Policies Towards Foreign Direct Investment

France welcomes foreign investment. In the current economic climate, the French government sees foreign investment as a means to create additional jobs and stimulate growth. Investment regulations are simple, and a range of financial incentives are available to foreign investors. According to surveys of U.S. investors, U.S. companies find France’s skilled and productive labor force, good infrastructure, technology, and central location in Europe attractive. France’s membership in the European Union (EU) and the Eurozone facilitates the efficient movement of people, services, capital, and goods. However, notwithstanding French efforts at economic and tax reform, market liberalization, and attracting foreign investment, perceived disincentives to investing in France include the relatively high tax environment. Labor market fluidity is improving due to labor market reforms but is still rigid compared to some OECD economies.

Limits on Foreign Control and Right to Private Ownership and Establishment

France is among the least restrictive countries for foreign investment. With a few exceptions in certain specified sectors, there are no statutory limits on foreign ownership of companies. Foreign entities have the right to establish and own business enterprises and engage in all forms of remunerative activity.

France maintains a national security review mechanism to screen high-risk investments. French law stipulates that control by acquisition of a domiciled company or subsidiary operating in certain sectors deemed crucial to France’s national interests relating to public order, public security and national defense are subject to prior notification, review, and approval by the Economy and Finance Minister. Other sectors requiring approval include energy infrastructure; transportation networks; public water supplies; electronic communication networks; public health protection; and installations vital to national security. In 2018, four additional categories – semiconductors, data storage, artificial intelligence and robotics – were added to the list requiring a national security review. For all listed sectors, France can block foreign takeovers of French companies according to the provisions of the 2014 Montebourg Decree.

On December 31, 2019 the government issued a decree to lower the threshold for vetting of foreign investment from outside Europe from 33 to 25 percent and then lowered it again to 10 percent on July 22, 2020, a temporary provision to prevent predatory investment during the COVID-19 crisis. This lower threshold is set to expire at the end of 2021. The decree also enhanced government-imposed conditions and penalties in cases of non-compliance and introduced a mechanism to coordinate the national security review of foreign direct investments with the European Union (EU Regulation 2019/452). The new rules entered into force on April 1, 2020. The list of strategic sectors was also expanded to include the following activities listed in the EU Regulation 2019/452: agricultural products, when such products contribute to national food supply security; the editing, printing, or distribution of press publications related to politics or general matters; and R&D activities relating to quantum technologies and energy storage technologies. Separately, France expanded the scope of sensitive sectors on April 30, 2020 to include biotechnology companies.

Procedurally, the Minister of Economy, Finance, and Recovery has 30 business days following the receipt of a request for authorization to either: 1) declare that the investor is not required to obtain such authorization; 2) grant its authorization without conditions; or 3) declare that an additional review is required to determine whether a conditional authorization is sufficient to protect national interests. If an additional review is required, the Minister has an additional 45 business days to either clear the transaction (possibly subject to conditions) or prohibit it. The Minister is further allowed to deny clearance based on the investor’s ties with a foreign government or public authority. The absence of a decision within the applicable timeframe is a de facto rejection of the authorization.

The government has also expanded the breadth of information required in the approval request. For example, a foreign investor must now disclose any financial relationship with or significant financial support from a State or public entity; a list of French and foreign competitors of the investor and of the target; or a signed statement that the investor has not, over the past five years, been subject to any sanctions for non-compliance with French FDI regulations.

In 2020, the government blocked at least one transaction—the attempted acquisition of a French firm by a U.S. company in the defense sector.

Other Investment Policy Reviews

France has not recently been the subject of international organizations’ investment policy reviews. The OECD Economic Survey for France (April 2019) can be found here:  http://www.oecd.org/economy/france-economic-forecast-summary.htm .

Business Facilitation

Business France is a government agency established with the purpose of promoting new foreign investment, expansion, technology partnerships, and financial investment. Business France provides services to help investors understand regulatory, tax, and employment policies as well as state and local investment incentives and government support programs. Business France also helps companies find project financing and equity capital. Business France recently unveiled a website in English to help prospective businesses that are considering investments in the French market ( https://www.businessfrance.fr/en/invest-in-France ).

In addition, France’s public investment bank, Bpifrance, assists foreign businesses to find local investors when setting up a subsidiary in France. It also supports foreign startups in France through the government’s French Tech Ticket program, which provides them with funding, a resident’s permit, and incubation facilities. Both business facilitation mechanisms provide for equitable treatment of women and minorities.

President Macron made innovation one of his priorities with a €10 billion ($11.8 billion) fund that is being financed through privatizations of State-owned enterprises. France’s priority sectors for investment include:  aeronautics, agro-foods, digital, nuclear, rail, auto, chemicals and materials, forestry, eco-industries, shipbuilding, health, luxury, and extractive industries. In the near-term, the French government intends to focus on driverless vehicles, batteries, the high-speed train of the future, nano-electronics, renewable energy, and health industries.

Business France and Bpifrance are particularly interested in attracting foreign investment in the tech sector. The French government has developed the “French Tech” initiative to promote France as a location for start-ups and high-growth digital companies. In addition to 17 French cities, French Tech offices have been established in 100 cities around the world, including New York, San Francisco, Los Angeles, Shanghai, Hong Kong, Vietnam, Moscow, and Berlin. French Tech has special programs to provide support to startups at various stages of their development. The latest effort has been the creation of the French Tech 120 Program, which provides financial and administrative support to some 123 most promising tech companies. In 2019, €5 billion ($5.9 billion) in venture funding was raised by French startups, an increase of nearly threefold since 2015. In September 2019, President Emmanuel Macron convinced major asset managers such as AXA and Natixis to invest €5 billion ($5.9 billion) into French tech companies over the next three years. He also announced the creation of a listing of France’s top 40 startups “Next 40” with the highest potential to grow into unicorns.

On June 5, 2020, the French government introduced a new €1.2 billion ($1.4 billion) plan to support French startups, especially in the health, quantum, artificial intelligence, and cybersecurity sectors. The plan includes the creation of a €500 million ($590 million) investment fund to help startups overcome the COVID-19 crisis and continue to innovate. It also comprises a “French Tech Sovereignty Fund” with an initial commitment of €150 million ($177 million) launched on December 11, 2020 by Bpifrance, France’s public investment bank.

The website Guichet Enterprises ( https://www.guichet-entreprises.fr/fr/ ) is designed to be a one-stop website for registering a business. The site, managed by the National Institute of Industrial Property (INPI), is available in both French and English although some fact sheets on regulated industries are only available in French.

Outward Investment

French firms invest more in the United States than in any other country and support approximately 780,000 American jobs. Total French investment in the United States reached $310.7 billion in 2019. France was our tenth largest trading partner with approximately $99.7 billion in bilateral trade in 2020. The business promotion agency Business France also assists French firms with outward investment, which it does not restrict.

Transparency of the Regulatory System

The French government has made considerable progress in the last decade on the transparency and accessibility of its regulatory system. The government generally engages in industry and public consultation before drafting legislation or rulemaking through a regular but variable process directed by the relevant ministry. However, the text of draft legislation is not always publicly available before parliamentary approval. U.S. firms may also find it useful to become members of industry associations, which can play an influential role in developing government policies. Even “observer” status can offer insight into new investment opportunities and greater access to government-sponsored projects.

To increase transparency in the legislative process, all ministries are required to attach an impact assessment to their draft bills. The Prime Minister’s Secretariat General (SGG for Secretariat General du Gouvernement) is responsible for ensuring that impact studies are undertaken in the early stages of the drafting process. The State Council (Conseil d’Etat), which must be consulted on all draft laws and regulations, may reject a draft bill if the impact assessment is inadequate.

After experimenting with new online consultations, the Macron Administration is regularly using this means to achieve consensus on its major reform bills. These consultations are often open to professionals as well as citizens at large. Another innovation is to impose regular impact assessments after a bill has been implemented to ensure its maximum efficiency, revising, as necessary, provisions that do not work in favor of those that do. Finally, the Macron Administration aims to make all regulations and laws available online by 2022.

Over past decades, reforms have extended the investigative and decision-making powers of France’s Competition Authority. On April 11, 2019, France implemented the European Competition Network (ECN) Directive, which widens the powers of all European national competition authorities to impose larger fines and temporary measures. The Authority publishes its methodology for calculating fines imposed on companies charged with abuse of a dominant position. It issues specific guidance on competition law compliance, and government ministers, companies, consumer organizations, and trade associations now have the right to petition the authority to investigate anti-competitive practices.

While the Authority alone examines the impact of mergers on competition, the Minister of the Economy retains the power to request a new investigation or reverse a merger transaction decision for reasons of industrial development, competitiveness, or saving jobs.  The Competition Authority continues to simplify takeover and merger notifications with online procedures via a dedicated platform in 2020. Also in 2020, the Competition Authority issued new merger control guidelines that replaced the prior ones issued in 2013. The new guidelines clarify the Competition Authority’s procedural rules and increase transparency into the substantive merger review process. In particular, the new rules emphasize the Competition Authority’s ability to request documents from merging parties.

France’s budget documents are comprehensive and cover all expenditures of the central government. An annex to the budget also provides estimates of cost sharing contributions, though these are not included in the budget estimates. Last September, the French government published its first “Green Budget,” as an annex to the 2021 Finance Bill. This event attests to France’s strong commitment, notably under the OECD-led “Paris Collaborative on Green Budgeting” (which France joined in December 2017), to integrate “green” tools into the budget process. In its spring report each year, the National Economic Commission outlines the deficits for the two previous years, the current year, and the year ahead, including consolidated figures on taxes, debt, and expenditures. Since 1999, the budget accounts have also included contingent liabilities from government guarantees and pension liabilities.  The government publishes its debt data promptly on the French Treasury’s website and in other documents. Data on nonnegotiable debt is available 15 days after the end of the month, and data on negotiable debt is available 35 days after the end of the month.  Annual data on debt guaranteed by the state is published in summary in the CGAF Report and in detail in the Compte de la dette publique. More information can be found at:  https://www.imf.org/external/np/rosc/fra/fiscal.htm 

International Regulatory Considerations

France is a founding member of the European Union, created in 1957. As such, France incorporates EU laws and regulatory norms into its domestic law. France has been a World Trade Organization (WTO) member since 1995 and a member of GATT since 1948. While developing new draft regulations, the French government submits a copy to the WTO for review to ensure the prospective legislation is consistent with its WTO obligations. France ratified the Trade Facilitation Agreement in October 2015 and has implemented all of its TFA commitments.

Legal System and Judicial Independence

French law is codified into what is sometimes referred to as the Napoleonic Code, but is officially the Code Civil des Francais, or French Civil Code. Private law governs interactions between individuals (e.g., civil, commercial, and employment law) and public law governs the relationship between the government and the people (e.g., criminal, administrative, and constitutional law).

France has an administrative court system to challenge a decision by local governments and the national government; the State Council (Conseil d’Etat) is the appellate court. France enforces foreign legal decisions such as judgments, rulings, and arbitral awards through the procedure of exequatur introduced before the Tribunal de Grande Instance (TGI), which is the court of original jurisdiction in the French legal system.

France’s Commercial Tribunal (Tribunal de Commerce or TDC) specializes in commercial litigation.  Magistrates of the commercial tribunals are lay judges, who are well known in the business community and have experience in the sectors they represent. Decisions by the commercial courts can be appealed before the Court of Appeals. France’s judicial system is procedurally competent, fair, and reliable and is independent of the government.

The judiciary – although its members are state employees – is independent of the executive branch. The judicial process in France is known to be competent, fair, thorough, and time-consuming. There is a right of appeal. The Appellate Court (cour d’appel) re-examines judgments rendered in civil, commercial, employment or criminal law cases. It re-examines the legal basis of judgments, checking for errors in due process and reexamines case facts. It may either confirm or set aside the judgment of the lower court, in whole or in part. Decisions of the Appellate Court may be appealed to the Highest Court in France (cour de cassation).

The French Financial Prosecution Office (Parquet National Financier, or PNF), specialized in serious economic and financial crimes, was set up by a December 6, 2013 law and began its activities in 2014.

Laws and Regulations on Foreign Direct Investment

Foreign and domestic private entities have the right to establish and own business enterprises and engage in all sorts of remunerative activities. U.S. investment in France is subject to the provisions of the Convention of Establishment between the United States of America and France, which was signed in 1959 and remains in force. The rights it provides U.S. nationals and companies include:  rights equivalent to those of French nationals in all commercial activities (excluding communications, air transportation, water transportation, banking, the exploitation of natural resources, the production of electricity, and professions of a scientific, literary, artistic, and educational nature, as well as certain regulated professions like doctors and lawyers). Treatment equivalent to that of French or third-country nationals is provided with respect to transfer of funds between France and the United States. Property is protected from expropriation except for public purposes; in that case it is accompanied by payment that is just, realizable, and prompt.

Potential investors can find relevant investment information and links to laws and investment regulations at  http://www.businessfrance.fr/ .

Competition and Antitrust Laws

Major reforms have extended the investigative and decision-making powers of France’s Competition Authority. France implemented the European Competition Network or ECN Directive on April 11, 2019, allowing the French Competition Authority to impose heftier fines (above €3 million / $3.5 million) and temporary measures to prevent an infringement that may cause harm. The Authority issues decisions and opinions mostly on antitrust issues, but its influence on competition issues is growing. For example, following a complaint in November 2019 by several French, European, and international associations of press publishers against Google over the use of their content online without compensation, the Authority ordered the U.S. company to start negotiating in good faith with news publishers over the use of their content online. In another matter, on December 20, 2019, Google was fined €150 million ($177 million) for abuse of dominant position. Following an in-depth review of the online ad sector, the Competition Authority found Google Ads to be “opaque and difficult to understand” and applied in “an unfair and random manner.”

The Competition Authority launches regular in-depth investigations into various sectors of the economy, which may lead to formal investigations and fines. The Authority publishes its methodology for calculating fines imposed on companies charged with abuse of a dominant position. It issues specific guidance on competition law compliance. Government ministers, companies, consumer organizations and trade associations have the right to petition the authority to investigate anti-competitive practices. While the Authority alone examines the impact of mergers on competition, the Minister of the Economy retains the power to request a new investigation or reverse a merger transaction decision for reasons of industrial development, competitiveness, or saving jobs.

A new law on Economic Growth, Activity and Equal Opportunities (known as the “Macron Law”), adopted in August 2016, vested the Competition Authority with the power to review mergers and alliances between retailers ex-ante (beforehand). The law provides that all contracts binding a retail business to a distribution network shall expire at the same time. This enables the retailer to switch to another distribution network more easily. Furthermore, distributors are prohibited from restricting a retailer’s commercial activity via post-contract terms. The civil fine incurred for restrictive practices can now amount to up to five percent of the business’s revenue earned in France.

Expropriation and Compensation

In accordance with international law, the national or local governments cannot legally expropriate property to build public infrastructure without fair market compensation. There have been no expropriations of note during the reporting period.

Dispute Settlement

ICSID Convention and New York Convention

France is a member of the World Bank-based International Centre for Settlement of Investment Disputes (ICSID) Convention and a signatory to the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention) which means local courts are obligated to enforce international arbitral awards under this system. The International Chamber of Commerce’s International Court of Arbitration (ICA) has been based in Paris since 1923.

France was one of the first countries to enact a modern arbitration law in 1980-1981. In 2011, the French Ministry of Justice issued Decree 2011-48, which introduced further international best practices into French arbitration procedural law. As a result, parties are free to agree orally to settle their disputes through arbitration, subject to standards of due process and a newly enacted principle of procedural efficiency and fairness.

Investor-State Dispute Settlement

The President of the High Civil Court of First Instance (Tribunal de Grande Instance) of Paris has the authority to issue orders related to ad-hoc international arbitration. Paris is the seat of the International Chamber of Commerce’s International Court of Arbitration, composed of representatives from 90 countries, that handles investment as well as commercial disputes.

France does not have a bilateral investment treaty with the United States.   The European Commission directly negotiates on behalf of the EU on foreign direct investment since it is part of the EU Common Commercial Policy. In 2015, the EU agreed to pursue an investment court approach to investor-State dispute settlement. While this model is included in the Comprehensive Economic and Trade Agreement (CETA) with Canada and the EU-Vietnam FTA, no actual court has yet been established in any form or context; no disputes have been brought under these post-2015 treaties.

International Commercial Arbitration and Foreign Courts

French law provides conditions for the recognition and the enforcement of foreign arbitral awards in relation to the New York Convention. The provisions of French law are contained in the Code of Civil Procedure and the Code of Civil Enforcement Procedures. The recognition of judgments of foreign courts by French courts is possible, but judgements must be accompanied by the issuance of an exequatur – a legal document issued by a sovereign authority that permits the exercise or enforcement of a foreign judgement.  The French Civil Code additionally provides for several mechanisms of alternative dispute resolution (ADR) including out-of-court arbitration and conciliation where a judicial conciliator facilitates resolution of a dispute.

Bankruptcy Regulations

France has extensive and detailed bankruptcy laws and regulations. Any creditor, regardless of the amount owed, may file suit in bankruptcy court against a debtor. Foreign creditors, equity shareholders and foreign contract holders have the same rights as their French counterparts. Monetary judgments by French courts on firms established in France are generally made in euros.  Not bankruptcy itself, but bankruptcy fraud – the misstatement by a debtor of his financial position in the context of a bankruptcy – is criminalized. Under France’s bankruptcy code managers and other entities responsible for the bankruptcy of a French company are prevented from escaping liability by shielding their assets (Law 2012-346).  France has adopted a law that enables debtors to implement a restructuring plan with financial creditors only, without affecting trade creditors.  France’s Commercial Code incorporates European Directive 2014/59/EU establishing a framework for the recovery and resolution of claims on insolvent credit institutions and investment firms.  In the World Bank’s 2020 Doing Business Index, France ranked 32nd of 190 countries on ease of resolving insolvency.

The Bank of France, the country’s only credit monitor, maintains files on persons having written unfunded checks, having declared bankruptcy, or having participated in fraudulent activities. Commercial credit reporting agencies do not exist in France.

Capital Markets and Portfolio Investment

There are no administrative restrictions on portfolio investment in France, and there is an effective regulatory system in place to facilitate portfolio investment. France’s open financial market allows foreign firms easy access to a variety of financial products, both in France and internationally. France continues to modernize its marketplace; as markets expand, foreign and domestic portfolio investment has become increasingly important. As in most EU countries, France’s listed companies are required to meet international accounting standards. Some aspects of French legal, regulatory, and accounting regimes are less transparent than U.S. systems, but they are consistent with international norms. Foreign banks are allowed to establish branches and operations in France and are subject to international prudential measures. Under IMF Article VIII, France may not impose restrictions on the making of payments and transfers for current international transactions without the (prior) approval of the Fund.

Foreign investors have access to all classic financing instruments, including short-, medium-, and long-term loans, short- and medium-term credit facilities, and secured and non-secured overdrafts offered by commercial banks. These assist in public offerings of shares and corporate debt, as well as mergers, acquisitions and takeovers, and offer hedging services against interest rate and currency fluctuations. Foreign companies have access to all banking services. Most loans are provided at market rates, although subsidies are available for home mortgages and small business financing.

Euronext Paris (also known as Paris Bourse) is part of a regulated cross-border stock exchange located in six European countries. Euronext Growth is an alternative exchange for medium-sized companies to list on a less regulated market (based on the legal definition of the European investment services directive), with more consumer protection than the Marché Libre still used by a couple hundred small businesses for their first stock listing. A company seeking a listing on Euronext Growth must have a sponsor with status granted by Euronext and prepare a French language prospectus for a permit from the Financial Markets Authority (Autorité des Marchés Financiers or AMF), the French equivalent of the U.S. Securities and Exchange Commission. Small and medium-size enterprises (SMEs) may also list on Enternext, a subsidiary of the Euronext Group created in 2013. The bourse in Paris also offers Euronext Access, an unregulated exchange for Start-ups.

Money and Banking System

France’s banking system recovered gradually from the 2008-2009 global financial crises and passed the 2018 stress tests conducted by the European Banking Authority. In the context of the COVID-19 outbreak, the European Banking Authority (EBA) postponed the EU-wide stress test to 2021 as a measure to temporarily alleviate the acute operational burden for banks. The EBA launched the EU-wide stress test exercise in January 2021 and its results will be published at the end of July 2021.

Four French banks were ranked among the world’s 20 largest as of January 2021 (BNP Paribas SA; Crédit Agricole Group, Société Générale SA, Groupe BPCE). The assets of France’s top five banks totaled $9.5 trillion in 2020. Acting on a proposal from France’s central bank, Banque de France, in March 2020, the High Council for Financial Stability (HCSF) instructed the country’s largest banks to decrease the “countercyclical capital buffer” from 0.25 percent to zero percent of their bank’s risk-weighted assets, thereby increasing liquidity to help mitigate the impact of the pandemic-induced recession. As of March 2021, banks maintained the zero percent countercyclical capital buffer with no intention to increase it before the end of 2022, at the earliest. The HCSF considered the risks to financial stability remain high, due to the impact of the crisis on the accounts of financial and non-financial actors. Firms increased their debt significantly in 2020, even if this was accompanied by an almost equivalent increase in their cash position. HCSF data highlighted the heterogeneity of the impact, as some companies were significantly weakened by the crisis, while others remain unaffected.   Banque de France is a member of the Eurosystem, which groups together the European Central Bank (ECB) and the national central banks of all countries that have adopted the euro. Banque de France is a public entity governed by the French Monetary and Financial Code. The conditions whereby it conducts its missions on national territory are set out in its Public Service Contract. The three main missions are monetary strategy; financial stability, together with the High Council of financial stability (Haut Conseil de la Stabilité Financière) which implements macroprudential policy; and the provision of economic services to the community. In addition, it participates in the preparation and implementation of decisions taken centrally by the ECB Governing Council.

Banque de France is a member of the Eurosystem, which groups together the European Central Bank (ECB) and the national central banks of all countries that have adopted the euro. Banque de France is a public entity governed by the French Monetary and Financial Code. The conditions whereby it conducts its missions on national territory are set out in its Public Service Contract. The three main missions are monetary strategy; financial stability, together with the High Council of financial stability (Haut Conseil de la Stabilité Financière) which implements macroprudential policy; and the provision of economic services to the community. In addition, it participates in the preparation and implementation of decisions taken centrally by the ECB Governing Council.

Foreign banks can operate in France either as subsidiaries or branches but need to obtain a license. Credit institutions’ licenses are generally issued by France’s Prudential Authority (Autorité de Contrôle Prudentiel et de Résolution or ACPR) which reviews whether certain conditions are met (e.g., minimum capital requirement, sound and prudent management of the bank, compliance with balance sheet requirements, etc.). Both EU law and French legislation apply to foreign banks. Foreign banks or branches are additionally subject to prudential measures and must provide periodic reports to the ACPR regarding operations in France, including detailed reports on their financial situation. At the EU level, the ‘passporting right’ allows a foreign bank settled in any EU country to provide their services across the EU, including France. There are about 941 credit institutions authorized to carry on banking activities in France; the list of foreign banks is available on this website:  https://www.regafi.fr/spip.php?page=results&type=advanced&id_secteur=3&lang=en&denomination=&siren=&cib=&bic=&nom=&siren_agent=&num=&cat=01-TBR07&retrait=0 

Foreign Exchange and Remittances

Foreign Exchange

For purposes of controlling exchange, the French government considers foreigners as residents from the time they arrive in France. French and foreign residents are subject to the same rules; they are entitled to open an account in a foreign currency with a bank established in France, and to establish accounts abroad. They must report all foreign accounts on their annual income tax returns, and money earned in France may be freely converted into dollars or any other currency and transferred abroad.

France is one of nineteen countries (known collectively as the Eurozone) that use the euro currency. Exchange rate policy for the euro is handled by the European Central Bank, located in Frankfurt, Germany. The average euro to USD exchange rate from March 1, 2020 to March 1, 2021 was 1 USD to 0.86 euro.

France is a founding member of the OECD-based Financial Action Task Force (FATF, a 39-member intergovernmental body). As reported in the Department of State’s France Report on Terrorism, the French government has a comprehensive anti-money laundering/ counterterrorist financing (AML/CTF) regime and is an active partner in international efforts to control money laundering and terrorist financing.  Tracfin, the French government’s financial intelligence unit, is active within international organizations, and has signed new bilateral agreements with foreign countries.

Remittance Policies

France’s investment remittance policies are stable and transparent. All inward and outward payments must be made through approved banking intermediaries by bank transfers. There is no restriction on the repatriation of capital. Similarly, there are no restrictions on transfers of profits, interest, royalties, or service fees. Foreign-controlled French businesses are required to have a resident French bank account and are subject to the same regulations as other French legal entities. The use of foreign bank accounts by residents is permitted.

Sovereign Wealth Funds

France has no sovereign wealth fund per se (none that use that nomenclature) but does operate funds with similar intent. The Public Investment Bank (Bpifrance) supports small and medium enterprises (SMEs), larger enterprises (Entreprises de Taille Intermedaire), and innovating businesses with over €36 billion ($42.5 billion) assets under management. The government strategy is defined at the national level and aims to fit with local strategies.  Bpifrance may hold direct stakes in companies, hold indirect stakes via generalist or sectorial funds, venture capital, development or transfer capital.  In November 2020, Bpifrance became a member of the One Planet Sovereign Wealth Funds (OPSWF) international initiative, which federates international sovereign wealth funds mobilized to contribute to the transition towards a more sustainable economy. Bpifrance stepped up its support for the ecological and energy transition, aiming to reach nearly €6 billion ($7.1 billion) per year by 2023.

The 11 listed entities in which the French State maintains stakes at the federal level are Aeroports de Paris (50.63 percent); Airbus Group (10.95 percent); Air France-KLM (14.29 percent, although expected to increase temporarily to nearly 30 percent as part of a March 2021 bailout package); EDF (83.58 percent), ENGIE (23.64 percent), Eramet (25.57 percent), La Française des Jeux (FDJ) (21.91 percent), Orange (a direct 13.39 percent stake and a 9.60 percent stake through Bpifrance), Renault (15.01 percent), Safran (11.23 percent), and Thales 25.68 percent). Unlisted companies owned by the State include SNCF (rail), RATP (public transport), CDC (Caisse des depots et consignations) and La Banque Postale (bank). In all, the government has majority and minority stakes in 88 firms, in a variety of sectors.

Private enterprises have the same access to financing as SOEs, including from state-owned banks or other state-owned investment vehicles. SOEs are subject to the same tax burden and tax rebate policies as their private sector competitors. Conversely, SOEs may get subsidies and other financial resources from the government, just as private competitors.

France, as a member of the European Union, is party to the Agreement on Government Procurement (GPA) within the framework of the World Trade Organization. Companies owned or controlled by the state behave largely like other companies in France and are subject to the same laws and tax code. The Boards of SOEs operate according to accepted French corporate governance principles as set out in the (private sector) AFEP-MEDEF Code of Corporate Governance. SOEs are required by law to publish an annual report, and the French Court of Audit conducts financial audits on all entities in which the state holds a majority interest. The French government appoints representatives to the Boards of Directors of all companies in which it holds significant numbers of shares, and manages its portfolio through a special unit attached to the Ministry for the Economy and Finance Ministry, the shareholding agency APE (Agence de Participations de l’Etat). The State as a shareholder must set an example in terms of upholding high standards with respect for the environment, gender equality and social responsibility. The report also highlighted that the State must protect its strategic assets and remain a shareholder in areas where the general interest is at stake.

Privatization Program

The government will temporarily increase its stake in Air France-KLM, which was severely impacted by the COVID-19 crisis. Although terms are still being negotiated as of March 2021, it is likely France’s stake in the entity will increase from 14.3 percent to nearly 30 percent.

The government was due to privatize many large companies in 2019, including ADP and ENGIE in order to create a €10 billion ($11.8 billion) fund for innovation and research. However, the program was delayed because of political opposition to the privatization of airport manager ADP, regarded as a strategic asset to be protected from foreign shareholders. The government succeeded in selling in November 2019 a 52 percent stake in gambling firm FDJ. The government continues to maintain a strong presence in some sectors, particularly power, public transport, and defense industries.

France is a politically stable country. Large demonstrations and protests occur regularly (sometimes organized to occur simultaneously in multiple French cities); these normally do not result in violence. When faced with imminent business closures, on rare occasions French trade unions have resorted to confrontational techniques such as setting plants on fire, planting bombs, or kidnapping executives or managers.

From mid-November 2018 through 2019, Paris and other cities in France faced regular protests and disruptions, including “Gilets Jaunes” (Yellow Vest) demonstrations that turned violent, initiated by discontent over high cost of living, taxes, and social exclusion. In the second half of 2019, most demonstrations were in response to President Macron’s proposed unemployment and pension reform. Authorities permitted peaceful protests. During some demonstrations, damage to property, including looting and arson, in popular tourist areas occurred with reckless disregard for public safety.  Police response included water cannons, rubber bullets and tear gas.

Between 2012 and 2020, 270 people have been killed in terrorist attacks in France, including the January 2015 assault on the satirical magazine Charlie Hebdo, the November 2015 coordinated attacks at the Bataclan concert hall, national stadium, and streets of Paris, and the 2016 Bastille Day truck attack in Nice. While the terrorist threat remains high, the threat is lower than its peak in 2015. Terrorist attacks have since been smaller in scale. Security services remained concerned with lone-wolf attacks, carried out by individuals already in France, inspired by or affiliated with ISIS.  French security agencies continue to disrupt plots and cells effectively. Despite the spate of recent small-scale attacks, France remains a strong, stable, democratic country with a vibrant economy and culture. Americans and investors from all over the world continue to invest heavily in France.

* French Source:  INSEE database for GDP figures and French Central Bank (Banque de France) for FDI figures. Accessed on March 19, 2021.  

*Note: These figures represent the stock of foreign direct investment (FDI), not the annual flow of FDI.  The United States was the top investor by flow of FDI in 2020.

Policies Towards Foreign Direct Investment

The government of the RMI publicly expresses interest in finding ways to increase foreign investment, but there are many structural impediments to foreign investment and economic progress, such as land rights, which are unlikely to be changed in the near future.

Foreign investment is governed through the Foreign Investment Business License (Amendment Act (2000)), which established the Registrar of Foreign Investment and which details restrictions on foreign investments. The Ministry of Natural Resources and Development, Trade and Investment Division administers the law in coordination with the Office of the Attorney General.

Land issues and disputes concerning leases are subject to customary law governing land tenure, and proceedings can take a protracted time to resolve.  Land cannot be purchased by investors; it can only be leased through customary practices.

Limits on Foreign Control and Right to Private Ownership and Establishment

Although the Marshall Islands generally encourages foreign investment, the Foreign Investment Business License (Amendment) Act established a National Reserved List, which restricts foreign investment in certain small-scale retail and service businesses. However, this law is not consistently enforced, and foreign investors may enter partnership agreements with local Marshallese businesses. Officially, foreign investment is prohibited in the following business ventures:

• Small scale agriculture and marine culture for local markets
• Bakeries and pastry shops
• Motor garages and fuel filling stations
• Land taxi operations, not including airport taxis used by hotels
• Rental of all types of motor vehicles
• Small retail shops with a quarterly turnover of less than USD 1,000 (including mobile retail shops and/or open-air vendors/take-outs)
• Laundromat and dry cleaning, other than service provided by hotels/motels
• Tailor/sewing shops
• Video rental
• Handicraft shops
• Delicatessens, Deli Shops, or Food take-out

Other Investment Policy Reviews

In the past three years the Government of the Marshall Islands has not conducted an investment policy review through any organization or institution.

Business Facilitation

The government of the Marshall Islands created the Office of Commerce and Investment and Tourism (OCIT) three years ago to assist foreign investors.  OCIT’s website at https://www.rmiocit.org/ has helpful information regarding investment and doing business in the Marshall Islands.  The OCIT is currently in the process of developing a one-stop-shop online business registration process, but  currently there is no online website for registering a business in the Marshall Islands.  This must be done in person.  After a foreign investor receives a FIBL, detailed in the Laws and Regulations on FDI, the business owner must complete the following steps:

• Check the uniqueness of the proposed company name with the Registrar of Corporations. This costs USD 100 and takes one day.
• Have the company charters notarized. Notarization can be done at the Office of the Attorney General.  It takes two days on average and costs USD 10.
• Register the company with the Registrar of Corporations. This takes five days and costs USD 250.  Limited Liability Companies need to file a Certificate of Formation and need to have LLC agreements detailing how the LLC will be operated, managed, and distributions divided.
• Obtain an Employer Identification Number from the Marshallese Social Security Administration. This number will also serve as the company’s tax identification number.  This process takes two days and costs USD 20.
• Apply for a business license. The business owner needs to submit a company charter along with the business license.  Business licenses are usually issued in seven days.  Licensing fees vary depending on the type of business.  Fees are as follows:
  • Retail Business: USD 150
  • Banks: USD 5,000
  • Professional: USD 3,000
  • Hotels: USD 500

The Ministry of Finance segments the business sector for tax purposes using annual gross revenue amounts, not number of employees.  There are no other segmentations recognized by the Marshall Islands.  There is a Small Business Development Center in Majuro.

Outward Investment

The RMI government does not actively promote, incentivize, or restrict outward investment.

Transparency of the Regulatory System

Regulatory and accounting systems are generally transparent and consistent with international norms. Bureaucratic procedures are generally transparent, although nepotism and customary hierarchal relationships can play a role in government actions. Proposed laws and regulations are available in draft form for public comment pursuant to the Administrative Procedures Act, Title 6 of the Marshall Islands Revised Code. Generally, tax, labor, environment, health and safety, and other laws and policies do not impede investment. There are no informal regulatory processes managed by nongovernmental organizations or private sector associations.

International Regulatory Considerations

The Marshall Islands currently remains a member of the Pacific Islands Forum (PIF), but has begun procedures to leave the organization. The PIF has a model regulatory and policy framework focused on competition, access and pricing, fair trading, and consumer protections.  The RMI has sought to implement PIF-agreed standards domestically; however, the capacity for enforcement remains weak.

Legal System and Judicial Independence

The Republic of the Marshall Islands has a responsive judiciary that consistently upholds the sanctity of contracts. The legal system in the Marshall Islands is patterned on common law proceedings as they exist in the United States. The country has a judicial branch composed of a Supreme Court, a High Court, a Traditional Rights Court, District Courts, and Community Courts. The Supreme Court is made up of one Chief Justice and two Associate Justices.  The High Court consists of the Chief Justice and one Associate Justice. The Chief Justices are both U.S. Citizens serving 10-year terms.  There are also three Traditional Rights Court judges, two District Court judges, and several Community Court judges serving the Marshall Islands. On certain occasions, as necessary, the Marshall Islands Judicial Service Commission recruits qualified judges on contract from the United States to serve with the Chief Justice on the Supreme Court and to temporarily fill vacancies on the High Court as there are few qualified and independent Marshallese who can fill these positions.  The Traditional Rights Court deals with customary law and land disputes.

The Marshall Islands Courts are generally considered fair, without undue influence or interference.  Marshall Islands Court rulings, legal codes, and public law can be found on their website: http://www.rmicourts.org/.

Laws and Regulations on Foreign Direct Investment

All non-citizens wishing to invest in the Marshall Islands must obtain a Foreign Investment Business License (FIBL). The FIBL is obtained from the Registrar of Foreign Investment in the office of the Attorney General. In coordination with the Investment Promotion Unit at the Ministry of Natural Resources and Commerce, the Ministry of Finance reviews the application and ensures that the business does not fall under the categories of the National Reserved List listed above. The application process usually takes 7-10 working days. The FIBL grants non-citizens the right to invest in the Marshall Islands, provided the investment remains within the scope of business activity for which the FIBL was granted.

The 2015 amendment to the Foreign Investment Business License Act requires all holders of FIBLs to maintain reliable and complete accounting records and records of ownership, and that all business records must be kept in such a way that they can be converted into written form at the request of an authorized inspector.  These records must be retained for a period of five years.

Competition and Anti-Trust Laws

The Marshall Islands does not currently have any anti-trust legislation or agency which reviews transactions for competition-related concerns.

Expropriation and Compensation

All land is privately owned by Marshallese citizens through complex family lineages. Although the Government of the Marshall Islands may legally expropriate property under the country’s constitution, the government has only exercised this right on one occasion and only for a temporary period of time. Given the importance of private land ownership in customary law and practice, it is very unlikely that the government will exercise this right in the near future.

If a business activity is subsequently added to the reserved List, the Registrar of Foreign Investment may not cancel or revoke an existing Foreign Investment Business License if the investment has already commenced.

Dispute Settlement

ICSID Convention and New York Convention

The Marshall Islands has been a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the 1958 New York Convention) since 2006, but is not a member of the International Center for Settlement of Investment Disputes (ICSID), nor does it have plans to become a member at this time.

Investor-State Dispute Settlement

There are no ongoing investment disputes involving the Government of the Republic of the Marshall Islands and foreign investors.   There is a very limited record of foreign investment disputes in the Marshall Islands due to the small size of foreign investment in the country. The most common type of business disputes is with landowners over land use, and land rights issues, and as there is currently no official dispute resolution procedure, these are frequently resolved informally or only after protracted court disputes. Domestic civil society has traditionally not been actively engaged in dispute resolution.  The Marshall Islands Courts are generally considered fair, without undue influence or interference.  There is no history of extrajudicial action against foreign investors.

International Commercial Arbitration and Foreign Courts

The Republic of the Marshall Islands does not have any alternative dispute resolution (ADR) mechanisms or domestic arbitration bodies available as a means for setting disputes between two private parties.  There is no known history of the RMI enforcing foreign commercial arbitral decisions.

Bankruptcy Regulations

There is no legal provision for bankruptcy in the Marshall Islands.  It ranks 153 out of 190 for resolving insolvency in World Bank’s 2020 Doing Business Report.

Capital Markets and Portfolio Investment

There are no stock exchanges or financial regulatory institutions in the country.

Money and Banking System

There are currently two banks with branches in the Marshall Islands. The Bank of Guam is a publicly owned U.S. company with its headquarters in Guam. It complies with all U.S. regulations and is FDIC-insured. The Bank of the Marshall Islands is a privately-owned Marshallese company with headquarters in Majuro.

Foreign Exchange and Remittances

Foreign Exchange

The government does not impose any restrictions on converting or transferring funds associated with an investment. The Marshall Islands uses the U.S. dollar as its official currency, and there is no central bank. There are no official remittance policies and no restrictions on foreign exchange transactions. There have been no reported difficulties in obtaining foreign exchange as the vast majority of funds are denominated in U.S. dollars.

Remittance Policies

While the government encourages reinvestment of profits locally, there are no laws restricting repatriation of profits, dividends, or other investment capital acquired in the Marshall Islands. To comply with international money laundering commitments, cash transactions and transfers exceeding USD 10,000 are reported by the banks to the Banking Commission, which monitors this information and has the authority to investigate financial records when necessary. To date, however, the country has not successfully prosecuted any money laundering cases.

Sovereign Wealth Funds

The Marshall Islands has no sovereign wealth fund (SWF) or asset management bureau (AMB), but the Compact of Free Association established a Trust Fund for the Marshall Islands that is independently overseen by a committee composed of the United States, Taiwan, and Marshall Islands representatives.

Nearly all major industries are controlled by state-owned enterprises (SOEs). The SOE sector, comprising 11 public enterprises, continues to underperform and to impose significant risks and burden on the fiscal system and economy.  In the Republic of the Marshall Islands Single Audit for FY2019, the government recognized the need for continued reforms at SOEs.  Air Marshall Islands, Marshall Islands Resort, and Tobolar  have negative cash flows and require subsidies each year.  The Marshall Islands Marine Resource Authority (MIMRA) is the only SOE to be a net revenue provider for the Marshall Islands, but the audit cautioned that the long-term future support from the fisheries sector cannot be taken for granted.  The Marshall Islands is not a member of the WTO.

In 2015 the Marshallese parliament passed the State-Owned Enterprises Act which set standards for the formation and operation of SOEs.  The Act changed the way the boards of directors of SOEs are structured, and set minimum reporting requirements for the 11 SOEs.  Boards must consist of at least three but no more than seven directors, only one of which can be a public official and that public official may not hold a term longer than three years.  A public official may not be selected as Chairman of the Board.

All SOEs are required to have their books independently audited as part of the government’s overall audit.

Privatization Program

There is no formal privatization program in the RMI.  Currently, foreign investors are allowed to purchase shares only in the National Telecommunications Agency, but foreign investors may not own a majority of shares. Bidding criteria are not readily available, and the process remains largely controlled by the national government.

There have been no reported incidents involving politically motivated damage to projects or installations.

Table 3: Sources and Destination of FDI
Data not available.

Table 4: Sources of Portfolio Investment
Data not available.

Policies Towards Foreign Direct Investment

Mauritania desires more foreign direct investment (FDI) and is trying to promote its strategic geographical location and natural resources to attract new investors. It is rich in minerals, has enormous energy potential and has some of the continent’s richest fishing grounds. Mauritania is making progress in improving its business climate. In the 2020 World Bank Doing Business Report, Mauritania was ranked 152nd out of 190 economies. According to the report, Mauritania improved access to credit information and made enforcing contracts easier. Among the factors hindering FDI, there is political influence, corruption, a weak judicial system, and a poorly diversified and highly informal economy.

There is no law prohibiting or limiting foreign investment in any sector of the economy. There are no laws or regulations specifically authorizing private firms to adopt articles of incorporation or association, which limit or prohibit foreign investment, participation, or control. There are no other practices by private firms to restrict foreign investment. The government continues to prioritize foreign investment in all sectors of the economy and is working closely with the International Monetary Fund (IMF), the World Bank, and the international donor community to improve basic infrastructure and to update laws and regulations.

In 2012, the government adopted a revised Investment Code and created the Office of Promotion of the Private Sector (OPPS) to promote and monitor investment. Currently, prospective investors are required to obtain an Investment Certificate by presenting their proposal and all required documents to the OPPS. The government maintains an ongoing dialogue with investors through formal business conferences and meetings.

Limits on Foreign Control and Right to Private Ownership and Establishment

Both domestic and foreign entities can engage in all forms of remunerative activities, except activities involving selling pork meat or alcohol. There are no limits of transfer of profit or repatriation of capital, royalties, or service fees, provided the investments were authorized and made through official channels. The government performs mandatory screening of foreign investments. These screening mechanisms are routine and non-discriminatory. The “Guichet Unique” (a single location to take care of all administrative needs related to registering a company) provides the review for all sectors, except the petroleum and mining sectors, which require approval from a cabinet meeting led by the president.

Other Investment Policy Reviews

The latest investment policy review occurred in February 2008. The United Nations Conference on Trade and Development (UNCTAD) review is available online, in French, at: http://unctad.org/en/Docs/iteipc20085_fr.pdf. The report recommended that Mauritania diversify its economy, improve its investment potential through increasing revenue generated by the exploitation of natural resources, accelerate required reforms, and enhance the business and investment climate.

In 2011, Mauritania underwent a World Trade Organization (WTO) trade policy review. The report is available online at http://www.wto.org/english/tratop_e/tpr_e/tp350_e.htm. The report states that, since 2002, the government had undertaken few reforms in the areas of customs, trade, or investment regulations. The report also highlighted a lack of transparency as a deficiency. These policy reviews led to the release of the revised Investment Code in June 2012 to improve transparency in the government procurement process.

Business Facilitation

The government continues to amend its laws and regulations to facilitate business registration. The first cabinet reshuffle of the new government in August 2019 divided the former Ministry of Economy and Finance into two separate ministries: The Ministry of Economy and the Ministry of Finance. On February 20, 2020, the government created an inter-ministerial committee consisting of the Prime Minister, Minister of Commerce, Minister of Economy, Minister of Finance, and the Private Sector Association. The committee is charged with improving the business climate and driving investment and is chaired by the Prime Minister. In March 2021, the government created an Investment Promotion Agency within the Ministry of Economy. This new agency, once fully operational, will facilitate the administrative work of foreign investors. The agency will help investors navigate the process to obtain permits and other various administrative requirements.

The normal business registration process takes up to five business days. The Nouadhibou Free Trade Zone Authority (http://www.ndbfreezone.mr/) and “Guichet Unique” facilitate business registration and encourage FDI.

Outward Investment

Government incentives toward promoting outward investment remain limited. Mauritania’s major exports are iron ore (46 percent), non-fillet frozen fish (16 percent), and gold (11 percent). China, France, Spain, Japan, and the United Arab Emirates are the main trading partners. There are no investment restrictions on domestic investors from investing abroad.

Transparency of the Regulatory System

The government continues to adopt laws and regulations to improve transparency. During the review period, the government made accounting budget bills widely and easily accessible to the public, including online. The accounting documents provided a complete picture of the government’s planned expenditures and revenue streams, including natural resource revenues. Budget documents were generally prepared according to internationally accepted principles. The government holds full authority in allocating the licenses for all natural resources and controls their finances. The criteria and procedures by which the government awards natural resource extraction contracts or licenses are specified in Mauritania’s investment code, mining code, and a new hydrocarbon law. Basic information on tenders is publicly available on government websites. There is no law or policy impeding foreign investment in Mauritania.

However, there is a complex and often overlapping system of permits and licenses required to do business. There continues to be a lack of transparency in implementation of the legal and regulatory policies.

Post is not aware of any informal regulatory processes managed by nongovernmental organizations or private sector associations, and laws and regulations do not discriminate against foreign investment.

International Regulatory Considerations

See section 2 – Bilateral Investment and Taxation Treaties.

Legal System and Judicial Independence

The Mauritanian judicial system combines French and Islamic (Malikite school) judicial systems. The constitution guarantees the independence of the judiciary (Article 89), and a law also protects judges from undue influence. Civil and Commercial Codes exist and are designed to protect contracts, although court enforcement and dispute settlement can be difficult. The judicial system remains weak and unpredictable in its application of the law, due in part to the training judges receive in two separate and distinct legal systems: Shari’a law and laws modeled after the French legal system. Judges remain undercompensated and susceptible to tribal pressures and bribery. Specialized commercial law courts exist, but sometimes judges lack training and experience in commercial and financial law. Some judges may only have formal training in the Shari’a legal system, while others are only familiar with the French civil law system. A lack of standardization of applicable legal knowledge in the judiciary leads to inefficiency in the execution of judgments in a timely and efficient manner. Laws and decrees related to commercial and financial sectors exist, but they are not always publicly available.

Most judgments are not issued within prescribed time limits and records are not always well kept. Judgments of foreign courts are recognized by local courts, but enforcement is limited. During the last few years, the government has taken steps to provide training to judges and lawyers as an attempt to professionalize the system to reduce the backlog and work through cases in a more efficient manner. In 2017, the Government passed a new small claims law that covers cases valued at less than USD 11,000. In January 2020, the government opened a new international center for mediation and arbitration. The center provides an alternative legal office for settlement of investment disputes and allows arbitration and mediation from international courts.

Laws and Regulations on Foreign Direct Investment

There were no new major investment laws or judicial decisions ratified last year. However, the government launched a new investment agency under the Ministry of Economy, which will coordinate procedures and processes related to investment. The investment code, which was last updated in June 2012, was designed to encourage direct investment by enhancing the security of investments and facilitating administrative procedures. The code provides for free repatriation of foreign capital and wages for foreign employees. The code also created free points of importation and export incentives. Small and medium enterprises (SME), which register through OPPS, do not pay corporate taxes or customs duties.

Competition and Antitrust Laws

The Ministry of Economy’s Office of Procurement Commission of the Economic and Finance Sectors is the government agency that reviews tender bids in accordance with the law and regulations. Suppliers for large government contracts are selected through a tender process initiated at the ministry level. Invitations for some tenders are publicly announced in local newspapers and on government websites. After issuing an invitation for tenders, the Ministry of Economy’s commission in charge of reviewing tenders selects the offer that best fulfills government requirements. If two offers, i.e., one from a foreign company and one from a Mauritanian company, are otherwise considered equal, statutes require that the government award the tender to the Mauritanian company. In practice, this has resulted in tenders awarded to companies that have strong ties to government officials and tribal leaders, regardless of the merits of an individual offer. Preferential treatment remains common in government procurement, despite the government’s recent efforts to promote transparency in the public sector.

Expropriation and Compensation

The revised Investment Code provides more property guarantees and protection to business owners. The Code protects private companies against nationalization, expropriation, and requisition. However, if a foreign enterprise is facing difficulties, the government can propose an expropriation plan to avoid bankruptcy and to protect jobs of local employees, with fair and equitable compensation.

The only known case of expropriation since Mauritania’s independence was the nationalization of the French mining MIFERMA in November 1974. In that case, the two parties agreed on a compensation plan.

Dispute Settlement

ICSID Convention and New York Convention

In 1966, Mauritania ratified the Convention on the settlement of investment disputes between States and nationals of other States. In 1997, Mauritania became a signatory to the convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention). However, there is no specific legislation to ensure enforcement.

Investor-State Dispute Settlement

The most recent investment dispute between the Mauritanian government and a foreign investor occurred in 2006 over production-sharing contracts (PSC) signed in 2003 with former President Taya’s government. A successor government lodged a dispute over four amendments to the original PSC involving oil revenues and environmental issues. An international arbitrator was brought in and ruled in the government’s favor.

International Commercial Arbitration and Foreign Courts

Judgments of foreign courts are not consistently applied. The government accepts international arbitration of investment disputes between foreign investors and government authorities. Judgments of foreign courts are accepted by the local courts, but enforcement is limited. In the past, issues were referred to the International Center for Settlement of Investment Disputes (ICSID), of which Mauritania has been a member since 1965.

Settling disputes through the courts remains a long and complicated process. Inadequate laws and poor administration remain the key source of legal disputes encountered in the country. The duration of investment disputes is subject to numerous appeals before reaching a final verdict. Though the government is looking for ways to streamline the system by providing training to judges and lawyers, the court procedures are currently long and complicated.

Though there are no recent reports on disputes involving State-Owned Enterprises (SOE), it is likely that domestic courts would favor SOEs during a dispute.

The Mauritanian government guarantees companies that the tax, customs, and legal regulations in force at the time of issuance of an Investment Certificate will remain applicable to them for a period of 20 years. Likewise, in theory, any favorable changes to the corporate tax or customs laws during that guaranteed period will be applicable to the investor.

Bankruptcy Regulations

The country has bankruptcy laws which carry the potential for criminal penalties. Mauritania’s bankruptcy laws were last updated in 2001. The bankruptcy law allows for the reorganization or restructuring of a business. There are very few reported cases of these laws being applied

Capital Markets and Portfolio Investment

The government is favorable to portfolio investment. Private entities, whether foreign or national, have the right to freely establish, acquire, own, and/or dispose of interests in business enterprises and receive legal remuneration. Privatization and liberalization programs have also helped put private enterprises on an equal footing with respect to access to markets and credit. In principle, government policies encourage the free flow of financial resources and do not place restrictions on access by foreign investors. Most foreign investors, however, prefer external financing due to the high interest rates and procedural complexities that prevail locally. Credit is often difficult to obtain due to a lax legal system to enforce regulations that build trust and guarantee credit return. There are no legal or policy restrictions on converting or transferring funds associated with investments. Investors are guaranteed the free transfer of convertible currencies at the legal market rate, subject to the availability. Similarly, foreigners working in Mauritania are guaranteed the prompt transfer of their professional salaries.

Commercial bank loans are virtually the only type of credit instrument. There is no stock market or other public trading of shares in Mauritanian companies. Currently, individual proprietors, family groups, and partnerships generally hold companies, and portfolio investments.

Money and Banking System

The IMF has assisted Mauritania with the stabilization of the banking sector and as a result, access to domestic credit has become easier and cheaper. A proliferation of banks has fostered competition that has contributed to the decline in interest rates from 30 percent in 2000 to 10 percent in 2009, to 6.5 percent in 2020, not including origination costs and other fees

Nevertheless, the banking system remains fragile due to liquidity constraints in the financial markets. The country’s five largest banks are estimated to have USD 100 million in combined reserves; however, these figures cannot be independently verified, making an evaluation of the banking system’s strength impossible. As of April 2020, 25 banks, national and foreign, operate in Mauritania, despite the fact that only 15 percent of the population hold bank accounts.

The Central Bank of Mauritania is in charge of regulating the Mauritanian banking industry, and the Central Bank has made reforms to streamline the financial sector’s compliance with international standards. The Central Bank performs yearly audits of Mauritanian banks. There are no restrictions enforced on foreigners who wish to obtain an individual or business banking account.

In March 2020 the Central Bank of Mauritania (BCM) announced the reduction in interest rate on credit from 9 percent to 6.5 percent as part of measures aimed at counter the effects of COVID-19 on the country’s economy.

In 2018, the Central Bank of Mauritania lost all correspondent banking relationships with banks in the United States due to de-risking policies enforced by U.S. banks. The Central Bank subsequently was able to reestablish a correspondent banking relationship in 2019, however there are still no Mauritanian banks that have been able to do so. Local branches of international banks (such as Societe Generale or Attijari) do maintain correspondent banking relationships with U.S. banks and are able to clear transactions in USD.

Foreign Exchange and Remittances

Foreign Exchange

There are no legal or policy restrictions on converting or transferring funds associated with investments. Investors are guaranteed the free transfer of convertible currencies at the legal market rate, subject to the availability of such currencies. Similarly, foreigners working in Mauritania are guaranteed the prompt transfer of their professional salaries. To transfer funds, investors are required to open a foreign exchange bank account in Mauritania. There are no maximum legal transaction limits for investors transferring money into or out of Mauritania, although regulations to withdraw money may be complicated in practice.

Businesses transfer money through the traditional Hawala system—they deposit their money in a Hawala store and designate a beneficiary for pick up. The Hawala system has become a reliable substitute to the high interest rate, long wait period and transaction fees imposed by local banks. However, the Central Bank closed 691 illegal money transfer points in 2019 to restructure the financial sector. Currently, only nine agencies have a provisional authorization for transfer of funds. Individuals and companies may obtain hard currency through the informal market and commercial banks for the payment of purchases or the repatriation of dividends. If the bank has hard currency available, there is no delay in effect for remitting investment returns. However, if the bank does not have enough reserves, the hard currency must be obtained from the Central Bank in order to conduct the transfer. The Central Bank is required to prioritize government transfers, which could present further delays. Delays of one to three weeks, although relatively uncommon, can occur.

In January 2018, the government of Mauritania introduced a new currency. The new currency drops a zero from the country’s previous currency; the value and the name of the currency remained the same, although the currency code changed from MRO to MRU. Local banks had to adapt their software, change their checkbooks, and reconfigure their ATMs to bring them into compliance with the new currency.

Remittance Policies

There is no limit on the inflow or outflow of funds for remittances of profits, debt service, capital or capital gains. The local currency, the ouguiya, is freely convertible within Mauritania, but its exportation is not legally authorized. Hard currencies can be obtained from the central bank and local commercial banks or parallel financial market in the informal sector. The Central Bank holds regular foreign exchange auctions, allowing market forces to fix the value of the ouguiya.

Sovereign Wealth Funds

The Central Bank administers the National Fund for Hydrocarbon Reserves, a sovereign wealth fund (SWF), which was established in 2006. The SWF is funded from the revenues received from the extraction of oil, any royalties and corporate taxes from oil companies, and from the profits made through the fund’s investment activities. The fund’s mandate is to create macroeconomic stability by setting aside oil revenues for developmental projects. However, the management of the SWF lacks transparency and the projected revenue streams remain unrealized.

SOEs and the parastatal sector in Mauritania represent important drivers of the economy. They have an impact on employment, service delivery, and most importantly fiscal reserves given their importance to the economy and the state budget. In 2020 parastatal companies and SOEs experienced significant business and financial problems in the form of increasing levels of debt, operational losses, and payment delays because of the COVID pandemic. This increase in fiscal reserve risk led the government to provide subsidies to SOEs.

Hard budget constraints for SOEs are written into the Public Procurement Code but are not enforced. SOMELEC, the state-owned electricity company, has been operating in a precarious financial situation for many years. The majority of larger, wholly government-owned enterprises operated, in principle, on a commercial basis. But, many have operated at a loss since the 1970s and failed to provide the services for which they were responsible.

Most state-owned enterprises in Mauritania have independent boards of directors. The directors are usually appointed based on political affiliations.

There are about 120 SOEs and parastatal companies active in a wide range of sectors including energy, network utilities, mining, petroleum, telecommunications, transportation, commerce, and fisheries. Parastatal and wholly owned SOEs remain the major employers in the country. This includes the National Mining Company, SNIM, which is by far the largest Mauritanian enterprise and the second largest employer in the country after the government.

The publicly available financial information on parastatal and wholly owned SOEs is incomplete and outdated, with the exception of budget transfers. There is no publication of the expenditures SOEs allocate to research and development. In addition, they execute the largest portion of government contracts, receiving preference over the private sector. According to the Public Procurement Code, there are no formal barriers to competition with SOEs. However, informal barriers such as denial of access to credit and/or land exist.

Privatization Program

Post is not aware of any privatization programs during the reporting period.

The August 2019 inauguration of President Mohamed Cheikh El Ghazouani marked the first democratic transition of power from one elected leader to another in the country’s history and ushered in a broad sense of optimism. Mauritania has not suffered a terrorist attack on its soil since 2011. And while the country continues to struggle in respecting human rights, the government is beginning to take concrete steps to addressing these issues.

Table 3: Sources and Destination of FDI
Data not available.

Table 4: Sources of Portfolio Investment
Data not available.

Policies Towards Foreign Direct Investment

Mauritius actively seeks foreign investment.  According to several surveys and metrics, Mauritius is among the freest and most business-friendly countries in Africa.  For the 12th consecutive year, the World Bank’s 2020 Doing Business report ranked Mauritius first among African economies, and 13th worldwide, in terms of overall ease of doing business.  It also outperforms all other African countries on the Human Development Index where, in 2020, it ranked 67 out of 189 countries.  The 2021 Index of Economic Freedom, published by the Heritage Foundation, ranked Mauritius first among 47 countries in the Sub-Saharan Africa region and 13th globally, compared to being 21st in 2020.  However, the index said that the government would need to reverse its negative trend in government integrity, which registered at a level typical of countries that were ranked lower in economic freedom.

The Economic Development Board (EDB), formerly the Board of Investment, is the single gateway government agency responsible for promoting investment in Mauritius, and for helping guide investors through the country’s legal and regulatory requirements.

In terms of investor retention policy, the EDB provided aftercare services that considered future business environment requirements for survival and/or expansion.  The EDB has a customer service unit that took investor suggestions and complaints.  EDB also organized workshops and roundtable sessions to inform investors about changes in investment policies.

Limits on Foreign Control and Right to Private Ownership and Establishment

A non-citizen can hold, purchase, or acquire real property under the Non-Citizens (Property Restriction) Act (NCPRA), subject to government approval.  A foreigner can acquire residential property and apartments under the government-regulated Property Development Scheme (PDS).  The NCPRA was amended in December 2016 to allow foreigners to purchase certain types of properties, as long as the amount paid is over 6 million Mauritian rupees (approximately 172,000 USD).  A non-citizen is eligible for a residence permit upon the purchase of a house under the PDS if the investment made is more than 500,000 USD.  More information is available at http://dha.pmo.govmu.org/English/Mandate/Pages/Non-Citizens-Property-Restriction.aspx.

No government approval is required in certain situations provided under the NCPRA, namely: (i) holding of immoveable property for commercial purposes under a lease agreement not exceeding 20 years; (ii) holding of shares in companies that do not own immoveable property; (iii) holding of immoveable property by inheritance or effect of marriage to a citizen under the “régime legal de communauté;” (iv) holding of shares in companies listed on the Stock Exchange of Mauritius; and (v) through a unit trust scheme or any collective investment vehicle as defined in the Securities Act.  More information is available at www.dha.govmu.org.

Regarding business activities, the GoM generally does not discriminate between local and foreign investment.  There are, however, some business activities where foreign involvement is restricted.  These include television broadcasting, sugar production, newspaper or magazine publishing, and certain operations in the tourism sector.

In 2019, the Independent Broadcasting Authority (IBA) Act was amended to increase the allowable equity participation of a foreign company investing in broadcasting to 49.9 percent from 20 percent.  Similarly, control by foreign nationals in broadcasting was limited to 49.9 percent. Furthermore, a foreign investor cannot hold 20 percent or more of a company that owns or controls any newspaper or magazine, or any printing press publishing such publications.  The IBA Act can be accessed via http://www.iba.mu/legal.htm. 

In the sugar sector, no foreign investor is allowed to make an investment that would result in 15 percent or more of the voting capital of a Mauritian sugar company being held by foreign investors.  However, foreign investors may be exempt from this rule subject to authorization by the Financial Services Commission.

In the tourism sector, there are conditions on investment by non-citizens in the following activities: (i) guesthouse/tourist accommodation; (ii) pleasure craft; (iii) diving; and (iv) tour operators.  Generally, the conditions include a minimum investment amount, number of rooms, or a maximum equity participation, depending on the business activity.

In the construction sector, foreign consultants or contractors are required to register with the Construction Industry Development Board (CIDB).  Details on registration procedures are available on   http://cidb.govmu.org/English/Consultants-Contractors/Pages/default.aspx.

The Investment Office of the EDB screens foreign investment proposals and provides a range of services to potential investors.  The EDB is a useful resource for investors exploring business opportunities in Mauritius and provides assistance with occupation permits, licenses, and clearances by coordinating with relevant local authorities.  In 2020, the U.S. Embassy in Port Louis did not receive negative comments from U.S. businesses regarding the fairness of the government’s investment screening mechanisms.

The Investment Office of the EDB reviews proposals for economic benefit, environmental impact, and national security concerns.  EDB then advises the potential investor on specific permits or licenses required, depending on the nature of the business.  Foreign investors can also apply through the EDB for necessary permits.  In the event an investment fails review, the prospective investor may appeal the decision within the EDB or to the relevant government ministry.

In response to the Covid-19 crisis, the GoM relaxed investment terms and conditions for foreign investors in 2020.  For instance, the minimum investment amount for obtaining an occupation permit was halved to 50,000 USD.  The minimum turnover and minimum amount invested for the Innovator Occupation Permit was removed.  Professionals with an occupation permit and foreign retirees with a residence permit were able to invest in other ventures without any shareholding restrictions.  The permanent residence permit validity was doubled to 20 years.  Non-citizens who had a residence permit under the various real estate schemes were no longer required to hold an occupation or work permit to invest and work in Mauritius.

The conditions relating to the acquisition of property developed under the Property Development Scheme (PDS) and Smart City Scheme (SCS) were also loosened.  The minimum price of a property that buyers could use to then apply for a residence permit dropped to 375,000 USD from 500,000 USD.

In 2020, the Non-Citizens (Employment Restriction) Act was amended to enable the following categories of individuals to engage in any occupation without the need for a permit: (a) the holder of an occupation permit issued under the Immigration Act; (b) the holder of a residence permit issued under the Immigration Act; (c) a non-citizen who has been granted a permanent resident permit under the Immigration Act; and (d) a member of the Mauritian diaspora under the Mauritian Diaspora Scheme.

Other Investment Policy Reviews

In 2018, the United Nations Conference on Trade and Development (UNCTAD) published its 2017 Report on the Implementation of the Investment Policy Review (IPR) for Mauritius. The GoM also requested UNCTAD’s assistance to craft a strategic investment plan.

UNCTAD worked with the GoM on the Industrial Policy Strategic Plan, launched in December 2020, found here:  https://unctad.org/system/files/official-document/gdsinf2020d5_en.pdf.

Mauritius’ other most recent third-party investment policy reviews through multilateral organizations were completed in 2014.  In June 2014, the Mauritius Government conducted an investment policy review with the Organization for Economic Cooperation and Development (OECD).  The review concluded that, while policies and legislation in Mauritius support private sector development, incentive schemes tend to bias investment towards real estate and property development.  In October 2014, the Mauritius Government also conducted a trade policy review with the World Trade Organization (WTO).  A new trade policy review was expected to start in May 2020.

In February 2020, the Financial Action Task Force (FATF) placed Mauritius on the list of jurisdictions under increased monitoring concerning anti-money laundering/combating the financing of terrorism (AML/CFT).  The European Union also concluded that Mauritius had strategic deficiencies in its AML/CFT regime under Article 9 of its 4th Anti-Money Laundering Directive and in October 2020 added Mauritius to its list of high-risk countries.

Business Facilitation

The Mauritian government recognizes the importance of a good business environment to attract investment and achieve a higher growth rate.  In 2019, the Business Facilitation (Miscellaneous Provisions) Act entered into force.  The main reforms brought about by this legislation were expediting trade fee payments, reviewing procedures for construction permits, reviewing fire safety compliance requirements, streamlining of business licenses, and implementing numerous trade facilitation measures.

The incorporation of companies and registration of business activities falls under the provisions of the Companies Act of 2001 and the Business Registration Act of 2002.   All businesses must register with the Registrar of Companies. In 2020, the Business Registration Act was amended to highlight that the Registrar of Companies shall be the Central Repository of business licenses and information. Accordingly, every public sector agency shall electronically forward a copy of any permit, license, authorization or clearance to the Registrar for publication in the Companies and Businesses Registration Integrated System (“CBRIS”). As a general rule, a company incorporated in Mauritius can be 100 percent foreign owned with no minimum capital.  According to the World Bank 2020 Doing Business report, while the procedure for registering a company takes one day, actually starting a business takes 4.5 days.

After the Registrar of Companies issues a certificate of incorporation, foreign-owned companies must register their business activities with the EDB.  The company can then apply for occupation permits (work and residence permits) and incentives offered to investors.  EDB’s investment facilitation services are available to all investors, domestic and foreign.

In partnership with the Corporate and Business Registration Department (a division of the Ministry of Finance and Economic Development), the Mauritius Network Services (MNS) has implemented the Companies and Business Registration Integrated System, a web-based portal that allows electronic submission for incorporation of companies and application for the Business Registration Number, file statutory returns, pay yearly fees, register businesses, and search for business information.

In March 2019, the National Electronic Licensing System (NELS), which is co-financed by the European Union, was officially launched.  NELS is a single point of entry for the processing of permits and licenses needed to start and operate a business. The submission of business licensing (including Building and Land Use Permit, Occupation Certificate, etc.) can now be done electronically with the implementation of the National Electronic Licensing System.

In 2020, the Economic Development Board Act was amended to allow companies to log any obstacles relating to obtaining licenses, permits, authorizations, or other clearances; to enquire about any issue and make recommendations to government agencies; and to report and publish any actions taken.

Mauritius also implemented the e-Registry System, where a national register of real estate properties and statistics on land dispute resolutions were publicly available.  A mechanism for filing of complaints was also implemented.  The e-Registry System featured an electronic dashboard for registry searches, submission of documents, online payment of registration fees, and electronic copies of registered documents.

Outward Investment

The Mauritian government imposes no restrictions on capital outflows.  Due to the small size of the Mauritian economy, the government encourages Mauritian entrepreneurs to invest overseas, particularly in Africa, to expand and grow their businesses.  As part of its Africa Strategy, the government has established the Mauritius Africa Fund, a public company with $13.8 million capitalization to support Mauritian investment in Africa.  Through the Fund, the government participates as an equity partner up to 10 percent of the seed capital invested by Mauritian investors in projects targeted towards Africa.  The government has signed agreements with Senegal, Madagascar, and Ghana establishing and managing Special Economic Zones (SEZ) in these countries and has invited local and international firms to set up operations in the SEZs.  As per the 2018 Finance Act, Mauritian companies collaborating with the Mauritius-Africa Fund for development of infrastructure in the SEZs benefit from a five-year tax holiday.  To further facilitate investment, Mauritius has also signed Investment Promotion and Protection Agreements and Double Taxation Avoidance Agreements with African states.

Since 2012, the Board of Investment (now restructured as the Investment Office of the EDB) has been operating an Africa Center of Excellence, a special office dedicated to facilitating investment from Mauritius into Africa.  It acts as a repository of business information for Mauritian entrepreneurs about investment opportunities in different sectors in Africa.

In 2019, the most recent figures available from the Bank of Mauritius, gross direct investment flows abroad (excluding the offshore sector) amounted to 96 million USD.  The top three sectors for outward investment were financial and insurance activities (24 percent), accommodation and food service activities (18 percent), and real estate activities (8 percent).  Investment abroad was focused mainly on developing countries, particularly in Africa, which received 32 million USD.  Seychelles was the top recipient country, receiving 15 million USD.

Transparency of the Regulatory System

Since 2006, the GoM has reformed trade, investment, tariffs, and income tax regulations to simplify the framework for doing business.  Trade licenses and many other bureaucratic hurdles have been reduced or abolished.  With a well-developed legal and commercial infrastructure and a tradition that combines entrepreneurship and representative democracy, Mauritius is one of Africa’s most successful economies.  Business Mauritius, the coordinating body of the Mauritian private sector, participates in discussions with and presents papers to government authorities on laws and regulations affecting the private sector.

Regulatory agencies do not request comments on proposed bills from the general public.  Both the notice of the introduction of a government bill and a copy of the bill are distributed to every member of the Legislative Assembly and published in the Government Gazette before enactment.  Bills with a “certificate of urgency” can be enacted with summary process.  All proposed regulations are published on the Legislative Assembly’s website and are publicly available.

Companies in Mauritius are regulated by the Companies Act of 2001, which incorporates international best practices and promotes accountability, openness, and fairness.  To combat corruption, money laundering and terrorist financing, the government also enacted the Prevention of Corruption Act, the Prevention of Terrorism Act, and the Financial Intelligence and Anti-Money Laundering Act.  While Mauritius does not have a freedom of information act, members of the public may request information by contacting the permanent secretary of the relevant ministry.

Budget documents, including the executive budget proposal, enacted budget, and end-of-year report, are publicly available and provide a substantially full picture of Mauritius’ planned expenditures and revenue streams.

International Regulatory Considerations

Mauritius is a member of the Southern African Development Community (SADC) and the Common Market for Eastern and Southern Africa (COMESA) The Mauritius Government implements its commitments to these regional economic institutions with domestic legal and regulatory adjustments, as appropriate).  Mauritius is a signatory to the Tripartite Free Trade Area and the African Continental Free Trade Area (AfCFTA).  AfCFTA took effect in January 2021.  Negotiations are still ongoing regarding the Tripartite FTA.

Mauritius has been a member of the World Trade Organization (WTO) since 1995.  The GoM notifies all draft technical regulations to the WTO Committee on Technical Barriers to Trade to the extent possible.  In July 2014, Mauritius notified its category A commitments to the WTO, among the first African countries to do so.  Mauritius was the fourth country to submit its instrument of acceptance for the Trade Facilitation Agreement (TFA).   Mauritius notified its category B & C commitments and its corresponding indicative dates of implementation in 2015.  It also indicated its requirements to implement category C measures.  With the coming into force of the WTO Trade Facilitation Agreement (TFA) in February 2017, Mauritius is implementing all of its category A commitments.

Of TFA’s 36 measures, Mauritius has classified 27 as category A, five as B, and four as C.  Discussions with donors to obtain technical assistance to finance trade facilitation projects listed under category C are ongoing.  Mauritius has already secured assistance from the World Bank and the World Customs Organization.

To coordinate efforts to implement the TFA, in 2015 Mauritius set up a National Committee on Trade Facilitation co-chaired by representatives from government and the private sector.  Members include MRA Customs, the Ministry of Agro-Industry and Food Security, the Ministry of Finance and Economic Development, the Mauritius Chamber of Commerce and Industry and the Economic Developments Board, amongst others.   The committee meets twice a year and discussion topics include identification of sources of financing for category C commitments and resolution of non-tariff barriers in Mauritius.

Mauritius is also part of the Cotonou Agreement, a 2000 treaty between the European Union and the African, Caribbean and Pacific Group of States.  The Cotonou Agreement was extended until November 2021 and negotiations were held to finalize a post-Cotonou Agreement.  This new agreement was finalized in December 2020 and was expected to take effect in December 2021.  It will focus on human rights, democracy, and governance; security; human and social development; environmental sustainability and climate change; sustainable growth; and migration and mobility.

Legal System and Judicial Independence

The Mauritian legal system is a unique mixture of traditions.  Mauritius draws legal principles from both French civil law and British common law traditions; its procedures are largely derived from the English system, while its substance is based in the Napoleonic Code of 1804.  Commercial and contractual law is also based on the civil code.  However, some specialized areas of law are comparable to other jurisdictions.  For example, its company law is practically identical to that of New Zealand.  Mauritian courts often resolve legal disputes by drawing on current legislation, the local legal tradition, and by means of a comparative approach utilizing various legal systems.  The highest court of appeal is the judicial committee of the Privy Council of England.  Mauritius is a member of the International Court of Justice.  Mauritius established a Commercial Court in 2009 to expedite the settlement of commercial disputes.

In 2020, the Courts Act was amended to provide for the creation of a Financial Crimes Division within the Supreme Court and the Intermediate Court.  An amendment to the Courts Act provided for the establishment of a Land Division court at the Supreme Court to expedite land dispute resolutions.

The Mauritian government as well as the judiciary are supportive of arbitration. Mauritius is a party to the New York Convention 1958, the United Nations Convention on Transparency in Treaty-based Investor State Arbitration, and has two arbitration centers.

Contracts are legally enforceable and binding.  Ownership of property is enforced with the registration of the title deed with the Registrar-General and payment of the registration duty.  Mauritian courts have jurisdiction to hear intellectual property claims, both civil and criminal.  The judiciary is independent, and the domestic legal system is generally non-discriminatory and transparent.

The Embassy is not aware of any recent cases of government or other interference in the court system affecting foreign investors.

Laws and Regulations on Foreign Direct Investment

The Economic Development Board Act of 2017 governs investment in Mauritius, while the Companies Act of 2001 contains the regulations governing incorporation of businesses.  The Corporate and Business Registration Department (CBRD) of the Ministry of Finance and Economic Development administers the Companies Act of 2001, the Business Registration Act of 2002, the Insolvency Act of 2009, the Limited Partnerships Act of 2011, and the Foundations Act of 2012.

Competition and Antitrust Laws

The Competition Commission of Mauritius (CCM) is an independent statutory body established in 2009 to enforce Competition Act 2007.  It is mandated to safeguard competition by preventing and remedying anticompetitive business practices in Mauritius.  Anticompetitive business practices, also called restrictive business practices, may be in the form of cartels, abuse of monopoly situations, and mergers that lessen competition.

The institutional design of the Competition Commission houses both an adjudicative and an investigative organ under one body.  While the Executive Director has power to investigate restrictive business practices (the Investigative Arm), the commissioners determine the cases (the Adjudicative Arm) on the basis of reports from the Executive Director.  Any party dissatisfied with an order or direction of the commission may appeal to the Supreme Court within 21 days.

Since it began operations, the Competition Commission has undertaken 55 investigations, of which 45 have been completed and 10 are ongoing as of March 2021.  To date, it has also conducted 281 enquiries, which are preliminary research exercises prior to proceeding to investigations.  The Competition Commission has also assessed 143 mergers across the Common Market for Southern and Eastern Africa Free Trade Area (COMESA) member states that affected Mauritius.

Since 2018, the Competition Commission has initiated a process to review and amend the Competition Act of 2007 to enable more effective enforcement.  The process is expected to be completed in 2021.

Expropriation and Compensation

The Constitution includes a guarantee against nationalization.  However, in 2015, the government passed the Insurance (Amendment) Act to enable the Financial Services Commission (FSC) to appoint special administrators in cases where there is evidence that the liabilities of an insurer and its related companies exceed assets by 1 billion rupees (approximately $25 million) and that such a situation “is likely to jeopardize the stability and soundness of the financial system of Mauritius.”  The special administrators are empowered to seize and sell assets.  The government enacted this law in the immediate aftermath of the financial scandal explained below.

In April 2015, the Bank of Mauritius, the central bank, revoked the banking license of Bramer Bank, the banking arm of Mauritian conglomerate British American Investment (BAI) Group, citing an inadequate capital reserve ratio.  As a result, Bramer Bank entered receivership and by May 2015 the receiver had transferred the assets and liabilities of Bramer Bank to a newly created state-owned bank, the National Commercial Bank Ltd., thus effectively nationalizing Bramer Bank.  In January 2016, the Mauritian government merged the National Commercial Bank with another government-owned bank, resulting in Maubank, a new bank dedicated mainly to servicing small- and medium-sized enterprises.  The GoM owns over 99 percent of Maubank shares.  Efforts to privatize the bank in 2018 did not produce any results.

The government likewise took over much of Bramer’s parent, the BAI Group.  The FSC placed the BAI Group in conservatorship, alleging fraud and corporate mismanagement in BAI’s insurance business.  Following passage of the Insurance (Amendment) Act in 2015, the FSC created the National Insurance Company, which took over the BAI Group’s core insurance business, and the National Property Fund, which took over other BAI Group assets, including a hospital and several retail outlets.  CIEL Healthcare, a local private company, bought the hospital in 2017.

In 2015, BAI’s former chairman filed a dispute against the GoM with the United Nations Commission on International Trade Law (UNCITRAL), alleging that the government illegally appropriated BAI’s assets.  The former chairman, who is a Mauritian-French dual national, claimed that Mauritius had breached the Mauritius-France bilateral investment treaty and requested the restitution of his assets and payment of compensation.  The tribunal concluded that it lacked jurisdiction over the dispute and ruled in favor of the GoM.  The former chairman has appealed this decision.  In May 2019, the former chairman filed a case in the Supreme Court to challenge the appointment of the liquidator for the Bramer Banking Group.

Dispute Settlement

Mauritius is a member of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention), and a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards Act.  Mauritius is also a member of the Multilateral Investment Guarantee Agency of the World Bank.  In 2014, it became a signatory of the United Nations Convention on Transparency in Treaty-based Investor State Arbitration 2014, also known as the Mauritius Convention as it was first signed in Mauritius.  In August 2019, it signed the United Nations Convention on International Settlement Agreements Resulting from Mediation, also known as the Singapore Convention.

The Convention on the Recognition and Enforcement of Foreign Arbitral Awards Act 2004 is the domestic legislation providing for the enforcement of awards under the 1958 New York Convention.  Because Mauritius is a party to the New York Convention without any reciprocity reservation, all foreign arbitral awards are enforceable in Mauritius.  The 1969 Investment Disputes (Enforcement of Awards) Act is the domestic legislation providing for enforcement of disputes under the Washington Convention.

Investor-State Dispute Settlement

The Mauritian government is party to several investment agreements recognizing international arbitration of investment disputes.  Most Investment Promotion and Protection Agreements (IPPA) include an arbitration clause referring to the ICSID dispute settlement mechanism.

While Mauritius has a Trade and Investment Framework Agreement with the United States, it does not have a specific bilateral investment treaty or free trade agreement with the United States.

The embassy is aware of a dispute between a U.S. company that operates in Mauritius and a parastatal partner.  After an apparent commercial impasse, in early 2020 the parastatal board filed a criminal complaint against the CEO of the U.S. company, who is a U.S. citizen.  The accused, whom police did not take into custody but forbade to leave the country pending investigation, alleged that the parastatal filed the complaint to gain leverage in the commercial dispute.  Both the commercial and criminal disputes continued through early 2021.

Recent investor-state disputes involving Mauritius and heard before ICSID include the following:

The Doutremepuich v. Mauritius arbitration began in 2018 due to an investment dispute over the ownership of three locally incorporated enterprises for the construction and operation of a forensic DNA and paternity testing laboratory in Mauritius.  The investor claimed that the GoM terminated the project after approving it.  The arbitral tribunal decided in favor of the GoM because the court lacked jurisdiction to hear the claims.

The Gosling and Others v. Mauritius arbitration began in 2016 and was related to a dispute over investments in two tourist resorts.  The investors claimed that GoM policies, namely changes to its planning guidance policy and the designation of one area as an UNESCO World Heritage Site, rendered the investments worthless.  In February 2020, the arbitration panel decided in the GoM’s favor.

The Rawat v. Mauritius arbitration, linked to the BAI case outlined above, started in 2015.  The claimant alleged that the GoM illegally appointed special administrators to take control over two insurance and banking companies as well as related companies in which the claimant held interests, and later sold or transferred assets to state-owned companies and third parties.  In April 2018, the arbitral tribunal decided in favor of the GoM on jurisdictional grounds.

In 2017, the Supreme Court ruled on an unfair competition case lodged in 2005 by Emtel, a local telecommunications firm, against state-owned Mauritius Telecom and the former Telecommunications Authority.  The court awarded over $16 million in damages to Emtel.

Another dispute involved Mauritian company Betamax against the State Trading Corporation (STC) for breach of contract.  STC is a public body and trading arm of the GoM.  In 2009, it entered into a contract with Betamax to transport petroleum products to Mauritius.  The contract provided for arbitration under the rules of the Singapore International Arbitration Centre.  In 2015, following a change of government, the cabinet terminated the contract alleging that it violated the 2006 Mauritian Public Procurement Act.  Betamax initiated arbitration proceedings against STC.  In 2017, the arbitrator decided in favor of Betamax and awarded damages for STC’s failure to perform its obligations under the contract.  STC then petitioned the Supreme Court of Mauritius to set aside the verdict, arguing that the Singapore tribunal lacked jurisdiction.  In 2019, the Supreme Court set aside the arbitral award on the grounds that the contract violated the Public Procurement Act, was illegal and unenforceable, and therefore the arbitral award was contrary to the public policy of Mauritius under the Mauritian International Arbitration Act 2008.  In June 2019, Betamax appealed to the UK Privy Council, which in June 2021 decided in favor of Betamax and enforcement of the arbitration decision.  The Privy Council ruled that the Supreme Court was not entitled to review the arbitration decision and that the contract did not breach public procurement laws.

In October 2017, the Association des Hoteliers et Restaurateurs of Mauritius (AHRIM) and the Sea Users Association (SUA) challenged the GoM’s issuance of a license to Growfish International to develop aquaculture farms.  The groups feared the fish farms would negatively impact tourism and the marine environment.  The Environment and Land Use Appeal Tribunal ruled in favor of AHRIM and SUA.  The Ministry of Environment and Growfish appealed to the Supreme Court and proceedings were ongoing.

A Malaysian power company, CT Power, challenged the GoM’s decision to cancel a proposed energy project that it had been negotiating with the previous government. The Supreme Court ruled in favor of the Malaysian company, and the GoM appealed to the Judicial Committee of the Privy Council.  In June 2019, the Privy Council decided in favor of the GoM.

Local courts recognized and enforced foreign arbitral awards issued against the government or a public body.  The Convention on the Recognition and Enforcement of Foreign Arbitral Awards Act 2004 is the domestic legislation providing for the enforcement of awards under the 1958 New York Convention.  Because Mauritius is a party to the New York Convention without any reciprocity reservation, all foreign arbitral awards are enforceable in Mauritius.  The 1969 Investment Disputes (Enforcement of Awards) Act is the domestic legislation providing for enforcement of disputes under the Washington Convention.

There is no known or reported extrajudicial action taken against foreign investors in Mauritius.

International Commercial Arbitration and Foreign Courts

In 2011, the GoM, the London Court of International Arbitration (LCIA), and the Mauritius International Arbitration Center (MIAC) established a new arbitration center in Mauritius called the LCIA-MIAC Arbitration Center.  LCIA-MIAC offered all services offered by the LCIA in the United Kingdom.  In July 2018, the LCIA and GoM terminated the partnership, after which the MIAC began operating as an independent organization.  The organization’s website has additional information: http://miac.mu/.

Additionally, the Mauritius Chamber of Commerce and Industry (MCCI), which pioneered institutional arbitration in Mauritius, set up the MCCI Permanent Court of Arbitration in 1996. In 2012, it was rebranded as the MCCI Arbitration and Mediation Center (MARC).   As from July 2020, MARC was operating under the Mediation and Arbitration Center (Mauritius) Ltd.  More information is available via the following link:  https://www.marc.mu/en.

Bankruptcy Regulations

Bankruptcy is not criminalized in Mauritius.  The Insolvency Act of 2009 amended and consolidated the law relating to insolvency of individuals and companies and the distribution of assets in the case of insolvency and related matters.  Most notably, the Act introduced administration procedures, providing creditors the option of a more orderly reorganization or restructuring of a business than in liquidation.  A bankrupt individual is automatically discharged from bankruptcy three years after adjudication but may apply to be discharged earlier.  The Act draws on the Model Law on Cross-Border Insolvency adopted by the United Nations Commission on International Trade Law in 1997.

According to the World Bank’s 2020 Doing Business report, Mauritius ranks 28th out of 190 countries in terms of resolving insolvency, with a rating of 12 over 16 in the World Bank’s strength of insolvency framework index.

There were no special procedures that foreign creditors must comply with when submitting claims in insolvency proceedings.  The law provides that foreign creditors have the same rights regarding the commencement of, and participation in, an insolvency proceeding as Mauritian creditors.  The Second Schedule to the Insolvency Act applies to foreign creditors with respect to the procedures for proving their debts.

The creditor must send to the liquidator of the company an affidavit, sworn by the creditor or an authorized person, that verifies the debt and contains a statement of account showing the particulars of the debt.  The affidavit must also state whether the creditor is a secured creditor.  Section 132 of the Act outlines the conditions under which a liquidator may be appointed for a foreign company and related procedures.

In 2020, the Insolvency Act was amended to give the Bankruptcy Division of the Supreme Court power to order that a deed of company arrangement be binding on the company and all classes of creditors where there are at least two classes of creditors and one of the classes resolves that the company executes the deed.

Capital Markets and Portfolio Investment

The Mauritian government welcomes foreign portfolio investment.

The Stock Exchange of Mauritius (SEM) was created in 1989 and was opened to foreign investors following the lifting of foreign exchange controls in 1994.  Foreign investors do not need approval to trade shares, except for when doing so would result in their holding more than 15 percent in a sugar company, a rule detailed in the Securities (Investment by Foreign Investors) Rules of 2013.  Incentives to foreign investors include no restrictions on the repatriation of revenue from the sale of shares and exemption from tax on dividends for all resident companies and for capital gains of shares held for more than six months.

The SEM currently operates two markets: the Official Market and the Development and Enterprise Market (DEM).  As of December 2019, the shares of 58 companies (local, global business, and foreign companies) were listed on the Official Market, representing a market capitalization of 7.4 billion USD, a fall of 15.8% from the previous financial year. This fall is mainly attributed to the impact of the Covid 19 pandemic.  Unique in Africa, the SEM can list, trade, and settle equity and debt products in U.S. dollars, Euros, Pounds Sterling, South African Rand, as well as Mauritian Rupees.  A variety of new asset classes of securities such as global funds, depositary receipts, mineral companies, and specialist securities including exchange-traded funds and structured products have also been introduced on the SEM.  The DEM was launched in 2006 and the shares of 39 companies are currently listed on this market with a market capitalization of 1.1 billion USD as of June 2020, falling by 24.4 percent during the financial year 2019-2020.  Foreign investors accounted for 26.4 percent of the trading volume on the exchange for the financial year 2019-2020, compared to 39.5 percent for the financial year 2018-2019.  Standard & Poor’s, Morgan Stanley, Dow Jones, and FTSE have included the Mauritius stock market in a number of their stock indices.  Since 2005, the SEM has been a member of the World Federation of Exchanges.  The SEM is also a partner exchange of the Sustainable Stock Exchanges Initiative.  In 2018, in line with its strategy to digitalize its investor services, SEM launched the mySEM mobile application.

In 2020, the slowdown in domestic economic activity resulting from the Covid-19 pandemic caused many listed companies to publish reduced earnings and defer dividend payments.  After a strong decline between March and April 2020, the SEMDEX and SEM-10 continued a downward trend during the rest of the year. Stocks associated with tourism were the hardest hit.

The government respects IMF Article VIII by refraining from restrictions on payments and transfers for current international transactions.

A variety of credit instruments is available to local and foreign investors through the banking system.

Money and Banking System

Mauritius has a sophisticated banking sector.  As of the end September 2020, 19 banks were licensed to undertake banking business, of which eight were local banks, eight were foreign-owned subsidiaries, and three are branches of foreign banks. The license of one bank was revoked in August 2020.  Another bank is currently under conservatorship.  One bank conducts solely Islamic banking.  Further details can be obtained at https://www.bom.mu/financial-stability/supervision/licensees/list-of-licensees.

The Mauritian banking sector historically accounts for about 7 percent of GDP (excluding bank-owned leasing businesses) and is the main component of financial services, which contribute 12 percent of GDP.  The total assets of the sector represented around 393.8 percent of GDP at the end of September 2020, compared to 319.3 percent at the end of March 2020.  The banking landscape is relatively concentrated, with the two, long-established domestic entities:  the Mauritius Commercial Bank (MCB) and the State Bank of Mauritius (SBM), which together constitute about 40 percent of the total domestic market.  Maubank, the third-largest bank in the country, became operational in 2016 following a merger between the Mauritius Post & Cooperative Bank and the National Commercial Bank.  The Bank of China started operations in Mauritius in 2016.  Other foreign banks present in Mauritius include HSBC, Barclays Bank, Bank of Baroda, Habib Bank, BCP Bank (Mauritius), Standard Bank, Standard Chartered Bank, State Bank of India, and Investec Bank.  Per the Bank of Mauritius, total banking assets as of January 2021 amounted to 43.5 billion USD).

Mauritian banks are compliant with international norms such as Basel III, IFRS 9, US Foreign Account Tax Compliance Act (FATCA), and the OECD’s Common Reporting Standard (CRS).

At the end of September 2020, non-banking, deposit-taking institutions, comprising leasing companies and finance companies, held assets equivalent to 15 percent of GDP, an increase of about 2 percent since April 2020.  Further details can be obtained at https://www.bom.mu/sites/default/files/financial_stability_report_-_december_2020_0.pdf.

According to the Banking Act of 2004, all banks are free to conduct business in all currencies.  There are also six non-bank deposit-taking institutions, as well as 12 money changers and foreign exchange dealers.  There are no official government restrictions on foreigners opening bank accounts in Mauritius, but banks may require letters of reference or proof of residence for their due diligence.  The Bank of Mauritius carries out the supervision and regulation of banks as well as non-bank financial institutions authorized to accept deposits.  The Bank of Mauritius has endorsed the Core Principles for Effective Banking Supervision as set out by the Basel Committee on Banking Supervision.

In July 2017, the Banking Act was amended to double the minimum capital requirement to 11.2 million USD from 5.8 million USD.  The Central Bank began reporting the liquidity coverage ratio in 2017 to improve the liquidity profile of banks and their ability to withstand potential liquidity disruptions.  The latest International Monetary Fund Article IV report highlights that banks have increased exposure to the region and that the Bank of Mauritius has strengthened cross-border supervision and cooperation with foreign regulators.  The IMF report also recommends that additional steps be taken to strengthen financial stability, including lowering the high non-performing loans stock through a more stringent approach to writing-off legacy exposures, and by safeguarding the longer-term forex funding needs stemming from banks’ swift expansion abroad.

As part of its Covid-19 response, the BoM has made 132 USD million available through commercial banks as special relief funds to help meet cash flow and working capital requirements.  The cash reserve ratio applicable to commercial banks was reduced to 8 percent from 9 percent.  The BoM also put on hold the Guideline on Credit Impairment Measurement and Income Recognition, which took effect in January 2020.

In July 2019, the Bank of Mauritius Act was amended to allow the Bank of Mauritius to use special reserve funds in exceptional circumstances and with approval of the central bank’s board for the repayment of central government external debt obligations, provided that repayments would not adversely affect the bank’s operations.  This provision was used in January 2020 to repay government debt worth 450 USD million, raising concerns about the central bank’s independence.

Most major banks in Mauritius have correspondent banking relationships with large banks overseas.  In recent years, according to industry experts, no banks have lost correspondent banking relationships and none report being in jeopardy of doing so as of April 2020.

In January 2019, the Bank of Mauritius signed a memorandum of cooperation with the Mauritius Police Force on financial crimes and illicit activities relating to the financial services sector.  In February 2020, the Financial Action Task Force (FATF) named Mauritius as a jurisdiction under increased monitoring, commonly known as the Grey List.  At that time, Mauritius made a high-level political commitment to work with the FATF and the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG) to strengthen the effectiveness of its AML/CFT regime.  Since the completion of its Mutual Evaluation Report in 2018, Mauritius has made progress on a number of its recommended actions to improve technical compliance and effectiveness, including amending the legal framework to require legal persons and legal arrangements to disclose of beneficial ownership information and improving the processes of identifying and confiscating proceeds of crimes.  Mauritius is working to implement its action plan, including (i) demonstrating that the supervisors of its global business sector and Designated Non-Financial Businesses and Professions implement risk-based supervision; (ii) ensuring the access to accurate basic and beneficial ownership information by competent authorities in a timely manner; (iii) demonstrating that law enforcement agencies have capacity to conduct money laundering investigations, including parallel financial investigations and complex cases; (iv) implementing a risk based approach for supervision of its non-profit sector to prevent abuse for terrorism financing purposes, and (v) demonstrating the adequate implementation of targeted financial sanctions through outreach and supervision.

In October 2020, the European Commission added Mauritius to its list of AML-CTF high-risk jurisdictions.  As of April 2021, Mauritius was still on the EU and FATF lists.

In February 2018, the Fintech and Innovation-driven Financial Services (FIFS) Regulatory Committee held its first meeting at the Financial Services Commission, the regulator for the non-banking financial services, to assess the regulatory framework concerning FIFS regulations in Mauritius and to identify priority areas within the regulatory space of fintech activities.  In May 2018, the Committee submitted recommendations for regulating the fintech sector to authorities.  A National Regulatory Sandbox License (RSL) Committee was set up to assess all fintech applications requiring a sandbox license for business activities without an existing legal framework.

Effective March 2019, the Financial Services Commission allows businesses that provide custodial services for digital assets.  According to the Bank of Mauritius 2019 Annual Report, the FIFS committee has initiated work on approaches to regulate Fintech tools such as artificial intelligence, big data, distributed ledger technologies, and biometrics.

In June 2020, the BoM announced that it was creating a central Know Your Client registry.

Foreign Exchange and Remittances

Foreign Exchange 

The government of Mauritius abolished foreign exchange controls in 1994.  Consequently, no approval is required for converting, transferring, or repatriating profits, dividends, or capital gains earned by a foreign investor in Mauritius.  Funds associated with any form of investment can be freely converted into any world currency.

The exchange rate is generally market-determined though the Bank of Mauritius, the central bank, occasionally intervenes.  Between January 2019 and December 2019, the Mauritian rupee depreciated against the U.S. dollar by 6.4 percent, the pound by 8.3 percent, and the euro by 3.6 percent.  Due to the Covid-19 crisis, the Bank of Mauritius intervened regularly on the domestic foreign exchange market in early 2020.

Remittance Policies

There are no time or quantity limits on remittance of capital, profits, dividends, and capital gains earned by a foreign investor in Mauritius.  Mauritius has a well-developed and modern banking system.  There is no legal parallel market in Mauritius for investment remittances.  The Embassy is unaware of any proposed changes by the government to its investment remittance policies.

Sovereign Wealth Funds

The government of Mauritius does not have a Sovereign Wealth Fund.

The government’s stated policy is to act as a facilitator to business, leaving production to the private sector.  The government, however, still controls key services directly or through parastatal companies in the power and water, television broadcasting, and postal service sectors.

The government also holds controlling shares in the State Bank of Mauritius, Air Mauritius (the national airline), and Mauritius Telecom.  These state-controlled companies have Boards of Directors on which seats are allocated to senior government officials.  The government nominates the chairperson and CEO of each of these companies.  In April 2020, Air Mauritius requested voluntary administration, similar to Chapter 11 bankruptcy in the United States, because it could not comply with financial obligations.

The government also invests in a wide variety of Mauritian businesses through its investment arm, the State Investment Corporation.  The government is also the owner of Maubank and the National Insurance Company.

Two parastatal entities are involved in the importation of agricultural products: the Agricultural Marketing Board (AMB) and the State Trading Corporation (STC).  The AMB’s role is to ensure that the supply of certain basic food products is constant, and their prices remain affordable.  The STC is the only authorized importer of petroleum products, liquefied petroleum gas, and flour.  SOEs purchase from or supply goods and services to private sector and foreign firms through tenders.

Audited accounts of SOEs are published in their annual reports.  Mauritius is part of the OECD network on corporate governance of state-owned enterprises in southern Africa.

Privatization Program 

The government has no specific privatization program.  In 2017, however, as part of its broader water reform efforts, the government agreed to a World Bank recommendation to appoint a private operator to maintain and operate the country’s potable water distribution system.  Under the World Bank’s proposed public-private partnership, the Central Water Authority (CWA) would continue to own distribution and supply assets, and will be responsible for business planning, setting tariffs, capital expenditure, and monitoring and enforcing the private operator’s performance.

In March 2018, despite protest by trade unions and consumer associations, the Minister of Energy and Public Utilities reiterated his intention to engage by the end of the year a private operator as a strategic partner to take over the water distribution services of the CWA.  To date, this has not materialized.  The government has said for years it planned to sell control of Maubank, into which it has injected about 173 million USD since it nationalized the bank in 2015.  In the 2019-2020 budget speech, the prime minister said the government would sell non-strategic assets to reduce government debt.  His office never identified a list of assets, but in parliament the prime minister has mentioned Maubank, the National Insurance Company, and Casinos of Mauritius as possible divestments.

Mauritius has a long tradition of political and social stability.  Civil unrest and political violence are uncommon.  Free and fair national elections are held every five years with the last general elections held in November 2019.  Those most recent elections took place without incident.  The current prime minister, Pravind Jugnauth previously served as finance minister, and was appointed prime minister 2017 after his father resigned (in accordance with the constitution). Jugnauth won reelection in 2019.   In August 2020 and February 2021, civilians engaged in mass protests following allegations of corruption and mismanagement by the government.  The protests were orderly and without incident.

Crime rates are low, but petty and violent crime can occur.  Visitors should keep track of their belongings at all times due to the potential for pickpocketing and purse-snatching, especially in crowded and tourist areas.  Visitors should also avoid walking alone, particularly on isolated beaches and at night, and should avoid demonstrations.

* Source for Host Country Data: Bank of Mauritius. The data provided includes the stock positions of global business companies.

Policies Towards Foreign Direct Investment

Mexico is open to foreign direct investment (FDI) in the vast majority of economic sectors and has consistently been one of the largest emerging market recipients of FDI.  Mexico’s proximity to the United States and preferential access to the U.S. market, macroeconomic stability, large domestic market, growing consumer base, and increasingly skilled yet cheap labor combine to attract foreign investors.  The COVID-19 economic crisis showed how linked North American supply chains are and highlighted new opportunities for partnership and investment.  Still, recent policy and regulatory changes have created doubts about the investment climate, particularly in the energy and the formal employment pensions management sectors.

Historically, the United States has been one of the largest sources of FDI in Mexico.  According to Mexico’s Secretariat of Economy, FDI flows for 2020 totaled USD 29.1 billion, a decrease of 11.7 percent compared to the preliminary information for 2019 (USD 32.9 billion), and a 14.7 percent decline compared to revised numbers.  The Secretariat cited COVID’s impact on global economic activity as the main reason for the decline.  From January to December 2020, 22 percent of FDI came from new investment.  New investment in 2020 (USD 6.4 billion) was only approximately half of the new investments received in 2019 (USD 12.8 billion), and 55.4 percent came from capital reinvestment while 24.9 percent from parent company accounts.  The automotive, aerospace, telecommunications, financial services, and electronics sectors typically receive large amounts of FDI.

Most foreign investment flows to northern states near the U.S. border, where most maquiladoras (export-oriented manufacturing and assembly plants) are located, or to Mexico City and the nearby “El Bajio” (e.g. Guanajuato, Queretaro, etc.) region.  In the past, foreign investors have overlooked Mexico’s southern states, although the administration is focused on attracting investment to the region, including through large infrastructure projects such as the Maya Train, the Dos Bocas refinery, and the trans-isthmus rail project.

The 1993 Foreign Investment Law, last updated in March 2017, governs foreign investment in Mexico, including which business sectors are open to foreign investors and to what extent.  It provides national treatment, eliminates performance requirements for most foreign investment projects, and liberalizes criteria for automatic approval of foreign investment.  Mexico is also a party to several Organization for Economic Cooperation and Development (OECD) agreements covering foreign investment, notably the Codes of Liberalization of Capital Movements and the National Treatment Instrument.

The administration has integrated components of the government’s investment agency into other ministries and offices.

Limits on Foreign Control and Right to Private Ownership and Establishment

Mexico reserves certain sectors, in whole or in part, for the State, including:  petroleum and other hydrocarbons; control of the national electric system, radioactive materials, telegraphic and postal services; nuclear energy generation; coinage and printing of money; and control, supervision, and surveillance of ports of entry.  Certain professional and technical services, development banks, and the land transportation of passengers, tourists, and cargo (not including courier and parcel services) are reserved entirely for Mexican nationals.  See section six for restrictions on foreign ownership of certain real estate.

Reforms in the energy, power generation, telecommunications, and retail fuel sales sectors have liberalized access for foreign investors.  While reforms have not led to the privatization of state-owned enterprises such as Pemex or the Federal Electricity Commission (CFE), they have allowed private firms to participate.  Still, the Lopez Obrador administration has made significant regulatory and policy changes that favor Pemex and CFE over private participants.  The changes have led private companies to file lawsuits in Mexican courts and several are considering international arbitration.

Hydrocarbons:  Private companies participate in hydrocarbon exploration and extraction activities through contracts with the government under four categories:  competitive contracts, joint ventures, profit sharing agreements, and license contracts.  All contracts must include a clause stating subsoil hydrocarbons are owned by the State.  The government has held nine auctions allowing private companies to bid on exploration and development rights to oil and gas resources in blocks around the country.  Between 2015 and 2018, Mexico auctioned more than 100 land, shallow, and deep-water blocks with significant interest from international oil companies.  The administration has since postponed further auctions but committed to respecting the existing contracts awarded under the previous administration.  Still, foreign players were discouraged when Pemex sought to take operatorship of a major shallow water oil discovery made by a U.S. company-led consortium.  The private consortium had invested more than USD 200 million in making the discovery and the outcome of this dispute has yet to be decided.

Telecommunications:  Mexican law states telecommunications and broadcasting activities are public services and the government will at all times maintain ownership of the radio spectrum.  In January 2021, President Lopez Obrador proposed incorporating the independent Federal Telecommunication Institute (IFT) into the Secretariat of Communications and Transportation (SCT), in an attempt to save government funds and avoid duplication.  Non-governmental organizations and private sector companies said such a move would potentially violate the USMCA, which mandates signatories to maintain independent telecommunications regulators.  As of March 2021, the proposal remains pending.  Mexico’s Secretary of Economy Tatiana Clouthier underscored in public statements that President López Obrador is committed to respecting Mexico’s obligations under the USMCA, including maintaining an autonomous telecommunications regulator.

Aviation:  The Foreign Investment Law limited foreign ownership of national air transportation to 25 percent until March 2017, when the limit was increased to 49 percent.

The USMCA, which entered into force July 1, 2020, maintained several NAFTA provisions, granting U.S. and Canadian investors national and most-favored-nation treatment in setting up operations or acquiring firms in Mexico.  Exceptions exist for investments restricted under the USMCA.  Currently, the United States, Canada, and Mexico have the right to settle any legacy disputes or claims under NAFTA through international arbitration for a sunset period of three years following the end of NAFTA.  Only the United States and Mexico are party to an international arbitration agreement under the USMCA, though access is restricted as the USMCA distinguishes between investors with covered government contracts and those without.  Most U.S. companies investing in Mexico will have access to fewer remedies under the USMCA than under NAFTA, as they will have to meet certain criteria to qualify for arbitration.  Local Mexican governments must also accord national treatment to investors from USMCA countries.

Approximately 95 percent of all foreign investment transactions do not require government approval.  Foreign investments that require government authorization and do not exceed USD 165 million are automatically approved, unless the proposed investment is in a legally reserved sector.

The National Foreign Investment Commission under the Secretariat of the Economy is the government authority that determines whether an investment in restricted sectors may move forward.  The Commission has 45 business days after submission of an investment request to make a decision.  Criteria for approval include employment and training considerations, and contributions to technology, productivity, and competitiveness.  The Commission may reject applications to acquire Mexican companies for national security reasons.  The Secretariat of Foreign Relations (SRE) must issue a permit for foreigners to establish or change the nature of Mexican companies.

Other Investment Policy Reviews

There has not been an update to the World Trade Organization’s (WTO) trade policy review of Mexico since June 2017 covering the period to year-end 2016.

Business Facilitation

According to the World Bank, on average registering a foreign-owned company in Mexico requires 11 procedures and 31 days.  Mexico ranked 60 out of 190 countries in the World Bank’s ease of doing business report in 2020.  In 2016, then-President Pena Nieto signed a law creating a new category of simplified businesses called Sociedad for Acciones Simplificadas (SAS).  Owners of SASs are supposed to be able to register a new company online in 24 hours.  Still, it can take between 66 and 90 days to start a new business in Mexico, according to the World Bank.  The Government of Mexico maintains a business registration website:  www.tuempresa.gob.mx.  Companies operating in Mexico must register with the tax authority (Servicio de Administration y Tributaria or SAT), the Secretariat of the Economy, and the Public Registry.  Additionally, companies engaging in international trade must register with the Registry of Importers, while foreign-owned companies must register with the National Registry of Foreign Investments.

Since October 2019, SAT has launched dozens of tax audits against major international and domestic corporations, resulting in hundreds of millions of dollars in new tax assessments, penalties, and late fees.  Multinational and Mexican firms have reported audits based on diverse aspects of the tax code, including adjustments on tax payments made, waivers received, and deductions reported during the Enrique Peña Nieto administration.

Changes to ten-digit tariff lines conducted by the Secretariat of Economy in 2020 created trade disruptions with many shipments held at the border, stemming from lack of clear communication between government agencies that resulted in different interpretation by SAT.

Outward Investment

Various offices at the Secretariat of Economy and the Secretariat of Foreign Affairs handle promoting Mexican outward investment and assistance to Mexican firms acquiring or establishing joint ventures with foreign firms.  Mexico does not restrict domestic investors from investing abroad.

Transparency of the Regulatory System

The National Commission on Regulatory Improvement (CONAMER), within the Secretariat of Economy, is the agency responsible for streamlining federal and sub-national regulation and reducing the regulatory burden on business.  Mexican law requires secretariats and regulatory agencies to conduct impact assessments of proposed regulations.  Assessments are made available for public comment via CONAMER’s website:  https://www.gob.mx/conamer.  The official gazette of state and federal laws currently in force in Mexico is publicly available via:  http://www.ordenjuridico.gob.mx/.  Mexican law provides for a 20-day public consultation period for most proposed regulations.  Any interested stakeholder has the opportunity to comment on draft regulations and the supporting justification, including regulatory impact assessments.  Certain measures are not subject to a mandatory public consultation period.  These include measures concerning taxation, responsibilities of public servants, the public prosecutor’s office executing its constitutional functions, and the Secretariats of National Defense (SEDENA) and the Navy (SEMAR).

The National Quality Infrastructure Program (PNIC) is the official document used to plan, inform, and coordinate standardization activities, both public and private.  The PNIC is published annually by the Secretariat of Economy in Mexico’s Official Gazette.  The PNIC describes Mexico’s plans for new voluntary standards (Normas Mexicanas; NMXs) and mandatory technical regulations (Normas Oficiales Mexicanas; NOMs) as well as proposed changes to existing standards and technical regulations.  Interested stakeholders have the opportunity to request the creation, modification, or cancelation of NMXs and NOMs as well as participate in the working groups that develop and modify these standards and technical regulations.  Mexico’s antitrust agency, the Federal Commission for Economic Competition (COFECE), plays a key role protecting, promoting, and ensuring a competitive free market in Mexico as well as protecting consumers.  COFECE is responsible for eliminating barriers both to competition and free market entry across the economy (except for the telecommunications sector, which is governed by its own competition authority) and for identifying and regulating access to essential production inputs.

In addition to COFECE, the Energy Regulatory Commission (CRE) and National Hydrocarbon Commission (CNH) are both technical-oriented independent agencies that play important roles in regulating the energy and hydrocarbons sectors.  CRE regulates national electricity generation, coverage, distribution, and commercialization, as well as the transportation, distribution, and storage of oil, gas, and biofuels.  CNH supervises and regulates oil and gas exploration and production and issues oil and gas upstream (exploration/production) concessions.

Mexico has seen a shift in the public procurement process since the onset of the COVID-19 pandemic.  Government entities are increasingly awarding contracts either as direct awards or by invitation-only procurements.  In addition, there have been recent tenders that favor European standards over North American standards.

International Regulatory Considerations

Generally speaking, the Mexican government has established legal, regulatory, and accounting  systems that are transparent and consistent with international norms.  Still, the Lopez Obrador administration has eroded the autonomy and publicly questioned the value of specific antitrust and energy regulators and has proposed dissolving some of them in order to cut costs.  Furthermore, corruption continues to affect equal enforcement of some regulations.  The Lopez Obrador administration rolled out an ambitious plan to centralize government procurement in an effort to root out corruption and generate efficiencies.  The administration estimated it could save up to USD 25 billion annually by consolidating government purchases in the Secretariat of Finance.  Still, the expedited rollout and lack of planning for supply chain contingencies led to several sole-source purchases.  The Mexican government’s budget is published online and readily available.  The Bank of Mexico also publishes and maintains data about the country’s finances and debt obligations.

Investors are increasingly concerned the administration is undermining confidence in the “rules of the game,” particularly in the energy sector, by weakening the political autonomy of COFECE, CNH, and CRE.  Still, COFECE has successfully challenged regulatory changes in the electricity sector that favor state-owned enterprises over maintaining competitive prices for the consumer.  The administration has appointed five of seven CRE commissioners over the Senate’s objections, which voted twice to reject the nominees in part due to concerns their appointments would erode the CRE’s autonomy.  The administration’s budget cuts resulted in significant layoffs, which has reportedly hampered agencies’ ability to carry out their work, a key factor in investment decisions.  The independence of the CRE and CNH was further undermined by a memo from the government to both bodies instructing them to use their regulatory powers to favor state-owned Pemex and CFE.

Legal System and Judicial Independence

Since the Spanish conquest in the 1500s, Mexico has had an inquisitorial system adopted from Europe in which proceedings were largely carried out in writing and sealed from public view.  Mexico amended its Constitution in 2008 to facilitate change to an oral accusatorial criminal justice system to better combat corruption, encourage transparency and efficiency, while ensuring respect for the fundamental rights of both the victim and the accused.  An ensuing National Code of Criminal Procedure passed in 2014 and is applicable to all 32 states.  The national procedural code is coupled with each state’s criminal code to provide the legal framework for the new accusatorial system, which allows for oral, public trials with the right of the defendant to face his/her accuser and challenge evidence presented against him/her, right to counsel, due process, and other guarantees.  Mexico fully adopted the new accusatorial criminal justice system at the state and federal levels in June 2016.

Mexico’s Commercial Code, which dates back to 1889, was most recently updated in 2014.  All commercial activities must abide by this code and other applicable mercantile laws, including commercial contracts and commercial dispute settlement measures.  Mexico has multiple specialized courts regarding fiscal, labor, economic competition, broadcasting, telecommunications, and agrarian law.

The judicial branch and Prosecutor General’s office (FGR) are constitutionally independent from each other and the executive.  The Prosecutor General is nominated by the president and approved by a two-thirds majority in the Senate for a nine-year term, effectively de-coupling the Prosecutor General from the political cycle of elections every six years.  With the historic 2019 labor reform, Mexico also created an independent labor court system run by the judicial branch (formerly this was an executive branch function).  The labor courts are being brought on line in a phased process by state with the final phase completed on May 1, 2022.

Laws and Regulations on Foreign Direct Investment

Mexico’s Foreign Investment Law sets the rules governing foreign investment into the country.  The National Commission for Foreign Investments, formed by several cabinet-level ministries including Interior (SEGOB), Foreign Relations (SRE), Finance (Hacienda), and Economy (SE) establishes the criteria for administering investment rules.

Competition and Antitrust Laws

Mexico has two constitutionally autonomous regulators to govern matters of competition – the Federal Telecommunications Institute (IFT) and the Federal Commission for Economic Competition (COFECE).  IFT governs broadcasting and telecommunications, while COFECE regulates all other sectors.  For more information on competition issues in Mexico, please visit COFECE’s bilingual website at: www.cofece.mx.  As mentioned above, Lopez Obrador has publicly questioned the value of COFECE and his party unsucessfully introduced a proposal last year which would have dramatically reduced its resources and merged COFECE and other regulators into a less-independent structure.  COFECE requires a quorum of at least three commissioners in order to act and currently has four out of seven commissioner seats filled.  The current chairwoman of the agency’s term as chair will expire in September, which raises questions about whether leadership will change and whether, given the hostility to the agency, the president will nominate new commissioners.

Expropriation and Compensation

USMCA (and NAFTA) contain clauses stating Mexico may not directly nor indirectly expropriate property, except for public purpose and on a non-discriminatory basis.  Expropriations are governed by international law and require rapid fair market value compensation, including accrued interest.  Investors have the right to international arbitration. The USMCA contains an annex regarding U.S.-Mexico investment disputes and those related to covered government contracts.

Dispute Settlement

ICSID Convention and New York Convention

Mexico ratified the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention) in 1971 and has codified this into domestic law.  Mexico is also a signatory to the Inter-American Convention on International Commercial Arbitration (1975 Panama Convention) and the 1933 Montevideo Convention on the Rights and Duties of States.  Mexico is not a member of the Convention on the Settlement of Investment Disputes between States and Nationals of other States (ICSID Convention), even though many of the investment agreements signed by Mexico include ICSID arbitration as a dispute settlement option.

Investor-State Dispute Settlement

The USMCA covers investor-state dispute settlement (ISDS) between the United States and Mexico in chapter 31.  Canada is not party to USMCA ISDS provisions as access to dispute resolution will be possible under the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (the “CPTPP”).  U.S. and Mexican investors will have access to a very similar regime under the USMCA available under NAFTA.  Foreign investors who are “part[ies] to a covered government contract” and belong to five “covered sectors”: (i) oil and gas; (ii) power generation; (iii) telecommunications; (iv) transportation; and (v) infrastructure will have access to ISDS per USMCA provisions but only after first defending their claims in local courts before initiating arbitration. A less favorable regime will apply to all other foreign investors under the USMCA, who can only access the USMCA’s ISDS system to enforce a limited number of claims and must first defend their claims in local courts before initiating arbitration.  Investors will be able to file new NAFTA claims before July 1, 2023, provided that the dispute arises out of investments made when NAFTA was still in force and remained “in existence” on July 1, 2020.

Since NAFTA’s inception, there have been 13 cases filed against Mexico by U.S. and Canadian investors who allege expropriation and/or other violations of Mexico’s NAFTA obligations.  For more details on the cases, please visit: https://icsid.worldbank.org/en/Pages/cases/searchcases.aspx

International Commercial Arbitration and Foreign Courts

The Arbitration Center of Mexico (CAM) is a specialized, private institution administering commercial arbitration as an alternative dispute resolution mechanism.  The average duration of a CAM-conducted arbitration process conducted is 14 months.  The Commercial Code dictates an arbitral award, regardless of the country where it originated, must be recognized as binding.  The award must be enforced after presenting a formal written petition to a judge.

The internal laws of both Pemex and CFE state all national disputes of any nature will have to be resolved by federal courts.  State-owned Enterprises (SOEs) and their productive subsidiaries may opt for alternative dispute settlement mechanisms under applicable commercial legislation and international treaties of which Mexico is a signatory.  When contracts are executed in a foreign country, Pemex and CFE have the option to follow procedures governed by non-Mexican law, to use foreign courts, or to participate in arbitration.

Bankruptcy Regulations

Mexico’s Reorganization and Bankruptcy Law (Ley de Concursos Mercantiles) governs bankruptcy and insolvency.  Congress approved modifications in 2014 to shorten procedural filing times and convey greater juridical certainty to all parties, including creditors.  Declaring bankruptcy is legal in Mexico and it may be granted to a private citizen, a business, or an individual business partner.  Debtors, creditors, or the Attorney General can file a bankruptcy claim.  Mexico ranked 33 out of 190 countries for resolving insolvency in the World Bank’s 2020 Doing Business report.  The average bankruptcy filing takes 1.8 years to be resolved and recovers 63.9 cents per USD, which compares favorably to average recovery in Latin America and the Caribbean of just 31.2 cents per USD.  The “Buró de Crédito” is Mexico’s main credit bureau.  More information on credit reports and ratings can be found at:  http://www.burodecredito.com.mx/ .

Capital Markets and Portfolio Investment

The Mexican government is generally open to foreign portfolio investments, and foreign investors trade actively in various public and private asset classes.  Foreign entities may freely invest in federal government securities.  The Foreign Investment Law establishes foreign investors may hold 100 percent of the capital stock of any Mexican corporation or partnership, except in those few areas expressly subject to limitations under that law.  Foreign investors may also purchase non-voting shares through mutual funds, trusts, offshore funds, and American Depositary Receipts.

They also have the right to buy directly limited or nonvoting shares as well as free subscription shares, or “B” shares, which carry voting rights.  Foreigners may purchase an interest in “A” shares, which are normally reserved for Mexican citizens, through a neutral fund operated by one of Mexico’s six development banks.  Finally, Mexico offers federal, state, and local governments bonds that are rated by international credit rating agencies.  The market for these securities has expanded rapidly in past years and foreign investors hold a significant stake of total federal issuances.  However, foreigners are limited in their ability to purchase sub-sovereign state and municipal debt.  Liquidity across asset classes is relatively deep.

Mexico established a fiscally transparent trust structure known as a FICAP in 2006 to allow venture and private equity funds to incorporate locally.  The Securities Market Law (Ley de Mercado de Valores) established the creation of three special investment vehicles which can provide more corporate and economic rights to shareholders than a normal corporation.  These categories are: (1) Investment Promotion Corporation (Sociedad Anonima de Promotora de Inversion or SAPI); (2) Stock Exchange Investment Promotion Corporation (Sociedad Anonima Promotora de Inversion Bursatil or SAPIB); and (3) Stock Exchange Corporation (Sociedad Anonima Bursatil or SAB).  Mexico also has a growing real estate investment trust market, locally referred to as Fideicomisos de Infraestructura y Bienes Raíces (FIBRAS) as well as FIBRAS-E, which allow for investment in non-real estate investment projects.  FIBRAS are regulated under Articles 187 and 188 of Mexican Federal Income Tax Law.

Money and Banking System

Financial sector reforms signed into law in 2014 have improved regulation and supervision of financial intermediaries and have fostered greater competition between financial services providers.  While access to financial services – particularly personal credit for formal sector workers – has expanded in the past four years, bank and credit penetration in Mexico remains low compared to OECD and emerging market peers.  Coupled with sound macroeconomic fundamentals, reforms have created a positive environment for the financial sector and capital markets.  According to the National Banking and Stock Commission (CNBV), the banking system remains healthy and well capitalized.  Non-performing loans have fallen 60 percent since 2001 and now account for 2.1 percent of all loans.

Mexico’s banking sector is heavily concentrated and majority foreign-owned:  the seven largest banks control 85 percent of system assets and foreign-owned institutions control 70 percent of total assets.  The USMCA maintains national treatment guarantees.  U.S. securities firms and investment funds, acting through local subsidiaries, have the right to engage in the full range of activities permitted in Mexico.

The Bank of Mexico (Banxico), Mexico’s central bank, maintains independence in operations and management by constitutional mandate.  Its main function is to provide domestic currency to the Mexican economy and to safeguard the Mexican Peso’s purchasing power by gearing monetary policy toward meeting a 3 percent inflation target over the medium term.

Mexico’s Financial Technology (FinTech) law came into effect in March 2018 and administration released secondary regulations in 2019, creating a broad rubric for the development and regulation of innovative financial technologies.  The law covers both cryptocurrencies and a regulatory “sandbox” for start-ups to test the viability of products, placing Mexico among the FinTech policy vanguard.  The reforms have already attracted significant investment to lending fintech companies and mobile payment companies.  Six fintechs have been authorized to operate in the Mexican market and CNBV is reviewing other applications.

Foreign Exchange and Remittances

Foreign Exchange

The Government of Mexico maintains a free-floating exchange rate.

Mexico maintains open conversion and transfer policies.  In general, capital and investment transactions, remittance of profits, dividends, royalties, technical service fees, and travel expenses are handled at market-determined exchange rates.  Mexican Peso (MXN)/USD exchange is available on same day, 24- and 48-hour settlement bases.  In order to prevent money-laundering transactions, Mexico imposes limits on USD cash deposits.  Businesses in designated border and tourism zones may deposit more than USD 14,000 per month subject to reporting rules and providing justification for their need to conduct USD cash transactions.  Individual account holders are subject to a USD 4,000 per month USD cash deposit limit.  In 2016, Banxico launched a central clearing house to allow for USD clearing services wholly within Mexico to improve clearing services for domestic companies with USD income.

Remittance Policies

There have been no recent changes in Mexico’s remittance policies.  Mexico continues to maintain open conversion and transfer policies.

Sovereign Wealth Funds

The Mexican Petroleum Fund for Stability and Development (FMP) was created as part of 2013 budgetary reforms.  Housed in Banxico, the fund distributes oil revenues to the national budget and a long-term savings account.  The FMP incorporates the Santiago Principles for transparency, placing it among the most transparent Sovereign Wealth Funds in the world.  Both Banxico and Mexico’s Supreme Federal Auditor regularly audit the fund.  Mexico is also a member of the International Working Group of Sovereign Wealth Funds.  The Fund received  MXN 197.3 billion (approximately USD 9.9 billion) in income in 2020.  The FMP is required to publish quarterly and annual reports, which can be found at www.fmped.org.mx .

There are two main SOEs in Mexico, both in the energy sector.  Pemex operates the hydrocarbons (oil and gas) sector, which includes upstream, mid-stream, and downstream operations.  Pemex historically contributed one-third of the Mexican government’s budget but falling output and global oil prices alongside improved revenue collection from other sources have diminished this amount over the past decade to about 8 percent.  The Federal Electricity Commission (CFE) operates the electricity sector.  While the Mexican government maintains state ownership, the latest constitutional reforms granted Pemex and CFE management and budget autonomy and greater flexibility to engage in private contracting.

Pemex

As a result of Mexico’s historic energy reform, the private sector is now able to compete with Pemex or enter into competitive contracts, joint ventures, profit sharing agreements, and license contracts with Pemex for hydrocarbon exploration and extraction.  Liberalization of the retail fuel sales market, which Mexico completed in 2017, created significant opportunities for foreign businesses.  Given Pemex frequently raises debt in international markets, its financial statements are regularly audited.  The Natural Resource Governance Institute considers Pemex to be the second most transparent state-owned oil company after Norway’s Statoil.  Pemex’s ten-person Board of Directors contains five government ministers and five independent councilors.  The administration has identified increasing Pemex’s oil, natural gas, and refined fuels production as its chief priority for Mexico’s hydrocarbon sector.

CFE

Changes to the Mexican constitution in 2013 and 2014 opened power generation and commercial supply to the private sector, allowing companies to compete with CFE.  Mexico has held three long-term power auctions since the reforms, in which over 40 contracts were awarded for 7,451 megawatts of energy supply and clean energy certificates.  CFE will remain the sole provider of distribution services and will own all distribution assets.  The 2014 energy reform separated CFE from the National Energy Control Center (CENACE), which now controls the national wholesale electricity market and ensures non-discriminatory access to the grid for competitors.  Still, legal and regulatory changes adopted by the Mexican government attempt to modify the rules governing the electricity dispatch order to favor CFE.  Dozens of private companies and non-governmental organizations have successfully sought injunctions against the measures, which they argue discriminate against private participants in the electricity sector.  Independent power generators were authorized to operate in 1992 but were required to sell their output to CFE or use it to self-supply.  Those legacy self-supply contracts have recently come under criticism with an electricity reform law giving the government the ability to cancel contracts it deems fraudulent.  Under the reform, private power generators may now install and manage interconnections with CFE’s existing state-owned distribution infrastructure.  The reform also requires the government to implement a National Program for the Sustainable Use of Energy as a transition strategy to encourage clean technology and fuel development and reduce pollutant emissions.  The administration has identified increasing CFE-owned power generation as its top priority for the utility, breaking from the firm’s recent practice of contracting private firms to build, own, and operate generation facilities.  CFE forced several foreign and domestic companies to renegotiate previously executed gas supply contracts, which raised significant concerns among investors about contract sanctity.

The main non-market-based advantage CFE and Pemex receive vis-a-vis private businesses in Mexico is related to access to capital.  In addition to receiving direct budget support from the Secretariat of Finance, both entities also receive implicit credit guarantees from the federal government.  As such, both are able to borrow funds on public markets at below the market rate their corporate risk profiles would normally suggest.  In addition to budgetary support, the CRE and SENER have delayed or halted necessary permits for new private sector gas stations, fuel terminals, and power plants, providing an additional non-market-based advantage to CFE and Pemex.

Privatization Program

Mexico’s 2014 energy reforms liberalized access to these sectors but did not privatize state-owned enterprises.

Mass demonstrations are common in the larger metropolitan areas and in the southern Mexican states of Guerrero and Oaxaca.  While political violence is rare, drug and organized crime-related violence has increased significantly in recent years.  Political violence is also likely to accelerate in the run-up to the June 2021 elections as criminal actors seek to promote election of their preferred candidates.  The national homicide rate remained stable at 29 homicides per 100,000 residents, although the number of homicides fell slightly from 35,618 to 35,498.  For complete security information, please see the Safety and Security section in the Consular Country Information page at https://travel.state.gov/content/travel/en/international-travel/International-Travel-Country-Information-Pages/Mexico.html.  Conditions vary widely by state.  For a state-by-state assessment please see the Consular Travel Advisory at https://travel.state.gov/content/travel/en/traveladvisories/traveladvisories/mexico-travel-advisory.html.

Companies have reported general security concerns remain an issue for those looking to invest in the country.  The American Chamber of Commerce in Mexico estimates in a biannual report that security expenses cost business as much as 5 percent of their operating budgets.  Many companies choose to take extra precautions for the protection of their executives.  They also report increasing security costs for shipments of goods.  The Overseas Security Advisory Council (OSAC) monitors and reports on regional security for U.S. businesses operating overseas.  OSAC constituency is available to any U.S.-owned, not-for-profit organization, or any enterprise incorporated in the United States (parent company, not subsidiaries or divisions) doing business overseas (https://www.osac.gov/Country/Mexico/Detail ).

* data from the IMF’s Coordinated Direct Investment Survey

* data from the IMF’s Coordinated Portfolio Investment Survey (CPIS)

Policies Towards Foreign Direct Investment

There are many structural impediments to increasing foreign investment in the FSM.  The FSM has no department dedicated to promoting investment nor any ongoing dialogue with potential investors.  These challenges, both regulatory and political, affect foreign investment and economic progress in general, and addressing them requires a constitutional and political will to change that is unlikely in the foreseeable future.  Some political leaders at the state and national levels are owners of the largest businesses on the islands and strongly oppose the required structural changes that would result in increased competition.  The FSM scores in the lowest quintile in almost all measures and international indices of economic activity and climate for doing business.

In theory, the country’s courts support contractual agreements, but enforcement of judicial decisions is weak.  Foreign firms doing business in the FSM have difficulty collecting debts owed by FSM governments, companies, and individuals, even after obtaining favorable judgments.  For these reasons, the World Bank ranked the FSM very low in protecting minority investors (185th of 190 countries) and enforcing contracts (183rd of 190 countries).  U.S. companies and individuals considering doing business with parties in the FSM should exercise due diligence and negotiate minimal credit and payment arrangements that fully protect their interests.

Policies Towards Foreign Direct Investment

Limits on Foreign Control and Right to Private Ownership and Establishment

All four of the FSM states have limits on foreign ownership of small- and medium-sized businesses.  Large projects are assessed by the respective state government on a case-by-case basis.  Each state requires a separate application for foreign investment permits.  Foreign investment is strictly limited by local ownership requirements (51-60 percent) and residency requirements of more than five years.  Financing through bank loans is not possible due to a weak financial sector.  Local small- and medium-sized businesses are protected from foreign competition through legal restrictions.  Larger projects in competition with a business sector already owned by public figures face strong political opposition.  Large and unrealistic development proposals are received enthusiastically by politicians, but do not move forward primarily due to land issues and traditional land owner disputes.  The FSM does not maintain an investment screening mechanism for inbound foreign investment.

Other Investment Policy Reviews

N/A

Business Facilitation

FSM lacks a single window for online business registration or information portals providing comprehensive business registration information.  The FSM Department of Resources and Development (R&D) maintains information on trade and investment on their website.  It was reported that obtaining licenses and permits in a timely manner may depend more on the relationship of the investor (or local legal counsel) with the official in charge, rather than any clear procedure or timeline.  The World Bank’s 2020 Ease of Doing Business report ranked the FSM as 158th of 190 countries globally in terms of procedures to register a business.

Outward Investment

The FSM government does not promote, incentivize or restrict outward investment.

Transparency of the Regulatory System

The FSM is not a signatory to any convention on transparency in international investment. Transparency of government actions is typically based more on personalities than on the law. Regulatory bodies sometimes involve themselves in issues beyond their jurisdiction. Conversely, other regulations are not uniformly enforced.  It is often difficult to obtain public records, although some states and government organizations do require open meetings. Text or summaries of proposed regulations are published before enactment but are not printed in an official journal or publication, and there is no appeal or administrative review process. In addition, government audits and statistical reports are not prepared promptly and timely data are often unavailable (the most recent publications occurring in 2019 using 2018 data).

The websites that provide the most relevant economic data on FSM are:

National Public Auditor www.fsmopa.fm 
Department of Resources & Development www.fsmrd.fm 
FSM Statistics www.fsmstatistics.fm 

International Regulatory Considerations

The FSM signed on to the Pacific Island Countries Trade Agreement (PICTA) in 2001, but did not ratify the agreement. PICTA is a free trade agreement on trade in goods among 14 members of the Pacific Islands Forum (excluding Australia and New Zealand). Eleven countries – Cook Islands, Fiji, Kiribati, Nauru, Niue, Papua New Guinea, Samoa, Solomon Islands, Tonga, Tuvalu and Vanuatu — have so far ratified PICTA. The FSM is not a member of any regional economic block, nor is it a member of the WTO.

Legal System and Judicial Independence

The FSM follows the U.S. common law system, and uses U.S. case law as precedent.  There are no specialized courts with the exception of Land Courts in Pohnpei and Kosrae.  All States have State Courts and State Supreme Courts. The judicial system remains independent of the executive branch, but is reported to be slow, weak, and lacking the ability to enforce judgments properly.  Regulations or enforcement actions are appealable. Appeals may be adjudicated in either the State or National courts.

Laws and Regulations on Foreign Direct Investment

In September 2018, the Pohnpei State Legislature overrode the Governor’s veto of a bill on Foreign Investment regulations.  The bill became State Law over the objection of several local business leaders. The new law placed all decision making power into the hands of one person, the Registrar of Corporations.

FSM national and state governments use a “traffic light” system to regulate businesses, with red for prohibited, amber for restricted, and green for unrestricted. Industry classifications in this system vary from state to state. The individual states directly regulate all foreign investment, except in the areas of deep ocean fishing, banking, insurance, air travel, and international shipping, which are regulated at the federal level.  Thus, a prospective investor who plans to operate in more than one state must obtain separate permits in each state, and often follow different regulations as well.

The following are the regulations pertaining to restrictions by sector in each of the states:

FSM National

• Red: Arms manufacture, minting of currency, nuclear power, radioactive goods.
• Amber: Increased scrutiny before approval for non-traditional banking services and insurance.
• Green: Banking, fishing, air transport, international shipping.

Kosrae State

• Red: manufacture of toxic or biohazard materials, gambling, casinos, fishing using sodium/cyanide or compressed air.  (Note: There is also currently a ban on all business transactions on Sundays in the capital town. End Note.)
• Amber: Real estate brokerage, non-ecology-based tourism, trade in reef fish, coral harvesting.
• Green: Eco-tourism, export of local goods, professional services.

Pohnpei State

• Red: None presently defined, determined by board from amber candidates.
• Amber: Everything not classified as green.
• Green: Businesses with greater than 60 percent FSM ownership, initial capitalization of USD250,000 or more, professional services with capitalization of USD50,000 or more, and Special Investment Sector businesses with 51 percent FSM ownership in retail, trade, exploration, development, and extraction of land or marine based mineral resources or timber.

Chuuk State

• Red:  Determined by the Director, none codified in law.
• Amber:  Casinos, lotteries, and industries that pollute the environment, destroy local culture and tradition, or deplete natural resources.
• Green:  Eco-tourism, professional services, intra-state airline services, exports of local goods.

Yap State

• Red:  Manufacture of toxic materials, weapons, ammunition, commercial export of reef fish, activities injurious to the health and welfare of the citizens of Yap.
• Amber:  None at present.
• Green:  All others.

Competition and Anti-Trust Laws

There is no law or agency governing competition in the FSM.

Expropriation and Compensation

The FSM Foreign Investment Act of 1997 guarantees no compulsory acquisition or expropriation of property of any foreign investment for which a Foreign Investment Permit is issued, except for violation of laws and regulations and in certain extraordinary circumstances. Those extraordinary circumstances include cases in which such action would be consistent with existing FSM eminent domain law, when such action is necessary to serve overriding national interests, or when either the FSM Congress or the FSM Secretary of Resources and Development has initiated expropriation.  There has been no history of expropriation involving foreign investors or U.S. companies.

Dispute Settlement

ICSID Convention and New York Convention

Since 1993, the FSM has been a member of the International Convention on Settlement of Investment Disputes between States and Nationals of Other States (ICSID), but is not a party to the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards.  To date, there have been no ICSID cases.

Investor-State Dispute Settlement

The FSM is not a signatory to a treaty or investment agreement in which binding international arbitration of investment disputes is recognized. Disputes take years to resolve and still may not produce concrete results.  Some cases have been on the docket, with little or no movement, for thirty years or more.

International Commercial Arbitration and Foreign Courts

There are no provisions under FSM Federal law for alternative dispute resolution.  This is also true of the states, with the exception of Kosrae, where an alternative dispute resolution system has taken the place of a small claims court.  Judgments from foreign jurisdictions are not enforceable in FSM courts.

Bankruptcy Regulations

A bankruptcy law has been in existence since 2005, but was used only three times, generally to avoid taxes.

Capital Markets and Portfolio Investment

There are no stock or commodities exchanges in the FSM.

Money and Banking System

The two commercial banks operating in the country, the Bank of Guam and the Bank of the FSM, can only make small, short-term unsecured loans because of the prohibition of using land or businesses as collateral, difficulties inherent in collecting debts, and the inability to identify collateral that can be attached and sold in the event of default. There are no credit reporting agencies.  The Bank of the FSM is prohibited by its charter from investing in any securities not insured by the U.S. government, so the bulk of its holdings are in U.S. Treasury bonds. The Bank of Guam operates as a deposit collector and transactions facilitator in the FSM, with most of its loans made in Guam.

The Bank of the FSM is protected from takeover by a trigger from the Federal Deposit Insurance Corporation (FDIC) that will cancel its insurance status if foreign ownership exceeds 30 percent.  Foreigners are not allowed to open accounts with the bank unless they provide proof of local residence and work permits and fulfill U.S. Treasury “know thy customer” requirements.

Money Exchange companies such as Western Union operate within FSM and handle the majority of remittances.

Since most businesses are family owned, there are no shares that can be acquired for mergers, acquisitions, or hostile takeovers. The FSM enacted a secured transaction law in 2005 and established a filing office in October 2006 primarily to serve the foreign corporate registration market.

Foreign Exchange and Remittances

Foreign Exchange

The currency of the FSM remains the U.S. dollar.  The only two commercial banks operating in the country at present are the Bank of Guam and the Bank of the FSM, both of which were FDIC insured.

Remittance Policies

There are no specific restrictions on repatriating profits from a business, except in the state of Chuuk, where an amount greater than USD 50,000 requires state approval.

Statistics on family-level and personal remittances are difficult to obtain, with various studies reporting figures ranging from USD 3 to USD 14 million per year entering the FSM.  However, remittances travel into and out of the country. Micronesians working abroad and in the United States sent money to their families in the FSM, while Filipino professionals and laborers working in FSM sent money to their families in the Philippines. The World Bank estimates a drop in remittances of 3.3 percent for FY2020 due to reductions in employment attributable to the COVID-19 pandemic. It did not, however, provide monetary estimates of remittance flows.

Sovereign Wealth Funds

The FSM had no sovereign wealth fund, but the government established a national trust fund modeled on the Compact Trust Fund to provide additional government income after 2023.  That fund is managed by a U.S.-based commercial fund manager.

The FSM established state monopolies and maintains state-owned enterprises (SOEs) in the areas of fuel distribution, telecommunications, and copra production.  These companies are Vital Energy (the parent of FSM Petroleum Corporation (FSMPC)), the FSM Telecommunications Corporation, and the FSM Coconut Development Authority, which was folded into Vital Energy in 2014.  Legislation passed in 2016 opened the telecom market to private companies in order to qualify for World Bank funding for a submarine fiber optic cable to Yap and Palau. Other prominent SOEs include the National Fisheries Corporation, the FSM Development Bank, the College of Micronesia, and Caroline Islands Air, Inc.

FSM does not currently adhere to the convention on the Organization of Economic Cooperation and Development (OECD) guidelines on corporate governance of SOEs.

Privatization Program

There is currently no privatization program in the FSM.

FSM enjoys a stable, democratic form of government with no history of civil or political strife. The islands became part of a UN Trust Territory under U.S. administration following World War II. In 1979, the islands adopted a constitution, formally becoming the Federated States of Micronesia.  Independence came in 1986 under a Compact of Free Association with the United States that was amended and renewed in 2004 and portions related to financial assistance currently are being renegotiated. Under this agreement, the U.S. Government guarantees the FSM’s external security.

The country’s last presidential election was held in March 2019, in which Peter Christian lost his bid for a second term to David W. Panuelo. The population’s main concerns during the campaign season were related to the high unemployment rate, depletion of marine resources from overfishing, corruption, and a reliance on foreign aid.

Table 3: Sources and Destination of FDI
No detailed information is available on the IMF’s Coordinated Portfolio Investment Survey (CPIS) website and no information is available on outward direct investment from FSM.

Table 4: Sources of Portfolio Investment
No detailed information is available on the IMF’s Coordinated Portfolio Investment Survey (CPIS) website and no information is available on outward direct investment from FSM. 14. Contact for More Information

Policies Towards Foreign Direct Investment

One of the poorest countries in Europe, Moldova relies heavily on foreign trade and remittances from abroad for its economic growth.  Under Moldovan law, foreign companies enjoy national treatment in most respects.  In principle, the government views FDI as vital for sustainable economic growth and poverty reduction.  In 2020, a lack of qualified labor and the continued emigration of qualified, working-age Moldovans undermined official efforts to attract foreign investment.

Moldova ratified its Association Agreement with the EU in 2016, with the intent of bringing closer political association and economic integration with the EU.  The DCFTA, a component of the Association Agreement, provides for mutual elimination of customs duties on industrial and most agricultural products and for further liberalization of the services market.  It also addresses other barriers to trade and reforms in economic governance, with the goal of strengthening transparency and competition and adopting EU product standards.  Given its small economy, Moldova has relied on a liberalized trade and investment strategy to increase the export of its goods and services to the EU.

A member of the WTO since 2001, Moldova has signed bilateral and multilateral free trade agreements, including:

• Commonwealth of Independent States (CIS) Free Trade Agreement
• Central European Free Trade Agreement
• EU DCFTA
• Turkey

After Moldova signed the Association Agreement and DCFTA in 2014, Russia sought to pressure Chisinau through a series of politically motivated trade bans on Moldova’s exports of fruit, canned products, and fresh and processed meat.  These embargos drove Moldova to expand and diversify its exports outside Russia and the former Soviet Union; despite the COVID-19 pandemic, the EU continues to be the country’s largest export destination, absorbing more than half of all Moldovan exports.  Nonetheless, Moldova’s Socialist-led government renewed efforts to expand trade with Russia.  In 2020, Moldova joined the Eurasian Economic Union meeting as an observer.

In addition to priority sectors, the government has identified in its national development strategy “Moldova 2020” seven priority public sector areas for development and reform:  education; access to financing; road infrastructure; business regulation; energy efficiency; justice system; and social insurance.  The government has made a formal commitment to accelerate the country’s development by making the economy more capital-intensive, sustainable, and knowledge-based.  The government has so far not completed its commitments under the Plan.  In fall 2019, the government published an overall Action Plan for 2020-2021 and committed to implement outstanding AA/DCFTA requirements.

Limits on Foreign Control and Right to Private Ownership and Establishment

There are no formal limits on foreign control of property and land, with the significant exception that foreigners are expressly prohibited from owning agricultural or forest land, even via a locally domiciled corporation or business. However, foreigners are permitted to buy all other forms of property in Moldova, including land plots under privatized enterprises and land designated for construction. Foreigners may become owners of such land only through inheritance and may only transfer the land to Moldovan citizens. In 2006, Parliament further restricted the right of sale and purchase of agricultural land to the state, Moldovan citizens, and legal entities without foreign capital. There are reportedly Moldova-registered companies with foreign capital known to own agricultural land through loopholes in the previous law. The only straightforward option available to foreigners who wish to use agricultural land in Moldova is to lease the land.

Moldova does not have a formal investment screening mechanism for inbound foreign investment but is working on putting in place a mechanism to screen for risks to national security. Under Moldovan law, foreign companies enjoy national treatment in most respects. The Law on Investment in Entrepreneurship prohibits discrimination against investments based on citizenship, domicile, residence, place of registration, place of activity, state of origin, or any other grounds. The law provides for equitable conditions for all investors and rules out discriminatory measures hindering management, operation, maintenance, utilization, acquisition, extension, or disposal of investments. The law mandates equitable treatment for local companies and foreigners regarding licensing, approval, and procurement. Companies registered in questionable tax havens are technically prohibited from holding shares in commercial banks.

By statute, special forms of legal organizations and certain activities require a minimum of capital to be invested (e.g., MDL 20,000 (USD 1,125) for joint stock companies, MDL 15 million (USD 844,000) for insurance companies, and MDL 100 million (USD 5.6 million) for banks).

Other Investment Policy Reviews

The latest Investment Policy Review of Moldova was conducted by the United Nations Conference on Trade and Development (UNCTAD) as part of a broader South-East Europe Review in 2017 and can be accessed at: https://unctad.org/en/PublicationsLibrary/diaepcb2017d6_en.pdf

https://unctad.org/en/PublicationsLibrary/diaepcb2017d6_en.pdf

Moldova underwent a trade policy review by the World Trade Organization (WTO) in October 2015: https://www.wto.org/english/tratop_e/tpr_e/tp423_e.htm 

Business Facilitation

Moldova has an investment promotion agency to assist prospective investors with information about business registration or industrial sectors, facilitate contact with relevant authorities, and organize study visits. The Investment Agency has an investment guide available on its website: invest.gov.md .

The government has established a special council to promote investment projects of national importance and tackle bureaucratic impediments to larger investment. It has also taken steps over the years to simplify and streamline business registration and licensing, lower tax rates, strengthen tax administration, and increase transparency.

The Public Services Agency, created in 2017, oversees business registrations. By law, registration should take three days for a standard procedure or four hours for an expedited procedure and is done in two stages. The first stage involves submission of an application and a set of documents, the range of which may vary depending on the legal form of the business (LLC, joint-stock company, sole proprietorship, etc.). At the second stage, the Agency issues a registration certificate and a unique identification number for the business, conferring full legal capacity to the entity. In 2010, the government introduced the “one-stop-shop” principle, under which businesses are relieved of the requirement to register separately with fiscal, statistical, social security, or health insurance authorities. There are currently no procedures for online business registration. Certain types of activity listed in the law on licensing require businesses to be first licensed by public authorities.

In 2006, the Moldovan Parliament ratified the 1961 Hague Convention on Abolishing the Requirement for Legalization for Foreign Public Documents. Acceptance of U.S. apostilles applied on official documents simplifies the legalization of official documents issued in the United States that are required in the process of business registration.

Outward Investment

Moldova does not have an official policy or mechanism for promoting or incentivizing outward investment.

Transparency of the Regulatory System

The Prime Minister chairs an Economic Council, which liaises with the Moldovan business community to discuss government proposals and gather ideas to improve Moldova’s economy, especially in response to the COVID-19 crisis. Laws and regulations are published in the official gazette called Monitorul Oficial, while a database of laws and regulations is available online at http://www.legis.md .

The Foreign Investors Association (FIA) was established in 2004 with the support of the OECD. FIA engages in a dialogue with the government on topics related to the investment climate and produces an annual publication of concerns and recommendations to improve the investment climate. In 2006, the American Chamber of Commerce (AmCham) registered in Moldova, presenting another voice for the business community. In 2011, a group of ten large EU investors founded the European Business Association (EBA). These are the three largest foreign business associations, and they regularly engage in policy discussions with the government.

All regulations and governmental decisions related to business activity have been published in a special business registry, “Register of Regulations on Business Activity,” to raise the awareness of businesspeople about their rights, increase the transparency of business regulations, and help fight corruption. The government has an approved list of business permits and authorizations. Government agencies and inspectors cannot issue any form of documents not included in the list.

The Moldovan government generally publishes significant laws in draft form for public comment. Draft laws are also available on-line, on the website of Moldovan Parliament. Business and trade associations provide other opportunities for comment. A significant exception to this norm is a mechanism that allows Parliament to also propose draft laws. The working group of the State Commission for Regulation of Entrepreneurial Activity, which was established as a filter to eliminate excessive business regulations, meets to vet draft governmental regulations dealing with entrepreneurship.

Nevertheless, bureaucratic procedures are not always transparent, and red tape often makes processing registrations, ownership, and other procedures unnecessarily long, costly, and burdensome. Discretionary decisions by government officials provide room for abuse and corruption. While the government adopted laws to improve the business climate and reduce excessive state controls and regulation, effective implementation is insufficient.  This inconsistent application of laws and regulations undermines fair competition and adds uncertainty for less politically connected businesses, particularly small- and medium-sized businesses as well as new entrants.

Moldova committed to implementing International Financial Reporting Standards (IFRS) in 2008. Use of IFRS is required by law for all public interest entities (financial entities, investment funds, insurance companies, private pension funds, and publicly listed entities) and national accounting standards (which approximate IFRS in many ways) are used by other firms, although many use IFRS as well due to foreign ownership.

Moldova has a “one stop window” which provides clear and uniform rules for the release of information and standardized documents for business registration.

A law simplifying the system of inspectorates and various inspection bodies was adopted in 2017 to increase efficiency and reduce regulatory burden. Through the reformation of inspection bodies, the government intends to reorganize the state inspection agencies for better planning and monitoring of inspectors’ activity. By reducing the number of inspection agencies and introducing risk-based criteria for inspections, the government seeks to improve the business climate by reducing the opportunity for inspections to be used for political purposes.

International Regulatory Considerations

The EU Association Agreement (AA), including a Deep Comprehensive Free Trade Area (DCFTA), has binding regulatory provisions committing Moldova to a reform agenda and to approximating domestic legislation to EU standards in a range of areas, including corporate law, labor, consumer protection, competition and market surveillance, general product safety, tax, energy, customs duties, public procurement, intellectual property rights, and others. Under the DCFTA, Moldova will gradually abolish duties and quotas in mutual trade in goods and services. It will also eliminate non-tariff barriers by adopting EU rules on health and safety standards, intellectual property rights, and other fields. The agreement contains a timeframe for implementation, with phase-ins up to ten years.

Moldova has been a member of the World Trade Organization (WTO) since 2001 and, as such, is a signatory to the General Agreement on Trade in Services (GATS), the Agreement on Trade Related Investment Measures (TRIMs) and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). These agreements contain major investment-related commitments, such as opening to the establishment of foreign service providers, prohibiting local content, trade-balancing, domestic sales requirements (TRIMs), and protection of intellectual property (TRIPS). No major WTO TRIMs inconsistencies have been reported.

As a WTO member, Moldova must notify draft technical regulations to the WTO Committee on Technical Barriers to Trade. In 2016, Moldova ratified the WTO Trade Facilitation Agreement and adopted several measures to conform to WTO requirements.

The government has undertaken incremental steps since 2017 on a draft Customs Code, which would merge existing separate laws on customs procedures and goods crossing national borders and approximate national customs rules to the EU Customs Code. In 2017, the government changed customs rules to align with the EU Authorized Economic Operator requirements and Approved Exporter conditions.

Moldova’s commercial litigation rules comply with WTO requirements. The main challenges to the business climate remain the lack of effective and equitable implementation of laws and regulations, and arbitrary, non-transparent decisions by government officials to give domestic producers an edge over foreign competitors in certain areas. For example, an environmental tax is applied on bottles and other packaging of imported goods, but not levied on bottles and packaging produced in Moldova. Additionally, the government may liberally cite public security or general social welfare as reasons to intervene in the economy in contravention of its declared respect for market principles. There are reports of problems with customs valuation of goods, specifically that the Customs Service has been applying the maximum possible values to imported goods, even if their actual purchase value was far lower. This has increased customs revenues but disadvantaged importers.

Legal System and Judicial Independence

Moldova has a civil law legal system with codified laws that govern different aspects of life, including business, trade, and economy. The country’s legal framework consists of its constitution, organic and ordinary laws passed by the Parliament, and administrative acts issued by the government and other public authorities. Although Moldovan courts are constitutionally independent, their structures have facilitated government and political interference; the courts suffer from inefficiency and low public trust.

The court system consists of lower courts (i.e., trial courts), four courts of appeal, the Supreme Court of Justice, and a separate Constitutional Court.

Moldova has prepared a new justice reform strategy for 2021-2024 approved by its Parliament in November 2020. Although the President has not promulgated the strategy, the Ministry of Justice began implementing some of its provisions.

The new strategy continues the 2016 parliamentary initiative to “optimize” the country’s court system as part of broader justice sector reforms intended to reduce the number of trial courts in Moldova from 40 to 15. Specialized courts such as the Commercial Circumscription Court and Military Court were eliminated. Five trial courts from Chisinau were conceptually merged into one – the Chisinau trial court – although in 2018 the merged Chisinau trial court was further reorganized to specialize across five districts (investigative and contravention; criminal; administrative; bankruptcy; and civil, which includes adjudication of commercial disputes). The government’s court optimization plan is scheduled to be fully implemented by 2027.

The 2016 reforms created two specialized quasi-independent prosecution offices. The Anticorruption Prosecution Office is responsible for investigating and prosecuting corruption, bribery, abuse of power by public officials, and money laundering. The Prosecution Office on Combating Organized Crime and Special Cases investigates and prosecutes organized, transnational and particular complex crimes, including tax evasion, smuggling, intellectual property offenses, trafficking in persons, and narcotics. In 2017-2019, the Moldovan Prosecution Service continued the implementation of reforms under a law on the prosecution service passed in 2016. The Prosecutor General’s Office (PGO) led the drafting of new regulations for the specialized prosecution offices, regional, district and municipal offices. As of January 1, 2021, the State Tax Service is authorized to investigate economic crimes.

Laws and Regulations on Foreign Direct Investment

In addition to its international agreements, Moldovan laws affecting FDI include the Civil Code, the Law on Property, the Law on Investment in Entrepreneurship, the Law on Entrepreneurship and Enterprises, the Law on Joint Stock Companies, the Law on Small Business Support, the Law on Financial Institutions, the Law on Franchising, the Tax Code, the Customs Code, the Law on Licensing Certain Activities, and the Law on Insolvency.

The current Law on Investment in Entrepreneurship came into effect in 2004. It was designed to be compatible with European standards in its definitions of types of local and foreign investment. It provides guarantees of investors’ rights, prohibitions against expropriation or similar actions, and for payment of damages if investors’ rights are violated. The law permits FDI in all sectors of the economy, while certain activities require a business license.

Competition and Antitrust Laws

In 2012, Parliament passed a law on competition in line with EU practice and legislation. The National Competition Agency was subsequently renamed the Competition Council. The Competition Council oversees compliance with competition and state-aid provisions and initiates examination of alleged violation of competition laws. The Competition Council may request cessation of action, prescribe behavioral or structural remedies, and apply fines.

Expropriation and Compensation

The government has had a history of depriving investors, both national and foreign, of their businesses in various forms. Many of them have sued the government at the European Court for Human Rights for violation of the right to fair trial and of the respect for property, or in international arbitral tribunals.

The Law on Investment in Entrepreneurship states that investments cannot be subject to expropriation or to measures with a similar effect. However, an investment may be expropriated for purposes of public utility if it is not discriminatory and just compensation is provided. If a public authority violates an investor’s rights, the investor is entitled to compensation equivalent to the actual damages at the time of occurrence, including any lost profits.

The government has given no indication of intent to discriminate against U.S. investments, companies, or representatives by expropriation, or of intent to expropriate property owned by citizens of other countries. No particular sectors are at greater risk of expropriation or similar actions in Moldova.

Since 2001, the government has cancelled several privatizations, citing the failure of investors to meet investment schedules or irregularities committed during the privatization process. While the government agreed to repay investors in such disputes, investors have had to apply to the European Court of Human Rights (ECHR) to enforce compensation payments. The government has complied with the ECHR rulings in these instances.

Dispute Settlement

ICSID Convention and New York Convention

In 2011, Moldova ratified the Convention on the International Center for the Settlement of Investment Disputes (ICSID – Washington Convention). The country also ratified the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards. Domestic courts recognize and enforce foreign arbitral awards. Moldova is also a party to the Geneva European Convention on International Commercial Arbitration of April 21, 1961, and the Paris Agreement relating to the application of the European Convention on International Commercial Arbitration of December 17, 1962.

Investor-State Dispute Settlement

Moldova is signatory to a number of bilateral investment treaties (see chapter 3 above), including the U.S.-Moldovan Treaty Concerning the Encouragement and Reciprocal Protection of Investment, which includes access to international arbitration for investment disputes.

Local courts recognize and enforce foreign arbitral awards against the government. There are no known cases when the Moldovan government denied voluntary payment under an arbitral award rendered against it.

International Commercial Arbitration and Foreign Courts

Private parties may choose alternative dispute resolution mechanisms instead of going to courts. Moldovan law provides the options of mediation and arbitration. The arbitration legislation is modeled after UNCITRAL rules. There are a number of arbitration bodies available in Moldova, including the arbitration court of the Moldovan Chamber of Commerce and Industry. AmCham Moldova has established the Chisinau Court of International Commercial Arbitration (CACIC) under its auspices.

Recognition and enforcement of foreign judgments are regulated by a complex framework of documents, including the Code for Civil Procedures, international conventions and bilateral treaties. Therefore, depending on the nationality of the court, Moldovan courts may apply different legal norms in examining the enforcement of foreign judgments. However, as a rule, foreign judgments are enforceable in Moldova on the basis of reciprocity and subject to New York Convention obligations.

Moldova’s court system generally enjoys a low level of public trust and is perceived to be vulnerable to acts of corruption, while court processes lack transparency. The overall expectation in court hearings involving representatives of public authorities, including economic entities, is that final court rulings will be in favor of state representatives. While arbitration is often seen as a preferable option to the courts, the courts must still enforce the arbitral decision. Investors have at times been discouraged by the slow pace of court enforcement of arbitral awards and the judge’s perceived discretion over the arbitral decision.

Bankruptcy Regulations

In terms of resolving insolvency, the World Bank ranks Moldova 67th out of 190 economies in the 2020 Doing Business Index; it takes creditors on average 2.8 years to recover their credit. This is below the regional average and trails EU members in Central and Eastern Europe. The country has changed its insolvency law to introduce expedited insolvency proceedings, including by granting priority to secured creditors, introducing new restructuring mechanisms, reducing opportunities for appeals, adding moratorium provisions, establishing strict statutory periods in the proceedings, and enhancing the role of insolvency administrators.

Capital Markets and Portfolio Investment

Moldova’s securities market is underdeveloped. Official National Bank of Moldova (NBM) statistics include data on portfolio investments, yet there is a lack of open-source information fully reflect the trends and relevance of these investments. NBM data shows that most portfolio investments target banks, while the National Statistics Bureau does not differentiate between foreign direct investment and portfolio investments of less than 10 percent in a company.

Laws, governmental decisions, NBM regulations, and Stock Exchange regulations provide the framework for capital markets and portfolio investment in Moldova. The government began regulatory reform in this area in 2007 with a view to spurring the development of the weak non-banking financial market. Since 2008, two bodies in particular – the NBM and the National Commission for Financial Markets – have regulated financial and capital markets.

Foreign investors are not restricted from obtaining credit from local banks, the main source of business financing. However, stringent lending practices limit access to credit for Moldovan companies, especially SMEs. The government has eased some lending regulations to assist SMEs to obtain credit during the COVID-19 pandemic. Local commercial banks provide mostly short-term, high-interest loans and require large amounts of collateral, reflecting the country’s perceived high economic risk. Progress in lending activity suffered a sharp reversal in 2015 after the late-2014 banking crisis, triggered by a massive bank fraud, which severely weakened the banking system. Extreme monetary tightening by the NBM following significant currency flight connected to the resulting bank bailouts led to prohibitively high interest rates. In recent years, lending conditions improved as interest rates continued to hover around nine percent.

Large investments can rarely be financed through a single bank and require a bank consortium. Recent years have seen growth in leasing and micro-financing, leading to calls for clear regulation of the non-bank financial sector. As a result, Parliament passed a new law on the non-bank financial sector, which entered into effect on October 1, 2018. Raiffeisen Leasing remains the only international leasing company which has opened a representative office in Moldova.

Even prior to the COVID-19 pandemic, the private sector’s access to credit instruments has been limited by the insufficiency of long-term funding, high interest rates, and unrealistic lending forecasts by banks. Financing through local private investment funds is virtually non-existent. A few U.S. investment funds have been active on the Moldovan market. The government adopted a 2018-2022 strategy for the development of the non-banking financial sector aimed at bolstering the capital markets combined with prudential supervision. A new Central Securities Depository was established under the supervision of the National Bank of Moldova to bring greater transparency and integrity to ownership and the recordkeeping associated with it.

Acting as an independent regulatory agency, the National Commission for Financial Markets (NCFM) supervises the securities market, insurance sector and non-bank financial institutions. A new capital markets law adopting EU regulations came into effect in 2013. It was designed to open up capital markets to foreign investors, strengthen NCFM’s powers of independent regulator, and set higher capital requirements on capital market participants.

Money and Banking System

In 2014, a crisis at three Moldovan banks (which resulted in their closure and the loss of USD 1.2 billion), two of them among the country’s largest, undermined confidence in the banking system. The role of a Moldovan bank in the “Russian Laundromat” case, estimated to have laundered from USD 20 to 80 billion, further underscored these challenges. The crisis shook Moldova’s banking system, causing some foreign correspondent banks to terminate ties with Moldovan banks and others to significantly tighten their lending.

In March 2020, Moldova successfully completed its IMF program after implementing reforms in financial and banking sectors. As a result of these reforms, the financial sector is better prepared to withstand the economic impact of the COVID-19 crisis. There is a high degree of capital and liquidity, and an overall reduction of non-performing loans to below eight percent. Moldovan banks remain the main, albeit currently limited, source of business financing. The non-bank financial institutions however have been gaining sizable market share, especially in individual and SME lending, where banks have been encumbered by prudential banking rules. Bank assets account for about 52 percent of GDP. Banks are also the largest loan providers, with loans amounting to approximately USD 2.6 billion. The COVID-19 crisis slowed down bank lending in 2020.

Moldova currently has 11 commercial banks. The NBM regulates the commercial bank sector and reports to Parliament. Foreign bank subsidiaries must register in Moldova and operate under the local banking legislation. Although the integrity of true bank ownership records is questionable, foreign investors’ share in Moldovan banks’ capital is approximately 87 percent of total capital, and includes such major foreign investors as OTP Bank (Hungary), Erste Bank (Austria), Banca Transilvania (Romania) and Doverie Holding (Bulgaria).

As of December 31, 2020, total bank assets were MDL 103.9 billion (USD 6 billion) and 90 percent of total assets in the financial sector. Moldova’s three largest commercial banks account for roughly 65 percent of the total bank assets, as follows: Moldova Agroindbank – MDL 30.4 billion (USD 1.75 billion); Moldindconbank – MDL 21.3 billion (USD 1.2 billion); and Victoriabank – MDL 15.4 billion (USD 887.7 million). To prevent another crisis, the NBM instituted special monitoring of these top three banks over concerns about the transparency of bank shareholders; this monitoring was lifted in April 2020.

After 2016, the Moldovan Parliament adopted legislation that would strengthen the independence of decision making at the NCFM and NBM – to help address systemic supervisory problems that had a negative effect on Moldova’s financial sector. To strengthen the system of tracking shares and shareholders, with USAID assistance, authorities put in place a law establishing the aforementioned Centralized Securities Depository. In addition, all bank shares must be sold and purchased on the Moldovan Stock Exchange. These measures have improved the transparency and reliability of the financial sector.

NBM’s Banking Law of 2018 and the Bank Recovery and Resolution Law from 2016 bring the financial sector closer to harmonization with EU standards, including through the application of stronger risk-based supervision to banks, increased enforcement powers and monetary penalties applied to banks, structures to address problem banks, and strengthening the NBM’s ability to conduct risk assessments. Also, NBM required banks to increase their credit loss provisioning and take urgent action to reinforce internal risk management as well as procedures on related-party financing. In addition, the NBM developed a methodology to better identify the related parties at banks.

Foreign Exchange and Remittances

Foreign Exchange

Moldova accepted Article VIII of the IMF Charter in 1995, which required liberalization of foreign exchange operations. There are no restrictions on the conversion or transfer of funds associated with foreign investment in Moldova. After the payment of taxes, foreign investors are permitted to repatriate residual funds. Residual fund transfers are not subject to any other duties or taxes and do not require special permissions. Moldova’s central bank uses a floating exchange rate regime and intervenes only to smooth sharp fluctuations.

Between late 2014 and early 2016, the national currency, the leu (plural lei), depreciated following challenges in the political environment, Russian bans on Moldovan food exports, and falling remittances from Russia, which impacted Moldova’s balance of payments. A massive banking fraud and a subsequent bailout program further undermined the leu, which depreciated by 36 percent. Since 2016, the National Bank has been pursuing a tight monetary policy that has contributed to a strengthening of the leu. In 2020, the national currency exchange rate fluctuated, but stabilized in the second half of the year.

Remittance Policies

No significant delays in the remittances of investment returns have been reported. Domestic commercial banks have accounts in leading multinational banks, and foreign investors enjoy the right to repatriate their earnings.

The Moldovan leu is the only accepted legal tender in the retail and service sectors in Moldova. Foreign exchange regulation of the NBM allows foreigners and residents to use foreign currencies in some current and capital transactions in the territory of Moldova. Generally, there are no difficulties associated with the exchange of foreign or local currency in Moldova.

Sovereign Wealth Funds

The embassy is not aware of any sovereign wealth funds run by the government of Moldova.

Since gaining independence in 1992, Moldova has privatized most State-owned enterprises (SOEs), and most sectors of the economy are almost entirely in private hands. However, the government still fully or partially controls some enterprises operating in a variety of economic sectors. The major SOEs are northern electricity grids, Chisinau heating companies, fixed-line telephone operator Moldtelecom, and the state railway company. The government keeps a registry of state-owned assets, which is available on the website on the Public Property Agency http://www.app.gov.md/registrul-patrimoniului-public-3-384 .

SOEs are governed by the law on stock companies and the law on state enterprises as well as a number of governmental decisions. SOEs have boards of directors usually comprised of representatives of the line ministry, the Ministry of Economy and Infrastructure, and the Ministry of Finance. As a rule, SOEs report to the respective ministries, with those registered as joint stock companies being required to make their financial reports public. Moldova does not incorporate references to the OECD Guidelines on Corporate Governance for SOEs in its normative acts.

Moldovan legislation does not formally discriminate between SOEs and private-run businesses. By law, governmental authorities must provide a level legal and economic playing field to all enterprises. However, SOEs are generally seen as better positioned to influence decision-makers than private sector competitors. In some cases, SOEs have allegedly used these advantages to prevent open competition in individual sectors.

The Law on Entrepreneurship and Enterprises has a list of activities restricted solely to SOEs, which includes, among others, human and animal medical research, manufacture of orders and medals, postal services (except express mail), sale and production of combat equipment and weapons, minting, and real estate registration.

Privatization Program

Moldova launched the first of several waves of privatization in 1994. In 2007, Parliament passed a new law governing management and privatization of SOEs. Two major privatizations in 2013 – of the then-largest bank, Banca de Economii, and the 49-year concession of the Chisinau Airport – subsequently proved highly controversial. Privatization efforts in 2014 and 2015 emphasized public-private partnerships as means for companies to gain access to SOEs in infrastructure-related projects. In 2018, the government held several rounds of privatization, selling its stake in 19 companies, including airline Air Moldova and gas interconnector Vestmoldtransgaz. In 2019, the government finished privatizing state tobacco company Tutun CTC, then announced a moratorium on all further privatizations, following controversies over past sales. The government resumed privatization in 2020, selling off MDL 420 million (USD 24.3 million) worth of state-owned assets in open outcry auctions.

To date, Moldova has conducted privatizations through open tenders organized at the stock exchange, open to interested investors. The government may also use open outcry auctions for some properties, so-called investment or commercial tenders to sell entire companies to buyers taking on investment commitments, or to the highest bidders or public-private partnerships for infrastructure related projects. The government publishes privatization announcements on the website of the Public Property Agency app.gov.md  and in the official journal Monitorul Oficial.

Levels of street crime and other types of violent crime are equal or lower in Moldova than in neighboring countries and businesses typically only employ the most basic security procedures to safeguard their personnel.  Moldova has not had significant instances of transnational terrorism.  While there have been occasional instances of political violence in the past decade, these cases have typically been directed against Moldovan state institutions and have not generally impacted the international business community in Moldova.  There have been no significant instances of political violence in the last four years and all recent large demonstrations have been peaceful.

The embassy has received no reports over the past ten years of politically motivated damage to business projects or installations in Moldova. In 2015 and early 2016, there was public outcry over the political class’ failure to prevent (or even facilitate) massive bank fraud where nearly 15 percent of GDP disappeared from the country’s then-three largest banks. Round-the-clock anti-government protests culminated in January 2016 in clashes with riot police when protesters tried to prevent Parliament from voting in a new government. The clashes were limited and did not turn into full-blown violence or cause extensive damage that would affect businesses in any way, and the government remained in power.

In 2020, protesters held rallies in front of Parliament without causing significant damages or clashing violently with police.

Separatists control the Transnistria region of Moldova, located between the Nistru River and the eastern border with Ukraine. Although a brief armed conflict took place in 1991-1992, the sides signed a cease-fire in July 1992. Local authorities in Transnistria maintain a separate monetary unit, the Transnistrian ruble and a separate customs system. Despite the political separation, economic cooperation takes place in various sectors. The government has implemented measures requiring businesses in Transnistria to register with Moldovan authorities. The Organization for Security and Cooperation in Europe (OSCE), with Russia, and Ukraine acting as guarantors/mediators and the United States and EU as observers, supports negotiations between Moldova and the separatist region Transnistria (known as the “5+2” format). Throughout the years, progress has been inconsistent, with talks stalling in 2006 and formally resuming in late November 2011. Important achievements in the past few years include the resumption of rail freight traffic through Transnistria, the opening of a bridge across the Nistru river, Transnistrian-registered vehicles gaining access to international traffic, issuance of Moldovan apostilles on Transnistrian-issued higher education diplomas, and the operation of Latin Script schools in Transnistria.

*National Bureau of Statistics and National Bank of Moldova are the primary source of the information. The FDI figure is preliminary.

Table 4: Sources of Portfolio Investment
Data not available.

Note: Moldova does not submit data for the IMF’s Coordinated Portfolio Investment Survey (CPIS). However, according to the National Bank of Moldova, the preliminary figure for total foreign portfolio investment amounted to USD 26.51 million in 2020. A breakdown by country for all portfolio investments is not available.

Policies Towards Foreign Direct Investment

Mongolia generally does not discriminate against foreign investors with two major exceptions.  First, foreign investors must invest a minimum of $100,000 to establish a venture; in contrast, Mongolian investors face no investment minimums.  Second, only Mongolian adult citizens may own real estate.  Additionally, while foreign investors may obtain use rights for the underlying land, these rights last for five years with a one-time, five-year renewal.  The government imposes no such restriction on its nationals.  Investors may also avail themselves of the Mongolian National Development Agency’s “One-Stop-Shop for Investors,” which provides services on visas, taxation, notarization, business registration (see  http://nda.gov.mn/ ).  The Agency has said that in some cases municipal, provincial, and central government officials may waive land-use rights limits and recommends that investors contact it for more information on how to apply for these waivers.  Investors have also encouraged the government to develop a policy aimed at retaining existing foreign direct investment in country.

Limits on Foreign Control and Right to Private Ownership and Establishment

Except for real estate, foreign and domestic investors have the same rights to establish, sell, transfer, or securitize structures, shares, use rights, companies, and movable property.  Mongolia generally imposes no statutory or regulatory limits on foreign ownership and control of investments.  The Mining Law allows the government to acquire up to 50 percent of mineral deposits deemed of “strategic” value to the state by parliament.  Article 6.2 of Mongolia’s Constitution also requires the state to take a “majority” share of the “benefits” of strategic mining projects.  Investors are waiting for the government to clarify the meaning of “benefits” derived from mining activities, which in the Mongolian language is the same word as “profit,” but, according to government officials, may include such non-cash contributions as development programs, employment, or technology transfers.  Investors also observe that excessive regulatory discretion allows bureaucrats de facto control over the use of legally granted rights, corporate governance decisions, and ownership stakes, stating that in some cases regulators make up rules beyond their actual statutory remit.  Finally, Mongolia has no formal or informal investment-screening mechanism, although the National Security Council has barred investments from some foreign state-owned entities.

Other Investment Policy Reviews

The Mongolian Government has undergone several third-party investment policy reviews over the last three years by the OECD ( http://www.oecd.org/investment/countryreviews.htm ) and the WTO ( WTO | Mongolia ).

Business Facilitation

Consistent with the World Bank’s Doing Business Report, investors report Mongolia’s business registration process is reasonably clear.  All foreign and domestic enterprises must register with the State Registration Office ( https://burtgel.gov.mn/ ).  Registrants can obtain required forms online and submit them by email.  The State Registration Office aims at a two-day turnaround for the review and approval process.  Investors report bureaucratic discretion often adds weeks or even months to the process and state more transparent adherence to the relevant laws and regulations would yield a consistent, streamlined process.  Once approved by the State Registration Office, a company must register with the General Tax Authority ( http://en.mta.mn/ ).  Upon hiring its first employees, a company must register with the Social Insurance Agency ( http://www.ndaatgal.mn/v1/ ).  The State Registration Office reports that notarization is not required for its registration process.

The same ease of opening a business does not apply to closing a business, however.  Foreign investors and legal contacts report the onerous bureaucratic and judicial process of shutting down a firm takes no less than 18-24 months.

Outward Investment

While the Mongolian Government neither promotes nor incentivizes outward investment, it does not restrict domestic investors from investing abroad.

Transparency of the Regulatory System

The Law on Legislation sets out who may draft and submit legislation; the format of these bills; the respective roles of the Mongolian parliament, government, and president; and the procedures for obtaining and employing public comment on pending legislation.  The Law on Legislation states that law initiators – members of parliament, the president of Mongolia, or cabinet ministers – must fulfill these criteria:  (1) provide a clear process for developing and justifying the need for the draft legislation; (2) set out methodologies for estimating costs to the government related to the bill’s implementation; (3) evaluate the impact of the legislation on the public if implemented; and (4) conduct public outreach before submitting legislation to the parliament.

Law initiators must post draft legislation for public comment and publish reports evaluating costs and impacts on parliament’s official website ( Parliament of Mongolia/Projects ) at least 30 days prior to submitting bills to parliament.  Posts must explicitly state the time for public comment and review.  Initiators must solicit comments in writing, organize public meetings, seek comments through social media, and carry out public surveys.  No more than 30 days after the public comment period ends, initiators must prepare a matrix of all comments, including those used to revise the bill as well as those not used, which must be posted on parliament’s official web site.  After a law’s passage, parliament must monitor and evaluate its implementation and impacts.  Investors report that while legislators have not implemented all these requirements, most relevant legislation is posted on parliament’s website before passage.  Ministries and agencies lag in fulfilling these statutory requirements, according to businesses.

While General Administrative Law Article 6 aligns Mongolia’s regulatory drafting process with Transparency Agreement obligations, investors report the government is not generally enforcing it.  Under the Transparency Agreement, originators of regulations must seek public comment by posting draft regulations in a single journal of national circulation, which Mongolia has designated as LegalInfo.mn ( LegalInfo ).  Drafters must record, report, and respond to significant public comments.  Under Mongolian law, the Ministry of Justice and Home Affairs must certify that each regulatory drafting process complies with the General Administrative Law before a regulation enters force.  After approval, the statutorily responsible government agency monitors implementation and impacts.

Businesses also complain about a high regulatory burden at the local, or province and county, levels.  They note inconsistent application of regulations and statutes among central, provincial, and municipal jurisdictions; and a lack of knowledge among local inspectors.  Regional tax, health, and safety inspectors are cited as particularly problematic.  The Economic Policy and Competitiveness Research Center of Mongolia annually ranks local regulatory burdens:  http://en.aimagindex.mn/competitiveness .

Mongolia’s so-called Glass Budget Law requires all levels of government publicly post proposed and actual budget expenditures; and the law, according to businesses and transparency experts, has generally been followed.

International Regulatory Considerations

Mongolia, not part of any regional economic bloc, often seeks to adapt European standards and norms in such areas as construction materials, food, and environmental regulations; looks to U.S. standards in the hydrocarbon sector; and adopts a combination of Australian and Canadian standards and norms in the mining sector.  Mongolia also tends to employ World Organization for Animal Health standards for its animal health regulations.  Mongolia, a member of the WTO, asserts it will notify the WTO Committee on Technical Barriers to Trade (TBT) of all draft technical regulations.

Legal System and Judicial Independence

Investors state that judges frequently avoid controversial decisions in business disputes, preferring to delay judgment for as long as possible – sometimes years.  If a decision is made, businesses face similarly long delays in obtaining and enforcing court orders.  In some instances, cases have taken so long that by the time an enforcement order is executed, the counterparty has liquidated assets and vanished.  Investors note similarly long delays with respect to inspection agencies, such as the Tax Dispute Settlement Resolution Council as well as with other inspection agency panels, especially those related to mineral licenses and health matters.

Investors have praised recent reforms they say could help to restore judicial independence severely compromised by a 2019 parliamentary resolution that vested the president, parliamentary speaker, and prime minister with the power to remove judges and prosecutors.  In November 2019 parliament amended the constitution to include reforms to strengthen judicial independence and accountability, effectively rendering the 2019 resolution invalid.  Parliament, in 2021 revised the Law of the Judiciary to bring it into line with the amended constitution.  The amended law, which entered into force March 1, limits the powers of the government, parliament, and the president to influence the selection and removal of judges and relegates discipline of jurists to a newly created Judicial Disciplinary Council, except in matters involving criminal acts.

Under Mongolia’s hybrid civil law-common law system, trial judges may use prior rulings to adjudicate similar cases but have no obligation to follow legal precedent as such.  Mongolian laws, and even their implementing regulations, often lack the specificity needed for consistent judicial and prosecutorial interpretation and application.  All courts may rule on matters of fact as well as matters of law at any point in the judicial process.

Mongolia has specialized laws for contracts but no dedicated courts for commercial activities. Contractual disputes are usually adjudicated through the Civil Court division of the district court system.  Criminal Courts adjudicate crime cases brought by the General Prosecutors Office. Disputants may appeal to the City Court of Ulaanbaatar and ultimately to the Supreme Court of Mongolia.  Mongolia has several specialized administrative courts adjudicating cases brought by citizens, foreign residents, and businesses against official administrative acts.  Mongolia’s Constitutional Court, the Tsets, rules on constitutional issues.  The General Executive Agency for Court Decisions enforces judgments and orders.

Investors and legal sector experts say that the Administrative Court is procedurally competent, fair, and reliable but that the Civil Courts deliver highly inconsistent judgments, reflecting ignorance of judicial best practices in civil and criminal matters as well as potential corruption, especially in civil commercial cases.

Laws and Regulations on Foreign Direct Investment

The 2013 Investment Law sets the general statutory and regulatory frame for all investors in Mongolia.  Under the law, foreign investors may access the same investment opportunities as Mongolian citizens and receive the same protections as domestic investors.  Investment domicile, not investor nationality, determines if an investment is foreign or domestic.  The law provides for a more stable tax environment and offers tax and other incentives for investors; and authorizes a single point of registration, the State Registration Office ( www.burtgel.gov.mn ), for all investors.  The Investment Law offers tax incentives in the form of transferable tax-stabilization certificates, giving qualifying projects favorable tax treatment for up to 27 years.  Affected taxes may include the corporate-income tax, customs duties, value-added tax, and royalties.

Investors cite two primary national-treatment issues with respect to investment rules.  First, foreign nationals and companies may not own real estate; only Mongolian adult citizens may own real estate.  While foreign investors may obtain use rights for the underlying land, these rights expire after a set number of years with limited rights of renewal.  The National Development Agency ( http://nda.gov.mn/ ), responsible for assisting foreign investors has said that in some cases municipal, provincial, and central government officials may waive land-use rights limits and recommends that investors contact it for more information on how to apply for these waivers.  Foreign investors also object to the regulatory requirement that each foreign investor in any given venture must invest a minimum of $100,000.  Although the Investment Law has no such requirement, Mongolian regulators impose it on all foreign investors without requiring the same minimum from Mongolian investors.

The Mongolian National Development Agency’s “One-Stop-Shop for Investors” provides services on investment data, visas, taxation, notarization, business registration, and government-business dispute resolution ( http://nda.gov.mn/ ).

Competition and Antitrust Laws

Mongolia’s Agency for Fair Competition and Consumer Protection reviews domestic transactions for competition-related concerns.  For a description of the Agency go to  AFCCP .  The Agency for Fair Competition and Consumer Protection launched no 2020 competition cases affecting FDI.

Expropriation and Compensation

State entities at all levels may confiscate or modify land-use rights for purposes of economic development, national security, historical preservation, or environmental protection.  Mongolia’s constitution recognizes private real-property rights and derivative rights, and Mongolian law specifically bars the government from expropriating assets without payment of adequate, market-based compensation.  Investors express little disagreement with such takings in principle but worry a lack of clear lines of authority among the central, provincial, and municipal governments has led to loss of property and use rights.  For example, the Minerals Law provides no clear division of local, regional, and national jurisdictions for issuances of land-use permits and special-use rights.  Faced with unclear lines of authority and frequent differences in practices and interpretation of rules and regulations by different levels of government, investors may find themselves unable to fully exercise legally conferred rights.

Some expropriation cases involve court expropriations after third-party criminal trials at which investors are compelled to appear as “civil defendants” – but are not allowed to fully participate in the proceedings.  In these cases, government officials are convicted of corruption, and the court then orders the civil defendant to surrender a license or property, or pay a tax penalty or fine, for having received an alleged favor from the criminal defendant with no judicial proceedings to determine if property or licenses were obtained illegally.

Dispute Settlement

ICSID Convention and New York Convention

Mongolia ratified the Washington Convention and joined the International Centre for Settlement of Investment Disputes (ICSID) in 1991 and the New York Convention in 1994; and has accepted international arbitration in several disputes.  Mongolian law allows for domestic enforcement of awards under the ICSID and New York Conventions.

Investor-State Dispute Settlement

Under the 1997 U.S.-Mongolia Bilateral Investment Treaty ( US-Mongolia BIT ), both countries agree to respect international legal standards for state-facilitated property expropriation and compensation matters involving nationals of either country, providing U.S. investors in Mongolia with an extra measure of protection against financial loss.

In disputes involving the government, investors report some government officials and politicians interfere in administrative and judicial dispute resolution processes.  Foreign investors describe three general categories of disputes eliciting interference.  First, in disputes between private parties before judicial tribunals, investors warn that Mongolian private parties may exploit contacts in the government, the judiciary, law enforcement, the media, or the prosecutor’s office to coerce foreign private parties to accede to demands.  Second, in disputes between investors and the Mongolian government directly, the government may claim a sovereign right to intervene in the business venture, often because the Mongolian government itself operates or seeks to operate a competing state-owned enterprise (SOE); because officials have undisclosed business interests; or from ignorance of the relevant statutes and regulations.  Third are disputes with Mongolian tax officials or prosecutors levying highly inflated, statutorily deficient tax assessments against a foreign entity and demanding immediate payment on threat of civil or criminal prosecution.

Investors report local courts recognize and enforce court decisions – but problems exist with enforcement.  The thinly staffed General Executive Agency for Court Decisions (GEACD) implements civil and criminal court orders.  Its employees, often living in the jurisdictions in which they work, are subject to pressure from friends and professional acquaintances.  A complicated chain-of-command and opportunities for conflicts of interest may weaken GEACD’s resolve to execute court judgments on behalf of foreign and domestic investors.

Mongolia has been both plaintiff and defendant in several past and ongoing international arbitration suits over the expropriation of private sector mining rights or the imposition of excessive tax assessments.  Whenever the government has lost arbitration claims, it has satisfied each and every judgment after some negotiation with foreign investors.

Investors have reported no extrajudicial actions against their interests.

The Oyu Tolgoi copper and gold mine has resurfaced as a bellwether of Mongolia’s investment climate.  Upon reaching full production, the mine may produce as much as 25 percent of Mongolia’s GDP.  Resolving an ongoing investment dispute related to the mine between the government and multi-national shareholders is seen by many investors as essential to improving Mongolia’s investment climate image internationally.

International Commercial Arbitration and Foreign Courts

The Mongolian government has consistently honored international arbitral awards against it.

Mongolia’s Arbitration Law, based on the United Nations Commission on International Trade Law (UNCITRAL), provides a clear set of rules and protections for Mongolia-based arbitration. Any organization that satisfies the laws’ requirements can provide arbitral services.

Bankruptcy Regulations

Bankruptcy Law treats bankruptcy as a civil matter requiring judicial adjudication.  Mongolia allows registration of mortgages and other debt instruments backed by real estate, structures, immovable collateral (mining and exploration licenses, intellectual property rights, and other use rights) and movable property (cars, equipment, livestock, receivables, and other items of value).  Although investors may securitize movable and immovable assets, local law firms hold that the bankruptcy process remains too vague, onerous, and time consuming for practical use.  Mongolia’s constitution and statutes allow foreclosure and bankruptcy only through judicial proceedings.  Reporting that proceedings usually require no less than 18 months, with 36 months not uncommon, investors and legal advisors state that a lengthy appeals process, perceived corruption, and government interference may create years of delay.  Moreover, while in court, creditors face suspended interest payments and limited access to the asset.

Capital Markets and Portfolio Investment

Mongolia imposes few restrictions on capital flows and has respected IMF Article VIII by not restricting international payments and transfers.  However, capital markets remain underdeveloped, with little ability to trade futures or derivatives.  The state-owned Mongolian Stock Exchange ( MSE ) is the primary venue for domestic capital and portfolio investments.

Money and Banking System

Mongolia’s four-largest commercial banks – Khan, Trade and Development Bank (TDB), Khas, and Golomt – are majority owned by a combination of both Mongolian and foreign investors and collectively hold 83 percent of all banking assets, or about $10.6 billion (as of December 2020).  Mongolian commercial banks had rates of non-performing loans averaging 11.8 percent in December 2020, an increase from December 2019’s 9.9 percent.  Ongoing COVID-19 rules enabling the postponement of consumer-loan and mortgage payments may create some additional forbearance risk in the banking sector.  The Bank of Mongolia, Mongolia’s central bank, regulates banking operations.  The Bank of Mongolia allows foreigners to establish domestic accounts so long as they can prove lawful residence in Mongolia.

Parliament amended Mongolia’s Law on Banking in January 2021.  The amended law states that ownership by a shareholder and their related parties collectively and as certified by the Bank of Mongolia shall not exceed 20 percent. Banks have until December 31, 2023 to comply with this divestment requirement.  In addition, Mongolia’s four systemically important commercial banks – Khan, TDB, Khas, and Golomt – and the state-owned State Bank must list themselves on the Mongolian Stock Exchange through an IPO by June 30, 2022.  The new rules should improve bank governance by creating accountability to a broader group of shareholders.

The IMF has reported unaddressed macroprudential concerns regarding the relatively large banking system, resulting in the Extended Fund Facility’s unsuccessful completion in May 2020.  Mongolia’s banking system remains broadly undercapitalized, while commercial banking practices and regulatory supervision remain inadequate for ensuring macroeconomic stability.  Mongolia also has a significant number of illiquid banks.  Potential investors in Mongolia’s banking sector are advised to conduct careful due diligence as sector participants and regulators have expressed concerns that the balance sheets of certain systemically important banks may have been inflated or misreported to create the perception of higher capital-adequacy ratios than is accurate.

International and domestic sector participants observe that the Bank of Mongolia does not exercise adequate macroprudential oversight over banks, enabling these banks to misreport their assets.  It has also allowed insolvent smaller banks to continue operating despite not having enough assets to cover liabilities.  Investors contemplating IPO participation should carefully factor in the additional systemic risk associated with these regulatory concerns.

Mongolia’s 2020 removal from the Financial Action Task Force can give confidence to investors that the country takes seriously anti-money laundering and countering the financing of terrorism concerns.

Foreign Exchange and Remittances

Foreign Exchange

The government employs a liberal foreign exchange regime; its national currency, the tugrik (denoted as MNT), is fully convertible into a wide array of international currencies.  Foreign and domestic businesses have reported no problems converting or transferring funds aside from occasional, market-driven shortages of foreign reserves.

Mongolia’s Currency Law requires domestic transactions use MNT, unless exempted by the Bank of Mongolia.  Regulation prohibits listing of wholesale or retail prices in any way – including as an internal accounting practice – that effectively denominates or otherwise indexes prices to currencies other than MNT.  Hedging mechanisms available elsewhere to mitigate exchange risk are generally unavailable given the small size of the market.  Letters of credit in a variety of currencies are available for trade facilitation.  The government sometimes pays for goods and services with promissory notes that cannot be directly exchanged for other currencies.

Remittance Policies

Businesses report no chronic, government-induced delays remitting investment returns or receiving inbound funds, although challenges with correspondent-banking relationships sometimes slow remittances.  Most transfers are completed within a few days to a week; however, occasional currency shortages, most often of U.S. dollars, may cause commercial banks and the central bank to limit transfers temporarily.  Remittances sent abroad are subject to a 10-percent withholding tax to cover potential tax liabilities.

Sovereign Wealth Funds

Mongolia’s Ministry of Finance manages two sovereign wealth funds (SWF) funded through diversion of mining sector revenues: The Fiscal Stabilization Fund and the Future Heritage Fund.  The Fiscal Stabilization Fund diverts revenues that might promote boom and bust cycles of spending; however, Mongolia’s recent fiscal crises have depleted this fund.  The Future Heritage Fund, resembling Norway’s Global Pension Fund, accumulates mining revenues for the future and invests the proceeds exclusively outside Mongolia.  The Ministry of Finance and the IMF project the Future Heritage Fund should start accumulating $104-125 million annually in 2022, coinciding with increased revenues from the Oyu Tolgoi copper and gold mine.  These SWFs are not meaningfully funded as 2021, however.

Mongolia has state-owned enterprises (SOEs) in the banking and finance, energy production, mining, and transport sectors.  The Ministry of Finance manages the State Bank of Mongolia and the Mongolian Stock Exchange, and the SOE Erdenes Mongol holds most of the government’s mining assets.  The Ministry of Roads and Transport Development manages the Mongolian Railway Authority.  The Government Agency for Policy Coordination on State Property ( http://www.pcsp.gov.mn/en ) manages non-mining and non-financial assets.  The Agency for Policy Coordination on State Property does not provide a complete list of its SOEs.

Investors are concerned SOEs crowd out more efficient private-sector investment.  Investors can compete with SOEs, but an opaque regulatory framework limits competition.  Foreign and domestic private investors have observed that government regulators favor SOEs, such as streamlining the process for environmental-permit approvals or ignoring health and safety issues at SOEs.

Mongolian SOEs do not adhere to the OECD Corporate Governance Guidelines for SOEs.  Although technically required to follow the same international best practices on disclosure, accounting, and reporting used by private companies, SOEs tend to follow these rules only when seeking international investment and financing.  Many international best practices are not institutionalized in Mongolian law, and SOEs tend to follow existing Mongolian rules.  At the same time, foreign-invested firms follow the international rules, causing inconsistencies in corporate governance, management, disclosure, minority-shareholder rights, and finance.

Privatization Program

The government routinely floats privatization for such state-held assets as the Mongolian Stock Exchange, the national air carrier MIAT, the Mongol Post Office, and the Tavan Tolgoi coal mine through sales of shares or equity but has not identified how or when it would do so.

Mongolia’s political and security environment is peaceful and stable.  Crime is low in the capital Ulaanbaatar but fluctuates from season to season.  Street-level petty theft and assault occur with some regularity, while more complex financial and fraud-based crimes are on the rise.  U.S. investors are generally welcomed by the Mongolian people; however, in small numbers and in specific areas, anti-foreign sentiment fueled by fringe nationalist groups has been observed. These sentiments do not focus on U.S. investors exclusively and are subject to current events.   Mining sector investors have reported that unlicensed, artisanal gold miners – locally know as ninja miners – may seek to mine gold on a legally licensed mine sites or sites where the ninja miners believe precious metals lie.  These intrusions can become disorderly and in rare cases lead to violence.

Note:  The Government of Mongolia does not track where beneficial ownership of a given investment terminates.  The government only records where the company claims its domicile.  The U.S. Embassy in Mongolia knows of numerous cases where foreign entities active in Mongolia do not incorporate in their countries of origin but rather in third countries for tax mitigation purposes.  Consequently, although Mongolia’s data and the IMF’s, respectively, suggest that much of Mongolia’s investment originates from such places as the Netherlands or Singapore, much of the investment comes from other jurisdictions, including but not limited to the United States, Australia, Canada, Russia, and PRC China.

Policies towards Foreign Direct Investment

Montenegro regained its independence in 2006, and, since then, the country has adopted an investment framework that in principle encourages growth, employment, and exports.  Montenegro, however, is still in the process of establishing a liberal business climate that fosters foreign investment and local production.  The country remains dependent on imports from neighboring countries despite its significant potential in some areas of agriculture and food production.  Although the continuing political transition has not yet eliminated all structural barriers, the government generally recognizes the need to remove impediments in order to remain competitive, reform the business environment, open the economy to foreign investors, and attract further FDI.

In general, there are no distinctions made between domestic and foreign-owned companies.  Foreign companies can own 100 percent of a domestic company, and profits and dividends can be repatriated without limitations or restrictions. Foreign investors can participate in local privatization processes and can own land in Montenegro generally on the same terms as locals.  Expropriation of property can only occur for a “compelling public purpose” and compensation must be made at fair market value.  There has been no known expropriation of foreign investments in Montenegro, however long-standing property restitution cases dating back to WWII remain unresolved. International arbitration is allowed in commercial disputes involving foreign investors.

Registration procedures have been simplified to such an extent that it is possible to complete all registration processes online.  In addition, bankruptcy laws have been streamlined to make it easier to liquidate a company; accounting standards have been brought up to international norms; and custom regulations have been simplified.  There are no mandated performance requirements.

Montenegro has enacted specific legislation outlining guarantees and safeguards for foreign investors.  Montenegro has also adopted more than 20 other business-related laws, all in accordance with EU standards.  The main laws that regulate foreign investment in Montenegro are: the Foreign Investment Law; the Enterprise Law; the Insolvency Law; the Law on Fiduciary Transfer of Property Rights; the Accounting Law; the Law on Capital and Current Transactions; the Foreign Trade Law; the Customs Law; the Law on Free Zones; the Labor Law; the Securities Law; the Concession Law, and the set of laws regulating tax policy.  Montenegro has taken significant steps in both amending investment-related legislation in accordance with global standards and creating necessary institutions for attracting investments.  However, as is the case with other transition countries, implementation and enforcement of existing legislation remains weak and inconsistent.

While Montenegro has taken steps to make the country more open for foreign investment, some deficiencies still exist.  The absence of fully developed legal institutions has fostered corruption and weak controls over conflicts of interest.  The judiciary is still slow to adjudicate cases, and court decisions are not always consistently reasoned or enforced.  Montenegro’s significant grey economy impacts its open market, negatively affecting businesses operating in accordance with the law.  Favorable tax policies established at the national level are often cancelled out with taxes introduced by different municipalities on the local level.

To better promote investment and foster economic development, the government adopted in December 2019 a new Law on Public Private Partnerships and established the Montenegrin Investment Agency (MIA), merging the Montenegrin Investment Promotion Agency (MIPA) and the Secretariat for Development Projects.  The MIA seeks to promote Montenegro as a competitive investment destination by facilitating investment projects in the country. Together with the Privatization and Capital Investment Council, MIA promotes investment opportunities in various sectors of the Montenegrin economy, primarily focusing on the tourism, energy, technology, and agricultural sectors.  These two institutions will maintain an ongoing dialogue with investors already present in Montenegro and, at the same time, seek to promote future projects and attract new investors to do business in Montenegro.  More information available at http://www.mia.gov.me.

Limits on Foreign Control and Right to Private Ownership and Establishment

Montenegro’s Foreign Investment Law, which was adopted by the Parliament in 2011, establishes the framework for investment in Montenegro.  The law eliminates previous investment restrictions, extends national treatment to foreign investors, allows for the transfer and repatriation of profits and dividends, provides guarantees against expropriation, and allows for customs duty waivers for equipment imported as capital-in-kind.  There are no limits on foreign control and right to private ownership or on establishing companies in Montenegro.  There are no institutional barriers to foreign investors, including U.S. businesses, and there is no screening mechanism for inbound foreign investment.

Other Investment Policy Reviews

The WTO secretariat conducted its first review of Montenegrin trade policies and practices in April 2018 (https://www.wto.org/english/tratop_e/tpr_e/tp469_e.htm).

Business Facilitation

The Central Register of the Commercial Court (CRPS) is responsible for business registration procedures (www.crps.me).  The court maintains an electronic database of registered business entities, and contracts on financial leasing and pledges.  The process to register a business in Montenegro takes an average of 4-5 working days. The minimum financial requirement for a Limited Liability Company (LLC) is just EUR 1 (USD 1.2), and three documents are required: a founding decision, bylaws, and a copy of the passport (if an individual is founding a company) or a registration form for the specific type of company. Samples of all documents are available for download at the CRPS website.  Montenegrin law permits the establishment of six types of companies: entrepreneur, limited liability company, joint stock company, general partnership, limited partnership, and part of a foreign company. All included in the business activities need to open a bank account.  Once a bank account is established, the company reports to the tax authority in order to receive a PIB (taxation identification number) and VAT number (Value Added Tax). For classification of companies by size, based on number of employees, the government’s definition is as follows: (i) small enterprises (from one to 49 employees), (ii) medium-sized enterprises (from 50 to 249) and (iii) large enterprises (more than 250 employees).

Outward Investment

While the Montenegrin government is very active in attracting and inviting foreign investors to do business in Montenegro, the government is not as dedicated to promoting outward investments. There are no government restrictions to domestic investors for their investments abroad.

Transparency of the Regulatory System

The main law governing foreign investment, the Montenegrin Law on Foreign Investment, is based on the national treatment principle, which is a basic principle of GATT/WTO that prohibits discrimination between imported and domestically produced goods with respect to internal taxation or other government regulation. All proposed laws and regulations put forth by the government are published in draft form and open for public comment, generally for a 30-day period.

Regulations are often applied inconsistently, particularly at the municipal level.  Many regulations are in conflict with other regulations, or are ambiguous, creating confusion for investors.  As noted in the American Chamber of Commerce’s (AmCham) biannual Business Climate Survey conducted in 2020, many municipalities lack adequate detailed urban plans, complicating investment plans.  Some municipalities have made efforts to speed up procedures in order to improve the business environment for investors.  While at the national level there are fewer obstacles for investments and other activities, many larger-scale projects involve both local and national authorities, and it is often necessary to work with both administrations in order to complete a project. AmCham members surveyed are dissatisfied with the duration of the court proceedings (79,5%) and unequal implementation of the law (63,6%). At the same time, over 70% of AmCham member companies surveyed believe that conditions for doing business when it comes to the duration of the court proceedings, and unequal implementation of the laws have not changed in the past two years.

Foreign investors are subject to the same conditions as domestic investors when it comes to establishing a company and making an investment.  There are no other regulations in place which might deprive a foreign investor of any rights or limit the investor’s ability to do business in Montenegro.  The Law of Foreign Investments is currently fully harmonized with World Trade Organization (WTO) rules.

In 2004, the Parliament established an Energy Regulatory Agency, which maintains authority over the electricity, gas, oil, and heating energy sectors.  Its main tasks include approving pricing, developing a model for determining allowable business costs for energy sector entities, issuing operating licenses for energy companies and for construction in the energy sector, and monitoring public tenders.  The energy law mandates that in the energy sectors, when prices are affected by monopoly positions of some participants, business costs will be set at levels approved by the Agency.  In those areas deemed to function competitively, the market will determine prices.  The price of gasoline is set nationally every two weeks and is uniform across all petrol stations.

The Agency for Electronic Communication and Postal Services was established by the government in 2001.  It is an independent regulatory body whose primary purpose is to design and implement a regulatory framework and to encourage private investment in the sector.

While there is a full legal and regulatory infrastructure in place to conduct public procurement, U.S. companies have complained in numerous cases about irregularities in the procurement process at the national level, and maintain there is an inability to meaningfully challenge decisions they believe were erroneously taken through the procurement apparatus.  In other cases, the system delivers appropriate outcomes, though in a complex and time-consuming way. Public procurement is conducted jointly by the Public Procurement Directorate, the Ministry of Finance (as the main line ministry for the procurement area), and the State Commission for Control of Public Procurement Procedures in the protection of rights area.  The Public Procurement Directorate began operations in 2007 while the State Commission for the Control of Public Procurement Procedures Control was established in 2011.  The State Commission takes decisions in the form of written orders and conclusions made at its meetings.  The decisions are made by a majority of present members.  The State Commission’s Rules of Procedure specify the method for this work.  The revised Law of Public Procurement entered into force in December 2019.  The Administrative Court oversees cases involving public procurement procedures.

The Montenegro State Audit Institution (SAI) is an independent supreme audit institution for verification of the entire government’s financial statements, including state-owned enterprises.  The audits are made publicly available on the SAI’s website.  Accounting standards implemented in Montenegro are transparent and consistent with international norms.  In addition, various international companies that conduct accounting and auditing procedures are present in the country.

International Regulatory Considerations

Montenegro is a candidate country for membership to the EU, with accession negotiations launched on June 29, 2012.  All 33 negotiating chapters have been opened, while three are provisionally closed.  Montenegro is currently taking steps to harmonize its regulations and accepted best practices with those of the EU, as part of the negotiation process. The government has not notified the WTO of any measures that are inconsistent with the WTO’s Trade Related Investment Measures (TRIMs), nor have there been any independent allegations that the government maintains any such measures.

Legal System and Judicial Independence

Montenegro’s legal system is of a civil, continental type based on Roman law.  It includes the legal heritage of the former Yugoslavia, and the State Union of Serbia and Montenegro.  As of 2006, when the country regained its independence, Montenegrin codes and criminal justice institutions were applicable and operational.  Montenegro’s Law on Courts defines a judicial system consisting of three levels of courts: Basic, High, and the Supreme Court.  Montenegro established the Appellate Court and the Administrative Court in 2005 for the appellate jurisdiction in criminal and commercial matters, and specialized jurisdiction in administrative matters.  The specialized Commercial Court has first instance jurisdiction in commercial matters. Apart from those, there are also specialized Misdemeanors Courts.

The Basic Courts have first instance jurisdiction in civil cases and criminal cases in which a prison sentence of up to 10 years is possible.  There are 15 Basic Courts for Montenegro’s 23 municipalities.  Two High Courts in Podgorica and Bijelo Polje have appellate review of basic court decisions.  The High Courts also decide on jurisdictional conflicts between the municipal courts.  They are also first instance courts for serious crimes where prison sentence of more than 10 years is specified.  The Podgorica High Court has specialized judges and departments who deal with organized crime, corruption, war crimes, money laundering, and terrorism cases.

According to the Law on Courts, there is just one Commercial Court based in Podgorica.  The Commercial Court has jurisdiction in the following matters: all civil disputes between legal entities, shipping, navigation, aircraft (except passenger transport), and disputes related to registration of commercial entities, competition law, intellectual property rights (IPR), bankruptcy, and unfair trade practices.  The High Court hears appeals of Basic Court decisions, and High Courts’ first instance decision may be appealed to the Appellate Court which is also a second instance court for decisions of the Commercial Court. The Supreme Court is the third (and final) instance court for all decisions.  The Supreme Court is the court of final judgment for all civil, criminal, commercial, and administrative cases, and it acts only upon irregular (i.e., extraordinary legal remedies).  There is also the Constitutional Court of Montenegro, which checks constitutionality and legality of legal acts and acts upon constitutional complaints in relation to human rights violations.

The Commercial Court system faces challenges, including weak implementation of legislation and confusion over numerous changes to existing laws; development of a new system of operations, including electronic communication with clients; and limited capacity and expertise among the judges as well as a general backlog in cases. The Commercial Law Development Program (CLDP), a technical assistance arm of the U.S. Department of Commerce is active in providing technical assistance in the area of commercial law.

Over the last several years, the adoption of 20 new business laws has significantly changed and clarified the legislative environment.  Recently adopted legislative reforms improved the efficiency and effectiveness of court proceedings, a trend which is already visible through the introduction of Public Enforcement Agents.

Laws and Regulations on Foreign Direct Investment

In order to attract foreign investment, the government established the Montenegrin Investment Agency (MIA) (www.mia.gov.me) and the Privatization and Capital Investment Council Dead link, not available elsewhere.. These organizations aim to promote Montenegro’s investment climate and opportunities in the local economy, with particular regard for the tourism, energy, infrastructure, and agriculture sectors.

Competition and Anti-Trust Laws

In 2013, the Agency for Protection of Competition was established as a functionally independent entity after the Law on Protection of Competition entered into force and the Central Register of Economic Entities registered the law. The area of free market competition, regulated by the law, represents the area that has direct and significant impact on economic development and investment activity, by raising the level of the quality of goods and services, thus creating the conditions for lower prices and creation of a modern, open market economy.  This, in turn, provides Montenegro with the possibility to participate in the single market of the EU and in other international markets.

Expropriation and Compensation

Montenegro provides legal safeguards against expropriation with protections codified in several laws adopted by the government.  There have been no cases of expropriation of foreign investments in Montenegro.  However, Montenegro has outstanding claims related to property nationalized under the Socialist Federal Republic of Yugoslavia. A number of unresolved restitution cases involve U.S. citizens. The cases are in various stages of adjudication and have been ongoing for over a decade. At the end of 2007, Parliament passed the new Law on Restitution, which supersedes the 2004 Act.  In line with the law, three review commissions have been formed: one in Bar (covering the coastal region); one in Podgorica (for the central region of Montenegro); and one in Bijelo Polje (for the northern region of Montenegro).  The basic restitution policy in Montenegro is restitution in kind, when possible, and cash compensation or substitution of other state land when physical return is not possible.
In addition, Montenegro provides safeguards from expropriation actions through its Foreign Investment Law.  The law states that the government cannot expropriate property from a foreign investor unless there is a “compelling public purpose” established by law or on the basis of the law.  If an expropriation is executed, compensation must be provided at fair market value plus one basis point above the London Interbank Offered Rate (LIBOR) rate for the period between the expropriation and the date of payment of compensation.

Dispute Settlement

ICSID Convention and New York Convention

Montenegro ratified its ICSID Convention membership in April 2013, and the country fully enforces the Convention.

Investor-State Dispute Settlement

Montenegro does not have a bilateral investment treaty with the United States. There are a number of individual American investors involved in public procurement and construction cases that are in various stages of dispute resolution with the government.

International Commercial Arbitration and Foreign Courts

Dispute resolution is under the authority of national courts, but it can also fall under the authority of international courts if the contract so designates.  Accordingly, Montenegro allows for the possibility of international arbitration.  Various foreign companies have other bilateral and multilateral organizations providing risk insurance against war, expropriation, nationalization, confiscation, inconvertibility of profit and dividends, and inability to transfer currency; these are the Multilateral Investment Guarantee Agency (MIGA of the World Bank), U.S. Development Finance Corporation (USDFC), U.K. Exports Credit Guarantee Department (ECGD), Slovenia Export Corporation (SID), Italian Export Credit Agency (SACE), French Export Credit Agency (COFACE), and Austrian Export Financing Group (OEKB).

Montenegro has taken steps to improve court-system inefficiencies, which frequently result in long and drawn-out trials.  Procedural laws have been amended in the last few years to improve efficiency of the proceedings in line with the standards of the European Convention of Human Rights.  It should be noted that most complaints that go to the European Court of Human Rights against Montenegro concern Article 6 of the Convention – the right to a fair trial in a reasonable time.  Civil appellate procedures have been simplified as part of an effort to eliminate the possibility of long appellate procedures, which was common in the past. In addition, Montenegro has passed the Law on the Protection of the Right to a Fair Trial in a Reasonable Time, which enables the court to award compensation for an excessively long trial and introduces a series of controlling mechanisms during the trial itself.  In 2011, Montenegro adopted the Law on Public Bailiffs, which subsequently improved the procedure to enforce civil judgments.

Bankruptcy Regulations

The Bankruptcy Law, adopted in 2011, mandates that debtors are designated insolvent if they cannot meet financial obligations within 45 days of the date of maturity of any debt obligation.  However, the law still offers some latitude for restrictive measures and discretionary government interference. Bankruptcy is criminalized in Montenegro and a responsible officer in a business entity who caused bankruptcy and damage to another person by irrational spending of assets or their bargain selling, by excessive borrowing, undertaking disproportional obligations, recklessly concluding contracts with insolvent entities, omitting to collect claims in time, by destroying or concealing property or by other acts which are not in compliance with  prudent business practices shall be punished by a prison term from six months to five years.

Capital Markets and Portfolio Investment

The banking sector in Montenegro is fully privatized with 12 privately owned banks operating in the country. The banking sector operates under market terms.  Foreign investors are able to get credit on the local market, and they have access to a variety of credit instruments since the majority of the banks in Montenegro belong to international banking chains.

The largest foreign investor-banks are OTP (Hungary) operating as CKB in Montenegro, Erste Bank (Austria) and NLB (Slovenia). The remaining, smaller foreign banks do not belong to large international groups.  A new set of banking laws have been adopted and some of the existing laws have been amended to improve regulation of the banking sector, provide a higher level of depositor safety, and increase trust in the banking sector itself.  The Law on the Protection of Deposits has been adopted to bring local legislation on protecting deposits up to European standards.  In accordance with the law, a fund for protecting deposits has been established and deposits are guaranteed up to the amount of EUR 50,000 (approximately USD 55,556).

Until 2010, Montenegro had two stock exchanges.  After a successful merger (in 2010), only one stock exchange operates on the capital market under the name of Montenegro Stock Exchange (MSE).  In December 2013, the Istanbul Stock Exchange purchased 24.38 percent of the MSE (www.montenegroberza.com).  Three types of securities are traded: shares of companies, shares of investment funds, and bonds (old currency savings bonds, pension fund bonds, and bonds from restitution.)  The MSE is organized on the principle of member firms, which trade in their own names and for their own account (dealers) in the name and for the account of their clients (brokers).  Members of the MSE can be a legal entity registered as a broker under the Law on Securities provided they meet conditions laid down by the Statute of the Stock Exchange.  In addition, members may include banks and insurance companies, once approved by the Commission for Securities to perform stock exchange trade.  MSE currently has 11 stock brokers.

Money and Banking System

According to Central Bank of Montenegro, the banking sector remained solvent and liquid, with a share of 5.5 percent of non-performing loans.  In 2020, lending activity grew by 3.2 percent in relation to the end of 2019 while the interest rate dropped to 5.84 percent as a result of increased competition.

Montenegro is one of a few countries that does not belong to the Euro zone but uses the Euro as its official currency (without any formal agreement).  Since its authority is limited in monetary policies, the Central Bank, in its role as the state’s fiscal agent, has focused on control of the banking system and maintenance of the payment system. The Central Bank also regulates the process for establishing a bank.  A bank can be founded as a joint-stock company and acquire the status of a legal entity by registering in the court register.  An application for registration in the court register must be submitted 60 days from when the bank is first licensed.

Foreign Exchange and Remittances

Foreign Exchange Policies

The Foreign Investment Law guarantees the right to transfer and repatriate profits in Montenegro.  Montenegro uses the Euro as its domestic currency. There are no other limitations placed on the transfer of foreign currency.

Remittance Policies

There are no difficulties in the free transfer of funds exercised on the basis of profit, repayment of resources, or residual assets. The Central Bank of Montenegro publishes statistics on remittances as a proportion of GDP, with the latest data available indicating that in 2018 remittances accounted for approximately 10 percent of GDP.

Sovereign Wealth Funds

There are no sovereign wealth funds in Montenegro.

Since the beginning of the privatization process in 1999, nearly 90 percent of formerly state-owned enterprises (SOEs) have been privatized.  The most prominent SOEs still in operation include the Port of Bar, Montenegro Railways, Airports of Montenegro, Plantaze Vineyards, Electric Power Industry of Montenegro (EPCG), and several companies in the tourism industry, including Ulcinjska and Budvanska Rivijera. In December 2020, the new Government decided to shut heavily-indebted national carrier Montenegro Airlines and to create a new state company ToMontenegro which should start operating by the middle of 2021. All of these companies are registered as joint-stock companies, with the government appointing one or more representatives to each board based on the ownership structure.  All SOEs must provide an annual report to the government and are subject to independent audits.  In addition, SOEs are listed and have publicly available auditing accounts on the Montenegrin Securities Commission’s website www.scmn.me.  Political affiliation has been known to play a role in job placement in SOEs.

Privatization Program

The privatization process in Montenegro is currently in its final phase.  The majority of companies that have not yet been privatized are of strategic importance to the Montenegrin economy and operate in such fields as energy, transport, and tourism.  Further privatization of SOEs should contribute to better economic performance, increase the competitiveness of the country, and enable the government to generate higher revenues (while lowering its outlays), which will enhance capital investments and reduce debts.

The Montenegrin government is the main institution responsible for the privatization process.  The Privatization and Capital Investment Council was established in 1996 to manage, control, and implement the privatization process as well as to propose and coordinate all activities necessary for the non-discriminatory and transparent application process for capital projects in Montenegro.  The prime minister of Montenegro is the president of the Privatization and Capital Investment Council. Dead link; could not find new council website.

Montenegro has a multi-party political system with a mixed parliamentary and presidential system. The August 30, 2020 national parliamentary elections resulted in three opposition coalitions – For the Future of Montenegro, Peace is Our Nation, and In Black and White – toppling the former ruling Democratic Party of Socialists (DPS) that had been in power since the introduction of the multi-party system in 1990.  The new ruling parliamentary majority is a mix of radical pro-Russian/pro-Serb parties, moderate pro-Serb parties, and civic parties, while the cabinet is composed of apolitical technocrats in what they term an expert government.  The leader of the For the Future of Montenegro coalition, Zdravko Krivokapic, was elected Prime Minister, while the leader of the In Black and White coalition, Dritan Abazovic, was elected Deputy Prime Minister and the leader of Peace is our Nation, Aleksa Becic, was elected Speaker of Parliament.  The three leaders signed an agreement to maintain Montenegro’s pro-Western, Euro-Atlantic trajectory, promising to fulfill all NATO membership obligations and accelerate EU accession efforts.  However, due to the radical, pro-Russian bent of a significant number of ruling coalition MPs, concerns of foreign malign influence persist.

Former Prime Minister Milo Djukanovic was elected President of Montenegro in April 2018 for a five year term.

Table 4: Sources of Portfolio Investment
Data not available.

Policies Towards Foreign Direct Investment

Morocco actively encourages foreign investment through macro-economic policies, trade liberalization, structural reforms, infrastructure improvements, and incentives for investors. Law 18-95 of October 1995, constituting the Investment Charter , is the foundational Moroccan text governing investment and applies to both domestic and foreign investment (direct and portfolio). The Ministry of Industry recently announced the second Industrial Acceleration Plan (PAI) to run from 2021-2025, which aims to build on the progress made in the previous 2014-2020 PAI and expand industrial development throughout all Moroccan regions. The PAI is based on establishing “ecosystems” that integrate value chains and supplier relationships between large companies and small- and medium-sized enterprises. Moroccan legislation governing FDI applies equally to Moroccan and foreign legal entities, with the exception of certain protected sectors.

Morocco’s Investment and Export Development Agency (AMDIE) is the national agency responsible for the development and promotion of investments and exports. Following the reform to the law  governing the country’s Regional Investment Centers (CRIs) in 2019, each of the 12 regions is empowered to lead their own investment promotion efforts. The CRI websites  aggregate relevant information for interested investors and include investment maps, procedures for creating a business, production costs, applicable laws and regulations, and general business climate information, among other investment services. The websites vary by region, with some functioning better than others. AMDIE and the 12 CRIs work together throughout the phases of investment at the national and regional level. For example, AMDIE and the CRIs coordinate contact between investors and partners. Regional investment commissions examine investment applications and send recommendations to AMDIE. The inter-ministerial investment committee, for which AMDIE acts as the secretariat, approves any investment agreement or contract which requires financial contribution from the government. AMDIE also provides an “after care” service to support investments and assist in resolving issues that may arise.

Further information about Morocco’s investment laws and procedures is available on AMDIE’s newly launched website  or through the individual websites of each of the CRIs. For information on agricultural investments, visit the Agricultural Development Agency website  or the National Agency for the Development of Aquaculture website .

When Morocco acceded to the OECD Declaration on International Investment and Multinational Enterprises in November 2009, Morocco guaranteed national treatment of foreign investors. The only exception to this national treatment of foreign investors is in those sectors closed to foreign investment (noted below), which Morocco delineated upon accession to the Declaration. The National Contact Point for Responsible Business Conduct ( NCP ), whose presidency and secretariat are held by AMDIE, is the lead agency responsible for the adherence to this declaration.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign and domestic private entities may establish and own business enterprises, barring certain restrictions by sector. While the U.S. Mission is unaware of any economy-wide limits on foreign ownership, Morocco places a 49 percent cap on foreign investment in air and maritime transport companies and maritime fisheries. Morocco currently prohibits foreigners from owning agricultural land, though they can lease it for up to 99 years; however, new regulation to open agricultural land to foreign ownership is forthcoming. The Moroccan government holds a monopoly on phosphate extraction through the 95 percent state-owned Office Cherifien des Phosphates (OCP). The Moroccan state also has a discretionary right to limit all foreign majority stakes in the capital of large national banks but apparently has never exercised that right. The Moroccan Central Bank (Bank Al-Maghrib) may use regulatory discretion in issuing authorizations for the establishment of domestic and foreign-owned banks. In the oil and gas sector, the National Agency for Hydrocarbons and Mines (ONHYM) retains a compulsory share of 25 percent of any exploration license or development permit. As established in the 1995 Investment Charter, there is no requirement for prior approval of FDI, and formalities related to investing in Morocco do not pose a meaningful barrier to investment. The U.S. Mission is not aware of instances in which the Moroccan government refused foreign investors for national security, economic, or other national policy reasons, nor is it aware of any U.S. investors disadvantaged or singled out by ownership or control mechanisms, sector restrictions, or investment screening mechanisms, relative to other foreign investors.

Other Investment Policy Reviews

The last third-party investment policy review of Morocco was the World Trade Organization (WTO) 2016 Trade Policy Review  (TPR), which found that the trade reforms implemented since the prior TPR in 2009 contributed to the economy’s continued growth by stimulating competition in domestic markets, encouraging innovation, creating new jobs, and contributing to growth diversification.

Business Facilitation

In the World Bank’s 2020 Doing Business Report , Morocco ranks 53 out of 190 economies, rising seven places since the 2019 report. Since 2012, Morocco has implemented reforms that facilitate business registration, such as eliminating the need to file a declaration of business incorporation with the Ministry of Labor, reducing company registration fees, and eliminating minimum capital requirements for limited liability companies. Morocco maintains a business registration website that is accessible through the various Regional Investment Centers (CRI ).

Foreign companies may utilize the online business registration mechanism. Foreign companies, with the exception of French companies, are required to provide an apostilled Arabic translated copy of their articles of association and an extract of the registry of commerce in its country of origin. Moreover, foreign companies must report the incorporation of the subsidiary a posteriori to the Foreign Exchange Office (Office de Changes) to facilitate repatriation of funds abroad such as profits and dividends. According to the World Bank, the process of registering a business in Morocco takes an average of nine days, significantly less than the Middle East and North Africa regional average of 20 days. Morocco does not require that the business owner deposit any paid-in minimum capital.

In January 2019, the electronic creation of businesses law 18-17 was published, but as of April 2021 the new process is not yet operational. The new system will allow for the creation of businesses online via an electronic platform managed by the Moroccan Office of Industrial and Commercial Property (OMPIC). All procedures related to the creation, registration, and publication of company data will be carried out via this platform, which is expected to launch by the end of 2021. A new national commission will monitor the implementation of the procedures. The Simplification of Administrative Procedures Law 55-19, passed in 2020, aims to streamline administrative processes by identifying and standardizing document requirements, eliminating unnecessary steps, and making the process fully digital via the National Administration Portal, which is expected to launch in Spring 2021.

The business facilitation mechanisms provide for equitable treatment of women and underrepresented minorities in the economy. Notably, according to the World Bank, the procedure, length of time, and cost to register a new business is equal for men and women in Morocco. The U.S. Mission is unaware of any official assistance provided to women and underrepresented minorities through the business registration mechanisms. In cooperation with the Moroccan government, civil society, and the private sector, there have been several initiatives aimed at improving gender quality in the workplace and access to the workplace for foreign migrants, particularly those from sub-Saharan Africa.

Outward Investment

The Government of Morocco prioritizes investment in Africa. The African Development Bank ranks Morocco as the second biggest African investor in Sub-Saharan Africa, after South Africa, and the largest African investor in West Africa. According to the Department of Studies and Financial Forecasts, under the Ministry of Economy, Finance, and Administration Reform, $640 million, or 47 percent of Morocco’s total outward FDI, was invested in the African continent in 2019. The U.S. Mission is not aware of a standalone outward investment promotion agency, although AMDIE’s mission includes supporting Moroccans seeking to invest outside of the country for the purpose of boosting Moroccan exports. Nor is the U.S. Mission aware of any restrictions for domestic investors attempting to invest abroad. However, under the Moroccan investment code, repatriation of funds is limited to “convertible” Moroccan Dirham accounts. Morocco’s Foreign Exchange Office (“Office des Changes,” OC) implemented several changes for 2020 that slightly liberalize the country’s foreign exchange regulations. Moroccans going abroad for tourism can now exchange up to $4,700 in foreign currency per year, with the possibility to attain further allowances indexed to their income tax filings. Business travelers can also obtain larger amounts of foreign currency, provided their company has properly filed and paid corporate income taxes. Another new provision permits banks to use foreign currency accounts to finance investments in Morocco’s Industrial Acceleration Zones.

Transparency of the Regulatory System

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

Morocco’s regulatory enforcement mechanisms depend on the sector in question, and enforcement is legally reviewable. The National Telecommunications Regulatory Agency (ANRT), for example, is the public body responsible for the control and regulation of the telecommunications sector. The agency regulates telecommunications by participating in the development of the legislative and regulatory framework. Morocco does not have specific regulatory impact assessment guidelines, nor are impact assessments required by law. Morocco does not have a specialized government body tasked with reviewing and monitoring regulatory impact assessments conducted by other individual agencies or government bodies.

The U.S. Mission is not aware of any informal regulatory processes managed by nongovernmental organizations or private sector associations. The Moroccan Ministry of Finance posts quarterly statistics   (compiled in accordance with IMF recommendations) on public finance and debt on their website. A report on public debt is published on the Ministry of Economy and Finance’s website and is used as part of the budget bill formulation and voting processes. The fiscal year 2021 debt report was published on December 18, 2020.

International Regulatory Considerations

Morocco joined the WTO in 1995 and reports technical regulations that could affect trade with other member countries to the WTO. Morocco is a signatory to the Trade Facilitation Agreement   and has a 91.2 percent implementation rate of TFA requirements. European standards are widely referenced in Morocco’s regulatory system. In some cases, U.S. or international standards, guidelines, and recommendations are also accepted.

Legal System and Judicial Independence

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

Laws and Regulations on Foreign Direct Investment

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

Competition and Antitrust Laws

Morocco’s Competition Law No. 06-99 on Free Pricing and Competition outlines the authority of the Competition Council  as an independent executive body with investigatory powers. Together with the INPPLC, the Competition Council is one of the main actors charged with improving public governance and advocating for further market liberalization. Law No. 20-13, adopted on August 7, 2014, amended the powers of the Competition Council to bring them in line with the 2011 Constitution. The Competition Council’s responsibilities include making decisions on anti-competition practices and controlling concentrations, with powers of investigation and sanction; providing opinions in official consultations by government authorities; and publishing reviews and studies on the state of competition.

In February 2020, the Moroccan telecommunications regulator, National Telecommunications Regulatory Agency (ANRT), issued a $340 million fine against Maroc Telecom for abusing its dominant position in the market. Maroc Telecom is majority owned by Etisalat, based in the United Arab Emirates (UAE), and is minority owned by the Moroccan government. ANRT ruled in favor of rival telecoms operator INWI, which is majority-owned by Morocco’s royal holding company and is minority-owned by Kuwait’s sovereign wealth fund and a private Kuwaiti company, which had filed the complaint with ANRT.

Following reported mishandling of an investigation into the alleged collusion by oil distribution companies, King Mohammed VI convened an ad hoc committee to investigate the Competition Council’s dysfunctions. In March 2021, the king appointed a new council president, and parliament adopted a new bill strengthening the Competition Council by improving its legal framework and increasing transparency.

Expropriation and Compensation

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

Dispute Settlement

ICSID Convention and New York Convention

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

Investor-State Dispute Settlement

Morocco is signatory to over 70 bilateral treaties recognizing binding international arbitration of trade disputes, including one with the United States. Law No. 08-05 established a system of conventional arbitration and mediation, while allowing parties to apply the Code of Civil Procedure in their dispute resolution. Foreign investors commonly rely on international arbitration to resolve contractual disputes. Commercial courts recognize and enforce foreign arbitration awards. Generally, investor rights are backed by a transparent, impartial procedure for dispute settlement. There have been no claims brought by foreign investors under the investment chapter of the U.S.-Morocco Free Trade Agreement since it came into effect in 2006. The U.S. Mission is not aware of any investment disputes over the last year involving U.S. investors.

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

International Commercial Arbitration and Foreign Courts

Morocco has a national commission on Alternative Dispute Resolution with a mandate to regulate mediation training centers and develop mediator certification systems. Morocco seeks to position itself as a regional center for arbitration in Africa, but the capacity of local courts remains a limiting factor. To remedy this shortcoming, the Moroccan government established the Center of Arbitration and Mediation in Rabat, and the Casablanca Finance City Authority established the Casablanca International Mediation and Arbitration Center, which now see a majority of investment disputes. The U.S. Mission is aware of several investment disputes and has advocated on behalf of U.S. companies to resolve the disputes.

Bankruptcy Regulations

Morocco’s bankruptcy law is based on French law. Commercial courts have jurisdiction over all cases related to insolvency, as set forth in Royal Decree No. 1-97-65 (1997). The Commercial Court in the debtor’s place of business holds jurisdiction in insolvency cases. The law gives secured debtors priority claim on assets and proceeds over unsecured debtors, who in turn have priority over equity shareholders. Bankruptcy is not criminalized. The World Bank’s 2020 Doing Business report ranked Morocco 73 out of 190 economies in “Resolving Insolvency”. The GOM revised the national insolvency code in March of 2018, but further reform is needed.

Capital Markets and Portfolio Investment

Morocco encourages foreign portfolio investment and Moroccan legislation applies equally to Moroccan and foreign legal entities and to both domestic and foreign portfolio investment. The Casablanca Stock Exchange (CSE), founded in 1929 and re-launched as a private institution in 1993, is one of the few exchanges in the region with no restrictions on foreign participation. The CSE is regulated by the Moroccan Capital Markets Authority. Local and foreign investors have identical tax exposure on dividends (10 percent) and pay no capital gains tax. With a market capitalization of around $66 billion and 76 listed companies, CSE is the second largest exchange in Africa (after the Johannesburg Stock Exchange). Nonetheless, the CSE saw only 14 new listings between 2010-2020. There was only one new initial public offering (IPO) in 2020. Short selling, which could provide liquidity to the market, is not permitted. The Moroccan government initiated the Futures Market Act (Act 42-12) in 2015 to define the institutional framework of the futures market in Morocco and the role of the regulatory and supervisory authorities. As of March 2021, futures trading was still pending implementation and is not expected to commence until 2023.

The Casablanca Stock Exchange demutualized in November of 2015. This change allowed the CSE greater flexibility and more access to global markets, and better positioned it as an integrated financial hub for the region. The Moroccan government holds a 25 percent share of the CSE but has announced its desire to sell to another major exchange to bring additional capital and expertise to the market. Morocco has accepted the obligations of IMF Article VIII, sections 2(a), 3, and 4, and its exchange system is free of restrictions on making payments and transfers on current international transactions. Credit is allocated on market terms, and foreign investors are able to obtain credit on the local market.

Money and Banking System

Morocco has a well-developed banking sector, where penetration is rising rapidly and recent improvements in macroeconomic fundamentals have helped resolve previous liquidity shortages. Morocco has some of Africa’s largest banks, and several are major players on the continent and continue to expand their footprint. The sector has several large, homegrown institutions with international footprints, as well as several subsidiaries of foreign banks. According to the IMF’s 2016 Financial System Stability Assessment on Morocco , Moroccan banks comprise about half of the financial system with total assets of 140 percent of GDP – up from 111 percent in 2008.

According to Bank Al-Maghrib (the Moroccan central bank) there are 24 banks operating in Morocco (five of these are Islamic “participatory” banks), six offshore institutions, 27 finance companies, 12 micro-credit associations, and 19 intermediary companies operating in funds transfer. Among the 19 traditional banks, the top seven banks comprise 90 percent of the system’s assets (including both on- and off-balance-sheet items). Attijariwafa, Morocco’s largest bank, is the sixth largest bank in Africa by total assets (approximately $55 billion in December 2019). The Moroccan royal family is the largest shareholder. Foreign (mainly French) financial institutions are majority stakeholders in seven banks and nine finance companies. Moroccan banks have built up their presence overseas mainly through the acquisition of local banks, thus local deposits largely fund their subsidiaries.

The overall strength of the banking sector has grown significantly in recent years. Since financial liberalization, credit is allocated freely and Bank Al-Maghrib has used indirect methods to control the interest rate and volume of credit. The banking penetration rate is approximately 56 percent, with significant opportunities remaining for firms pursuing rural and less affluent segments of the market. At the start of 2017, Bank Al-Maghrib approved five requests to open Islamic banks in the country. By mid-2018, over 80 branches specializing in Islamic banking services were operating in Morocco. The first Islamic bonds (sukuk) were issued in October 2018. In 2019, Islamic banks in Morocco granted $930 million in financing. The GOM passed a law authorizing Islamic insurance products (takaful) in 2019, but as of March 2021 the implementation regulations are still pending, and the products are not yet active.

Following an upward trend beginning in 2012, the ratio of non-performing loans (NPL) to bank credit stabilized in 2017 through 2019 at 7.6 percent. This was offset by COVID-related complications causing the NPL rate to jump to 9.9 percent in the end of 2020.

Morocco’s accounting, legal, and regulatory procedures are transparent and consistent with international norms. Morocco is a member of UNCTAD’s international network of transparent investment procedures  . Bank Al-Maghrib is responsible for issuing accounting standards for banks and financial institutions. Bank Al Maghrib requires that all entities under its supervision use International Financial Reporting Standards (IFRS). The Securities Commission is responsible for issuing financial reporting and accounting standards for public companies. Moroccan Stock Exchange Law ( Law 52-01 ) stipulates that all companies listed on the Casablanca Stock Exchange (CSE), other than banks and similar financial institutions, can choose between IFRS and Moroccan Generally Accepted Accounting Principles (GAAP). In practice, most public companies use IFRS.

Legal provisions regulating the banking sector include Law No. 76-03 on the Charter of Bank Al-Maghrib, which created an independent board of directors and prohibits the Ministry of Finance and Economy from borrowing from the Central Bank except under exceptional circumstances. Even with the financial crisis caused by COVID-19, the central bank did not provide financing directly to the state, but instead used other monetary tools (such as reducing reserve requirements) to intervene and reinforce the banking sector. Law No. 34-03 (2006) reinforced the supervisory authority of Bank Al-Maghrib over the activities of credit institutions. Foreign banks and branches are allowed to establish operations in Morocco and are subject to provisions regulating the banking sector. At present, the U.S. Mission is not aware of Morocco losing correspondent banking relationships.

There are no restrictions on foreigners’ abilities to establish bank accounts. However, foreigners who wish to establish a bank account are required to open a “convertible” account with foreign currency. The account holder may only deposit foreign currency into that account; at no time can they deposit dirhams. There are anecdotal reports that Moroccan banks have closed accounts without giving appropriate warning and that it has been difficult for some foreigners to open bank accounts.

Morocco prohibits the use of cryptocurrencies, noting that they carry significant risks that may lead to penalties.

Foreign Exchange and Remittances

Foreign Exchange

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

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

Morocco has achieved relatively stable macroeconomic and financial conditions under an exchange rate peg (60/40 Euro/Dollar split), which has helped achieve price stability and insulated the economy from nominal shocks. In March of 2020, the Moroccan Ministry of Economy, Finance, and Administrative Reform, in consultation with the Central Bank, adopted a new exchange regime in which the Moroccan dirham may now fluctuate within a band of ± 5 percent compared to the Bank’s central rate (peg). The change loosened the fluctuation band from its previous ± 2.5 percent. The change is designed to strengthen the capacity of the Moroccan economy to absorb external shocks, support its competitiveness, and contribute to improving growth.

Remittance Policies

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

Sovereign Wealth Funds

Ithmar Capital is Morocco’s investment fund and financial vehicle, which aims to support the national sectorial strategies. Ithmar Capital is a full member of the International Forum of Sovereign Wealth Funds and follows the Santiago Principles. The $1.8 billion fund was launched in 2011 by the Moroccan government, supported by the royal Hassan II Fund for Economic and Social Development. This fund initially supported the government’s long-term Vision 2020 strategic plan for tourism. The fund is currently part of the long-term development plan initiated by the government in multiple economic sectors.

Boards of directors (in single-tier boards) or supervisory boards (in dual-tier boards) oversee Moroccan SOEs. The Financial Control Act and the Limited Liability Companies Act govern these bodies. The Ministry of Economy and Finance’s Department of Public Enterprises and Privatization monitors SOE governance. Pursuant to Law No. 69-00, SOE annual accounts are publicly available. Under Law No. 62-99, or the Financial Jurisdictions Code, the Court of Accounts and the Regional Courts of Accounts audit the management of a number of public enterprises. As of March 2021, the Moroccan Treasury held a direct share in 225 state-owned enterprises (SOEs) and 43 companies. A list of SOEs is available on the Ministry of Finance’s website .

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

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

Privatization Program

The government relaunched Morocco’s privatization program in the 2019 budget. Parliament enacted the updated annex to Law 38-89 (which authorizes the transfer of publicly held shares to the private sector) in February 2019 through publication in the official bulletin, including the list of entities to be privatized. The state still holds significant shares in the main telecommunications companies, banks, and insurance companies, as well as railway and air transport companies. In 2020, King Mohamed VI called for a sweeping reform to address the structural deficiencies of SOEs, after which the Ministry of Economy, Finance and Administration Reform announced plans to consolidate SOEs with overlapping missions, dissolve unproductive SOEs, and reorganize others to increase efficiencies. The government also authorized the establishment of the Mohammed VI Investment Fund, a public-limited company with initial capital of $4.7 billion to fund growth-generating projects through PPPs. The fund will contribute capital directly to large public and private companies operating in areas considered priorities. Public and private institutions will be able to collectively hold up to 49 percent of the Fund’s shares once the fund is fully operational.

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

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

Table 4: Sources of Portfolio Investment
Data not available.

Policies Towards Foreign Direct Investment

The Government of the Republic of Mozambique (GRM) welcomes foreign investment and sees it as a key driver of economic growth and job creation.  With the exception of a few sectors related to national security, all business sectors are open to foreign investment.  Mozambique’s 1993 Law on Investment, No. 3/93, and its related regulations, govern foreign investment.  In 2009, Decree No. 43/2009 replaced earlier amendments from 1993 and 1995, providing new regulations to the Investment Law.

In general, large investors receive more support from the government than small and medium-sized investors.  Government authorities must approve all foreign and domestic investment requiring guarantees and incentives.  Regulations for the 2009 Code of Fiscal Benefits, Law No. 4/2009, were established in 2009 under Decree No. 56/2009.

The Agency for Promotion of Investments and Exports (APIEX, Agencia para a Promocao de Investimentos e Exportacoes) is the primary investor contact within the GRM, operating under the Ministry of Industry and Commerce.  Its objective is to promote and facilitate private and public investment.  It also oversees the promotion of national exports.  APIEX can assist with administrative, financial, and property issues.  Through APIEX, investors can receive exemptions from some customs and value-added tax (VAT) duties when importing “Class K” equipment, which includes capital investments.

Contact information for APIEX is:

Agency for Promotion of Investments and Exports
http://www.apiex.gov.mz/ 
Rua da Imprensa, 332 (ground floor)
Tel: (+258) 21313310
Ahmed Sekou Toure Ave., 2539
Telephone: (+258) 21 321291
Mobile: (+258 ) 823056432

Government dialogue with the private sector is primarily coordinated by Mozambique’s Ministry of Industry and Commerce. Most businesses in Mozambique interact with the government via the country’s largest business association, the Confederation of Economic Associations (CTA, Confederação das Associações Económicas de Moçambique). CTA was formed in 1996 and continues to be the dominant and most influential business association in Mozambique.

Limits on Foreign Control and Right to Private Ownership and Establishment

Mozambique investment law and its regulations generally do not distinguish between investor origin or limit foreign ownership or control of companies.  With the exception of security, safety, media, entertainment, and certain game hunting concessions, there were no legal requirements that Mozambican citizens own shares of foreign investments until 2011, when the government adopted Law No. 15/2011, otherwise known as the “Mega-Projects Law.” This law governs public-private partnerships, large scale ventures, and major business concessions and states that Mozambican persons must hold between 5 percent to 20 percent of the equity capital of the project company.  Implementing regulations were approved by the Council of Ministers in 2012.

Article 4.1 of Law 14/2014, often referred to as the “Petroleum Law,” states that the GRM regulates the exploration, research, production, transportation, trade, refinery, and transformation of liquid hydrocarbons and their by-products, including petrochemical activities.  Article 4.6 established the state-owned oil company, the National Hydrocarbon Company (ENH, Empresa National das Hidorcorbonetos) as the government’s exclusive representative for investment and participation in oil and gas projects.  ENH typically owns up to 15 percent of shares in oil and gas projects in the country.

Depending on the size of the investment, the government approves both domestic and foreign investments at the provincial or national level, but there is no other formal investment screening process.

Other Investment Policy Reviews

Mozambique has not undergone a third-party investment policy review in the last three years.

Business Facilitation

Starting a business in Mozambique is a lengthy and bureaucratically complex process which has led to Mozambique’s relatively low score on the World Bank’s 2020 Doing Business Report. In the 2020 report, Mozambique ranked 176 out of 190 economies worldwide in terms of starting a new business, scoring well below the regional average for sub-Saharan Africa, in particular due to the relatively high cost of registering a business and number of procedures required to complete the process.

Registering a business typically involves reserving a name, signing an incorporation contract, payment of registration fees, publishing the company’s name and statutes in the national gazette, registering with the tax authority, and then notifying relevant agencies of the start of activity including the municipality’s one-stop-shop, the municipality’s labor office, national tax authority, and social security institute. According to the World Bank’s estimates, this process takes approximately 17 days. There is no single business registration website.

In May 2020, the Maputo City “one stop shop” known as the balcão de atendimento unico (BAU) introduced reforms that effectively reduced the number of procedures required to set up a new company from 11 to four by consolidating several steps required to register a new business.

Outward Investment

The government does not promote or incentivize outward investment.  It also does not restrict domestic investors from investing abroad.  However, Mozambique does require domestic investors to remit investment income from overseas, except for amounts required to pay debts, taxes, or other expenses abroad.

Transparency of the Regulatory System

Investors face myriad requirements for permits, approvals, and clearances that take substantial time and effort to obtain.  The difficulty of navigating the system provides opportunities for corruption and bribery, a scenario that is aggravated by the prevailing low wages for administrative clerks.  Labor, health, safety, and environmental regulations often go unenforced, or are selectively enforced.  In addition, civil servants have threatened to enforce antiquated regulations that remain on the books to obtain favors or bribes.

The private sector, through CTA, maintains an ongoing dialogue with the government, holding quarterly meetings with the Prime Minister and an annual meeting with the President. CTA provides feedback to the GRM on laws and regulations that impact the business environment on behalf of its members and other business associations. However, because of its exclusive role in communicating with the government on behalf of the private sector, some businesses have expressed concern that minority voices are not heard and that CTA, because of its close relationship with the government, is no longer an effective advocate. In 2019, an American Chamber of Commerce formed in Mozambique to represent the interests of the growing U.S. business community.

Draft bills are usually made available for public comments through the business associations or relevant sectors or in public meetings.  Changes to laws and regulations are published in the National Gazette.  Public comments are usually limited to input from a few private sector organizations, such as CTA.  There have been complaints of short comment periods and that comments are not properly reflected in the National Gazette.  The government is considering a law that would make public consultation on future legislation mandatory.

Overall fiscal transparency in Mozambique is improving in the wake of the 2016 hidden debt crisis which saw the government own up to contracting over USD 2 billion dollars in secret loans in 2013 and 2014.  Publicly available budget documents provide an incomplete picture of the government’s revenue streams, especially with regard to natural resource revenues and allocations to and earnings from state-owned enterprises (SOE), which generally did not have publicly available audited financial statements. Government reporting on debt, however, has improved with SOE debt now included in the national budget. The government also maintains off-budget accounts not subject to adequate audit or oversight.  For portions of the budget that were relatively complete, the provided information is generally reliable.

International Regulatory Considerations

Mozambique is a member of the Southern African Development Community (SADC).  In 2016, the SADC Economic Partnership Agreement (EPA) Group, which includes Mozambique, Botswana, Lesotho, Namibia, South Africa, and Swaziland, signed an EPA with the European Union.  Mozambique exports aluminum under this EPA agreement.

The GRM ratified the Trade Facilitation Agreement (TFA) in July 2016 and notified the WTO in January 2017.  A National Trade Facilitation Committee was established to coordinate the implementation of the TFA.

Mozambique is a member of the WTO and generally notifies all draft technical regulations to the WTO Committee on Technical Barriers to Trade (TBT). The National Institute of Norms and Quality (Instituto Nacional de Normalização e Qualidade, INNOQ) falls under the supervision of the Ministry of Industry and Commerce and it is the WTO enquiry point for TBT-related issues. INNOQ is a member of the International Standards Organization (ISO) and carries the mandate to issue ISO 9001 certificates. According to the WTO’s 2017 Trade Policy Review of Mozambique no specific trade concerns have been raised about Mozambique’s TBT measures in the WTO TBT Committee.

Like most countries in Africa, Mozambique leans toward the use of standards based on existing ISO and International Electrotechnical Commission (IEC) standards for most products.

Legal System and Judicial Independence

Mozambique’s legal system is based on Portuguese civil law and customary law.  In 2005, the Parliament approved major revisions to the Commercial Code which went into effect in 2006.  The previous Commercial Code from the colonial period had clauses dating back to the 19th century and did not provide an effective basis for modern commerce or resolution of commercial disputes. In 2018, the Council of Ministers passed new provisions for the Commercial Code, which were debated and approved in Parliament.

In recent years Mozambique’s legal system has shown a degree of independence. For example, the GRM has pursued some politically connected former officials and their family members for their role in the hidden debt scandal. The Attorney General has also prosecuted several lower level officials, including those connected with wildlife trafficking.

Laws and Regulations on Foreign Direct Investment

The 2009 Code of Fiscal Benefits, Law No. 4/2009, and Decree No. 56/2009 form the legal basis for foreign direct investment in Mozambique. Operating within these regulations, APIEX analyzes the fiscal and customs incentives available for a particular investment.  Investors must establish foreign business representation and acquire a commercial representation license.  During project development, investors must document their community consultation efforts related to the project.  If the investment requires the use of land, the investor will also have to present, among other documents, a topographic plan or an outline of the site where the project will be developed.

If the investment involves an area under 1,000 hectares and the investment is under approximately USD 25 million, the governor of the province where it will be located can approve the investment.  There has been no update to the law since the introduction of provincial-level State Secretaries with the new government in 2020. APIEX has the authority to approve any project between roughly USD 25 million – USD 40 million. The Minister of Economy and Finance must approve national or foreign investment between USD 40 – USD 225 million.  If the investment (national or foreign) occupies an area of 10,000 hectares or an area superior to 100,000 hectares for a forestry concession, or it amounts to more than USD 225 million, the project must be approved by the Council of Ministers.  More detailed information regarding all requirements to invest in Mozambique can be found on the APIEX website: http://invest.apiex.gov.mz/wp-content/uploads/sites/4/2019/08/Leis-e-Regulamentos-Relacionados-com-Investimento-Directo-Estrangeiro.pdf .

Competition and Antitrust Laws

The so called “Competition Law,” Law No. 10/2013, adopted in 2013 established a modern legal framework for competition and created the Competition Regulatory Authority. A budget has still not been allocated to this body, but the government appointed a director in April 2020.

The framework is inspired by the Portuguese competition enforcement system.  Violating the prohibitions contained in the Competition Law (either by entering into an illegal agreement or practice or by implementing a concentration subject to mandatory filing) could result in a fine of up to 5 percent of the turnover of the company in the previous year.  Competition Regulatory Authority decisions may be appealed in the Judicial Court in Maputo, for cases leading to fines or other sanctions, or to the Administrative Court for merger control procedures.

Expropriation and Compensation

While there have been no significant cases of nationalization since the adoption of the 1990 Constitution, Mozambican law holds that “when deemed absolutely necessary for weighty reasons of national interest or public health and order, the nationalization or expropriation of goods and rights shall (result in the owner being) entitled to just and equitable compensation.” No U.S. companies have been subject to expropriation issues in Mozambique since the adoption of the 1990 Constitution.

Dispute Settlement

ICSID Convention and New York Convention

Mozambique acceded to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards in 1998.

Investor-State Dispute Settlement

For disputes between U.S. and Mozambican companies where a BIT violation is alleged, recourse via the international Alternative Dispute Resolution may also be available.  No investment disputes in the past ten years have involved U.S. investors. Investors who feel they have a dispute covered under the BIT should contact the U.S. Embassy.

International Commercial Arbitration and Foreign Courts

In 1999 the Parliament passed Law No. 11/99 known as the Law on Arbitration. This law allows access to modern commercial arbitration for foreign investors.  The Judicial Council approved Resolutions No. 1/CJ/2017 and No. 2/CJ/2017 in 2017, creating the Regulations of Mediation Services in Judicial Courts and the Judicial Mediators’ Code of Conduct.  These new resolutions are designed to promote the mediation process as an alternative to litigation.  Labor and commercial arbitration are recognized by local courts as well as cases judged internationally.

The Center of Arbitration, Conciliation, and Mediation (Centro de Arbitragem, Conciliação e Mediação, CACM) offers commercial arbitration. In 2020, CACM handled 38 cases of commercial arbitration, and 24 additional cases are in process.  CACM has 316 arbitrators, 12 of which are international.  However, many contracts do not incorporate a clause that allows conflicts to be resolved via arbitration instead of in the courts which limits the use of arbitration.

Bankruptcy Regulations

In 2013, the GRM adopted a comprehensive legal regime for bankruptcy known as the “Insolvency Law,” Law No. 1/2013. This law streamlined the bankruptcy process and set the rules for business recovery.  The law facilitates potential recovery for struggling businesses and establishes legal methods to declare bankruptcy. Rather than being forced to immediately sell assets or declare insolvency, entrepreneurs now have options to recover normal economic activity and maintain jobs. Under the law, creditors can approve any proposed rescue plan, request that a debtor be declared insolvent, and challenge suspicious transactions. In the 2020 World Bank Doing Business Report, Mozambique ranked 86 overall for resolving insolvency, scoring well above average for sub-Saharan Africa.

Capital Markets and Portfolio Investment

The Mozambique Stock Exchange (Bolsa de Valores de Mocambique, BVM) is a public institution under the guardianship of the Minister of Economy and Finance and the supervision of the Central Bank of Mozambique.  In general, the BVM is underutilized as a means of financing and investment.  However, the government has expressed interest in reforming market rules in an effort to increase capitalization and potentially prepare the ground for new rules that would require foreign companies active in Mozambique to be listed on the local stock exchange. Corporate and government bonds are traded on the BVM and there is only one dealer that operates in the country, with all other brokers incorporated into commercial banks, which act as the primary dealers for treasury bills.  The secondary market in Mozambique remains underdeveloped.  Available credit instruments include medium and short-term loans, syndicated loans, foreign exchange derivatives, and trade finance instruments, such as letters of credit and credit guarantees.  The BVM remains illiquid, in the sense that very limited activity occurs outside the issuing time.  Investors tend to hold their instruments until maturity.  The market also lacks a bond yield curve as government issuances use a floating price regime for the coupons with no price discovery for tenures above 12 months.

The GRM notified the IMF that it has accepted the obligations of Article VIII sections 2, 3, and 4 of the IMF Articles of Agreement, effective May 20, 2011.

Money and Banking System

According to the Mozambican Bank Association December 2020 bank survey, there are 19 commercial banks operating in Mozambique. The top three banks – Banco Comercial e de Investimentos (BCI), Banco Internacional de Mocambique SA (BIM), and Standard Bank – account for 69 percent of the total assets, total loans and advances, and total deposits held by commercial banks in Mozambique.

Between 2018-2019, the value of non-performing loans (NPL) decreased by 2 percent, but the NPL ratio worsened from 8.5 percent to 9.1 percent over the same period.  Banking sector profits have dropped by 2 percent due to the reduction of prime lending rates, costs of rehabilitation of branches and property damage from cyclones Idai and Kenneth, and reduced commission income following new Central Bank legislation limiting charges for certain services to promote financial inclusion.

In 2016, Mozambique launched a six-year National Financial Inclusion Strategy which has led to limited improvements in access to formal financial services. According to 2019 FinScope data, 21 percent of the population has access to a bank account, still well below the country’s 2022 target of 60 percent. As of March 2020, Mozambique had 706 bank agencies, 1,755 ATMs and 36,701 point of sale devices. Most banking locations are concentrated in provincial capitals and rural districts often have no banks at all.  Thanks to the partnership between mobile communications companies and banks for electronic or mobile-money transactions, access to financial services is improving. The number of services available from ATMs is also increasing. There are also 1,697 banking agents in the country that provide basic banking services to customers without access to a bank branch.

Credit is allocated on market terms, but eligibility requirements exclude much of the population from obtaining credit. Banks request collateral, but since land cannot be used as collateral, the majority of individuals do not qualify for loans. Foreign investor export activities in critical areas related to food, fuel, and health markets have access to credit in foreign and local currencies.  All other sectors have access to credit only in the local currency.

Foreign Exchange and Remittances

Foreign Exchange

In 2017 Mozambique approved new foreign exchange control rules in Law No. 49/2017. Under the terms of the new law, Mozambican residents are now required to deposit export earnings into an export earnings account in foreign currency, which can only be used for specifically defined purposes.  Under the new decree, foreign exchange operations will now be processed electronically in real time by the commercial banks.  Applications for capital operations are now processed by commercial banks and forwarded to the Central Bank. Foreign direct investment (FDI) up to USD 250,000 no longer requires prior authorization from the Bank of Mozambique and only needs to be registered with the commercial bank handling the transactions.  Shareholder and intercompany loans made by foreign entities up to USD 5 million require no authorization from the Central Bank, provided the loans are interest free or lower than the base lending rate for the relevant currency, the repayment period is at least three years, and no other fees or charges apply.

A special foreign exchange regime for oil, gas, and mining sectors allows for greater flexibility in foreign exchange and financing operations.  The law, which went into force in January 2018, stipulates that profits from petroleum rights are entirely taxed at an autonomous tax rate of 32 percent.  The law also guarantees tax stabilization for up to 10 years, starting from the beginning of commercial production with an investment amount of USD 100 million.  The Ministry of Economy and Finance can also approve the use of U.S. dollars, if the company has invested at least USD 500 million and more than 90 percent of its transactions are in U.S. dollars.  The law also revoked a 50 percent tax rate reduction related to the production tax that was available when extracted products were used locally.

Remittance Policies

The 2021 Central Bank’s Aviso 6/GBM/2020 requires at least 30 percent of export proceeds to be converted into local currency.  However, per the Central Bank Circular issued in February 2021, this conversion rule does not apply for rent paid in a foreign currency by non-resident entitles to a Mozambican landlord.

Sovereign Wealth Funds

In October 2020, Mozambique’s Central Bank published an initial proposal for a Sovereign Wealth Fund (SWF) to manage the expected increase in government revenues from the natural gas projects in northern Mozambique. As of April 2021, the government is currently revising the proposal and aims to put forward a formal legislative proposal by the end of the year for review and approval by Mozambique’s National Assembly.

The initial draft from the Central Bank calls for 50 percent of government revenue from the natural gas sector as well as other extractive industries to be used to fund the SWF for a period of 20 years and sets up strict payout criteria for any withdrawals from the SWF before it reaches maturity. In general, the government’s proposal follows the Santiago Principles and the government is working with the International Forum of Sovereign Wealth Funds to refine its proposal. In total, the government estimates it will receive USD 96 billion from the Rovuma Basin natural gas projects over the lifetime of the projects. Delays in construction and evolving international energy prices, however, could lead to lower-than-expected returns from the natural gas projects.

Mozambique’s SOEs have their origin in the Marxist-Leninist government established after independence in 1975, with a variety of SOEs competing with the private sector in the Mozambican economy.  Government participation varies depending on the company and sector. SOEs are managed by the Institute for the Management of State Participation (Instituto de Gestão das Participações do Estado, IGEPE).  According IGEPE’s 2019 annual report, IGEPE manages 12 public SOEs, 16 wholly or majority state-owned enterprises, and 23 other enterprises which are partially state-owned.  IGEPE’s holdings are partially detailed on its website:  http://www.igepe.org.mz/ 

Some of the largest SOEs, such as Airports of Mozambique (Aeroportos de Moçambique) and Electricity of Mozambique (Electricidade de Moçambique) have monopolies in their respective industries.  In some cases, SOEs enter into joint ventures with private firms to deliver certain services.  For example, Ports and Railways of Mozambique (CFM, Portos e Caminhos de Ferro de Moçambique) offers concessions for some of its ports and railways. Many SOEs benefit from state subsidies.  In some instances, SOEs have benefited from non-compete contracts that should have been competitively tendered.  SOE accounts are generally not transparent and not thoroughly audited by the Supreme Audit Institution.  SOE debt represents a potentially significant liability for the GRM.  SOEs were also at the heart of the hidden debt scandal revealed in 2016.

In 2018, the Parliament passed a Law No. 3/2018, which broadens the definition of SOEs to include all public enterprises and shareholding companies.  The law seeks to unify SOE oversight and harmonize the corporate governance structure, placing additional financial controls, borrowing limits, and financial analysis and evaluation requirements for borrowing by SOEs.  The law requires the oversight authority to publish a consolidated annual report on SOEs, with additional reporting requirements for individual SOEs.  The Council of Ministers approved regulations for the SOE law in early 2019, and in 2020 the Ministry of Economy and Finance published limited information on SOE debt.

Privatization Program

Mozambique’s privatization program has been relatively transparent, with tendering procedures that are generally open and competitive.  Most remaining parastatals operate as state-owned public utilities, with government oversight and control, making their privatization more politically sensitive.  While the government has indicated an intention to include private partners in most of these utility industries, progress has been slow.

Terrorism in northern Mozambique poses a significant threat to investment, in particular in Cabo Delgado Province. A March 24 attack on Palma town, where many expatriate LNG workers stayed, in the vicinity of the Total camp, led Total to suspend operations and temporarily evacuate all personnel from Cabo Delgado Province (CDP) in April 2021.

The United States designated the Islamic State in Mozambique (ISIS-M) as a Foreign Terrorist Organization and Specially Designated Global Terrorists in March 2021. ISIS provides support to the combatants in northern Mozambique and occasionally claims credit for their attacks.  The violence has resulted in an estimated 2,500 deaths and nearly 700,000 internally displaced persons.  Since 2017, the ISIS affiliate carried out more than 500 deliberate attacks against unarmed civilians.

ISIS-M operates in CDP, which is also the site of the two onshore LNG projects led by Total and ENI/ExxonMobil. The March 24 attack on the district capital of Palma in the vicinity of the LNG project site in March 2021 marked a significant escalation in the level of violence in close proximity to the project and several expatriates were killed.  However, to date, the insurgents’ primary target remains villages and government forces and institutions.

Following the ceasefire and peace agreement signed in August 2019, Mozambique continues to make strong progress in the disarmament, demobilization, and re-integration (DDR) of ex-combatants from Renamo. Although a violent splinter group’s leader remains at large, a significant drop in the number of attacks on road transport along major highways in Manica and Sofala provinces has occurred in early 2021.

* Source for Host Country Data: National Statistical Institute (INE, Instituto National de Estatistica), 2019 Annual Statistics published November 2020. http://www.ine.gov.mz/estatisticas/estatisticas-economicas/contas-nacionais/anuais-1 ; APIEX

The IMF’s Coordinated Direct Investment Survey results for 2019 track loosely with the FDI reported by APIEX—with both sources listing South Africa, Mauritius, Portugal, and the United Arab Emirates (UAE) among Mozambique’s top five foreign investors. However, local data from APIEX diverges significantly in terms of the value of FDI as well as the relative share of each country. According to APIEX, in 2019 FDI in Mozambique totaled USD 637 million, with South Africa accounting for 58 percent of total foreign investment in Mozambique, followed by China, Mauritius, Portugal, and the UAE.

The large share of investment listed from UAE and Mauritius likely is linked to the fact that the Exxon Mobil/ENI and Total led natural gas projects have set up special purpose vehicles for their natural gas projects in these countries.

Table 4: Sources of Portfolio Investment
Data not available.

Policies Towards Foreign Direct Investment

The Namibian government welcomes increased foreign investment to help develop the national economy and benefit its population. The Foreign Investment Act of 1993 (FIA) currently governs FDI in Namibia and guarantees equal treatment for foreign investors and Namibian firms, including the possibility of fair compensation in the event of expropriation, international arbitration of disputes between investors and the government, the right to remit profits, and access to foreign exchange. Investment and tax incentives are also available for the manufacturing sector. The government prioritizes investment retention and maintains ongoing dialogue with investors including through investment conferences. The government is cognizant that some of its bureaucratic processes (such as the time it takes to get a business visa) impede the ease of doing business and is working to address outstanding challenges. The Namibian Investment Promotion Act has been under review since 2016 to replace the FIA.

The new Namibia Investment Promotion and Development Board (NIPDB) housed in the Office of the President, serves as Namibia’s official investment promotion and facilitation office. The NIPDB is headed by a highly regarded chartered accountant, and analysts are optimistic that this new entity will better facilitate investment in Namibia. The NIPDB is the first point of contact for potential investors, and it offers comprehensive services from the initial inquiry stage through to operational stages. NIPDB Facebook page: https://www.facebook.com/NIPDB; NIPDB Contact: andreas.andjene@nipdb.com . The NIPDB also provides general information packages, coordinates trade delegations, and assists with advice on investment opportunities, incentives, and procedures. The NIPDB is tasked with assisting investors in minimizing bureaucratic red tape, including obtaining work visas for foreign investors, by coordinating with government ministries as well as regulatory bodies.

Limits on Foreign Control and Right to Private Ownership and Establishment

Under the Foreign Investment Act (FIA), foreign and domestic entities may establish and own business enterprises and engage in all forms of remunerative activities. The Ministry of Home Affairs, Immigration, Safety, and Security grants renewable and non-renewable temporary employment permits for a period of up to 12 months for skills not locally or readily available. However, work permits and long-term residence permits are subject to bureaucratic hurdles and are hard to obtain for jobs that could be performed by a Namibian. Complaints about delays in renewing visas and work permits are common.

Foreigners must pay a 10 percent non-resident shareholder tax on dividends. There are no capital gains or marketable securities taxes, although certain capital gains are taxed as normal income. As a member of the Common Monetary Area, the Namibian dollar (NAD) is pegged at parity with the South African rand.

There are no general mandatory limits on foreign ownership, but some sectors have a mandatory joint ownership between a local firm and foreign firm, such as in the natural resources sector. Government procurements usually also require a variable percentage of local ownership.

Other Investment Policy Reviews

Namibia has not undergone any third party investment policy reviews in the last three years by the OECD, WTO, or UNCTAD. The Southern Africa Customs Union (SACU), of which Namibia is a member, was last reviewed by the WTO in 2015.

Business Facilitation

Foreign and domestic investors may conduct business in the form of a public or private company, branch of a foreign company, closed corporation, partnership, joint venture, or sole trader. Companies are regulated under the 2004 Companies Act, which covers both domestic companies and those incorporated outside Namibia but traded through local branches. To operate in Namibia, businesses must also register with the relevant local authorities, the Workmen’s Compensation Commission, and the Social Security Commission.

Most investors find it helpful to have a local presence or a local partner in order to do business in Namibia, although this is not currently a legal requirement, except in sectors that require a joint venture partner. Companies usually establish business relationships before tender opportunities are announced. The World Bank’s Doing Business 2020 report notes that it takes ten steps and an average of 54 days to start a business in Namibia. Some accounting and law firms provide business registration services.

The Business and Intellectual Property Authority (BIPA) is the primary institution which serves the business community and ensures effective administration of business and intellectual property rights (IPRs) registration. BIPA serves as a one-stop-center for all business and IPR registrations and related matters. It also provides general advisory services and information on business registration and IPRs. Website: http://www.bipa.gov.na/. 

Outward Investment

Namibia provides incentives for outward investment mainly aimed at stimulating manufacturing, attracting foreign investment to Namibia, and promoting exports. To take advantage of the incentives, companies must be registered with MIT and the Ministry of Finance. Tax and non-tax incentives are accessible to both existing and new manufacturers. Here is the list of the investment incentives: https://www.namibweb.com/tin.htm. Namibia is in the process of creating Special Economic Zones, which will replace the old Export Processing Zone regime, to offer favorable conditions for companies wishing to manufacture and export products.

Transparency of the Regulatory System

Namibia’s legal, regulatory, and accounting systems are relatively transparent and consistent with international norms. Draft bills, proposed legislation, and draft regulations are normally not available for public comment and are not required to be, although there are consultations on such documents throughout the government. Depending on the topic, bills are customarily drafted within the relevant ministry with minimal stakeholder or public consultation and then presented to the parliament for debate. Comments on draft legislation and regulations may also be solicited through public meetings or targeted outreach to stakeholder groups. Such comments are also not required to be made public and generally are not. There is no formal process of appeal or reconsideration of published regulations. Approved legislation and regulations are publicly available and published in the Government Gazette, the official journal of the government of Namibia.

Public finances are generally transparent, with the annual budget and mid-term budget reviews published on the Ministry of Finance’s website and in the Government Gazette. The Ministry of Finance has begun holding consultations with interest groups during the budget preparation process. The Bank of Namibia publishes the government of Namibia’s debt position – including explicit and contingent liabilities – in its annual reports and quarterly bulletins.

International Regulatory Considerations

The national coordinating bureau for standards is the Namibian Standards Institution. Namibia is also a member of the International Organization for Standardization. As a member of SACU and SADC, Namibia’s national regulations conform to both regional agreements. Namibia is a member of the World Trade Organization (WTO) and notifies the Committee on Technical Barriers to Trade on draft technical regulations.

Legal System and Judicial Independence

The Namibian court system is independent and is widely perceived to be free from government interference. Namibia’s legal system, based on Roman Dutch law, is similar to that of South Africa. The system provides effective means to enforce property and contractual rights, but the speed of justice is generally very slow due to a backlog of cases across the judicial spectrum. Regulation and enforcement actions are appealable. Parliament will consider legislation in 2021 that would permit plea bargains to expedite cases and reduce backlog to advance rule of law in Namibia.

Laws and Regulations on Foreign Direct Investment

The Foreign Investment Act (FIA) provides for liberal foreign investment conditions and equal treatment of foreign and local investors. With limited exceptions, all sectors of the economy are open to foreign investment. There is no local participation requirement in the FIA, but the Namibian government is increasingly emphasizing the need for investors to partner with Namibian-owned companies and/or to have a majority of local employees in order to operate in the country.

The FIA reiterates the protection of investment and property provided for in the Namibian Constitution. It also provides for equal treatment of foreign investors and Namibian firms, including the possibility of fair compensation in the event of expropriation, international arbitration of disputes between investors and the government, the right to remit profits, and access to foreign exchange.

The Business and Intellectual Property Agency (BIPA) acts as a one-stop-shop for business registrations and provides information on relevant laws, rules, procedures, and reporting requirement for investors. More information is available at: http://www.bipa.na/ .

The FIA will be replaced by the revised NIPA once revisions are complete and approved by Parliament. The NIPA provides for transparent admission procedures for investors, the reservation of certain categories of business and sectors, and the establishment of an Integrated Client Service Facility or one-stop-shop for investors.

Competition and Antitrust Laws

Established in 2009, the Namibia Competition Commission (NaCC) is the principal institution that promotes and safeguards fair competition in Namibia. The Commission is tasked with: providing consumers with competitive prices and product choices; promoting employment and advancing the social economic welfare of Namibians; expanding opportunities for Namibian participation in world markets while recognizing the role of foreign competition in Namibia; ensuring that small businesses have an equitable opportunity to participate in the Namibian economy; and promoting a greater spread of ownership, in particular to increase ownership stakes of historically disadvantaged persons. The NaCC has the mandate to review any potential mergers and acquisitions that might limit the competitive landscape or adversely impact the Namibian economy. For example, in August 2020, the NaCC blocked the sale of Schwenk Namibia’s stake in Ohorongo Cement to West China Cement Ltd. over fears the deal could lead to anti-competitive behavior in the local cement market.  In the ruling, the competition watchdog said that, if the USD 870 million deal was allowed to proceed, it would stifle competition and lead to possible collusion and price-fixing.  The Minister of Industrialization and Trade is the final arbiter on merger decisions and may accept or reject a NaCC decision. Any investor can file an appeal with the ministry, though no formal process for doing so has been established.

Expropriation and Compensation

The Namibian Constitution enshrines the right to private property but allows the state to expropriate property in the public interest subject to the payment of just compensation. The Agricultural (Commercial) Land Reform Act 6 of 1995 (ACLRA) is the primary legal mechanism allowing for expropriation, but the government has adhered to a “willing seller/willing buyer” policy as part of land reform programs. In 2004, the government announced it would proceed with land expropriations after much criticism about the slow pace of land reform. To date, the government has only expropriated farms from a small number of owners, and in each instance ultimately either compensated the owner or returned the land. In March 2008, Namibia’s High Court ruled against the government in Gunter Kessl v. Ministry of Lands and Resettlement in the sole instance in which expropriation was legally challenged, and in doing so established a strong legal precedent protecting individual land rights. Non-binding resolutions adopted at the Second National Land Conference in 2018 resolved to abolish the “willing seller/willing buyer” policy and bar foreign-ownership of agricultural land; however, no legislation formalizing these resolutions has been proposed. The Namibian Constitution makes pragmatic provision for different types of economic activity and a “mixed economy” (Article 98), accepts the importance of foreign investment (Article 99), and enshrines the principle that the ownership of natural resources is vested in the Namibian state (Article 100). Section 11 of the FIA reiterates the commitment to market compensation in the case of expropriation in terms of Article 16 of the Constitution. Holders of a Certificate of Status Investment must be compensated in foreign currency and can opt for international arbitration if any disputes arise.

Dispute Settlement

ICSID Convention and New York Convention

Namibia signed but has not ratified the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID). The ICSID and New York Convention are therefore not applicable.

Investor-State Dispute Settlement

The FIA allows for the settlement of disputes by international arbitration for investors that have obtained a Certificate of Status Investment (CSI) that includes a provision for international arbitration. The FIA stipulates that arbitration “shall be in accordance with the Arbitration Rules of the United Nations Commission on International Trade Law in force at the time when the Certificate was issued” unless the CSI stipulated another form of dispute resolution. There have not been any investment disputes involving a U.S. person in the last 10 years.

International Commercial Arbitration and Foreign Courts

As the “one-stop-shop” for investors, the Namibia Investment Promotion and Development Board (NIPDB) is the body that first learns of an investment dispute between a foreign investor and a domestic enterprise. The NIPDB has not yet received a report of an investment dispute involving U.S. entities. Investment disputes can be handled by the courts.

There is no domestic arbitration body in Namibia. Investors without a CSI that encounter a dispute have to address their dispute in the Namibian courts or in the court system which has jurisdiction according to the investor’s contract. The Namibian court system is independent and is widely perceived to be free from government interference, including when SOEs are involved in investment disputes.

Bankruptcy Regulations

The Companies Act of 1973, amended in 2004, governs company and corporate liquidations while the Insolvency Act 12 of 1936, as amended by the Insolvency Amendment Act of 2005, governs insolvent individuals and their estates. The Insolvency Act details sequestration procedures and the rights of creditors. Through the law, all debtors (whether foreign or domestic) may file for both liquidation and reorganization, and a creditor may file for both liquidation and reorganization. As reorganization (judicial management) is rarely successful, however, the most likely insolvency procedure is liquidation. International credit monitoring agency TransUnion is a licensed credit bureau in Namibia. The World Bank’s Doing Business Report ranks Namibia’s resolution of insolvency at 127 out of 190.

Capital Markets and Portfolio Investment

There is a free flow of financial resources within Namibia and throughout the Common Monetary Area (CMA) countries of the South African Customs Union (SACU), which include Namibia, Botswana, eSwatini, South Africa, and Lesotho. Capital flows with the rest of the world are relatively free, subject to the South African currency exchange rate. The Namibia Financial Institutions Supervisory Authority (NAMFISA) registers portfolio managers and supervises the actions of the Namibian Stock Exchange (NSX) and other non-banking financial institutions.

Although the NSX is the second-largest stock exchange in Africa, this ranking is largely because many South African firms listed on the Johannesburg exchange are also listed (dual listed) on the NSX. By law, Namibia’s government pension fund and other Namibian funds are required to allocate a certain percentage of their holdings to Namibian investments. Namibia has a world-class banking system that offers all the services needed by a large company. Foreign investors are able to get credit on local market terms.

There are no laws or practices by private firms in Namibia to prohibit foreign investment, participation, or control; nor are there any laws or practices by private firms or government precluding foreign participation in industry standards-setting consortia.

Money and Banking System

Namibia’s central bank, the Bank of Namibia (BON), regulates the banking sector. Namibia has a highly sophisticated and developed commercial banking sector that is comparable with the best in Africa. There are eight commercial banks: Standard Bank, Nedbank Namibia, Bank Windhoek, FNB Namibia, Trustco Bank, Letshego Bank Limited, Banco BIC, and Banco Atlantico. Bank Windhoek and Trustco Bank are the only locally-owned banks, and Trustco Bank specializes in micro-finance. Standard Bank, Nedbank, and FNB are South African subsidiaries, Banco BIC and Banco Atlantico are Angolan. A significant proportion of bank loans come in the form of bonds or mortgages to individuals. There is little or no investment banking activity.

The Development Bank of Namibia (DBN) and Agribank are Namibian government-owned banks with a mandate for development project financing. Agribank’s mandate is specifically in the agriculture sector.

While there are no restrictions on foreigners’ ability to open bank accounts, a non-resident must open a “non-resident” account at a Namibian commercial bank to facilitate loan repayments. This account would normally be funded from abroad or from rentals received on the property purchased, subject to the bank holding the account being provided with a copy of any rental. Non-residents who are in possession of a valid Namibian work permit/permanent residency are considered to be residents for the duration of their work permit and are therefore not subject to borrowing restrictions placed on non-residents without the necessary permits.

The BON does not recognize cryptocurrencies, such as Bitcoin, as legal tender in Namibia. The BON is reluctant to allow the implementation of blockchain technologies in banking transactions.

Foreign Exchange and Remittances

Foreign Exchange

The Namibian dollar is pegged at parity to the South African rand, and rand are accepted as legal tender in Namibia. The FIA offers investors meeting certain eligibility criteria the opportunity to obtain a Certificate of Status Investment (CSI). A “status investor” is entitled to:

• Preferential access to foreign exchange to repay foreign debt, pay royalties and similar charges, and remit branch profits and dividends;
• Preferential access to foreign currency in order to repatriate proceeds from the sale of an enterprise to a Namibian resident;
• Exemption from regulations which might restrict certain business or categories of business to Namibian participation;
• Right to international arbitration in the event of a dispute with the government; and
• Payment of just compensation without undue delay and in freely convertible currency in the event of expropriation.

Remittance Policies

According to World Bank Development Indicators, remittances to Namibia have been consistently less than 0.15 percent of GDP for at least the last decade. The majority of remittances are processed through commercial banks. There have been no plans to change investment remittance policies in recent times.

Sovereign Wealth Funds

Namibia does not have a Sovereign Wealth Fund (SWF), but the government has publicly stated its intention to create one. The Government Institution Pension Fund (GIPF) provides retirement and benefits for employees in the service of the Namibian government as well as institutions established by an act of the Namibian Parliament.

While Namibian companies are generally open to foreign investment, government-owned enterprises have generally been closed to all investors (Namibian and foreign), with the exception of joint ventures discussed below. More than 90 State-Owned Enterprises (SOEs, also known as parastatals) include a wide variety of commercial companies, financial institutions, regulatory bodies, educational institutions, boards, and agencies. Generally, employment at SOEs is highly sought after because their remuneration packages are not bound by public service constraints. Parastatals provide most essential services, such as telecommunications, transport, water, and electricity. A list of SOEs can be found on the Ministry of Public Enterprises’ website: www.mpe.gov.na . The following are the most prominent SOEs:

• Namibia Airports Company (airport management company)
• Namibia Institute of Pathology (medical laboratories)
• Namibia Wildlife Resorts (tourism)
• Namport (maritime port authority)
• Nampost (postal and courier services)
• Namwater (water sanitation and provisioning)
• Roads Contractor Company
• Telecom Namibia (primarily fixed-line) and MTC (mobile communications)
• TransNamib (rail company)
• NamPower (electricity generation and transmission)
• Namcor (national petroleum company)
• Epangelo (mining)

The government owns numerous other enterprises, from media ventures to a fishing company. Parastatals own assets worth approximately 40 percent of GDP and most receive subsidies from the government. Most SOEs are perennially unprofitable and have only managed to stay solvent with government subsidies. In industries where private companies compete with SOEs (e.g., tourism and fishing), SOEs are sometimes perceived to receive favorable concessions from the government. Foreign investors have participated in joint ventures with the government in a number of sectors, including mobile telecommunications and mining. In 2015, the Namibian President created a new Ministry of Public Enterprises intended to improve the management and performance of SOEs. Legislation to shift oversight of commercial SOEs from line ministries to the Ministry of Public Enterprises was passed by Parliament in 2019.

In 2021, the government liquidated the state-owned airline, Air Namibia, which had become a financial burden. When the Minister of Finance tabled the budget in March 2021, he announced that the Namibian government will reduce its stake in state-owned enterprises as a way of raising capital, unburdening the government from the budgetary drain of perpetual SOE-bailouts, and giving room for the private sector to play a more prominent role in the economy.  The government is looking to reduce its stake or completely divest in certain SOEs, but has not yet made concrete announcements.

Privatization Program

Namibia does not have a privatization program, but discussions have begun within the government to consider privatizing certain SOEs. The Minister of Finance has announced that in 2021 the government intends to sell its shares in Namibia’s biggest telecommunications company, Mobile Telecommunications Company (MTC), and use the proceeds to reduce the government’s debt.

Namibia is a stable multiparty and multiracial democracy. The protection of human rights is enshrined in the Namibian Constitution, and the government generally respects those rights. Political violence is rare and damage to commercial projects and/or installations as a result of political violence is unlikely. The State Department’s Country Report on Human Rights for Namibia provides additional information.

Table 4: Sources of Portfolio Investment
Data not available.

Policies Toward Foreign Direct Investment

There is recognition within the GoN that foreign investment is necessary to boost economic growth to meet the GoN’s target of becoming a middle-income country by 2030. While the GoN’s stated attitude toward FDI is positive, this has yet to translate into meaningful practice.

The most significant foreign investment laws are the revised Foreign Investment and Technology Transfer Act (FITTA) of 2019, the Public-Private Partnership and Investment Act (PPIA) of 2019, the Foreign Exchange Regulation Act of 1962, the Immigration Rules of 1994, the Customs Act of 2007 (a revised act is under Parliamentary review), the Industrial Enterprise Act of 2016 (and its 2020 revision), the Special Economic Zone (SEZ) Act of 2016 (and its 2019 amendment), the Company Act (2006), the Electricity Act of 1992, the Privatization Act of 1994, and the Income Tax Act (2002). Also important is the annual budget, which outlines customs, duties, export service charges, sales, airfreight and income taxes, and other excise taxes that affect foreign investment.

The FITTA attempted to create a friendlier environment for foreign investors. It streamlined the process for inbound foreign investment by requiring approval of FDI within seven days of application. Similarly, the FITTA streamlined the profit repatriation approval process, mandating decisions within 15 days. The revised FITTA set up a Single Window Service Center, through which foreign investors can avail themselves of the full range of services provided by the various government entities involved in investment approvals, including the Ministry of Industry, Commerce, and Supplies (MOICS), the Labor and Immigration Departments, and the Central Bank. The FITTA included a provision requiring the government to set a minimum threshold for foreign investment and publish it in the Nepal Gazette. On May 23, 2019, citing that provision, the government raised the minimum foreign investment threshold ten-fold to NPR 50 million (USD415,000) from the existing NPR 5 million (USD41,500). The new FITTA commits to providing “national treatment” to all foreign investors and that foreign companies will not be nationalized. Under the FITTA, investments up to NPR 6 billion (USD52 million) come under the purview, including approval authority, of the MOICS Department of Industry (DOI), and anything above that amount falls under the authority of the Investment Board of Nepal (IBN).

Other relevant laws include the Industrial Enterprise Act, the SEZ Act, an updated Labor Act (2017), and a pending Intellectual Property Rights Act. The Industrial Enterprise Act is intended to promote industrial growth in the private sector, includes a “no work, no pay” provision, and allows companies to take certain steps – such as buying land and establishing a line of credit – while environmental assessments and other regulatory requirements are being carried out. In practice, U.S. and other foreign companies comment that corruption, bureaucracy, inefficient implementation of existing procedures and requirements, and a weak regulatory environment make investing in Nepal unattractive, and Nepal’s new legislation has not improved the investment climate sufficiently to change that assessment.

Another significant piece of legislation that could affect investment decisions in Nepal is the Customs Act (2007), which established invoice-based customs valuations and replaced many investment tax incentives with a lower, uniform rate.  In 2017, the Department of Customs started to use the Automated System for Customs Data (ASYCUDA) world software platform. In addition, the Electricity Act includes special terms and conditions for investment in hydropower development and the Privatization Act of 1994 authorizes and defines the procedures for privatization of state-owned enterprises.

There is no public evidence of direct executive interference in the court system that could affect foreign investors.  However, in recent years there has been public and media criticism of the politicization of the judiciary, including appointments of judges to Appellate Courts and the Supreme Court allegedly based on their political affiliations.

The IBN, a high-level government body chaired by the Prime Minister, was formed in 2011 to promote economic development in Nepal.  In addition to approving large-scale investment projects, the IBN is also the GoN body charged with assessing and managing public-private partnership (PPP) projects. It has the task of attracting large foreign investors to Nepal and was a key organizer of the last two Investment Summits in 2017 and 2019. It is the primary point of contact for large investors (above USD50 million), especially those engaged in public infrastructure projects.

The Nepal Business Forum ( http://www.nepalbusinessforum.org/ ) was formed in 2010 with the “aim of improving the business environment in Nepal through better interaction between the business community and government officials.” The NBF does not meet according to a regularized schedule, and the Embassy is not aware of any formal mechanisms or platforms to enable on-going dialogue, aside from the IBN, DOI, and the NBF.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign and domestic private entities have the right to establish and own business enterprises in Nepal and engage in various forms of remunerative activity.  The FITTA 2019 slightly increased the number of sectors open to foreign investment.  Outside of the restricted sectors listed below, foreign investment up to 100 percent ownership is permitted in most sectors. The GoN announced the opening of FDI in the primary agricultural sector for exports in January 2021. However, the matter is sub judice at the Supreme Court (as of March 2021), and so remains unimplemented.

During 2018 and 2019, the Market Monitoring Unit of the MOICS’s Department of Supply Management raided business establishments, seized records, closed business outlets, and brought charges against private businesses in various sectors, including retail, healthcare, and education, alleging that companies were charging prices that were too high.  Such raids are sporadic rather than a matter of sustained policy but contribute to creating an uncertain business environment.

The sectors excluded from foreign investment are listed in the annex of the FITTA 2019 and include:

1. Primary agricultural sectors including animal husbandry, fisheries, beekeeping, oil-processing (from seeds or legumes), milk-based product processing; (Note: The GoN is attempting to open this sector for FDI if 75 percent of the products are exported. However, the matter is under review at the Supreme Court.)
2. Small and cottage enterprises;
3. Personal business services (haircutting, tailoring, driving, etc.);
4. Arms and ammunition, bullets, gunpowder and explosives, nuclear, chemical and biological weapons, industries related to atomic energy and radioactive materials;
5. Real estate (excluding construction industries), retail business, domestic courier services, catering services, money exchange and remittance services;
6. Tourism-related services – trekking, mountaineering and travel agents, tourist guides, rural tourism including arranging homestays;
7. Mass media (print, radio, television, and online news), feature films in national languages;
8. Management, accounting, engineering, legal consultancy services, language, music, and computer training; and
9. Any consultancy services in which foreign investment is above 51 percent.

Investment proposals are screened by the DOI or the IBN to ensure compliance with the FITTA and other relevant laws.  Historically, the lack of clear, objective criteria and timeframes for decisions have resulted in complaints from prospective investors. While the GoN intended the FITTA to address these issues, the regulations enabling the implementation of the Act were only completed in January 2021, and thus how the law will work in practice remains to be seen.

The IBN website provides resources to prospective investors including the Nepal Investment Guide ( http://www.ibn.gov.np/ ). Similarly, the DOI maintains a website that should be helpful to investors ( http://www.investnepal.gov.np ).

U.S. investors are not disadvantaged or singled out relative to other foreign investors by any of the ownership or control mechanisms, sector restrictions, or investment screening mechanisms.  U.S. companies often note that they struggle to compete with firms from neighboring countries when it comes to cost, but this is not a factor resulting from any specific GoN policy.

Other Investment Policy Reviews

There have been no recent investment policy reviews of Nepal.  The last one by the United Nations Conference on Trade and Development (UNCTAD) was conducted in 2003. The World Trade Organization (WTO) conducted a trade policy review in 2019, available online at:   https://docs.wto.org/dol2fe/Pages/FE_Search/FE_S_S006.aspx?Query=((%20@Title=%20nepal)%20or%20(@CountryConcerned=%20nepal))%20and%20(%20(%20@Symbol=%20wt/tpr/g/*%20))&Language=ENGLISH&Context=FomerScriptedSearch&languageUIChanged=true#  and https://www.wto.org/english/tratop_e/tpr_e/tp_rep_e.htm#bycountry .  The International Finance Corporation (IFC) conducted a Country Private Sector Diagnostics, available at:   https://www.ifc.org/wps/wcm/connect/publications_ext_content/ifc_external_publication_site/publications_listing_page/creating+markets+in+nepal+country+private+sector+diagnostic .

Business Facilitation

In recent years, GoN officials have proclaimed Nepal “open for business” and explicitly welcomed foreign investment.  While the GoN likes to appear enthusiastic in its efforts to attract foreign investors, the reality has not yet matched the rhetoric.  Three laws directly affecting foreign investment (FITTA, PPP, and SEZ) were hurriedly revised and passed by Parliament but left little time for stakeholder consultations or transparency in the process. Both foreign and domestic private sector representatives often state that the GoN has not done enough to improve the business environment. While welcome provisions were included in the FITTA—for example, a streamlined approval process and single window service center—an assessment of the true effects of the reforms await full implementation.

After obtaining a letter of approval from DOI or IBN, Nepal’s Office of Company Registrar (OCR) maintains a website ( http://ocr.gov.np/index.php on which foreign companies can register.  OCR’s website also links to an information portal ( http://www.theiguides.org/public-docs/guides/nepal ), maintained by UNCTAD and the International Chamber of Commerce, with resources and information for potential investors interested in Nepal.  According to the portal, registering a company takes “between three days and a week with the law authorizing up to 15 days.” Independent think tanks, however, have noted the online system does not eliminate corruption, and bureaucrats frequently request additional documentation that must be submitted in person, rather than online. Users ranked the Nepal portion of the OCR business registration website a four out of ten, according to the UNCTAD supported Global Enterprise Registration website  www.GER.co .

Outward Investment

The Act Restricting Investment Abroad (ARIA) of 1964 prohibits outbound investment from Nepal.  Some enterprising Nepalis have found ways around the Act, but for most Nepali investors, outward investment is a practical impossibility. The GoN is currently in the process of revising the Foreign Exchange Regulation Act, which is expected to annul the ARIA, paving the way to limited capital account convertibility.

Transparency of the Regulatory System

The GoN has many laws, policies, and regulations that look good on paper, but are often not fully and consistently enforced.  Frequent government changes and staff rotations within the civil service result in officials who are often unclear on applicable laws and policies or interpret them differently than their predecessors.  Many foreign investors note that Nepal’s regulatory system is based largely on personal relationships with government officials, rather than systematic and routine processes.  Legal, regulatory, and accounting systems are not transparent and are not consistent with international norms. The World Bank gives Nepal a score of 1.75 (on a scale of one to five) on its “Global Indicators of Regulatory Governance” index https://rulemaking.worldbank.org/en/data/explorecountries/nepal , and notes that ministries in Nepal do not routinely create lists of “anticipated regulatory changes or proposals” and do not have the “legal obligation to publish the text of proposed regulations before their enactment.”

Historically, rule-making and regulatory authority resided almost exclusively with the central government in Kathmandu.  Nepal’s 2015 Constitution outlines a three-tiered federalist model. Following elections in 2017, seven provincial governments and 753 local government units were established.  Foreign businesses can expect to continue to interact with bureaucrats at the central government level in the near term, as national regulations remain the most relevant for foreign businesses. However, this could change over time as provincial governments become more established.

Traditionally, once acts are drafted and passed by Parliament, it has been incumbent upon the related government agencies and ministries to draft regulations to enforce the acts.  Regulations are passed by the cabinet and do not need parliamentary approval.  Nepal still lacks an established mechanism or system for the review of regulations based on scientific or data-driven assessments, or for conducting quantitative analyses for such purposes. The World Bank notes that the GoN is not required by law to solicit comments on proposed regulations, nor do ministries or regulatory agencies report on the results of the consultation on proposed regulations.  Post is not aware of any informal regulatory processes that are managed by nongovernmental organizations or private sector associations.

Legal, regulatory, and accounting systems are neither fully transparent nor consistent with international norms.  Though auditing is mandatory, professional accounting standards are low, and practitioners may be poorly trained. As a result, published financial reports can be unreliable, and investors often rely instead on businesses reputations unless companies voluntarily use international accounting standards.

Publicly listed companies in Nepal follow the 2013 Nepal Financial Reporting Standards (NFRSs), which were prepared on the basis of the International Financial Reporting Standards (IFRSs) 2012, developed by the IFRS Foundation and their standard-setting body, the International Accounting Standards Board.  Audited reports of publicly listed companies are usually made available.

Draft bills or regulations are sometimes made available for public comment, although there is no legal obligation to do so.  The government agency that drafts the bill is responsible for undertaking a public consultation process with key stakeholders by issuing federal notices for comments and recommendations, although it is unclear in practice how many government agencies actually do so.  Additionally, all parliamentarians are given copies of the draft bills to share with their constituencies.  This applies to all draft laws, regulations, and policies. Parliamentary rules, however, require that draft amendments to bills be proposed only within 72 hours of a bill’s introduction, giving minimal time for lawmakers, constituents, or stakeholders to submit considered feedback. In practice, post’s observation has been that there is no clear timeline for the process of creating and passing bills, including the time period provided for public or stakeholder consultation.

Generally, the government agency that drafted the bill, legislation, policy, or regulation posts the actual draft (in Nepali language) online.  Once approved, the Department of Printing, an office that is part of the Ministry of Communications and Information Technology, posts all acts online. Regulatory actions and summaries of these actions are available at the Office of the Auditor General and the Ministry of Finance.  Both of these government agencies post periodic reports on the regulatory actions taken against agencies violating laws, rules, and regulations.  Such summaries and reports are available online in Nepali.

Individual ministries are responsible for enforcement of regulations under their purview.  The enforcement process is legally reviewable, making the agencies publicly accountable.  There are several government entities, including the Parliamentary Accounts Committee, the Office of the Auditor General, and the Commission for the Investigation of Abuse of Authority (CIAA) that oversee the government’s administrative and regulatory processes. Post is not aware of any regulatory reform efforts.

Nepal’s budget and information on debt obligations are widely and easily accessible to the general public.  The annual budget is substantially complete and considered generally reliable. Nepal’s supreme audit institution reviews the government’s accounts, and its reports are publicly available.

International Regulatory Considerations

Nepal is one of eight members of the South Asian Association for Regional Cooperation (SAARC), an intergovernmental organization and geopolitical union of nations in South Asia including: Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka. Under SAARC, Nepal is also a member of the South Asian Free Trade Area (SAFTA) which came into force on January 1, 2006 with the goal of creating a duty-free trade regime among SAARC member countries.  According to SAFTA rules, member countries were supposed to reduce formal tariff rates to zero by 2016.  However, tariff barriers remain in place for hundreds of “sensitive” goods produced by various SAARC member countries that do not qualify for duty-free status.

Nepal is also a member of the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC), an international organization of seven South Asian and Southeast Asian nations: Bangladesh, India, Myanmar, Sri Lanka, Thailand, Bhutan, and Nepal.

Bangladesh, Bhutan, India, and Nepal – known collectively as BBIN – are working together to develop a platform for sub-regional cooperation in such areas as water resources management, power connectivity, transportation, and infrastructure development.  The four BBIN nations agreed on a motor vehicle agreement (MVA – both cargo and passengers) in 2015. In early 2018, Bangladesh, India, and Nepal also agreed on operating procedures for the movement of passenger vehicles, and in early 2020, the same three countries met to draft a memorandum of understanding to implement the MVA, without obligation to Bhutan.

Nepal’s regulatory system generally relies on international norms and standards developed by the United Nations, World Bank, World Trade Organization (WTO), and other international organizations and regulatory agencies.

Nepal joined the WTO in March 2004.  According to its WTO accession commitments, the GoN agreed to provide notice of all draft technical regulations to the WTO Committee on Technical Barriers to Trade (TBT).  However, GoN officials are unable to confirm whether this procedure is followed consistently.

Nepal ratified the WTO’s Trade Facilitation Agreement (TFA) in January 2017.  As a least developed country (LDC), Nepal could benefit from additional technical assistance from WTO members through the TFA Facility.  A 2017 Asia Development Bank report noted, “Nepal has been making progress in undertaking trade facilitation reforms over the years, particularly those related to the customs.” The WTO’s December 2018 policy review ( https://www.wto.org/english/tratop_e/tpr_e/tp481_crc_e.htm ) noted Nepal’s efforts to diversify its narrow production and export base and encouraged Nepal to pursue further economic reform, including through its National Trade Integration Strategy ( https://www.oecd.org/aidfortrade/countryprofiles/dtis/Napal-DTIS-2016.pdf ) as well as address its supply side constraints, most notably high transit and transportation costs.  According to the TFA Facility’s website ( http://www.tfafacility.org ), Nepal has submitted provisions for all three categories, a key step for implementing TFA Category A, B, and C requisites.

Legal System and Judicial Independence

Nepal’s court system is based on common law and its legal system is generally categorized under civil and criminal offences and laws. Contract law is codified.  In theory, contracts are automatically enforced, and a breach of contract can be challenged in a court of law. In practice, enforcement of contracts is weak. Nepal’s contracts are guided by the Contract Act of 2000.  Nepal does not have a commercial code. All civil courts are authorized to hear commercial complaints. A ‘commercial bench’ has been established at the High Court, but judges who preside on this bench are the same judges dealing with civil and criminal cases as well.

The judicial system is independent of the executive branch.  Regulations or enforcement actions are appealable, and they are adjudicated in the national court system. In general, the judicial process is procedurally competent, fair, and reliable. In some isolated or high-profile cases, however, court judgments have come under criticism for alleged political interference favoring particular individuals and groups.  There remains widespread public perception that bribery and judicial conflicts of interest affect some judicial outcomes.

Laws and Regulations on Foreign Direct Investment

In March 2019, three laws directly affecting foreign investment (FITTA, PPP, and SEZ) were hurriedly revised and passed by Parliament ahead of the 2019 Investment Summit.  This left little time for effective stakeholder consultations and transparency. While welcome provisions were included in the FITTA (a promised single window service center and a streamlined approval process, for example), the regulations to implement the reforms were only completed in January 2021 and observers remain skeptical given the GoN’s record of making lofty announcements without delivering on them in practice. As drafted, even these pieces of reform legislation retain various institutional and procedural impediments to smooth businesses practices which will dissuade all but the most risk-tolerant investors.

Competition and Anti-Trust Laws

The Competition Promotion and Market Protection Board, comprised of GoN officials from various ministries and chaired by the Minister of Industry, Commerce, and Supplies, is responsible for reviewing competition-related concerns.  Post is not aware of any competition cases that have involved foreign investors. MOICS’ Department of Supplies Management has a mandate to crack down on cartels and protect consumers. In the previous two years, it has played a more active role in cracking down on businesses—ranging from retailers to healthcare facilities to private schools—for alleged price-gouging.  However, private sector representatives have said that this department is interfering with the free market and is being used by businesses with political connections to target competitors, rather than as a mechanism to protect consumers.

Nepal’s private sector is dominated by cartels and syndicates—often under the banner of business associations–which are often successful in limiting competition from new market entrants in multiple sectors.  In 2018, the GoN issued new permits for transportation companies, and the Minister of Physical Infrastructure and Transport called the cartels “a curse to the nation.” Subsequently, however, the GoN has taken few additional steps to crack down on cartels.

Expropriation and Compensation

The Industrial Enterprise Act of 2016 states that “no industry shall be nationalized.”  To date, there have been no cases of nationalization in Nepal, nor are there any official policies that suggest expropriation should be a concern for prospective investors.  However, companies can be sealed or confiscated if they do not pay taxes in accordance with Nepali law, and bank accounts can be frozen if authorities have suspicions of money laundering or other financial crimes.  Nepal does not have a history of expropriations. There have been no government actions or shifts in government policy that indicate expropriations will become more likely in the foreseeable future.

Dispute Settlement

ICSID Convention and New York Convention

Nepal is a member of both the 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 Award.  Nepal’s Arbitration Act of 1999 allows the enforcement of foreign arbitral awards and limits the conditions under which those awards can be challenged. The GoN has updated its legislation on dispute settlement to bring its laws into line with the requirements of the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Award.

Investor-State Dispute Settlement

As a signatory to the New York Convention and Nepal’s Arbitration Act of 1999, the GoN recognizes foreign arbitral awards as binding.  The Agreement between the Government of India and the Government of Nepal for the Promotion and Protection of Investments also discusses arbitration as a means to resolve investment disputes and notes that awards are binding.

Nepal does not have a Bilateral Investment Treaty or Free Trade Agreement with the United States.  Investment disputes involving U.S. or other foreign investors have not been frequent.  In the past ten years, Post is aware of only two cases in which a U.S. investor claimed the GoN had not honored terms of a contract.  In a third case, a U.S. investor complained about monetary compensation given to a landowner. This case was eventually resolved in favor of the investor. Under the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards, local courts are obligated to recognize and enforce foreign arbitral awards issued against the government, but Post is not aware of any cases that have involved foreign arbitral awards. There are no known cases of extrajudicial action against foreign investors.

International Commercial Arbitration and Foreign Courts

Other than arbitration, Post is not aware of any alternative dispute resolution mechanisms available in Nepal. In disputes involving a foreign investor, the concerned parties are encouraged to settle through mediation in the presence of the DOI.  If the dispute cannot be resolved through mediation, depending on the amount of the initial investment and the procedures specified in the contractual agreement, cases may be settled either in a Nepali court or in another legal jurisdiction. Commercial disputes under the jurisdiction of Nepali courts and laws often drag on for years.

Under the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards, local courts are obligated to recognize and enforce foreign arbitral awards, but Post is not aware of any cases that have involved foreign arbitral awards.

Domestic courts have a history of siding with state-owned enterprises (SOE) and other government entities in cases involving investment disputes. There have been cases in which local courts have refused to determine whether documents issued by an SOE were genuine.

Bankruptcy Regulations

There is no single specific act in Nepal that exclusively covers bankruptcy.  The 2006 Insolvency Act provides guidelines for insolvency proceedings in Nepal and specifies the conditions under which such proceedings can occur.  Additionally, the General Code of 1963 covers bankruptcy-related issues. Creditors, shareholders, or debenture holders can initiate insolvency proceedings against a company by filing a petition at the court.

If a company is solvent, its liquidation is covered by the Company Act of 2006.  If the company is insolvent and unable to pay its liabilities, or if its liabilities exceed its assets, then liquidation is covered by the Insolvency Act of 2006.  Under the Company Act, the order of claimant priority is as follows: 1) government revenue; 2) creditors; and 3) shareholders. Under the Insolvency Act, the government is equal to all other unsecured creditors.  Monetary judgments are made in local currency. Firms and entrepreneurs who have declared bankruptcy are blacklisted from receiving loans for 10 years.

Capital Markets and Portfolio Investment

The Nepal Stock Exchange (NEPSE) is the only stock exchange in Nepal. The majority of NEPSE’s 255 listed companies are hydropower companies and banks, with the NEPSE listings for banks driven primarily by a regulatory requirement rather than commercial considerations. There are few opportunities for foreign portfolio investment in Nepal.  Foreign investors are not allowed to invest in the Nepal Stock Exchange nor permitted to trade in the shares of publicly listed Nepali companies; only Nepali citizens and Non-Resident Nepalis (NRNs) are allowed to invest in NEPSE and trade stock. The FITTA, however, allows for the creation of a “venture capital fund” to enable foreign institutional investors to take equity stakes in Nepali companies.

The Securities Board of Nepal (SEBON) regulates NEPSE, but the Board does little to encourage and facilitate portfolio investment. While both NEPSE and SEBON have been enhancing their capabilities in recent years, Post’s view is that the NEPSE is far from becoming a mature stock exchange and likely does not have sufficient liquidity to allow for the entry and exit of sizeable positions. Some experts have raised concerns about the Ministry of Finance’s degree of influence over both SEBON and NEPSE and have cited lack of independence from government influence as an impediment to the development of Nepal’s capital market. (See: https://milkeninstitute.org/reports/framing-issues-modernizing-public-equity-market-nepal .)

Nepal moved to full convertibility (no foreign exchange restrictions for transactions in the current account)  when it accepted Article VIII obligations of IMF’s Articles of Agreement in May 1994. In line with this, the GoN and NRB refrain from imposing restrictions on payments and transfers for current international transactions.

Credit is generally allocated on market terms, although special credit arrangements exist for farmers and rural producers through the Agricultural Development Bank of Nepal.  Foreign-owned companies can obtain loans on the local market. The private sector has access to a variety of credit and investment instruments. These include public stock and direct loans from finance companies and joint venture commercial banks. Foreign investors can access equity financing locally, but in order to do so, the investor must be incorporated in Nepal under the Companies Act of 2006 and listed on the stock exchange. The banking sector has grappled with shortages of loanable funds in the last couple of years resulting in high interest rates on loans. One of the major reasons for this is slow and inefficient government spending leading to lack of liquidity in the system. With the return of relative political stability in 2018, it was hoped this problem would be reduced but it has continued.

Money and Banking System

The NRB has promoted mergers in the financial sector and published merger bylaws in 2011 to help consolidate and better regulate the banking sector.  As of January 2021, there were 27 commercial banks, 19 development banks, and 21 finance companies registered with the NRB. This total does not include micro-finance institutions, savings and credit cooperatives, non-government organizations (NGOs), and other institutions, which provide many of the functions of banks and financial institutions.  There are no legal provisions to defend against hostile takeovers, but there have been no reports of hostile takeovers in the banking system.

Nepal’s poor infrastructure and challenging terrain has meant that many parts of the country do not have access to financial services.  A 2015 study by the UN Capital Development Fund (UNCDF) reported that 61 percent of Nepalis had access to formal financial services (40 percent to formal banking). Following local elections in 2017, the GoN established 753 local government units and promised that each unit would be served by at least one bank.  As of January 2020, 8 local units were still without a bank. Most of the local units without banks are in remote locations with few suitable buildings and a lack of proper security and internet connectivity.

(UNCDF) reported that 61 percent of Nepalis had access to formal financial services (40 percent to formal banking). Following local elections in 2017, the GoN established 753 local government units and promised that each unit would be served by at least one bank.  As of January 2020, 8 local units were still without a bank. Most of the local units without banks are in remote locations with few suitable buildings and a lack of proper security and internet connectivity.

Nepal’s banking sector is relatively healthy, though fragmented, and NRB bank supervision, while improving, remains weak, allegedly due to political influence according to several private sector representatives.  The GoN hopes to strengthen the banking system by reducing the number of smaller banks and it has actively encouraged consolidation of commercial banks; there are currently 27 commercial banks, down from 78 in 2012. Most banks locate their branches in and around Kathmandu and in the large cities of southern Nepal.  Some banks are owned by prominent business houses, which could create conflicts of interest. There are also a large number of cooperative banks that are governed not by the NRB but by the Ministry of Agricultural, Land Management, and Cooperatives. These cooperatives compete with banks for customers.

In January 2017, Parliament approved the Bank and Financial Institutions (BAFI) Act.  First introduced in 2013, BAFI is designed to strengthen corporate governance by setting term limits for Chief Executive Officers and board members at banks and financial institutions.  The legislation also aims to reduce potential conflicts of interest by prohibiting business owners from serving on the board of any bank from which their business has taken loans.

In 2018, NRB was criticized for not taking action to relieve a liquidity crunch and the Nepal Banker’s Association came to a gentlemen’s agreement to limit deposit rates.  The NRB did not protest this action, leading to some criticism that it was not fulfilling its role as a regulator against what many perceived as cartel behavior.

The NRB regulates the national banking system and also functions as the government’s central bank. As a regulator, NRB controls foreign exchange; supervises, monitors, and governs operations of banking and non-banking financial institutions; determines interest rates for commercial loans and deposits; and determines exchange rates for foreign currencies.  As the government’s bank, NRB manages all government income and expenditure accounts, issues Nepali bills and treasury notes, makes loans to the government, and determines monetary policy.

Existing banking laws do not allow retail branch operations by foreign banks, which compels foreign banks to set up a local bank if choosing to operate in Nepal.  For example, Standard Chartered formed Standard Chartered Nepal. All commercial banks have correspondent banking arrangements with foreign commercial banks, which they use for transfers and payments.  Standard Chartered is the only correspondent bank with a physical presence in Nepal and handles foreign transactions for the NRB. Nepal will be undergoing a review by the Financial Action Task Force (FATF) in 2021 to assess its anti-money laundering regime. Although unlikely, Nepal risks losing its correspondent banking relationships or increased FATF monitoring if it fails this assessment.  Foreigners who are legal residents of Nepal with proper work permits and business visas are allowed to open bank accounts.

Foreign Exchange and Remittances

Foreign Exchange

The FITTA allows foreign investors to repatriate all profits and dividends, all money raised through the sale of shares, all payments of principal and interest on any foreign loans, and any amounts invested in transferring foreign technology. Doing so, however, requires multiple approvals and extended procedures which have historically resulted in such transactions taking months to complete. Foreign nationals working in local industries are also allowed to repatriate 75 percent of their income. Opening bank accounts and obtaining permission for remittance of foreign exchange are available based on the recommendation of the DOI, which usually has provided approval of the original investment.

In practice, repatriation is difficult, time consuming, and not guaranteed.  The relevant GoN department and the NRB, which regulates foreign exchange, must both approve the repatriation of funds. In most cases, approval must also be obtained from the DOI. In the case of the telecommunications sector, the Nepal Telecommunications Authority must also approve the repatriation. In joint venture cases, the NRB and the Ministry of Finance must grant approval. Repatriation of funds is expected to become easier after the single window service center, as provided for by the FITTA, comes fully into operation.

In the past, several foreign companies reported that the GoN insisted on contracts denominated in Nepal’s currency, the Nepali rupee (NPR), and not major world currencies, such as the U.S. dollar. This seems to be changing, at least in the energy sector, where the GoN has adopted a policy that permits the Nepal Electricity Authority to sign Power Purchase Agreements (PPAs) denominated in U.S. dollars (or other hard foreign currency).  There are some limits on so-called “forex” or hard currency PPAs, including, for example, the stipulations that only costs or borrowing in foreign currency are covered and that payments may only be made for 10 years or the term of the loan, whichever is less. Provisions for repatriation are governed by NRB procedures, as is conversion of foreign investors’ funds into other currencies. Nepal’s currency has been pegged to the Indian rupee (INR) since 1994 at a rate of 1.6 NPR to 1 INR. As such, the NPR fluctuates relative to world currencies in line with the INR. According to the April 2020 IMF Article IV Consultation—Press Release; Staff Report; and Statement by the Executive Director for Nepal ( https://www.imf.org/en/Countries/NPL ), the peg to the INR reduces exchange rate uncertainty for trade and investment with India, its major trading partner, but the appreciation of the Nepali rupee against the Indian rupee has also resulted in the overvaluation of the Nepali rupee and could affect Nepal’s competitiveness.

Remittance Policies

The FITTA legislation promises to make it easier to remit investment earnings, but it will depend on how effectively the single window, as well as associated approvals and procedures, functions in practice. In the interim, foreign investors will continue to use the old process of applying to the NRB to repatriate funds from the sale of shares. For repatriation of funds connected with dividends, principal and interest on foreign loans, technology transfer fees, or expatriate salaries, the foreign investor applies first to the DOI and then to the NRB. At the DOI stage of obtaining remittance approval, foreign investors must submit remittance requests to a commercial bank. Final remittance approval is granted by the NRB Department of Foreign Exchange, a process that is reported by foreign investors to be opaque and time-consuming. After administrative approvals, a lengthy clearance process between the NRB and the commercial bank further slows the foreign exchange transfer. The experience of U.S. and other foreign investors so far indicates serious discrepancies between the government’s stated policies in the FITTA and implementation in practice.

Sovereign Wealth Funds

Nepal has no sovereign wealth funds.

There are 36 state-owned enterprises (SOEs) in Nepal, including Nepal Airlines Corporation, Nepal Oil Corporation, and the Nepal Electricity Authority. Since 1993, Nepal has initiated numerous market policy and regulatory reforms in an effort to open eligible government-controlled sectors to domestic and foreign private investment. These efforts have had mixed results. The majority of private investment has been made in manufacturing and tourism—sectors where there is little government involvement and existing state-owned enterprises are not competitive. Many state-owned sectors are not open for foreign investment. Information on the annual performance of Nepal’s SOEs’ can be found on this website. https://mof.gov.np/uploads/document/file/Annual%20Status%20Review%20of%20Public%20Enterprises%202019_20200213054242.pdf .

Corporate governance of SOEs remains a challenge and executive positions have reportedly been filled by people connected to politically appointed government ministers. Board seats are generally allocated to senior government officials and the SOEs are often required to consult with government officials before making any major business decisions. A 2011 executive order mandates a competitive and merit-based selection process but has encountered resistance within some ministries. Third-party market analysts consider most Nepali SOEs to be poorly managed and characterized by excessive government control and political interference. According to local economic analysts, SOEs are sometimes given preference for government tenders, although official policy states that SOEs and private companies are to compete under the same terms and conditions.

Private enterprises do not have the same access to finance as SOEs. Private enterprises mostly rely on commercial banks and financial institutions for business and project financing. SOEs, however, also have access to financing from state-owned banks, development banks, and other state-owned investment vehicles. Similar concessions or facilities are not granted to private enterprises. SOEs receive non-market-based advantages, given their proximity to government officials, although these advantages can be hard to quantify. Some SOEs, such as the Nepal Electricity Authority or the Nepal Oil Corporation have monopolies that prevent foreign competitors from entering those market sectors.

The World Bank in Nepal assesses corporate governance benchmarks (both law and practice) against the OECD Principles of Corporate Governance, focusing on companies listed on the stock market. Awareness of the importance of corporate governance is growing. The NRB has introduced higher corporate governance standards for banks and other financial institutions. Under the OECD Principles of Corporate Governance, the World Bank recommended in 2011 that the GoN strengthen capital market institutions and overhaul the OCR. Although some reforms were initiated, many were never finalized and no reforms have been instituted at the OCR.

Privatization Program

The Privatization Act of 1994 authorizes and defines the procedures for privatization of state-owned enterprises to broaden participation of the private sector in the operation of such enterprises. The Privatization Act of 1994 generally does not discriminate between national and foreign investors, however, in cases where proposals from two or more investors are identical, the government gives priority to Nepali investors.

Economic reforms, deregulation, privatization of businesses and industries under government control, and liberalized policies toward FDI were initiated in the early 1990s. During this time, sectors such as telecommunications, civil aviation, coal imports, print and electronic media, insurance, and hydropower generation were opened for private investment, both domestic and foreign. The first privatization of a state-owned corporation was conducted in October 1992 through a Cabinet decision (executive order). Since then, a total of 23 state-owned corporations have been privatized, liquidated, or dissolved, though the process has been static since 2008.

The last company to be (partially) privatized was Nepal Telecom in 2008 (although the GoN still is the majority shareholder). Since then, no SOEs have been privatized. In the past, privatization was initiated with a public bidding process that was transparent and non-discriminatory. Procedural delays, resistance from trade unions, and a lack of will within the GoN, however, have created obstacles to the privatization process. The Corporate Coordination and Privatization Division of the Ministry of Finance is responsible for management of the privatization program. Foreign investors can participate in privatization programs of state-owned enterprises.

In 2017, Nepal successfully held local, provincial, and national elections to fully implement its 2015 constitution. The Madhesi population in Nepal’s southern Terai belt, together with other traditionally marginalized ethnic and caste groups, believes the constitution is insufficiently inclusive and that its grievances are not being addressed. Post-election, however, this feeling of disenfranchisement may be somewhat assuaged due to the fact that Madhesi parties achieved a majority in the Province 2 provincial assembly elections. The Nepal Communist Party (NCP)—formed by the merger of the Communist Party of Nepal (Unified Marxist Leninist (UML)) and the Communist Party of Nepal (Maoist Center)—swept the 2017 elections to form a two-thirds majority government in 2018. However, internal wrangling within the NCP broke into the open and dominated much of 2020, resulting in Prime Minister KP Sharma Oli dissolving the parliament in December 2020. Although the parliament was reinstated by the Supreme Court on February 23, 2021, a March 7 Supreme Court ruling broke up the NCP into its original constituents, the Communist Party of Nepal (CPN)-United Marxist Leninist (CPN-UML) and CPN-Maoist Center (CPN-MC) parties. It is unclear when or if a new coalition government will be formed among the various parties represented in the (reconvened) Parliament – or whether early elections will be called if the Oli government fails to win a confidence vote. Political negotiations, wrangling, and horse-trading are ongoing, with governance and lawmaking taking a back seat. In the meantime Oli continues as PM.

Criminal violence, sometimes conducted under the guise of political activism, remains a problem. Bandhs (general strikes) called by political parties and other agitating groups sometimes halt transport and shut down businesses, sometimes nationwide. However, in the last several years, few bandhs have been successfully carried out in Kathmandu. Americans and other Westerners are generally not targets of violence.

U.S. citizens who travel to or reside in Nepal are urged to register with the Consular Section of the Embassy by accessing the Department of State’s travel registration site at  https://step.state.gov/step,. The Consular Section provides updated information on travel and security on the embassy website, http://np.usembassy.gov., and can be reached through the Embassy switchboard at (977) (1) 423-4500, by fax at (977) (1) 400-7281, by email at  consktm@state.gov .

U.S. citizens also should consult the Department of State’s Consular Information Sheet for Nepal and Worldwide Caution Public Announcement on the Department of State’s home page at http://travel.state.gov, by calling 1-888-407-4747 toll free in the United States and Canada, or, for callers outside the United States and Canada, by a regular toll line at 1-202-501-4444. These numbers are available from 8:00 a.m. to 8:00 p.m. Eastern Time, Monday through Friday (except U.S. federal holidays).

Over the last ten years, there have been frequent calls for strikes, particularly in the Terai. Occasionally, protesters have vandalized or damaged factories and other businesses. On February 22, 2019, a small improvised explosive device (IED) was placed overnight outside the entrance of NCell, Nepal’s second largest mobile carrier. One person died and two others were injured. The Indian-run Arun 3 hydro-power plant has been targeted by IEDs on three occasions and in early-2018 the U.S. Embassy issued a security notice about credible threats of violence targeting the private Chandragiri Hills Cable Car attraction. Such incidents remain infrequent, but unpredictable. Demonstrations have on occasion turned violent, although these activities generally are not directed at U.S. citizens or businesses. Biplav, a splinter Maoist group that threatened or attempted to extort NGOs, businesses, and educational institutions across Nepal over the past two years, is in negotiations with the KP Oli government to give up violence and enter peaceful politics.

Nepalis are prohibited from investing abroad as per the Act Restricting Investment Abroad (ARIA), 1964. Post has heard this Law might be abrogated soon, but as of April 2021, no outward investment is permitted from Nepal.

Table 4: Sources of Portfolio Investment
Data not available.

Policies Towards Foreign Direct Investment

The Netherlands is the seventeenth largest economy in the world and the fifth largest in the European Union, with a gross domestic product (GDP) in 2019 of over USD 950 billion (810 billion euros). According to the International Monetary Fund (IMF), the Netherlands is consistently among the three largest source and recipient economies for foreign direct investment (FDI) in the world, although the Netherlands is not the ultimate destination for the majority of this investment. Similarly, in its 2020 investment report, the UN Conference on Trade and Development (UNCTAD) identified the Netherlands as the world’s fourth largest destination of global FDI inflows and the third largest source of FDI outflows.

The government of the Netherlands maintains liberal policies toward FDI, has established itself as a platform for third-country investment with some 145 investment agreements in force, and adheres to the Organization for Economic Cooperation and Development (OECD) Codes of Liberalization and Declaration on International Investment, including a National Treatment commitment and adherence to relevant guidelines.

The Netherlands is the recipient of eight percent of all FDI inflow into the EU. The Netherlands has become a key export platform and pan-regional distribution hub for U.S. firms. Roughly 60 percent of total U.S. foreign-affiliate sales in the Netherlands are exports, with the bulk of them going to other EU members. The nearly 3,000 U.S. owned corporations represent more than 20% of all foreign owned firms in the Netherlands and they create more than 200,000 jobs. Foreign owned firms operate predominantly in business services, wholesale, and retail sectors.

Although policy makers feared that Brexit would have an extremely negative impact on the Dutch economy, the Netherlands is benefitting from companies exiting the United Kingdom in search of an anchor location inside the EU Single Market. The European Medicines Agency (EMA) also relocated from London to Amsterdam. According to the Netherlands Foreign Investment Agency (NFIA), the number of companies interested in moving to or opening branches in the Netherlands because of Brexit increased from 80 in 2017 to 150 in 2018 to 250 in 2019. Approximately150 UK-based corporations are currently considering establishing a Dutch foothold in the European Union. The companies are mainly from the health, creative industry, financial services, and logistics sectors. The Dutch Authority for the Financial Markets (AFM) expects Amsterdam to emerge as a main post-Brexit financial trading center in Europe for automated trading platforms and other ‘fintech’ firms, as more of these companies cross the Channel to keep their European trading within the confines of the EU regulatory oversight.

Dutch tax authorities provide a high degree of customer service to foreign investors, seeking to provide transparent, precise tax guidance that makes long-term tax obligations more predictable. Advance Tax Rulings (ATR) and Advance Pricing Agreements (APA) are guarantees given by local tax inspectors regarding long-term tax commitments for a particular acquisition or greenfield investment. Dutch tax policy continues to evolve as the EU seeks to harmonize tax measures across member states. A more detailed description of Dutch tax policy for foreign investors can be found at https://investinholland.com/why-invest/incentives-taxes/ .

Dutch corporations and branches of foreign corporations are currently subject to a corporate tax rate of 25 percent on taxable profits, which puts the Netherlands in the middle third among EU countries’ corporate tax rates and below the tax rates of its larger neighbors. Profits up to USD 290,000 (245,000 euros) are taxed at a rate of 15 percent, this threshold will be raised to USD 470,000 (Euro 395,000) in 2022.

Dutch corporate taxation generally allows for exemption of dividends and capital gains derived from a foreign subsidiary. Surveys of the corporate tax structure of EU member states note that both the corporate tax rate and the effective corporate tax rate in the Netherlands are around the EU average. Nevertheless, the Dutch corporate tax structure ranks among the most competitive in Europe considering other beneficial measures such as the possibility for the tax authorities to provide corporations with clarity on future treatment of taxes via “advance” rulings and agreements such as ATR and/or APA. The Netherlands also has no branch profit tax and does not levy a withholding tax on interest and royalties.

Maintaining an investment-friendly reputation is a high priority for the Dutch government, which provides public information and institutional assistance to prospective investors through the Netherlands Foreign Investment Agency (NFIA) ( https://investinholland.com/ ). Historically, over a third of all “greenfield” FDI projects that NFIA attracts to the Netherlands originate from U.S. companies. Additionally, the Netherlands business gateway at https://business.gov.nl/  – maintained by the Dutch government – provides information on regulations, taxes, and investment incentives that apply to foreign investors in the Netherlands and clear guidance on establishing a business in the Netherlands. The NFIA maintains five regional offices in the United States (Washington, DC; Atlanta; Chicago; New York City; and San Francisco). The American Chamber of Commerce in the Netherlands ( https://www.amcham.nl/ ) also promotes U.S. and Dutch business interests in the Netherlands.

Limits on Foreign Control and Right to Private Ownership and Establishment

With few exceptions, the Netherlands does not discriminate between national and foreign individuals in the establishment and operation of private companies. The government has divested its complete ownership of many public utilities, but in a number of strategic sectors, private investment – including foreign investment – may be subject to limitations or conditions. These include transportation, energy, defense and security, finance, postal services, public broadcasting, and the media.

Air transport is governed by EU regulation and subject to the U.S.-EU Air Transport Agreement. U.S. nationals can invest in Dutch/European carriers as long as the airline remains majority-owned by EU governments or nationals from EU member states. Additionally, the EU and its member states reserve the right to limit U.S. investment in the voting equity of an EU airline on a reciprocal basis that the United States allows for foreign nationals in U.S. carriers.

In concert with the European Union, the Dutch government is considering how to best protect its economic security but also continue as one of the world’s most open economies. The Netherlands has foreign investment and procurement screening mechanisms in place for certain vital sectors that could present national security vulnerabilities. The first such laws (one on investment screening per EU directive and one on unwanted outside influence in the telecommunications sector) passed in 2020. The government is in the process of expanding screening measures to cover sensitive technologies more broadly, and a formal policy, which will apply retroactively as well, should be presented to Parliament for approval before summer 2021. Among policymakers, foreign investment and procurement screening is considered a non-partisan issue with support across the political spectrum. There is no requirement for Dutch nationals to have an equity stake in a Dutch registered company.

Other Investment Policy Reviews

The Netherlands has not recently undergone an investment policy review by the OECD, World Trade Organization (WTO), or UNCTAD.

Business Facilitation

All companies must register with the Netherlands’ Chamber of Commerce and apply for a fiscal number with the tax administration, which allows expedited registration for small- and medium-sized enterprises (SMEs) with fewer than 50 employees: https://www.kvk.nl/english/registration/foreign-company-registration/ 

The World Bank’s 2020 Ease of Doing Business Index ranks the Netherlands as number 24 in starting a business. The Netherlands ranks better than the OECD average on registration time, the number of procedures, and required minimum capital. The reports ranks the Netherlands first in terms of trading across borders, with zero costs and a small number of hours associated with border and documentary compliance, respectively.

The Netherlands business gateway at https://business.gov.nl/  – maintained by the Dutch government – provides a general checklist for starting a business in the Netherlands: https://business.gov.nl/starting-your-business/checklists-for-starting-a-business/how-to-start-a-business-in-the-netherlands-a-checklist/ .

The Dutch American Friendship Treaty (DAFT) from 1956 gives U.S. citizens preferential treatment to operate a business in the Netherlands, providing ease of establishment that most other non-EU nationals do not enjoy. U.S. entrepreneurs applying under the DAFT do not need to satisfy a strict, points-based test and do not have to meet pre-conditions related to providing an innovative product. U.S. entrepreneurs setting up a sole proprietorship only have to register with the Chamber of Commerce and demonstrate a minimum investment of 4,500 euros. DAFT entrepreneurs receive a two-year residence permit, with the possibility of renewal for five subsequent years.

Outward Investment

In order to sustain the top ten ranking of the Netherlands among the world’s largest exporting nations, the Ministry for International Trade and Development coordinates with the government and private sector trade promotion agencies in setting an annual ‘overseas trade mission’ agenda. The Netherlands Enterprise Agency ( https://english.rvo.nl/ ) has the lead in organizing a custom-tailored and topical format of trade missions to accompany State visits and other official delegations abroad. Participation in these missions is open to any enterprise established in the Netherlands.

Transparency of the Regulatory System

Dutch commercial laws and regulations accord with international legal practices and standards; they apply equally to foreign and Dutch companies. The rules on acquisition, mergers, takeovers, and reinvestment are nondiscriminatory. The Social Economic Council (SER)–an official advisory body consisting of employers’ representatives, labor representatives, and government appointed independent experts–administers Dutch mergers and acquisitions rules. The SER’s rules serve to protect the interests of stakeholders and employees. They include requirements for the timely announcement of mergers and acquisitions (M&A) and for discussions with trade unions.

As an EU member and Eurozone country, the Netherlands is firmly integrated in the European regulatory system, with national and European institutions exercising authority over specific markets, industries, consumer rights, and competition behavior of individual firms.

Financial markets are regulated in an interconnected EU and national system of prudential and behavioral oversight. The domestic regulators are the Dutch Central Bank (DNB) and the Netherlands Authority for the Financial Market (AFM). Their EU counterparts are the European Central Bank (ECB) and the European Securities and Markets Authority (ESMA).

Traditionally, public consultation in drafting new laws is achieved by invitation of various civil society bodies, trade associations, and organizations of stakeholders. In addition, the SER has a formal mandate to provide the government with advice, both solicited and of its own accord. Recently, the SER has provided the government with advice on emissions reduction of greenhouse gases, energy transition, and pension reforms. New laws and regulations are subject to legal review by the Council of State and must be approved by the Second and First Chambers of Parliament.

International Regulatory Considerations

The Netherlands is a member of the WTO and does not maintain any measures that are inconsistent with obligations under Trade Related Investment Measures (TRIMs).

Legal System and Judicial Independence

Dutch contract law is based on the principle of party autonomy and full freedom of contract. Signing parties are free to draft an agreement in any form and any language, based on the legal system of their choice. Dutch corporate law provides for a legal and fiscal framework that is designed to be flexible. This element of the investment climate makes the Netherlands especially attractive to foreign investors.

The Dutch civil court system has a chamber dedicated to business disputes, called the Enterprise Chamber. The Enterprise Chamber includes judges who are experts in various commercial fields. They resolve a wide range of corporate disputes, from corporate governance disputes to high-profile shareholder conflicts over mergers or hostile take-overs.

Since 2019, the Enterprise Chamber houses an English-language commercial court. The Netherlands Commercial Court (NCC) and its appellate chamber (NCCA) offer parties the opportunity to litigate in English and will provide judgments in English. Both the NCC and NCCA will focus primarily on major international commercial cases. See also: https://www.rechtspraak.nl/English/NCC/Pages/default.aspx 

Laws and Regulations on Foreign Direct Investment

The Dutch government has demonstrated a growing concern with the protection of its open, market-based economy against foreign state malign activity and currently the Netherlands is in the process of establishing a formal domestic investment screening mechanism as per EU directive.  In May 2020, the long-awaited investment screening law in the telecommunications sector came into force.  In December 2020, the law on establishing a framework for investment screening for all critical sectors came into force, aimed at protecting Dutch national security.

Competition and Antitrust Laws

Structural and regulatory reforms are an integral part of Dutch economic policy.  Laws are routinely developed for stimulating market forces, liberalization, deregulation, and tightening competition policy.

As an EU and Eurozone member, the Netherlands is firmly integrated in the European regulatory system with national and European institutions exercising authority over specific markets, industries, consumer rights, and competition behavior of individual firms.

The Authority for Consumers and Markets (ACM) provides regulatory oversight in three key areas:  consumer protection, post and telecommunications, and market competition.

Expropriation and Compensation

The Netherlands maintains strong protection on all types of property, including private and intellectual property rights, and the right of citizens to own and use property.  Expropriation of corporate assets or the nationalization of industry requires a special act of Parliament, as demonstrated in the nationalization of ABN AMRO during the 2008 financial crisis (the government returned it to public shareholding through a 2016 IPO).  In the event of expropriation, the Dutch government follows customary international law, providing prompt, adequate, and effective compensation, as well as ample process for legal recourse.

The U.S. Mission to the Netherlands is unaware of any recent expropriation claims involving the Dutch government and a U.S. or other foreign-owned company.

Dispute Settlement

ICSID Convention and New York Convention

As a member of the International Center for the Settlement of Investment Disputes (ICSID), the Netherlands accepts binding arbitration between foreign investors and the state.  The Netherlands is one of the initial signatories of the New York Convention on Recognition and Enforcement of Foreign Arbitral Awards (UNCITRAL) and permits local enforcement of arbitration judgments decided in other signatory countries.

The Hague is the seat of the Permanent Court of Arbitration (PCA), an intergovernmental organization that is not a court, but like the ICSID, is a facilitator of independent arbitral tribunals to resolve conflicts between PCA member states, including the United States.

Investor-State Dispute Settlement

The Embassy is not aware of any American company raising an investment dispute with the Netherlands over the last 10 years. According to the UNCTAD ISDS navigator database ( https://investmentpolicy.unctad.org/investment-dispute-settlement/country/148/netherlands/investor), the Netherlands is not involved in any investor-state dispute settlement proceedings with foreign investors.

International Commercial Arbitration and Foreign Courts

The Netherlands has maintained a Treaty of Friendship, Commerce, and Navigation with the United States since 1957 that provides for national treatment and free entry for foreign investors, with certain exceptions.  The Embassy is not aware of any American company raising an investment dispute with the Netherlands over the last 10 years.

Bankruptcy Regulations

Dutch bankruptcy law is governed by the Dutch Bankruptcy Code, which applies both to individuals and to companies.  The code covers three separate legal proceedings:  1) bankruptcy, which has a goal of liquidating the company’s assets; 2) receivership, aimed at reaching an agreement between the creditors and the company; and 3) debt restructuring, which is only available to individuals. The World Bank’s 2020 Ease of Doing Business Index ranks the Netherlands as number seven in resolving insolvency.  The Netherlands ranks better than the OECD average on bankruptcy time, cost, and recovery rate.

Capital Markets and Portfolio Investment

The Netherlands is home to the world’s oldest stock exchange – established four centuries ago – and Europe’s first options exchange, both located in Amsterdam.  The Amsterdam financial exchanges are part of the Euronext group that operates stock exchanges and derivatives markets in Amsterdam, Brussels, Lisbon, and Paris. Dutch financial markets are fully developed and operate at market rates, facilitating the free flow of financial resources.  The Netherlands is an international financial center for the foreign exchange market, Eurobonds, and bullion trade.

The flexibility that foreign companies enjoy in conducting business in the Netherlands extends into the area of currency and foreign exchange.  There are no restrictions on foreign investors’ access to sources of local finance.

Money and Banking System

The Dutch banking sector is firmly embedded in the European System of Central Banks, of which the Dutch Central Bank (DNB) is the national prudential banking supervisor.  AFM, the Dutch securities and exchange supervisor, supervises financial institutions and the proper functioning of financial markets and falls under the EU-wide European Securities and Markets Authority (ESMA). The highly concentrated Dutch banking sector is over three times as large as the rest of the Dutch economy, making it one of Europe’s largest banking sectors in relation to GDP.  Three banks, ING, ABN AMRO, and Rabobank, hold nearly 85 percent of the banking sector’s total assets.  The largest bank, ING, has a balance sheet of just over $1 trillion (€937 billion).

The DNB does not consider Bitcoin and similar cryptocurrencies to be legitimate currency, as they do not fulfill the traditional purpose of money as stable means of exchange or saving, and their value is not supported via central bank guarantee mechanisms.  DNB considers current cryptocurrencies to be risky investments that are especially vulnerable to criminal abuse and has begun requiring that providers of financial services related to exchange and deposit of cryptocurrencies register with the DNB, per anti-money laundering (AML) legislation.

The DNB acknowledges however that in the future, cash transactions will likely be replaced with digital transactions that require central bank-issued and -guaranteed cryptocurrencies.  Dutch society has already embraced cash-less commerce to a high degree – seventy percent of over-the-counter shopping is via PIN transactions and contactless payment – and DNB is participating with central banks from Canada, Japan, England, Sweden, Switzerland, and the Bank for International Settlements in research about a possible central bank-issued cryptocurrency.

Foreign Exchange and Remittances

Foreign Exchange

The Netherlands is a founding member of the EU and one of the first members of the Eurozone.  The European Central Bank supervises monetary policy, and the president of the Dutch Central Bank (DNB) sits on the European Central Bank’s Governing Council.

There are no restrictions on the conversion or repatriation of capital and earnings (including branch profits, dividends, interest, royalties), or management and technical service fees, with the exception of the nominal exchange-license requirements for nonresident firms.

Remittance Policies

The Netherlands does not impose waiting periods or other measures on foreign exchange for remittances.  Similarly, there are no limitations on the inflow or outflow of funds for remittance of profits or revenue.  The Netherlands, as a Eurozone member, does not engage in currency manipulation tactics. The Netherlands has been a member of the Financial Action Task Force) FATF since 1990 and – because of the membership of its Caribbean territories in the Caribbean FATF (C-FATF) – strongly supports C-FATF.

With the promulgation of additional, preventative anti-money laundering and counterfeiting legislation, the Netherlands has remedied many of the deficiencies revealed in a 2011 Mutual Evaluation Report.  As a result, FATF removed the Netherlands from its “regular follow-up process” in February 2014.  The Netherlands is preparing for its next mutual evaluation report in 2022. The State Department’s Bureau of International Narcotics and Law Enforcement’s International Narcotics Control Strategy Report (INCSR) has listed the Netherlands as a “country of primary concern,” largely because the country is a major global trade and financial center and consequently an attractive venue for laundering funds generated by illicit activities.

More information can be found at  https://www.state.gov/wp-content/uploads/2021/02/21-00620-INLSR-Vol2_Report-FINAL.pdf [1 MB].

Sovereign Wealth Funds

The Netherlands has no sovereign wealth funds.

The Dutch government maintains an equity stake in a small number of enterprises and some ownership in companies that play an important role in strategic sectors.  In particular, government-controlled entities retain dominant positions in gas and electricity distribution, rail transport, and the water management sector.  The Netherlands has an extensive public broadcasting network, which generates its own income through advertising revenues but also receives government subsidies. For a complete list of all 32 government-owned entities, please see:  https://www.rijksoverheid.nl/onderwerpen/staatsdeelnemingen/vraag-en-antwoord/in-welke-ondernemingen-heeft-de-overheid-aandelen 

Private enterprises are allowed to compete with public enterprises with respect to market access, credits, and other business operations such as licenses and supplies.  Government-appointed supervisory boards oversee state-owned enterprises (SOEs).  In some instances involving large investment decisions, SOEs must consult with the cabinet ministry that oversees them.  As with any other firm in the Netherlands, SOEs must publish annual reports, and their financial accounts must be audited. The Netherlands fully adheres to the OECD Guidelines on Corporate Governance of SOEs.

Privatization Program

There are no ongoing privatization programs in the Netherlands.

Although political violence rarely occurs in the highly stable and consensus-oriented Dutch society, public debate on issues such as immigration and integration policy has been contentious.  While rare, there have been some politically and religiously inspired acts of violence.

The Dutch economy derives much of its strength from a stable business climate that fosters partnerships among unions, business organizations, and the government.  Strikes are rarely used as a way to resolve labor disputes.

* Source for Host Country Data: Netherlands Bureau for Economic Policy Analysis (CPB): GDP, Dutch Central Bank (DNB): FDI.

Note 1: Inbound stock/GDP ratio is calculated with exclusion of Special Financial Institutions (SFI) that transfer corporate global funds; including SFI, the ratio inbound stock of FDI/GDP is 480%.

Note 2: When excluding corporate SFI funds from inward and outward FDI stocks in the Netherlands, the numbers for 2019 show U.S. FDI in the Netherlands of $207 billion and Dutch FDI in the U.S. of $351 billion.

Note 3: For conversion of euros to USD, the Treasury official exchange rate for 2019 is used: 0.893.

Policies Towards Foreign Direct Investment

Foreign investment in New Zealand is generally encouraged without discrimination. New Zealand has an open and transparent economy. Some restrictions do apply in a few areas of critical interest including certain types of land, significant business assets, and fishing quotas. These restrictions are facilitated by a screening process conducted by the Overseas Investment Office (OIO), described in the next section.

New Zealand has a rapidly expanding network of bilateral investment treaties and free trade agreements that include investment components. New Zealand also has a well-developed legal framework and regulatory system, and the judicial system is generally effective in enforcing property and contractual rights. Investment disputes are rare, and there have been no major disputes in recent years involving U.S. companies.

The Labour Party-led government elected in 2017 and re-elected in 2020 has continued its program of tighter screening of some forms of foreign investment and has moved to restrict the availability of permits for oil and gas exploration. It has also focused on different aspects of trade agreement negotiation compared with the previous government, such as an aversion to investor-state dispute settlement provisions.

The implementation of the CPTPP has eased the criteria for partner nations to seek approval for certain investments in New Zealand by increasing the monetary threshold when government approval is required. This has also been triggered by New Zealand’s ‘most favored nation’ obligation in their FTA with China once the upgrade to the 2008 agreement enters into force. A separate bilateral agreement with Australia allows for its threshold to be reviewed each year and is significantly higher before triggering the need for approval. Separate agreements with Australia and Singapore exempt their respective citizens from restrictions introduced in 2018 on the purchase of New Zealand residential property by non-residents. In this respect in the absence of a similar free-trade agreement with New Zealand, certain investments by United States citizens can be subject to higher scrutiny.

In 2019 the OIO approved 139 overseas investment applications, up from 94 the previous year. Net investment increased slightly from NZD 3.5 billion (USD 2.3 billion) to NZD 3.8 billion (USD 2.5 billion) while the total value of assets of approved applications more than doubled to NZD 2.3 billion (USD 1.5 billion) in 2018 to NZD 5.2 billion (USD 3.4 billion) in 2019. Over 22,000 hectares [86.7 square miles; 55,500 acres] of land was sold, leased, or granted forestry rights from 119 approvals. In 2018 there were fewer approvals (64) securing more land area of almost 50,000 hectares [193.1 square miles; 123,600 acres].

Crown entity New Zealand Trade and Enterprise (NZTE) is New Zealand’s primary investment promotion agency. In addition to its New Zealand central and regional presence, it has 40 international locations, including four offices in the United States. Approximately half of the NZTE staff is based overseas. The NZTE helps investors develop their plans, access opportunities, and facilitate connections with New Zealand-based private sector advisors: https://www.nzte.govt.nz/page/how-nzte-works-with-customers Once investors independently complete their negotiations, due diligence, and receive confirmation of their investment, the NZTE offers aftercare advice. The NZTE aims to channel investment into regional areas of New Zealand to build capability and to promote opportunities outside of the country’s main cities.

Under certain conditions, foreign investors can bid alongside New Zealand businesses for contestable government funding for research and development (R&D) grants. For more see: https://www.mbie.govt.nz/science-and-technology/science-and-innovation/international-opportunities/new-zealand-r-d/ . Most of the programs which are operated by NZTE, the Ministry of Business, Innovation, and Employment (MBIE), and Callaghan Innovation, provide financial assistance, and support through skills and knowledge, or supporting innovative business ventures in the early stages of operation. For more see: https://www.business.govt.nz/how-to-grow/getting-government-grants/what-can-i-get-help-with/ .

The New Zealand-United States Council, established in 2001, is a non-partisan organization funded by business and the government. It fosters a strong and mutually beneficial relationship between New Zealand and the United States through both government-to-government contacts, and business-to-business links. The American Chamber of Commerce in Auckland provides a platform for New Zealand and U.S. businesses to network among themselves and with government agencies.

Limits on Foreign Control and Right to Private Ownership and Establishment

The New Zealand government does not discriminate against U.S. or other foreign investors in their rights to establish and own business enterprises.  It has placed separate limitations on foreign ownership of airline Air New Zealand and telecommunications infrastructure provider Chorus Limited.

Air New Zealand’s constitution requires that no person who is not a New Zealand national hold 10 percent or more of the voting rights without the consent of the Minister of Transport. There must be between five and eight board directors, at least three of which must reside in New Zealand. In 2013 the government sold a partial stake in Air New Zealand reducing its equity interest from 73 percent to 53 percent.

The establishment of telecommunications infrastructure provider Chorus resulted from a demerger of provider Spark New Zealand Limited (Spark) in 2011. In 2019, Spark amended its constitution removing the requirement that half of the Spark Board be New Zealand citizens and in accordance with NZX Listing Rules, requires at least two directors be ordinarily resident in New Zealand.

Chorus owns most of the telephone infrastructure in New Zealand, and provides wholesale services to telecommunications retailers, including Spark. The demerger freed Spark from its foreign ownership restrictions allowing it to compete with other retail providers which do not have such restrictions. The foreign ownership restrictions apply to Chorus as a natural monopoly and infrastructure provider.

Chorus’s constitution requires at least half of its Board be New Zealand citizens. It requires no single shareholder may own more than 10 percent of the shares and no person who is not a New Zealand national may own more than 49.9 percent of the shares without the approval of the Minister of Finance. To date, approval has been granted to two private entities to exceed the 10 percent threshold, increasing their interest in Chorus up to 15 percent.

New Zealand otherwise screens overseas investment to ensure quality investments are made that benefit New Zealand. Failure to obtain consent before purchase can lead to significant financial penalties. The Overseas Investment Office (OIO) is responsible for screening foreign investment that falls within certain criteria specified in the Overseas Investment Act 2005.

The OIO requires consent be obtained by overseas persons wishing to acquire or invest in significant business assets, sensitive land, farmland, or fishing quota, as defined below.

A “significant business asset” includes: acquiring 25 percent or more ownership or controlling interest in a New Zealand company with assets exceeding NZD 100 million (USD 65 million); establishing a business in New Zealand that will be operational more than 90 days per year and expected costs of establishing the business exceeds NZD 100 million; or acquiring business assets in New Zealand that exceed NZD 100 million.

OIO consent is required for overseas investors to purchase “sensitive land” either directly or acquiring a controlling interest of 25 percent or more in a person who owns the land. Non-residential sensitive land includes land that: is non-urban and exceeds five hectares (12.35 acres); is part of or adjoins the foreshore or seabed; exceeds 0.4 hectares (1 acre) and falls under of the Conservation Act of 1987 or it is land proposed for a reserve or public park; is subject to a Heritage Order, or is a historic or wahi tapu area (sacred Maori land); or is considered “special land” that is defined as including the foreshore, seabed, riverbed, or lakebed and must first be offered to the Crown. If the Crown accepts the offer, the Crown can only acquire the part of the “sensitive land” that is “special land,” and can acquire it only if the overseas person completes the process for acquisition of the sensitive land.

Where a proposed acquisition involves “farm land” (land used principally for agricultural, horticultural, or pastoral purposes, or for the keeping of bees, poultry, or livestock), the OIO can only grant approval if the land is first advertised and offered on the open market in New Zealand to citizens and residents. The Crown can waive this requirement in special circumstances at the discretion of the relevant government Minister.

Commercial fishing in New Zealand is controlled by the Fisheries Act, which sets out a quota management system that prohibits commercial fishing of certain species without the ownership of a fishing quota which specifies the quantity of fish that may be taken. OIO legislation together with the Fisheries Act, requires consent from the relevant Ministers in order for an overseas person to obtain an interest in a fishing quota, or an interest of 25 percent or more in a business that owns or controls a fishing quota.

Investors subject to OIO screening must demonstrate in their application they meet the criteria for the “Investor Test” and the “Benefit to New Zealand test.” The former requires the investor to display the necessary business experience and acumen to manage the investment, demonstrate financial commitment to the investment, and be of “good character” meaning a person who would be eligible for a permit under New Zealand immigration law.

The “Benefit to New Zealand test” requires the OIO assess the investment against 21 factors, which are set out in the Overseas Investment Act and Regulations. The OIO applies a counterfactual analysis to benefit factors where such analysis can be applied, and the onus is upon the investor to consider the likely counterfactual if the overseas investment does not proceed. Economic factors are given weighting, particularly if the investment will create new job opportunities, retain existing jobs, and lead to greater efficiency or productivity domestically.

The screening thresholds are significantly higher for Australian investors and are reviewed each year in accordance with the 2013 Protocol on Investment to the New Zealand-Australia Closer Economic Relations Trade Agreement. In the 2020 calendar year Australian non-government investors are screened at NZD 536 million (USD 348 million) and Australian government investors at NZD 112 million (USD 73 million).

New Zealand and the People’s Republic of China (PRC) concluded negotiations on an upgrade to their FTA in November 2019. A side letter confirms higher screening thresholds applicable to investments from the PRC in New Zealand significant business assets, following the entry into force of CPTPP. Due to New Zealand’s “Most Favored Nation” obligations in the existing 2008 bilateral FTA, PRC non-government investments in New Zealand significant business assets are screened at NZD 200 million (USD 130 million), and PRC government investments in New Zealand significant business assets are screened at NZD100 million (USD 65 million).

New Zealand screens overseas investment mainly for economic reasons but has legislation that outlines a framework to protect the national security of telecommunication networks. The Telecommunications (Interception and Security) Act 2013 (TICSA) sets out the process for network operators to work with the Government Communications Security Bureau (GCSB) – in accordance with Section 7 – to prevent, sufficiently mitigate, or remove security risks arising from the design, build, or operation of public telecommunications networks; and interconnections to or between public telecommunications networks in New Zealand or with networks overseas.

In 2019 as part of the second phase of overseas investment reform, the Government consulted on and released details for the addition of a National Interest test that will be added to the screening process to protect New Zealand assets deemed sensitive and “high-risk.” This will be discussed in the next chapter.

Other Investment Policy Reviews

New Zealand has not conducted an Investment Policy Review through the OECD or the United Nations Conference on Trade and Development (UNCTAD) in the past three years. New Zealand’s last Trade Policy Review was in 2015 and the next will take place in 2021: https://www.wto.org/english/tratop_e/tpr_e/tp416_e.htm .

Business Facilitation

The New Zealand government has shown a strong commitment to continue efforts to streamline business facilitation. According to the World Bank’s Ease of Doing Business 2020 report New Zealand is ranked first in “Starting a Business,” and “Getting Credit,” and is ranked second for “Registering Property.”

There are no restrictions on the movement of funds into or out of New Zealand, or on the repatriation of profits. No additional performance measures are imposed on foreign-owned enterprises, other than those that require OIO approval. Overseas investors must adhere to the normal legislative business framework for New Zealand-based companies, which includes the Commerce Act 1986, the Companies Act 1993, the Financial Markets Conduct Act 2013, the Financial Reporting Act 2013, and the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (AML/CFT). The Contract and Commercial Law Act 2017 was passed to modernize and consolidate existing legislation underpinning contracts and commercial transactions.

The tightening of anti-money laundering laws has impacted the cross-border movement of remittance orders from New Zealanders and migrant workers to the Pacific Islands. Banks, non-bank institutions, and people in occupations that typically handle large amounts of cash, are required to collect additional information about their customers and report any suspicious transactions to the New Zealand Police. If an entity is unable to comply with the AML/CFT in its dealings with a customer, it must not do business with that person. For banks this would mean not processing certain transactions, withdrawing the banking products and services it offers, and choosing not to have that person as a customer. This has resulted in some banks charging higher fees for remittance services in order to reduce their exposure to risks, which has led to the forced closing of accounts held by some money transfer operators. Phase 1 sectors which include financial institutions, remitters, trust and company service providers, casinos, payment providers, and lenders have had to comply with the AML/CFT since 2013. Phase 2 sectors which include lawyers, conveyancers, accountants, bookkeepers, and realtors have had to comply from January 2019.

In order to combat the increasing use of New Zealand shell companies for illegal activities, the Companies Amendment Act 2014 and the Limited Partnerships Amendment Act 2014 introduced new requirements for companies registering in New Zealand. Companies must have at least one director that either lives in New Zealand or lives in Australia and is a director of a company incorporated in Australia. New companies incorporated must provide the date and place of birth of all directors and provide details of any ultimate holding company. The Acts introduced offences for serious misconduct by directors that results in serious losses to the company or its creditors and aligns the company reconstruction provisions in the Companies Act with the Takeovers Act 1993 and the Takeovers Code Approval Order 2000.

The Companies Office holds an overseas business-related register and provides that information to persons in New Zealand who intend to deal with the company or to creditors in New Zealand. The information provided includes where and when the company was incorporated, if there is any restriction on its ability to trade contained in its constitutional documents, names of the directors, its principal place of business in New Zealand, and where and on whom documents can be served in New Zealand. For further information on how overseas companies can register in New Zealand: https://companies-register.companiesoffice.govt.nz/help-centre/starting-a-company/ 

The New Zealand Business Number (NZBN) Act 2016 allows the allocation of unique identifiers to eligible entities to enable them to conduct business more efficiently, interact more easily with the government, and to protect the entity’s security and confidentiality of information. All companies registered in New Zealand have had NZBNs since 2013 and are also available to other types of businesses such as sole traders and partnerships.

Tax registration is recommended when the investor incorporates the company with the Companies Office, but is required if the company is registering as an employer and if it intends to register for New Zealand’s consumption tax, the Goods and Services Tax (GST), which is currently 15 percent. Companies importing into New Zealand or exporting to other countries which have a turnover exceeding NZD 60,000 (USD 39,000) over a 12-month period or expect to pass NZD 60,000 in the next 12 months, must register for GST. Non-resident businesses that conduct a taxable activity supplying goods or services in New Zealand and make taxable supplies in New Zealand, must register for GST: https://www.ird.govt.nz/gst/registering-for-gst . From 2014, non-resident businesses that do not make taxable supplies in New Zealand have been able to claim GST if they meet certain criteria.

To comply with GST registration, overseas companies need two pieces of evidence to prove their customer is a resident in New Zealand, such as their billing address or IP address, and a GST return must be filed every quarter even if the company does not make any sales.

In 2016 mandatory GST registration was extended to non-resident suppliers of “remote services” to New Zealand customers, if they meet the NZD 60,000 annual sales threshold. In 2019 legislation was enacted that requires non-resident suppliers of “low-value” import goods destined for New Zealand to register for GST, if they meet the NZD 60,000 annual sales threshold. Both are discussed in a later section.

Outward Investment

The New Zealand government does not place restrictions on domestic investors to invest abroad.

NZTE is the government’s international business development agency. It promotes outward investment and provides resources and services for New Zealand businesses to prepare for export and advice on how to grow internationally. The Ministry of Foreign Affairs and Trade (MFAT) and Customs New Zealand each operates business outreach programs that advise businesses on how to maximize the benefit from FTAs to improve the competitiveness of their goods offshore, and provides information on how to meet requirements such as rules of origin.

Transparency of the Regulatory System

The New Zealand government policies and laws governing competition are transparent, non-discriminatory, and consistent with international norms. New Zealand ranks high on the World Bank’s Global Indicators of Regulatory Governance, scoring 4.25 out of a possible 5, but is marked down in part for a lack of transparency in some departments’ individual forward regulatory plans, and the development of the government’s annual legislative program (for primary laws), for which the Ministers responsible do not make public.

While regulations are not in a centralized location in a form similar to the United States Federal Register, the New Zealand government requires the major regulatory departments to publish an annual regulatory stewardship strategy.

Draft bills and regulations including those relating to FTAs and investment law, are generally made available for public comment, through a public consultation process. In a few instances there has been criticism of New Zealand governments choosing to follow a “truncated” or shortened public consultation process or adding a substantive legislative change after public consultation through the process of adding a Supplementary Order Paper to the Bill.

The Regulatory Quality Team within the New Zealand Treasury is responsible for the strategic coordination of the Government’s regulatory management system. Treasury exercises stewardship over the regulatory management system to maintain and enhance the quality of government-initiated regulation. The Treasury’s responsibilities include the oversight of the performance of the regulatory management system as a whole and making recommendations on changes to government and Parliamentary systems and processes. These functions complement the Treasury’s role as the government’s primary economic and fiscal advisor. New Zealand’s seven major regulatory departments are the Department of Internal Affairs, IRD, MBIE, Ministry for the Environment, Ministry of Justice, the Ministry for Primary Industries, and the Ministry of Transport.

In recent years there has been a revision to the Regulatory Impact Assessment (RIA) requirements in order to help New Zealand’s regulatory framework keep up with global standards. To improve transparency in the regulatory process, RIAs are published on the Treasury’s website at the time the relevant bill is introduced to Parliament or the regulation is published in the newspaper, or at the time of Ministerial release. An RIA provides a high-level summary of the problem being addressed, the options and their associated costs and benefits, the consultation undertaken, and the proposed arrangements for implementation and review.

MBIE is responsible for the stewardship of 16 regulatory systems covering about 140 statutes. In 2018 the government introduced three omnibus bills that contain amendments to legislation administered by MBIE, including economic development, employment relations, and housing: https://www.mbie.govt.nz/cross-government-functions/regulatory-stewardship/regulatory-systems-amendment-bills/. The government’s objective with this package of legislation is to ensure that they are effective, efficient, and accord with best regulatory practice by providing a process for making continuous improvements to regulatory systems that do not warrant standalone bills. In November 2019, the Regulatory Systems (Economic Development) Amendment Act 2019 passed and amended about 14 Acts including laws regarding business insolvency, takeovers, trademarks, and limited partnerships.

Most standards are developed through Standards New Zealand, which is a business unit within MBIE, operating on a cost-recovery basis rather than a membership subscription service as previously. The Standards and Accreditation Act 2015 set out the role and function of the Standards Approval Board which commenced from March 2016. Most standards in New Zealand are set in coordination with Australia.

The Resource Management Act 1991 (RMA) has drawn criticism from foreign and domestic investors as a barrier to investment in New Zealand. The RMA regulates access to natural and physical resources such as land and water. Critics contend that the resource management process mandated by the law is unpredictable, protracted, and subject to undue influence from competitors and lobby groups. In some cases, companies have been found to exploit the RMA’s objections submission process to stifle competition. Investors have raised concerns that the law is unequally applied between jurisdictions because of the lack of implementing guidelines. The Resource Management Amendment Act 2013 and the Resource Management (Simplifying and Streamlining) Amendment Act 2009 were passed to help address these concerns.

The Resource Legislation Amendment Act 2017 (RLAA) is considered the most comprehensive set of reforms to the RMA. It contains almost 40 amendments and makes significant changes to five different Acts including the RMA and the Public Works Act (PWA) 1981. Its aim is to balance environmental management with the need to increase capacity for housing development and to align resource consent processes in a consistent manner among New Zealand’s 78 local councils, by providing a stronger national direction, a more responsive planning process, and improved consistency with other legislation. Further amendments to the RMA are expected during 2020 to reduce regulatory barriers to reduce the time for significant infrastructure projects to gain approval.

The PWA enables the Crown to acquire land for public works by agreement or compulsory acquisition and prescribes landowner compensation. New Zealand continues to face a significant demand for large-scale infrastructure works and the PWA is designed to ensure project delivery and enable infrastructure development. In December 2019 a NZD 12 billion (USD 7.8 billion) upgrade fund was announced, amounting to 4 percent of New Zealand’s GDP. Further funding was added in the Government’s Budget delivered in May 2020. Compulsory acquisition of private land is exercised only after an acquiring authority has made all reasonable endeavors to negotiate in good faith the sale and purchase of the owner’s land, without reaching an agreement. The landowner retains the right to have their objection heard by the Environment Court, but only in relation to the taking of the land, not to the amount of compensation payable. The RLAA amendment to the PWA aims to improve the efficiency and fairness of the compensation, land acquisition, and Environment Court objection provisions.

The Land Transfer Act 2018 aims to simplify and modernize the law to make it more accessible and to add certainty around property rights. It empowers courts with limited discretion to restore a landowner’s registered title in cases of manifest injustice.

The Government of New Zealand is generally transparent about its public finances and debt obligations. The annual budget for the government and its departments publish assumptions, and implications of explicit and contingent liabilities on estimated government revenue and spending.

International Regulatory Considerations

In recent years, the Government of New Zealand has introduced laws to enhance regulatory coordination with Australia as part of their Single Economic Market agenda. In February 2017, the Patents (Trans-Tasman Patent Attorneys and Other Matters) Amendment Act took effect creating a single body to regulate patent attorneys in both countries. Other areas of regulatory coordination include insolvency law, financial reporting, food safety, competition policy, consumer policy and the 2013 Trans-Tasman Court Proceedings and Regulatory Enforcement Treaty, which allows the enforcement of civil judgements between both countries.

The Privacy Bill which if enacted will repeal the existing Privacy Act 1993 aims to bring New Zealand privacy law into line with international best practice, including the 2013 OECD Privacy Guidelines and the European General Data Protection Regulation (GDPR).

In 2016 the Financial Markets Authority issued the Disclosure Using Overseas Generally Accepted Accounting Principles (GAAP) Exemption and the Overseas Registered Banks and Licensed Insurers Exemption Notice. They ease compliance costs on overseas entities by allowing them under certain circumstances to use United States statutory accounting principles (overseas GAAP) rather than New Zealand GAAP, and the opportunity to use an overseas approved auditor rather than a New Zealand qualified auditor.

In August 2019, the government passed the Financial Markets (Derivatives Margin and Benchmarking) Reform Amendment Act to better align New Zealand’s financial markets law with new international regulations, to help strengthen the resilience of global financial markets. The Act amended several pieces of legislation relating to financial market regulation to help financial institutions maintain access to offshore funding markets and help ensure institutions – that rely on derivatives to hedge against currency and other risks – can invest and raise funds efficiently.

New Zealand is a Party to WTO Agreement on Technical Barriers to Trade (TBT). Standards New Zealand is responsible for operating the TBT Enquiry Point on behalf of MFAT. From 2016, Standards New Zealand became a business unit within MBIE administered under the Standards and Accreditation Act 2015. Standards New Zealand establishes techniques and processes built from requirements under the Act and from the International Organization for Standardization.

The Standards New Zealand TBT Enquiry Point operates as a service for producers and exporters to search for proposed TBT Notifications and associated documents such as draft or actual regulations or standards. They also provide contact details for the Trade Negotiations Division of MFAT to respond to businesses concerned about proposed measures. https://www.standards.govt.nz/develop-standards/international-engagement/technical-barriers-to-trade-tbt/ 

The government has a dedicated website to provide a centralized point of contact for businesses to access information and support on non-tariff trade barriers (NTB). New Zealand exporters can report issues, seek government advice and assistance with NTBs and other export issues. Exporters can confidentially register a trade barrier, and the website serves to track and trace the assignment and resolution across agencies on their behalf. It also provides the government with an accurate and timely report of NTBs and other trade issues encountered by exporters, and involves the participation of Customs, MFAT, MPI, MBIE, and NZTE. For more see: https://tradebarriers.govt.nz/ 

New Zealand ratified the WTO Trade Facilitation Agreement (TFA) in 2015 and it entered into force in February 2017. New Zealand was already largely in compliance with the TFA which is expected to benefit New Zealand agricultural exporters and importers of perishable items to enhanced procedures for border clearances.

Legal System and Judicial Independence

New Zealand’s legal system is derived from the English system and comes from a mix of common law and statute law. The judicial system is independent of the executive branch and is generally transparent and effective in enforcing property and contractual rights. The highest appeals court is a domestic Supreme Court, which replaced the Privy Council in London and began hearing cases July 1, 2004. New Zealand courts can recognize and enforce a judgment of a foreign court if the foreign court is considered to have exercised proper jurisdiction over the defendant according to private international law rules. New Zealand has well defined and consistently applied commercial and bankruptcy laws. Arbitration is a widely used dispute resolution mechanism and is governed by the Arbitration Act of 1996, Arbitration (Foreign Agreements and Awards) Act of 1982, and the Arbitration (International Investment Disputes) Act 1979.

Legislation to modernize and consolidate laws underpinning contracts and commercial transactions came into effect in September 2017. The Contract and Commercial Law Act 2017 consolidates and repeals 12 acts that date between 1908 and 2002. The Private International Law (Choice of Law in Tort) Act, passed in December 2017, clarifies which jurisdiction’s law is applicable in actions of tort and abolishes certain common law rules, and establishes the general rule that the applicable law will be the law of the country in which the events constituting the tort in question occur.

Laws and Regulations on Foreign Direct Investment

Overseas investments in New Zealand assets are screened only if they are defined as sensitive according to the definitions within the Overseas Investment Act 2005, as mentioned in the previous section. The OIO, a dedicated unit located within Land Information New Zealand (LINZ), administers the Act. The Overseas Investment Regulations 2005 set out the criteria for assessing applications, provide the framework for applicable fees, and criteria to determine if the investment will benefit New Zealand. Ministerial Directive Letters are issued by the Government to instruct the OIO on their general policy approach, their functions, powers, and duties as regulator. Letters have been issued in December 2010 and November 2017. Substantive changes, such as inclusion of another asset type within “sensitive land,” requires a legislative amendment to the Act. New Zealand companies seeking capital injections from overseas investors that require OIO approval, must meet certain criteria regarding disclosure to shareholders and fulfil other responsibilities under the Companies Act 1993.

The government ministers for finance, land information, and primary industries (where applicable) are responsible for assessing OIO recommendations and can choose to override OIO recommendations on approved applications. Ministers’ decisions on OIO applications can be appealed by the applicant in the New Zealand High Court. Ministers have the power to confer a discretionary exemption from the requirement for a prospective investor to seek OIO consent under certain circumstances. For more see: http://www.linz.govt.nz/regulatory/overseas-investment 

The OIO Regulations set out the fee schedule for lodging new applications which can be costly and current processing times regularly exceed six months. In recent years, some foreign investors have abandoned their applications, due to the costs and time frames involved in obtaining OIO consent.

The OIO monitors foreign investments after approval. All consents are granted with reporting conditions, which are generally standard in nature. Investors must report regularly on their compliance with the terms of the consent. Offenses include: defeating, evading, or circumventing the OIO Act; failure to comply with notices, requirements, or conditions; and making false or misleading statements or omissions. If an offense has been committed under the Act, the High Court has the power to impose penalties, including monetary fines, ordering compliance, and ordering the disposal of the investor’s New Zealand holdings.

The LINZ website reports on enforcement actions they have taken against foreign investors, including the number of compliance letters issued, the number of warnings and their circumstances, referrals to professional conduct body in relation to an OIO breach, and disposal of investments. For more see: https://www.linz.govt.nz/overseas-investment/enforcement/enforcement-action-taken .

In February 2020 New Zealand reported its first conviction under the Overseas Investment Act. The offender was charged for obstructing an OIO investigation which was initiated because he had not obtained OIO consent for his property purchase and for later submitting a fraudulent application.

In 2017 the Government announced a reform of the Overseas Investment Act shortly after being elected and has already implemented Phase 1 reforms with strengthened requirements for screening foreign investment in residential houses, building residential housing developments, and farmland acreage. Screening for investments in forestry were eased slightly to help meet the Government’s One Billion Tree policy. Phase 2 began in 2019 when the Government consulted on and released details for the introduction of a National Interest test to the screening process to protect New Zealand assets deemed sensitive and “high-risk.”

In December 2017, the government introduced regulatory changes that place greater emphasis on the assessment of significant economic benefits to New Zealand. For forestry investments, the OIO is required to place importance on investments that result in increased domestic processing of wood and advance government strategies. For rural land, importance is placed on the generation of economic benefits which were previously seldom applied for lifestyle rural property purchases that previously relied on non-economic benefits to gain OIO approval.

New rules reduced the area threshold for foreign purchases of rural land so that OIO approval is required for rural land of an area over five hectares, rather than the previous metric of farm land “more than ten times the average farm size,” which was about 7,146 hectares for sheep and beef farms, and 1,987 hectares for dairy farms. Foreign investors can still purchase rural land less than five hectares, but the government said it intends to introduce other measures to discourage “land bankers,” or investors holding onto land for speculative purposes.

The government issued new rules regarding residency for overseas investors intending to reside in New Zealand, that they move within 12 months and become ordinarily resident within 24 months.

In 2018, the Overseas Investment Amendment Act passed in order to help address housing affordability and reduce speculative behavior in the housing market. The 2005 Act was amended to bring residential land within the category of “sensitive land.” Residential land is defined as land that has a category of residential or lifestyle within the relevant district valuation roll; and includes a residential flat (apartment) in a building owned by a flat-owning company which could be on residential or non-residential land.

Since October 2018, the Overseas Investment Act generally requires persons who are not ordinarily resident in New Zealand to get OIO consent to purchase residential homes on residential land. Australian and Singaporean citizens are exempt due to existing bilateral trade agreements. To avoid breaching the Act, contracts to purchase residential land must be conditional on getting consent under the Act – entering into an unconditional contract will breach the Act. All purchasers of residential land (including New Zealanders) will need to complete a statement confirming whether the Act applies, and solicitors/conveyancers cannot lodge land transfer documents without that statement.

Overseas persons wishing to purchase one home on residential land will need to fulfil a “Commitment to Reside Test.” Applicants must hold the appropriate non-temporary visa (those on student visas, work visas, or visitor visas cannot apply), have lived in New Zealand for the immediate preceding 12 months and intend to reside in the property being purchased. If the applicant stops living in New Zealand they will have to sell the property. OIO applicants not intending to reside will generally need to show: (1) they will convert the land to another use and demonstrate this would have wider benefits to New Zealand; or (2) they will be adding to New Zealand’s housing supply. Applicants seeking approval under the latter – the “Increased Housing Test” – must intend to increase the number of dwellings on the property by one or more, and they cannot live in the dwellings once built (the “non-occupation condition”). Applicants must then on-sell the dwellings, unless they are building 20 or more new residential dwellings and they intend to provide a shared equity, rent-to-buy, or rental arrangement (the “On-Sale Condition”).

The Amendment also imposes restrictions on overseas persons buying into new residential property developments. Where pre-sales of the new residential dwellings are an essential aspect of the development funding, overseas purchasers may be able to rely on the “Increased Housing” Test, although they will be subject to the on-sale and non-occupation conditions. Otherwise, individual purchasers must apply for OIO consent and meet the “commitment to reside test,” or make their purchase conditional on receiving an “exemption certificate” held by an apartment developer. According to the OIO Regulations, developers can apply for an exemption certificate allowing them to sell 60 percent of the apartments “off the plan” to overseas buyers without those buyers requiring OIO consent but whom would have to meet the non-occupation condition.

Ministers may exercise discretion to waive the on-sale condition if an overseas person is applying for consent to acquire an ownership interest in an entity that holds residential land in New Zealand; if they are acquiring less than a 50 percent ownership interest; or if they are acquiring an indirect ownership interest, (e.g. through another entity). Exemptions can also apply for long-term accommodation facilities, hotel lease-back arrangements, retirement village developments, and for network utility companies needing to acquire residential land to provide essential services. Over 2019 the OIO issued several warnings and fines to overseas buyers of residential property who had failed to apply for OIO consent.

The Labour-led government formed after 2017 elections (reelected in 2020) indicated that forestry would be a priority in boosting regional development. In March 2018, the government announced forestry cutting rights be brought into the OIO screening regime, similar to the requirements for investment in leasehold and freehold forestry land. In addition to residential land, the Overseas Investment Amendment Act 2018 classified “forestry rights” within the asset class of “sensitive land.”

Overseas investors wanting to purchase up to 1,000 hectares of forestry rights per year or any forestry right of less than three years duration, do not generally require OIO approval.

Overseas investors can apply for consent to buy or lease land that is in forestry, or land to be used for forestry, or to buy forestry rights. In addition to meeting the “Benefit to New Zealand Test,” applicants wishing to buy or lease land for forestry purposes, convert farmland to forestry land, or purchase forestry rights, must meet either the “Special Forestry Test,” or the “Modified Benefits Test.”

The Special Forestry Test is the most streamlined test, and is used to buy forestry land and continue to operate it with existing arrangements remaining in place, such as public access, protection of habitat for indigenous plants and animals, and historic places, as well as log supply arrangements. The investor would be required to replant after harvest, unless exempted, and use the land exclusively or nearly exclusively for forestry activities. The land can be used for accommodation only to support forestry activities.

The Modified Benefits Test is suitable for investors who will use the land only for forestry activities, but who cannot maintain existing arrangements relating to the land, such as public access. The investor would need to pass the Benefit to New Zealand Test, replant after harvest, and use the land exclusively or nearly exclusively for forestry activities.

By 2020 the OIO issued several warnings and fines to overseas investors purchasing forestry rights for failing to comply with conditions or failing to apply for OIO approval.

[Phase 2 Reforms]

In April 2019, the government signaled it would be considering a “national interest” restriction on foreign investment, and issued a document for public consultation, later agreeing upon New Zealand’s most strategically important assets in November. The government aims to bring New Zealand to apply a National Interest Test to overseas investors wishing to purchase New Zealand high-risk, sensitive or monopoly assets such as ports and airports, telecommunications infrastructure, electricity and other critical infrastructure.

Current legislation does not consider National Security or Public Order investments under NZD 100 million (USD 65 million).

A “call in” power would apply to the sale of New Zealand’s most strategically important assets, such as firms developing military technology and direct suppliers to New Zealand defense and security agencies. This will apply to assets not currently screened under the Overseas Investment Act. The tests could also be used to control investments in significant media entities if they are likely to damage New Zealand security or democracy.

Phase 2 includes other measures to protect New Zealand’s interests announced in November 2019, such as equipping the OIO with enhanced enforcement powers and increasing the maximum penalties for non-compliance NZD 300,000 (USD 195,000) to NZD 10 million (USD 6.5 million) for corporates. The legislation will also include a requirement that overseas investors in farmland show substantial benefit to New Zealand, by adding something substantially new or creating additional value to the New Zealand economy. In recognition of complaints regarding cost and time to gain OIO consent, the government will set specific timeframes to give investors greater certainty and exempt a range of low risk transactions, such as some involving companies that are majority owned and controlled by New Zealanders.

There has been controversy and concern about water extraction investment by overseas investors in New Zealand, particularly water bottling to export, earning overseas companies profits from a high-value New Zealand resource without paying a charge. Under Phase 2 the Government will require overseas investors in water extraction take into consideration the environmental, economic, and cultural impact of their investment, and its effect on local water quality and the overall sustainability of a water bottling enterprise.

In February 2020, Treasury released all documents online, including the Cabinet Paper that recommended the Phase 2 reform.

[Phase 2 Reforms – Fast-Tracked Legislation]

The Government of New Zealand was quick to recognize the risks posed by a COVID-19 recession and fast-tracked implementation of Overseas Investment Act (OIA) Phase 2 reforms, which went into effect on June 16. These reforms grant the government increased oversight and approval authority for foreign investments, which may have fallen in value during the pandemic, to protect critical infrastructure such as telecoms, ports, airports, and dual use/military related sensitive technology, as well as media.

The changes bring forward the introduction of a national interest test to strategically important assets, and the temporary application of that test to any foreign investments, regardless of dollar value that result in more than a 25 percent ownership interest, or that increases an existing interest to or beyond 50 percent, 75 percent or 100 percent in a New Zealand business.

This includes purchases by “fundamentally New Zealand companies” and small changes in existing shareholdings. In addition, the Government will use regulations to extend existing exemptions and remove screening from two further classes of low risk lending and portfolio management transactions.

In addition, as of March 22, 2021, the “New Investor Test” is in force which includes Twelve character and capability factors including a review for convictions resulting in imprisonment, penalties for tax evasion, corporate fines, and civil pecuniary penalties. The test is satisfied when none of these factors are established or, if a factor is met, the decision-maker is satisfied that this does not make an investor unsuitable to own or control a sensitive New Zealand asset.

[Non-OIO Legislation Governing Foreign Investment]

Outside of the OIO framework, the previous government passed the Taxation (Bright-line Test for Residential Land) Bill to apply to domestic and foreign purchasers of residential land in part to counter criticism New Zealand’s lack of tax on capital gains was fueling house price inflation. Under this Act, properties bought after October 1, 2015 will accrue tax on any gain earned if the house is bought and sold within two years, unless it is the owner’s main home. The bill requires foreign purchasers to have both a New Zealand bank account and an IRD tax number and will not be entitled to the “main home” exception. The purchaser must also submit other taxpayer identification number held in countries where they pay tax on income. To assist the IRD in ensuring investors – foreign and domestic – meet their tax obligations, legislation was passed in 2016 that empowered LINZ to collect additional information when residential property is bought and sold, and to pass this information to the IRD.

In March 2018, the new government passed legislation to extend the “bright-line test” from two to five years as a measure to further deter property speculation in the New Zealand housing market.

In November 2018, the government passed the Crown Minerals (Petroleum) Amendment Act, to stop new exploration permits being granted offshore and onshore outside of the Taranaki province on the west coast of the North Island. The policy is part of the government’s efforts to transition away from fossil fuels and achieve their goal to have net zero emissions by 2050. The annual Oil and Gas Block Offers program has been operational since 2012 to raise New Zealand’s profile among international investors in the energy and mining sector and has been a significant source of government revenue.

There are currently about 20 offshore permits covering 38,000 square miles that will have the same rights and privileges as before the law came into force and will continue operation until 2030. If those permit holders are successful in their exploration, the companies could extract oil and gas from the areas beyond 2030.

Competition and Anti-Trust Laws

The Commerce Act 1986 prohibits contracts, arrangements, or understandings that have the purpose, or effect, of substantially lessening competition in a market, unless authorized by the Commerce Commission, an independent Crown entity. Before granting such authorization, the Commerce Commission must be satisfied that the public benefit would outweigh the reduction of competition. The Commerce Commission has legislative power to deny an application for a merger or takeover if it would result in the new company gaining a dominant position in the New Zealand market.

In addition, the Commerce Commission enforces certain pieces of legislation that, through regulation, aim to provide the benefits of competition in markets with certain natural monopolies, such as the dairy, electricity, gas, airports, and telecommunications industries. In order to monitor the changing competitive landscapes in these industries, the Commerce Commission conducts independent studies, currently including fiber networks (https://comcom.govt.nz/regulated-industries/telecommunications/regulated-services/fibre-regulation/fibre-services-study ), mobile phones (https://comcom.govt.nz/regulated-industries/telecommunications/projects/mobile-market-study ), and retail petrol (https://comcom.govt.nz/about-us/our-role/competition-studies/market-study-into-retail-fuel ).

The Commerce Amendment Act of 2018 empowers the Commerce Commission to undertake market (“competition”) studies where this is in the public interest in order to improve the agency’s enforcement actions without having to go to court. The Government introduced a market studies power to align the Commerce Commission with competition authorities in similar jurisdictions. The Act allows settlements to be registered as enforceable undertakings so breaches can be quickly penalized by the courts and saves the Commission from the expense and uncertainty of litigation. The amendment also strengthens the information disclosure regulations for airports.

The Dairy Industry Restructuring Act of 2001 (DIR) established dairy co-operative Fonterra Co-operative Group Limited (Fonterra). The DIR is designed to manage Fonterra’s dominant position in the domestic dairy market, until sufficient competition has emerged. A review by the Commerce Commission in 2016 found competition insufficient, but the findings from a subsequent review in 2018 resulted in the introduction of the DIR Amendment Bill (No 3) which passed its first reading in August 2019, and was advanced to the Select Committee stage for scrutiny on March 20, 2020.

This amendment, if passed, will ease the requirement that Fonterra accept all milk from new suppliers, allowing the cooperative the option to refuse milk if it does not meet environmental standards or if it comes from newly converted dairy farms. The bill would also limit Fonterra’s discretion in calculating the base milk price.

The Commerce Commission is also charged with monitoring competition in the telecommunications sector. Under the 1997 WTO Basic Telecommunications Services Agreement, New Zealand has committed to the maintenance of an open, competitive environment in the telecommunications sector.

Following a four-year government review of the Telecommunications Act 2001, the Telecommunications (New Regulatory Framework) Amendment Act of 2018 establishes a regulatory framework for fiber fixed line access services; removes unnecessary copper fixed line access service regulation in areas where fiber is available; streamline regulatory processes; and provides more regulatory oversight of retail service quality. The amendment requires the Commerce Commission to implement the new regulatory regime by January 2022.

Chorus won government contracts to build 70 percent of New Zealand’s new ultra-fast broadband fiber-optic cable network and has received subsidies. Chorus is listed on the NZX stock exchange and the Australian Stock Exchange but is subject to foreign investment restrictions. From 2020, Chorus and the local fiber companies are required under their open access deeds to offer an unbundled mass-market fiber service on commercial terms.

The telecommunications service obligations (TSO) regulatory framework established under the Telecommunications Act of 2001 enables certain telecommunications services to be available and affordable. A TSO is established through an agreement under the Telecommunications Act between the Crown and a TSO provider. Currently there are two TSOs. Spark (supported by Chorus) is the TSO Provider for the local residential telephone service, which includes charge-free local calling. Sprint International is the TSO Provider for the New Zealand relay service for deaf, hearing impaired and speech impaired people. Under the Telecommunications (New Regulatory Framework) Amendment Act, the TSOs which apply to Chorus and Spark will cease to apply in areas which have fiber. Consumers in these areas will have access to affordable fiber-based landline and broadband services.

Radio Spectrum Management (RSM) is a business unit within MBIE that is responsible for providing advice to the government on the allocation of radio frequencies to meet the demands of emerging technologies and services. Spectrum is allocated in a manner intended to ensure that radio spectrum provides the greatest economic and social benefit to New Zealand society. The allocation of spectrum is a core regulatory issue for the deployment of 5G in New Zealand. The Commerce Commission completed a two-year study in September 2019 of mobile network operators (MNOs) in New Zealand in order to assess the process for 5G spectrum allocation and whether it will impact the ability of new mobile network operators to enter the market. It found no case to support regulatory intervention to promote a fourth national MNO to enter the market, but that the spectrum allocation process should not preclude new parties from obtaining spectrum.

In March 2019, the government announced it freed up space on the spectrum for a fourth mobile network operator to compete with the three existing ones. In order to do so, the three existing operators lost parts of their spectrum, for which sources criticized the government, claiming they supported competition in principle but questioned the ability of the New Zealand market to cope with another operator. The Government claims it needs to keep some of that spectrum in reserve to retain flexibility and it might be used for new technologies or by the emergency services network.

The Government’s first auction of 5G spectrum planned for 2020 – and ready for use by November 2022 – was cancelled in May 2020 due to the COVID-19 pandemic. The Government directly allocated spectrum to the three MNOs, with these rights expiring in October 2022 after which the scheme will switch to long-term rights that will be gained in a separate auction process. The government determined the allocations in such a way as to prevent a single operator to prevent monopolistic behavior, but it also to set aside spectrum to deal with potential Treaty of Waitangi issues. Vodafone announced in February 2021 Vodafone that they were the first telco in New Zealand to stage a widespread 5G fixed-wireless access 5G launch. New Zealand telecom 2degress announced on April 14, 2021 it has selected Ericsson as its partner for a 5G RAN (Radio Access Network) and Core nationwide network launch.

The Commerce Commission has a regulatory role to promote competition within the electricity industry under the Commerce Act 1986 and the Fair Trading Act 1986. As natural monopolies, the electricity transmission and distribution businesses are subject to specific additional regulations, regarding pricing, sales techniques, and ensuring sufficient competition in the industry. The Commerce Commission completed a project in March 2020 that set the default price-quality path to determine the price caps that will apply to the 17 electricity distributors in New Zealand from April 1, 2020 to March 31, 2025. Due to increased expenditure for distributors to accommodate new technology, the Commerce Commission also recommended new recoverable costs to incentivize ongoing innovation in the electricity sector.

The New Zealand motor fuel market became more concentrated after Shell New Zealand sold its transport fuels distribution business in 2010 and Chevron sold its retail brands Caltex and Challenge in 2016 to New Zealand fuel distributor Z-Energy. Z-Energy holds almost half of the market share in New Zealand. A two-year study by the Commerce Commission was completed in December 2019 that evaluated whether competition in the retail fuel market is promoting outcomes that benefit New Zealand consumers over the long-term. They found that the lack of an active wholesale market in New Zealand has weakened price competition in the retail market and that the major fuel companies’ joint infrastructure network and supply relationships gave them an advantage over other fuel importers. The wholesale supply relationships, including restrictive contract terms between the majors and resellers, limits the ability of resellers to switch supplier.

The Commerce (Cartels and Other Matters) Amendment Act of 2017 empowers the Commerce Commission with easier enforcement action against international cartels. It created a new clearance regime allowing firms to test their proposed collaboration with the Commerce Commission and get greater legal certainty before they enter into the arrangements. It expanded prohibited conduct to include price fixing, restricting output, and allocating markets, and expands competition oversight to the international liner shipping industry. It empowers the Commerce Commission to apply to the New Zealand High Court for a declaration to determine if the acquisition of a controlling interest in a New Zealand company by an overseas person will have an effect of “substantially lessening” competition in a market in New Zealand.

The Commerce (Criminalization of Cartels) Amendment Act was passed in April 2019 to align New Zealand law with other jurisdictions – particularly Australia – by criminalizing cartel behavior. Individuals convicted of engaging in cartel conduct – price fixing, restricting output, or allocating markets – will face fines of up to NZD 500,000 (USD 325,000) and/or up to seven years imprisonment. For companies, the fines can be up to NZD 10 million (USD 6.5 million), or higher based on turnover. Business have been given two years to ensure compliance before the criminal sanctions enter into force. While not a significant issue in New Zealand, the government believes criminalizing cartel behavior provides a certain and stable operating environment for businesses to compete, and aligns New Zealand with overseas jurisdictions that impose criminal sanctions for cartel conduct, enhancing the ability of the Commerce Commission to cooperate with its overseas counterparts in investigations of international cartels.

In January 2019, the Government announced proposed amendments to section 36 of the Commerce Act, which relates to the misuse of market power. The government is seeking consultation on repealing sections of the Commerce Act that shield some intellectual property arrangements from competition law, in order to prevent dominant firms misusing market power by enforcing their patent rights in a way they would not do if it was in a more competitive market. It also seeks to strengthen laws and enforcement powers against the misuse of market power by aligning it with Australia and other developed economies, particularly because New Zealand competition law currently does not prohibit dominant firms from engaging in conduct with an anti-competitive effect. Section 36 of the Act only prohibits conduct with certain anti-competitive purposes.

The Commerce Commission has international cooperation arrangements with Australia since 2013 and Canada since 2016, to allow the sharing of compulsorily acquired information, and provide investigative assistance. The arrangements help effective enforcement of both competition and consumer law.

In May 2020, the Commerce Commission issued guidance easing restrictions on businesses to collaborate in order to ensure the provision of essential goods and services to New Zealand consumers during the COVID-19 pandemic.

Expropriation and Compensation

Expropriation is generally not an issue in New Zealand, and there are no outstanding cases. New Zealand ranks second in the World Bank’s 2020 Doing Business report for “registering property” and third for “protecting minority investors.”

The government’s KiwiBuild program aims to build 100,000 affordable homes over ten years, with half being in Auckland. However, progress on KiwiBuild has been slow and well below targets. The government has indicated it will use compulsory acquisition under the PWA if necessary to achieve planned government housing development.

The lack of precedent for due process in the treatment of residents affected by liquefaction of residential land caused by the Canterbury earthquake in 2011 resulted in prolonged court cases against the Government based largely on the amount of compensation offered to insured home and/or land owners and the lack of any compensation for uninsured owners. Several large areas of residential land in Christchurch were deemed Residential Red Zones (RRZ) meaning there had to be significant and extensive area wide land damage, the extent of the damage required an area-wide solution, engineering solutions would be uncertain, disruptive, not timely, and not cost-effective. One offer made by the government to uninsured Christchurch RRZ landowners for 50 percent of the rated value of their property was deemed unlawful in the Court of Appeal in 2013. A later offer was made by the government to uninsured residents, but only for the value of their land and not their house.

In 2018, the government opted to settle with a group of uninsured home and landowners, but some objected to the compensation because it was based on 2007/08 rating valuations. There were also reports some insurance companies paid out less to policy holders than the full value of some houses if they found based on the structural characteristics of the house that it was repairable, even though the repairs would be legally prohibited if in the RRZ.

LINZ currently manages Crown-owned land in the RRZ and can temporarily agree short-term leases of this land under the Greater Christchurch Regeneration Act 2016 but does not make offers to buy properties from RRZ residents. From June 2020 ownership and management of the land is progressively transitioning from the Crown back to the Christchurch City Council, according to the terms under an agreement made in September 2019 and to be legislated as an amendment to the 2016 Act. LINZ must review the interests of each of the 5,500 titles in the RRZ to check if anyone has rights to the land, such as an easement, a covenant, or a mortgage. For more see: https://www.linz.govt.nz/crown-property/types-crown-property/christchurch-residential-red-zone .

Dispute Settlement

ICSID Convention and New York Convention

New Zealand is a party to both the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the Washington Convention), and to the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards.

Proceedings taken under the Washington Convention are administered under the Arbitration (International Investment Disputes) Act 1979. Proceedings taken under the New York Convention are now administered under the Arbitration Act 1996.

Investor-State Dispute Settlement

Investment disputes are rare, and there have been no major disputes in recent years involving U.S. companies. The mechanism for handling disputes is the judicial system, which is generally open, transparent and effective in enforcing property and contractual rights.

Most of New Zealand’s recently enacted FTAs contain Investor-State Dispute Settlement (ISDS) provisions, and to date no claims have been filed against New Zealand. The current Government has signaled it will seek to remove ISDS from future FTAs, having secured exemptions with several CPTPP signatories in the form of side letters. ISDS claims challenging New Zealand’s tobacco control measures – under the Smoke-free Environments (Tobacco Standardized Packaging) Amendment Act 2016 – cannot be made against New Zealand under CPTPP.

International Commercial Arbitration and Foreign Courts

Arbitrations taking place in New Zealand (including international arbitrations) are governed by the Arbitration Act 1996. The Arbitration Act includes rules based on the United Nations Commission on International Trade Law (UNCITRAL) and its 2006 amendments. Parties to an international arbitration can opt out of some of the rules, but the Arbitration Act provides the default position.

The Arbitration Act also gives effect to the New Zealand government’s obligations under the Protocol on Arbitration Clauses (1923), the Convention on the Execution of Foreign Arbitral Awards (1927), and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958). Obligations under the Washington Convention are administered under the Arbitration (International Investment Disputes) Act 1979.

The New Zealand Dispute Resolution Centre (NZDRC) is the leading independent, nationwide provider of private commercial, family and relationship dispute resolution services in New Zealand. It also provides international dispute resolution services through its related entity, the New Zealand International Arbitration Centre (NZIAC). The NZDRC is willing to act as an appointing authority, as is the Arbitrators’ and Mediators’ Association of New Zealand (AMINZ).

Forms of dispute resolution available in New Zealand include formal negotiations, mediation, expert determination, court proceedings, arbitration, or a combination of these methods. Arbitration methods include ‘ad hoc,’ which allows the parties to select their arbitrator and agree to a set of rules, or institutional arbitration, which is run according to procedures set by the institution. Institutions recommended by the New Zealand government include the International Chamber of Commerce (ICC), the American Arbitration Association (AAA), and the London Court of International Arbitration (LCIA).

The Arbitration Amendment Act 2016 empowered the Minister of Justice to create an “appointed body” to exercise powers which were previously powers of the High Court. It also provides for the High Court to exercise the powers if the appointed body does not act, or there is a dispute about the process of the appointed body. The Minister of Justice has appointed the AMINZ the default authority for all arbitrations sited in New Zealand in place of the High Court. In 2017 AMINZ issued its own Arbitration Rules based on the latest editions of rules published in other Model Law jurisdictions, to be used in both domestic and international arbitrations, and consistent with the 1996 Act.

The Arbitration Amendment Act 2019 was passed to bring New Zealand’s policy of preserving the confidentiality of trust deed clauses in line with foreign arbitration legislation and case law. The amendment means arbitration clauses in trust deeds are given effect to extend the presumption of confidentiality in arbitration to the presumption of confidentiality in related court proceedings under the Act because often such cases arise from sensitive family disputes.

Bankruptcy Regulations

Bankruptcy is addressed in the Insolvency Act 2006, the Receiverships Act 1993, and the Companies Act 1993. The Insolvency (Cross-border) Act 2006 implements the Model Law on Cross-Border Insolvency adopted by the United Nations Commission on International Trade Law in 1997. It also provides the framework for facilitating insolvency proceedings when a person is subject to insolvency administration (whether personal or corporate) in one country, but has assets or debts in another country; or when more than one insolvency administration has commenced in more than one country in relation to a person. New Zealand bankrupts are subject to conditions on borrowing and international travel, and violations are considered offences and punishable by law.

The registration system operated by the Companies Office within MBIE, is designed to enable New Zealand creditors to sue an overseas company in New Zealand, rather than forcing them to sue in the country’s home jurisdiction. This avoids attendant costs, delays, possible language problems and uncertainty due to a different legal system. An overseas company’s assets in New Zealand can be liquidated for the benefit of creditors. All registered ‘large’ overseas companies are required to file financial statements under the Companies Act of 1993. See: https://companies-register.companiesoffice.govt.nz/help-centre/managing-an-overseas-company-in-nz/ 

The Insolvency and Trustee Service (the Official Assignee’s Office) is a business unit of MBIE. The Official Assignee is appointed under the State Sector Act of 1988 to administer the Insolvency Act of 2006, the insolvency provisions of the Companies Act of 1993 and the Criminal Proceeds (Recovery) Act of 2009. The Official Assignee administers all bankruptcies, No Asset Procedures, Summary Installment Orders, and some liquidations by collecting and selling assets to repay creditors. The bankrupt or company directors will be asked for information to help identify and deal with the assets. The money recovered is paid to creditors who have made a claim, in order according to the relevant Acts. Creditors can log in to the Insolvency and Trustee Service website to track the progress of their claim and how long it is likely to take.

In the World Bank’s Doing Business 2020 Report New Zealand slipped in the rankings for “resolving insolvency” from 31st last year to 36th. Despite a high recovery rate (79.7 cents per dollar compared with 70.2 cents for the average across high-income OECD countries), New Zealand scores lower based on the strength of its insolvency framework. Specific weaknesses identified in the survey include the management of debtors’ assets, the reorganization proceedings, and the participation of creditors.

The government has recognized the need for more insolvency law reform beyond the 2006 Act which repealed the Insolvency Act 1967. The Regulatory Systems (Economic Development) Amendment Act which passed in November 2019 included amendments to the Insolvency Act that strengthened some regulations and assigned more powers to the Official Assignee. After the previous government established an Insolvency Working Group in 2015, MBIE published a proposed set of reforms in November 2019, based on the group’s recommendations from 2017. The current government plans to introduce an insolvency law reform bill in early 2020. The omnibus COVID-19 Response (Further Management Measures) Legislation Bill passed on May 15, 2020, included provisions to provide temporary relief for businesses facing insolvency, and exemptions for compliance, due to the COVID-19 pandemic.

Capital Markets and Portfolio Investment

New Zealand policies generally facilitate the free flow of financial resources to support the flow of resources in the product and factor markets. Credit is generally allocated on market terms, and foreigners are able to obtain credit on the local market. The private sector has access to a limited variety of credit instruments. New Zealand has a strong infrastructure of statutory law, policy, contracts, codes of conduct, corporate governance, and dispute resolution that support financial activity. The banking system, mostly dominated by foreign banks, is rapidly moving New Zealand into a “cashless” society.

New Zealand adheres to International Monetary Fund (IMF) Article VIII and does not place restrictions on payments and transfers for international transactions.

New Zealand has a range of other financial institutions, including a securities exchange, investment firms and trusts, insurance firms and other non-bank lenders. Non-bank finance institutions experienced difficulties during the global financial crisis (GFC) due to risky lending practices, and the government of New Zealand subsequently introduced legal changes to bring them into the regulatory framework. This included the introduction of the Non-bank Deposit Takers Act 2013 and associated regulations which impose requirements on exposure limits, minimum capital ratios, and governance. It requires non-bank institutions be licensed and have suitable directors and senior officers. It also provides the RBNZ with powers to detect and intervene if a non-bank institution becomes distressed or fails.

The RBNZ is the prudential regulator and supervisor of all insurers carrying on insurance business in New Zealand and is responsible for administering the Insurance (Prudential Supervision) Act 2010. The RBNZ administers the Act to promote the maintenance of a sound and efficient insurance sector; and promoting public confidence in the insurance sector.

The GFC also prompted New Zealand to introduce broad-based financial market law reform which included the establishment of the Financial Markets Authority (FMA) in 2014. The Financial Markets Conduct Act (FMC) 2013 provided a new licensing regime to bring New Zealand financial market regulations in line with international standards. It expanded the role of the FMA as the primary regulator of fair dealing conduct in financial markets, provided enforcement for parts of the Financial Advisers Act 2008, and made the FMA one of the three supervisors for AML/CFT, alongside the RBNZ and the Department of Internal Affairs. The FMA supervises approximately 800 reporting entities.

Legal, regulatory, and accounting systems are transparent. Financial accounting standards are issued by the New Zealand Accounting Standards Board (NZASB), which is a committee of the External Reporting Board established under the Crown Entities Act 2004. The NZASB has the delegated authority to develop, adopt and issue accounting standards for general purpose financial reporting in New Zealand and are based largely on international accounting standards, and GAAP.

Smaller companies (except issuers of securities and overseas companies) that meet proscribed criteria face less stringent reporting requirements. Entities listed on the stock exchange are required to produce annual financial reports for shareholders. Stocks in a number of New Zealand listed firms are also traded in Australia and in the United States. Small, publicly held companies not listed on the NZX may include in their constitution measures to restrict hostile takeovers by outside interests, domestic or foreign. However, NZX rules generally prohibit such measures by its listed companies.

In December 2019, the government introduced the Financial Market Infrastructure Bill to establish a new regulatory regime for financial market infrastructures (FMI), and to provide certain FMIs with legal protections relating to settlement finality, netting, and the enforceability of their rules. The bill aims to maintain a sound and efficient financial system; avoid significant damage to the financial system resulting from problems with an FMI, an operator of an FMI, or a participant of an FMI; promote the confident and informed participation of businesses, investors, and consumers in the financial markets; and promote and facilitate the development of fair, efficient, and transparent financial markets. The bill if passed would be administered jointly by the RBNZ and the FMA. The bill passed its first reading in February 2020 and is with the select committee.

In 2018, the market capitalization of listed domestic companies in New Zealand was 42 percent of GDP, at USD 86 billion. The small size of the market reflects in part the risk averse nature of New Zealand investors, preferring residential property and bank term deposits over equities or credit instruments for investment. New Zealand’s stock of investment in residential property is valued at NZD 1.19 trillion (USD 774 billion).

Money and Banking System

The Reserve Bank (RBNZ) regulates banks in New Zealand in accordance with the Reserve Bank of New Zealand Act 1989. The RBNZ is statutorily independent and is responsible for conducting monetary policy and maintaining a sound and efficient financial system. The New Zealand banking system consists of 26 registered banks, and more than 90 percent of their combined assets are owned by foreign banks, mostly Australian. There is no requirement in New Zealand for financial institutions to be registered to provide banking services, but an institution must be registered to call itself a bank.

In November 2017, the government announced it would undertake the first ever review of the RBNZ Act. In December 2018, the government passed an amendment to the Act to broaden the legislated objective of monetary policy beyond price stability, to include supporting maximum sustainable employment. It also requires that monetary policy be decided by a consensus of a Monetary Policy Committee, which must also publish records of its meetings. While policy decisions at the RBNZ have been made by the Governing Committee for several years before the amendment, the Act had laid individual accountability with the Governor, who could be removed from office for inadequate performance according to the goals set through the Policy Targets Agreement.

Applicants for bank registration must meet qualitative and quantitative criteria set out in the RBNZ Act. Applicants who are incorporated overseas are required to have the approval of their home supervisor to conduct banking business in New Zealand, and the applicant must meet the ongoing prudential requirements imposed on it by the overseas supervisor. Accordingly, the conditions of registration that apply to branch banks mainly focus on compliance with the overseas supervisor’s regulatory requirements.

The RBNZ introduced a Dual Registration Policy for Small Foreign Banks in December 2016. Foreign-owned banks are permitted to apply for dual registration – operating both a branch and a locally incorporated subsidiary in New Zealand – provided both entities comply with relevant prudential requirements. Locally incorporated subsidiaries are separate legal entities from the parent bank. They are required, among other things, to maintain minimum capital requirements in New Zealand and have their own board of directors, including independent directors. In contrast, bank branches are essentially an extension of the parent bank with the ability to leverage the global bank balance sheet for larger lending transactions. Capital and governance requirements for branch banks are established by the home regulatory authority. There are no local capital or governance requirements for registered bank branches in New Zealand.

In addition to registered banks, the RBNZ supervises and regulates insurance companies in accordance with the Insurance (Prudential Supervision) Act of 2010 and non-bank lending institutions. Non-bank deposit takers are regulated under the Non-bank Deposit Takers Act of 2013.

New Zealand has no permanent deposit insurance scheme and the RBNZ has no requirement to guarantee the viability of a registered bank. The RBNZ operates the Open Bank Resolution (OBR) which allows a distressed bank to be kept open for business, while placing the cost of a bank failure primarily on the bank’s shareholders and creditors, rather than on taxpayers. While the scheme has been generally successful, in 2010 the government paid out NZD 1.6 billion (USD 1 billion) to cover investor losses when New Zealand’s largest locally-owned finance company at the time, went into receivership. There have since been bailouts of several insurance companies and other small finance companies.

New Zealand’s banking system relies on offshore wholesale funding markets as a result of low levels of domestic savings. Banks can raise funds in international markets relatively easily at reasonable cost, but are vulnerable to global market volatility, geopolitics, and domestic economic conditions. Domestically, banks face exposure due to the concentration of New Zealand exports in a small number of commodity-based sectors which can be subject to considerable price volatility. Residential mortgage and agricultural lending exposures have also presented risk.

The four largest banks (ASB, ANZ, BNZ and Westpac) control 88 percent of the retail and commercial banking market measured in terms of total banking assets. With the addition of Kiwibank, that rises to 91 percent. Kiwibank launched in 2002 and is majority owned by NZ Post (53 percent), with the NZ Superannuation Fund (25 percent), and the Accident Compensation Corporation (22 percent).

The RBNZ reports the total assets of registered banks to be about NZD 631 billion (USD 410 billion) as of March 2020. Assets of insurance companies’ assets were valued at NZD 81 billion (USD 53 billion) and NZD 14.4 billion (USD 9.4 billion) for non-bank lending institutions. The RBNZ estimates approximately 0.6 percent of bank loans are non-performing. Agriculture loans make up about 13 percent of bank lending and has seen higher rates of non-performing loans – particularly dairy farms – in 2019. The RBNZ expect non-performing to rise again having recovered only in the past few years from the Global Financial Crisis.

The four banks have capital generally above the regulatory requirements. The initial findings from a RBNZ review of bank capital requirements released in March 2017 found New Zealand banks to be “in the pack” in terms of capital ratios relative to international peers. There have since been subsequently four rounds of consultations revisiting capital requirements after the Australian Financial System Inquiry made recommendations that were subsequently accepted by the Australian Prudential Regulation Authority to improve the resilience of the Australian banks. While this contributes to the ultimate soundness of the New Zealand subsidiaries, it does not directly strengthen their balance sheets.

In February 2019, the RBNZ proposed to almost double capital requirements for the four big banks. The RBNZ proposed to require banks’ Tier 1 capital to be comprised solely of equity and to increase from the current minimum of 8.5 percent of total capital to 16 percent over five years. It also wants Tier 1 capital to be pure equity, rather than hybrid-type securities that usually behave as debt, but which can be converted into equity if required, and which are about a fifth of the cost of pure equity. Since the GFC, the minimum tier 1 capital has already been raised from 4 percent of risk-weighted assets to 8.5 percent.

In December 2019, the RBNZ announced the minimum total capital ratio will increase from 10.5 percent currently to 18 percent for the four largest banks, and 16 percent for the smaller local banks. For the largest banks, at least 16 percent must consist of tier 1 capital, and within this at least 13.5 percent must be common equity. For the small banks, the requirements are 14 percent and 11.5 percent respectively. Debt instruments that can be converted to equity will no longer count towards regulatory capital. However, banks will able to make greater use of redeemable preference shares. Initially in order to give the banks time to accumulate capital through retained earnings the changes were to be phased in over a seven-year period starting from July 2020. The RBNZ has delayed the introduction until July 1, 2021 due to the COVID-19 pandemic.

The penetration of New Zealand’s major banks has improved since the introduction of the voluntary superannuation scheme, KiwiSaver in 2007. The increase in their market share is also a result of the appointment of three additional banks as default KiwiSaver providers in 2014. People who start a new job are automatically enrolled in KiwiSaver and must opt-out if they do not want to be a member. Contributions are made by the employee, the employer and if eligible from the government in the form of a tax credit. At the start of 2021 there were more than 3 million KiwiSaver members, and the amount invested in KiwiSaver schemes is estimated to be NZD 62 billion (USD 40.3 billion). While funds can only be withdrawn at the age of 65 with very few exceptions, members can shift their funds. Over the course of 2020 as markets dropped, KiwiSavers shifted NZD 1.5 billion (USD 975 million) from share-heavy funds to cash or conservative funds.

There are some restrictions on opening a bank account in New Zealand that include providing proof of income and needing to be a permanent New Zealand resident of 18 years old or above. Access to money in the account will not be granted until the individual presents one form of photo ID and a proof of address in-person at a branch of the bank in New Zealand. Some banks will require a copy of the applicant’s visa. If the applicant does not apply for an IRD number, the tax rate on income earned will default to the highest rate of 33 percent. New Zealand banks typically have a dedicated branch for migrants and businesses to set up banking arrangements.

Foreign Exchange and Remittances

Foreign Exchange

New Zealand has revoked all foreign exchange controls. Accordingly, there are no such restrictions – beyond those that seek to prevent money laundering and financing of terrorism – on the transfer of capital, profits, dividends, royalties or interest into or from New Zealand. Full remittance of profits and capital is permitted through normal banking channels and there is no difficulty in obtaining foreign exchange. However, withholding taxes can apply to certain payments out of New Zealand including dividends, interest, and royalties, and may apply to capital gains for non-residents and on the payment of profits to certain non-resident contractors.

New Zealand operates a free-floating currency. As a small nation that relies heavily on trade and global financial and geopolitical conditions, the New Zealand currency experiences more fluctuation when compared with other developed high-income countries.

Remittance Policies

The Pacific Islands are the main destination of New Zealand remittances from residents and from temporary workers participating in the Recognized Seasonal Employer (RSE) scheme. The RSE allows the horticulture and viticulture industries to recruit workers from nine Pacific Island nations for seasonal work when there are not enough New Zealand workers. Other people who use remittance services include recently resettled refugees, and other migrant workers particularly in the hospitality and construction sectors.

Anti-money laundering and combatting terrorism financing laws have made access to cross-border financial services difficult for some Pacific island countries. Banks, non-bank institutions, and people in occupations that typically handle large amounts of cash, are required to collect additional information about their customers and report any suspicious transactions to the New Zealand Police.

Financial institutions have had to comply with the AML/CFT Act since 2013, including remitters, trust and company service providers, payment providers, and other lending institutions. If a bank is unable to comply with the Act in its dealings with a customer, it must not do business with that person. This would include not processing certain transactions, withdrawing the banking products and services it offers, and choosing not to have that person or entity as a customer. Since then New Zealand banks have been reducing their exposure to risks and charging higher fees for remittance services, which in some instances has led to the forced closing of accounts held by money transfer operators (MTOs).

The New Zealand government is working with banks to improve the bankability of small MTOs, and to develop low cost products for seasonal migrant workers in the RSE. New Zealand is also using its membership in global fora to encourage a coordinated approach to addressing high remittance costs, and is working with Pacific Island governments to find ways to lower costs in the receiving country, such as the adoption and use of an electronic payments systems infrastructure.

The New Zealand Treasury released a report in March 2017 to explore feasible policy options to address the issues in the New Zealand remittance market that would maintain access and reduce costs of remitting money from New Zealand to the Pacific. In 2018, the New Zealand and Australian governments hosted a series of roundtable meetings in Auckland, Sydney, and Tonga, with the Asian Development Bank and the International Monetary Fund that included officials from banks, MTOs, and regulators from Australia, New Zealand, and the Pacific, senior officials from international financial institutions, and training providers to discuss the issue and identify practical solutions to address the costs and risks of transferring remittances to Pacific countries and difficulties in undertaking cross-border transactions.

Barriers to remittances to Pacific nations remain a significant public policy issue during 2019, and work is underway led by MFAT and involving financial regulators in New Zealand and overseas, to address some of these barriers. A pilot of a Know Your Customer and Customer Due Diligence Utility is being planned for remittances between Samoa, Australia and New Zealand.

Sovereign Wealth Funds

The New Zealand Superannuation Fund was established in September 2003 under the New Zealand Superannuation and Retirement Income Act 2001. The fund was designed to partially provide for the future cost of New Zealand Superannuation, which is a universal benefit paid by the New Zealand government to eligible residents over the age of 65 years irrespective or income or asset levels.

The Act also created the Guardians of New Zealand Superannuation, a Crown entity charged with managing and administering the fund. It operates by investing government contributions and the associated returns in New Zealand and internationally, in order to grow the size of the fund over the long term. Between 2003 and 2009, the government contributed NZD 14.9 billion (USD 9.7 billion) to the fund, after which it temporarily halted contributions during the Global Financial Crisis. In December 2017, the newly elected government resumed contributions, with plans to resume contributions to the full amount according to the formula set out in the 2001 Act from 2022. The Fund received an estimated NZD 500 million (USD 325 million) payment in the year to June 2018, and a NZD 1 billion (USD 650 million) contribution in the year to June 2019.

Planned contributions for the year to June 2020 will be NZD 1.5 billion (USD 975 million) according to Budget 2020 announced in May. This increases to NZD 2.1 billion (USD 1.4 billion) in the year to June 2021 and NZD 2.4 billion (USD 1.6 billion) in the year to June 2022. The legislated formula suggests lower contributions be made due to the impact of COVID-19 on GDP forecasts. Between fiscal years 2019/20 and 2022/23, Budget 2020 transfers small amounts of the capital contributions to a new fund administered by the Guardians of New Zealand Superannuation, which will invest via the New Zealand Venture Investment Fund Limited (NZVIF). The government has not indicated it will suspend its contributions during the economic impact of the pandemic.

In June 2019, the fund was valued at NZD 43.1 billion (USD 28 billion) of which 48.8 percent was in North America, 17.3 percent in Europe, 12.9 percent in New Zealand, 10.9 percent in Asia excluding Japan, 6 percent in Japan, and 1.6 percent in Australia. During 2018/19 the fund earned a pre-tax return of 7 percent. In the first four months of 2020, the fund made losses of NZD 4.6 billion (USD 3 billion).

The guardians have a stated commitment to responsible investment, including environmental, social and governance factors, which is closely aligned to the United Nations Principles for Responsible Investment. It is a member of the International Forum of Sovereign Wealth Funds and is signed up to the Santiago Principles.

The fund operates its own environmental, social, and governance principles with a responsible investment framework. Companies that are directly involved in the following activities are excluded from the Fund: the manufacture of cluster munitions, testing of nuclear explosive devices, and anti-personnel mines; the manufacture of tobacco; the processing of whale meat; recreational cannabis; and the manufacture of civilian automatic and semi-automatic firearms, magazines or parts. As of December 2019, the fund does not make investments in 14 countries, mainly located in Africa and the Middle East.

Following the attack on two Christchurch mosques by a gunman using legally obtained guns on March 15, the fund divested NZD 19 million (USD 13 million) from seven companies (including four U.S. companies), involved in the manufacture of civilian automatic and semi-automatic firearms, magazines or parts that are prohibited under recently enacted New Zealand law. Due to the live-stream of the attack the NZSF announced on March 20, 2019 it had joined up with other New Zealand wealth funds as a shareholder of Facebook, Twitter, and YouTube owner Alphabet, to strengthen controls to prevent the live-streaming of objectionable content. The NZSF aims to achieve this from the collective action of New Zealand’s investor sector with a global coalition of shareholders as well as the pressure put on the companies by other stakeholder groups. The NZSF will undertake discussions with the companies concerned in confidence and will report on milestones achieved in future Annual Reports. For further information including a full list of participants see: https://www.nzsuperfund.nz/how-we-invest/ 

In recent years the NZSF has explicitly excluded companies that are directly involved in the manufacture of: cluster munitions, testing of nuclear explosive devices, anti-personnel mines, tobacco, recreational cannabis, and the processing of whale meat. In 2013, the fund divested a group of five U.S. companies due to their involvement with nuclear weapons. In 2007, the fund divested NZD 37.6 million (USD 24.4 million) in 20 tobacco companies.

In June 2017, the fund transitioned NZD 14 billion (USD 9 billion) passive global equity portfolio (constituting 40 percent of the fund) to low carbon, selling passive holdings in 297 companies worth NZD 950 million (USD 617 million). The aim of the Climate Change Investment Strategy is to reduce exposure to investments in carbon and fossil fuels. The guardians applied their carbon exclusion methodology again in June 2018 and June 2019.

The government manages two other wealth funds that also aim to reduce future liability and burden on New Zealanders. The Government Superannuation Fund (GSF) aims to meet the cost of 57,000 state sector employees who worked between 1948 to 1995 and are entitled to an additional fixed retirement income. The GSF was valued at NZD 4.5 billion (USD 2.9 billion) in June 2019. The Accident Compensation Corporation (ACC) covers all New Zealanders and visitors’ costs if they are injured in an accident under a no-fault scheme. In addition to ACC levies paid by workers and businesses, the ACC operates a fund to meet the future costs of injuries. As of June 2019, it was valued at NZD 44 billion (USD 29 billion), of which about 72 percent in New Zealand and 4 percent in Australia. Over 2018/19 the fund earned a return of 13.1 percent. ACC is one of the largest investors, owning about 2.6 percent of the market capitalization of the New Zealand share market, and directly owns 22 percent of Kiwibank.

The Commercial Operations group in the New Zealand Treasury is responsible for monitoring the Crown’s interests as a shareholder in, or owner of organizations that are required to operate as successful businesses, or that have mixed commercial and social objectives. Each entity monitored by the Treasury has a primary legislation that defines its organizational framework, which include: State-Owned Enterprises (SOEs), Crown-Owned Entity Companies, Crown Research Institutions, Crown Financial Institutions, Other Crown Entity Companies, and Mixed Ownership Model Companies.

SOEs are subject to the State-Owned Enterprises Act 1986, are registered as companies, and are bound by the provisions of the Companies Act 1993. The board of directors of each SOE reports to two ministers, the Minister of Finance and the relevant portfolio minister. A list of SOEs and information on the Crown’s financial interest in each SOE is made available in the financial statements of the government at the end of each fiscal year. For a list of the SOEs see: http://www.treasury.govt.nz/statesector/commercial/portfolio/bytype/soes 

In the 12 months to June 30, 2020 New Zealand State-Owned Enterprises had revenue of NZD 5.08 billion (USD 2.2 billion) and expenses of NZD 5.14 billion (USD 3.34 billion with an operating balance of NZD -27 million (USD -17.6 million). Entities saw operating losses of NZD 206 million (USD 134 million) from KiwiRail and fair value write down of NZD 1.1 billion (USD 715 million) in relation to the Air New Zealand aircraft fleet suffering from reduced service due to the pandemic.

Most of New Zealand’s SOEs are concentrated in the energy and transportation sectors. Private enterprises can compete with public enterprises under the same terms and conditions with respect to markets, credit, and other business operations. Under SOE Continuous Disclosure Rules, SOEs are required to continuously report on any matter that may materially affect their commercial value.

Privatization Program

New Zealand governments have embarked on several privatization programs since the 1980s, to reduce government debt, move non-strategic businesses to the private sector to improve efficiency, and raise economic growth.

In 2014, the government completed a program of asset sales to raise funds to reduce public debt. It involved the partial sale of three energy companies and Air New Zealand, with the government retaining its majority share in each. The bulk of the initial share float was made available to New Zealand share brokers and international institutions, and unsold shares were made available to foreign investors. Foreign investors are free to purchase shares on the secondary market.

New Zealand has been using the public private partnership (PPP) method of procurement and increasingly so where the public sector seeks to complete needed infrastructure assets faster than conventional methods of procuring and financing would achieve.

The New Zealand Treasury was previously responsible for the PPP program. It lists the other agencies that are involved in the planning, implementing, and advising on infrastructure, including MBIE (telecommunications and energy infrastructure), Department of Corrections, and the Ministry of Defence among others. https://treasury.govt.nz/information-and-services/nz-economy/infrastructure/other-government-agencies 

In 2019 the Infrastructure Transaction Unit was created within Treasury as an interim measure to provide support to agencies and local authorities in planning and delivering major infrastructure projects. This unit moved into the newly formed Crown entity the Infrastructure Commission (InfraCom) and provides the Major Projects function. The New Zealand Infrastructure Commission Act was passed in September 2019, to create Crown Entity InfraCom, and it will be responsible for delivering New Zealand’s Public Private Partnership (PPP) Program https://infracom.govt.nz/major-projects/public-private-partnerships/ 

The Infrastructure Commission will support government agencies, local authorities and others to procure and deliver major infrastructure projects, and it will be responsible for: developing PPP policy and processes; assisting agencies with PPP procurement; the Standard Form PPP Project Agreement; engaging with potential private sector participants; and monitoring the implementation of PPP projects. InfraCom is currently reviewing the Standard Form PPP Agreement. On its website InfraCom likens its establishment to those in Australia, the United Kingdom, Singapore, Hong Kong, and China’s National Development and Reform Commission https://infracom.govt.nz/strategy/international-context/ 

InfraCom will publish PPP guidance material and project information for businesses wanting to enter into a long term contract for the delivery of a service, where the provision of the service requires the construction of a new asset, or the enhancement of an existing asset, that is financed from external (private) sources on a non-recourse basis and where full legal ownership of the asset is retained by the Crown. The government is increasing its focus on PPP due to its significant NZD 15 billion (USD 9.8 billion) funding package announced in December 2019 and May 2020 which amounts to 5 percent of New Zealand’s GDP.

The government aims for its PPP procurement process to improve the delivery of service outcomes from major public infrastructure assets by: integrating asset and service design; incentivizing whole of life design and asset management; allocating risks to the parties who are best able to manage them; and only paying for services that meet pre-agreed performance standards.

In December 2019, the government introduced the Infrastructure Funding and Financing Bill, which was passed and was given royal assent on August 6, 2020. The provisions provides a funding and financing model to support the provision of infrastructure for housing and urban development that supports the functioning of urban land markets and reduces the impact of local authority financing and funding constraints. It makes several amendments to the Public Works Act 1981 and the Resource Management Act 1991. It also outlines the administration, obligations, and monitoring of Special Purpose Vehicles (SPVs) which are responsible for raising capital for a project, transferring the infrastructure to the relevant central or local government entity after completion, and its obligations to effectively and efficiently construct the infrastructure.

MBIE administers the procurement process. In October 2019 MBIE issued substantive changes to the New Zealand Government’s Procurement Rules. The MBIE Guide to Mastering Procurement explains the eight stages of the procurement lifecycle. It is available at: https://www.procurement.govt.nz/procurement/  . Contract opportunities must be listed on Government Electronic Tenders Service (GETS) at: https://www.gets.govt.nz/ExternalIndex.htm , publish a Notice of Procurement on GETS, and provide access to all relevant tender documents. The Notice of Procurement includes the request for a quote, a registration of interest, and requests for tender and for proposal. The New Zealand Government’s Procurement Rules contain a specific section on non-discrimination, which in part states “All suppliers must be given an equal opportunity to bid for contracts. Agencies must treat suppliers from another country no less favorably than New Zealand suppliers. Procurement decisions must be based on the best value for money, which isn’t always the cheapest price, over the whole-of-life of the goods, services or works. Suppliers must not be discriminated against because of: a. the country the goods, services or works come from [or] b. their degree of foreign ownership or foreign business affiliations.”

Where applicable foreign bidders who are ultimately successful, they may still be required to meet tax obligations and approval from the Overseas Investment Office. The New Zealand government has recently entered and completed infrastructure roading projects in partnership with companies from Australia, Japan, the United States, and China. New Zealand is one of several countries cooperating with China on infrastructure investment relating to their USD 2.5 trillion Belt and Road Initiative. Chinese banks with a presence in New Zealand use capital to invest in New Zealand infrastructure projects including infrastructure in the Christchurch rebuild and Wellington’s 17-mile Transmission Gully motorway.

The upgrade to the New Zealand-China FTA adds a Government Procurement chapter, which among other provisions, includes a built-in agreement to enter into market access negotiations with New Zealand once China completes its accession to the WTO Agreement on Government Procurement, or if it were to negotiate market access on government procurement with another country. This commitment puts New Zealand at the ‘front of the line’ if China were to open its government procurement market in the future.

Infrastructure New Zealand is an industry association founded in 2004, and addresses key strategic challenges including the reform of complex regulatory and environmental approval and the appropriate use of public and private sector debt to finance infrastructure investment opportunities. It is supported by a board of 12 members who are industry leaders in their professional fields.

New Zealand is a stable liberal democracy with almost no record of political violence.

The New Zealand government raised its national security threat level for the first time from “low” to “high” after the terrorist attack on two mosques in Christchurch on March 15, 2019. One month later it lowered the risk to “medium” where a “terrorist attack, or violent criminal behavior, or violent protest activity is assessed as feasible and could well occur.” The incident led to wide-ranging gun law reform that restricts semi-automatic firearms and magazines with a capacity of more than ten rounds. An amnesty buy-back scheme of prohibited firearms administered by the NZ Police ran until December 20, 2019.

Please note that the following tables include FDI statistics from three different sources, and therefore will not be identical.  Table 2 uses BEA data when available, which measures the stock of FDI by the market value of the investment in the year the investment was made (often referred to as historical value).  This approach tends to undervalue the present value of FDI stock because it does not account for inflation.  BEA data is not available for all countries, particularly if only a few US firms have direct investments in a country.  In such cases, Table 2 uses other sources that typically measure FDI stock in current value (or, historical values adjusted for inflation).  Even when Table 2 uses BEA data, Table 3 uses the IMF’s Coordinated Direct Investment Survey (CDIS) to determine the top five sources of FDI in the country.  The CDIS measures FDI stock in current value, which means that if the U.S. is one of the top five sources of inward investment, U.S. FDI into the country will be listed in this table.  That value will come from the CDIS and therefore will not match the BEA data.

* Source for Host Country Data: Host country statistics differ from USG and international sources due to calculation methodologies, and timing of exchange rate conversions.  Almost a third of inbound foreign direct investment in New Zealand is in the financial and insurance services sector. Foreign direct investment data for March 2020 s released in September 2020.   Statistics New Zealand data available at www.stats.govt.nz

Policies Towards Foreign Direct Investment

The Nicaraguan government seeks foreign direct investment to project normalcy and international support in a time when foreign investment has all but stopped following the government’s violent suppression of peaceful protests starting in April 2018. As traditional sources of foreign direct investment fled the ongoing political crisis, the government has increasingly pursued foreign investment from other countries such as Iran and China. Investment incentives target export-focused companies that require large amounts of unskilled or low-skilled labor.

In general, there are local laws and practices that harm foreign investors, but few that target foreign investors in particular. Investors should be aware that local connections with the government are vital to success. Investors have raised concerns that regulatory authorities act arbitrarily and often favor one competitor over another. Foreign investors report significant delays in receiving residency permits, requiring frequent travel out of the country to renew visas.

ProNicaragua, the country’s investment and export promotion agency, has all but halted its investment promotion activities. It has virtually no clients due to the ongoing political crisis. ProNicaragua, already heavily politicized, became more so after President Ortega installed his son, Laureano Ortega (who was designated for sanctions by the Office of Foreign Assets Control (OFAC)), as the organization’s primary public face. ProNicaragua formerly provided information packages, investment facilitation, and prospecting services to interested investors. For more information, see http://www.pronicaragua.org .

Personal connections and affiliation with industry associations and chambers of commerce are critical for foreigners investing in Nicaragua. Prior to the crisis, the Superior Council of Private Enterprise (COSEP) had functioned as the main private sector interlocutor with the government through a series of roundtable and regular meetings. These roundtables have ceased since the onset of Nicaragua’s 2018 crisis, as has collaboration between the government, private sector, and unions. Though municipal and ministerial authorities may enact decisions relevant to foreign businesses, all actions are subject to de facto approval by the Presidency.

The absence of commercial international flights—caused in part by the COVID-19 pandemic— significantly hinders international investment. Although a few commercial airlines are operating flights to and from Nicaragua, the government only permits those airlines to operate under charter flight regulations, including providing the government with full passenger manifests 36 hours before the arrival or departure of each flight. Currently there is only one non-stop flight per day between the United States and Nicaragua, with the exception of Saturday, when there are two non-stop flights to Miami.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign and domestic private entities have the right to establish and own business enterprises and engage in all forms of remunerative activity. Any individual or entity may make investments of any kind. In general, Nicaraguan law provides equal treatment for domestic and foreign investment. There are a few exceptions imposed by specific laws, such as the Border Law (2010/749), which prohibits foreigners from owning land in certain border areas.

Investors should be cautious of the 2020 Foreign Agents Law—also commonly referred to as “Putin’s Law”—which places onerous reporting and registration burdens on all organizations receiving funds or direction from abroad. While the law purportedly exempts purely business entities, some companies have been required to register or end their social responsibility efforts to avoid scrutiny. The process to register as a foreign agent is overtly politicized, with the government outright refusing to register some entities for their perceived political leanings.

Nicaragua allows foreigners to be shareholders of local companies, but the company representative must be a Nicaraguan citizen or a foreigner with legal residence in the country. Many companies satisfy this requirement by using their local legal counsel as a representative. Legal residency procedures for foreign investors can take up to eighteen months and require in-person interviews in Managua.

The government can limit foreign ownership for national security or public health reasons under the Foreign Investment Law. The government requires all investments in the petroleum sector include one of Nicaragua’s state-owned enterprises as a partner. Similar requirements are in place for the mining sector as well.

The government does not formally screen, review, or approve foreign direct investments. However, President Daniel Ortega and the executive branch maintain de facto review authority over any foreign direct investment. This review process is not transparent.

Other Investment Policy Reviews

Nicaragua had a trade policy review with the WTO in 2021. The trade policy review did not resolve the many informal trade barriers faced by importers in Nicaragua.

Business Facilitation

The government is eager to draw more foreign investment to Nicaragua. Its business facilitation efforts focus primarily on one-on-one engagement with potential investors, rather than a systematic whole-of-government approach.

Nicaragua does not have an online business registration system. Companies must typically register with the national tax administration, social security administration, and local municipality to ensure the government can collect taxes. Those registers are typically not available to the public. Investors should be aware the social security system is close to insolvency, having engaged in a series of “investments” over the past decade that funnel social security funds into the hands of Ortega insiders. The government has sought to close the shortfalls by increasing social security taxes and contributions. This has caused many workers to flee the social security system to the informal sector, which economists estimate hold between 70 and 90 percent of Nicaragua’s workers.

According to the Ministry of Growth, Industry, and Trade (MIFIC), the process to register a business takes a minimum of 14 days. In practice, registration usually takes more time. Establishing a foreign-owned limited liability company takes eight procedures and 42 days.

Outward Investment

Nicaragua does not promote or incentivize outward investment and does not restrict domestic investors from investing abroad.

Transparency of the Regulatory System

The government does not have transparent policies to establish clear “rules of the game.” Legal, regulatory, and accounting systems exist but implementation is opaque. The government does not foster competition on a non-discriminatory basis. In fact, the Ortega regime maintains direct control over various sectors of the economy to enrich its inner circle. Ortega also controls the judicial system and there is no expectation of fair and objective rulings. Investors regularly complain that regulatory authorities are arbitrary, negligent, or slow to apply existing laws, at times in an apparent effort to favor one competitor over another.

The executive branch retains ultimate rule-making and regulatory authority. In practice, the relevant government agency is empowered to levy fines directly. In some instances, the prosecutor’s office may also bring enforcement actions. These actions are widely perceived to be controlled by the executive branch and are neither objective nor transparent.

NGOs and private sector associations do not manage informal regulatory processes. There have not been recent regulatory or enforcement reforms.

There is no accountancy law in Nicaragua. International accounting standards are not a focus for most of the economy, but major businesses typically use IFRS standards or U.S. GAAP. The national banking authority officially requires loans to be submitted using IFRS standards.

Draft legislation is ostensibly made available for public comment through meetings with associations that will be affected by the proposed regulations. Drafts are commonly not published on official websites or available to the public. The legislature is not required by law to give notice. The executive branch proposes most investment legislation; the Sandinista party has a supermajority in the National Assembly and seldom modifies such legislation.

Nicaragua publishes regulatory actions in La Gaceta, the official journal of government actions, including official summaries and the full text of all legislation. La Gaceta is available online. There are no effective oversight or enforcement mechanisms to ensure the government follows administrative processes.

Public finances and debt obligations are not transparent. The Central Bank has increasingly refused to publish key economic data starting in 2018, including public finances and debt obligations. The Central Bank published limited data in 2020 as a condition of funding from the International Monetary Fund. There is no accountability or oversight.

International Regulatory Considerations

All CAFTA-DR provisions are fully incorporated into Nicaragua’s national regulatory system. However, authorities willingly flout the national regulatory system, and investors claim that some customs practices violate CAFTA-DR provisions.

Nicaragua is a signatory to the Trade Facilitation Agreement and reported in July 2018 that it had implemented 81 percent of its commitments to date; however, Nicaragua’s trade facilitation progress remains beset with bureaucratic inefficiency, corruption, and lack of transparency. Nicaragua is a member of the WTO and notifies the WTO Committee on Technical Barriers to Trade of draft technical regulations.

In 2020 the government passed amendments to the “Consumer Protection Law” to treat financial services as a basic good and forbid commercial banks operating in Nicaragua from refusing financial services without a reason recognized in Nicaraguan law. If implemented, this provision could threaten commercial banks’ capacity to enforce international anti-money laundering compliance measure, avoid criminal or suspicious transactions, or meet their contractual or other legal obligations to implement international sanctions laws.

Legal System and Judicial Independence

Nicaragua is a civil law country in which legislation is the primary source of law. The legislative process is found in Articles 140 to 143 of the Constitution. However, implementation and enforcement of these laws is neither objective nor transparent. Contracts are ostensibly legally enforced through the judicial system, but extrajudicial factors are more likely to influence rulings than the facts at issue. The legal system is weak and cumbersome. Nicaragua has a Commercial Code, but it is outdated and rarely used. There are no specialized courts.

Members of the judiciary, including those at senior levels, are widely believed to be corrupt and subject to significant political pressure, especially from the executive branch. The judicial process is neither competent, fair, nor reliable. Regulations and enforcement actions are technically subject to judicial review, but appeals procedures are neither transparent nor objective.

Laws and Regulations on Foreign Direct Investment

Nicaragua has laws that relate to foreign investment but implementation, enforcement, and interpretation are subject to corruption and political pressure. The CAFTA-DR Investment Chapter ostensibly establishes a secure, predictable legal framework for U.S. investors in Central America and the Dominican Republic. The agreement provides six basic protections: (1) nondiscriminatory treatment relative to domestic investors and investors from third countries; (2) limits on performance requirements; (3) the free transfer of funds related to an investment; (4) protection from expropriation other than in conformity with customary international law; (5) a minimum standard of treatment in conformity with customary international law; and (6) the ability to hire key managerial personnel without regard to nationality. The full text of CAFTA-DR is available at http://www.ustr.gov/trade-agreements/free-trade-agreements/cafta-dr-dominican-republic-central-america-fta/final-text .

Nicaragua’s Foreign Investment Law (2000/344) defines the legal framework for foreign investment. It permits 100 percent foreign ownership in most industries. (See Limits on Foreign Control and Right to Private Ownership and Establishment for exceptions.) It also establishes national treatment for investors, guarantees foreign exchange conversion and profit repatriation, clarifies foreigners’ access to local financing, and reaffirms respect for private property.

MIFIC maintains an information portal regarding applicable laws and regulations for trade and investment at http://www.tramitesnicaragua.gob.ni , which includes detailed information on administrative procedures for investment and income generating operations such as the number of steps, contact information for relevant entities, required documents costs, processing time, and applicable laws. The site is available only in Spanish.

Competition and Antitrust Laws

The Institute for the Promotion of Competition (Procompetencia) investigates and disciplines businesses engaged in anticompetitive business practices but has no effective power. The Ortega regime controls decisions regarding competition.

Expropriation and Compensation

There is a long history of expropriations in Nicaragua and existing cases of the government expropriating property regardless of legal basis. As a result, considerable uncertainty remains in securing property rights (see Protection of Property Rights).

During the ongoing crisis, multiple landowners reported land invasions by government-affiliated actors. Landowners were sometimes able to resolve these invasions through government connections or bribes. In instances where the government actually claimed legal right to the land, offers of compensation—if any—are calculated on cadastral value, which vastly underestimates the actual value of the land. Ortega declared on numerous occasions that the government would not act to evict those who had illegally taken possession of private property.

There is generally no credible due process for land expropriations. Conflicting land title claims are abundant and judicial appeal in these cases is very challenging. Since 2018, the government has used proxies and its control over the judicial and executive branches to use land seizures to punish opposition actors and enrich government insiders. In 2020, the government increased seizures of property based on coercive tax bills.

Dispute Settlement

ICSID Convention and New York Convention

Nicaragua is a member of the Convention of the Settlement of Investment Disputes between States and Nationals of Other States (ICSID). It signed the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral awards in 2003. There is no specific domestic legislation providing for enforcement under the ICSID Convention or 1958 New York Convention.

Investor-State Dispute Settlement

CAFTA-DR establishes an investor-state dispute settlement mechanism. An investor who believes the government has breached a substantive obligation under CAFTA-DR or that the government has breached an investment agreement may request binding international arbitration in a forum defined by the Investment Chapter in the Agreement. There have only been two official claims or disputes by U.S. investors under CAFTA-DR, the most recent in April 2021. Both cases are still pending before the ICSID. Many U.S. investors reported customs and other procedures that they allege are not compliant with Nicaragua’s obligations under CAFTA-DR. Businesses operating in Nicaragua say the investor-state dispute settlement mechanism does not represent a viable means of due process to enforce CAFTA-DR obligations due to the high expense and likelihood of becoming a political target. Many companies facing Nicaragua’s noncompliance with CAFTA-DR simply pay the fines or increased taxes.

Embassy Managua is unaware of any instances of local courts recognizing and enforcing arbitral awards issued against the government. Given the judiciary’s lack of independence and vulnerability to political pressure, it is unlikely the courts would recognize such a judgment.

Investors should be aware that the government can take adverse action against them at any given time with limited basis or recourse. However, it does not appear that foreign investors have been targeted due to nationality.

International Commercial Arbitration and Foreign Courts

Alternative dispute resolution (ADR) is not common, and many Nicaraguans companies are unfamiliar with the practice. The Mediation and Arbitration Law (2005/540) is based on the UNCITRAL model law and established the legal framework for ADR. The Nicaraguan Chamber of Commerce and Services (CCSN) founded Nicaragua’s Mediation and Arbitration Center. CCSN conducts trainings and other events to promote the value of ADR and encourage its use. Arbitration clauses are included in some business contracts, but their enforceability has not been tested in Nicaraguan courts.

The Embassy is unaware of any local courts that have enforced foreign arbitral awards. In general, enforcement of court orders is frequently subject to non-judicial considerations. The Embassy is unaware of any recent domestic decisions involving investment disputes with state-owned entities (SOE).

Bankruptcy Regulations

Bankruptcy provisions are included in the Civil and Commercial Codes, but there is no tradition or culture of bankruptcy in Nicaragua. Companies simply close their operations and set up a new entity without going through a formal bankruptcy procedure, effectively leaving creditors unprotected. Creditors typically attempt to collect as much as they can directly from the debtor to avoid an uncertain judicial process or give up on any potential claims. Nicaragua’s rules on bankruptcy focus on the liquidation of business entities rather than on reorganization and do not provide equitable treatment of creditors.

Capital Markets and Portfolio Investment

There are no restrictions on foreign portfolio investment. Nicaragua does not have its own equities market and there is no regulatory structure to facilitate publicly held companies. There is a small bond market that traffics primarily in government bonds but also sells some corporate debt to institutional investors. In 2019 and 2020 this market has traded less than only 10 percent of the volume from before the political-economic crisis. The Superintendent of Banks and Other Financial Institutions (SIBOIF) supervises this fledgling market.

New policies threaten the free flow of financial resources into the product and factor markets, as well as foreign currency convertibility. Banks must now request foreign currency purchases in writing, 48 hours in advance, and the BCN reserves the right to arbitrarily deny these requests.

To shore up liquidity, banks have sharply restricted lending, increased interest rates, and implemented stricter collateral standards. The overall size and depth of Nicaragua’s financial markets and portfolio positions are very limited.

Money and Banking System

While the banking system has grown and developed in the past two decades, Nicaragua remains underbanked relative to other countries in the region. Only 19 percent of Nicaraguans aged 15 or older have bank accounts, and only 8 percent have any savings in such accounts, approximately half the rate of other countries in the region according to World Bank data. One-third of Nicaraguans continue to save their money in their home or other location while 49 percent have no savings. Nicaragua also has one of the lowest mobile banking rates in Central America.

After the sociopolitical crisis sharply slashed the National Financial System in 2018, the banking sector recovered slightly in 2019 and 2020. Liquidity ratios dipped 6 percent year-on-year to 41 percent (six percent less than 2019 levels) suggesting a credit portfolio recovery. However, the overall credit portfolio continued to contract, registering a $271 million reduction compared to 2019. The ratio of non-performing loans to banking sector assets reached 17 percent, five percent higher than 2019. The banking sector remains fragile and vulnerable to sociopolitical uncertainty.

The banking industry remains conservative and highly concentrated, with four banks (BANPRO, LAFISE Bancentro, BAC, and FICOHSA) constituting 77 percent of the country’s market share. The crisis sparked large withdrawals of deposits from the banking system. Those withdrawals have stabilized but total assets still lag pre-crisis levels—as of December 2020, the financial system had total assets worth $4.3 billion, a 10 percent increase over 2019 ($3.9 billion) but 22 percent lower than in March 2018 ($5.5 billion).

On April 17, 2019, the Department of Treasury designated BANCORP—a subsidiary of ALBA de Nicaragua (ALBANISA), a joint venture between the State-owned oil companies of Nicaragua (49%) and Venezuela (51%)—for money laundering and corruption. On April 22, BANCORP presented its dissolution to SIBOIF. BANCORP’s closure was secretive and outside the legal framework that governs financial institutions in Nicaragua.

The Central Bank of Nicaragua (BCN) was established in 1961 as the regulator of the monetary system with the sole right to issue the national currency, the Córdoba. Foreign banks can open branches in Nicaragua. The number of correspondent banking relationships with the United States shrank during the crisis as Wells Fargo Bank withdrew altogether and Bank of America withdrew correspondent services from a local bank. Recent amendment