Policies Towards Foreign Direct Investment

Historically, the Malaysian government has welcomed FDI as an integral component of its economic development. Over the last decade, the gradual liberalization of the economy and influx of FDI has led to the creation of new jobs and businesses and fueled Malaysia’s export-oriented growth strategy. The Malaysian economy is highly dependent on trade. According to World Bank data, the value of Malaysia’s imports and exports of goods and services as a share of GDP held steady at roughly 130 percent in 2018, more than double the global average.

In October 2019, the government introduced measures in its 2020 budget designed to streamline and further incentivize foreign investment, with special emphasis on investments being redirected from China as a result of shifting global supply chains. The Malaysian government established the China Special Channel for the purpose of attracting these investments, an initiative being managed by InvestKL, an investment promotion agency under the Ministry of International Trade and Industry. The government also established the National Committee on Investment, an investment approval body jointly chaired by the Minister of Finance and the Minister of International Trade and Industry, to expedite the regulatory process with respect to approving new investments.

In its 2021 budget, the government proposed a slew of tax incentives which include extensions of existing relocation incentives for the manufacturing sector (including a 0 percent tax rate for new companies or a 100 percent investment tax allowance for five years) and extensions of existing tax incentives for certain industrial sectors. In light of the pandemic, manufacturers of pharmaceutical products, particularly those involved with COVID-19 vaccine supply chains, investing in Malaysia will be given income tax rates of zero percent to 10 percent for the first 10 years; with 10 percent rates for the subsequent 10 years.

Malaysia has various national, regional, and municipal investment promotion agencies, including the Malaysian Investment Development Authority (MIDA) and InvestKL. These agencies can assist with business strategy consultations, area familiarization, talent management programs, networking, and other post-investment services.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign and domestic private entities can establish and own business enterprises and engage in all forms of remunerative activity, with some exceptions. Although Malaysia has taken steps to liberalize policies concerning foreign investment, there continue to exist requirements for local equity participation within specific sectors. In 2009, Malaysia repealed Foreign Investment Committee (FIC) guidelines that limited transactions for acquisitions of interests, mergers, and takeovers of local companies by foreign parties. However, certain business sectors, including logistics, industrial training, and distributive trade, are required to limit foreign equity participation when applying for operating licenses, permits and approvals. Due to residual economic policies, this limitation most commonly manifests as a 70-30 equity split between foreign investors (maximum 70 percent) and Bumiputera (i.e., ethnic Malays and indigenous peoples) entities (minimum 30 percent).

Foreign investment in services, whether in sectors with no foreign equity caps or controlled sub-sectors, remain subject to review and approval by ministries and agencies with jurisdiction over the relevant sectors. A key function of this review and approval process is to determine whether proposed investments meet the government’s qualifications for the various incentives in place to promote economic development goals. The Ministerial Functions Act grants relevant ministries broad discretionary powers over the approval of investment projects. Investors in industries targeted by the Malaysian government can often negotiate favorable terms with the ministries or agencies responsible for regulating that industry. This can include assistance in navigating a complex web of regulations and policies, some of which can be waived on a case-by-case basis. Foreign investors in non-targeted industries tend to receive less government assistance in obtaining the necessary approvals from various regulatory bodies and therefore can face greater bureaucratic obstacles.

Finance

Malaysia’s 2011-2020 Financial Sector Blueprint has produced partial liberalization within the financial services sector; however, it does not contain specific market-opening commitments or timelines. For example, the services liberalization program that started in 2009 raised the limit of foreign ownership in insurance companies to 70 percent. However, Bank Negara Malaysia (BNM), Malaysia’s central bank, would allow a greater foreign ownership stake if the investment is determined to facilitate the consolidation of the industry. The latest Blueprint helped to codify this case-by-case approach. Under the Financial Services Act passed in late 2012, issuance of new licenses will be guided by prudential criteria and the “best interests of Malaysia,” which may include consideration of the financial strength, business record, experience, character and integrity of the prospective foreign investor, soundness and feasibility of the business plan for the institution in Malaysia, transparency and complexity of the group structure, and the extent of supervision of the foreign investor in its home country. In determining the “best interests of Malaysia,” BNM may consider the contribution of the investment in promoting new high value-added economic activities, addressing demand for financial services where there are gaps, enhancing trade and investment linkages, and providing high-skilled employment opportunities. BNM, however, has never defined criteria for the “best interests of Malaysia” test, and no firms have qualified.

While there has been no policy change in terms of the 70 percent foreign ownership cap for insurance companies, the government did agree to let one foreign owned insurer maintain a 100 percent equity stake after that firm made a contribution to a health insurance scheme aimed at providing health coverage to lower-income Malaysians.

BNM currently allows foreign banks to open four additional branches throughout Malaysia, subject to restrictions, which include designating where the branches can be set up (i.e., in market centers, semi-urban areas and non-urban areas). The policies do not allow foreign banks to set up new branches within 1.5 km of an existing local bank. BNM also has conditioned foreign banks’ ability to offer certain services on commitments to undertake certain back-office activities in Malaysia.

Information & Communication

In 2012, Malaysia authorized up to 100 percent foreign equity participation among application service providers, network service providers, and network facilities providers. An exception to this is national telecommunications firm Telekom Malaysia, which has an aggregate foreign share cap of 30 percent, or five percent for individual investors.

Manufacturing Industries

Malaysia permits up to 100 percent foreign equity participation for new manufacturing investments by licensed manufacturers. However, foreign companies can face difficulties obtaining a manufacturing license and often resort to incorporating a local subsidiary for this purpose.

Oil and Gas

Under the terms of the Petroleum Development Act of 1974, the upstream oil and gas industry is controlled by Petroleum Nasional Berhad (PETRONAS), a wholly state-owned company and the sole entity with legal title to Malaysian crude oil and gas deposits. Foreign participation tends to take the form of production sharing contracts (PSCs). PETRONAS regularly requires its PSC partners to work with Malaysian firms for many tenders. Non-Malaysian firms are permitted to participate in oil services in partnership with local firms and are restricted to a 49 percent equity stake if the foreign party is the principal shareholder. PETRONAS sets the terms of upstream projects with foreign participation on a case-by-case basis.

Other Investment Policy Reviews

Malaysia’s most recent Organization for Economic Cooperation and Development (OECD) investment review occurred in 2013. Although the review underscored the generally positive direction of economic reforms and efforts at liberalization, the recommendations emphasized the need for greater service sector liberalization, stronger intellectual property protections, enhanced guidance and support from Malaysia’s Investment Development Authority (MIDA), and continued corporate governance reforms.

Malaysia also conducted a WTO Trade Policy Review in February 2018, which incorporated a general overview of the country’s investment policies. The WTO’s review noted the Malaysian government’s action to institute incentives to encourage investment as well as a number of agencies to guide prospective investors. Beyond attracting investment, Malaysia had made measurable progress on reforms to facilitate increased commercial activity. Among the new trade and investment-related laws that entered into force during the review period were: the Companies Act, which introduced provisions to simplify the procedures to start a company, to reduce the cost of doing business, as well as to reform corporate insolvency mechanisms; the introduction of the goods and services tax (GST) to replace the sales tax; the Malaysian Aviation Commission Act, pursuant to which the Malaysian Aviation Commission was established; and various amendments to the Food Regulations. Since the WTO Trade Policy Review, however, the new government has already eliminated the GST, and has revived the Sales and Services Tax, which was implemented on September 1, 2018.

Business Facilitation

The principal law governing foreign investors’ entry and practice in the Malaysian economy is the Companies Act of 2016 (CA), which entered into force on January 31, 2017 and replaced the Companies Act of 1965. Incorporation requirements under the new CA have been further simplified and are the same for domestic and foreign sole proprietorships, partnerships, as well as privately held and publicly traded corporations. According to the World Bank’s Doing Business Report 2019, Malaysia streamlined the process of obtaining a building permit and made it faster to obtain construction permits; eliminated the site visit requirement for new commercial electricity connections, making getting electricity easier for businesses; implemented an online single window platform to carry out property searches and simplified the property transfer process; and introduced electronic forms and enhanced risk-based inspection system for cross-border trade and improved the infrastructure and port operation system at Port Klang, the largest port in Malaysia, thereby facilitating international trade; and made resolving insolvency easier by introducing the reorganization procedure. These changes led to a significant improvement of Malaysia’s ranking per the Doing Business Report, from 24 to 15 in one year.

In addition to registering with the Companies Commission of Malaysia, business entities must file: 1) Memorandum and Articles of Association (i.e., company charter); 2) a Declaration of Compliance (i.e., compliance with provisions of the Companies Act); and 3) a Statutory Declaration (i.e., no bankruptcies, no convictions). The registration and business establishment process takes two weeks to complete, on average. GST was repealed in May of 2018 and a new sales and services tax (SST) took effect on September 1, 2018.

Beyond these requirements, foreign investors must obtain licenses. Under the Industrial Coordination Act of 1975, an investor seeking to engage in manufacturing will need a license if the business claims capital of RM2.5 million (approximately USD 641,000) or employs at least 75 full-time staff. The Malaysian government’s guidelines for approving manufacturing investments, and by extension, manufacturing licenses, are generally based on capital-to-employee ratios. Projects below a threshold of RM55,000 (approximately USD 14,100) of capital per employee are deemed labor-intensive and will generally not qualify. Manufacturing investors seeking to expand or diversify their operations need to apply through MIDA.

Manufacturing investors whose companies have annual revenue below RM50 million (approximately USD 12.8 million) or with fewer than 200 full-time employees meet the definition of small and medium size enterprises (SMEs) and will generally be eligible for government SME incentives. Companies in the services or other sectors that have revenue below RM20 million (approximately USD 5.1 million) or fewer than 75 full-time employees also meet the SME definition.

Outward Investment

While the Malaysian government does not promote or incentivize outward investment, a number of government-linked companies, pension funds, and investment companies do have investments overseas. These companies include the sovereign wealth fund of the Government of Malaysia, Khazanah Nasional Berhad; KWAP, Malaysia’s largest public services pension fund; and the Employees’ Provident Fund of Malaysia. Government-owned oil and gas firm Petronas also has investments in several regions outside Asia.

As a member of ASEAN, Malaysia is a party to trade agreements with Australia and New Zealand; China; India; Japan; and the Republic of Korea. During the review period, the ASEAN-India Agreement was expanded to cover trade in services. Malaysia also has bilateral FTAs with Australia; Chile; India; Japan; New Zealand; Pakistan; and Turkey.

Reference: https://www.wto.org/english/tratop_e/tpr_e/s366_sum_e.pdf

Malaysia has bilateral investment treaties with 36 countries, but not yet with the United States. Malaysia does have bilateral “investment guarantee agreements” with over 70 economies, including the United States. The Malaysian government reports that 65 of Malaysia’s existing investment agreements contain Investor State Dispute Settlement (ISDS) provisions. Malaysia has double taxation treaties with over 70 countries, though the double taxation agreement with the U.S. currently is limited to air and sea transportation.

Transparency of the Regulatory System

In July 2013, the Malaysian government accelerated its efforts to modernize the regulatory processes in the country by releasing the National Policy on Development and Implementation of Regulations (NPDIR), a roadmap to achieving Good Regulatory Practice (GRP). Under the NPDIR, the federal government formalized a comprehensive approach to improve the efficiency and transparency of the country’s regulatory framework. The benefits to the private sector thus far have included a streamlining of project approval requirements and fees (to the point that Malaysia ranked 2nd in the World Bank’s 2020 Doing Business report on ease of “dealing with construction permits”), a greater role in the lawmaking process, and improved standardization and transparency in all phases of regulatory proceedings. The main components of the policy are: 1) the requirement of a Regulatory Impact Assessment (RIA) (a cost-benefit analysis of all newly proposed regulations) with each new piece of regulation; and 2) the formalization of a public consultation process to take the views of stakeholders into account while formulating new legislation. Under the NPDIR, the government has committed to reviewing all new regulations every five years to determine which ones need to be adjusted or eliminated.

In furtherance of the NPDIR, the Malaysian government published four circulars in 2013 and 2014 to explain the methodology and implementation of their new strategy. These four documents laid out a clear framework toward increasing accountability, standardization, and transparency, as well as explaining enforcement and compliance mechanisms to be established. Throughout its various agencies, the government of Malaysia has taken steps to actualize these circulars. Ministries and agencies use their respective websites to publish the text and or summaries of proposed regulations prior to enactment, albeit with varying levels of consistency. Further, Malaysia’s procurement principles include adherence to open and fair competition, public accountability, transparency, and value for money.

Despite these efforts to foster inclusion, fairness, and transparency, considerable room for improvement exists. The Malaysian government’s 2018 Report on Modernization (sic) of Regulations emphasized the need to “Establish an accountability mechanism for the implementation of regulatory reviews by the government.” Many foreign investors echo this lack of accountability and criticize the opacity in the government decision-making process. One major area of concern for foreign investors remains government procurement policy, as non-Malaysian companies claim to have lost bids against Bumiputera-owned (ethnic Malay) companies despite offering better products at lower costs. Such results are due to the government’s preference policy to facilitate greater Bumiputera participation in the private sector. This preference policy is manifested through set-aside contracts for Bumiputera suppliers and contractors, and through the use of preferential price margins to increase the competitiveness of Bumiputera bidders.

Malaysia has a three-tiered system of legislation: federal-level (parliament), state-level, and local-level. Federal and state-level legislation derive their authority from the Malaysian Constitution, specifically Articles 73-79. Parliament has the exclusive power to make laws over matters including trade, commerce and industry, and financial matters. Parliament can delegate its authority to administrative agencies, states, and local bodies through Acts. States have the power to make laws concerning land, local government, and Islamic courts. Local legislative bodies derive their authority from Acts promulgated by parliament, most notably the Local Government Act of 1976. Local authorities can issue by-laws concerning local taxation and land use. For foreign investors, parliament is the most relevant legislating body, as it governs issues related to trade, and in instances of conflict, Article 75 of the Constitution states that federal laws will supersede state laws.

It is also important to note the role of the administrative state in the promulgation of new laws and regulations in Malaysia. Pursuant to the Interpretation Act of 1948 and 1967, “Any proclamation, rule, regulation, order, notification, bye-law, or other instrument made under any Act, Enactment, Ordinance or other lawful authority and having legislative effect.” Thus, the various ministries and agencies can be delegated lawmaking authority by an Act of a legislature with the legal right to make laws.

The Malaysian Accounting Standards Board (MASB) introduced the Malaysian Financial Reporting Standards (MFRS) framework, which came into effect on January 1, 2012. The MFRS framework is fully compliant with the International Financial Reporting Standards (IFRS) framework; this compliance serves to enhance the credibility and transparency of financial reporting in Malaysia.

The Malaysian Institute of Accountants’ (MIA) Auditing and Assurance Standards Board (AASB) reviews standards and technical pronouncements issued by the International Auditing and Assurance Standards Board (IAASB), which sets International Standards on Auditing (ISAs) that have been adopted in more than 110 jurisdictions.

In theory, pieces of legislation are to be made available for public comment through a multi-stage system of rulemaking. The Malaysia Productivity Corporation (MPC) published the Guideline on Public Consultation Procedures in 2014 (the “Guideline”), which clarifies the roles of government and stakeholders in the consultation process and provides the guiding principles for Malaysia’s public consultation approach. As in the case of foreign investment, the consultation procedures usually fall under the purview of the Malaysian Securities Commission (SC), the Bursa Malaysia (Malaysia’s stock exchange), or BNM. The SC, for example, keeps public consultation papers on its website, easily accessible by stakeholders. These papers generally contain the rationale for the proposed regulations, as well as potential impacts, and provide a list of questions for stakeholders to explain their views to regulators.

The public is also engaged in the public consultation process through the increased role of PEMUDAH (the Special Task Force to Facilitate Business), which was founded in 2007 to serve as a bridge between government, businesses, and civil society organizations. PEMUDAH promotes the understanding of regulatory requirements that impact economic activities, by addressing unfair treatment resulting from inconsistencies in enforcement and implementation. It also plays an advocacy role in various points in the regulatory implementation process; provides recommendations from the private sector to regulators before new regulations are implemented, and monitors enactment of existing pieces of regulation.

Despite the Guideline, and significant steps taken to reduce the regulatory burden on industry, obstacles remain. There are frequent inconsistencies between different ministries in their implementation of the public consultation procedures, as well as in their respective interpretations of how regulations are to be applied. Adding to the difficulty is the complicated relationship between state-level and federal-level legislation, which can overlap on a range of issues and lead to inefficiencies for investors.

The CLJ Law website publishes the full text of Malaysian bills and amendments from 2013 onward: https://www.cljlaw.com/?page=latestmybill&year=2020 . In 2019 Malaysia in association with the World Bank, created a website that contains all ongoing pieces of legislation and allows public comment thereon. The website, called the Uniform Public Consultation Portal (http://upc.mpc.gov.my/csp/sys/bi/%25cspapp.bi.index.cls?home=1 ), does not contain legislation that was completed or implemented before 2019, but is a positive move toward standardizing and emphasizing the public consultation process. The website is user-friendly and allows searching by due date, implementing agency, and phase of consultation.

Malaysia has a multi-faceted approach to ensuring governmental compliance with regulatory requirements. The most important enforcement mechanism is access to judicial review. The WEF 2019 Report lists Malaysia as the 12th ranked country in efficiency of the legal framework in challenging regulations. Through ease in accessing administrative and judicial courts, aggrieved parties in Malaysia are able to compel action by the regulator.

Besides the legal route, aggrieved parties can also seek recourse through the various agency-led enforcement mechanisms. The central bank has a dedicated “Complaints Unit,” which deals with consumer complaints against banking institutions. The Bank lists enforcement options as “a public or private reprimand; an order to comply; an administrative and civic penalty; restitution to customer; or prosecution. By contrast, the Inland Revenue Board of Malaysia (tax agency) has the Special Commissioners of Income Tax, to which taxpayers may file appeals concerning judgments and new regulations. The Malaysian Companies Commission (which regulates laws relating to companies registered in Malaysia) is also engaged in enforcement proceedings, as is the Malaysian Securities Commission. On matters of procurement, aggrieved bidders may complain to the Public Complaints Bureau, the Malaysian Anti-Corruption Commission, the Malaysian Competition Commission, or the National Audit Department.

International Regulatory Considerations

Malaysia is one of 10 Member States that constitute the Association of Southeast Asian Nations (ASEAN). On December 31, 2015, the ASEAN Economic Community formally came into existence. ASEAN’s economic policy leaders meet regularly to discuss promoting greater economic integration within the 10-country bloc. Although already robust, Member States have prioritized steps to facilitate a greater flow of goods, services, and capital. No regional regulatory system is in place. As a member of the WTO, Malaysia provides notification of all draft technical regulations to the Committee on Technical Barriers to Trade.

Legal System and Judicial Independence

Malaysia’s legal system consists of written laws, such as the federal and state constitutions and laws passed by parliament and state legislatures, and unwritten laws derived from court cases and local customs. The Contract Law of 1950 still guides the enforcement of contracts and resolution of disputes. States generally control property laws for residences but through such programs as the Multimedia Super Corridor, Free Commercial Zones, and Free Industrial Zones, the federal government has substantial reach into a range of geographic areas as a means of encouraging foreign investment and facilitating ownership of commercial and industrial property.

Malaysia has taken measures to increase the efficacy of the courts to improve its reputation as an international business hub. Other than the usual criminal and civil branches of the legal system, there are dedicated courts for issues such as intellectual property (IP) and labor.

Certain foreign judgments are enforceable in Malaysia by virtue of the Reciprocal Enforcement of Judgments Act 1958 (REJA). However, before a foreign judgment can be enforceable, it must be registered. The registration of foreign judgments is only possible if the judgment was given by a Superior Court from a country listed in the First Schedule of the REJA: the United Kingdom, Hong Kong Special Administrative Region of the People’s Republic of China, Singapore, New Zealand, Republic of Sri Lanka, India, and Brunei. If the judgment is not from a country listed in the First Schedule to the REJA, the only method of enforcement at common law is by securing a Malaysian judgment. This involves suing on the judgment in the local Courts as an action in debt.

To register a foreign judgment under the REJA, the judgment creditor has to apply for the same within six years after the date of the foreign judgment. Any foreign judgment coming under the REJA shall be registered unless it has been wholly satisfied, or it could not be enforced by execution in the country of the original Court.

Post is not aware of instances in which political figures or government authorities have interfered in judiciary proceedings involving commercial matters.

Laws and Regulations on Foreign Direct Investment

The e Malaysia Investment Development Authority (MIDA). Under the purview of the Ministry of International Trade and Industry (MITI) has the task to attract foreign investment and serve as a focal point for legal and regulatory questions. Other regional bodies providing support to investors include: Invest Kuala Lumpur, Invest Penang, Invest Selangor, the Sabah Economic Development and Investment Authority (SEDIA), and the Sarawak Economic Development Corporation, among others.

Competition and Antitrust Laws

On April 21, 2010, the Parliament of Malaysia passed the Competition Commission Act 2010 and the Competition Act 2010 which took effect on January 1, 2012. The Competition Act prohibits cartels and abuses of a dominant market position but does not create any pre-transaction review of mergers or acquisitions. Violations are punishable by fines, as well as imprisonment for individual violations. Malaysia’s Competition Commission has responsibility for determining whether a company’s “conduct” constitutes an abuse of dominant market position or otherwise distorts or restricts competition. As a matter of law, the Competition Commission does not have separate standards for foreign and domestic companies. Commission membership consists of senior officials from the Ministry of International Trade and Industry (MITI), the Ministry of Domestic Trade, Cooperatives, and Consumerism (MDTCC), the Ministry of Finance, and, on a rotating basis, representatives from academia and the private sector.

In addition to the Competition Commission, the Acts established a Competition Appeals Tribunal (CAT) to hear all appeals of Commission decisions. In the largest case to date, the Commission imposed a fine of RM10 million on Malaysia Airlines and Air Asia in September 2013 for colluding to divide shares of the air transport services market. The airlines filed an appeal in March 2014. In February 2016, the CAT ruled in favor of the airlines in its first-ever decision and ordered the penalty to be set aside and refunded to both airlines.

Expropriation and Compensation

The Embassy is not aware of any cases of uncompensated expropriation of U.S.-held assets, or confiscatory tax collection practices, by the Malaysian government. The government’s stated policy is that all investors, both foreign and domestic, are entitled to fair compensation in the event that their private property is required for public purposes. Should the investor and the government disagree on the amount of compensation, the issue is then referred to the Malaysian judicial system.

Dispute Settlement

ICSID Convention and New York Convention

Malaysia signed the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID) on October 22, 1965, coming into force on October 14, 1966. In addition, it is a contracting state of the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards since November 5, 1985.

Malaysia adopted the following measures to make the two conventions effective in its territory:

The Convention on the Settlement of Investment Disputes Act, 1966 (Act of Parliament 14 of 1966); the Notification on entry into force of the Convention on the Settlement of Investment Disputes Act, 1966 (Notification No. 96 of March 10, 1966); and the Arbitration (Amendment) Act, 1980 (Act A 478 of 1980).

Although the domestic legal system is accessible to foreign investors, filing a case generally requires any non-Malaysian citizen to make a large deposit before pursuing a case in the Malaysian courts. Post is unaware of any U.S. investors’ recent complaints of political interference in any judicial proceedings.

Investor-State Dispute Settlement

Malaysia’s investment agreements contain provisions allowing for international arbitration of investment disputes. Malaysia does not have a Bilateral Investment Treaty with the United States.

Post has little data concerning the Malaysian government’s general handling of investment disputes. In 2004, a U.S. investor filed a case against the directors of the firm, who constituted the majority shareholders. The case involves allegations by the U.S. investor of embezzlement by the other directors, and its resolution is unknown.

The Malaysian government has been involved in three ICSID cases — in 1994, 1999, and 2005. The first case was settled out of court. The second, filed under the Malaysia-Belgo-Luxembourg Investment Guarantee Agreement (IGA), was concluded in 2000 in Malaysia’s favor. The 2005 case, filed under the Malaysia-UK Bilateral Investment Treaty, was concluded in 2007 in favor of the investor. However, the judgment against Malaysia was ultimately dismissed on jurisdictional grounds, namely that ICSID was not the appropriate forum to settle the dispute because the transaction in question was not deemed an investment since it did not materially contribute to Malaysia’s development. Nevertheless, Malaysian courts recognize arbitral awards issued against the government. There is no history of extrajudicial action against foreign investors.

International Commercial Arbitration and Foreign Courts

Malaysia’s Arbitration Act of 2005 applies to both international and domestic arbitration. Although its provisions largely reflect those of the UN Commission on International Trade Law (UNCITRAL) Model Law, there are some notable differences, including the requirement that parties in domestic arbitration must choose Malaysian law as the applicable law. Although an arbitration agreement may be concluded by email or fax, it must be in writing: Malaysia does not recognize oral agreements or conduct as constituting binding arbitration agreements.

Many firms choose to include mandatory arbitration clauses in their contracts. The government actively promotes use of the Kuala Lumpur Regional Center for Arbitration ( http://www.rcakl.org.my ), established under the auspices of the Asian-African Legal Consultative Committee to offer international arbitration, mediation, and conciliation for trade disputes. The KLRCA is the only recognized center for arbitration in Malaysia. Arbitration held in a foreign jurisdiction under the rules of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States 1965 or under the United Nations Commission on International trade Law Arbitration Rules 1976 and the Rules of the Regional Centre for Arbitration at Kuala Lumpur can be enforceable in Malaysia.

Bankruptcy Regulations

Malaysia’s Department of Insolvency (MDI) is the lead agency implementing the Insolvency Act of 1967, previously known as the Bankruptcy Act of 1967. On October 6, 2017, the Bankruptcy Bill 2016 came into force, changing the name of the previous Act, and amending certain terms and conditions. The most significant changes in the amendment include — (1) a social guarantor can no longer be made bankrupt; (2) there is now a stricter requirement for personal service for bankruptcy notice and petition; (3) introduction of the voluntary arrangement as an alternative to bankruptcy; (4) a higher bankruptcy threshold from RM30,000 to RM50,000; (5) introduction of the automatic discharge of bankruptcy; (6) no objection to four categories of bankruptcy for applying a discharge under section 33A (discharge of bankrupt by Certificate of Director General of Insolvency); (7) introduction of single bankruptcy order as a result of the abolishment of the current two-tier order system, i.e. receiving and adjudication orders; (8) creation of the Insolvency Assistance fund.

The distribution of proceeds from the liquidation of a bankrupt company’s assets generally adheres to the “priority matters and persons” identified by the Companies Act of 2016. After the bankruptcy process legal costs are covered, recipients of proceeds are: employees, secured creditors (i.e., creditors of real assets), unsecured creditors (i.e., creditors of financial instruments), and shareholders. Bankruptcy is not criminalized in Malaysia. The country ranks 40th on the World Bank Group’s Doing Business 2020 Rankings for Ease of Resolving Insolvency.

Investment Incentives

The Malaysian government has codified the incentives available for investments in qualifying projects in target sectors and regions. Tax holidays, financing, and special deductions are among the measures generally available for domestic as well as foreign investors in the following sectors and geographic areas: information and communications technologies (ICT); biotechnology; halal products (e.g., food, cosmetics, pharmaceuticals); oil and gas storage and trading; Islamic finance; Kuala Lumpur; Labuan Island (off Eastern Malaysia); East Coast of Peninsular Malaysia; Sabah and Sarawak (Eastern Malaysia); Northern Corridor.

The lists of application procedures and incentives available to investors in these sectors and regions can be found at: http://www.mida.gov.my/home/invest-in-malaysia .

Foreign Trade Zones/Free Ports/Trade Facilitation

The Free Zone Act of 1990 authorized the Minister of Finance to designate any suitable area as either a Free Industrial Zone (FIZ), where manufacturing and assembly takes place, or a Free Commercial Zone (FCZ), generally for warehousing commercial stock. The Minister of Finance may appoint any federal, state, or local government agency or entity as an authority to administer, maintain and operate any free trade zone. Currently there are 13 FIZs and 12 FCZs in Malaysia. In June 2006, the Port Klang Free Zone opened as the nation’s first fully integrated FIZ and FCZ, although the project has been dogged by corruption allegations related to the land acquisition for the site. The government launched a prosecution in 2009 of the former Transport Minister involved in the land purchase process, though he was later acquitted in October 2013.

The Digital Free Trade Zone (DFTZ) is an initiative by the Malaysian government, implemented through MDEC, launched in November 2017 with the participation of China’s Alibaba. DFTZ aims to facilitate seamless cross-border trading and eCommerce and enable Malaysian SMEs to export their goods internationally. According to the Malaysian government, the DFTZ consists of an eFulfilment Hub to help Malaysian SMEs export their goods with the help of leading fulfilment service providers; and an eServices Platform to efficiently manage cargo clearance and other processes needed for cross-border trade.

For more information, please visit https://mdec.my/digital-economy-initiatives/for-the-industry/entrepreneurs/dftz/ .

Raw materials, products and equipment may be imported duty-free into these zones with minimum customs formalities. Companies that export not less than 80 percent of their output and depend on imported goods, raw materials, and components may be located in these Free Zones. Ports, shipping, and maritime-related services play an important role in Malaysia, as 90 percent of the country’s international trade by volume is seaborne. Malaysia is also a major transshipment center.

Goods sold into the Malaysian economy by companies within the FZs must pay import duties. If a company wants to enjoy Common External Preferential Tariff (CEPT) rates within the ASEAN Free Trade Area, 40 percent of a product’s content must be ASEAN-sourced. In addition to the FZs, Malaysia permits the establishment of licensed manufacturing warehouses outside of free zones, which give companies greater freedom of location while allowing them to enjoy privileges similar to firms operating in an FZ. Companies operating in these zones require approval/license for each activity. The time needed to obtain licenses depends on the type of approval and ranges from two to eight weeks.

Performance and Data Localization Requirements

Fiscal incentives granted to both foreign and domestic investors historically have been subject to performance requirements, usually in the form of export targets, local content requirements and technology transfer requirements. Performance requirements are usually written into the individual manufacturing licenses of local and foreign investors.

The Malaysian government extends a full tax exemption incentive of fifteen years for firms with “Pioneer Status” (companies promoting products or activities in industries or parts of Malaysia to which the government places a high priority), and ten years for companies with “Investment Tax Allowance” status (those on which the government places a priority, but not as high as Pioneer Status). However, the government appears to have some flexibility with respect to the expiry of these periods, and some firms reportedly have had their pioneer status renewed. Government priorities generally include the levels of value-added, technology used, and industrial linkages. If a firm (foreign or domestic) fails to meet the terms of its license, it risks losing any tax benefits it may have been awarded. Potentially, a firm could lose its manufacturing license. The New Economic Model stated that in the long term, the government intends gradually to eliminate most of the fiscal incentives now offered to foreign and domestic manufacturing investors. More information on specific incentives for various sectors can be found at www.mida.gov.my .

Malaysia also seeks to attract foreign investment in the information technology industry, particularly in the Multimedia Super Corridor (MSC), a government scheme to foster the growth of research, development, and other high technology activities in Malaysia. However, since July 1, 2018, the Government decided to put on hold the granting of MSC Malaysia Status and its incentives, including extension of income tax exemption period, or adding new MSC Malaysia Qualifying Activities to review and amend Malaysia’s tax incentives. While the MSC Malaysia Status Services Incentive was published on December 31, 2018, the MSC Malaysia Status IP Incentive policy is still under review. For further details on incentives, see www.mdec.my. The Malaysia Digital Economy Corporation (MDEC) approves all applications for MSC status. For more information please visit: https://www.mdec.my/msc-malaysia .

In the services sector, the government’s stated goal is to attract foreign investment in regional distribution centers, international procurement centers, operational headquarter research and development, university and graduate education, integrated market and logistics support services, cold chain facilities, central utility facilities, industrial training, and environmental management. To date, Malaysia has had some success in attracting regional distribution centers, global shared services offices, and local campuses of foreign universities. For example, GE and Honeywell maintain regional offices for ASEAN in Malaysia. In 2016, McDermott moved its regional headquarters to Malaysia and Boston Scientific broke ground on a medical device manufacturing facility.

Malaysia seeks to attract foreign investment in biotechnology but sends a mixed message on agricultural and food biotechnology. On July 8, 2010, the Malaysian Ministry of Health posted amendments to the Food Regulations 1985 [P.U. (A) 437/1985] that require strict mandatory labeling of food and food ingredients obtained through modern biotechnology. The amendments also included a requirement that no person shall import, prepare, or advertise for sale, or sell any food or food ingredients obtained through modern biotechnology without the prior written approval of the Director. There is no ‘threshold’ level on the labeling requirement. Labeling of “GMO Free” or “Non-GMO” is not permitted. The labeling requirements only apply to foods and food ingredients obtained through modern biotechnology but not to food produced with GMO feed. The labeling regulation has yet to go into force although was slated to do so in 2014.

Malaysia has not implemented measures amounting to “forced localization” for data storage. Bank Negara Malaysia has amended its recent Outsourcing Guidelines to remove the original data localization requirement and shared that it will similarly remove the data localization elements in its upcoming Risk Management in Technology framework. The government has provided inducements to attract foreign and domestic investors to the Multimedia Super Corridor but does not mandate use of onshore providers. Companies in the information and communications technology sector are not required to hand over source code.

Real Property

Land administration is shared among federal, state, and local government. State governments have their own rules about land ownership, including foreign ownership. Malaysian law affords strong protections to real property owners. Real property titles are recorded in public records and attorneys review transfer documentation to ensure efficacy of a title transfer. There is no title insurance available in Malaysia. Malaysian courts protect property ownership rights. Foreign investors are allowed to borrow using real property as collateral. Foreign and domestic lenders are able to record mortgages with competent authorities and execute foreclosure in the event of loan default. Malaysia ranks 33rd (ranked 29th in 2019) in ease of registering property according to the Doing Business 2020 report, right behind Austria and ahead of Finland, thanks to changes it made to its registration procedures.

Intellectual Property Rights

Malaysia is not currently listed in the Office of the United States Trade Representative (USTR) Special 301 Report. Its Petaling Street Market is listed in 2020 Review of Notorious Markets for Counterfeiting and Piracy (the Notorious Markets List). The overhaul of IPR protections that began in 2019 under the previous government continued in 2020 despite political uncertainty. Following Malaysia’s 2019 Trademarks Act, which brought protections in line with the Madrid Protocol, Malaysia amended its 1987 Copyright Act as part of an ongoing review of its IPR framework. New trademark provisions came into force on July 1, 2020 to strengthen copyright protection by creating an alternative avenue for dispute resolution by tribunal. Malaysia continues to assess its Copyright Act and has indicated it is considering additional amendments to further strengthen IPR protections. There is not yet an official determination of whether Malaysia will ratify the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP); therefore, it remains unclear whether these legislative amendments will incorporate the IP-related provisions of the CPTPP.

Malaysia has a mixed but improving record of IPR enforcement, particularly for online services that stream illegal sports content. The Malaysian Communications and Multimedia Commission proactively combats illegal streaming sites that provide content in violation of copyright laws and acts against owners of non-certified Android TV boxes being used to stream illegal content. Malaysian enforcement authorities registered their first case related to infringing streaming devices under the Copyright Act, which was brought to court on February 8. Malaysia also increased its blocking of illegal streaming sites by over 900 percent over the past three years.

Despite Malaysia’s success in improving IPR enforcement, key issues remain. There is relatively widespread availability of pirated and counterfeit products in Malaysia and there are concerns that the Royal Malaysian Customs Department (RMC) is not always effectively identifying counterfeit goods in transit.

Malaysia’s 2017 compulsory license for U.S. Gilead Sciences’ sofosbuvir, a major intellectual property-related concern in recent years, expired in 2020. Malaysia has not indicated it intends to renew the compulsory license or a government manufacturing contract for the drug, both of which expired in October 2020. Malaysia has now registered Gilead’s sofosbuvir product, Sovaldi, for local use and offers fast-track registration with the Ministry of Health for new products under Gilead’s voluntary license program. Two Indian-manufactured sofosbuvir generics granted voluntary license agreements by Gilead Sciences have already made use of this registration program with Malaysia’s Drug Control Authority.

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

Capital Markets and Portfolio Investment

Foreigners may trade in securities and derivatives. Malaysia houses one of Asia’s largest corporate bond markets and is the largest sukuk (Islamic bond) market in East Asia. Both domestic and foreign companies regularly access capital in Malaysia’s bond market. Malaysia provides tax incentives for foreign companies issuing Islamic bonds and financial instruments in Malaysia.

Malaysia’s stock market (Bursa Malaysia) is open to foreign investment and foreign corporation issuing shares. However, foreign issuers remain subject to Bumiputera ownership requirements of 12.5 percent if the majority of their operations are in Malaysia. Listing requirements for foreign companies are similar to that of local companies, although foreign companies must also obtain approval of regulatory authorities of foreign jurisdiction where the company was incorporated and valuation of assets that are standards applied in Malaysia or International Valuation Standards and register with the Registrar of Companies under the Companies Act 1965 or 2016.

Malaysia has taken steps to promote good corporate governance by listed companies. Publicly listed companies must submit quarterly reports that include a balance sheet and income statement within two months of each financial quarter’s end and audited annual accounts for public scrutiny within four months of each year’s end. An individual may hold up to 25 corporate directorships. All public and private company directors are required to attend classes on corporate rules and regulations.

Legislation also regulates equity buybacks, mandates book entry of all securities transfers, and requires that all owners of securities accounts be identified. A Central Depository System (CDS) for stocks and bonds established in 1991 makes physical possession of certificates unnecessary. All shares traded on the Bursa Malaysia must be deposited in the CDS. Short selling of stocks is prohibited.

Money and Banking System

International investors generally regard Malaysia’s banking sector as dynamic and well regulated. Although privately owned banks are competitive with state-owned banks, the state-owned banks dominate the market. The five largest banks – Maybank, CIMB, Public Bank, RHB, and AmBank – account for an estimated 75 percent of banking sector loans. According to the World Bank, total banking sector lending for 2019 was 120.8 percent of GDP, and 1.5 percent of the Malaysian banking sector’s loans were non-performing for 2019.

Bank Negara prohibits hostile takeovers of banks, but the Securities Commission has established non-discriminatory rules and disclosure requirements for hostile takeovers of publicly traded companies.

Foreign Exchange and Remittances

Foreign Exchange

In December 2016, the central bank, began implementing new foreign exchange management requirements. Under the policy, exporters are required to convert 75 percent of their export earnings into Malaysian ringgit. The goal of this policy was to deepen the market for the currency, with the goal of reducing exchange rate volatility. The policy remains in place, with the Central Bank giving case-by-case exceptions. All domestic trade in goods and services must be transacted in ringgit only, with no optional settlement in foreign currency. The Central Bank has demonstrated little flexibility with respect to the ratio of earnings that exporters hold in ringgit. Post is unaware of any instances where the requirement for exporters to hold their earnings in ringgit has impeded their ability to remit profits to headquarters.

Remittance Policies

Malaysia imposes few investment remittances rules on resident companies. Incorporated and individual U.S. investors have not raised concerns about their ability to transfer dividend payments, loan payments, royalties or other fees to home offices or U.S.-based accounts. Tax advisory firms and consultancies have not flagged payments as a significant concern among U.S. or foreign investors in Malaysia. Foreign exchange administration policies place no foreign currency asset limits on firms that have no ringgit-denominated debt. Companies that fund their purchases of foreign exchange assets with either onshore or offshore foreign exchange holdings, whether or not such companies have ringgit-denominated debt, face no limits in making remittances. However, a company with ringgit-denominated debt will need approval from the Central Bank for conversions of RM50 million or more into foreign exchange assets in a calendar year.

The Treasury Department has not identified Malaysia as a currency manipulator.

Sovereign Wealth Funds

The Malaysian Government established government-linked investment companies (GLICs) as vehicles to harness revenue from commodity-based industries and promote growth in strategic development areas. Khazanah is the largest of the GLICs, and the company holds equity in a range of domestic firms as well as investments outside Malaysia. The other GLICs – Armed Forces Retirement Fund (LTAT), National Capital (PNB), Employees Provident Fund (EPF), Pilgrimage Fund (Tabung Haji), Public Employees Retirement Fund (KWAP) – execute similar investments but are structured as savings vehicles for Malaysians. Khazanah follows the Santiago Principles and participates in the International Forum on Sovereign Wealth Funds.

Khazanah was incorporated in 1993 under the Companies Act of 1965 as a public limited company with a charter to promote growth in strategic industries and national initiatives. As of December 31, 2020, Khazanah’s “realizable” assets stood at RM95.3 billion as compared to RM136 billion in 2019. Its profit from operations fell to RM2.9 billion in 2020 as compared to RM7.4 billion in 2019. Dividend income from investee companies rose to RM5.2 billion from RM3.8 billion According to its Annual Review 2020 presentation, Khazanah’s priorities, going forward, include further enhancing commercial returns, delivering impactful value through strategic investments, becoming a responsible organization through embedding ESG considerations across all investment activities, building a strong digital and technology foundation. https://www.khazanah.com.my/our-performance/khazanah-annual-review-2021/ 

State-owned enterprises which in Malaysia are called government-linked companies (GLCs), play a very significant role in the Malaysian economy. Such enterprises have been used to spearhead infrastructure and industrial projects. A 2017 analysis by the University of Malaya estimated that the government owns approximately 42 percent of the value of firms listed on the Bursa Malaysia through its seven Government-Linked Investment Corporations (GLICs), including a majority stake in a number of companies. Only a minority portion of stock is available for trading for some of the largest publicly listed local companies. Khazanah, often considered the government’s sovereign wealth fund, owns stakes in companies competing in many of the country’s major industries including aerospace, construction, energy, finance, information & communication, and marine technologies. The Prime Minister chairs Khazanah’s Board of Directors. PETRONAS, the state-owned oil and gas company, is Malaysia’s only Fortune Global 500 firm.

As part of its Government Linked Companies (GLC) Transformation Program, the Malaysian Government embarked on a two-pronged strategy to reduce its shares across a range of companies and to make those companies more competitive through improved corporate governance. The Transformation Program pushes for more independent and professionalized board membership, but the OECD noted in 2018 that in practice shareholder oversight is lax and government officials exert influence over corporate boards.

Among the notable divestments of recent years, Khazanah offloaded its stake in the national car company Proton to DRB-Hicom Bhd in 2012. In 2013, Khazanah divested its holdings in telecommunications services giant Time Engineering Bhd. Khazanah’s annual report for 2017 noted only that the fund had completed 12 divestments that produced a gain of RM 2.5 billion (USD 625 million). In 2018, Khazanah partially divested its shares in IHH Healthcare Berhad, saw two successful IPOs, and issued USUSD 321 million in exchangeable sukuk. However, significant losses at domestic companies including at Axiata, Telekom Malaysia, Tenaga Nasional, IHH Healthcare Berhad, CIMB Bank, and Malaysia Airports led to the pre-tax loss of USD 1.52 billion the company experienced in 2018. In April 2019, Khazanah sold 1.5 percent of its stake in Tenaga Nasional on Bursa Malaysia, after which Khazanah still owned 27.27 percent of the national electric company. In its annual review for 2020, Khazanah posted lower divestment gains of RM2.7 billion (USD675 million) compared to RM9.9 billion (USD2.25 billion) in 2019.

Reference: https://www.khazanah.com.my/news_press_releases/khazanah-annual-review-2021/ 

GLCs with publicly traded shares must produce audited financial statements every year. These SOEs must also submit filings related to changes in the organization’s management. The SOEs that do not offer publicly traded shares are required to submit annual reports to the Companies Commission. The requirement for publicly reporting the financial standing and scope of activities of SOEs has increased their transparency. It is also consistent with the OECD’s guideline for Transparency and Disclosure. Moreover, many SOEs prioritize operations that maximize their earnings.

The close relationships SOEs have with senior government officials, however, blur the line between strictly commercial activity pursued for its own sake and activity that has been directed to advance a policy interest. For example, Petroliam Nasional Berhad (PETRONAS) is both an SOE in the oil and gas sector and the regulator of the industry. Malaysia Airlines (MAS), in which the government previously held 70 percent but now holds 100 percent, required periodic infusions of resources from the government to maintain the large numbers of company’s staff and senior executives.

The Ministry of Finance holds significant minority stakes in five companies including a 50% stake in the financial guarantee insurer Danajamin Nasional Berhad. The government also holds a golden share in 32 companies from key industries such as aerospace, marine technology, energy industries and ports. The Ministry of Finance maintains a list of 70 companies directly controlled by the Minister of Finance Incorporated, known as MOF Inc, the largest Government Linked Investment Company (GLIC). The seven GLICs in Malaysia are also listed. However, a comprehensive list of the more than 200 GLCs that are controlled by these seven investment companies is not readily available. For more information, please visit: https://www.mof.gov.my/index.php/en/profile/divisions/government-investment-companies. Links to the sources of regulation and authorities can be found here:

• Attorney General’s Chamber: https://www.agc.gov.my/
• Companies Commission of Malaysia: https://www.ssm.com.my/Pages/Home.aspx
• Securities Commission Malaysia: https://www.sc.com.my/
• Ministry of Finance: https://www.mof.gov.my/ms/

With formal and informal ties between board members and government, Malaysian SOEs (GLCs) may have access to capital and financial protection from bankruptcy as well as reduced pressure to deliver profits to government shareholders. The legal framework establishing GLCs under Malaysian law specifically seeks economic opportunity for Bumiputera entrepreneurs. There is some empirical evidence, published by the Asian Development Bank, that SOEs crowd out private investment in Malaysia.

Malaysia participates in OECD corporate governance engagements and continues to work on full adherence to the OECD Guidelines on Corporate Governance for SOEs through its Government Linked Companies (GLC) Transformation Program. The National Resource Governance Institute’s Resource Governance Index rates Malaysia as weak on governance of its oil and gas sector; however, Malaysia also ranks as 27th among 89 rated countries, in the top third.

Privatization Program

In several key sectors, including transportation, agriculture, utilities, financial services, manufacturing, and construction, Government Linked Corporations (GLCs) continue to dominate the market. However, the Malaysian Government remains publicly committed to the continued, eventual privatization, though it has not set a timeline for the process and faces substantial political pressure to preserve the roles of the GLCs. The Malaysian Government established the Public-Private Partnership Unit (UKAS) in 2009 to provide guidance and administrative support to businesses interested in privatization projects as well as large-scale government procurement projects. UKAS, which used to be a part of the Office of the Prime Minister, is now under the Ministry of Finance. UKAS oversees transactions ranging from contracts and concessions to sales and transfers of ownership from the public sector to the private sector.

Foreign investors may participate in privatization programs, but foreign ownership is limited to 25 percent of the privatized entity’s equity. The National Development Policy confers preferential treatment to the Bumiputera, which are entitled to at least 30 percent of the privatized entity’s equity.

The privatization process is formally subject to public bidding. However, the lack of transparency has led to criticism that the government’s decisions tend to favor individuals and businesses with close ties to high-ranking officials.

The development of RBC programs in Malaysia has transformed from a government-led initiative into a concept embraced by the private sector. Through the efforts of the Bursa Malaysia and other governmental bodies, awareness of corporate responsibility now exists across wide swathes of the private sector in Malaysia.

The government initially viewed RBC through the lens of Corporate Social Responsibility (CSR) and philanthropic activities. In 2006, the Malaysian Securities Commission published a CSR framework for all publicly listed companies (PLCs), which are required to disclose their CSR programs in their annual financial reports. In 2007, the Women, Family and Community Ministry launched the Prime Minister’s CSR Awards to encourage the spread of CSR programs, and to honor those companies whose commitment to CSR had made a difference in their respective communities.

Presently, the government through the Ministry of Entrepreneur Development and Cooperatives has the Protégé – Ready to Work Program Rules 2021 which allow companies participating in this [program to claim a double tax deduction on certain expenditure incurred on a trainee (Malaysian citizen graduate who is unemployed or under an employment which does not commensurate with his qualification).

The Business Council for Sustainable Development Malaysia (BCSDM) (formerly known as the Board for Corporate Sustainability and Responsibility Malaysia) also supplanted the Institute for Corporate Responsibility Malaysia as the focal point for the country’s RBC programs. This was an important development on the road to meeting international norms, as BCSDM is the local affiliate of the World Business Council for Sustainable Development, and aims to meet the World Bank’s Sustainable Development Goals. Additionally, BCSDM has laid out its own Vision 2050 plan, which aims to facilitate an improvement in global living standards through the implementation of a series of environmentally responsible steps.

Bursa Malaysia spearheaded the drive of including Environmental, Social, and Governance (ESG) issues to enhance corporate accountability by launching the FTSE4Good Bursa Malaysia Index in 2014.This Index is composed of companies selected from the top 200 Malaysian stocks in the FTSE Bursa Malaysia EMAS Index. These companies are screened in accordance with transparent and defined ESG criteria, and the index provides an avenue for investors to make ESG-focused investments and increase ESG exposure in their investment portfolios, thereby putting indirect pressure on companies to behave more responsibly.

In a subsequent step in 2015, Bursa Malaysia launched a Sustainability Framework, which was comprised of amendments to the Listing Requirement (which all PLCs must meet), and the publication of a Sustainability Reporting Guide Toolkit. As part of their new responsibilities, PLCs were required to disclose sustainability statements in their annual reports, incorporating ESG issues related to their respective businesses. In 2018 Bursa Malaysia launched a 2nd edition of the Sustainability Reporting Guidelines, which include recommendations for PLCs regarding how to integrate sustainability into their businesses, and how to conduct more extensive reporting on material Economic, Environmental, and Social (EES) risks and opportunities.

In 2015, SUHAKAM, the Malaysian Human Rights Commission, published a framework for a national plan of action on business and human rights (BHR Framework). The goal of the BHR Framework was to facilitate the adoption and implementation of the UN Guiding Principles on Business and Human Rights by both state and non-state actors in Malaysia. Subsequent to the creation of the BHR Framework, Parliament passed an amended Companies Act in 2016, which included the optional disclosure of a business review, containing information about: (i) environmental matters, including the impact of the company’s business on the environment; (ii) the company’s employees; and (iii) social and community issues. In the wake of the Companies Act 2016, The Companies Commission of Malaysia similarly sought to push RBC, by developing a best practices circular that promotes adherence to international sustainability reporting standards. This circular endorses specific international standards such as the Global Reporting Initiative (GRI) framework and the UN Guiding Principles on Business and Human Rights.

The push toward effectuating RBC by the government has not only involved human rights, but has also addressed environmental concerns. The Ministry of Energy, Science, Technology, Environment & Climate Change (MESTECC) has published multiple roadmaps to that end, including: Green Technology Master Plan Malaysia 2017-2030; Malaysia’s Roadmap towards Zero Single-use Plastics 2018-2030; and National Energy Efficiency Master Plan. Despite the efforts across multiple ministries to emphasize RBC, there is nothing in Malaysia’s official procurement policy that mentions it as a factor in government contracting.

In September 2019, U.S. Customs and Border Protection (CBP) issued a Withhold Release Order (WRO), thereby suspending imports of medical gloves from WRP Asia Pacific, a Malaysian manufacturer, citing widespread reports of the company’s use of forced labor to produce the gloves. CBP later issued WRO’s against Top Glove (rubber gloves) on July 15, 2020, FGV Holdings Berhad (palm oil) on September 30, 2020, and against Sime Darby Plantation Berhad (palm oil) on December 30, 2020. On March 29, 2021, CBP announced that the WRO against Top Glove would move to an official Finding of forced labor, resulting in CBP seizing any shipments from Top Glove that enter U.S. ports. Since the Finding announcement CBP has seized two large shipments of TG products: a shipment of gloves worth USD 518,000 on May 5, and a second shipment of gloves worth USD 619,000 on May 13. Malaysia is the world’s largest exporter of medical gloves, and the United States is its largest export market. In March 2020, CBP revoked the WRO on WRP-produced rubber gloves, citing information “showing the company is no longer producing the rubber gloves under forced labor conditions.”

A 2019 chemical dumping incident paints a blurry picture regarding Malaysia’s ability to effectively and fairly enforce domestic laws on environmental protection. In the state of Johor in March 2019, a lorry dumped a mixture of toxic chemicals into the Kim Kim River, causing the hospitalization of almost 3,000 individuals. The overwhelming majority of those hospitalized did not get sick after the initial dumping, but rather days later aided by strong winds. The authorities did not immediately remove the chemicals from the river due to the costliness of the procedure, leading to a political backlash. The state government took straightforward legal steps against the responsible parties, and completed its investigation in a thorough and impartial manner. The Johor government charged the driver of the lorry under the Environmental Quality Act 1974, and charged the owners of the factory responsible for the dumping pursuant to the Environment Quality Regulations (Scheduled Wastes) 2005 and Environmental Quality Regulations (Clean Air) Regulations 2014.

The Malaysian Securities Commission leads issues regarding corporate governance and shareholder protection. In furtherance of its goal of safeguarding investors, in 2017 the SC released an updated version of the Malaysian Code of Corporate Governance (MCCG). This -document includes principles on board leadership and effectiveness, audit and risk management, integrity in corporate reporting, and meaningful relationships with stakeholders. The SC publishes an annual report called the CG Monitor to ascertain which of their suggested best practices in the MCCG are being implemented. The CG Monitor evaluates issues ranging from executive compensation standards to the quality of disclosures made by PLCs. The SC also issues policy papers on a range of related issues, including rules on takeovers, mergers, and acquisitions, with an eye on protecting shareholders.

Bursa Malaysia is similarly interested in ensuring shareholder protection, and has a dedicated chapter in its Listing Requirements to corporate governance. This chapter lays out in detail the requirements for listed companies concerning board composition, rights of directors, and auditing practices. The Listing Requirements circle back to the MCCG, and require that the board of PLCs disclose which of the best practices annunciated in the MCCG the company is following.

Promotion of RBC in Malaysia has been increasing due to pressure from institutional investors and government-linked investment funds. In 2014, the Minority Shareholders Watch Group (an independent research organization on corporate governance matters, originally funded by four state-owned investment funds) (MSWG) and the SC worked together to draft the Malaysian Code for Institutional Investors (MCII). The MCII includes six principles of effective stewardship by institutional investors, as well as guidance to facilitate implementation. Furthermore, the MCII encourages institutional investors to invest responsibly by taking stock of the RBC and corporate governance standards of the company. As a response to the MCII, the Institutional Investor Council (IIC) was formed in 2015. The IIC is an industry-led initiative that represents the common interests of institutional investors in Malaysia, and promotes good governance (including ESG considerations) to PLCs.

The interest in RBC and good governance has taken hold not only in industry, but in governmental funds as well. The government of Malaysia’s strategic investment fund (Khazanah Nasional Berhad), the government pension fund (KWAP), and the Employees Provident Fund (EPF) are signatories to the UN-supported Principles for Responsible Investment (PRI). As signatories, they are required to carry out PRI principles, including taking ESG into consideration during the due diligence phase before making a potential investment, and ensuring that ESG best practices are met in companies in which they invest.

Post is not aware of any governmental interference in the efforts of regulators, business associations, and investors to improve responsible business practices amongst Malaysian corporations.

Additional Resources

Department of State

• Country Reports on Human Rights Practices;
• Trafficking in Persons Report;
• Guidance on Implementing the “UN Guiding Principles” for Transactions Linked to Foreign Government End-Users for Products or Services with Surveillance Capabilities and;
• North Korea Sanctions & Enforcement Actions Advisory

Department of Labor

• Findings on the Worst Forms of Child Labor Report;
• List of Goods Produced by Child Labor or Forced Labor.
• Sweat & Toil: Child Labor, Forced Labor, and Human Trafficking Around the World and;
• Comply Chain.

The Malaysian government established the Malaysian Anti-Corruption Commission (MACC) in 2008 and the Whistleblower Protection Act in 2010 to combat corruption and considers bribery a criminal act. Malaysia’s 2009 Anti-Corruption Commission Act (ACCA) prohibits bribery of foreign public officials, permits the prosecution of Malaysians for offenses committed overseas, prohibits bribes from being deducted from taxes, and provides for the seizure of property. The government amended the ACCA in 2018 with new provisions that introduced corporate liability. It added the ability to penalize commercial organizations, including foreign companies with operations in Malaysia, that has an “associated person” involved in corruption or bribery. The definition of “associated person” is broad and can mean a director, partner, employee, or any person who performs services for or on behalf of the company. The purpose of the law is to incentivize companies to implement stringent procedures and safeguards to prevent the emergence and development of corrupt practices, though corruption watchdog Transparency International’s Malaysia Business Integrity Country Agenda highlighted that most Malaysian businesses do not have anti-corruption programs or policies.

According to the Malaysian Anti-Corruption Commission, authorities arrested 867 public officials for corruption and bribery from January 2019 to September 2020. The MACC conducts investigations, but prosecutorial discretion remains with the Attorney General’s Chambers (AGC). Under the Statutory Declaration Act of 1960, public officials are required to disclose their earnings and assets within three months of appointment, and the asset declarations are accessible to the public on the MACC online portal. The Whistleblower Protection Act does not provide protection for those who disclose allegations to the media.

In July 2020, in the first criminal trial in the country’s history involving a former prime minister, the Malaysia’s High Court convicted former Prime Minister Najib Razak on all seven counts brought against him in the first of five corruption trials tied to the 1Malaysia Development Berhad (1MDB) investment fund scandal. Najib was charged with giving government guarantees on a loan from the country’s retirement fund to a subsidiary of the 1MDB, misappropriation of funds, and money laundering. Najib is appealing the conviction. Suits filed against Najib’s wife Rosmah Mansor on 19 counts of money laundering and tax evasion are ongoing. In May 2020, a Sessions Court granted Najib’s stepson, Riza Aziz, a “discharge not amounting to acquittal” in relation to five counts of laundering nearly $250 million from the 1MDB investment fund. As part of the agreement, Riza will return $108 million in assets. Many members of the legal community condemned the Session Court’s decision.

Resources to Report Corruption

Datuk Seri Azam Baki – Chief Commissioner
Malaysia Anti-Corruption Commission
Block D6, Complex D, Pusat Pentadbiran
Kerajaan Persekutuan, Peti Surat 6000
62007 Putrajaya
+6-1800-88-6000
Email: info@sprm.gov.my

Contact at a “watchdog” organization:

Cynthia Gabriel, Director
The Center to Combat Corruption and Cronyism (C4)
C Four Consultancies Sdn Bhd
A-2-10, 8 Avenue
Jalan Sg Jernih 8/1, Seksyen 8, 46050 Petaling Jaya
Selangor, Malaysia
Email: info@c4center.org

There have been no significant incidents of political violence since the 1969 national elections. In April 2012, the Peaceful Assembly Act took effect, which outlaws street protests and places other significant restrictions on public assemblies. The May 9, 2018, national election led to the first transition of power between coalitions since independence, and it was peaceful. The Pakatan Harapan administration that came to office in that election collapsed on February 24, 2020 and was replaced by the Perikatan Nasional coalition led by current Prime Minister Muhyiddin Yassin. Periodically, Malaysian groups will organize modest protests against U.S. government policies, including over the Israeli-Palestinian conflict, usually involving demonstrations outside the U.S. embassy. To date, these have remained peaceful and localized, with a strong police presence. Likewise, several non-governmental organizations have organized mass rallies in major cities in peninsular and East Malaysia related to domestic policies that have been peaceful. It is illegal for foreigners to participate in political demonstrations of any kind.

Malaysia’s two million documented and estimated 1.5 to four million undocumented foreign workers make up over 30 percent of the country’s workforce. However, to curb the rise of COVID-19, the Malaysian government banned in 2020 additional or replacement migrant workers from entering the country, resulting in a dearth of migrant labor available for domestic companies.

Malaysia’s shortage of skilled labor is the most frequently mentioned impediment to economic growth cited in numerous studies. Malaysia has an acute shortage of highly qualified professionals, scientists, and academics. U.S. firms operating in Malaysia have echoed this sentiment, noting that the shortage of skilled labor has resulted in more on-the-job training for new hires.

The Malaysian labor market, traditionally accustomed to operating at or near full employment, has been heavily impacted by the prolonged shutdown as part of the government’s response to the global pandemic. The unemployment rate reached five percent in April 2020, Malaysia’s highest in over 30 years, with economic observers predicting it will climb higher during the year.

Malaysia is a member of the International Labor Organization (ILO). Labor relations in Malaysia are generally non-confrontational. While a system of government controls strongly discourages strikes and restricts the formation of unions, the new government has created a National Labor Advisory Council – comprised of the Malaysian Trade Unions Congress and Malaysian Employer’s Federation – to increase labor participation in unions. The government amended its Trade Unions Act and Industrial Relations Act in July 2019 to increase freedom of association in Malaysia. Some labor disputes are settled through negotiation or arbitration by an industrial court. Malaysian authorities have pledged to move forward with amendments to the country’s labor laws as a means of boosting the economy’s overall competitiveness and combatting forced labor conditions. The previous government prohibited outsourcing companies, improved oversight of employment agencies, and brought the Employment Act, Children and Young Persons Act, and Occupational Safety and Health Act in line with ILO principles.

Although national unions are currently proscribed in Malaysia, there are a number of territorial federations of unions (the three territories being Peninsular Malaysia, Sabah, and Sarawak). The government has prevented some trade unions, such as those in the electronics and textile sectors, from forming territorial federations of unions. Instead of allowing a federation of unions for all of Peninsular Malaysia, the electronics sector is limited to forming four regional federations of unions, while the textile sector is limited to state-based federations of unions, for those states which have a textile industry. Proposed changes to the Trade Unions Act address this issue and would allow unions to form.

Employers and employees share the costs of the Social Security Organization (SOSCO), which covers an estimated 12.9 million workers and has been expanded to cover foreign workers. No systematic welfare programs or government unemployment benefits exist; however, the Employee Provident Fund, which employers and employees are required to contribute to, provides retirement benefits for workers in the private sector. Civil servants receive pensions upon retirement.

The regulation of employment in Malaysia, specifically as it affects the hiring and redundancy of workers, remains a notable impediment to employing workers in Malaysia. The high cost of terminating employees, even in cases of wrongdoing, is a source of complaint for domestic and foreign employers. The former prime minister formed an Independent Committee on Foreign Workers to study foreign worker policies. The Committee submitted 40 recommendations for streamlining the hiring of foreign workers and protecting employees from debt bondage and forced labor conditions. It is unclear whether or how the new government will act on these recommendations.

Executives at U.S. companies operating in Malaysia have reported that the government monitors the ethnic balance among employees and enforces an ethnic quota system for hiring in certain areas. Race-based preferences in hiring and promotion are widespread in government, government-owned universities, and government-linked corporations.

The former government increased and standardized the minimum wage across the country to RM 1100 (USD 275), a raise from RM 1,000 (USD 250) in Peninsular Malaysia and RM 920 (USD 230) in East Malaysia.

In 2018, the Department of Labor’s Trafficking Victims Protection Reauthorization Act (TVPRA) listing of goods produced with child labor and forced labor included Malaysian palm oil (forced and child labor), electronics (forced labor), garments (forced labor), and rubber gloves (forced labor). Senior officials within a number of Malaysian government agencies have been working with the private sector and civil society to address concerns relating to the recruitment, hiring, and management of foreign workers in all sectors of the Malaysian economy yet progress remains slow as the government’s priorities are focused on issues of public health and the economy.

Embassy Kuala Lumpur Economic Section
376 Jalan Tun Razak / 50400 Kuala Lumpur Malaysia +6-03-2168-5027
+6-03-2168-5027
Email: KualaLumpurEcon@state.gov

Policies Towards Foreign Direct Investment

The Philippines seeks foreign investment to generate employment, promote economic development, and contribute to inclusive and sustained growth.  The Board of Investments (BOI) and Philippine Economic Zone Authority (PEZA) are the country’s lead investment promotion agencies (IPAs).  They provide incentives and special investment packages to investors. Noteworthy advantages of the Philippine investment landscape include free trade zones, including economic zones, and a large, educated, English-speaking, and relatively low-cost Filipino workforce.  Philippine law treats foreign investors the same as their domestic counterparts, except in sectors reserved for Filipinos by the Philippine Constitution and the Foreign Investment Act (see details under Limits on Foreign Control section).  Additional information regarding investment policies and incentives are available on the BOI (http://boi.gov.ph) and PEZA (http://www.peza.gov.ph) websites.

Restrictions on foreign ownership, inadequate public investment in infrastructure, and lack of transparency in procurement tenders hinder foreign investment.  The Philippines’ regulatory regime remains ambiguous in many sectors of the economy, and corruption is a significant problem.  Large, family-owned conglomerates, including San Miguel, Ayala, Aboitiz Equity Ventures, and SM Investments, dominate the economic landscape, crowding out other smaller businesses.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreigners are prohibited from fully owning land under the 1987 Constitution, although the 1993 Investors’ Lease Act allows foreign investors to lease a contiguous parcel of up to 1,000 hectares (2,471 acres) for a maximum of 75 years.  Dual citizens are permitted to own land.

The 1991 Foreign Investment Act (FIA) requires the publishing every two years of the Foreign Investment Negative List (FINL), which outlines sectors in which foreign investment is restricted.  The latest FINL was released in October 2018 and will be updated once the Strategic Investment Priorities Plan (SIPP) is drafted.  The FINL bans foreign ownership/participation in the following investment activities:  mass media (except recording and internet businesses); small-scale mining; private security agencies; utilization of marine resources; cockpits; manufacturing of firecrackers and pyrotechnic devices; and manufacturing and distribution of nuclear, biological, chemical and radiological weapons, and anti-personnel mines.  With the exception of the practices of law, radiologic and x-ray technology, and marine deck and marine engine officers, other laws and regulations on professions allow foreigners to practice in the Philippines if their country permits reciprocity for Philippine citizens, these include medicine, pharmacy, nursing, dentistry, accountancy, architecture, engineering, criminology, teaching, chemistry, environmental planning, geology, forestry, interior design, landscape architecture, and customs brokerage.  In practice, however, language exams, onerous registration processes, and other barriers prevent this from taking place.

The Philippines limits foreign ownership to 40 percent in the manufacturing of explosives, firearms, and military hardware; private radio communication networks; natural resource exploration, development, and utilization (with exceptions); educational institutions (with some exceptions); operation and management of public utilities; operation of commercial deep sea fishing vessels; Philippine government procurement contracts (40 percent for supply of goods and commodities); contracts for the construction and repair of locally funded public works (with some exceptions); ownership of private lands; and rice and corn production and processing (with some exceptions).  Other areas that carry varying foreign ownership ceilings include the following: private employee recruitment firms (25 percent) and advertising agencies (30 percent).

Retail trade enterprises with capital of less than USD 2.5 million, or less than USD 250,000, for retailers of luxury goods, are reserved for Filipinos.  The Philippines allows up to full foreign ownership of insurance adjustment, lending, financing, or investment companies; however, foreign investors are prohibited from owning stock in such enterprises, unless the investor’s home country affords the same reciprocal rights to Filipino investors.

Foreign banks are allowed to establish branches or own up to 100 percent of the voting stock of locally incorporated subsidiaries if they can meet certain requirements.  However, a foreign bank cannot open more than six branches in the Philippines.  A minimum of 60 percent of the total assets of the Philippine banking system should, at all times, remain controlled by majority Philippine-owned banks.  Ownership caps apply to foreign non-bank investors, whose aggregate share should not exceed 40 percent of the total voting stock in a domestic commercial bank and 60 percent of the voting stock in a thrift/rural bank.

Other Investment Policy Reviews

The World Trade Organization (WTO) and the Organization for Economic Co-operation and Development (OECD) conducted a Trade Policy Review of the Philippines in March 2018 and an Investment Policy Review of the Philippines in 2016, respectively.  The reviews are available online at the WTO website (https://www.wto.org/english/tratop_e/tpr_e/tp468_e.htm) and OECD website (http://www.oecd.org/daf/oecd-investment-policy-reviews-philippines-2016-9789264254510-en.htm).

Business Facilitation

Business registration in the Philippines is cumbersome due to multiple agencies involved in the process.  It takes an average of 33 days to start a business in Quezon City in Metro Manila, according to the 2020 World Bank’s Ease of Doing Business report.  The Duterte Administrations’ landmark law, Republic Act No. 11032 or the Ease of Doing Business and Efficient Government Service Delivery Act of 2018 sought to address the issues through the amendment of the Anti-Red Tape Act of 2007 (https://www.officialgazette.gov.ph/2018/05/28/republic-act-no-11032/).  It legislates standardized deadlines for government transactions, a single business application form, a one-stop-shop, automation of business permits processing, a zero-contact policy, and a central business databank.  Implementing rules and regulations for the Act was signed in 2019 (http://arta.gov.ph/pages/IRR.html).  It created an Anti-Red Tape Authority (ARTA) under the Office of the President that oversees national policy on anti-red tape issues and implements reforms to improve competitiveness rankings.  It also monitors compliance of agencies and issue notices to erring and non-compliant government employees and officials.  ARTA is governed by a council that includes the Secretaries of Trade and Industry, Finance, Interior and Local Governments, and Information and Communications Technology.  The Department of Trade and Industry serves as interim Secretariat for ARTA.  Since this landmark legislation, the Philippines jumped 29 notches in the World Bank’s 2020 Doing Business Report ranking 95th from its previous 124th rank with the ARTA pushing for the full adoption of an online application system as an efficient alternative to on-site application procedures, issue online permits, and use e-signatures in the processing of government transactions.

The Revised Corporation Code, a business-friendly amendment that encourages entrepreneurship, improves the ease of business and promotes good corporate governance.  This new law amends part of the four-decade-old Corporation Code and allows for existing and future companies to hold a perpetual status of incorporation, compared to the previous 50-year term limit which required renewal.  More importantly, the amendments allow for the formation of one-person corporations, providing more flexibility to conduct business; the old code required all incorporation to have at least five stockholders and provided less protection from liabilities.

Outward Investment

There are no restrictions on outward portfolio investments for Philippine residents, defined to include non-Filipino citizens who have been residing in the country for at least one year; foreign-controlled entities organized under Philippine laws; and branches, subsidiaries, or affiliates of foreign enterprises organized under foreign laws operating in the country.  However, outward investments funded by foreign exchange purchases above USD 60 million or its equivalent per investor per year, require prior notification to the Central Bank.

The Philippines has neither a bilateral investment nor a free trade agreement with the United States, but it utilizes the Generalized System of Preferences (GSP – https://ustr.gov/issue-areas/trade-development/preference-programs/generalized-system-preference-gsp), which is yet to be renewed.  The only bilateral free trade agreement the Philippines has is with Japan.  The Philippines has signed bilateral investment agreements with 37 countries or entities:  Argentina, Australia, Austria, Bangladesh, Belgium-Luxembourg Economic Union, Cambodia, Canada, Chile, China, Czech Republic, Denmark, Finland, France, Germany, India, Indonesia, Iran, Italy, Kuwait, Mongolia, Myanmar, Netherlands, Pakistan, Portugal, Republic of Korea, Romania, Russian Federation, Saudi Arabia, Spain, Sweden, Switzerland, Syria, Taiwan, Thailand, Turkey, United Kingdom, and Vietnam.

The Philippines is party to ASEAN regional trade agreements, including an investment chapter with trading partners Australia and New Zealand, Republic of Korea, India, Japan, and China.  It also has an investment agreement with Iceland, Liechtenstein, Norway, and Switzerland under the Philippines-European Free Trade Association (EFTA) Free Trade Agreement.  On November 15, the Philippines along with 14 other Asia-Pacific countries, signed the Regional Comprehensive Economic Partnership (RCEP) trade agreement.  The agreement will be implemented after a ratification process, which could take up to two years.

The Philippines has a tax treaty with United States to avoid double taxation and provide procedures for resolving interpretative disputes and tax enforcement in both countries.  The treaty encourages bilateral trade and investment by allowing the exchange of capital, goods, and services under clearly defined tax rules and, in some cases, preferential tax rates or tax exemptions.

U.S. recipients of royalty income qualify for preferential tax rates (currently 10 percent) under the most favored nation clause of the United States-Philippines tax treaty.  A preferential tax treaty rate of 15 percent applies to dividends and interest income from bona fide loans; and 10 percent on interest income from government bonds.  The Philippine Supreme Court ruled in 2013 that securing a tax treaty relief ruling from the Bureau of Internal Revenue (BIR) is not a legal requirement to qualify for preferential treatment and tax treaty rates; however, based on experience, tax experts generally still advise filing a tax treaty relief application to avoid potential challenges or controversies.  Despite efforts to streamline processes, taxpayers find documentation requirements for tax treaty relief applications burdensome.  The volume of tax treaty relief applications has resulted in processing delays, with most applications reportedly pending for over a year.  Inconsistent taxation rulings are also a concern.

Given the recent updates on tax rulings, the BIR rules and regulations for tax accounting are yet to be fully harmonized with the Philippine Financial Reporting Standards.  The BIR requires taxpayers to maintain records in case of further audits of financial statements and income tax returns.  Additional information regarding BIR regulations is available on the BIR website (https://www.bir.gov.ph/).

The Philippines and United States signed a reciprocal Inter-Governmental Agreement (IGA) in July 2015 for automatic exchange of information between tax authorities to implement the U.S. Foreign Account Tax Compliant Act (FATCA).  The bilateral agreement has yet to enter into force pending completion of domestic legal remedies to overcome stringent bank secrecy restrictions to the disclosure/sharing of information.

Transparency of the Regulatory System

Proposed Philippine laws must undergo public comment and review.  Government agencies are required to craft implementing rules and regulations (IRRs) through public consultation meetings within the government and with private sector representatives after laws are passed.  New regulations must be published in newspapers or in the government’s official gazette, available online, before taking effect (https://www.gov.ph/).  The 2016 Executive Order on Freedom of Information (FOI) mandates full public disclosure and transparency of government operations, with certain exceptions.  The public may request copies of official records through the FOI website (https://www.foi.gov.ph/).  Government offices in the Executive Branch are expected to come up with their respective agencies’ implementation guidelines.  The order is criticized for its long list of exceptions, rendering the policy less effective.

Stakeholders report regulatory enforcement in the Philippines is generally weak, inconsistent, and unpredictable.  Many U.S. investors describe business registration, customs, immigration, and visa procedures as burdensome and frustrating.  Regulatory agencies are generally not statutorily independent but are attached to cabinet departments or the Office of the President and, therefore, are subject to political pressure.  Issues in the judicial system also affect regulatory enforcement.

International Regulatory Considerations

The Philippines is a member of the World Trade Organization (WTO) and provides notice of draft technical regulations to the WTO Committee on Technical Barriers to Trade (TBT).  (http://tbtims.wto.org/en/Notifications/Search?ProductsCoveredHSCodes=&ProductsCoveredICSCodes=&DoSearch=True&ExpandSearchMoreFields=False&NotifyingMember=Philippines&DocumentSymbol=&DistributionDateFrom=&DistributionDateTo=&SearchTerm=&ProductsCovered=&DescriptionOfContent=&CommentPeriod=&FinalDateForCommentsFrom=&FinalDateForCommentsTo=&ProposedDateOfAdoptionFrom=&ProposedDateOfAdoptionTo=&ProposedDateOfEntryIntoForceFrom=&ProposedDateOfEntryIntoForceTo=).

The Philippines continues to fulfill required regulatory reforms under the ASEAN Economic Community (AEC).  The Philippines officially joined live operations of the ASEAN Single Window (ASW) on December 30, 2019.  The country’s National Single Window (NSW) now issues an electronic Certificate of Origin via the TRADENET.gov.ph platform, and the NSW is connected to the ASW, allowing for customs efficiencies and better transparency.

The Philippines passed the Customs Modernization and Tariff Act in 2016, which enables the country to largely comply with the WTO Agreement on Trade Facilitation.  However, the various implementing rules and regulations to execute specific provisions have not been completed by the Department of Finance and the Bureau of Customs as of April 2020.

Legal System and Judicial Independence

The Philippines has a mixed legal system of civil, common, Islamic, and customary laws, along with commercial and contractual laws.

The Philippine judicial system is a separate and largely independent branch of the government, made up of the Supreme Court and lower courts.  The Supreme Court is the highest court and sole constitutional body.  More information is available on the court’s website (http://sc.judiciary.gov.ph/).  The lower courts consist of:  (a) trial courts with limited jurisdictions (i.e., Municipal Trial Courts, Metropolitan Trial Courts, etc.); (b) Regional Trial Courts (RTCs); (c) Shari’ah District Courts (Muslim courts); and (d) Court of Appeals (appellate courts).  Special courts include the “Sandiganbayan” (anti-graft court for public officials) and the Court of Tax Appeals.  Several RTCs have been designated as Special Commercial Courts (SCC) to hear intellectual property (IP) cases, with four SCCs authorized to issue writs of search and seizure on IP violations, enforceable nationwide.  In addition, nearly any case can be appealed to appellate courts, including the Supreme Court, increasing caseloads and further clogging the judicial system.

Foreign investors describe the inefficiency and uncertainty of the judicial system as a significant disincentive to investment.  Many investors decline to file dispute cases in court because of slow and complex litigation processes and corruption among some personnel.  The courts are not considered impartial or fair.  Stakeholders also report an inexperienced judiciary when confronted with complex issues such as technology, science, and intellectual property cases.  The Philippines ranked 152nd out of 190 economies, and 18th among 25 economies from East Asia and the Pacific, in the World Bank’s 2020 Ease of Doing Business report in terms of enforcing contracts.

Laws and Regulations on Foreign Direct Investment

The Fiscal Incentives Review Board (FIRB) is the ultimate governing body that oversees the administration and grant of tax incentives by investments promotions agencies (IPAs).  It also determines the target performance metrics used as conditions to avail of tax incentives and reviews, approve, and cancels incentives for investments above  USD 20 million as endorsed by IPAs.  The BOI regulates and promotes investment into the Philippines that caters to the domestic market.  The Strategic Investment Priorities Plan (SIPP), identified by the National Economic and Development Authority (NEDA) and administered by the BOI, identifies preferred economic activities approved by the President.  Government agencies are encouraged to adopt policies and implement programs consistent with the SIPP.

The Foreign Investment Act (FIA) requires the publishing of the Foreign Investment Negative List (FINL) that outlines sectors in which foreign investment is restricted.  The FINL consists of two parts:  Part A details sectors in which foreign equity participation is restricted by the Philippine Constitution or laws; and Part B lists areas in which foreign ownership is limited for reasons of national security, defense, public health, morals, and/or the protection of small and medium enterprises (SMEs).

The 1995 Special Economic Zone Act allows PEZAs to regulate and promote investments in export-oriented manufacturing and service facilities inside special economic zones, including grants of fiscal and non-fiscal incentives.

Further information about investing in the Philippines is available at BOI website (http://boi.gov.ph/) and PEZA website (http://www.peza.gov.ph).

Competition and Antitrust Laws

The 2015 Philippine competition law established the Philippine Competition Commission (PCC), an independent body mandated to resolve complaints on issues such as price fixing and bid rigging, to stop mergers that would restrict competition.  More information is available on PCC website (http://phcc.gov.ph/#content).  The Department of Justice (https://www.doj.gov.ph/) prosecutes criminal offenses involving violations of competition laws.

Expropriation and Compensation

Philippine law allows expropriation of private property for public use or in the interest of national welfare or defense in return for fair market value compensation.  In the event of expropriation, foreign investors have the right to receive compensation in the currency in which the investment was originally made and to remit it at the equivalent exchange rate.  However, the process of agreeing on a mutually acceptable price can be protracted in Philippine courts.  No recent cases of expropriation involve U.S. companies in the Philippines.

The 2016 Right-of-Way Act facilitates acquisition of right-of-way sites for national government infrastructure projects and outlines procedures in providing “just compensation” to owners of expropriated real properties to expedite implementation of government infrastructure programs.

Dispute Settlement

ICSID Convention and New York Convention

The Philippines is a member of the International Center for the Settlement of Investment Disputes (ICSID) and has adopted the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, or the New York Convention.

Investor-State Dispute Settlement

The Philippines is signatory to various bilateral investment treaties that recognize international arbitration of investment disputes.  Since 2002, the Philippines has been respondent to five investment dispute cases filed before the ICSID.  Details of cases involving the Philippines are available on the ICSID website (https://icsid.worldbank.org/en/).

International Commercial Arbitration and Foreign Courts

Investment disputes can take years to resolve due to systemic problems in Philippine courts.  Lack of resources, understaffing, and corruption make the already complex court processes protracted and expensive.  Several laws on alternative dispute resolution (ADR) mechanisms (i.e., arbitration, mediation, negotiation, and conciliation) were approved to decongest clogged court dockets.  Public-Private Partnership (PPP) infrastructure contracts are required to include ADR provisions to make resolving disputes less expensive and time-consuming.

A separate action must be filed for foreign judgments to be recognized or enforced under Philippine law.  Philippine law does not recognize or enforce foreign judgments that run counter to existing laws, particularly those relating to public order, public policy, and good customary practices.  Foreign arbitral awards are enforceable upon application in writing to the regional trial court with jurisdiction.  The petition may be filed any time after receipt of the award.

Bankruptcy Regulations

The 2010 Philippine bankruptcy and insolvency law provides a predictable framework for rehabilitation and liquidation of distressed companies, although an examination of some reported cases suggests uneven implementation.  Rehabilitation may be initiated by debtors or creditors under court-supervised, pre-negotiated, or out-of-court proceedings.  The law sets conditions for voluntary (debtor-initiated) and involuntary (creditor-initiated) liquidation.  It also recognizes cross-border insolvency proceedings in accordance with the United Nations Conference on Trade and Development (UNCTAD) Model Law on Cross-Border Insolvency, allowing courts to recognize proceedings in a foreign jurisdiction involving a foreign entity with assets in the Philippines.  Regional trial courts designated by the Supreme Court have jurisdiction over insolvency and bankruptcy cases.  The Philippines ranked 65th out of 190 economies, and ninth among 25 economies from East Asia and the Pacific, in the World Bank’s 2020 Ease of Doing Business report in terms of resolving insolvency and bankruptcy cases.

Investment Incentives

The Philippines’ Investment Priorities Plan (IPP) enumerates investment activities entitled to incentives facilitated by BOI, such as an income tax holiday.  Non-fiscal incentives include the following:  employment of foreign nationals, simplified customs procedures, duty exemption on imported capital equipment and spare parts, importation of consigned equipment, and operation of a bonded manufacturing warehouse.

The 2017 IPP provides incentives to the following activities: manufacturing (e.g., agro-processing, modular housing components, machinery, and equipment); agriculture, fishery, and forestry; integrated circuit design, creative industries, and knowledge-based services (e.g., IT-Business Process Management services for the domestic market, repair/maintenance of aircraft, telecommunications, etc.); healthcare (e.g., hospitals and drug rehabilitation centers); mass housing; infrastructure and logistics (e.g., airports, seaports, and PPP projects); energy (development of energy sources, power generation plants, and ancillary services); innovation drivers (e.g,. fabrication laboratories); and environment (e.g., climate change-related projects).  Further details of the 2017 IPP are available on the BOI website (http://boi.gov.ph/).  The BOI was tasked to update the investment priorities and formulate a Strategic Investment Priorities Plan to replace the IPP in light of the planned amendments in the tax incentive scheme of the Philippines under the Comprehensive Tax Reform Program (CREATE).

In the current set-up, BOI-registered enterprises that locate in less-developed areas are entitled to pioneer incentives and can deduct 100 percent of the cost of necessary infrastructure work and labor expenses from taxable income.  Pioneer status can be granted to enterprises producing new products or using new methods, goods deemed highly essential to the country’s agricultural self-sufficiency program, or goods utilizing non-conventional fuel sources.  Furthermore, an enterprise with more than 40 percent foreign equity that exports at least 70 percent of its production may be entitled to incentives even if the activity is not listed in the IPP.  Export-oriented firms with at least 50 percent of revenues derived from exports may register for additional incentives under the 1994 Export Development Act.

Multinational entities that establish regional warehouses for the supply of spare parts, manufactured components, or raw materials for foreign markets also enjoy incentives on imports that are re-exported, including exemption from customs duties, internal revenue taxes, and local taxes.  The first package of the Tax Reform for Acceleration and Inclusion (TRAIN) law which took effect January 1, 2018, removed the 15 percent special tax rate on gross income of employees of multinational enterprises’ regional headquarters (RHQ) and regional operating headquarters (ROHQ) located in the Philippines.  RHQ and ROHQ employees are now subjected to regular income tax rates, usually at higher and less competitive rates.

Foreign Trade Zones/Free Ports/Trade Facilitation

Export-related businesses enjoy preferential tax treatment when located in export processing zones, free trade zones, and certain industrial estates, collectively known as economic zones, or ecozones.  Businesses located in ecozones are considered outside customs territory and are allowed to import capital equipment and raw material free of customs duties, taxes, and other import restrictions.  Goods imported into ecozones may be stored, repacked, mixed, or otherwise manipulated without being subject to import duties and are exempt from the Bureau of Customs’ Selective Pre-shipment Advance Classification Scheme.  While some ecozones are designated as both export processing zones and free trade zones, individual businesses within them are only permitted to receive incentives under a single category.

Philippine Economic Zone Authority (PEZA)

PEZA operates 379 ecozones, primarily in manufacturing, IT, tourism, medical tourism, logistics/warehousing, and agro-industrial sectors.  PEZA manages four government-owned export-processing zones (Mactan, Baguio, Cavite, and Pampanga) and administers incentives to enterprises in other privately owned and operated ecozones.  Any person, partnership, corporation, or business organization, regardless of nationality, control and/or ownership, may register as an export, IT, tourism, medical tourism, or agro-industrial enterprise with PEZA, provided the enterprise physically locates its activity inside any of the ecozones.  PEZA administrators have earned a reputation for maintaining a clear and predictable investment environment within the zones of their authority (http://www.peza.gov.ph/index.php/economic-zones/list-of-economic-zones/operating-economic-zones).

Bases Conversion Development Authority (BCDA) and Subic Bay Metropolitan Authority (SBMA)

The ecozones located inside former U.S. military bases were established under the 1992 Bases Conversion and Development Act.  The BCDA (http://www.bcda.gov.ph/) operates Clark Freeport Zone (Angeles City, Pampanga), John Hay Special Economic Zone (Baguio), Poro Point Freeport Zone (La Union), and Bataan Technology Park (Morong, Bataan).  The SBMA operates the Subic Bay Freeport Zone (Subic Bay, Zambales).  Clark and Subic have their own international airports, power plants, telecommunications networks, housing complexes, and tourist facilities.  These ecozones offer comparable incentives to PEZA.  Enterprises already receiving incentives under the BCDA law are disqualified to receive incentives and benefits offered by other laws.

Other Zones

The Phividec Industrial Estate (Misamis Oriental Province, Mindanao) is governed by Phividec Industrial Authority (PIA) (http://www.piamo.gov.ph/), a government-owned and controlled corporation.  Other ecozones are Zamboanga City Economic Zone and Freeport (Zamboanga City, Mindanao) (http://www.zfa.gov.ph/), Cagayan Special Economic Zone (CEZA) and Freeport (Santa Ana, Cagayan Province) (http://ceza.gov.ph/), and Freeport Area of Bataan (FAB) (Mariveles, Bataan).  CEZA grants gaming licenses in addition to offering export incentives.  The Regional Economic Zone Authority (Cotabato City, Mindanao) (https://reza.bangsamoro.gov.ph/) has been operated by the Bangsamoro Autonomous Region in Muslim Mindanao (BARMM).  The FAB is operated by the Authority of the Freeport Area of Bataan (AFAB) (https://afab.gov.ph/).  The incentives available to investors in these zones are similar to PEZA but administered independently.

Performance and Data Localization Requirements

The BOI imposes a higher export performance requirement on foreign-owned enterprises (70 percent of production) than on Philippine-owned companies (50 percent of production) when providing incentives under SIPP.

Companies registered with BOI and PEZA may employ foreign nationals in supervisory, technical, or advisory positions for five years from date of registration (possibly extendable upon request).  Top positions and elective officers of majority foreign-owned BOI-registered enterprises (such as president, general manager, and treasurer, or their equivalents) are exempt from employment term limitation.  Foreigners intending to work locally must secure an Alien Employment Permit from the Department of Labor and Employment (DOLE), renewable every year with the duration of employment (which in no case shall exceed five years).  The BOI and PEZA facilitate special investor’s resident visas with multiple entry privileges and extend visa facilitation assistance to foreign nationals, their spouses, and dependents.

The 2006 Biofuels Act establishes local content requirements for diesel and gasoline.  Regarding diesel, only locally produced biodiesel is permitted.  For gasoline, all local ethanol must be bought off the market before imports are allowed to meet the blend requirement, and the local ethanol production may only be sourced from locally-produced sugar/molasses feedstock.

The Philippines does not impose restrictions on cross-border data transfers.  Sensitive personal information is protected under the 2012 Data Privacy Act, which provides penalties for unauthorized processing and improper disposal of data even if processed outside the Philippines.

Real Property

The Philippines recognizes and protects property rights, but the enforcement of laws is weak and fragmented.  The Land Registration Authority and the Register of Deeds (http://www.lra.gov.ph/), which facilitate the registration and transfer of property titles, are responsible for land administration, with more information available on their websites.  Property registration processes are tedious and costly.  Multiple agencies are involved in property administration, which results in overlapping procedures for land valuation and titling processes.  Record management is weak due to a lack of funds and trained personnel.  Corruption is also prevalent among land administration personnel and the court system is slow to resolve land disputes.  The Philippines ranked 120th out of 190 economies in terms of ease of property registration in the World Bank’s 2020 Ease of Doing Business report.

Intellectual Property Rights

The Philippines is not listed on the United States Trade Representative’s (USTR) Special 301 Watch List.  The country has a generally robust intellectual property rights (IPR) regime in place, although enforcement is irregular and inconsistent.  The total estimated value of counterfeit goods reported seized in 2020 was USD180 million, lower than 2019’s USD 460 million.  The closure of commercial establishments and a strict three-month lockdown due to the COVID-19 pandemic,impacted enforcement activities.  The sale of imported counterfeit goods in local markets has visibly decreased, though the amount of counterfeit goods sold online has dramatically increased due to the shift of most businesses to online activities.

The Intellectual Property (IP) Code provides a legal framework for IPR protection, particularly in key areas of patents, trademarks, and copyrights.  The Intellectual Property Office of the Philippines (IPOPHL) is the implementing agency of the IP Code, with more information available on its website (https://www.ipophil.gov.ph/).  The Philippines generally has strong patent and trademark laws.  IPOPHL’s IP Enforcement Office (IEO) reviews IPR-related complaints and visits establishments reportedly engaged in IPR-related violations.  However, weak border protection, corruption, limited enforcement capacity by the government, and lack of clear procedures continue to weaken enforcement.  In addition, IP owners still must assume most enforcement and storage costs when counterfeit goods are seized.

Enforcement actions are often not followed by successful prosecutions.  The slow and capricious judicial system keeps most IP owners from pursuing cases in court.  IP infringement is not considered a major crime in the Philippines and takes a lower priority in court proceedings, especially as the courts become more crowded out with criminal cases deemed more serious, which receive higher priority.  Many IP owners opt for out-of-court settlements (such as ADR) rather than filing a lawsuit that may take years to resolve in the unpredictable Philippine courts.

The IPOPHL has jurisdiction to resolve certain disputes concerning alleged infringement and licensing through its Arbitration and Mediation Center.

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

Resources for Rights Holders

Contacts at Mission:

Douglas Fowler, Economic Officer
Karen Ang, Economic Specialist
Economic Section, U.S. Embassy Manila
Telephone: (+632) 5301.2000
Email: ManilaEcon@state.gov

A list of local lawyers can be found on the U.S. Embassy’s website:  https://ph.usembassy.gov/u-s-citizen-services/attorneys/.

Capital Markets and Portfolio Investment

The Philippines welcomes the entry of foreign portfolio investments, including local and foreign-issued equities listed on the Philippine Stock Exchange (PSE).  Investments in certain publicly listed companies are subject to foreign ownership restrictions specified in the Constitution and other laws.  Non-residents are allowed to issue bonds/notes or similar instruments in the domestic market with prior approval from the Central Bank; in certain cases, they may also obtain financing in Philippine pesos from authorized agent banks without prior Central Bank approval.

Although growing, the PSE (with 271 listed firms as of end-2020) lags behind many of its neighbors in size, product offerings, and trading activity.  Efforts are underway to deepen the equity market, including introduction of new instruments (e.g., real investment trusts) and plans to amend listing rules for small and medium enterprises (SME).  The securities market is growing, and while it remains dominated by government bills and bonds, corporate issuances continue to expand due to the favorable interest rate environment and recent regulatory reforms.  Hostile takeovers are uncommon because most companies’ shares are not publicly listed and controlling interest tends to remain with a small group of parties.  Cross-ownership and interlocking directorates among listed companies also decrease the likelihood of hostile takeovers.

The Bangko Sentral ng Pilipinas (BSP/Central Bank) does not restrict payments and transfers for current international transactions in accordance to the country’s acceptance of International Monetary Fund Article VIII obligations of September 1995.  Purchase of foreign currencies for trade and non-trade obligations and/or remittances requires submission of a foreign exchange purchase application form if the foreign exchange is sourced from banks and/or their subsidiary/affiliate foreign exchange corporations falls within specified thresholds (currently USD 500,000 for individuals and USD 1 million for corporates/other entities).  Purchases above the thresholds are also subject to the submission of minimum documentary requirements but do not require prior Central Bank approval.  Meanwhile, a person may freely bring in or carryout foreign currencies up to USD 10,000; more than this threshold requires submission of a foreign currency declaration form.

Credit is generally granted on market terms and foreign investors are able to obtain credit from the liquid domestic market.  However, some laws require financial institutions to set aside loans for preferred sectors such as agriculture, agrarian reform, and MSMEs.  Notwithstanding, bank loans to these sectors remain constrained; for example, lending to MSMEs only amount to 5.9 percent of the total banking system loans despite comprising 99 percent of domestic firms. The government has implemented measures to promote lending to preferred sectors at competitive rates, including the establishment of a centralized credit information system and enactment of the 2018 Personal Property Security Law allowing the use of non-traditional collaterals (e.g., movable assets like machinery and equipment and inventories).  The government also established the Philippine Guarantee Corporation in 2018 to expand development financing by extending credit guarantees to priority sectors, including MSMEs.

Money and Banking System

The Bangko Sentral ng Pilipinas (BSP/Central Bank) is a highly respected institution that oversees a stable banking system.  The Central Bank has pursued regulatory reforms promoting good governance and aligning risk management regulations with international standards.  Capital adequacy ratios are well above the eight percent international standard and the Central Bank’s 10 percent regulatory requirement.  The non-performing loan ratio was at 3.7 percent as of end-2020, and there is ample liquidity in the system, with the liquid assets-to-deposits ratio estimated at about 53 percent.  Commercial banks constitute more than 93 percent of the total assets of the Philippine banking industry.  As of September 2020, the five largest commercial banks represented 60 percent of the total resources of the commercial banking sector.  The banking system was liberalized in 2014, allowing the full control of domestic lenders by non-residents and lifting the limits to the number of foreign banks that can operate in the country, subject to central bank prudential regulations.   Twenty-six of the 46 commercial banks operating in the country are foreign branches and subsidiaries, including three U.S. banks (Citibank, Bank of America, and JP Morgan Chase).  Citibank has the largest presence among the foreign bank branches and currently ranks 12th overall in terms of assets.  Despite the adequate number of operational banks, 31 percent of cities and municipalities in the Philippines were still without banking presence as of end-2019 and 4.6 percent were without any financial access point. The level of bank account penetration – the percentage of adults with a formal transaction account – stands at 34.5 percent, nearly halfway to the central bank goal of 70 percent by 2023.

Foreign residents and non-residents may open foreign and local currency bank accounts.  Although non-residents may open local currency deposit accounts, they are limited to the funding sources specified under Central Bank regulations.  Should non-residents decide to convert to foreign currency their local deposits, sales of foreign currencies are limited up to the local currency balance.  Non-residents’ foreign currency accounts cannot be funded from foreign exchange purchases from banks and banks’ subsidiary/affiliate foreign exchange corporations.

Foreign Exchange and Remittances

Foreign Exchange

The Bangko Sentral ng Pilipinas (Central Bank) has actively pursued reforms since the 1990s to liberalize and simplify foreign exchange regulations.  As a general rule, the Central Bank allows residents and non-residents to purchase foreign exchange from banks, banks’ subsidiary/affiliate foreign exchange corporations, and other non-bank entities operating as foreign exchange dealers and/or money changers and remittance agents to fund legitimate foreign exchange obligations, subject to provision of information and/or supporting documents on underlying obligations.  No mandatory foreign exchange surrender requirement is imposed on exporters, overseas workers’ incomes, or other foreign currency earners; these foreign exchange receipts may be sold for pesos or retained in foreign exchange in local and/or offshore accounts.  The Central Bank follows a market-determined exchange rate policy, with scope for intervention to smooth excessive foreign exchange volatility.

Remittance Policies

Foreign exchange policies do not require approval of inward foreign direct and portfolio investments unless the investor will purchase foreign currency from banks to convert its local currency proceeds or earnings for repatriation or remittance.  Registration of foreign investments with the Central Bank or custodian banks is generally optional.  Duly registered foreign investments are entitled to full and immediate repatriation of capital and remittance of dividends, profits, and earnings.  The Central Bank particularly requires foreign exchange for divestment purposes to be directly remitted to the account of non-resident investor on the date of purchase, with limited exemptions.  To repatriate capital from investments that did not fully materialize, non-resident investors can exchange excess local currencies provided at least 50 percent of inwardly remitted foreign exchange have been invested onshore, except for certain conditions.

As a general policy, government-guaranteed private sector foreign loans/borrowings (including those in the form of notes, bonds, and similar instruments) require prior Central Bank approval.  Although there are exceptions, private sector loan agreements should also be registered with the Central Bank if serviced through the purchase of foreign exchange from the banking system.

The Philippines strengthened its Anti-Money Laundering Act (AMLA) on January 29, 2021. The amended law expands covered entities and empowers the Anti-Terrorism Council to designate covered persons.

Sovereign Wealth Funds

The Philippines does not presently have sovereign wealth funds.

State-owned enterprises, known in the Philippines as government-owned and controlled corporations (GOCC), are predominantly in the finance, power, transport, infrastructure, communications, land and water resources, social services, housing, and support services sectors.  There were 133 operational and functioning GOCCs as of end-2020; a list is available on the Governance Commission for GOCC [GCG] website (https://gcg.gov.ph).  The government corporate sector has a combined asset of USD 300 billion and liability of  USD 210 billion (or net assets/equity worth about USD 9 billion) as of end-2019.  Its total income increased by 3.3 percent to  USD 33 billion during the year, while total expense rose by 0.6 percent to USD 24 billion; these result in a profit of USD 9 billion.  GOCCs are required to remit at least 50 percent of their annual net earnings (e.g., cash, stock, or property dividends) to the national government.

Private and state-owned enterprises generally compete equally.  The Government Service Insurance System (GSIS) is the only agency, with limited exceptions, allowed to provide coverage for the government’s insurance risks and interests, including those in build-operate-transfer (BOT) projects and privatized government corporations.  Since the national government acts as the main guarantor of loans, stakeholders report GOCCs often have an advantage in obtaining financing from government financial institutions and private banks.  Most GOCCs are not statutorily independent, thus could potentially be subject to political interference.

OECD Guidelines on Corporate Governance of SOEs

The Philippines is not an OECD member country.  The 2011 GOCC Governance Act addresses problems experienced by GOCCs, including poor financial performance, weak governance structures, and unauthorized allowances.  The law allows unrestricted access to GOCC account books and requires strict compliance with accounting and financial disclosure standards; establishes the power to privatize, abolish, or restructure GOCCs without legislative action; and sets performance standards and limits on compensation and allowances.  The GCG formulates and implements GOCC policies.  GOCC board members are limited to one-year term and subject to reappointment based on a performance rating set by GCG, with final approval by the Philippine President.

Privatization Program

The Philippine Government’s privatization program is managed by the Privatization Management Office (PMO) under the Department of Finance (DOF).  The privatization of government assets undergoes a public bidding process.  Apart from restrictions stipulated in FINL, no regulations discriminate against foreign buyers and the bidding process appears to be transparent.  Additional information is available on the PMO website (http://www.pmo.gov.ph/index.htm).

Responsible Business Conduct (RBC) is regularly practiced in the Philippines, although no domestic laws require it.  The Philippine Tax Code provides RBC-related incentives to corporations, such as tax exemptions and deductions.  Various non-government organizations and business associations also promote RBC.  The Philippine Business for Social Progress (PBSP) is the largest corporate-led social development foundation involved in advocating corporate citizenship practice in the Philippines.  U.S. companies report strong and favorable responses to RBC programs among employees and within local communities.

OECD Guidelines for Multinational Enterprises

The Philippines is not an OECD member country.  The Philippine government strongly supports RBC practices among the business community but has not yet endorsed the OECD Guidelines for Multinational Enterprises to stakeholders.

Additional Resources

Department of State

• Country Reports on Human Rights Practices (https://www.state.gov/reports-bureau-of-democracy-human-rights-and-labor/country-reports-on-human-rights-practices/);
• Trafficking in Persons Report (https://www.state.gov/trafficking-in-persons-report/);
• Guidance on Implementing the “UN Guiding Principles” for Transactions Linked to Foreign Government End-Users for Products or Services with Surveillance Capabilities (https://www.state.gov/key-topics-bureau-of-democracy-human-rights-and-labor/due-diligence-guidance/) and;
• North Korea Sanctions & Enforcement Actions Advisory (https://home.treasury.gov/system/files/126/dprk_supplychain_advisory_07232018.pdf)

Department of Labor

• Findings on the Worst forms of Child Labor Report (https://www.dol.gov/agencies/ilab/resources/reports/child-labor/findings ) and;
• List of Goods Produced by Child Labor or Forced Labor (https://www.dol.gov/agencies/ilab/reports/child-labor/list-of-goods).
• Sweat & Toil: Child Labor, Forced Labor, and Human Trafficking Around the World (https://www.dol.gov/general/apps/ilab) and;
• Comply Chain (https://www.dol.gov/ilab/complychain/).

Corruption is a pervasive and long-standing problem in both the public and private sectors.  The country’s ranking in Transparency International’s Corruption Perceptions Index declined to the 115th spot (out of 180), its worst score in eight years.  Philippine efforts to control corruption appears stagnant since 2012.  The ranking was also dragged by the government’s poor response to COVID-19, having been characterized as abusive enforcement of and major violations of human rights and media freedom, according to Transparency International.  Various organizations, including the World Economic Forum, have cited corruption among the top problematic factors for doing business in the Philippines.  The Bureau of Customs is still considered to be one of the most corrupt agencies in the country.

The Philippine Development Plan 2017-2022 outlines strategies to reduce corruption by streamlining government transactions, modernizing regulatory processes, and establishing mechanisms for citizens to report complaints.  A front line desk in the Office of the President, the Presidential Complaint Center, or PCC (https://op-proper.gov.ph/contact-us/), receives and acts on corruption complaints from the general public.  The PCC can be reached through its complaint hotline, text services (SMS), and social media sites.

The Philippine Revised Penal Code, the Anti-Graft and Corrupt Practices Act, and the Code of Ethical Conduct for Public Officials all aim to combat corruption and related anti-competitive business practices.  The Office of the Ombudsman investigates and prosecutes cases of alleged graft and corruption involving public officials, with more information available on its website.  Cases against high-ranking officials are brought before a special anti-corruption court, the Sandiganbayan, while cases against low-ranking officials are filed before regional trial courts.

The Office of the President can directly investigate and hear administrative cases involving presidential appointees in the executive branch and government-owned and controlled corporations.  Soliciting, accepting, and/or offering/giving a bribe are criminal offenses punishable by imprisonment, a fine, and/or disqualification from public office or business dealings with the government.  Government anti-corruption agencies routinely investigate public officials, but convictions by courts are limited, often appealed, and can be overturned.  Recent positive steps include the creation of an investors’ desk at the Ombudsman’s Office, and corporate governance reforms of the Securities and Exchange Commission.

UN Anticorruption Convention, OECD Convention on Combatting Bribery

The Philippines ratified the United Nations Convention against Corruption in 2003.  It is not a signatory to the OECD Convention on Combating Bribery.

Resources to Report Corruption

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

Office of the Ombudsman
Ombudsman Building, Agham Road, North Triangle
Diliman, Quezon City
Hotline:  (+632) 8926.2662
Telephone:  (+632) 8479.7300
Email/Website: pab@ombudsman.gov.ph / http://www.ombudsman.gov.ph/

Presidential Complaint Center
Gama Bldg., Minerva St. corner Jose Laurel St.
San Miguel, Manila
Telephone: (+632) 8736.8645, 8736.8603, 8736.8606
Email: pcc@malacanang.gov.ph / https://op-proper.gov.ph/presidential-action-center/

Contact Center ng Bayan
Text:  (+63) 908 881.6565
Email/Website: email@contactcenterngbayan.gov.ph / https://contactcenterngbayan.gov.ph/

Terrorist groups and criminal gangs operate around the country.  The Department of State publishes a consular information sheet and advises all Americans living in or visiting the Philippines to review the information periodically.  A travel advisory is in place for those U.S. citizens contemplating travel to the Philippines.

Terrorist groups, including the ISIS-Philippines affiliated Abu Sayyaf Group (ASG), the Maute Group, Ansar al-Khalifa Philippines (AKP) and elements of the Bangsamoro Islamic Freedom Fighters (BIFF), periodically attack civilian targets, kidnap civilians – including foreigners – for ransom, and engage in armed attacks against government security forces.  These groups have mostly carried out their activities in the western and central regions of Mindanao, including the Sulu Archipelago and Sulu Sea.  Groups affiliated with ISIS-Philippines continued efforts to recover from battlefield losses, recruiting and training new members, and staging suicide bombings and attacks with improvised explosive devices (IEDs) and small arms that targeted security forces and civilians.

In 2017, ISIS-affiliated groups in Mindanao occupied and held siege to Marawi City for five months, prompting President Duterte to declare martial law over the entire Mindanao region – approximately one-third of the country’s territory.  After granting multiple extensions of over two and a half years, Congress, with support from the government, allowed martial law to lapse on December 31, 2019.  In expressing its support for the decision, the military cited improvement in the security climate in Mindanao, but also noted that Proclamation 55, a national state of emergency declaration, remained in effect and would be used as necessary.

The Philippines’ most significant human rights problems were killings allegedly undertaken by vigilantes, security forces, and insurgents; cases of apparent governmental disregard for human rights and due process; official corruption; shrinking civic spaces; and a weak and overburdened criminal justice system notable for slow court procedures, weak prosecutions, and poor cooperation between police and investigators.  In 2020, the Philippines has seen a number of arrests and killings of human rights defenders and members of the media.

President Duterte’s administration continued its nationwide campaign against illegal drugs, led primarily by the Philippine National Police (PNP) and the Philippine Drug Enforcement Agency (PDEA), which continues to receive worldwide attention for its harsh tactics.  In 2020, the government also renewed focus on  anti-terrorism with a particular emphasis against communist insurgents.  In addition to Philippine military and police actions against the insurgents, the Philippine government also pressured a number of political groups and activists – accusing them of links to the NPA, often without evidence.  The Anti-Terrorism Act of 2020, signed into law on July 3, intends to prevent, prohibit, and penalize terrorism in the country, although critics question whether law enforcement and prosecutors might be able to use the law to punish political opponents and endanger human rights.

Managers of U.S. companies in the Philippines report that local labor costs are relatively low and workers are highly motivated, with generally strong English language skills.  As of October 2020, the Philippine labor force reached 44 million workers, with an employment rate of 91.3 percent and an unemployment rate of 8.7 percent.  These figures include employment in the informal sector and do not capture the substantial rates of underemployment in the country.  Youths between the ages of 15 and 24 made up over 19 percent of the unemployed.  More than half of all employment was in the services sector, with 57.2 percent.  Agriculture and industry sectors constitute 24.5 percent and 18.3 percent, respectively.

Compensation packages in the Philippines tend to be comparable with those in neighboring countries.  Regional Wage and Productivity Boards meet periodically in each of the country’s 16 administrative regions to determine minimum wages.  The non-agricultural daily minimum wage in Metro Manila is approximately USD 10, although some private sector workers receive less.  Most regions set their minimum wage significantly lower than Metro Manila.  Violation of minimum wage standards is common, especially non-payment of social security contributions, bonuses, and overtime.  Philippine law also provides for a comprehensive set of occupational safety and health standards.  The Department of Labor and Employment (DOLE) has responsibility for safety inspection, but a shortage of inspectors has made enforcement difficult.

The Philippines Constitution enshrines the right of workers to form and join trade unions.  The trend among firms using temporary contract labor to lower employment costs continues despite government efforts to regulate the practice.  The DOLE Secretary has the authority to end strikes and mandate a settlement between parties in cases involving national interest.  DOLE amended its rules concerning disputes in 2013, specifying industries vital to national interest:  hospitals, the electric power industry, water supply services (excluding small bottle suppliers), air traffic control, and other industries as recommended by the National Tripartite Industrial Peace Council (NTIPC).  Economic zones often offer on-site labor centers to assist investors with recruitment.  Although labor laws apply equally to economic zones, unions have noted some difficulty organizing inside the zones.

The Philippines is signatory to all International Labor Organization (ILO) core conventions but has faced challenges with enforcement.  Unions allege that companies or local officials use illegal tactics to prevent workers from organizing.  The quasi-judicial National Labor Relations Commission reviews allegations of intimidation and discrimination in connection with union activities.  Meanwhile, the NTIPC monitors the application of international labor standards.

Reports of forced labor in the Philippines continue, particularly in connection with human trafficking in the commercial sex, domestic service, agriculture, and fishing industries, as well as online sexual exploitation of children.

The U.S. International Development Finance Corp. (DFC) provides debt financing, partial credit guarantees, political risk insurance, grants, equity investment, and private equity capital to support U.S. investors and their investments.  It does so under a bilateral agreement with the Philippines.  DFC can provide debt financing, in the form of direct loans and loan guarantees, of up to USD 1 billion per project for business investments, preferably with U.S. private sector participation, covering sectors as diverse as tourism, transportation, manufacturing, franchising, power, infrastructure, and others.  DFC political risk insurance for currency inconvertibility, expropriation, and political violence for U.S. and other investments including equity, loans and loan guarantees, technical assistance, leases, and consigned inventory or equipment is also available for business investments in the Philippines.  Grants are available for projects that are already reasonably developed but need additional, limited funding and specific work – for example technical, environment and social, or legal – in order to be bankable and eligible for DFC financing or insurance.  In all cases, DFC support is available only where sufficient or appropriate investment support is unavailable from local or other private sector financial institutions.  In addition, DFC supports fifteen private equity funds that are eligible to invest in projects within the Philippines.

* Host Country Statistical Sources:
Philippine Statistical Authority (http://psa.gov.ph/nap-press-release/data-charts)
Bangko Sentral ng Pilipinas (http://www.bsp.gov.ph/statistics/efs_ext2.asp#FCDU)

The Philippine Central Bank does not publish or post inward and outward FDI stock broken down by country.  Total stock figures are reported under the “International Investment Position” data that the Central Bank publishes and submits to the International Monetary Fund’s Dissemination Standards Bulletin Board (DSBB).  As of the third quarter of 2020, inward direct investment (i.e. liabilities) is USD 95 billion, while outward direct investment (i.e., assets) is USD 61 billion.

The Philippine Central Bank disaggregates data into equity and debt securities but does not publish or post the stock of portfolio investments assets broken down by country.  Total foreign portfolio investment stock figures are reported under the “International Investment Position” data that Central Bank publishes and submits to the International Monetary Fund’s Dissemination Standards Bulletin Board (DSBB).  As of third quarter 2020, outward portfolio investment (i.e., assets) was USD 30.9 billion, of which USD 3.9 billion was in equity investments and USD 27 billion was in debt securities.

Douglas Fowler, Economic Officer
Karen Ang, Economic Specialist
U.S. Embassy Manila
1201 Roxas Boulevard, Manila, Philippines
Telephone: (+632) 5301.2000
Email: ManilaEcon@state.gov

Policies Toward Foreign Direct Investment

The government of Ukraine (GoU) actively seeks to attract FDI.  In 2014, the GoU established the National Investment Council as a consultative and advisory body under the president, and in 2016 the Ukrainian government established an investment promotion office UkraineInvest, with a mandate to attract and support FDI.  UkraineInvest’s mission is to provide a one-stop shop for investors by helping them find and/or initiate a project and then guiding them through any necessary regulatory processes.  UkraineInvest is also the primary point of contact for companies applying for tax and operational benefits under the newly enacted investment incentive law, “On State Support of Investment Projects with Significant Investments.”

The Business Ombudsman Council of Ukraine is as an advisory body under the Cabinet of Ministers that provides a forum for domestic or foreign businesses to file complaints about unjust treatment by government officials and state-owned enterprises. In June 2020, a draft law #3607 “On the Establishment of the Business Ombudsman Institution in Ukraine” was registered, which would significantly expand the institution’s authorities to investigate complaints.

Limits on Foreign Control and Right to Private Ownership and Establishment

The regulatory framework for the establishment and operation of businesses in Ukraine by foreign investors is generally similar to that for domestic investors.  Registering a foreign investment is governed by “The Law on Foreign Investments” (1996), although according to the Law “On amendments to some legislative acts of Ukraine to abolish the obligation of state registration of foreign investments” (2016), registration is not mandatory.  However, Article 395 of the Economic Code of Ukraine states that unregistered foreign investments will lose key legal guarantees. These guarantees include, the transfer of profits and income resulting from investment in Ukraine, the right to issue a permanent residence permit, a ban on nationalization, etc. Before registering their business, non-Ukrainian citizens must register with the Office of Immigration in the Ministry of Foreign Affairs and receive a taxpayer identification number through the State Fiscal Service.  Legislation adopted in October 2019 reduced the cost of accreditation for foreign representative offices (excluding Russian businesses) from $2,500 to one minimum monthly wage (which in 2020 was approximately $180) and the timeframe from 60 to 20 days.  The Ministry of Economic Development, Trade, and Agriculture issues these accreditations.

Foreign and domestic private entities can engage in all forms of remunerative activity, with some exceptions:  foreign companies are restricted from owning agricultural land, producing bioethanol, and some publishing activities.  In addition, Ukrainian law authorizes the government to set limits on foreign participation in state-owned enterprises, although the definition of “foreign participation” is vague, and the law is rarely used in practice.  Certain critical infrastructure, especially in the energy sector, is precluded by law from private ownership and therefore not available to foreign investors.  This includes the gas transmission system, electricity grids, and various plants and factories.  While the authorities currently review merger and acquisition investments on competition grounds, the government is developing a mechanism for investment review on security grounds.  On February 3, 2021 a draft Law # 5011 “On Foreign Investments in Economic Entities of Strategic Importance for the National Security of Ukraine” was registered in the Parliament.  If enacted, the bill is expected to introduce a system for assessing the impact of foreign investments on national interests and security of the state.

Other Investment Policy Reviews

The Organization for Economic Cooperation and Development (OECD) and the World Trade Organization (WTO) conducted formal reviews in 2016, and can be found at OECD: http://www.oecd.org/investment/oecd-investment-policy-reviews-ukraine-2016-9789264257368-en.htm; WTO: https://www.wto.org/english/tratop_e/tpr_e/tp434_e.htm.

Business Facilitation

Ukraine has taken major steps to improve the ease of doing business over the past five years, helping it move up seven spots in the World Bank’s 2020 Doing Business Ranking from 71st place in 2019 to 64th.  This was Ukraine’s largest annual leap since 2014 and the highest ranking the country has ever received.  Ukraine demonstrated improvements in six out of the ten indicators the World Bank assesses, scoring the highest in categories such as “starting a business” and “dealing with construction permits.”  However, an investor sentiment survey conducted by one of the largest private industry associations in Ukraine at the end of 2020 found a majority of its member company respondents felt the overall investment climate in Ukraine was declining. Companies cited corruption as one of the top reasons for this perceived downward movement in Ukraine’s investment climate. (Please note that the World Bank has put the 2021 Doing Business Rankings on hold until at least mid-2021).

The investor sentiment survey can be found at: https://eba.com.ua/wp content/uploads/2020/11/2020_ForeignInvestorSurvey_Presentation_en.pdf

Private entrepreneurs and legal entities can register online at https://poslugy.gov.ua/ and https://online.minjust.gov.ua/dokumenty/choise/.  These online registrations systems are not commonly used because it is difficult to submit the required documents online.  Once a company is registered with the State Registrar, its data is transferred by the registrar to the relevant state authorities, such as the State Committee of Statistics of Ukraine, the State Pension Fund, State Fiscal Service, the Employment Insurance Fund, the Social Security Fund, and the Fund for Social Insurance.  Registering a joint-stock company or a limited liability company takes approximately six days.

Outward Investment

As of January of 2020, Ukraine’s investments in foreign countries totaled approximately $3.5 billion, according to data provided by the National Bank of Ukraine.  Outward investment for legal entities and private entrepreneurs registered in Ukraine are capped of EUR 2 million ($2.2 million) per year.

Transparency of the Regulatory System

Regulatory regimes in Ukraine are often characterized by outdated, contradictory, and burdensome regulations, a high degree of arbitrariness and favoritism in decisions by government officials, weak protection of property rights, and irregular payments.  Since 2014, however, the country has been generally moving toward clearer rules and fair competition.  Ukraine’s efforts to implement its EU Association Agreement, including the Deep and Comprehensive Free Trade Area (DCFTA), should continue to help boost overall transparency and legal certainty as Ukraine strives to establish legal and regulatory systems that are consistent with international norms.

The formulation of regulations falls solely under the purview of the government.  In Ukraine there are no regulatory processes managed by non-governmental organizations or private sector associations.  According to the Law “On the Principles of State Regulatory Policy in the Sphere of Economic Activity” (2004), the relevant ministry or regulatory agency is required to publish draft text of proposed regulations on its website for review and comment for at least one month but not more than three months.  Along with the draft text, the governmental body must include a data-based assessment justifying the need for the regulation and analyzing its potential impact.  The ministry or agency receives comments via its website, at public meetings, and through targeted outreach to stakeholders.  The comments received are generally not made public.  At the end of the consultation period, the relevant ministry or regulator may publish the results on its website.  Often, however, final draft legislative initiatives are not publicly available or they reappear in dramatically different form.  In 2020, the Ministry of Economy successfully launched an electronic platform (https://techreg.in.ua/main/), on which it is publicizing all draft regulatory measures, accepting public comments, and providing responses to those comments.  Information on draft laws and existing legislation is available on the Verkhovna Rada (parliament) and Cabinet of Ministers websites.

Public finances and debt obligations are transparent.  Budget documents and information on debt obligations are widely and easily accessible to the general public, including online.  Budget documents provide a mostly full picture of the government’s planned expenditures and revenue streams.  Information on debt obligations is publicly available, and is published as part of the budget document on the Parliament’s website.  Information on the status of sovereign and guaranteed debt is published and updated on a monthly basis on the Finance Ministry’s website.  Statistics are broken down by type of debt, type of creditor, and type of currency.

International Regulatory Considerations

Ukraine is not a member of the EU, but it is working to approximate many of its standards to meet EU requirements and facilitate access to EU markets.  As Ukraine drafts laws, it often incorporates or references EU norms and standards.  Ukraine is a member of the WTO and a signatory to the WTO Trade Facilitation Agreement.  The Ministry of Economic Development,  Trade and Agriculture (MEDTA) is responsible for notifying all draft technical regulations to the WTO Committee on Technical Barriers to Trade.  Despite occasional delays in submitting draft legislation to the WTO, Ukraine’s notification of draft texts to the WTO for comment has improved in the past few years.

Legal System and Judicial Independence

The legal system in Ukraine is based on a civil system of codified laws passed by parliamentary body, the Verkhovna Rada.  Contracts related to foreign investments fall within the jurisdiction of a system of specialized commercial courts.  Generally, the Foreign Investment Law provides that a dispute between a foreign investor and the state of Ukraine must be settled in the Ukrainian courts, unless otherwise provided for by international treaties.

Courts of general jurisdiction are organized by territory and specialty and include: local courts; appellate courts; specialized high courts for civil and criminal cases; and the Supreme Court.  Commercial and contract law in Ukraine is codified in the Commercial Code and Civil Code. There is a three-tier system of specialized commercial courts with first and appellate instances and the Commercial Cassation Court of the Supreme Court as the highest instance.  Local courts are either courts of general jurisdiction or specialized courts (i.e. commercial and administrative courts).  Local commercial courts exercise jurisdiction over commercial and corporate disputes, while local administrative courts administer justice in legal disputes connected with state government and municipalities, with the exception of military disputes.  Regulations and enforcement actions are subject to appeal with no exceptions within terms prescribed in procedural codes and are adjudicated in the national (general) court system.

The judicial system is independent of the executive branch; however, extensive corruption in the court system provides an opening for outside influence.  Among the major problems of the Ukrainian judicial system are its overall lack of capacity and the existence of executive and prosecutorial influence on judges.  In surveys of their members, two major business associations identified the lack of effectiveness and integrity in Ukraine’s judicial system as top impediments to greater investment in the country.

Laws and Regulations on Foreign Direct Investment

The Law on Investment Activity (1991) established the general principles for investment and was subsequently followed by additional legislative acts to facilitate foreign investment, most recently the law “On State Support of Investment Projects with Significant Investments” and subsequent amending legislation granting further tax and customs benefits for major investors.  Due in part to conflicts in the body of laws that govern investment and commercial activity in Ukraine, and persistent issues with corruption, foreign investors have found it difficult to pursue cases in Ukrainian courts and often seek arbitration outside of the country.  The website of Ukraine’s Investment Promotion Office (https://ukraineinvest.com/) provides relevant laws, rules, procedures, and reporting requirements for potential investors.

Competition and Anti-Trust Laws

The Antimonopoly Committee of Ukraine (AMCU) is the Ukrainian state authority for protection of economic competition.  AMCU’s functions include investigating and prosecuting anticompetitive conduct, granting permissions for mergers and acquisitions, considering applications regarding violations of public procurement as an appeal body, monitoring the state aid system, conducting competition advocacy within the government, and formulating competition policy.  AMCU decisions can be appealed to Ukraine’s economic courts of first instance, and then to the central appellate court and in some cases the Supreme Court.

Expropriation and Compensation

Current legislation permits legal expropriation of property in certain criminal proceedings or in cases of failure to fulfill investment obligations during privatization procedures.  Additionally, the Law “On Legal Regime of Martial Law” (2015) and the Law “On Confiscation of Property During Legal Regime of Martial Law” (2013) allow voluntary or forced expropriations for military purposes with compensation to be provided either immediately or following cancellation of the “special regime/martial law.”

Dispute Settlement

ICSID Convention and New York Convention

Ukraine is a Party to both the International Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID) and the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards.  On October 20, 2015, the Government of Ukraine submitted a formal UN communication, noting that Ukraine’s ability to implement its obligations under the New York Convention in the occupied territories of Crimea, Donetsk, and Luhansk is limited and not guaranteed until Ukraine regains effective control from the Russian Federation.  The full text of the communication is available at: C.N.597.2015.TREATIES-XXII.1 of 20 October 2015.

The procedure for recognition and enforcement of foreign arbitral awards in Ukraine is regulated by the following legislative acts:

• The Law on International Commercial Arbitration (ICAL, 1994).  ICAL is almost a literal translation of the UNCITRAL Model Law.
• The Code of Civil Procedure of Ukraine (CPC, 2004).  Pursuant to Article 390 of the CPC, Ukrainian courts shall enforce foreign court decisions provided that:  recognition and enforcement are stipulated under an international treaty ratified by the Verkhovna Rada; or on the basis of the reciprocity principle under an ad hoc agreement with a foreign country, whose court decision shall be enforced in Ukraine.

Investor-State Dispute Settlement

Many of Ukraine’s bilateral investment treaties recognize binding international arbitration of investment disputes.  Claims under the Bilateral Investment Treaty (BIT) between the United States and Ukraine by American investors are rare.  The Embassy only tracks disputes at the request of U.S. businesses or individuals involved in the case, and cannot provide a comprehensive number for all investment disputes involving U.S. or other foreign investors in Ukraine.  Such disputes are a significant problem, however, both in fact and in terms of public perception.   The Embassy is currently aware of one case pending in the International Center for Settlement of Investment Disputes in Washington, DC.

ICAL limits the jurisdiction of international arbitration tribunals to civil law disputes arising from international economic operations (provided that the commercial enterprise of at least one party exists outside of Ukraine), disputes between international organizations and enterprises with foreign investments in Ukraine, and intra-company disputes of these enterprises.  ICAL does not address foreign arbitral awards issued against the government.

Extrajudicial action against foreign investors in the form of official acts of government (e.g. unwarranted inspections, investigations, fines) and illegitimate acts by private parties (e.g. corporate raiding) occur in Ukraine.  The Ukrainian government has made it a stated priority to improve the business environment, end corporate raiding, and attract more foreign investment.  In 2019, the Ukrainian Parliament passed legislation aimed to end corporate raidership: the Law “On Amendments to Certain Legislative Acts of Ukraine on Property Rights Protection,” and the Law “On Amendments to the Land Code of Ukraine and Other Legislative Acts on Counteracting Raiding.”

International Commercial Arbitration and Foreign Courts

The Law on Arbitration Courts (2004) stipulates that parties can refer most of their commercial or civil law disputes to courts of arbitration, which are non-state bodies.  Article 51 stipulates that awards of the aforementioned courts of arbitration are final, and Article 57 stipulates that they can be subject to mandatory enforcement via a competent state court.

Ukraine’s International Commercial Arbitration Court (ICAC) and the Maritime Arbitration Commission at the Ukrainian Chamber of Commerce and Industry are both annexed to the ICAL, which itself is a near-direct translation of the UNCITRAL model law.  ICAL distributes the functions of arbitration assistance and supervision between the district courts and the President of the Chamber of Commerce and Industry of Ukraine for both ad hoc and institutional arbitrations.  Local courts are obliged to recognize and enforce foreign arbitral awards under ICAL and the CPC, per Ukraine’s obligations under the ICSID and the New York Convention of 1958.  However, the reliability, consistency, and timeliness of implementation are unknown.

Bankruptcy Regulations

In October 2019, a new Code of Bankruptcy Proceedings took effect, replacing bankruptcy law that had been in force since 1992.  The new law strengthened creditors’ rights by allowing them to select their bankruptcy administrator, decide the starting prices of debtor assets at auction, and participate in other asset sales matters.  The law also improved the procedures for selling debtors’ assets by introducing online auctions and removed a requirement for asset collection through courts or enforcement services before insolvency proceedings can begin, easing the debt collection process and reducing legal costs for creditors.  The new bankruptcy code also provides additional protection of secured creditors.

In November 2020, the government proposed additional technical amendments to the Code which are pending consideration in parliament

Bankruptcy is not criminalized in Ukraine.  The Criminal Code of Ukraine, however, does criminalize: 1) intentionally making an entity bankrupt and 2) distorting certain financial data in order to conceal the insolvency of a financial institution.  The World Bank’s 2020 Doing Business Report ranked Ukraine 146th out of 190 in the “resolving insolvency” subcategory, down from 145^th in 2019.  Ukraine’s low ranking is driven by a low recovery rate and the high cost of recovering funds from insolvent firms by creditors.

Investment Incentives

The GoU has made attracting investment a top priority.  As part of this effort, in December 2020, the Rada passed the law “On State Support of Investment Projects with Significant Investments,” giving new financial and operational incentives to companies that invest at least EUR 20 million in one of a dozen predefined industries. The GoU will appoint a manager for qualifying investors  who will help them communicate with the authorities and navigate government bureaucracy, permits, and regulations. The companies will also receive a number of tax and customs exemptions as well as favorable access to land and necessary infrastructure.  UkraineInvest will take the lead on helping companies identify potential projects and signing an agreement with the GoU.  The agreement will permit investors to pursue international arbitration for violations of property rights.  The government has also launched a program that offers loans to Ukrainian micro and small enterprises at discounted rates of five, seven, or nine percent.

Previous incentives, such as generous depreciation rates for most fixed assets, including property, plant, and equipment for investors, are still in place.  Moreover, foreign investors remain exempt from customs duties for any in-kind contribution imported into Ukraine for the company’s charter fund.  Some restrictions do apply and import duties must be paid if the enterprise sells, transfers, or otherwise disposes of the property.  The government does not have a practice of jointly financing foreign direct investment projects, and the issuance of government guarantees is rare and subject to budgetary restrictions.

Foreign Trade Zones/Free Ports/Trade Facilitation

Ukraine does not currently maintain special or free economic zones.

Performance and Data Localization Requirements

An employer may employ a foreign national as long as the employer has obtained a work permit for this person.  The law “On Employment of the Population” sets forth the procedure for issuing work permits to foreigners.  Authorities issue work permits on a case-by-case basis, for a particular applicant and a particular position in a company.  A work permit is normally issued for the period of employment indicated in the employment contract, but for not more than one year.  A work permit can be renewed for the same term, for an unlimited number of times and free of charge.

A foreign citizen with a valid work permit who spends more than 90 days within a 180-day period in Ukraine, can obtain a temporary residence certificate.  As of June 1, 2018, temporary residence certificates are now contactless electronic cards with biometric data. The new permits are generally issued for the term of an individual’s work permit.  There are also no age or nationality restrictions on who can be a manager or company director in the private sector.

Citizens of EU countries, the United States, Canada, Japan and some other countries do not require a visa to enter Ukraine for a stay of up to 90 days within a 180-day period.  Individuals who are planning to get a temporary residence permit in Ukraine due to work must obtain a long-term type D visa.  The list of countries and respective visa requirements are available on the website of the Ministry of Foreign Affairs of Ukraine (http://mfa.gov.ua/en).  There are no reports from foreign investors and their employees of excessively onerous visa requirements inhibiting their mobility.  Russian citizens have reported difficulties and heightened scrutiny when arranging travel to Ukraine.  Additionally, people who previously traveled to Russian-occupied Crimea since 2014 have been reported being denied entry to Ukraine.

Under Article II, clause 6 of the Bilateral Investment Treaty between the United States and Ukraine, neither Party shall impose performance requirements as a condition of establishment, expansion, or maintenance of investments, which require or enforce commitments to export goods produced, or which specify that goods or services must be purchased locally, or which impose any other similar requirements.

Ukraine’s parliament is considering legislation that would give domestic producers preference in government tenders if they can demonstrate at least 30 percent local content.  U.S. officials have raised concerns that the law, if passed, will unfairly discriminate against U.S. companies.  In 2019, a renewable auction law replaced Ukraine’s feed-in tariff regime, eliminating any local content requirements or preferences.  Ukraine has no forced localization policies or requirements for foreign IT providers to turn over any source code or provide backdoors into hardware or software applications.  Ukraine’s IT infrastructure and Internet Service Providers are largely unregulated.  There are no legal measures preventing or impeding companies from transmitting business-related data outside of Ukraine.  In terms of data storage and protection requirements, the EU–Ukraine Association Agreement requires Ukraine to revise legislation to bring it into compliance with the EU’s General Data Protection Regulation (GDPR), but implementation is still in progress.

Real Property

Ukraine has a regulatory framework protecting property interests, as well as mortgages and liens.  The record system is generally reliable and maintained by the Ministry of Justice.  Still, judicial reform is needed to ensure efficient enforcement of property rights.  On March 31, 2020, Ukraine’s parliament adopted a law lifting the moratorium on the sale of agricultural land, effective July 1, 2021, and established new regulations for the land market.  The sale of state- and municipality-owned agricultural land will remain banned, meaning that in practice, the total initial market of land will be the 28 million hectares originally privatized in the 1990s.  The law limits the purchase of land to individuals who are citizens of Ukraine until January 1, 2024; until that date, each Ukrainian citizen can buy up to 100 hectares of agricultural land.  After January 1, 2024, Ukrainian legal entities (companies) will also be allowed to buy , up to 10,000 hectares of land. The law establishes that a national referendum will be necessary to determine whether foreigners may purchase agricultural land in the future.  Foreign nationals may lease land.   The State Land Cadaster system has assessed that 27 percent of Ukraine’s 43.8 million hectares of agricultural land does not have a clear ownership title.  The State Service of Ukraine for Geodesy, Cartography and Cadaster (StateGeoCadaster) is working to identify ownership of this land.  Sector experts believe the StateGeoCadaster will reduce the untitled portion of land to 18 percent by January 1, 2022. Unoccupied property can become communal property only by court decision following a request from the local body authorized to manage real estate property.  The request can only be made a year after the property was registered as unoccupied.

Intellectual Property Rights

Ukraine has a long history of inadequate enforcement and protection of intellectual property rights (IPR).  Ukraine has been listed on the Priority Watch List of the U.S Trade Representative’s (USTR’s) Special 301 Report since 2015 due to the use of unlicensed software within the government, Internet piracy, and an inadequate system of collective management organizations (CMOs).  However, in the past few years, Ukraine has made strides toward establishing the necessary legal framework to improve protection of IPR and has actively engaged various stakeholders, including the United States and the EU.

To combat online piracy, the Cyber Division of the National Police has continued to increase the size of its Department for Combating Crimes in the Sphere of Illegal Content and Telecommunications (DCCSICT), which now has 70 officers across Ukraine, including 15 in Kyiv.  In 2020, DCCSICT shut down 41 sites selling and distributing copyrighted materials and initiated 84 criminal proceedings against operators of the sites.  To cut off funding from sites that promote piracy, the Cyber Police launched investigations into the advertising firms that provide the websites significant amounts of their income.  However, a lack of resources and inadequate laws governing Ukraine’s notice and takedown system limit the effectiveness of the Cyber Police’s efforts.

Numerous hurdles exist for rights holders in seeking to flag pirated content or counterfeit goods.  Moreover, legal and regulatory red tape makes investigations cumbersome, and penalties for violators are often too inconsequential to deter future violations. The Ministry of Economy is currently drafting a law which, if passed, will help address many of the inadequacies in Ukraine’s online IP protection regime.

In December 2020, the government of Ukraine finalized the selection process for the accreditation of collective management organizations (CMO), which should further improve Ukraine’s system of collecting and distributing music royalties.  Currently, CMOs operate in six of eight spheres of musical works defined by the GoU. Industry stakeholders report that within these six spheres there has been a noticeable increase in the amount of royalties collected and distributed in 2020.

In July 2020, Ukraine increased compliance with commitments under the EU Association Agreement by passing a new law on patent reform, bringing Ukraine’s patent regime closer to the European Patent Convention. Some pharmaceutical companies have raised concerns that the law will restrict the patentability of several specified compounds.   In July 2020, the Rada also passed a law establishing the National Intellectual Property Agency (NIPA), which will unify the administration of IP policy and some IP policymaking into a single body.  The new agency will review and issue patents and trademarks, train IPR examiners, hear appeals on patent and trademark claims, and support the drafting of IPR policy and regulations.

As noted in USTR’s 2020 Notorious Markets Report, the availability of counterfeit goods in large physical marketplaces has considerably fallen in recent years with the notable exception of the Seventh Kilometer Market in Odessa.  However, the decline of counterfeit goods in these physical markets corresponds with an increase of counterfeit goods in Ukrainian online marketplaces. In 2020, the State Customs Service of Ukraine (SCS) carried out thousands of inspections resulting in the suspension of over 1,900 shipments; however, the total value of counterfeit goods seized in 2020 amounted to less than $200,000.  This represents a significant drop from the over $1 million worth of goods seized in the second half of 2019.  Observers from major trade organizations attribute the lack of goods seized to a lack of adequate enforcement by customs officers.

Ukraine is a member of the World Intellectual Property Organization (WIPO) and is party to the Berne Convention, the Paris Convention, the Patent Cooperation Treaty, the WIPO Copyright Treaty, and the WIPO Performances and Phonograms Treaty.  For additional information about national laws and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/.

Capital Markets and Portfolio Investment

The Ukrainian government encourages foreign portfolio investment in Ukraine, but Ukraine’s capital and commodity markets remain underdeveloped.  Ukraine’s capital market consists of markets for stocks and for commodities.  Liquidity is limited and investors have few investment options.  The financial market includes ten stock exchanges, a settlement center, two depositories, and a securities market regulator.  Government bonds constitute 95 percent of the trades.  A few corporate securities are listed, but the volume of their trades is insignificant.  With limited exceptions, only Ukrainian-licensed securities traders may handle securities transactions.  In January 2020, China’s Bohai Commodity Exchange acquired a 49.9% stake in one of Ukraine’s leading stock exchanges, JSC PFTS Stock Exchange.  The commodity market in Ukraine does not have a transparent regulatory framework.

The regulator of Ukraine’s capital market, the National Securities and Stock Market Commission, lacks financial and operational independence and is not a signatory to the Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information of the International Organization of Securities Commissions.  Ukraine has been a member of the International Organization of Securities Commissions (IOSCO) since 1996.  In February 2021, a new draft law “On the National commission on securities and stock exchanges” was registered in parliament and is pending consideration.  The law would strengthen the independence and institutional capacity of the Securities Commission and facilitate compliance with IOSCO standards.  Ukraine committed to adoption of the law as part of its IMF program.  In November 2019, Ukraine adopted the so-called “Split” law to regulate the non-banking financial services sector.  The law, which entered into force on July 1, 2020, transitions Ukraine from a sectoral regulatory model to an integrated model, and lays the foundation for the full development of consumer rights protections and market conduct regulations in the financial markets. The law dissolved the National Commission for State Regulation of Financial Services Markets and split up its regulatory functions between the National Bank of Ukraine and the National Securities and Stock Market Commission.  The National Bank of Ukraine now supervises and regulates the insurance market, leasing and factoring companies, credit unions, credit bureaus, pawnshops and other financial companies, while the National Securities and Stock Market Commission regulates private funds, including pension funds, construction financing, and real estate transactions.

For many years, Ukrainian capital markets have struggled due to significant gaps and inconsistencies in the regulatory framework.  In June 2020, parliament passed the law “On amendments to certain laws regarding facilitating investments and new financial instruments,” aimed at restarting Ukrainian capital markets.  The law will bring Ukrainian legislation in line with key provisions of EU laws on capital markets (MiFID II, MiFIR, EMIR, the Settlement Finality Directive, and the Financial Collateral Directive), create a framework for updated capital markets’ infrastructure, and regulate commodity markets and derivatives.  The law is expected to have a transformative effect on Ukraine’s capital markets as it provides for new financial instruments for savings and investment, new tools for risk management, and new requirements for market transparency. The law is expected to enter into force on July 1, 2021.

Credit is largely allocated on market terms, and foreign investors are able to get credit on the local market through a variety of credit instruments.

Money and Banking System

Ukraine’s banking sector has seen remarkable progress following the 2014-2015 crisis thanks in large part to  banking sector cleanup, which resulted in the closure of over 100 banks for insolvency or money laundering activities, and the professionalization of Ukraine’s central bank, the National Bank of Ukraine.  At the end 2020, 73 solvent banks were operating in Ukraine.

Partly due to the Covid-19 pandemic, the number of unprofitable banks ticked up in 2020.  Eight banks were unprofitable in 2020 compared to six in 2019, and two banks were declared insolvent due to non-compliance with capital requirements.  The banking sector in Ukraine reported net profit of UAH 41.3 billion ($1.4 billion) for 2020, roughly a quarter of the profit reported in 2019.  State-owned PrivatBank accounted for more than half of the banking sector’s total profits.  In 2020, banks’ total assets increased by 22 percent to UAH 1.8 trillion ($64 billion), the total amount of loans decreased by 6.8 percent to UAH 963 billion ($34 billion), while total obligations increased by 24.6 percent to UAH 1.6 trillion ($21 billion).

Non-performing loans (NPL) decreased from 48.4 percent in 2019 to 41 percent in 2020 but remain one of the biggest unresolved issues in the banking sector.  State-owned banks wrote off UAH 30.6 billion ($1.1 billion) in local currency loans and $3.1 billion in dollar-denominated loans in 2020, reducing their share of NPLs from 63.5 percent to 57.4 percent.  The share of NPLs in foreign commercial banks decreased from 16 percent to 12.3 percent, and in Ukrainian commercial banks from 18.6 percent to 14.6 percent. Greater oversight by the National Financial Stability Council, along with the National Bank’s new criteria for writing off distressed assets, has improved the banks’ NPL strategies.

Foreign-owned banks may carry out all activities conducted by domestic banks, and there are no restrictions on their participation in the banking system, including operating via subsidiaries.  A foreign company can open a bank account in Ukraine for the purposes of investment operations; otherwise, it needs to register a representative office in Ukraine.  A nonresident private person can open a bank account in Ukraine.  A foreign investor may open an account in a bank operating in Ukraine and transfer in funds for further investment or invest directly into an account of a Ukrainian resident company.

Foreign Exchange and Remittances

Foreign Exchange

The National Bank of Ukraine (NBU) continued in 2020 to liberalize currency controls, which had been put in place to stabilize the Ukrainian foreign exchange market during the 2014 economic crisis.  Under the law “On Currency and Currency Transactions”, which entered into force in February 2019, individuals can purchase foreign currency online and on credit.  The National Bank increased the cap for currency transfers by individuals from EUR 50,000 in December 2019 to EUR 200,000 in February 2021.  The daily limit was raised to UAH 399.9 thousand (or the USD/EUR equivalent).  Currency transfers abroad for legal entities are capped at EUR 2 million a year. The cap includes any outward investments.  According its currency liberalization road map, one of NBU’s priorities is to eliminate foreign currency transfer limits for individuals. Even though many restrictions for foreign currency transactions have been loosened, the new regulations still require Ukrainian banks to monitor most foreign currency transactions.

In 2019, the NBU abolished all restrictions related to the repatriation of dividends. The NBU also cancelled the mandatory sale of foreign currency proceeds by businesses from June 2019.  In addition, it removed the hryvnia reserve requirement banks had to keep for foreign currency purchases, and it now allows unlimited daily purchase of foreign currency by individuals through banks, financial institutions, and via online banking.

The NBU now allows transactions from Ukrainian bank accounts opened by non-resident legal entities. Foreign companies can open, and make payments from, current accounts as well as accumulate and buy foreign currencies using these accounts.

The NBU has developed a road map for removing currency restrictions with the goal of reaching a full capital flow regime.  The roadmap is publicly available on the NBU’s website in both Ukrainian and English:

https://bank.gov.ua/en/markets/liberalization

Further liberalization is contingent on implementation of BEPS legislation and general macro-economic conditions.

The NBU has a floating exchange rate regime, although the NBU may carry out currency interventions to meet two objectives: reducing excessive currency fluctuations and replenishment of international reserves.

Remittance Policies

In 2020, the National Bank of Ukraine doubled the limit for some retail foreign currency remittances, including for investment abroad or foreign deposits, to EUR 200,000 ($230,000) per year.  As long as they comply with the limit, individuals are permitted to remit foreign currency (or the national currency hryvnia) abroad or to current accounts of corporate nonresidents in Ukraine.  The transactions allowed include: investing abroad, depositing funds into one’s own accounts abroad, transferring funds under life insurance agreements, or making loans to nonresidents.  In 2020, individuals transferred about EUR 274 million ($315 million) abroad.  The NBU aims to completely remove the limit on international investments by individuals, subject to the full adoption and implementation of the BEPS legislation.

Sovereign Wealth Funds

Ukraine does not maintain or operate a sovereign wealth fund.

The Government of Ukraine operates 1,600 state-owned enterprises (SOEs) out of 3,358 registered SOEs, with an economic output of approximately ten percent of GDP.  While the government lists 3,358 enterprises, more than 1,700 of them no longer operate as functioning businesses.  SOEs in Ukraine are defined as companies in which the state owns at least 50-percent plus one share.  SOEs are active in areas such as energy, machine-building, and infrastructure.   Some of the companies have significant environmental problems, legacy legal issues, or oligarchs as minority owners.

There is no common public list of all SOEs in Ukraine and each ministry publishes a list of SOEs under its respective management.  The Ministry of Economic Development and Trade periodically updates information on annual financial reports of significant SOEs (100 of the largest SOEs), which it publishes on the ministry website.

http://www.me.gov.ua/Documents/List?lang=uk-UA&id=40a27e1b-8234-43d3-a37f-c4c752729fca&tag=FinansovaZvitnistPidprimstv

Ukraine’s law on corporate governance requires SOEs to publicize annual financial reports and disclosures on official websites, including information on financial indicators, company officials, transactions, etc.  The law also stipulates that SOEs publish their annual financial statements and audits, though a review of SOE financial statements and audits showed that SOEs did not rigorously adhere to the law.  Independent and government board members were selected in 2020 in certain strategic SOEs in the defense sector.  Since late 2019, some rollbacks of corporate governance protections at SOEs have been observed, especially in SOEs in the energy and infrastructure sectors, such as Naftogaz, Ukrenergo, and Energoatom.

In April 2020, the Cabinet of Ministers introduced a cap on the salaries of heads of executive bodies and members of supervisory boards of SOEs of $1,740 a month.  The limitation was nominally introduced for the duration of the COVID-19 lockdown period.  The move followed similar lowered pay caps for Ukraine’s ministers and their deputies.  Critics worried the salary cap would lead to the loss of crucial talent and necessary expertise.  In October 2020, the government canceled the cap on wages of SOE managers, including members of executive bodies and the restoration of supervisory board member pay to the levels determined by earlier contracts/agreements.  The end of the temporary limitation was followed by several failed attempts to pass legislation to introduce permanent caps on wages of civil servants and SOEs.

SOE senior managers traditionally report directly to the ministry overseeing the relevant SOE’s area of expertise.  Ukrainian law specifies that ministries are not permitted to interfere with the daily economic activities of an SOE, but numerous anecdotal reports indicate that ministries and vested interests ignore this restriction.  The Cabinet of Ministers has the power to decide on the creation, reorganization, and liquidation of SOEs, and to adopt and enforce SOE charters.  It can delegate this authority to the ministry charged with supervising the SOE.  The Cabinet of Ministers may also delegate to ministries the permission to create joint ventures with state property and prepare proposals to divide state property between the national and municipal levels.

Most SOEs rely on government subsidies to function and cannot directly compete with private firms.  Several SOEs capable of making a profit have already been privatized, and the result has been that the most inefficient firms have remained in government hands.  The Ukrainian government continues to heavily subsidize state-owned enterprises (especially in the coal mining, rail transportation, gas, and communal heating sectors) and has sometimes paid outstanding debts of some SOEs with sovereign loan guarantees.  SOE access to extensions of tax payment deadlines remains nontransparent, especially where SOEs are directed to sell their products at below-market prices.

Privatization Program

On March 30, 2021, parliament passed in its final reading the bill cancelling the laws blocking the privatization of large SOEs.  Auctions for 22 large SOEs slated for privatization should now start in the second half of 2021.  The government has also approved a list of smaller-scale SOEs to put up for sale in 2020.  Ukraine netted $75 million from 419 small-scale privatization auctions in 2020, including $41 million generated by the sale of Kyiv’s Dnipro Hotel.

Starting in 2019, Ukraine’s government has vowed to implement a series of major privatization reforms, including a dramatic reduction of the number of SOEs deemed strategic and exempt from sale.  In October 2019, the government nullified legislation from 1999 banning the privatization of a lengthy list of state assets. On March 30, 2021, parliament passed in its first reading a draft law establishing a list of 659 SOEs that are exempt from privatization.  Included in the list are energy and defense companies, natural monopolies like the state railway and postal service, forestry facilities, and entities with social value in the culture, sports, science, and education sectors.  In February 2020, as part of an effort to reform state-owned companies, the government started the legislative process to permit partial privatization of some previously excluded SOEs, including Naftogaz, MainGasPipelines of Ukraine, UkrTransGaz, UkrNafta, Ukrgasvydobuvannya, Ukrzaliznytsia, and UkrPoshta.  The United States has provided significant technical assistance to Ukraine to support an open and transparent privatization process.

The State Property Fund oversees privatizations in Ukraine.  The rules on privatization apply to foreign and domestic investors and, theoretically, establish a level playing field.  However, observers have pointed to numerous instances in past privatizations where vested interests have influenced the process to fit a pre-selected bidder.  Despite these concerns, the government has stated that there would be no revisions of past privatizations, but there are ongoing court cases wherein private companies are challenging earlier privatizations.

There is limited but growing awareness in Ukraine of internationally accepted standards for responsible business conduct, including corporate social responsibility.  Primary drivers for the introduction of these standards have been Ukraine’s vibrant civil society, international companies and investors, and efforts by business associations such as the American Chamber of Commerce and the European Business Association.  The government of Ukraine has put in place corporate governance standards to protect shareholders; however, these are voluntary.

In 2017, Ukraine became the 47th country to adhere to the OECD Declaration and Decisions on International Investment and Multinational Enterprises, which provides recommendations on responsible business conduct.  Ukraine established its National Contact Point to promote these guidelines for Multinational Enterprises under the Ministry of Economic Development and Trade (http://ncp.gov.ua/?lang=en).  On May 31, 2018, Ukraine adopted and agreed to support and monitor implementation of the OECD Due Diligence Guidance for Responsible Business Conduct.  There are also independent NGOs, such Center for the Development of Corporate Social Responsibility, as well as investment funds, worker organization and unions, and business associations promoting or monitoring responsible business conduct.  There are no reported restrictions on their activities aimed at promoting responsible business conduct.

Ukraine has been a member of the Extractive Industries Transparency Initiative (EITI) since 2013.  Participation by companies in Ukraine, however, remains voluntary.  Ukraine has not joined the Voluntary Principles on Security and Human Rights.

Additional Resources

Department of State

Country Reports on Human Rights Practices

Trafficking in Persons Report

Guidance on Implementing the “UN Guiding Principles” for Transactions Linked to Foreign Government End-Users for Products or Services with Surveillance Capabilities and;

North Korea Sanctions & Enforcement Actions Advisory

Department of Labor

Findings on the Worst forms of Child Labor Report

List of Goods Produced by Child Labor or Forced Labor

Sweat & Toil: Child Labor, Forced Labor, and Human Trafficking Around the World  and;

Comply Chain

Ukraine has numerous laws to combat corruption by public officials, and following the Revolution of Dignity in 2014, the government launched new anti-corruption institutions, including the National Anti-Corruption Bureau (NABU), to investigate corruption by public officials, the Special Anti-Corruption Prosecutor’s Office (SAPO), the National Agency for Prevention of Corruption (NAPC), and the High Anti-Corruption Court (HACC).

In fall 2020, Ukraine’s Constitutional Court struck down certain provisions of the Law of Ukraine about NABU and the Law on Corruption Prevention (in particular, provisions on e-declarations and on the powers of the National Agency on Corruption Prevention (NACP) related to their verification) as unconstitutional.  The Constitutional Court is also considering cases challenging the constitutionality of the HACC and the Deposit Guarantee Fund.  These rulings have been criticized by the government as corruptly influenced; they have also created new obstacles to new disbursements under the IMF, World Bank and EU assistance programs.  The government and parliament are in discussions with international partners on draft legislation that would restore those aspects Ukraine’s institutional anti-corruption infrastructure struck down by the Court.

The government  began drafting legislation to criminalize the falsification of customs records, and is preparing to launch an agency-wide reform initiative to detect and address internal corruption. Beginning in 2017, the State Border Guard Service (SBGS) reformed ten of its border crossing points, including five along the Polish border and five international airports, using a personnel and process reform model that has been expanded to SBGS Command Staff promotions and is being considered within the State Customs Service.  The National Police of Ukraine is also redesigning its approach to addressing corruption nationwide and within its ranks by standing up a new General Inspectorate Unit.

Foreign businesses, including U.S. companies, continue to identify corruption in many sectors as a significant obstacle to FDI.  Reform of public procurement has been a relative success story, with the introduction of the online ProZorro system providing transparency for most procurement.  Parliament is currently reviewing draft legislation to reform the defense procurement process, pending amendments made to the Law on State Secrets, which will declassify the process.  The energy sector has seen some improvements, including reforms at the large oil and gas SOE Naftogaz, but participants in the sector continue to raise concerns.  Government interference in the corporate governance of Naftogaz is a persistent concern and has now spread to Ukrenergo, Energoatom, and Ukrhydroenergo, among others.  There are allegations of corruption at specific SOEs in a variety of sectors, as well as allegations that external corrupt forces interfere regularly in SOE operations.

There are several NGOs actively involved in investigating corruption and advocating for anti-corruption measures.

Resources to Report Corruption

NABU, established in October 2014, is the appropriate resource for the reporting of high-level corruption.

Government of Ukraine contact for combating corruption:

National Anti-Corruption Bureau
3, Vasyl Surikov St, Kyiv, Ukraine 03035
Hot-line:  0-800-503-200
info@nabu.gov.ua

Corruption Reporting eForm:  http://nabu.gov.ua/povidomlennya-pro-kryminalne-pravoporushennya

Contact at Transparency International:
Mr. Andriy Borovyk
Executive Director
Transparency International Ukraine
37-41 Sichovykh Striltsiv Street, 5^th floor,
Kyiv, Ukraine 04053+38(044) 360-52-42
borovyk@ti-ukraine.org
office@ti-ukraine.org

Russia’s military aggression entered its eighth year in the eastern oblasts of Donetsk and Luhansk, as did its illegal occupation of Crimea.  Residents of Russia-controlled areas are subject to political violence at the hands of Russia’s proxy authorities.  Civilian casualties in eastern Ukraine from landmines, shelling, and small arms fire have decreased steadily since 2017, but continued to occur.  Infrastructure for water, gas, and electricity remained at risk of conflict-related damage, and fighting routinely disrupted maintenance of aging facilities, thereby threatening essential service delivery to populated areas.  Russia-led forces control approximately 400 km of Ukraine’s international border with Russia through which Russia supplies and equips its proxy forces, which receive logistical and command support from Russian Army soldiers.  Russia continued its illegal occupation of the Autonomous Republic of Crimea and the City of Sevastopol, and reports of political violence, repression, and religious persecution continue.

Since the 2019 Ukrainian presidential and parliamentary elections, the new administration’s efforts to take measurable steps toward peace, anti-corruption initiatives, and integration into Western institutions have faced push back from vested interests However, the government has demonstrated its commitment to reform in the face of adverse court decisions overturning key reform legislation.  The president has rallied his party’s majority in parliament to adopt laws to address many of these court decisions, but more needs to be done.  Protests in support of judicial reform drew up to 10,000 people in late February 2021.

Ukraine has a well-educated and skilled labor force of about 20 million people with a nearly 100-percent literacy rate.  Ukraine has a reported population of 41.9 million people as of January 2021.  Ukraine’s official unemployment rate was 9.3 percent in Q3 2020, although unemployment in some regions, particularly in rural areas, remained significantly higher.  According to the government’s statistics, there were about 1.64 million unemployed workers in Q3 2020.  However, only 25 percent were officially registered with the State Employment Service.  Wages in Ukraine remain low by Western standards.  In January 2021, the minimum monthly wage was raised to UAH 6000 ($215) from UAH 4,723 ($193).  The real average monthly wage increased by 10.2 percent year-on-year to UAH 14,179 ($506).  The highest wages are traditionally in the financial and aviation sectors; the lowest wages are paid to food service and public health workers.

Following unrest in Belarus, the Zelenskyy administration issue a decree obligating the Cabinet of Ministers to streamline the immigration and registration process for highly qualified IT specialists and entrepreneurs fleeing Belarus. The GoU estimated that, by March 2021, nearly 40 companies and 2,000 new IT specialists from Belarus had relocated to Ukraine.

Ukrainian law allows workers to organize, and unions are prevalent in most industries.  The law provides most workers with the right to form and join independent unions and to bargain collectively without previous authorization.  By law, trade unions are equal, and a union’s establishment does not require government permission.  Within classic sectors of the economy, sector-specific collective bargaining agreements involve representative employers’ associations (e.g., chemical industry employers), sector trade unions, and some participation of the government through the Ministry of Social Policy.  Such agreements can also take place at the regional level.  The independence of unions from government or employer control, however, has been disputed by certain labor groups.  Independent trade unions alleged that the country’s largest trade union confederation, the Federation of Trade Unions of Ukraine (FPU), enjoyed a cozy relationship with employers and members of some political parties.  Unions not affiliated with the FPU were denied a share of disputed trade union assets inherited by the FPU from Soviet-era unions.

The law provides for the right to strike “to defend one’s economic and social interests,” as long as strikes do not jeopardize national security, public health, or the rights and liberties of others; the government generally respects this right.  The law does not extend the right to strike to personnel of the Prosecutor General’s Office, the judiciary, armed forces, security services, law enforcement agencies, the transportation sector, or public servants.  Workers who strike in prohibited sectors may receive prison terms of up to three years.

The State Labor Service is responsible for enforcing labor laws, although the number of planned and unplanned inspections is low.  Experts assess the number to be inadequate relative to the size of the Ukrainian economy.  The National Mediation and Reconciliation Service (NMRS) is responsible for mediating labor disputes.  According to official Ukrainian statistics, during 2020 the NMRS resolved 377 labor disputes that involved 1.4 million employees and 6,778 economic entities.

* Source for Host Country Data: State Statistics Service of Ukraine

Source: State Statistics Service of Ukraine

Aaron Easlick
Economic Officer
U.S. Embassy Kyiv
Aviakonstructor Igor Sikorsky St, 4, Kyiv, Ukraine, 04112
+380 44 521 5000
Easlickac@state.gov