,000.
Switzerland and Liechtenstein
Switzerland is welcoming to international investors, with a positive overall investment climate. The Swiss federal government enacts laws and regulations governing corporate structure, the financial system, and immigration, and concludes international trade and investment treaties. However, Switzerland’s 26 cantons (analogous to U.S. states) and largest municipalities have significant independence to shape investment policies locally, including incentives to attract investment. This federal approach has helped the Swiss maintain long-term economic and political stability, a transparent legal system, extensive and reliable infrastructure, efficient capital markets, and an excellent quality of life for the country’s 8.6 million inhabitants. Many U.S. firms base their European or regional headquarters in Switzerland, drawn to the country’s modest corporate tax rates, productive and multilingual workforce, and well-maintained infrastructure and transportation networks. U.S. companies also choose Switzerland as a gateway to markets in Eastern Europe, the Middle East, and beyond. Furthermore, U.S. companies select Switzerland because of favorable and less restrictive labor laws compared to other European locations as well as availability of a skilled workforce.
In 2019, the World Economic Forum rated Switzerland the world’s fifth most competitive economy. This high ranking reflects the country’s sound institutional environment and high levels of technological and scientific research and development. With very few exceptions, Switzerland welcomes foreign investment, accords national treatment, and does not impose, facilitate, or allow barriers to trade. According to the OECD, Swiss public administration ranks high globally in output efficiency and enjoys the highest public confidence of any national government in the OECD. The country’s competitive economy and openness to investment brought Switzerland’s cumulative inward direct investment to USD 1.4 trillion in 2020 (latest available figures) according to the Swiss National Bank, although nearly half of this amount is invested in regional hubs or headquarters that further invest in other countries.
In order to address international criticism of tax incentives provided by Swiss cantons, the Federal Act on Tax Reform and Swiss Pension System Financing (TRAF) entered into force on January 1, 2020. TRAF obliges cantons to offer the same corporate tax rates to both Swiss and foreign companies, while allowing cantons to continue to set their own cantonal tax rates and offer incentives for corporate investment. These can be deductions or preferential tax treatment for certain types of income (such as for patents), or expenses (such as for research and development). Switzerland joined the Statement of the OECD/G20 Inclusive Framework on Base Erosion and Profit Sharing (BEPS) in July 2021. It intends to implement the BEPS effective minimum corporate tax rate of 15 percent by January 2024, after a referendum to amend the Swiss constitution.
Personal income and corporate tax rates vary widely across Switzerland’s cantons. Effective corporate tax rates ranged between 11.85 and 21.04 percent in 2021, according to KPMG. In Zurich, for example, the combined effective corporate tax rate (including municipal, cantonal, and federal taxes),was 19.7 percent in 2021. The United States and Switzerland have a bilateral tax treaty.
Key sectors that have attracted significant investments in Switzerland include information technology, precision engineering, scientific instruments, pharmaceuticals, medical technology, and machine building. Switzerland hosts a significant number of startups. A new “blockchain act” came fully into force in August 2021, which is expected to benefit Switzerland’s already sizeable ecosystem for companies in blockchain and distributed ledger technologies.
There are no “forced localization” laws designed to require foreign investors to use domestic content in goods or technology (e.g., data storage within Switzerland). Switzerland follows strict privacy laws and certain personal data may not be collected in Switzerland.
Switzerland is a highly innovative economy with strong overall intellectual property protection. Switzerland enforces intellectual property rights linked to patents and trademarks effectively, and new amendments to the country’s Copyright Act to strengthen copyright enforcement on the internet came into force in April 2020.
There are some investment restrictions in areas under state monopolies, including certain types of public transportation, telecommunications, postal services, alcohol and spirits, aerospace and defense, certain types of insurance and banking services, and the trade in salt. The Swiss agricultural sector remains protected and heavily subsidized.
Liechtenstein’s investment conditions are identical in most key aspects to those in Switzerland, due to its integration into the Swiss economy. The two countries form a customs union, and Swiss authorities are responsible for implementing import and export regulations.
Both Liechtenstein and Switzerland are members of the European Free Trade Association (EFTA, which also includes Iceland and Norway). EFTA is an intergovernmental trade organization and free trade area that operates in parallel with the European Union (EU). Liechtenstein participates in the EU single market through the European Economic Area (EEA), unlike Switzerland, which has opted for a set of bilateral agreements with the EU instead.
Liechtenstein has a stable and open economy employing 40,328 people in 2020 (latest figures available), exceeding its domestic population of 39,055 and requiring a substantial number of foreign workers. In 2020, 70.6 percent of the Liechtenstein workforce were foreigners, mainly Swiss, Austrians and Germans, most of whom commute daily to Liechtenstein. Liechtenstein was granted an exception to the EU’s Free Movement of People Agreement, enabling the country not to grant residence permits to its workers.
Liechtenstein is one of the world’s wealthiest countries. Liechtenstein’s gross domestic product per capita amounted to USD 162,558 in 2019 (latest data available). According to the Liechtenstein Statistical Yearbook, the services sector, particularly in finance, accounts for 63 percent of Liechtenstein’s jobs, followed by the manufacturing sector (particularly mechanical engineering, machine tools, precision instruments, and dental products), which employs 36 percent of the workforce. Agriculture accounts for less than one percent of the country’s employment.
Liechtenstein’s corporate tax rate, at 12.5 percent, is one of the lowest in Europe. Capital gains, inheritance, and gift taxes have been abolished. The Embassy has no recorded complaints from U.S. investors stemming from market restrictions in Liechtenstein. The United States and Liechtenstein do not have a bilateral income tax treaty.
1. Openness To, and Restrictions Upon, Foreign Investment
With the exception of its agricultural sector, foreign investment into Switzerland is generally not hampered by significant barriers, with no reported discrimination against foreign investors or foreign-owned investments. Incidents of trade discrimination do exist, for example with regards to agricultural goods such as bovine genetics products.
A Swiss government-affiliated non-profit organization, Switzerland Global Enterprise (S-GE), has a nationwide mandate to attract foreign business to Switzerland on behalf of the Swiss Confederation. S-GE promotes Switzerland as an economic hub and fosters exports, imports, and investments. Some city and cantonal governments offer access to an ombudsman, who may address a wide variety of issues involving individuals and the government, but does not focus exclusively on investment issues.
Foreign and domestic enterprises may freely establish, acquire, and dispose of interests in business enterprises in Switzerland. In August 2021, the Swiss government released a broad framework for a future foreign direct investment (FDI) screening regime. A draft bill is expected to be issued for public consultation in 2022. The bill is expected to focus on any mergers or acquisitions by foreign interests, but with a particular focus on foreign state-owned or state-related investors, regardless of the sector involved. For foreign private-sector investors, no list has been published indicating any specific sectors that would be subject to mandatory reporting and approval.
There are some investment restrictions in areas under state monopolies, including certain types of public transportation, postal services, alcohol and spirits, aerospace and defense, certain types of insurance and banking services, and the trade in salt. Restrictions (in the form of domicile requirements) also exist in air and maritime transport, hydroelectric and nuclear power, operation of oil and gas pipelines, and the transportation of explosive materials. Additionally, the following legal restrictions apply within Switzerland:
Corporate boards: A company registered in Switzerland must be represented by at least one person domiciled in Switzerland. This can be either a member of the board of directors or a member of the executive board (article 718 para. 4 of the Code of Obligations). Foreign-controlled companies often meet this requirement by nominating Swiss directors. However, the manager of a company need not be a Swiss citizen, and company shares may be controlled by foreigners. Further, since January 1, 2021, larger publicly listed companies headquartered in Switzerland must fill at least 30 percent of their board positions with women. Companies have five years to meet this requirement, otherwise they will be required to state the reasons and outline planned remediation measures in their compensation report to shareholders. The establishment of a commercial presence by persons or enterprises without legal status under Swiss law requires a cantonal establishment authorization. These requirements do not generally pose a major hardship or impediment for U.S. investors.
Hostile takeovers: Swiss corporate equity can be issued in the form of either registered shares (in the name of the holder) or bearer shares. Provided the shares are not listed on a stock exchange, Swiss companies may, in their articles of incorporation, impose certain restrictions on the transfer of registered shares to prevent hostile takeovers by foreign or domestic companies (article 685a of the Code of Obligations). Hostile takeovers can also be annulled by public companies under certain circumstances. The company must cite in its statutes significant justification (relevant to the survival, conduct, and purpose of its business) to prevent or hinder a takeover by a foreign entity. Furthermore, public corporations may limit the number of registered shares that can be held by any shareholder to a percentage of the issued registered stock. Under the public takeover provisions of the 2015 Federal Act on Financial Market Infrastructures and Market Conduct in Securities and Derivatives Trading and its 2019 amendments, a formal notification is required when an investor purchases more than three percent of a Swiss company’s shares. An “opt-out” clause is available for firms that do not want to be taken over by a hostile bidder, but such opt-outs must be approved by a super-majority of shareholders and must take place well in advance of any takeover attempt.
Banking: Those wishing to establish banking operations in Switzerland must obtain prior approval from the Swiss Financial Market Supervisory Authority (FINMA), a largely independent agency administered under the Swiss Federal Department of Finance. FINMA promotes confidence in financial markets and works to protect customers, creditors, and investors. FINMA approval of bank operations is generally granted if the following conditions are met: reciprocity on the part of the foreign state; the foreign bank’s name must not give the impression that the bank is Swiss; the bank must adhere to Swiss monetary and credit policy; and a majority of the bank’s management must have their permanent residence in Switzerland. Otherwise, foreign banks are subject to the same regulatory requirements as domestic banks.
Banks organized under Swiss law must inform FINMA before they open a branch, subsidiary, or representation abroad. Foreign or domestic investors must inform FINMA before acquiring or disposing of a qualified majority of shares of a bank organized under Swiss law. If exceptional temporary capital outflows threaten monetary policy, the Swiss National Bank, the country’s independent central bank, may require other institutions to seek approval before selling foreign bonds or other financial instruments.
Insurance: A federal ordinance requires the placement of all risks physically situated in Switzerland with companies located in the country. Therefore, it is necessary for foreign insurers wishing to provide liability coverage in Switzerland to establish a subsidiary or branch in-country.
U.S. investors have not identified any specific restrictions that create market access challenges for foreign investors.Other Investment Policy Reviews
The World Trade Organization’s (WTO) September 2017 Trade Policy Review of Switzerland and Liechtenstein includes investment information. Other reports containing elements referring to the investment climate in Switzerland include the OECD Economic Survey of January 2022.
The Swiss government-affiliated non-profit organization Switzerland Global Enterprise (SGE) has a mandate to attract foreign business to Switzerland on behalf of the Swiss Confederation. SGE promotes Switzerland as an economic hub and fosters exports, imports, and investments. Larger regional offices include the Greater Geneva-Berne Area (which covers large parts of Western Switzerland), the Greater Zurich Area, and the Basel Area. Cantonal and regional Chambers of Commerce provide similar support. Each canton has a business promotion office dedicated to helping facilitate real estate location, beneficial tax arrangements, and employee recruitment plans. These regional and cantonal investment promotion agencies do not require a minimum investment or job-creation threshold in order to provide assistance. However, these offices generally focus resources on attracting medium-sized or larger entities with the potential to create higher numbers of jobs in their region.
The Swiss government’s online portal (“easygov”) is Switzerland’s online registration website and includes links to the main local interlocutors for business related questions: https://www.easygov.swiss/easygov/#/
Switzerland has a dual system for granting work permits and allowing foreigners to create their own companies in Switzerland. Employees who are citizens of the EU/EFTA area can benefit from the EU Free Movement of Persons Agreement. Permits for people from countries outside the EU/EFTA area, such as U.S. citizens, are restricted to highly qualified personnel. U.S. citizens who want to become self-employed in Switzerland must meet Swiss labor market requirements. The criteria for admittance, which usually do not create unusual hindrances for U.S. persons, are contained in:
Setting up a company in Switzerland requires registration at the relevant cantonal Commercial Registry. The cost for registering a company can range considerably, from a few hundred Swiss francs in the case of sole proprietorships or joint partnerships, to higher registration costs for limited liability companies or corporations. A list of Swiss federal fees generally applied for small and medium-sized companies is available at https://www.kmu.admin.ch/kmu/en/home/concrete-know-how/setting-up-sme/starting-business/commercial-register%20/registration-costs.html. However, additional cantonal fees can add significantly to total registration costs, and Public Notary fees may also be necessary, which can also vary considerably by canton.
Other steps/procedures for registration include: 1) placing paid-in capital in an escrow account with a bank; 2) drafting articles of association in the presence of a notary public; 3) filing a deed certifying the articles of association with the local commercial register to obtain a legal entity registration; 4) paying the stamp tax at a post office or bank after receiving an assessment by mail; 5) registering for VAT; and 6) enrolling employees in the social insurance system (federal and cantonal authorities).
While Switzerland does not explicitly promote or incentivize outward investment, Switzerland’s export promotion agency Switzerland Global Enterprise facilitates overseas market entry for Swiss companies through its Swiss Business Hubs in several countries, including the United States. Switzerland does not restrict domestic investors from investing abroad.
3. Legal Regime
The Swiss government uses transparent policies and effective laws to foster a competitive investment climate. Proposed laws and regulations are open for three-month public comment from interested parties, interest groups, cantons, and cities before being discussed within the bicameral parliament or promulgated by the appropriate regulatory authority. Authorities take comments into account carefully, particularly since proposals may be subject to optional or automatic referenda that allow Swiss voters to reject or accept the proposals. Only in rare instances – such as the case of the extension of a moratorium until 2025 on planting GMO crops – are regulations reviewed on the basis of political or customer preferences rather than solely on the basis of scientific analysis.
Switzerland is not a member of the European Union. However, Switzerland adopts many EU standards in line with a series of agreements with the EU.
The WTO concluded in 2017 that Switzerland has regularly notified its draft technical regulations, ordinances, and conformity assessment procedures to the WTO TBT Committee. Switzerland has been a signatory to the Trade Facilitation Agreement (TFA) since 2015.
Swiss civil law is codified in the Swiss Civil Code (which governs the status of individuals, family law, inheritance law, and property law) and in the Swiss Code of Obligations (which governs contracts, torts, commercial law, company law, law of checks and other payment instruments). Switzerland’s civil legal system is divided into public and private law. Public law governs the organization of the state, as well as the relationships between the state and private individuals or other entities, such as companies. Constitutional law, administrative law, tax law, criminal law, criminal procedure, public international law, civil procedure, debt enforcement, and bankruptcy law are sub-divisions of public law. Private law governs relationships among individuals or entities. Intellectual property law (copyright, patents, trademarks, etc.) is an area of private law. Labor is governed by both private and public law.
All cantons have a high court, which includes a specialized commercial court in four cantons (Zurich, Bern, St. Gallen and Aargau). The organization of the judiciary differs by canton; smaller cantons have only one court, while larger cantons have multiple courts. Cantonal high court decisions can be appealed to the Swiss Supreme Court. The court system is independent, competent, and fair.
Switzerland is party to a number of bilateral and multilateral treaties governing the recognition and enforcement of foreign judgments. The Lugano Convention, a multilateral treaty tying Switzerland to European legal conventions, entered into force in 2011 (replacing an older legal framework by the same name). A set of bilateral treaties is also in place to handle judgments of specific foreign courts. While no such agreement is in place between the United States and Switzerland, Switzerland operates under the New York Convention on Recognition and Enforcement of Foreign Arbitral Law, meaning local courts must enforce international arbitration awards under specific circumstances.
The major laws governing foreign investment in Switzerland are the Swiss Code of Obligations, the Lex Friedrich/Koller, Switzerland’s Securities Law, the Cartel Law and the Financial Market Infrastructure Act. There is currently no specific screening of foreign investment beyond a normal anti-trust review. However, Parliament instructed the Federal Council to prepare a foreign investment screening mechanism in March 2020. The Federal Council decided on the basic tenets of Switzerland’s future investment screening mechanism in August 2021, and a draft law is expected to go to Parliament in 2022, with the earliest potential date for entry into force in 2023. There are few sectoral or geographic incentives or restrictions; exceptions are described below in the section on performance requirements and incentives.
There is no pronounced interference in the court system that should affect foreign investors.
The Swiss Competition Commission and the Swiss Takeover Board review competition-related concerns, and regularly decide on questions concerning mergers, market access, abuse of market position, and other matters affecting competitive advantage. In May and July 2021, the Competition Commission decided on cases involving collusive behavior in public and private tenders in the field of electrical installation and maintenance, and fined Ford Credit Switzerland for unlawful coordination of leasing conditions. The Competition Commission found an amicable conclusion with a German tobacco producer which colluded with several European partners distributors export pans to Switzerland.
Decisions by the Swiss Competition Commission may be appealed to the Federal Administrative Court, those by the Swiss Takeover Board to the Swiss Financial Market Supervisory Authority (FINMA).
A revision to the Swiss Cartel Act came into force in January 2022, regarding the conduct of companies with relative market power, the freedom of powerful companies to set prices, and geo-blocking practices applies. Under the revised law, all Swiss competition law rules against the abuse of a dominant position will apply not only to dominant companies, but also to companies with relative market power. A new category of abusive pricing by dominant companies and companies with relative market power was also introduced. Further, the geo-blocking of Swiss customers in distance selling and e-commerce is now prohibited.
There are no known cases of expropriation within Switzerland.
Switzerland’s bankruptcy law, the Federal Act on Debt Enforcement and Bankruptcy of 11 April 1889 (in German, French and Italian), does not criminalize bankruptcy. Under the bankruptcy law, the same rights and obligations apply to foreign and Swiss contract holders. Swiss authorities provide information about Swiss residents and companies regarding debts registered with the debt collection register.
The Swiss Federal Statute on Private International Law (PILS, Art. 166-175, in force since January 1, 1989) governs Swiss recognition of foreign insolvency proceedings, including bankruptcies, foreign composition, and arrangements. Swiss law requires reciprocity for recognition of foreign insolvency.
4. Industrial Policies
Many of Switzerland’s cantons make significant use of financial incentives to attract investment to their jurisdictions. Some of the more forward-leaning cantons have in the past waived taxes for new firms for up to ten years. However, after criticism by the OECD and European Union, the Federal Council proposed tax reform measures to create an internationally compliant, competitive tax system that became known as “Tax Reform and AHV Financing” (TRAF), which entered into force in January 2020. TRAF obliged Swiss cantons to offer the same corporate tax rates to both Swiss and foreign companies, while allowing cantons to continue to set their own cantonal rates and offer incentives for corporate investment. This can be deductions and preferential tax treatment for certain types of income, such as patents, or expenses, such as research and development.
In its latest locational quality survey in 2021, Credit Suisse noted that many cantons offer attractive tax rates, and that the relative advantage of low corporate tax rates between cantons has declined. Under TRAF, effective tax rates of between 12 and 15 percent including municipal, cantonal and federal tax can be expected in most cantons, according to PricewaterhouseCoopers. In Zurich, which is sometimes used as a reference point for corporate location tax calculations within Switzerland due to its role as a prominent business center, the combined effective corporate tax rate stood at 19.7% in 2021. The implementation of the OECD/G20 corporate global minimum tax rate of 15%, planned to come in force in Switzerland in January 2024, would decrease Switzerland’s relative tax advantage even further. The Swiss government estimates that 3,000-4,000 companies based in Switzerland would be affected, including 250 Swiss-owned companies. Although countries are likely to have some differences in how they calculate corporate profits, a number of Swiss cantons could come under pressure to raise their corporate tax rates once the measure comes into force. Personal income tax rates may also vary widely across the 26 cantons.
Producers of renewable electricity (wind, solar, geothermal and biomass) may benefit from various subsidies, e.g. feed-in tariffs for electricity production, or investment subsidies covering a certain percentage of the investment costs. Large-scale hydropower plants may benefit from special subsidies and other support. Further subsidies are available for geothermal exploration projects, and for the improvement of energy efficiency and ecological rehabilitation. Subsidies for large-scale solar plants are under review in Parliament.
Switzerland’s free ports remain an important hub particularly for art works and collectibles from all over the world. The country has taken steps in recent years to strengthen anti-money laundering measures and minimize the risks of abuse in free ports, to ensure that processes are in line with international standards.
Switzerland does not mandate local employment, but the work of foreign nationals is subject to work permit regulations. Employees who are citizens of the EU/EFTA area can benefit from the EU Free Movement of Persons Agreement. Permits for people from countries outside the EU/EFTA area, such as U.S. citizens, are restricted to highly qualified personnel.
There are no “forced localization” laws designed to require foreign investors to use domestic content in goods or technology (e.g. data storage within Switzerland). In a June 2017 court decision regarding a 2014 Federal Council decision to exclude a foreign competitor from bidding on services related to the government’s critical infrastructure, the court ruled in favor of the Swiss state-owned enterprise involved in the bid. U.S. companies have to date not voiced concerns.
Switzerland follows strict privacy laws and certain data may not be collected in Switzerland, as it is deemed personal and “worthy of protection.” The collection of certain data may need to be registered at the office of the Federal Data Protection and Information Commissioner. Some foreign companies have located data centers in Switzerland due to the country’s strict privacy rules and neutrality. In April 2018, FINMA published an outsourcing circular clarifying regulations for data storage for the banking and insurance sector at: https://www.finma.ch/en/documentation/circulars/.
On September 8, 2020, the Federal Data Protection and Information Commissioner (FDPIC) of Switzerland issued an opinion concluding that the Swiss-U.S. Privacy Shield Framework does not provide an adequate level of protection for data transfers from Switzerland to the United States pursuant to Switzerland’s Federal Act on Data Protection (FADP). Privacy Shield had provided a framework for companies in both countries since 2017 to comply with data protection requirements when transferring personal data from Switzerland to the United States in support of transatlantic commerce. The Swiss action followed a July 2020 judgment by the Court of Justice of the European Union declaring in the Schrems II case as “invalid” the European Commission’s Decision 2016/1250 of 12 July 2016 on the adequacy of the protection provided by the EU-U.S. Privacy Shield. As a result of the FDPIC opinion, organizations wishing to rely on the Swiss-U.S. Privacy Shield to transfer personal data from Switzerland to the United States should seek guidance from the FDPIC or legal counsel. Like the EU decision, the FDPIC left open the possibility of data transfers under the EU’s standard contractual clauses. The United States and the European Union announced in March 2022 that they had agreed in principle on a new Trans-Atlantic Data Privacy Framework to foster trans-Atlantic data flows and address the concerns raised by the Court of Justice of the European Union. The Trans-Atlantic Data Privacy Framework will have a strong impact on a new U.S.-Swiss data privacy framework as well.
5. Protection of Property Rights
Physical property rights are recognized and enforced within Switzerland. Restrictions on the acquisition of real estate by persons abroad are regulated in the Federal Law on the Acquisition of Real Property by Persons Abroad (Permit Act) and the Permit Ordinance. In general, persons abroad require a permit from the competent cantonal authority to acquire real estate. However, not all foreign nationals require a permit; the decisive factor is the nationality, and in some circumstances also the residence status of the foreign person. EU/EFTA nationals and cross-border commuters do not need a permit. Third-country nationals with a residence permit in Switzerland only need a permit for the purchase of second homes or properties for rent.
U.S. citizens resident in Switzerland can face obstacles opening obtaining a mortgage. In Switzerland, mortgages may be contingent on whether or not the applicant can obtain a life insurance policy, but U.S. citizens have reported that insurance companies scrutinize applications involving U.S. citizens in great detail due to potential liabilities. This creates additional burdens on mortgage lenders, which may as a result refuse mortgages services to U.S. citizens or offer them at significantly higher rates.
Squatting is considered trespassing according to Art. 186 of the Swiss Criminal Code. A partial revision of the Civil Code and the Code of Civil Procedure with the aim of improving the protection of property owners and facilitating expulsions in cases of unlawful squatting is ongoing. Substantial and procedural amendments to the law are pending Parliamentary review and approval.
A revision of the Swiss Copyright Act came into force on April 1, 2020, intending to address specific difficulties in Switzerland’s system of online copyright protection and provisions to facilitate civil and criminal enforcement, particularly regarding online infringement. It is now allowed to collect internet protocol (IP) addresses, and the revision also implemented a “take down and stay down” provision. The United States is monitoring the implementation, interpretation, and effectiveness of the newly enacted legislation. In addition, cable TV operators and broadcasters reached an agreement in May 2021 on a tariff for time-shifting services, which came into force on January 1, 2022.
Federal customs authorities in Switzerland have the authority to seize counterfeit goods, upon request from the IPR holder or from related interest groups (e.g. professional associations). Goods can be seized for 10 days if there is reasonable suspicion that they are counterfeit. Provisional measures can also be obtained from a Swiss court to ensure evidence is not destroyed. If the destruction of goods is requested by an IPR holder, the owner of the goods can dispute that claim in writing within 10 days. The boom in online trade and tighter border controls during the health crisis have led to a major increase in the number of counterfeit goods seized by federal customs. In 2021, Swiss Customs conducted 5,959 interventions to seize counterfeit commercial goods, up 34 percent from the number of cases in 2020. After travel restrictions eased again, the number of items seized increased again to 33,285 in 2021 from 18,788 in 2020 , most of which were counterfeit bags and watches. In 2021, a total of 11,263 consignments of unauthorized pharmaceuticals were seized, the large majority of which were unauthorized erectile dysfunction medications.
The Swiss government’s attitude toward foreign portfolio investment and market structures is positive, resulting in high global rankings by many indices.
The SIX Swiss stock exchange based in Zurich is a significant international stock market based on market capitalization.
Switzerland is home to a sophisticated banking system that provides a high degree of service to both foreign and domestic entities. Switzerland also has an effective regulatory system that encourages and facilitates portfolio investment. The Swiss Bankers Association, which has nearly 300-member financial institutions, estimated that Switzerland’s banking sector managed assets amounting to approximately USD 8.4 trillion in 2020. Switzerland is the global market leader in cross-border private banking, accounting for a quarter of all cross-border assets under management worldwide. The largest banks, UBS and Credit Suisse, have total assets of approximately USD 1 trillion and USD 826 million, respectively, while Raiffeisen Switzerland holds about USD 260 billion and Zurich Cantonal Bank holds roughly USD 209 billion. Switzerland’s independent central bank is the Swiss National Bank (SNB).
U.S. citizens who are resident in Switzerland may face difficulties in opening bank accounts at Swiss banks, as some banks seek to avoid the administrative costs of complying with additional regulatory and administrative procedures required for the accounts of U.S. persons under accepted disclosure rules. Many banks, especially smaller ones, assess that the additional compliance costs involved with U.S. citizens exceed the potential benefit they would receive from U.S. accountholder business. As a result, these banks offer limited or no services to U.S. citizens.
U.S.-owned companies have also reported that Swiss banks treat them unequally as compared to companies owned by shareholders of other nationalities. One multinational corporation reported that its Swiss subsidiary has long held a corporate account in Switzerland, but the bank was unwilling to set up a business account for its U.S. parent company. In another case, a consortium of international citizens resident in Switzerland, including U.S. citizens, purchased a Swiss company, but reported that the Swiss company’s bank refused to maintain its corporate account as long as there were U.S. citizen shareholders.
In 2018, the Swiss government created a blockchain task force and endorsed a report on the legal framework for blockchain and distributed ledger technology (DLT) in the financial sector, with the goal of creating favorable conditions for Switzerland to evolve as a leading location for fintech and DLT companies while maintaining anti-money laundering controls. The new “blockchain act,” consisting of company law reforms came into force in February 2021, while legislation on financial market infrastructure upgrades came into force in August 2021. This opens the doors to a fully regulated cryptocurrency and digital securities industry in Switzerland. There are now a wide range of companies in Switzerland that can create and list DLT-compatible digital securities. . In September 2021, for the first time a license was issued in Switzerland for infrastructure to facilitate the trading of digital securities in the form of tokens and their integrated settlement. SIX Digital Exchange AG was authorized to act as a central securities depository, and the associated company SDX Trading AG to act as a stock exchange.
Switzerland does not have a sovereign wealth fund or an asset management bureau.
7. State-Owned Enterprises
The Swiss Confederation is the largest or sole shareholder in Switzerland’s five state-owned enterprises (SOEs), active in the areas of ground transportation (SBB), information and communication (Swiss Post, Swisscom), defense (RUAG, which was divided into two companies in January 2020 – see below), and aviation / air traffic control (Skyguide). These companies are typically responsible for “public function mandates,” but may also cover commercial activities (e.g., Swisscom in the area of telecommunications).
These SOEs typically have commercial relationships with private industry. Private sector competitors can compete with the SOEs under the same terms and conditions with respect to access to markets, credit, and other business operations. Additional publicly owned enterprises are controlled by the cantons in the areas of energy, water supply, and a number of subsectors. SOEs and canton-owned companies may benefit from exclusive rights and privileges (some of which are listed in Table A 3.2 of the most recent WTO Trade Policy Review – https://www.wto.org/english/tratop_e/tpr_e/tp455_e.htm).
Switzerland is a party to the WTO Government Procurement Agreement (GPA). Some areas are partly or fully exempted from the GPA, such as the management of drinking water, energy, transportation, telecommunications, and defense. Private companies may encounter difficulties gaining business in these exempted sectors.
In the aftermath of a 2016 cyberattack, the Federal Council reviewed Swiss defense and aerospace company RUAG’s structure in light of cybersecurity concerns for the Swiss military, and decided in June 2018 to split the company. RUAG was split into two holding companies as of January 1, 2020. A smaller company, MRO Switzerland, remains state-owned and provides essential technology and systems support to the Swiss military. A larger company, RUAG International, includes non-armaments aviation and aerospace businesses, and will be gradually fully privatized in the medium term, according to the Swiss government.
8. Responsible Business Conduct
The Swiss Confederation and Swiss companies are generally aware of the importance of pursuing due diligence to responsible business conduct (RBC) and demonstrating corporate social responsibility (CSR). In response to criticism from civil society about the business practices of Swiss companies abroad, the Swiss government commissioned a series of reports on the government’s role in ensuring CSR, particularly in the commodities sector, and in December 2016 published a national action plan in conjunction with its commitments under the UN Guiding Principles on Business and Human Rights (https://www.admin.ch/gov/en/start/documentation/media-releases.msg-id-64884.html). In June 2017, the Swiss government concluded that Switzerland promotes voluntary principles, such as the upholding of human rights standards, and also supports including mandatory CSR market incentives, such as minimum conditions for the protection of workers abroad, in forthcoming legislation. In January 2020, the Swiss government approved the CSR Action Plan 2020-2023, which covers sixteen measures – particularly promoting sustainability reporting and due diligence by companies, stakeholder dialogue, and the alignment of private section CSR instruments with the OECD Guidelines for Multinational Enterprises.
In November 2020, a referendum known as the “Responsible Business Initiative,” which would have placed new obligations on Swiss companies to protect human rights and the environment internationally, was narrowly rejected by Swiss voters. Instead, a proposal of Parliament came into force in January 2022, obliging covered companies to report on environmental and labor issues, human rights and the fight against corruption and to exercise due diligence with regard to conflict minerals and child labor. After a one-year transition period, the new reporting obligations will apply as of 2023, and companies will submit their first reports in2024. Also, Swiss companies involved in minerals extraction abroad are required to source all minerals in compliance with international labor standards and applicable environmental laws, and must report on measures to ensure their international activities do not involve or support child labor.
In March 2021, Swiss voters approved a free trade agreement between Indonesia and the European Free Trade Association (EFTA), of which Switzerland is a member. The agreement requires that any palm oil imported under preferential tariffs be produced sustainably. This is said to be the first-ever agreement of its type that links trade preferences to sustainable methods of production.
Switzerland ranked 3rd out of 180 countries in the 2020 Yale University-based Environmental Performance Index (EPI).
The Swiss government implements the OECD Due Diligence Guide for Responsible Supply Chains of Minerals from Conflict and High-Risk Areas. Switzerland is a member of the Extractive Industries Transparency Initiative and supports the Better Gold Initiative, which promotes responsible gold mining in Peru, Bolivia and Colombia. Switzerland’s Point of Contact for the OECD Guidelines at the State Secretariat for Economic Affairs (SECO) may be contacted at: https://mneguidelines.oecd.org/ncps/switzerland.htm. Information about the Swiss Better Gold Association is available at: https://www.swissbettergold.ch.
Switzerland has signed a number of nonbinding agreements outlining best practices for corporations, including the Voluntary Principles on Security and Human Rights and the International Code of Conduct for Private Security Service Providers. The latter was the result of a multi-stakeholder initiative launched by Switzerland.
Switzerland is also a signatory state of the Montreux Document, a non-binding instrument on the obligations of states under international law with regard to the activities of private military and security companies.
In 2019, Switzerland set a 2050 target for net-zero emissions, and in January 2021 it adopted a corresponding Long-Term Climate Strategy, which sets out climate policy guidelines up to 2050 and establishes strategic targets for key sectors. The strategy presents development scenarios and strategic targets up to 2050 for the buildings, industry, transport, agricultural and food sectors, financial markets, aviation, and the waste industry. Additionally, in February 2020, Switzerland updated and enhanced its nationally determined contribution (NDC) to reflect the latest findings by the IPCC indicating a need to reduce global CO2 emissions by about 45 percent from 2010 levels by 2030, and to achieve full carbon neutrality by 2050 in order to limit warming to 1.5 degrees Celsius.
In June 2021, the Swiss population rejected a revision of the country’s CO2 Act in a referendum. The revised Act aimed to further reduce CO2 output in Switzerland by at least 50% by 2030 in line with the commitments made under the Paris Climate Agreement. However, observers believe the Act was rejected because it relied strongly on new taxes on fossil fuels, which were argued to disproportionately affect residents of rural areas. The Federal Council introduced a new revision of the CO2 Act to parliament in December 2021, relying more on incentives investments rather than taxes.
In August 2021, the Federal Council set the parameters for future binding disclosure requirements in line with the Task Force on Climate-related Financial Disclosures (TCFD). Public companies, banks, and insurance companies with 500 or more employees more than CHF 20 million (USD 2.13 million) in total assets, or more than CHF 40 million ($4.25 million) in turnover will be required to publicly report on all climate issues. A draft law should be prepared by mid-2022. The Swiss government also issued guidance that asset managers should publish their methodology and strategy for weighing climate and environmental risks when managing clients’ assets.
Switzerland currently ranks 5 out of 34 countries in ITIF’s Global Energy Innovation Index, and 19 out of 76 countries in MIT’s Technology Review’s Green Future Index. Switzerland currently ranks 8 out of 29 European countries in the Global Green Growth Index of the Global Green Growth Institute.
Switzerland is ranked 7th of 180 countries in Transparency International’s Corruption Perceptions Index 2021, reflecting low perceptions of corruption in society. Under Swiss law, officials are not to accept anything that would “challenge their independence and capacity to act.” In case of non-compliance the law foresees criminal penalties, including imprisonment for up to five years, for official corruption, and the government generally implements these laws effectively. The bribery of public officials is governed by the Swiss Criminal Code (Art. 322), while the bribery of private individuals is governed by the Federal Law Against Unfair Competition. The law defines as granting an “undue advantage” either in exchange for a specific act, or in some cases for future behavior not related to a specific act. Some officials may receive small gifts valued at no more than CHF 200 or CHF 300 for an entire year, which are not seen as “undue.” However, officials in some fields, such as financial regulators, may receive no advantages at all. Transparency International has recommended that a maximum sum should be set at the federal level.
Investigating and prosecuting government corruption is a federal responsibility. A majority of cantons require members of cantonal parliaments to disclose their interests. A joint working group comprising representatives of various federal government agencies works under the leadership of the Federal Department of Foreign Affairs to combat corruption. Some multinational companies have set up internal hotlines to enable staff to report problems anonymously.
Switzerland ratified the United Nations Convention against Corruption in 2009. Swiss government experts believe this ratification did not result in significant domestic changes, since passive and active corruption of public servants was already considered a crime under the Swiss Criminal Code.
A review by the Council of Europe’s Group of States against Corruption (GRECO) in 2017 recommended the adoption of a code of ethics/conduct, together with awareness-raising measures, for members of the federal parliament, judges, and the Office of the Attorney General (OAG) to avoid conflict of interests. These measures needed to be accompanied by a reinforced monitoring of members of parliament’s compliance with their obligations. In March 2018, the OECD Working Group on Bribery in International Business Transactions recommended that Switzerland adopt an appropriate legal framework to protect private sector whistleblowers from discrimination and disciplinary action, to ensure that sanctions imposed for foreign bribery against natural and legal persons are effective, proportionate, and dissuasive, and to ensure broader and more systematic publication of concluded foreign bribery cases. The OECD Working Group positively highlighted Switzerland’s proactive policy on seizure and confiscation, its active involvement in mutual legal assistance, and its role as a promoter of cooperation in field of foreign bribery. Regarding detection, the OECD Working Group commended the key role played by the Swiss Financial Intelligence Unit (MROS) in detecting foreign bribery.
A number of Swiss federal administrative authorities are involved in combating bribery. The Swiss State Secretariat for Economic Affairs (SECO) deals with issues relating to the OECD Convention. The Federal Office of Justice deals with those relating to the Council of Europe Convention, while the Federal Department of Foreign Affairs (MFA) deals with the UN Convention. The power to prosecute and judge corruption offenses is shared between the relevant Swiss canton and the federal government. For the federal government, the competent authorities are the Office of the Attorney General, the Federal Criminal Court, and the Federal Police. In the cantons, the relevant actors are the cantonal judicial authorities and the cantonal police forces.
In 2001, Switzerland signed the Council of Europe’s Criminal Law Convention on Corruption. In 1997, Switzerland signed the OECD Anti-Bribery Convention, which entered into force in 2000. Switzerland signed the UN Convention against Corruption in 2003. Switzerland ratified the UN Anticorruption Convention in 2009.
In order to implement the Council of Europe convention, the Swiss parliament amended the Penal Code to make bribery of foreign public officials a federal offense (Title Nineteen “Bribery”); these amendments entered into force in 2000. In accordance with the revised 1997 OECD Anti-Bribery Convention, the Swiss parliament amended legislation as of 2001 on direct taxes of the Confederation, cantons, and townships to prohibit the tax deductibility of bribes.
Switzerland maintains an effective legal and policy framework to combat domestic corruption. U.S. firms investing in Switzerland have not raised with the Embassy any corruption concerns in recent years.
“Watchdog” Organization Contact:
Transparency International Switzerland
P.O. Box 8509
3001 Bern / Switzerland
Ph. +41 31 382 3550
10. Political and Security Environment
There is minimal risk from civil unrest in Switzerland. Protests do occur in Switzerland, but authorities carefully monitor protest activities. Urban areas regularly experience demonstrations, mostly on global trade and political issues, and some occasionally sparked by U.S. foreign policy. Protests held during the annual World Economic Forum (WEF) occasionally draw participants from several countries in Europe. Historically, demonstrations have been peaceful, with protestors registering for police permits. Protestors have blocked traffic; spray-painted areas with graffiti, and on rare occasions, clashed with police. Political extremist or anarchist groups sometimes instigate civil unrest. Right-wing activists have targeted refugees/asylum seekers/foreigners, and more recently have organized protests against COVID-19 restrictions. Meanwhile, left-wing activists (who historically have demonstrated a greater propensity toward violence) usually target organizations involved with globalization, alleged fascism, and alleged police repression. Swiss police have at their disposal tear gas and water cannons, which are rarely used.
11. Labor Policies and Practices
The Swiss labor force is highly educated and highly skilled. The Swiss economy is capital intensive and geared toward high value-added products and services. In 2021, 77.2 percent of the workforce was employed in services, 20.4 percent in manufacturing, and 2.4 percent in agriculture. Full-time work compared to part-time work is more prevalent among foreign workers than among Swiss workers: 40.4 percent of the Swiss population works part-time, compared to 27.8 percent of the foreign working population. Part-time work is three times more common among women than men. Wages in Switzerland are among the highest in the world. Switzerland continues to observe International Labor Organization (ILO) core conventions. Government regulations cover maximum work hours, minimum length of holidays, sick leave, compulsory military service, contract termination, and other requirements. There is no federal minimum wage law.
Foreigners fill not only low-skilled, low-wage jobs, but also highly technical positions in the manufacturing and service industries. In 2021, foreigners account for 26.4 percent of Switzerland’s labor force estimated at about 4.7 million people. Many foreign nationals are long-time Swiss residents who have not applied for or been granted Swiss citizenship. Foreign seasonal workers take many lower-wage jobs in agriculture. Switzerland has one of the smallest informal economies in Europe, accounting for approximately 6% of GDP since 2016.
In the wake of a 2014 referendum to impose limits on immigration, the government introduced a series of measures aimed at bringing traditionally underemployed groups into the labor market – women, older job seekers, refugees, and temporarily accepted asylum seekers. In 2018 the Federal Council implemented a parliamentary decision that companies in sectors with more than 5 percent unemployment provide information on job openings to government-run employment centers, which make the openings available to cross-border commuters and EU nationals as well.
Trade union density – the percentage of the workforce represented by trade unions – is on the decline in Switzerland, according to OECD data. From over 20 percent in 2000, trade union density had fallen to 14.4 percent by 2018, according to the OECD (latest data available). Labor-management relations are generally constructive, with a general willingness on both sides to settle disputes by negotiation rather than labor action. According to the Federal Office of Statistics, some 581 collective agreements were in force in Switzerland in March 2018 (latest data available). Of these, approximately 64 percent concern the services sector, 34 percent the manufacturing sector, and one percent the agricultural sector; these are usually renewed without major difficulties. Trade unions continue to promote a wider coverage of collective agreements for the Swiss labor force. Although the number of workdays lost to strikes in Switzerland is among the lowest in the OECD, Swiss trade unions have encouraged workers to strike on several occasions in recent years. A general prohibition on strikes by Swiss public servants was repealed in 2000, although restrictions remain in place in a few cantons. The Federal Council may now only restrict or prohibit the right to strike where it affects the security of the state, external relations, or the supply of vital goods to the country.
In difficult economic times, employers may temporarily shift full-time employees to part-time by registering with cantonal authorities and justifying reductions as necessary to business activities. This practice, known as Kurzarbeit (“short-time work”), allows for the government to make partial salary payments through the unemployment insurance fund. Employees can reject the shift to part-time work, but risk dismissal in that case. Kurzarbeit became widespread with the onset of the COVD-19 crisis and the temporary shutdown of wide segments of the Swiss economy in 2020. By October 2021 this was drastically reduced to 48,264 affected employees from 7,917 companies, compared to 1.91 million employees in May and 219,388 in October 2020. . The Swiss government has continued expanded financial support for the Kurzarbeit program throughout the pandemic.
Switzerland’s average unemployment rate was 4.8 percent in 2020 under ILO Labor Force Survey methodology, while according to Swiss authorities registered unemployment in 2021 was 3.0 percent. Cantons bordering EU countries experience higher unemployment rates than Switzerland as a whole.
The Netherlands consistently ranks among the world’s most competitive industrialized economies. It offers an attractive business and investment climate and remains a welcoming location for business investment from the United States and elsewhere.
Strengths of the Dutch economy include the Netherlands’ stable political and macroeconomic climate, a highly developed financial sector, strategic location, well-educated and productive labor force, and high-quality physical and communications infrastructure. Investors in the Netherlands take advantage of its highly competitive logistics, anchored by the largest seaport and fourth-largest airport in Europe. In telecommunications, the Netherlands has one of the highest levels of internet penetration in the European Union (EU) at 96 percent and hosts one of the largest data transport hubs in the world, the Amsterdam Internet Exchange.
The Netherlands is among the largest recipients and sources of foreign direct investment (FDI) in the world and one of the largest historical recipients of direct investment from the United States. This can be attributed to the Netherlands’ competitive economy, historically business-friendly tax climate, and many investment treaties containing investor protections. The Dutch economy has significant foreign direct investment in a wide range of sectors including logistics, information technology, and manufacturing. Dutch tax policy continues to evolve in response to EU attempts to harmonize tax policy across member states.
Until the COVID-19 crisis, economic growth had placed the Dutch economy in a very healthy position, with successive years of a budget surplus, public debt that was well under 50 percent of GDP, and record-low unemployment of 3.5 percent. This allowed the Dutch government significant fiscal space to implement coronavirus relief measures. In response to COVID, the Dutch government implemented wide-ranging support for businesses affected by the COVID crisis, including support to cover employee wages, benefits to self-employed professions to bridge a loss of income, and compensation for fixed costs other than wages. The financial support measures added up to about $70.5 billion (€60 billion) in the first year of the crisis. These programs prevented a wave of bankruptcies – bankruptcy filings in 2020 and 2021 were the lowest in two decades.
The new coalition government announced in early 2022 plans to be climate neutral by 2050. The government said it would adjust domestic climate goals to at least 55 percent CO2 reduction by 2030 compared to 1990, with ambitions to aim higher for a 60 percent reduction. The government has named a Minister for Climate and Energy Policy to work on domestic issues in addition to a Climate Envoy focused on international efforts. The Netherlands joined the U.S.-EU Global Methane Pledge and promised to end all investment in new coal power generation domestically and internationally. In April 2022, the government joined the AIM for Climate initiative.
The 2019 National Climate Agreement contains policy and measures to achieve climate goals through agreements with various economic sectors on specific actions. The participating sectors include electricity, industry, “built environment,” traffic and transport, and agriculture.
The Netherlands business community suffered a two-pronged loss in the planned departure of two of its major national corporate champions. Energy leader Shell and food and household products conglomerate Unilever announced in 2021 a relocation of their corporate headquarters from The Hague and Rotterdam, respectively, to London. The companies cited concerns with Dutch tax law relative to dividend taxation and need for consolidated management structure. (Note: Both companies previously split their corporate governance between the Netherlands and the UK. End Note.)
In March 2022, the Dutch Central Planning Bureau (CPB) published its 2022 economic projections. Due to the Russian invasion of Ukraine, the outlook was marked by uncertainty and flagged “even higher” energy prices as the most important economic consequence. Because of increased energy prices and high inflation from the COVID pandemic, CPB estimates a 5.2% inflation rate for 2022 with a range of 6.0% and 3.0% depending on how long energy prices remain high. CPB estimated economic growth of 3.6% in 2022 and 1.7% in 2023. CPB predicted unemployment at 4 percent in 2022, down from 4.2% in 2021. The low unemployment rate reflects a similar challenge also faced by the United States – businesses are finding it difficult to recruit qualified staff. Government debt is expected to rise to 61 percent of GDP by 2025 due to increased spending under the new coalition government, including on defense, outlays to support an aging population, and support to low-income families to offset inflation in energy and food prices.
According to the U.S. Bureau of Economic Analysis (BEA), when measured by country of foreign parent, the Netherlands is the second largest destination for U.S. FDI abroad in 2020 after the UK, holding $844 billion out of a total of $6.1 trillion total outbound U.S. investment – about 14 percent. Investment from the Netherlands contributed $484 billion FDI to the United States, making it the fourth largest investor at the end of 2020 of about $4.6 trillion total inbound FDI to the United States– about 10.5 percent. Measured by ultimate beneficial owner (UBO), the Netherlands was the seventh largest investor at $236 billion. For the Netherlands, outbound FDI to the United States represented 14 percent of all direct investment abroad.
1. Openness To, and Restrictions Upon, Foreign Investment
In 2020, the Netherlands was the 18th largest economy in the world and is the fifth largest economy in the European Union with a gross domestic product (GDP) in 2020 of over $913 billion according to the World Bank. The Netherlands consistently ranks among the world’s most competitive industrialized economies in global rankings that measure competitiveness, innovation, and access to infrastructure. According to the OECD and the International Monetary Fund (IMF), in 2020 the Netherlands was the second largest source and recipient for foreign direct investment (FDI) in the world, although the Netherlands is not the ultimate destination for the majority of this investment. Similarly, in its 2020 investment report, the UN Conference on Trade and Development (UNCTAD) identified the Netherlands as the world’s fourth largest destination of global FDI inflows and the third largest source of FDI outflows.
The government of the Netherlands maintains liberal policies toward FDI, has established itself as a platform for third-country investment with some 145 investment agreements in force, and adheres to the Organization for Economic Cooperation and Development (OECD) Codes of Liberalization and Declaration on International Investment, including a National Treatment commitment and adherence to relevant guidelines.
The Netherlands is the recipient of eight percent of all FDI inflow into the EU. The Netherlands has become a key export platform and pan-regional distribution hub for U.S. firms. Roughly 60 percent of total U.S. foreign-affiliate sales in the Netherlands are exports, with the bulk of them going to other EU members. The nearly 3,000 U.S. owned corporations represent more than 20% of all foreign owned firms in the Netherlands and they create more than 200,000 jobs. Foreign owned firms operate predominantly in business services, wholesale, and retail sectors.
Although policy makers feared that Brexit would have an extremely negative impact on the Dutch economy, the Netherlands is benefitting from companies exiting the United Kingdom in search of an anchor location inside the EU Single Market. The European Medicines Agency (EMA) also relocated from London to Amsterdam. According to the Netherlands Foreign Investment Agency (NFIA), since the referendum in 2016, 316 companies have chosen to relocate to the Netherlands. The companies are mainly from the health, creative industry, financial services, and logistics sectors. The Dutch Authority for the Financial Markets (AFM) expects Amsterdam to emerge as a main post-Brexit financial trading center in Europe for automated trading platforms and other ‘fintech’ firms, as more of these companies cross the Channel to keep their European trading within the confines of the EU regulatory oversight.
Dutch tax authorities provide a high degree of customer service to foreign investors, seeking to provide transparent, precise tax guidance that makes long-term tax obligations more predictable. Advance Tax Rulings (ATR) and Advance Pricing Agreements (APA) are guarantees given by local tax inspectors regarding long-term tax commitments for a particular acquisition or greenfield investment. Dutch tax policy continues to evolve as the EU seeks to harmonize tax measures across member states. A more detailed description of Dutch tax policy for foreign investors can be found at https://investinholland.com/why-invest/incentives-taxes/ .
Dutch corporations and branches of foreign corporations are currently subject to a corporate tax rate of 25 percent on taxable profits, which puts the Netherlands in the middle third among EU countries’ corporate tax rates and below the tax rates of its larger neighbors. Corporate income tax rates in the Netherlands are currently 15% for the first €395,000 of taxable profits and 25.8% for taxable profits exceeding €395,000 in 2022.
Dutch corporate taxation generally allows for exemption of dividends and capital gains derived from a foreign subsidiary. Surveys of the corporate tax structure of EU member states note that both the corporate tax rate and the effective corporate tax rate in the Netherlands are around the EU average. Nevertheless, the Dutch corporate tax structure ranks among the most competitive in Europe considering other beneficial measures such as the possibility for the tax authorities to provide corporations with clarity on future treatment of taxes via “advance” rulings and agreements such as ATR and/or APA. The Netherlands also has no branch profit tax and does not levy a withholding tax on interest and royalties.
Maintaining an investment-friendly reputation is a high priority for the Dutch government, which provides public information and institutional assistance to prospective investors through the Netherlands Foreign Investment Agency (NFIA) ( https://investinholland.com/ ). Historically, over a third of all “greenfield” FDI projects that NFIA attracts to the Netherlands originate from U.S. companies. Additionally, the Netherlands business gateway at https://business.gov.nl/ – maintained by the Dutch government – provides information on regulations, taxes, and investment incentives that apply to foreign investors in the Netherlands and clear guidance on establishing a business in the Netherlands. The NFIA maintains five regional offices in the United States (Washington, DC; Atlanta; Chicago; New York City; and San Francisco). The American Chamber of Commerce in the Netherlands ( https://www.amcham.nl/ ) also promotes U.S. and Dutch business interests in the Netherlands.
With few exceptions, the Netherlands does not discriminate between national and foreign individuals in the establishment and operation of private companies. The government has divested its complete ownership of many public utilities, but in a number of strategic sectors, private investment – including foreign investment – may be subject to limitations or conditions. These include transportation, energy, defense and security, finance, postal services, public broadcasting, and the media.
Air transport is governed by EU regulation and subject to the U.S.-EU Air Transport Agreement. U.S. nationals can invest in Dutch/European carriers as long as the airline remains majority-owned by EU governments or nationals from EU member states. Additionally, the EU and its member states reserve the right to limit U.S. investment in the voting equity of an EU airline on a reciprocal basis that the United States allows for foreign nationals in U.S. carriers.
The Netherlands has not recently undergone an investment policy review by the OECD, World Trade Organization (WTO), or UNCTAD.
The Dutch American Friendship Treaty (DAFT) from 1956 gives U.S. citizens preferential treatment to operate a business in the Netherlands, providing ease of establishment that most other non-EU nationals do not enjoy. U.S. entrepreneurs applying under the DAFT do not need to satisfy a strict, points-based test and do not have to meet pre-conditions related to providing an innovative product. U.S. entrepreneurs setting up a sole proprietorship only have to register with the Chamber of Commerce and demonstrate a minimum investment of 4,500 euros. DAFT entrepreneurs receive a two-year residence permit, with the possibility of renewal for five subsequent years.
In order to sustain the top ten ranking of the Netherlands among the world’s largest exporting nations, the Minister for International Trade and Development Cooperation within the Ministry for Foreign Affairs coordinates with the government and private sector trade promotion agencies in setting an annual ‘overseas trade mission’ agenda. The Netherlands Enterprise Agency (https://english.rvo.nl/) has the lead in organizing a custom-tailored and topical format of trade missions to accompany State visits and other official delegations abroad. Participation in these missions is open to any enterprise established in the Netherlands.
3. Legal Regime
Dutch commercial laws and regulations accord with international legal practices and standards; they apply equally to foreign and Dutch companies. The rules on acquisition, mergers, takeovers, and reinvestment are nondiscriminatory. The Social Economic Council (SER)–an official advisory body consisting of employers’ representatives, labor representatives, and government appointed independent experts–administers Dutch mergers and acquisitions rules. The SER’s rules serve to protect the interests of stakeholders and employees. They include requirements for the timely announcement of mergers and acquisitions (M&A) and for discussions with trade unions.
As an EU member and Eurozone country, the Netherlands is firmly integrated in the European regulatory system, with national and European institutions exercising authority over specific markets, industries, consumer rights, and competition behavior of individual firms.
Financial markets are regulated in an interconnected EU and national system of prudential and behavioral oversight. The domestic regulators are the Dutch Central Bank (DNB) and the Netherlands Authority for the Financial Market (AFM). Their EU counterparts are the European Central Bank (ECB) and the European Securities and Markets Authority (ESMA).
The Dutch Civil Code requires boards’ statements of large companies to include non-financial performance indicators in their annual report. EU law is relevant in the Netherlands. Companies often voluntarily disclose ESG-related issues and refer to the GRI Sustainability Reporting Guidelines and the Task Force on Climate-related Financial Disclosures recommendations on its website. Some sectors such as the pension sector have committed to the 2018 Covenant on International Socially Responsible Investing (IMVB). In December 2021, the Netherlands became the latest European government to announce plans to introduce mandatory human rights and environmental due diligence (HREDD) legislation at a national level should the EU continue to delay an introduction of mandatory HREDD legislation.
Traditionally, public consultation in drafting new laws is achieved by invitation of various civil society bodies, trade associations, and organizations of stakeholders. In addition, the SER has a formal mandate to provide the government with advice, both solicited and of its own accord. Recently, the SER has provided the government with advice on emissions reduction of greenhouse gases, energy transition, and pension reforms. New laws and regulations are subject to legal review by the Council of State and must be approved by the Second and First Chambers of Parliament. The World Bank scores the Netherlands at 4.75 out of 5 on its Global Indicators of Regulatory Governance which assesses transparency around proposed regulations and access to enacted laws. All proposed regulations are published publicly including on a unified website and on the website of the relevant ministry or regulator.
The Netherlands is a member of the WTO and does not maintain any measures that are inconsistent with obligations under Trade Related Investment Measures (TRIMs).
Dutch contract law is based on the principle of party autonomy and full freedom of contract. Signing parties are free to draft an agreement in any form and any language, based on the legal system of their choice. Dutch corporate law provides for a legal and fiscal framework that is designed to be flexible. This element of the investment climate makes the Netherlands especially attractive to foreign investors.
The Dutch civil court system has a chamber dedicated to business disputes, called the Enterprise Chamber. The Enterprise Chamber includes judges who are experts in various commercial fields. They resolve a wide range of corporate disputes, from corporate governance disputes to high-profile shareholder conflicts over mergers or hostile take-overs.
Since 2019, the Enterprise Chamber houses an English-language commercial court. The Netherlands Commercial Court (NCC) and its appellate chamber (NCCA) offer parties the opportunity to litigate in English and will provide judgments in English. Both the NCC and NCCA will focus primarily on major international commercial cases. See also: https://www.rechtspraak.nl/English/NCC/Pages/default.aspx
The Dutch government has demonstrated a growing concern with the protection of its open, market-based economy against foreign state malign activity. The Netherlands is in the process of establishing a formal domestic investment screening mechanism as per EU directive. In May 2020, the long-awaited investment screening law in the telecommunications sector came into force. In December 2020, the law on establishing a framework for investment screening for all critical sectors came into force, aimed at protecting Dutch national security.
In concert with the European Union, the Dutch government is considering how to best protect its economic security and also continue as one of the world’s most open economies. The Netherlands has foreign investment and procurement screening mechanisms in place for certain vital sectors that could present national security vulnerabilities. The first such laws (one on investment screening per EU directive and one on unwanted outside influence in the telecommunications sector) passed in 2020. The government is in the process of expanding screening measures to cover sensitive technologies more broadly, and a new law, which will apply retroactively from September 2020, is expected to be passed by Parliament in 2022. Among policymakers, foreign investment and procurement screening is considered a non-partisan issue with support across the political spectrum. There is no requirement for Dutch nationals to have an equity stake in a Dutch registered company.
Structural and regulatory reforms are an integral part of Dutch economic policy. Laws are routinely developed for stimulating market forces, liberalization, deregulation, and tightening competition policy.
As an EU and Eurozone member, the Netherlands is firmly integrated in the European regulatory system with national and European institutions exercising authority over specific markets, industries, consumer rights, and competition behavior of individual firms.
The Authority for Consumers and Markets (ACM) provides regulatory oversight in three key areas: consumer protection, post and telecommunications, and market competition.
The Netherlands maintains strong protection on all types of property, including private and intellectual property rights, and the right of citizens to own and use property. Expropriation of corporate assets or the nationalization of industry requires a special act of Parliament, as demonstrated in the nationalization of ABN AMRO during the 2008 financial crisis (the government returned it to public shareholding through a 2016 IPO). In the event of expropriation, the Dutch government follows customary international law, providing prompt, adequate, and effective compensation, as well as ample process for legal recourse.
The U.S. Mission to the Netherlands is unaware of any recent expropriation claims involving the Dutch government and a U.S. or other foreign-owned company.
Dutch bankruptcy law is governed by the Dutch Bankruptcy Code, which applies both to individuals and to companies. The code covers three separate legal proceedings: 1) bankruptcy, which has a goal of liquidating the company’s assets; 2) receivership, aimed at reaching an agreement between the creditors and the company; and 3) debt restructuring, which is only available to individuals.
4. Industrial Policies
General requirements to qualify for investment subsidy schemes apply equally to domestic and foreign investors. Industry-specific, targeted investment incentives have long been a tool of Dutch economic policy to facilitate economic restructuring and to promote economic priorities. Such subsidies and incentives are spelled out in detailed regulations. Subsidies are in the form of tax credits disbursed through corporate tax rebates or direct cash payments if there is no tax liability. For an overview of government subsidies and investment programs, see: http://english.rvo.nl/subsidies-programmes.
FDI tends to be concentrated in growth sectors including information and communications technology (ICT), biotechnology, medical technology, electronic components, and machinery and equipment. Investment projects are predominantly in value-added logistics, machinery and equipment, and food.
Since 2010, the government shifted from traditional industrial support policies to a comprehensive approach to public/private financing agreements in areas where investment is deemed of strategic value. Government, academia, and industry work together to determine recipient sectors for co-financed (public and private) R&D. The government’s industrial policy focuses on nine “Top Sectors”: creative industries, logistics, horticulture, agriculture and food, life sciences, energy, water, chemical industry, and high tech. (For more information, see https://www.government.nl/topics/enterprise-and-innovation/contents/encouraging-innovation.)
The Netherlands has no free trade zones (FTZs) or free ports where commodities can be processed or reprocessed tax-free. However, FTZs exist for bonded storage, cargo consolidation, and reconfiguration of non-EU goods. This reflects the key role that transport, transit, logistics, and distribution play in the Dutch economy. Dutch Customs oversee a large number of customs warehouses, free warehouses, and free zones along many of the Netherlands’ trade routes and entry points.
Schiphol Airport handles around 1.7 million tons of goods per year for distribution, making it the third largest cargo airport in Europe. In 2021, a relaxation of COVID-19 measures and rebound in global trade activity combined to boost air freight volumes in cargo operations. Specific parts of Schiphol are designated customs-free zones. The Port of Rotterdam is Europe’s largest seaport by volume, handling over 37 percent of all cargo shipping on Europe’s Le Havre-Hamburg coastline and processing nearly 470 million tons of goods and handling a record 15.3 million twenty-foot equivalent unit (TEU) containers in 2021. Port of Rotterdam’s throughput in 2021 matched the pre-pandemic level of 2019 and rose by over seven percent compared with 2020. Many agents operate customs warehouses under varying customs regimes on the premises of the Port of Rotterdam.
There are no trade-related investment performance requirements in the Netherlands and no requirements for employment of local capital or managerial personnel.
The Dutch government does not follow a “forced localization” policy and does not require foreign information technology (IT) providers to turn over source code or provide access to surveillance. The Dutch Data Protection Authority (DPA) monitors and enforces Dutch legislation on the protection of personal data (https://autoriteitpersoonsgegevens.nl/en). The Dutch DPA is active in the EU’s Article 29 Working Party, the collective of EU national DPAs. The primary law on protection of personal data in the Netherlands is the Dutch law implementing EU directive 95/46/EC. The European General Data Protection Regulation (GDPR), which is directly applicable in member states, entered into force May 25, 2018, as part of the EU’s comprehensive reform on data protection. The Dutch DPA recognized U.S. firms that registered and self-certified with the U.S.-EU Safe Harbor program that began in 2000 and focused on safe transfer of personal data between the European Union and the United States.
On July 12, 2016, the European Commission issued an adequacy decision on the EU-U.S. Privacy Shield framework which replaced the Safe Harbor program, providing a legal mechanism for companies to transfer personal data from the EU to the United States. Although the Dutch government strongly supported Privacy Shield, a 2020 verdict of the European Court of Justice declared the Privacy Shield framework inadequate for the protection of personal data as it found that U.S. intelligences services have overly broad powers of access. In March 2022, the United States and European Union announced a political agreement, following over a year of negotiations, on a new Trans-Atlantic Data Privacy Framework to replace the invalidated Privacy Shield instrument. The new framework will enter into force through a series of legal adoptions within the EU and an Executive Order in the United States.
5. Protection of Property Rights
The Netherlands fully complies with international standards on protection of real property. The number of procedures involved is at the OECD average, while the processing time of 2.5 days is nearly ten times faster than the OECD average.
The Netherlands’ Cadaster, Land Registry, and Mapping Agency (Cadaster) was established in 1832 to collect and register administrative and spatial data on real property. The Cadaster is publicly available and can be accessed online (https://www.kadaster.com/).
The Netherlands is a member of the World Intellectual Property Organization (WIPO) and party to many of its treaties, including the Berne Convention, the Paris Convention, the Patent Cooperation Treaty (PCT), the WIPO Copyright Treaty (WCT), and the WIPO Performances and Phonograms Treaty (WPPT). The Netherlands generally conforms to accepted international practice for intellectual property rights (IPR), including the World Trade Organization (WTO) Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). Despite participating in negotiations on the Anti-Counterfeiting Trade Agreement (ACTA) treaty, the Netherlands, like other EU member states, has stated it will not sign the treaty in its current form. The EU has requested the European Court of Justice to advise on the compatibility of ACTA with existing European treaties, in particular the EU Charter of Fundamental Rights of the European Union.
The Netherlands is a signatory to the European Patent Convention and so is a contracting state of the European Patent Organization. In the Netherlands, patents for foreign investors are granted retroactively to the date of the original filing in the home country, provided the application is made through a Dutch patent lawyer within one year of the original filing date. Dutch patents are valid for 20 years, in line with EU regulations. Because the Netherlands and the United States are both party to the PCT, U.S. inventors may file for rights in the Netherlands using the PCT application. Legal procedures exist for compulsory licensing if the patent is inadequately used after a period of three years, but these procedures have rarely been invoked.
With the implementation of EU Directive 2004/48 on the enforcement of IPR, rights holders have a number of instruments at their disposal to enforce their rights in civil court. In addition to possible civil remedies, all IPR laws contain penal bylaws and reference to the Criminal Code. In 2012, the Dutch Parliament passed legislation that strengthened oversight and coordination of seven different collective institutions that oversee control, administration, and remuneration for commercial use of IPR. Policymakers agree on the need to raise public awareness of IPR rules and regulations and to strengthen enforcement. The Dutch government has recognized the need to protect IPR, and law enforcement personnel have worked with industry associations to find and seize pirated software. Current Dutch IPR legislation explicitly includes computer software under copyright statutes.
The Netherlands has resisted criminalizing online copyright infringement for personal use, instead placing a surcharge on the sales of blank media, such as CDs, DVDs, and USB storage devices, to remunerate rights holders for the downloading of material from legal and illegal sources alike.
The Netherlands is not included in the USTR Special 301 Report but is mentioned as hosting infringing websites in the 2021 Notorious Markets List.
The Netherlands is home to the world’s oldest stock exchange – established four centuries ago – and Europe’s first options exchange, both located in Amsterdam. The Amsterdam financial exchanges are part of the Euronext group that operates stock exchanges and derivatives markets in Amsterdam, Brussels, Lisbon, and Paris. Dutch financial markets are fully developed and operate at market rates, facilitating the free flow of financial resources. The Netherlands is an international financial center for the foreign exchange market, Eurobonds, and bullion trade.
The flexibility that foreign companies enjoy in conducting business in the Netherlands extends into the area of currency and foreign exchange. There are no restrictions on foreign investors’ access to sources of local finance.
The Dutch banking sector is firmly embedded in the European System of Central Banks, of which the Dutch Central Bank (DNB) is the national prudential banking supervisor. AFM, the Dutch securities and exchange supervisor, supervises financial institutions and the proper functioning of financial markets and falls under the EU-wide European Securities and Markets Authority (ESMA). The highly concentrated Dutch banking sector is over three times as large as the rest of the Dutch economy, making it one of Europe’s largest banking sectors in relation to GDP. Three banks, ING, ABN AMRO, and Rabobank, hold nearly 85 percent of the banking sector’s total assets. The largest bank, ING, has a balance sheetof just over $1 trillion (€937 billion).
The DNB does not consider Bitcoin and similar cryptocurrencies to be legitimate currency, as they do not fulfill the traditional purpose of money as a stable means of exchange or saving, and their value is not supported via central bank guarantee mechanisms. DNB considers current cryptocurrencies to be risky investments that are especially vulnerable to criminal abuse and has begun requiring that providers of financial services related to exchange and deposit of cryptocurrencies register with the DNB, per anti-money laundering (AML) legislation.
The DNB acknowledges that, in the future, cash transactions will likely be replaced with digital transactions that require central bank-issued and -guaranteed cryptocurrencies. Dutch society has already embraced cash-less commerce to a high degree – seventy percent of over-the-counter shopping is via PIN transactions and contactless payment – and DNB is participating with central banks from Canada, Japan, England, Sweden, Switzerland, and the Bank for International Settlements in research about a possible central bank-issued cryptocurrency.
The Netherlands has no sovereign wealth funds.
7. State-Owned Enterprises
The Dutch government maintains an equity stake in a small number of enterprises and some ownership in companies that play an important role in strategic sectors. In particular, government-controlled entities retain dominant positions in gas and electricity distribution, rail transport, and the water management sector. The Netherlands has an extensive public broadcasting network, which generates its own income through advertising revenues but also receives government subsidies. For a complete list of government-owned entities, please see: https://www.rijksoverheid.nl/onderwerpen/staatsdeelnemingen/vraag-en-antwoord/in-welke-ondernemingen-heeft-de-overheid-aandelen
Private enterprises are allowed to compete with public enterprises with respect to market access, credits, and other business operations such as licenses and supplies. Government-appointed supervisory boards oversee state-owned enterprises (SOEs). In some instances involving large investment decisions, SOEs must consult with the cabinet ministry that oversees them. As with any other firm in the Netherlands, SOEs must publish annual reports, and their financial accounts must be audited. The Netherlands fully adheres to the OECD Guidelines on Corporate Governance of SOEs.
There are no ongoing privatization programs in the Netherlands.
8. Responsible Business Conduct
The Netherlands is a global leader in corporate social responsibility (CSR). Principles of CSR are promoted and prescribed through a range of corporate, governmental, and international guidelines. In general, companies carefully guard their CSR reputation and consumers are increasingly opting for products and services that are produced in an ethical and sustainable manner. The Netherlands adheres to OECD Guidelines for Multinational Enterprises, and the Dutch Ministry of Economic Affairs and Climate Policy houses the National Contact Point (NCP) that promotes OECD guidelines and helps mediate concerns that persons, non-governmental organizations (NGOs), and enterprises may have regarding implementation by a specific company. For more information, visit http://www.oecdguidelines.nl.
The Dutch government strongly encourages foreign and local enterprises to follow UN Guiding Principles on Business and Human Rights, which states that businesses have a social responsibility to respect the same human rights norms in other countries as they do in the Netherlands.
Under the law, there is no differentiation for men and women regarding equal access to investment. Furthermore, no groups are excluded from participating in financial markets and the financial system.
The Netherlands has strong standards for corporate governance. Publicly listed companies are required to publish audited financial reports. As of 2017, the EU requires these companies to include a chapter on Responsible Business Conduct.
The government has national strategies for climate and natural capital. The Netherlands’ 2019 Climate Act sets legally binding targets to reduce greenhouse gas (GHG) emissions 49 percent by 2030 compared to 1990 levels, and 95 percent by 2050. The 2019 National Climate Agreement contains the policy and measures to achieve these climate goals through agreements with various economic sectors on specific actions. In addition, a lower court ruling later upheld by the Supreme Court requires the government to reduce GHG emissions 25 percent by 2020 from 1990 levels. The case set an international precedent for climate-related legal action and argued that not addressing harmful climate change endangered the human rights of Dutch citizens. The 2017 Dutch Nature Conservation Act protects nature reserves as well as certain plants and animals. The government published in 2014 its strategy on managing the natural environment up to 2025 entitled “The Natural Way Forward: Government Vision 2014.” A central part of the strategy and legislation is the National Ecological Network, which is made up of existing and planned nature areas. The government commissions work on monitoring and accounting for biodiversity and ecosystem services from Statistics Netherlands and Wageningen university.
The 2019 National Climate Agreement contains the policy and measures to achieve climate goals through agreements with various economic sectors on specific actions. The participating sectors include electricity, industry, “built environment,” traffic and transport, and agriculture.
The government has designated 10 percent of the Netherlands land area as “Natura 2000” areas under the EU’s Habitats Directive. These areas are subject to ceilings on nitrogen depositions. Around 80 percent of Dutch legislation on the environment is derived from EU legislation. The National Environmental Management Act, which sets out how the environment is to be protected, is based on EU legislation and regulations.
The government has published an extensive National Plan on Sustainable Public Procurement for 2021-2025 with seven lines of action to address environmental and social concerns.
The 2021 National Trade Estimate of the Office of the U.S. Trade Representative (USTR) referred to some Dutch sustainability criteria that can bring about trade impediments: “The Sustainable Trade Initiative (IDH) and the Forest Stewardship Council (FSC) have developed standards for soybeans and wood pellets, respectively, that have been supported by the Dutch government and effectively require U.S. producers to meet onerous certification requirements. [… ] These criteria include a requirement for sustainability certification at the forest level, which effectively precludes reliance on the U.S. risk-based approach to sustainable forest management. As a result of the implementation of the criteria, wood pellet exports to the Netherlands have not kept pace with demand.”
The Netherlands fully complies with international standards on combating corruption. Transparency International ranked the Netherlands eighth in its 2020 Corruption Perception Index. Anti-bribery legislation to implement the 1997 OECD Anti-Bribery Convention (ABC) entered into effect in 2001. The anti-bribery law reconciles the language of the ABC with the EU Fraud Directive and the Council of Europe Convention on Fraud. Under the law, it is a criminal offense if one obtains foreign contracts through corruption.
At the national level, the Ministry of the Interior and Kingdom Relations and Ministry of Justice and Security have both taken steps to enhance regulations to combat bribery in the processes of public procurement and issuance of permits and subsidies. Most companies have internal controls and/or codes of conduct that prohibit bribery.
Several agencies combat corruption. The Dutch Whistleblowers Authority serves as a knowledge center, develops new instruments for tracking problems, and identifies trends on matters of integrity. The Independent Commission for Integrity in Government is an appeals board for whistleblowers in government and law enforcement agencies.
The Netherlands signed and ratified the UN Anticorruption Convention and is party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.
Although political violence rarely occurs in the highly stable and consensus-oriented Dutch society, public debate on issues such as immigration and integration policy has been contentious. While rare, there have been some politically and religiously inspired acts of violence.
The Dutch economy derives much of its strength from a stable business climate that fosters partnerships among unions, business organizations, and the government. Strikes are rarely used as a way to resolve labor disputes.
11. Labor Policies and Practices
The Netherlands has a strongly regulated labor market (over 75 percent of labor contracts fall under some form of collective labor agreement) that comprises a well-educated and multilingual workforce. Labor/management relations in both the public and private sectors are generally good in a system that emphasizes the concept of social partnership between industry and labor. Although wage bargaining in the Netherlands is increasingly decentralized, there still exists a central bargaining apparatus where labor contract guidelines are established.
The terms of collective labor agreements apply to all employees in a sector, not only union members. To avoid surprises, potential investors are advised to consult with local trade unions prior to making an investment decision to determine which, if any, labor contracts apply to workers in their business sector. Collective bargaining agreements negotiated in recent years have, by and large, been accepted without protest.
Every company in the Netherlands with at least 50 workers is required by law to institute a Works Council (“Ondernemingsraad”), through which management must consult on a range of issues, including investment decisions, pension packages, and wage structures. The Social Economic Council has helpful programs on establishing employee participation that allow firms to comply with the law on Works Councils. See https://www.ser.nl/en/SER/About-the-SER/What-does-the-SER-do.
The working population consists of 9 million persons. Workers are sought through government-operated labor exchanges, private employment firms, or direct hiring. At 50 percent, the Netherlands has the highest share of part-time workers in its workforce of all EU member states (in 2017, the EU average of part-time workers was 19 percent). A rise in female participation in the workforce led to a 37 percent increase in the share of part-time workers in the total working population. Three-quarters of women and one quarter of men work less than a 36-hour week. Labor market participation, especially by older workers, is growing, and the number of independent contractors is rapidly increasing.
To ensure continued economic growth and address the impact of an aging population, increased labor market participation is critical. The age to qualify for a state pension (AOW) will increase from age 66 to 67 by 2024. Governmental labor market policies are targeted at increasing productivity of the labor force, including the expansion of working hours. For example, access to daycare is improving in order to raise the average number of hours per week worked by women (28 hours), which is 11 hours below the average of hours worked by men.
Effective January 1, 2022, the minimum wage for employees older than 21 years is €1,725 ($1,850) per month.
13. Foreign Direct Investment and Foreign Portfolio Investment Statistics
Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source*
USG or international statistical source
USG or International Source of Data: BEA; IMF; Eurostat; UNCTAD, Other
Host Country Gross Domestic Product (GDP) ($M USD)