Policies Towards Foreign Direct Investment

The Macri government actively seeks foreign direct investment. To improve the investment climate, the Macri administration has enacted reforms to simplify bureaucratic procedures in an effort to provide more transparency, reduce costs, diminish economic distortions by adopting good regulatory practices, and increase capital market efficiencies. Since 2016, Argentina has expanded economic and commercial cooperation with key partners including Chile, Brazil, Japan, South Korea, Spain, Canada, and the United States, and deepened its engagement in international fora such as the G-20, WTO, and OECD.

Over the past year, Argentina issued new regulations in the gas and energy, communications, technology, and aviation industries to improve competition and provide incentives aimed to attract investment in those sectors. Argentina seeks tenders for investment in wireless infrastructure, oil and gas, lithium mines, renewable energy, and other areas. However, many of the public-private partnership projects for public infrastructure planned for 2018 had to be delayed or canceled due to Argentina’s broader macroeconomic difficulties and ongoing corruption investigations into public works projects.

Foreign and domestic investors generally compete under the same conditions in Argentina. The amount of foreign investment is restricted in specific sectors such as aviation and media. Foreign ownership of rural productive lands, bodies of water, and areas along borders is also restricted.

Argentina has a national Investment and Trade Promotion Agency that provides information and consultation services to investors and traders on economic and financial conditions, investment opportunities, Argentine laws and regulations, and services to help Argentine companies establish a presence abroad. The agency also provides matchmaking services and organizes roadshows and trade delegations. The agency’s web portal provides detailed information on available services (http://www.produccion.gob.ar/agencia). Many of the 24 provinces also have their own provincial investment and trade promotion offices.

The Macri administration welcomes dialogue with investors. Argentine officials regularly host roundtable discussions with visiting business delegations and meet with local and foreign business chambers. During official visits over the past year to the United States, China, India, Vietnam, and Europe, among others, Argentine delegations often met with host country business leaders.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign and domestic commercial entities in Argentina are regulated by the Commercial Partnerships Law (Law 19,550), the Argentina Civil and Commercial Code, and rules issued by the regulatory agencies. Foreign private entities can establish and own business enterprises and engage in all forms of remunerative activity in nearly all sectors.

Full foreign equity ownership of Argentine businesses is not restricted, for the most part, with exception in the air transportation and media industries. The share of foreign capital in companies that provide commercial passenger transportation within the Argentine territory is limited to 49 percent per the Aeronautic Code Law 17,285. The company must be incorporated according to Argentine law and domiciled in Buenos Aires. In the media sector, Law 25,750 establishes a limit on foreign ownership in television, radio, newspapers, journals, magazines, and publishing companies to 30 percent.

Law 26,737 (Regime for Protection of National Domain over Ownership, Possession or Tenure of Rural Land) establishes that a foreigner cannot own land that allows for the extension of existing bodies of water or that are located near a Border Security Zone. In February 2012, the government issued Decree 274/2012 further restricting foreign ownership to a maximum of 30 percent of national land and 15 percent of productive land. Foreign individuals or foreign company ownership is limited to 1,000 hectares (2,470 acres) in the most productive farming areas. In June 2016, the Macri administration issued Decree 820 easing the requirements for foreign land ownership by changing the percentage that defines foreign ownership of a person or company, raising it from 25 percent to 51 percent of the social capital of a legal entity. Waivers are not available.

Argentina does not maintain an investment screening mechanism for inbound foreign investment. U.S. investors are not at a disadvantage to other foreign investors or singled out for discriminatory treatment.

Other Investment Policy Reviews

Argentina was last subject to an investment policy review by the OECD in 1997 and a trade policy review by the WTO in 2013. The United Nations Conference on Trade and Development (UNCTAD) has not done an investment policy review of Argentina.

Business Facilitation

Since entering into office in December 2015, the Macri administration has enacted reforms to normalize financial and commercial transactions and facilitate business creation and cross-border trade. These reforms include eliminating capital controls, reducing some export taxes and import restrictions, reducing business administrative processes, decreasing tax burdens, increasing businesses’ access to financing, and streamlining customs controls.

In October 2016, the Ministry of Production issued Decree 1079/2016, easing bureaucratic hurdles for foreign trade and creating a Single Window for Foreign Trade (“VUCE” for its Spanish acronym). The VUCE centralizes the administration of all required paperwork for the import, export, and transit of goods (e.g., certificates, permits, licenses, and other authorizations and documents). Argentina subjects imports to automatic or non-automatic licenses that are managed through the Comprehensive Import Monitoring System (SIMI, or Sistema Integral de Monitoreo de Importaciones), established in December 2015 by the National Tax Agency (AFIP by its Spanish acronym) through Resolutions 5/2015 and 3823/2015. The SIMI system requires importers to submit detailed information electronically about goods to be imported into Argentina. Once the information is submitted, the relevant Argentine government agencies can review the application through the VUCE and make any observations or request additional information. The number of products subjected to non-automatic licenses has been modified several times, resulting in a net decrease since the beginning of the SIMI system.

The Argentine Congress approved an Entrepreneurs’ Law in March 2017, which allows for the creation of a simplified joint-stock company (SAS, or Sociedad por Acciones Simplifacada) online within 24 hours of registration. Detailed information on how to register a SAS is available at: https://www.argentina.gob.ar/crear-una-sociedad-por-acciones-simplificada-sas . As of April 2019, the online business registration process is only available for companies located in Buenos Aires. The government is working on expanding the SAS to other provinces. Further information can be found at http://www.produccion.gob.ar/todo-sobre-la-ley-de-emprendedores/.

Foreign investors seeking to set up business operations in Argentina follow the same procedures as domestic entities without prior approval and under the same conditions as local investors. To open a local branch of a foreign company in Argentina, the parent company must be legally registered in Argentina. Argentine law requires at least two equity holders, with the minority equity holder maintaining at least a five percent interest. In addition to the procedures required of a domestic company, a foreign company establishing itself in Argentina must legalize the parent company’s documents, register the incoming foreign capital with the Argentine Central Bank, and obtain a trading license.

A company must register its name with the Office of Corporations (IGJ, or Inspeccion General de Justicia). The IGJ website describes the registration process and some portions can be completed online (http://www.jus.gob.ar/igj/tramites/guia-de-tramites/inscripcion-en-el-registro-publico-de-comercio.aspx ). Once the IGJ registers the company, the company must request that the College of Public Notaries submit the company’s accounting books to be certified with the IGJ. The company’s legal representative must obtain a tax identification number from AFIP, register for social security, and obtain blank receipts from another agency. Companies can register with AFIP online at www.afip.gob.ar or by submitting the sworn affidavit form No. 885 to AFIP.

Details on how to register a company can be found at the Ministry of Production and Labor’s website: https://www.argentina.gob.ar/produccion/crear-una-empresa . Instructions on how to obtain a tax identification code can be found at: https://www.argentina.gob.ar/obtener-el-cuit .

The enterprise must also provide workers’ compensation insurance for its employees through the Workers’ Compensation Agency (ART, or Aseguradora de Riesgos del Trabajo). The company must register and certify its accounting of wages and salaries with the Directorate of Labor, within the Ministry of Production and Labor.

In April 2016, the Small Business Administration of the United States and the Ministry of Production of Argentina signed a Memorandum of Understanding (MOU) to set up small and medium sized business development centers (SBDCs) in Argentina. The goal of the MOU is to provide small businesses with tools to improve their productivity and increase their growth. Under the MOU, in June 2017, Argentina set up the first SBDC pilot in the province of Neuquen.

The Ministry of Production and Labor offers a wide range of attendance-based courses and online training for businesses. The full training menu can be viewed at: https://www.argentina.gob.ar/produccion/capacitacion 

Outward Investment

Argentina does not have a governmental agency to promote Argentine investors to invest abroad nor does it have any restrictions for a domestic investor investing overseas.

Argentina has a Bilateral Investment Treaty (BIT) with the United States, which entered into force on October 20, 1994. The text of the Argentina-United States BIT is available at: http://2001-2009.state.gov/documents/organization/43475.pdf .

As of April 2019, Argentina has 50 BITs in force. Argentina has signed treaties that are not yet in force with six other countries: Greece (October 1999), New Zealand (August 1999), the Dominican Republic (March 2001), Qatar (November 2016), United Arab Emirates (April 2018), and Japan (December 2018).

During 2018 and the first quarter of 2019, Argentina continued discussions to strengthen bilateral commercial, economic, and investment cooperation with a number of countries, including China, Denmark, India, Mexico, Japan, the Netherlands, Spain, South Korea, Russia, Vietnam, and the United States. Argentina and the United States established a bilateral Commercial Dialogue and a Trade and Investment Framework Agreement (TIFA) in 2016. Bilateral talks are ongoing through both mechanisms. Argentina does not have a Free Trade Agreement with the United States.

Argentina is a founding member of the Southern Common Market (MERCOSUR), which includes Brazil, Paraguay, Uruguay, and Venezuela (currently suspended). Through MERCOSUR, Argentina has Free Trade Agreements with Egypt, Israel, Bolivia, Chile, and Peru. MERCOSUR has Trade Framework Agreements with Morocco and Mexico, and Preferential Trade Agreements (PTA) with the Southern African Customs Union (SACU), India, Colombia, Chile, Mexico, and Ecuador. MERCOSUR is currently pursuing a Free Trade Agreement with the European Union and the European Free Trade Association (EFTA) and has initiated free trade discussions with Canada, South Korea, and Japan. The bloc is also in talks to expand on its agreements with SACU and India.

Argentina has Economic Complementarity Agreements with Bolivia, Colombia, Ecuador, Mexico, Peru, and Chile that were established before MERCOSUR and thus, grandfathered into Mercosur. Argentina is engaged in ongoing negotiations to expand the PTA agreement with Mexico. Argentina also has an economic association agreement with Colombia signed in June 2017. In January 2019, the expanded Economic Complementation Agreement (ECA) between Chile and Argentina entered into effect. The new ECA was signed in November 2017, approved by the Argentine Congress in December 2018, and ratified by the Chilean Congress in January 2019. The new deal includes trade facilitation regulation and development programs directed to supporting SMEs, and adds chapters on e-commerce, trade in services, and government procurement.

Argentina does not have a bilateral taxation treaty with the United States. In December 2016, Argentina signed a Tax Information Exchange Agreement with the United States, which increases the transparency of commercial transactions between the two countries to aid with combating tax and customs fraud. The Agreement entered into force on November 13, 2017. The United States and Argentina have initiated discussions to sign a Foreign Account Tax Compliance Act (FATCA) inter-governmental agreement.

In 2014, Argentina committed to implementing the OECD single global standard on automatic exchange of financial information. According to media sources, Argentina had been set to make its first financial information exchange in September 2018, but it was postponed to 2019.

In June 2018, AFIP and the OECD signed an MOU to establish the first Latin American Financial and Fiscal Crime Investigation Academy.

Argentina has signed 18 double taxation treaties, including with Germany, Canada, Russia, and the United Kingdom. In November 2016, Argentina and Switzerland signed a bilateral double taxation treaty. In November 2016, Argentina signed an agreement with the United Arab Emirates, which has not yet entered into force. In July 2017, Argentina updated a prior agreement with Brazil, which also has not yet been implemented. Argentina also has customs agreements with numerous countries. A full listing is available at: http://www.afip.gov.ar/institucional/acuerdos.asp .

In general, national taxation rules do not discriminate against foreigners or foreign firms (e.g., asset taxes are applied to equity possessed by both domestic and foreign entities).

Transparency of the Regulatory System

The Macri administration has taken measures to improve government transparency. President Macri created the Ministry of Modernization, tasked with conducting quantitative and qualitative studies of government procedures and finding solutions to streamline bureaucratic processes and improve transparency. In September 2018, the Ministry of Modernization was downgraded into a Secretariat due to a budget-oriented streamlining of the Cabinet.

In September 2016, Argentina enacted a Right to Access Public Information Law (27,275) that mandates all three governmental branches (legislative, judicial, and executive), political parties, universities, and unions that receive public funding are to provide non-classified information at the request of any citizen. The law also created the Agency for the Right to Access Public Information to oversee compliance.

Continuing its efforts to improve transparency, in November 2017, the Treasury Ministry launched a new website to communicate how the government spends public funds in a user-friendly format. Subsections of this website are targeted toward policymakers, such as a new page to monitor budget performance (http://www.aaip.gob.ar/hacienda/sechacienda/metasfiscales ), as well as improving citizens’ understanding of the budget, e.g. the new citizen’s budget “Presupuesto Ciudadano” website (https://www.minhacienda.gob.ar/onp/presupuesto_ciudadano/). This program is part of the broader Macri administration initiative led by the Secretariat of Modernization to build a transparent, active, and innovative state that includes data and information from every area of the public administration. The initiative aligns with the Global Initiative for Fiscal Transparency (GIFT) and UN Resolution 67/218 on promoting transparency, participation, and accountability in fiscal policy.

During 2017, the government introduced new procurement standards including electronic procurement, formalization of procedures for costing-out projects, and transparent processes to renegotiate debts to suppliers. The government also introduced OECD recommendations on corporate governance for state-owned enterprises to promote transparency and accountability during the procurement process. (The link to the regulation is at http://servicios.infoleg.gob.ar/infolegInternet/verNorma.do?id=306769 .)

Argentine government efforts to improve transparency were recognized internationally. In its December 2017 Article IV consultation, the International Monetary Fund (IMF) Executive Board noted that “Argentina’s government made important progress in restoring integrity and transparency in public sector operations,” and agreed with the staff appraisal that commended the government for the progress made in the systemic transformation of the Argentine economy, including efforts to rebuild institutions and restore integrity, transparency, and efficiency in government.

On January 10, 2018, the government issued Decree 27 with the aim of curbing bureaucracy and simplifying administrative proceedings to promote the dynamic and effective functioning of public administration. Broadly, the decree seeks to eliminate regulatory barriers and reduce bureaucratic burdens, expedite and simplify processes in the public domain, and deploy existing technological tools to better focus on transparency.

In April 2018, Argentina passed the Business Criminal Responsibility Law (27,041) through Decree 277. The decree establishes an Anti-Corruption Office in charge of outlining and monitoring the transparency policies with which companies must comply to be eligible for public procurement.

Under the bilateral Commercial Dialogue, Argentina and the United States discuss good regulatory practices, conducting regulatory impact analyses, and improving the incorporation of public consultations in the regulatory process. Similarly, under the bilateral Digital Economy Working Group, Argentina and the United States share best practices on promoting competition, spectrum management policy, and broadband investment and wireless infrastructure development.

Legislation can be drafted and proposed by any citizen and is subject to Congressional and Executive approval before being passed into law. Argentine government authorities and a number of quasi-independent regulatory entities can issue regulations and norms within their mandates. There are no informal regulatory processes managed by non-governmental organizations or private sector associations. Rulemaking has traditionally been a top-down process in Argentina, unlike in the United States where industry organizations often lead in the development of standards and technical regulations.

Ministries, regulatory agencies, and Congress are not obligated to provide a list of anticipated regulatory changes or proposals, share draft regulations with the public, or establish a timeline for public comment. They are also not required to conduct impact assessments of the proposed legislation and regulations.

Since 2016, the Office of the President and various ministries has sought to increase public consultation in the rulemaking process; however, public consultation is non-binding and has been done in an ad-hoc fashion. In 2017, the Federal Government of Argentina issued a series of legal instruments that seek to promote the use of tools to improve the quality of the regulatory framework. Amongst them, Decree 891/2017 for Good Practices in Simplification establishes a series of tools to improve the rulemaking process. The decree introduces tools on ex-ante and ex-post evaluation of regulation, stakeholder engagement, and administrative simplification, amongst others. Nevertheless, no formal oversight mechanism has been established to supervise the use of these tools across the line of ministries and government agencies, which make implementation difficult and limit severely the potential to adopt a whole-of-government approach to regulatory policy, according to a 2019 OECD publication on Regulatory Policy in Argentina.

Some ministries and agencies have developed their own processes for public consultation, such as publishing the draft on their websites, directly distributing the draft to interested stakeholders for feedback, or holding public hearings. In 2016 the Ministry of Justice and Human Rights launched the digital platform Justicia2020 (https://www.justicia2020.gob.ar/ ), to foster public involvement in the Judiciary reform process projected by 2020. Once the draft of a bill is introduced into the Argentine Congress, the full text of the bill and its status can be viewed online at the Chamber of Deputies website (http://www.diputados.gov.ar/), and that of the Senate (http://www.senado.gov.ar/ ).

All final texts of laws, regulations, resolutions, dispositions, and administrative decisions must be published in the Official Gazette (https://www.boletinoficial.gob.ar ), as well as in the newspapers and the websites of the Ministries and agencies. These texts can also be accessed through the official website Infoleg (http://www.infoleg.gob.ar/ ), overseen by the Ministry of Justice. Interested stakeholders can pursue judicial review of regulatory decisions.

Argentina requires public companies to adhere to International Financial Reporting Standards (IFRS). Argentina is a member of UNCTAD’s international network of transparent investment procedures.

International Regulatory Considerations

Argentina is a founding member of MERCOSUR and has been a member of the Latin American Integration Association (ALADI for Asociacion Latinoamericana de Integracion) since 1980.

Argentina has been a member of the WTO since 1995 and it ratified the Trade Facilitation Agreement in January 2018. Argentina notifies technical regulations, but not proposed drafts, to the WTO Committee on Technical Barriers to Trade. Argentina has sought to deepen its engagement with the OECD and submitted itself to an OECD regulatory policy review in March 2018, which was released in Mach 2019. Argentina participates in all 23 OECD committees and seeks an accession invitation before the end of 2019.

Additionally, the Argentine Institute for Standards and Certifications (IRAM) is a member of international and regional standards bodies including the International Standardization Organization (ISO), the International Electrotechnical Commission (IEC), the Panamerican Commission on Technical Standards (COPAM), the MERCOSUR Association of Standardization (AMN), the International Certification Network (i-Qnet), the System of Conformity Assessment for Electrotechnical Equipment and Components (IECEE), and the Global Good Agricultural Practice network (GLOBALG.A.P.).

Legal System and Judicial Independence

According to the Argentine constitution, the judiciary is a separate and equal branch of government. In practice, there have been instances of political interference in the judicial process. Companies have complained that courts lack transparency and reliability, and that Argentine governments have used the judicial system to pressure the private sector. A 2017 working group review of Argentina’s application to join the OECD noted the politicization of the General Prosecutor’s Office created a lack of prosecutorial independence. The OECD working group said the executive branch, prior to the Macri government, had pressured judges through threatened or actual disciplinary proceedings. Media revelations of judicial impropriety and corruption feed public perception and undermine confidence in the judiciary.  

The Macri administration has publicly expressed its intent to improve transparency and rule of law in the judicial system, and the Justice Minister announced in March 2016 the “Justice 2020” initiative to reform the judiciary.

Argentina follows a Civil Law system. In 2014, the Argentine government passed a new Civil and Commercial Code that has been in effect since August 2015. The Civil and Commercial Code provides regulations for civil and commercial liability, including ownership of real and intangible property claims. The current judicial process is lengthy and suffers from significant backlogs. In the Argentine legal system, appeals may be brought from many rulings of the lower court, including evidentiary decisions, not just final orders, which significantly slows all aspects of the system. The Justice Ministry reported in December 2018 that the expanded use of oral processes had reduced the duration of 68 percent of all civil matters to less than two years.  

Many foreign investors prefer to rely on private or international arbitration when those options are available. Claims regarding labor practices are processed through a labor court, regulated by Law 18,345 and its subsequent amendments and implementing regulations by Decree 106/98. Contracts often include clauses designating specific judicial or arbitral recourse for dispute settlement.

Laws and Regulations on Foreign Direct Investment

According to the Foreign Direct Investment Law 21,382 and Decree 1853/93, foreign investors may invest in Argentina without prior governmental approval, under the same conditions as investors domiciled within the country. Foreign investors are free to enter into mergers, acquisitions, greenfield investments, or joint ventures. Foreign firms may also participate in publicly-financed research and development programs on a national treatment basis. Incoming foreign currency must be identified by the participating bank to the Central Bank of Argentina (www.bcra.gov.ar). There is no official regulation or other interference in the court that could affect foreign investors.

All foreign and domestic commercial entities in Argentina are regulated by the Commercial Partnerships Law (Law No. 19,550) and the rules issued by the commercial regulatory agencies. Decree 27/2018 amended Law 19,550 to simplify bureaucratic procedures. Full text of the decree can be found at (http://servicios.infoleg.gob.ar/infolegInternet/anexos/305000-309999/305736/norma.htm ). All other laws and norms concerning commercial entities are established in the Argentina Civil and Commercial Code, which can be found at: http://servicios.infoleg.gob.ar/infolegInternet/anexos/235000-239999/235975/norma.htm 

Further information about Argentina’s investment policies can be found at the following websites:

• Ministry of Production and Labor (http://www.produccion.gob.ar/ )
• Treasury Ministry (https://www.argentina.gob.ar/hacienda )
• The Central Bank of the Argentine Republic (http://www.bcra.gov.ar/ )
• The National Securities Exchange Commission (http://www.cnv.gob.ar/ )
• The National Investment and Trade Promotion Agency (http://www.inversionycomercio.org.ar/ )
• Investors can download Argentina’s investor guide through this link: (https://drive.google.com/file/d/0B-086VB27JBjN0x0NmM4Y09GODA/view )

Competition and Anti-Trust Laws

The National Commission for the Defense of Competition and the Secretariat of Commerce, both within the Ministry of Production and Labor, have enforcement authority of the Competition Law (Law 25,156). The law aims to promote a culture of competition in all sectors of the national economy. In May 2018, the Argentine Congress approved a new Defense of the Competition Law (Law 27,442). The new law incorporates anti-competitive conduct regulations and a leniency program to facilitate cartel investigation. The full text of the law can be viewed at: http://servicios.infoleg.gob.ar/infolegInternet/verNorma.do?id=310241 .

Expropriation and Compensation

Section 17 of the Argentine Constitution affirms the right of private property and states that any expropriation must be authorized by law and compensation must be provided. The United States-Argentina BIT states that investments shall not be expropriated or nationalized except for public purposes upon prompt payment of the fair market value in compensation.

Argentina has a history of expropriations under previous administrations, the most recent of which occurred in March 2015 when the Argentine Congress approved the nationalization of the train and railway system. A number of companies that were privatized during the 1990s under the Menem administration were renationalized under the Kirchner administrations. Additionally, in October 2008, Argentina nationalized its private pension funds, which amounted to approximately one-third of total GDP, and transferred the funds to the government social security agency.

In May 2012, the Fernandez de Kirchner administration nationalized the oil and gas company Repsol-YPF. Although most of the litigation was settled in 2016, a small percentage of stocks owned by an American hedge fund remain in litigation in U.S. courts.

Dispute Settlement

ICSID Convention and New York Convention

Argentina is signatory to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitration Awards, which the country ratified in 1989. Argentina is also a party to the International Center for Settlement of Investment Disputes (ICSID) Convention since 1994.

There is neither specific domestic legislation providing for enforcement under the 1958 New York Convention nor legislation for the enforcement of awards under the ICSID Convention. Companies that seek recourse through Argentine courts may not simultaneously pursue recourse through international arbitration. In practice, the Macri administration has shown a willingness to negotiate settlements to valid arbitration awards.

In March 2012, the United States suspended Argentina’s designation as a Generalized System of Preferences (GSP) beneficiary developing country because it had not acted in good faith in enforcing arbitration awards in favor of United States citizens or a corporation, partnership, or association that is 50 percent or more beneficially owned by United States citizens. Effective January 1, 2018, the United States ended Argentina’s suspension from the GSP program.  Following Congressional reauthorization of the program, as of April 22, 2018, Argentina’s access was restored for GSP duty-free treatment for over 3,000 Argentine products.

Investor-State Dispute Settlement

The Argentine government officially accepts the principle of international arbitration. The United States-Argentina BIT includes a chapter on Investor-State Dispute Settlement for U.S. investors.

In the past ten years, Argentina has been brought before the ICSID in 54 cases involving U.S. or other foreign investors. Argentina currently has four pending arbitration cases filed against it by U.S. investors. For more information on the cases brought by U.S. claimants against Argentina, go to: https://icsid.worldbank.org/en/Pages/cases/AdvancedSearch.aspx# .

Local courts cannot enforce arbitral awards issued against the government based on the public policy clause. There is no history of extrajudicial action against foreign investors.

Argentina is a member of the United Nations Commission on International Trade Law (UNCITRAL) and the World Bank’s Multilateral Investment Guarantee Agency (MIGA).

Argentina is also a party to several bilateral and multilateral treaties and conventions for the enforcement and recognition of foreign judgments, which provide requirements for the enforcement of foreign judgments in Argentina, including:

Treaty of International Procedural Law, approved in the South-American Congress of Private International Law held in Montevideo in 1898, ratified by Argentina by law No. 3,192.

Treaty of International Procedural Law, approved in the South-American Congress of Private International Law held in Montevideo in 1939-1940, ratified by Dec. Ley 7771/56 (1956).

Panamá Convention of 1975, CIDIP I: Inter-American Convention on International Commercial Arbitration, adopted within the Private International Law Conferences – Organization of American States, ratified by law No. 24,322 (1995).

Montevideo Convention of 1979, CIDIP II: Inter-American Convention on Extraterritorial Validity of Foreign Judgments and Arbitral Awards, adopted within the Private International Law Conferences – Organization of American States, ratified by law No. 22,921 (1983).

International Commercial Arbitration and Foreign Courts

Alternative dispute resolution (ADR) mechanisms can be stipulated in contracts. Argentina also has ADR mechanisms available such as the Center for Mediation and Arbitrage (CEMARC) of the Argentine Chamber of Trade. More information can be found at: http://www.intracen.org/Centro-de-Mediacion-y-Arbitraje-Comercial-de-la-Camara-Argentina-de-Comercio—CEMARC–/#sthash.RagZdv0l.dpuf .

Argentina does not have a specific law governing arbitration, but it has adopted a mediation law (Law 24.573/1995), which makes mediation mandatory prior to litigation. Some arbitration provisions are scattered throughout the Civil Code, the National Code of Civil and Commercial Procedure, the Commercial Code, and three other laws. The following methods of concluding an arbitration agreement are non-binding under Argentine law: electronic communication, fax, oral agreement, and conduct on the part of one party. Generally, all commercial matters are subject to arbitration. There are no legal restrictions on the identity and professional qualifications of arbitrators. Parties must be represented in arbitration proceedings in Argentina by attorneys who are licensed to practice locally. The grounds for annulment of arbitration awards are limited to substantial procedural violations, an ultra petita award (award outside the scope of the arbitration agreement), an award rendered after the agreed-upon time limit, and a public order violation that is not yet settled by jurisprudence when related to the merits of the award. On average, it takes around 21 weeks to enforce an arbitration award rendered in Argentina, from filing an application to a writ of execution attaching assets (assuming there is no appeal). It takes roughly 18 weeks to enforce a foreign award. The requirements for the enforcement of foreign judgments are set out in section 517 of the National Procedural Code.

No information is available as to whether the domestic courts frequently rule in cases in favor of state-owned enterprises (SOE) when SOEs are party to a dispute.

Bankruptcy Regulations

Argentina’s bankruptcy law was codified in 1995 in Law 24,522. The full text can be found at: http://www.infoleg.gov.ar/infolegInternet/anexos/25000-29999/25379/texact.htm . Under the law, debtors are generally able to begin insolvency proceedings when they are no longer able to pay their debts as they mature. Debtors may file for both liquidation and reorganization. Creditors may file for insolvency of the debtor for liquidation only. The insolvency framework does not require approval by the creditors for the selection or appointment of the insolvency representative or for the sale of substantial assets of the debtor. The insolvency framework does not provide rights to the creditor to request information from the insolvency representative but the creditor has the right to object to decisions by the debtor to accept or reject creditors’ claims. Bankruptcy is not criminalized; however, convictions for fraudulent bankruptcy can carry two to six years of prison time.

Financial institutions regulated by the Central Bank of Argentina (BCRA) publish monthly outstanding credit balances of their debtors; the BCRA and the National Center of Debtors (Central de Deudores) compile and publish this information. The database is available for use of financial institutions that comply with legal requirements concerning protection of personal data. The credit monitoring system only includes negative information, and the information remains on file through the person’s life. At least one local NGO that makes microcredit loans is working to make the payment history of these loans publicly accessible for the purpose of demonstrating credit history, including positive information, for those without access to bank accounts and who are outside of the Central Bank’s system. Equifax, which operates under the local name “Veraz” (or “truthfully”), also provides credit information to financial institutions and other clients, such as telecommunications service providers and other retailers that operate monthly billing or credit/layaway programs.

The World Bank’s 2018 Doing Business Report ranked Argentina 101 among 189 countries for the effectiveness of its insolvency law. This is a jump of 15 places from its ranking of 116 in 2017. The report notes that it takes an average of 2.4 years and 16.5 percent of the estate to resolve bankruptcy in Argentina.

Investment Incentives

Government incentives do not make any distinction between foreign and domestic investors.

The Argentine government offers a number of investment promotion programs at the federal, provincial, and municipal levels to attract investment to specific economic sectors such as capital assets and infrastructure, innovation and technological development, and energy, with no discrimination between national or foreign-owned enterprises. They also offer incentives to encourage the productive development of specific geographical areas. The Investment and International Trade Promotion Agency provides cost-free assessment and information to investors to facilitate operations in the country. Argentina’s investment promotion programs and regimes can be found at: http://www.investandtrade.org.ar/?lang=en  http://www.inversionycomercio.org.ar/en/where_tax_benefits.php?wia=1&lang=en<http://www.inversionycomercio.org.ar/docs/pdf/Doing_Business_in_Argentina-2018.pdf, and http://www.produccion.gob.ar.

The National Fund for the Development of Micro, Small, and Medium Enterprises provides low cost credit to small and medium-sized enterprises for investment projects, labor, capital, and energy efficiency improvement with no distinction between national or foreign-owned enterprises. More information can be found at https://www.argentina.gob.ar/produccion/financiamiento 

The Ministry of Production and Labor supports numerous employment training programs that are frequently free to the participants and do not differentiate based on nationality.

Some of the investment promotion programs require investments within a specific region or locality, industry, or economic activity. Some programs offer refunds on Value-Added Tax (VAT) or other tax incentives for local production of capital goods.

Foreign Trade Zones/Free Ports/Trade Facilitation

Argentina has two types of tax-exempt trading areas: Free Trade Zones (FTZ), which are located throughout the country, and the more comprehensive Special Customs Area (SCA), which covers all of Tierra del Fuego Province and is scheduled to expire at the end of 2023.

Argentine law defines an FTZ as a territory outside the “general customs area” (GCA, i.e., the rest of Argentina) where neither the inflows nor outflows of exported final merchandise are subject to tariffs, non-tariff barriers, or other taxes on goods. Goods produced within a FTZ generally cannot be shipped to the GCA unless they are capital goods not produced in the rest of the country. The labor, sanitary, ecological, safety, criminal, and financial regulations within FTZs are the same as those that prevail in the GCA. Foreign firms receive national treatment in FTZs.

Merchandise shipped from the GCA to a FTZ may receive export incentive benefits, if applicable, only after the goods are exported from the FTZ to a third country destination. Merchandise shipped from the GCA to a FTZ and later exported to another country is not exempt from export taxes. Any value added in an FTZ or re-export from an FTZ is exempt from export taxes. For more information on FTZ in Argentina see: http://www.afip.gob.ar/zonasFrancas/ .

Products manufactured in an SCA may enter the GCA free from taxes or tariffs. In addition, the government may enact special regulations that exempt products shipped through an SCA (but not manufactured therein) from all forms of taxation except excise taxes. The SCA program provides benefits for established companies that meet specific production and employment objectives.

Performance and Data Localization Requirements

Employment and Investor Requirements

The Argentine national government does not have local employment mandates nor does it apply such schemes to senior management or boards of directors. However, certain provincial governments do require employers to hire a certain percentage of their workforce from provincial residents. There are no excessively onerous visa, residence, work permit, or similar requirements inhibiting mobility of foreign investors and their employees. Under Argentine Law, conditions to invest are equal for national and foreign investors. As of March 2018, citizens of MERCOSUR countries can obtain legal residence within five months and at little cost, which grants permission to work. Argentina suspended its method for expediting this process in early 2018.

Goods, Technology, and Data Treatment

Argentina has local content requirements for specific sectors. Requirements are applicable to domestic and foreign investors equally. Argentine law establishes a national preference for local industry for most government procurement if the domestic supplier’s tender is no more than five to seven percent higher than the foreign tender. The amount by which the domestic bid may exceed a foreign bid depends on the size of the domestic company making the bid. On May 10, 2018, Argentina issued Law 27,437, giving additional priority to Argentine small and medium-sized enterprises and, separately, requiring that foreign companies that win a tender must subcontract domestic companies to cover 20 percent of the value of the work. The preference applies to procurement by all government agencies, public utilities, and concessionaires.  There is similar legislation at the sub-national (provincial) level.

On September 5, 2018, the government issued Decree 800/2018, which provides the regulatory framework for Law 27,437. On November 16, 2016, the government passed a public-private partnership (PPP) law (27,328) that regulates public-private contracts. The law lowered regulatory barriers to foreign investment in public infrastructure projects with the aim of attracting more foreign direct investment. Several projects under the PPP initiative have been canceled or put on hold due to an ongoing investigation on corruption in public works projects during the last administration. The PPP law contains a “Buy Argentina” clause that mandates at least 33 percent local content for every public project.

Argentina is not a signatory to the WTO Agreement on Government Procurement (GPA), but it became an observer to the GPA in February 1997.

On July 5, 2016, the Ministry of Production and Labor and the Ministry of Energy and Mining issued Joint Resolutions 123 and 313, which allow companies to obtain tax benefits on purchases of solar or wind energy equipment for use in investment projects that incorporate at least 60 percent local content in their electromechanical installations.  In cases where local supply is insufficient to reach the 60 percent threshold, the threshold can be reduced to 30 percent. The resolutions also provide tax exemptions for imports of capital and intermediate goods that are not locally produced for use in the investment projects.

On August 1, 2016, Argentina passed law 27,263, implemented by Resolution 599-E/2016, which provides tax credits to automotive manufacturers for the purchase of locally-produced automotive parts and accessories incorporated into specific types of vehicles. The tax credits range from 4 percent to 15 percent of the value of the purchased parts.  The list of vehicle types included in the regime can be found here: http://servicios.infoleg.gob.ar/infolegInternet/anexos/260000-264999/263955/norma.htm . On April 20, 2018, Argentina issued Resolution 28/2018, simplifying the procedure for obtaining the tax credits. The resolution also establishes that if the national content drops below the minimum required by the resolution because of relative price changes due to exchange rate fluctuations, automotive manufacturers will not be considered non-compliant with the regime. However, the resolution sets forth that tax benefits will be suspended for the quarter when the drop was registered.

The Media Law, enacted in 2009 and amended in 2015, requires companies to produce advertising and publicity materials locally or to include 60 percent local content. The Media Law also establishes a 70 percent local production content requirement for companies with radio licenses. Additionally, the Media Law requires that 50 percent of the news and 30 percent of the music that is broadcast on the radio be of Argentine origin. In the case of private television operators, at least 60 percent of broadcast content must be of Argentine origin. Of that 60 percent, 30 percent must be local news and 10 to 30 percent must be local independent content.

Argentina establishes percentages of local content in the production process for manufacturers of mobile and cellular radio communication equipment operating in Tierra del Fuego province.  Resolution 66, issued July 12, 2018, replaces Resolution 1219/2015 and maintains the local content requirement for products such as technical manuals, packaging, and labeling. Resolution 66 eliminated the local content requirement imposed by Resolution 1219 for batteries, screws, and chargers. The percentage of local content required ranges from 10 percent to 100 percent depending on the process or item. In cases where local supply is insufficient to meet local content requirements, companies may apply for an exemption that is subject to review every six months. A detailed description of local content percentage requirements can be found here .

There are no requirements for foreign IT providers to turn over source code and/or provide access to encryption, nor does the government prevent companies from freely transmitting customer or other business-related data outside the country’s territory.

Argentina does not have forced localization of content in technology or requirements of data storage in country.

Investment Performance Requirements

There is no discrimination between domestic and foreign investors in investment incentives. There are no performance requirements. A complete guide of incentives for investors in Argentina can be found at: http://www.inversionycomercio.org.ar/invest_argentina.php .

Real Property

Secured interests in property, including mortgages, are recognized in Argentina. Such interests can be easily and effectively registered. They also can be readily bought and sold. Argentina manages a national registry of real estate ownership (Registro de la Propiedad Inmueble) at http://www.dnrpi.jus.gov.ar/ . No data is available on the percent of all land that does not have clear title. There are no specific regulations regarding land lease and acquisition of residential and commercial real estate by foreign investors. Law 26,737 (Regime for Protection of National Domain over Ownership, Possession or Tenure of Rural Land) establishes the restrictions of foreign ownership on rural and productive lands, including water bodies. Foreign ownership is also restricted on land located near borders.

Legal claims may be brought to evict persons unlawfully occupying real property, even if the property is unoccupied by the lawful owner. However, these legal proceedings can be quite lengthy, and until the legal proceedings are complete, evicting squatters is problematic. The title and actual conditions of real property interests under consideration should be carefully reviewed before acquisition.

Argentine Law 26.160 prevents the eviction and confiscation of land traditionally occupied by indigenous communities in Argentina, or encumbered with an indigenous land claim. Indigenous land claims can be found in the land registry. Enforcement is carried out by the National Institute of Indigenous Affairs, under the Ministry of Social Development.

Intellectual Property Rights

The government of Argentina adheres to some treaties and international agreements on intellectual property (IP) and belongs to the World Intellectual Property Organization and the World Trade Organization. The Argentine Congress ratified the Uruguay Round agreements, including the provisions on intellectual property, in Law 24425 on January 5, 1995.

The U.S. Trade Representative’s 2019 Special 301 Report identified Argentina on the Priority Watch List. Trading partners on the Priority Watch List present the most significant concerns regarding inadequate or ineffective IP protection or enforcement or actions that otherwise limit market access for persons relying on IP protection. For a complete version of the 2019 Report, see: https://ustr.gov/about-us/policy-offices/press-office/press-releases/2018/april/ustr-releases-2018-special-301-report .

Argentina continues to present longstanding and well-known challenges to IP-intensive industries, including from the United States. A key deficiency in Argentina’s legal framework for patents is the unduly broad limitations on patent eligible subject matter. Pursuant to a highly problematic 2012 Joint Resolution establishing guidelines for the examination of patents, Argentina rejects patent applications for categories of pharmaceutical inventions that are eligible for patentability in other jurisdictions, including in the United States. Additionally, to be patentable, Argentina requires that processes for the manufacture of active compounds disclosed in a specification be reproducible and applicable on an industrial scale. Stakeholders assert that Resolution 283/2015, introduced in September 2015, also limits the ability to patent biotechnological innovations based on living matter and natural substances. Such measures have interfered with the ability of companies investing in Argentina to protect their IP and may be inconsistent with international norms. Another ongoing challenge to the innovative agricultural, chemical, and pharmaceutical sectors is inadequate protection against the unfair commercial use, as well as unauthorized disclosure, of undisclosed test or other data generated to obtain marketing approval for products in those sectors. Argentina struggles with a substantial backlog of patent applications resulting in long delays for innovators seeking patent protection in the market, a problem compounded by a reduction in the number of patent examiners in 2018 primarily due to a government-wide hiring freeze.

Enforcement of IP rights in Argentina continues to be a challenge and stakeholders report widespread unfair competition from sellers of counterfeit and pirated goods and services. La Salada in Buenos Aires remains the largest counterfeit market in Latin America. Argentine police generally do not take ex officio actions, prosecutions can stall and languish in excessive formalities, and, when a criminal case does reach final judgment, infringers rarely receive deterrent sentences. Hard goods counterfeiting and optical disc piracy is widespread, and online piracy continues to grow as criminal enforcement against online piracy is nearly nonexistent. As a result, IP enforcement online in Argentina consists mainly of right holders trying to convince cooperative Argentine ISPs to agree to take down specific infringing works, as well as attempting to seek injunctions in civil cases. Right holders also cite widespread use of unlicensed software by Argentine private enterprises and the government.

Over the last year, Argentina made limited progress in IP protection and enforcement. Beset with economic challenges, Argentina’s government agencies were strapped by a reduction of funding and a government-wide hiring freeze, and many of Argentina’s IP-related initiatives that had gained momentum last year did not gain further traction due to a lack of resources. Despite these circumstances, the National Institute of Industrial Property (INPI) revamped its procedures and began accepting electronic filing of patent, trademark, and industrial designs applications as of October 1, 2018. Argentina also improved registration procedures for trademarks and industrial designs.  On trademarks, the law now provides for a fast track option that reduces the time to register a trademark to four months. The United States continues to monitor this change as INPI works on the implementing regulation. For industrial designs, INPI now accepts multiple applications in a single filing and applicants may substitute digital photographs for formal drawings. To further improve patent protection in Argentina, including for small and medium-sized enterprises, the United States urges Argentina to ratify the Patent Cooperation Treaty (PCT).

Argentina’s efforts to combat counterfeiting continue, but without systemic measures, illegal activity persists.  Argentine authorities arrested the alleged operators of the market La Salada as well as numerous associates in 2017, but vendors continue to sell counterfeit and pirated goods at the market and throughout Buenos Aires. The United States has encouraged Argentina to create a national IP enforcement strategy to build on these successes and move to a sustainable, long-lasting initiative. The United States also has encouraged legislative proposals to this effect, along the lines of prior bills introduced in Congress to provide for landlord liability and stronger enforcement on the sale of infringing goods at outdoor marketplaces such as La Salada, and to amend the trademark law to increase criminal penalties for counterfeiting carried out by criminal networks. In November 2017, Argentina entered into an agreement with the Chamber of Medium-Sized Enterprises and the Argentine Anti-Piracy Association to create a National Anti-Piracy Initiative focusing initially on trademark counterfeiting. The United States encourages Argentina to expand this initiative to online piracy. In March, revisions to the criminal code, including certain criminal sanctions for circumventing technological protection measures (TPMs), were submitted to Congress. While Argentina has moved forward with the creation of a federal specialized IP prosecutor’s office, the office is not yet in operation. In November 2018, following a constructive bilateral meeting earlier in the year, Argentina and the United States held a DVC under the bilateral Innovation and Creativity Forum for Economic Development, part of the U.S.-Argentina Trade and Investment Framework Agreement (TIFA), to continue discussions and collaboration on IP topics of mutual interest. The United States intends to monitor all the outstanding issues for progress, and urges Argentina to continue its efforts to create a more attractive environment for investment and innovation.

For statistics on illegal sales in Argentina, go to the following link: http://redcame.org.ar/seccion/relevamiento-venta-ilegal 

Capital Markets and Portfolio Investment

The Macri administration has enacted a series of macroeconomic reforms (unifying the exchange rate, settling with holdout creditors, annulling most of the trade restrictions, lifting capital controls, to mention a few) to improve the investment climate. In May 2018, the Congress approved a new capital markets law aimed at boosting economic growth through the development and deepening of the local capital market. The law removed over-reaching regulatory intervention provisions introduced by the previous government and eased restrictions on mutual funds and foreign portfolio investment in domestic markets. Argentina also signed several bilateral agreements and MOUs with other countries aimed to increase foreign direct investment. There are no restrictions on payments and transfers abroad (in accordance with IMF Article VIII).

The Argentine Securities and Exchange Commission (CNV or Comision Nacional de Valores) is the federal agency that regulates securities markets offerings. Securities and accounting standards are transparent and consistent with international norms. Foreign investors have access to a variety of options on the local market to obtain credit. Nevertheless, the domestic credit market is small – credit is 16 percent of GDP, according to the World Bank. The Buenos Aires Stock Exchange is the organization responsible for the operation of Argentina’s primary stock exchange, located in Buenos Aires city. The most important index of the Buenos Aires Stock Exchange is the MERVAL (Mercado de Valores).

U.S. banks, securities firms, and investment funds are well-represented in Argentina and are dynamic players in local capital markets. In 2003, the government began requiring foreign banks to disclose to the public the nature and extent to which their foreign parent banks guarantee their branches or subsidiaries in Argentina.

Money and Banking System

Argentina has a relatively sound banking sector based on diversified revenues, well-contained operating costs, and a high liquidity level. The main challenge for banks is to rebuild long-term assets and liabilities. Due to adverse international and domestic conditions with the economy entering into a recession with high inflation and interest rates, credit to the private sector in local currency (for both corporations and individuals) decreased 18 percent in real terms in 2018. In spite of falling credit, banks remain well equipped to weather weak economic conditions. The largest bank is the Banco de la Nacion Argentina. Non-performing private sector loans constitute less than four percent of banks’ portfolios. The ten largest private banks have total assets of approximately ARS 2,643 billion (USD 64 billion). Total financial system assets are approximately ARS 5,506 billion (USD 134 billion). The Central Bank of Argentina acts as the country’s financial agent and is the main regulatory body for the banking system.

Foreign banks and branches are allowed to establish operations in Argentina. They are subject to the same regulation as local banks. Argentina’s Central Bank has many correspondent banking relationships, none of which are known to have been lost in the past three years.

The Central Bank has enacted a resolution recognizing cryptocurrencies and requiring that they comply with local banking and tax laws. No implementing regulations have been adopted. Blockchain developers report that several companies in the financial services sector are exploring or considering using blockchain-based programs externally and are using some such programs internally. One Argentine NGO, through funding from the Inter-American Development Bank (IDB), is developing blockchain-based banking applications to assist low income populations.

Foreign Exchange and Remittances

Foreign Exchange

President Macri has issued a number of regulations that lifted all capital controls and reduced trade restrictions. In November 2017, the government repealed the obligation to convert hard currency earnings on exports of both goods and services to pesos in the local foreign exchange market.

Per Resolution 36,162 of October 2011, locally registered insurance companies are mandated to maintain all investments and cash equivalents in the country. The BCRA limits banks’ dollar-denominated asset holdings to 10 percent of their net worth.

In June 2018, the International Monetary Fund (IMF) and Argentina announced a Standby Arrangement agreement (SBA). Three months after agreeing to a USD 50 billion SBA, Argentina and the IMF announced in September 2018 a set of revisions, including an increase of the line of credit by USD 7.1 billion and front loading the disbursement of funds. The revised program sought to erase any doubts about the government’s ability to cover its financing needs for 2018 and 2019 and in turn, Argentina committed to meeting strict new budget and monetary policy targets. On the monetary side, the BCRA replaced inflation targeting with a policy to ensure zero growth of the monetary base through December 2019. The BCRA also allows the exchange rate to float freely between a floor and ceiling of 34 and 44 pesos per dollar (at the time of introducing the framework).

Originally, the BCRA hoped that the floor and ceiling bounds would avoid a real appreciation of the peso; the adjustment started with a 3 percent monthly increase for the last quarter of 2018, and would drop to a monthly 1.75 percent increase for the second quarter of 2019. However, in mid-April 2019, the BCRA announced that the floor and ceiling will remain constant until the end of 2019, at 39.8 and 51.5 pesos per dollar, respectively. Under this framework, the BCRA may only sell up to USD 150 million reserves per day when trading above the ceiling.

Remittance Policies

According to Resolutions 3,819/2015 and 1/2017, companies and investors have no official restrictions on money conversion, remittances, or repatriation of their earnings.

Sovereign Wealth Funds

The Argentine Government does not maintain a Sovereign Wealth Fund.

The Argentine government has state-owned enterprises (SOEs) or significant stakes in mixed-capital companies in the following sectors: civil commercial aviation, water and sanitation, oil and gas, electricity generation, transport, paper production, satellite, banking, railway, shipyard, and aircraft ground handling services.

By Argentine law, a company is considered a public enterprise if the state owns 100 percent of the company’s shares. The state has majority control over a company if the state owns 51 percent of the company’s shares. The state has minority participation in a company if the state owns less than 51 percent of the company’s shares. Laws regulating state-owned enterprises and enterprises with state participation can be found at http://www.saij.gob.ar/13653-nacional-regimen-empresas-estado-lns0001871-1955-03-23/123456789-0abc-defg-g17-81000scanyel .

Through the government’s social security agency (ANSES), the Argentine government owns stakes ranging from one to 31 percent in 46 publically-listed companies. U.S. investors also own shares in some of these companies. As part of the ANSES takeover of Argentina’s private pension system in 2008, the government agreed to commit itself to being a passive investor in the companies and limit the exercise of its voting rights to 5 percent, regardless of the equity stake the social security agency owned. A list of such enterprises can be found at: http://fgs.anses.gob.ar/participacion .

State-owned enterprises purchase and supply goods and services from the private sector and foreign firms. Private enterprises may compete with SOEs under the same terms and conditions with respect to market share, products/services, and incentives. Private enterprises also have access to financing terms and conditions similar to SOEs. SOEs are subject to the same tax burden and tax rebate policies as their private sector competitors. SOEs are not currently subject to firm budget constraints under the law, and have been subsidized by the central government in the past; however, the Macri administration is reducing subsidies in the energy, water, and transportation sectors. Argentina does not have regulations that differentiate treatment of SOEs and private enterprises. Argentina has observer status under the WTO Agreement on Government Procurement and, as such, SOEs are subject to the conditions of Argentina’s observance.

Argentina does not have a specified ownership policy, guideline or governance code for how the government exercises ownership of SOEs. The country generally adheres to the OECD Guidelines on Corporate Governance of SOEs. The practices for SOEs are mainly in compliance with the policies and practices for transparency and accountability in the OECD Guidelines.

Argentina does not have a centralized ownership entity that exercises ownership rights for each of the SOEs. The general rule in Argentina is that requirements that apply to all listed companies also apply to publicly-listed SOEs.

In 2018, the OECD released a report evaluating the corporate governance framework for the Argentine SOE sector relative to the OECD Guidelines on Corporate Governance of SOEs, which can be viewed here: http://www.oecd.org/countries/argentina/oecd-review-corporate-governance-soe-argentina.htm .

Privatization Program

The current administration has not developed a privatization program.

There is an increasing awareness of corporate social responsibility (CSR) and responsible business conduct (RBC) among both producers and consumers in Argentina. RBC and CSR practices are welcomed by beneficiary communities throughout Argentina. There are many institutes that promote RBC and CSR in Argentina, the most prominent being the Argentine Institute for Business Social Responsibility (http://www.iarse.org /), which has been working in the country for more than 17 years and includes among its members many of the most important companies in Argentina.

Argentina is a member of the United Nation’s Global Compact. Established in April 2004, the Global Compact Network Argentina is a business-led network with a multi-stakeholder governing body elected for two-year terms by active participants. The network is supported by the United Nations Development Program (UNDP) Argentina in close collaboration with other UN Agencies. The Global Compact Network Argentina is the most important RBC/CSR initiative in the country with a presence in more than 20 provinces. More information on the initiative can be found at: http://pactoglobal.org.ar .

Foreign and local enterprises tend to follow generally accepted CSR/RBC principles. Argentina subscribed to the Declaration on the OECD Guidelines for Multinational Enterprises in April 1997.

Many provinces, such as Mendoza and Neuquen, have or are in the process of enacting a provincial CSR/RBC law. There have been many previously unsuccessful attempts to pass a CSR/RBC law. Distrust over the State’s role in private companies had been the main concern for legislators opposed to these bills.

In February 2019, the Argentine government joined the Extractive Industries Transparency Initiative (EITI).

Argentina’s legal system incorporates several measures to address public sector corruption. The government institutions tasked with combatting corruption include the Anti-Corruption Office (ACO), the National Auditor General, and the General Comptroller’s Office. Public officials are subject to financial disclosure laws, and the Ministry of Justice’s ACO is responsible for analyzing and investigating federal executive branch officials based on their financial disclosure forms. The ACO is also responsible for investigating corruption within the federal executive branch or in matters involving federal funds, except for funds transferred to the provinces. While the ACO does not have authority to independently prosecute cases, it can refer cases to other agencies or serve as the plaintiff and request a judge to initiate a case.

Argentina enacted a new Corporate Criminal Liability Law in November 2017 following the advice of the OECD to comply with its Anti-Bribery Convention. The full text of Law 27,401 can be found at: http://servicios.infoleg.gob.ar/infolegInternet/anexos/295000-299999/296846/norma.htm . The new law entered into force in early 2018. It extends anti-bribery criminal sanctions to corporations, whereas previously they only applied to individuals; expands the definition of prohibited conduct, including illegal enrichment of public officials; and allows Argentina to hold Argentines responsible for foreign bribery. Sanctions include fines and blacklisting from public contracts. Argentina also enacted an express prohibition on the tax deductibility of bribes.

Corruption has been an issue in Argentina. In its March 2017 report, the OECD expressed concern about Argentina’s enforcement of foreign bribery laws, inefficiencies in the judicial system, politicization and perceived lack of independence at the Attorney General’s Office, and lack of training and awareness for judges and prosecutors. According to the World Bank’s worldwide governance indicators, corruption remains an area of concern in Argentina. In the latest Transparency International Corruption Perceptions Index (CPI) that ranks countries and territories by their perceived levels of corruption, Argentina ranked 85 out of 180 countries in 2018, an improvement of 10 places versus 2016. Allegations of corruption in provincial as well as federal courts remained frequent. Few Argentine companies have implemented anti-foreign bribery measures beyond limited codes of ethics.

Since assuming office, President Macri made combating corruption and improving government transparency a priority objective for his administration. In September 2016, Congress passed a law on public access to information. The law explicitly applies to all three branches of the federal government, the public justice offices, and entities such as businesses, political parties, universities, and trade associations that receive public funding. It requires these institutions to respond to citizen requests for public information within 15 days, with an additional 15-day extension available for “exceptional” circumstances. Sanctions apply for noncompliance. The law also mandates the creation of the Agency for Access to Public Information, an autonomous office within the executive branch. President Macri also proposed a series of criminal justice and administrative reforms. Chief among these are measures to speed the recovery of assets acquired through corruption, plea-bargaining-type incentives to encourage judicial cooperation, and greater financial disclosure for public servants. In early 2016, the Argentine government reaffirmed its commitment to the Open Government Partnership (OGP), became a founding member of the Global Anti-Corruption Coalition, and reengaged the OECD Working Group on Bribery.

Argentina is a party to the Organization of American States’ Inter-American Convention against Corruption. It ratified in 2001 the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (Anti-Bribery Convention). Argentina also signed and ratified the UN Convention against Corruption (UNCAC) and participates in UNCAC’s Conference of State Parties. Argentina also participates in the Mechanism for Follow-up on the Implementation of the Inter-American Convention against Corruption (MESICIC).

Since Argentina became a party to the OECD Anti-Bribery Convention, allegations of Argentine individuals or companies bribing foreign officials have surfaced. A March 2017 report by the OECD Working Group on Bribery indicated there were 13 known foreign bribery allegations involving Argentine companies and individuals as of that date.  According to the report, Argentine authorities investigated and closed some of the allegations and declined to investigate others.  The authorities determined some allegations did not involve foreign bribery but rather other offenses.  Several such allegations remained under investigation. 

Resources to Report Corruption

Laura Alonso
Director
Government of Argentina Anti-Corruption Office
Oficina Anticorrupción, Tucumán 394, C1049AAH, Ciudad Autónoma de Buenos Aires.
Phone: +54 11 5167 6400
Email: anticorrupcion@jus.gov.ar and http://denuncias.anticorrupcion.gob.ar/ 

Poder Ciudadano (Local Transparency International Affiliate)
Phone: +54 11 4331 4925 ext 225
Fax: +54 11 4331 4925
Email: comunicaciones@poderciudadano.org
Website: http://www.poderciudadano.org 

Demonstrations are common in metropolitan Buenos Aires and in other major cities and rural areas. Political violence is not widely considered a hindrance to the investment climate in Argentina.

Protesters regularly block streets, highways, and major intersections, causing traffic jams and delaying travel. Public demonstrations, strikes, and street blocking barricades increased in 2018 in response to economic and political issues. While demonstrations are usually non-violent, individuals sometimes seek confrontation with the police and vandalize private property. Groups occasionally protest in front of the U.S. Embassy or U.S.-affiliated businesses. In February 2016, the Ministry of Security approved a National Anti-Street Pickets Protocol that provides guidelines to prevent the blockage of major streets and public facilities during demonstrations. However, this protocol did not often apply to venues within the City of Buenos Aires (CABA), which fall under the city’s jurisdiction.  The CABA government often did not enforce security protocols against illegal demonstrations.

In December 2017, while Congress had called an extraordinary session to address the retirement system reforms, several demonstrations against the bill turned violent, causing structural damage to public and private property, injuries to 162 people (including 88 policemen), and arrests of 60 people. The demonstrations ultimately dissipated, and the government passed the bill.

Argentine workers are among the most highly-educated and skilled in Latin America. Foreign investors often cite Argentina’s skilled workforce as a key factor in their decision to invest in Argentina. Argentina has relatively high social security, health, and other labor taxes, however, and high labor costs are among foreign investors’ most often cited operational challenges. The unemployment rate was 9.1 percent in the fourth quarter of 2018, according to official statistics. The government estimated unemployment for workers below 29 years old as roughly double the national rate. Analysts estimate one-third of Argentina’s salaried workforce was employed informally. Though difficult to measure, analysts believe including self-employed informal workers in the estimate would drive the overall rate of informality to 40 percent of the labor force.

Labor laws are comparatively protective of workers in Argentina, and investors cite labor-related litigation as an important factor increasing labor costs in Argentina. There are no special laws or exemptions from regular labor laws in the Foreign Trade Zones. Organized labor plays an important role in labor-management relations and in Argentine politics. Under Argentine law, the Secretariat of Labor recognizes one union per sector per geographic unit (e.g., nationwide, a single province, or a major city) with the right to negotiate a collective bargaining agreement for that sector and geographic area. Roughly 40 percent of Argentina’s formal workforce is unionized. The Secretariat of Labor ratifies collective bargaining agreements. Collective bargaining agreements cover workers in a given sector and geographic area whether they are union members or not, so roughly 70 percent of the workforce was covered by an agreement. While negotiations between unions and industry are generally independent, the Secretariat of Labor often serves as a mediator. Argentine law also offers recourse to mediation and arbitration of labor disputes.

Tensions between management and unions occur. Many managers of foreign companies say they have good relations with their unions. Others say the challenges posed by strong unions can hinder further investment by their international headquarters. Depending on how sectors are defined, some activities such as oil and gas production or aviation involve multiple unions, which can lead to inter-union power disputes that can impede the companies’ operations.

During 2017, the government helped employers and workers agree on adjustments to collective bargaining agreements covering private sector oil and gas sector workers in Neuquen Province for unconventional hydrocarbon exploration and production. The changes were aimed at reducing certain labor costs and incentivizing greater productivity. Employers and unions reached similar agreements in the construction and automotive sectors. The government intends to adapt such agreements to other sectors, while it seeks to advance broader labor reforms through new legislation.

The government presented to the Congress in November 2017 a labor reform bill, including four broad thrusts: (1) a labor amnesty that would aim to reduce informality by encouraging employers to declare their off-the-books workers to the authorities without penalties or fines; (2) a National Institute of Worker Education to develop policies and programs aimed at workers’ skills development, as well as a system of workplace-based educational programs specifically for secondary, technical, and university students; (3) a technical commission to limit costs for union healthcare programs by evaluating drugs and medical treatments to determine which ones the union plans must cover; and (4) modifications to the labor contract law to reduce employers’ costs, incentivize hiring, and improve competitiveness. Union resistance to the fourth area led the government to divide the bill into three separate proposals covering the first three reform areas, respectively, and to resubmit the new bills to the congress in May 2018. The three labor reform bills remained pending before congress as of March 2019.

Labor-related demonstrations in Argentina occurred periodically in 2018. Reasons for strikes include job losses, high taxes, loss of purchasing power, and wage negotiations. Labor demonstrations may involve tens of thousands of protestors. Recent demonstrations have essentially closed sections of the city for a few hours or days at a time. Demonstrations by airline employees caused significant flight delays or cancellations in recent months as well.

The Secretariat of Labor has hotlines and an online website to report labor abuses, including child labor, forced labor, and labor trafficking. The Superintendent of Labor Risk (Superintendencia de Riesgos del Trabajo) has oversight of health and safety standards. Unions also play a key role in monitoring labor conditions, reporting abuses and filing complaints with the authorities. Argentina has a Service of Mandatory Labor Conciliation (SECLO), which falls within the Secretariat of Labor, Employment and Social Security. Provincial governments and the city government of Buenos Aires are also responsible for labor law enforcement.

The minimum age for employment is 16. Children between the ages of 16 and 18 may work in a limited number of job categories and for limited hours if they have completed compulsory schooling, which normally ends at age 18. The law requires employers to provide adequate care for workers’ children during work hours to discourage child labor. The Department of Labor’s 2016 Worst Form of Child Labor for Argentina can be accessed here: https://www.dol.gov/agencies/ilab/resources/reports/child-labor/argentina 

The Department of State’s 2018 Human Rights Report for Argentina can be accessed here. 

Argentine Law prohibits discrimination on the grounds of sex, race, nationality, religion, political opinion, union affiliation, or age. The law also prohibits employers, either during recruitment or time of employment, from asking about a worker’s political, religious, labor, and cultural views or sexual orientation. These national anti-discrimination laws also apply to labor relations and other social relations.

Argentina has been a member of the International Labor Organization since 1919.

The Argentine government signed a comprehensive agreement with the Overseas Private Investment Corporation (OPIC) in 1989. The agreement allows OPIC to insure U.S. investments against risks resulting from expropriation, inconvertibility, war or other conflicts affecting public order. In November 2018, OPIC and the Government of Argentina signed six letters of interest to advance several projects in support of Argentina’s economic growth. The agreements will support sectors ranging from infrastructure to energy to logistics and total USD 813 million dollars in U.S. support that will catalyze additional private investment.

OPIC is open for business in all Latin American and Caribbean countries except Venezuela and Cuba. Argentina is also a member of the World Bank’s Multilateral Investment Guarantee Agency (MIGA).

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

* https://www.indec.gob.ar/uploads/informesdeprensa/pib_03_19.pdf ;  www.bcra.gov.ar 

Table 3: Sources and Destination of FDI

No information from the IMF’s Coordinated Portfolio Investment Survey (CPIS) for Outward Direct Investment is available for Argentina.

Table 4: Sources of Portfolio Investment

Data not available.

Economic Section
U.S. Embassy Buenos Aires
Avenida Colombia 4300
(C1425GMN)
Buenos Aires, Argentina
+54-11-5777-4747
ECONBA@state.gov

Canada and the United States (U.S.) have one of the largest and most comprehensive investment relationships in the world. U.S. investors are attracted to Canada’s strong economic fundamentals, its proximity to the U.S. market, its highly skilled work force, and abundant resources. As of 2017, the U.S. had a stock of USD391 billion of foreign direct investment (FDI) in Canada.  U.S. FDI stock in Canada represents 49 percent of Canada’s total investment. Canada’s FDI stock in the U.S. totaled USD523 billion.

U.S. FDI in Canada is subject to the provisions of the Investment Canada Act (ICA), the World Trade Organization (WTO), and the 1994 North American Free Trade Agreement (NAFTA). Chapter 11 of NAFTA contains provisions such as “national treatment” designed to protect cross-border investors and facilitate the settlement of investment disputes.  NAFTA does not exempt U.S. investors from review under the ICA, which has guided foreign investment policy in Canada since its implementation in 1985. The ICA provides for review of large acquisitions by non-Canadian investors and includes the requirement that these investments be of “net benefit” to Canada. The ICA also has provisions for the review of investments on national security grounds.  The Canadian government has blocked investments on only a few occasions.

Canada, the United States, and Mexico completed negotiations for a modernized and rebalanced NAFTA agreement on September 30, 2018.  The new United States-Mexico-Canada Agreement (USMCA) was signed by all three countries November 30, 2018 and will come into force after the completion of the domestic ratification processes by each individual member of the agreement.  The agreement updates NAFTA’s provisions with respect to investment protection rules and investor-state dispute settlement procedures to better reflect U.S. priorities related to foreign investment. All Parties to the agreement have agreed to treat investors and investments of the other Parties in accordance with the highest international standards, and consistent with U.S. law and practice, while safeguarding each Party’s sovereignty and promoting domestic investment.

Although foreign investment is a key component of Canada’s economic development, restrictions remain in key sectors. Under the Telecommunications Act, Canada maintains a 46.7 percent limit on foreign ownership of voting shares for a Canadian telecom services provider. However, a 2012 amendment exempts foreign telecom carriers with less than 10 percent market share from ownership restrictions in an attempt to increase competition in the sector. In May 2018, Canada eased its foreign ownership restrictions in the aviation sector, which increased foreign ownership limits of Canadian commercial airlines to 49 percent from 25 percent. Investment in cultural industries also carries restrictions, including a provision under the ICA that foreign investment in book publishing and distribution must be compatible with Canada’s national cultural policies and be of “net benefit” to Canada. Canada is open to investment in the financial sector, but barriers remain in retail banking.

Table 1

The NAFTA guides investment relations between Canada and the U.S. Investment relations with other states are governed by Foreign Investment Protection Agreements (FIPAs). These bilateral treaties promote and protect foreign investment through a system of legally binding rights and obligations based on the same principles found in the NAFTA. Canada has 37 FIPAs in force with countries in Central Europe, Latin America, Africa, and Asia. Canada is actively pursuing FIPAs with 14 countries including India, Pakistan, and Kosovo. Canada views China as an increasingly important trade and investment partner and ratified a FIPA with China in September 2014.  The Canada-EU Comprehensive and Economic Trade Agreement (CETA) was signed in October 2016 and came into force provisionally in September 2017. Canada is a partner to the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), which entered into force in December 2018.

Canada has tax conventions or agreements with many countries, including the U.S.

Transparency of the Regulatory System

The transparency of Canada’s regulatory system is similar to that of the U.S. The legal, regulatory, and accounting systems, including those related to debt obligations, are transparent and consistent with international norms. Proposed legislation is subject to parliamentary debate and public hearings, and regulations are issued in draft form for public comment prior to implementation. While federal and/or provincial licenses or permits may be needed to engage in economic activities, regulation of these activities is generally for statistical or tax compliance reasons.

Canada and the U.S. announced the creation of the Canada-U.S. Regulatory Cooperation Council (RCC) on February 4, 2011. This regulatory cooperation does not encompass all regulatory activities within all agencies. Rather, the RCC focuses on areas where benefits can be realized by regulated parties, consumers, and/or regulators without sacrificing outcomes such as protecting public health, safety and the environment. The initial RCC Joint Action Plan set out 29 initiatives where Canada and the U.S. sought greater regulatory alignment.  A Memorandum of Understanding between the Treasury Board of Canada and the U.S. Office of Information and Regulatory Affairs, signed on June 4, 2018, reaffirmed the RCC as a vehicle for regulatory cooperation.

The World Bank published in-depth information on regulatory transparency for 185 economies. For information on Canada, see http://rulemaking.worldbank.org/data/explorecountries/canada#cer_transparency  .

International Regulatory Considerations

Canada is not part of a regional economic block and does not incorporate regional standards into its economic system. Canada and the U.S. work together through the RCC to develop like standards and streamline product certification on both sides of the border. Canada, with the U.S. and Mexico, is a member of the NAFTA.  The CETA agreement also contains a chapter on regulatory cooperation that commits both sides to strengthen regulatory cooperation and facilitate discussions between regulatory authorities in the EU and Canada. The Comprehensive and Progressive Partnership for Trans-Pacific Partnership contains a chapter on regulatory coherence that aims to encourage members of the agreement to adopt widely accepted good regulatory practices, such as reviewing the effectiveness of existing regulatory practices and providing public notice of future regulatory measures.

Canada is a member of the WTO and notifies draft technical regulations to the WTO Committee on Technical Barriers to Trade (TBT). Canada is a signatory to the Trade Facilitation Agreement, which it ratified in December 2016.

Legal System and Judicial Independence

Canada’s legal system is based on English common law, except for Quebec, which follows civil law. Canada has both a federal parliament which makes laws for all of Canada and a legislature in each of the provinces and territories that deals with laws in their areas. When Parliament or a provincial or territorial legislature passes a statute, it takes the place of common law or precedents dealing with the same subject. The judicial branch of government is independent of the executive branch and the current judicial process is considered procedurally competent, fair, and reliable. The provinces administer justice in their jurisdictions. This includes organizing and maintaining the civil and criminal provincial courts and civil procedures in those courts.

Canada has both written commercial law and contractual law, and specialized commercial and civil courts. Canada’s Commercial Law Directorate provides advisory and litigation services to federal departments and agencies whose mandate includes a commercial component and has legal counsel in Montréal and Ottawa.

Parliament and provincial and territorial legislatures give government organizations the authority to make specific regulations. As of June 1, 2009, all consolidated Acts and regulations on the Justice Laws Website (http://laws-lois.justice.gc.ca/eng/  ) are “official,” meaning they can be used for evidentiary purposes.

Laws and Regulations on FDI

Foreign investment policy in Canada has been guided by the Investment Canada Act (ICA) since 1985. The ICA liberalized policy on foreign investment by recognizing that investment is central to economic growth and key to technological advancement. The ICA provides for review of large acquisitions by non-Canadians and imposes a requirement that these investments be of “net benefit” to Canada.  The ICA also contains provisions that permit the government to conduct a national security review of virtually any investment or acquisition. For the vast majority of small acquisitions and the establishment of new businesses, foreign investors need only to notify the Canadian government of their investments.

U.S. FDI in Canada is subject to provisions of the ICA, the WTO, and the NAFTA. Chapter 11 of the NAFTA ensures that regulation of U.S. investors in Canada and Canadian investors in the U.S. results in treatment no different than that extended to domestic investors within each country, i.e., “national treatment.” Both governments are free to regulate the ongoing operation of business enterprises in their respective jurisdictions provided that the governments accord national treatment to both U.S. and Canadian investors.

Competition and Anti-Trust Laws

The Bureau of Competition Policy and the Competition Tribunal, a quasi-judicial body, enforce Canada’s antitrust legislation.

Expropriation and Compensation

Canadian federal and provincial laws recognize both the right of the government to expropriate private property for a public purpose, and the obligation to pay compensation. The federal government has not nationalized any foreign firm since the nationalization of Axis property during World War II. Both the federal and provincial governments have assumed control of private firms, usually financially distressed, after reaching agreement with the former owners.

Dispute Settlement

ICSID Convention and New York Convention

Canada ratified the International Centre for Settlement of Investment Disputes (ICSID) Convention on December 1, 2013 and is a signatory to the 1958 New York Convention, ratified on May 12, 1986. Canada signed the United Nations Convention on Transparency in Treaty-based Investor-State Arbitration (known as the Mauritius Convention on Transparency) in March 2015.

Investor-State Dispute Settlement

Canada accepts binding arbitration of investment disputes to which it is a party only when it has specifically agreed to do so through a bilateral or multilateral agreement, such as a Foreign Investment Protection Agreement. The provisions of Chapter 11 of the NAFTA guide the resolution of investment disputes between NAFTA persons and NAFTA member governments. The NAFTA encourages parties to settle disputes through consultation or negotiation. It also establishes special arbitration procedures for investment disputes separate from the NAFTA’s general dispute settlement provisions. Under the NAFTA, a narrow range of disputes dealing with government monopolies and expropriation between an investor from a NAFTA country and a NAFTA government may be settled, at the investor’s option, by binding international arbitration. An investor who seeks binding arbitration in a dispute with a NAFTA party gives up his right to seek redress through the court system of the NAFTA party, except for proceedings seeking nonmonetary damages. Canada does not have a history of extrajudicial action against foreign investors.

A list of current NAFTA Chapter 11 Arbitrations is below:

• Clayton/Bilcon v. Government of Canada: http://www.international.gc.ca/trade-agreements-accords-commerciaux/topics-domaines/disp-diff/clayton.aspx?lang=eng  
• Lone Pine Resources Inc. v. Government of Canada: http://www.international.gc.ca/trade-agreements-accords-commerciaux/topics-domaines/disp-diff/lone.aspx?lang=eng  
• Mobil Investments Inc. v. Government of Canada: http://www.international.gc.ca/trade-agreements-accords-commerciaux/topics-domaines/disp-diff/mobil2.aspx?lang=eng  
• Resolute Forest Products Inc. v. Government of Canada: http://www.international.gc.ca/trade-agreements-accords-commerciaux/topics-domaines/disp-diff/resolute.aspx?lang=eng  
• Tennant Energy, LLC. v. Government of Canada: http://www.international.gc.ca/trade-agreements-accords-commerciaux/topics-domaines/disp-diff/tennant.aspx?lang=eng  
• Westmoreland Coal Company v. Government of Canada: https://www.international.gc.ca/trade-agreements-accords-commerciaux/topics-domaines/disp-diff/westmoreland.aspx?lang=eng  

International Commercial Arbitration and Foreign Courts

Provinces primarily regulate arbitration within Canada. With the exception of Quebec, each province has legislation adopting the UNCITRAL Model Law. The Quebec Civil Code and Code of Civil Procedure are consistent with the UNCITRAL Model Law. The Canadian Supreme Court has ruled that arbitration agreements must be broadly interpreted and enforced. Canadian courts respect arbitral proceedings and have been willing to lend their enforcement powers to facilitate the effective conduct of arbitration proceedings, requiring witnesses to attend and give evidence and produce documents and other evidence to the arbitral tribunal.

Bankruptcy Regulations

Bankruptcy in Canada is governed by the Bankruptcy and Insolvency Act (BIA) and is not criminalized. Creditors must deliver claims to the trustee and the trustee must examine every proof of claim. The trustee may disallow, in whole or in part, any claim of right to a priority under the BIA or security. Generally, the test of proving the claim before the trustee in bankruptcy is very low and a claim is proved unless it is too “remote and speculative.” Provision is also made for dealing with cross-border insolvencies and the recognition of foreign proceedings. Canada is ranked number 13 for ease of “resolving insolvency” by the World Bank. Credit bureaus in Canada include Equifax Canada and TransUnion Canada.

Investment Incentives

Federal and provincial governments in Canada offer a wide array of investment incentives that municipalities are generally prohibited from offering. The incentives are designed to advance broader policy goals, such as boosting research and development or promoting regional economies. The funds are available to any qualified Canadian or foreign investor who agrees to use the monies for the stated purpose. For example, Export Development Canada can support inbound investment under certain specific conditions (e.g., investment must be export-focused; export contracts must be in hand or companies have a track record; there is a world or regional product mandate for the product to be produced).  The government also announced the USD 940 million Strategic Innovation Fund in 2017, which provides repayable or non-repayable contributions to firms of all sizes across Canada’s industrial and technology

sectors in an effort to grow and expand those industries.  One of the explicit goals of the program is to attract new investments to Canada.

The Liberal government invested USD 730 million over five years, beginning in 2018, to support five business-led supercluster projects that have the potential to accelerate economic and investment growth in Canada.  The superclusters are now operational, and feature projects in digital technologies, food production, advanced manufacturing, artificial intelligence in supply chain management, and ocean industries. 450 businesses, 60 post-secondary institutions, and 180 other partners are involved in the supercluster projects.  Several U.S. firms are participants, including Microsoft, Boeing, Lockheed Martin, and GE.

Several provinces offer an array of incentive programs and services aimed at attracting foreign investment that lower corporate taxes and incentivize research and development. The Province of Quebec officially re-launched its “Plan Nord” (Northern Plan) in April 2015, a 20-year sustainable development investment initiative that is intended to harness the economic, mineral, energy, and tourism potential of Quebec’s northern territory. Quebec’s government created the “Société du Plan Nord” (Northern Plan Company) to attract investors and work with local communities to implement the plan. Thus far, Plan Nord has helped finance mining projects in northern Quebec and began building the necessary infrastructure to link remote mines with ports. The provincial government is actively seeking other foreign investors who desire to take advantage of these opportunities.

Provincial incentives tend to be more investor-specific and are conditioned on applying the funds to an investment in the granting province. For example, Ontario’s Jobs and Prosperity Fund provides USD2.5 billion from 2013 to 2023 to enhance productivity, bolster innovation, and grow Ontario’s exports. To qualify, companies must have substantive operations (generally three years) and at least C10 million in eligible project costs. Alberta offers companies a 10 percent refundable provincial tax credit worth up to C400,000 annually for scientific research and experimental development encouraging research and development in Alberta as well as Alberta Innovation Vouchers worth C15,000 to C50,000 to help small early-stage technology and knowledge-driven businesses in Alberta get their ideas and products to market faster. Newfoundland and Labrador provide vouchers worth 75 percent of eligible project costs up to C15,000 for R&D, performance testing, field trials, and other projects.

Provincial incentives may also be restricted to firms established in the province or that agree to establish a facility in the province. Government officials at both the federal and provincial levels expect investors who receive investment incentives to use them for the agreed purpose, but no enforcement mechanism exists.

Incentives for investment in cultural industries, at both the federal and provincial level, are generally available only to Canadian-controlled firms. Incentives may take the form of grants, loans, loan guarantees, venture capital, or tax credits. Provincial incentive programs for film production in Canada are available to foreign filmmakers.

Foreign Trade Zones/Free Ports/Trade Facilitation

Under the NAFTA, Canada operates as a free trade zone for products made in the U.S. Most U.S. made goods enter Canada duty free.

Performance and Data Localization Requirements

Data localization is an evolving area in Canada. Privacy rules in two Canadian provinces, British Columbia and Nova Scotia, mandate that personal information in the custody of a public body must be stored and accessed only in Canada unless one of a few limited exceptions applies. These laws prevent public bodies such as primary and secondary schools, universities, hospitals, government-owned utilities, and public agencies from using non-Canadian hosting services.

The Canada Revenue Agency stipulates that tax records must be kept at a filer’s place of business or residence in Canada. Current regulations were written over 30 years ago and do not take into account current technical realities concerning data storage.

Real Property

Foreign investors have full and fair access to Canada’s legal system, with private property rights limited only by the rights of governments to establish monopolies and to expropriate for public purposes. Investors from NAFTA countries have mechanisms available to them for dispute resolution regarding property expropriation by the Government of Canada. The recording system for mortgages and liens is reliable. Canada is ranked 34 in 2019 in the World Bank’s “Ease of Registering Property” rankings. About 89 percent of Canada’s land area is Crown Land owned by federal (41 percent) or provincial (48 percent) governments; the remaining 11 percent is privately owned. British Columbia began a 15 percent tax on foreign buyers of residential real estate in the Metro Vancouver area in August 2016.

https://www2.gov.bc.ca/gov/content/taxes/property-taxes/property-transfer-tax/understand/additional-property-transfer-tax  ). In early 2017, the province announced that foreign buyers with work permits would be exempt from the tax.  In 2018, British Columbia increased this tax to 20 percent and expanded its geographical coverage to include several other metro areas, including that of the provincial capital Victoria.

A 2014 Supreme Court decision recognized the existence of aboriginal title on land in British Columbia, which has ramifications for aboriginal land claims across Canada. While stopping short of giving aboriginals a veto on projects, the decision gives them increased influence on the economic development of any land with a colorable (potentially valid) aboriginal title claim.

In terms of non-resident access to land, including farmland, Ontario, Newfoundland and Labrador, New Brunswick and Nova Scotia have no restrictions on foreign ownership of land. However, Prince Edward Island, Quebec, Manitoba, Alberta and Saskatchewan maintain measures aimed at prohibiting or limiting land acquisition by foreigners. The acreage limits vary by province, from as low as five acres in Prince Edward Island to as high as 40 acres in Manitoba. In certain cases, provincial authorities may grant exemptions from these limits, for instance for investment projects. In British Columbia, Crown land cannot be acquired by foreigners, while there are no restrictions on acquisition of other land.

Intellectual Property Rights

Canada was placed on the Watch List in the U.S. Trade Representative’s 2019 Special 301 Report.  While this represents an improvement from 2018 when Canada was on the Special 301 Priority Watch List, Canada remains the only G7 country identified in the report.  The report applauds Canada’s agreement to important intellectual property (IP) provisions in the USMCA that will significantly improve Canada’s IP environment once implemented.  Canada’s commitment to high IP standards was welcomed through the seizure of suspected counterfeit items from the Pacific Mall in Ontario, which was listed in the 2017 Notorious Markets List.  Right holders also report that Canadian courts have established meaningful penalties against circumvention devices and services.  Canada has also made positive progress in reforming proceedings before the Copyright Board related to tariff-setting procedures for the use of copyrighted works.

Significant challenges to adequate and effective protection of IP rights remain in Canada, including poor border and law enforcement with respect to counterfeit or pirated goods, weak patent and pricing environment for innovative pharmaceuticals, deficient copyright protection, and inadequate transparency and due process regarding geographical indications.

Canada continues to exclude shipments of goods in-transit to the U.S. from counterfeit inspection, which permits large-scale shipments of counterfeit and pirated goods to enter our highly integrated supply chains.

On pharmaceuticals, Canada has drawn concern from stakeholders by proposing changes that would dramatically reshape how the Patented Medicine Prices Review Board evaluates patented pharmaceuticals and sets their ceiling prices. Further, the U.S. has serious concerns about the fairness of Canada’s Patented Medicines (Notice of Compliance) proceedings as amended in September 2017. Canada’s long-anticipated proposal to provide for patent term restoration for delays in obtaining marketing approval appears to be disappointingly limited in duration, eligibility, and scope of protection. The U.S. also has serious concerns about the breadth of the Minister of Health’s discretion in disclosing confidential business information.

Commercial-scale online piracy is a significant issue in Canada where some notorious copyright-infringing websites are hosted or operated.  Stream-ripping, the unauthorized converting of a file from a licensed streaming site into an unauthorized copy, is now a dominant method of music piracy, including in Canada, causing substantial economic harm to music creators and undermining legitimate online services.  Industry is also concerned with uneven application of new notice and notice regulations requiring Internet Service Providers (ISPs) to notify (and address) sites of trademark or copyright infringements. Canada’s ambiguous education-related exemption added to the 2012 copyright law has significantly damaged the market for educational publishers and authors.  While Canadian courts have helped clarify this exception, confusion remains and the educational publishing sector reports lost revenue from licensing.

On Geographical Indications (GIs), the U.S. has concerns about lack of due process and transparency relating to the GI system in Canada, including commitments Canada made without public notification or opposition procedures to protect certain GIs under the Comprehensive Economic and Trade Agreement with the EU, which came into force provisionally on September 21, 2017. These measures negatively affect market access for U.S. agricultural producers. The U.S. prefers the protection or recognition of GIs, including with respect to existing trademarks, safeguards for the use of common names, and meaningful opposition and cancellation procedures.

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

Capital Markets and Portfolio Investment

Canada’s capital markets are open, accessible, and without onerous regulatory requirements. Foreign investors are able to get credit in the local market. Canada has its own stock market, the Toronto Exchange, and there is sufficient liquidity in the markets to enter and exit sizeable positions. The World Economic Forum ranked Canada’s banking system as the second “most sound” in the world in 2018. Among other factors, Canadian banking stability is linked to high capitalization rates that are well above the norms set by the Bank for International Settlements. The Canadian government and Bank of Canada do not place restrictions on payments and transfers for current international transactions.

Money and Banking System

The Canadian banking industry is dominated by six major domestic banks, but includes a total of 29 domestic banks, 24 foreign bank subsidiaries, 27 full-service foreign bank branches and three foreign bank lending branches operating in Canada. The six largest banks manage close to USD4 trillion in assets.  Many large international banks have a presence in Canada through a subsidiary, representative office, or branch of the parent bank. Ninety-nine percent of Canadians have an account with a financial institution.

Foreign financial firms interested in investing submit their applications to the Office of the Superintendent of Financial Institutions (OSFI) for approval by the Finance Minister. U.S. firms are present in all three sectors, but play secondary roles. U.S. and other foreign banks have long been able to establish banking subsidiaries in Canada, but no U.S. banks have retail banking operations in Canada. Several U.S. financial institutions have established branches in Canada, chiefly targeting commercial lending, investment banking, and niche markets such as credit card issuance.

The Bank of Canada is the nation’s central bank. Its principal role is “to promote the economic and financial welfare of Canada,” as defined in the Bank of Canada Act. The Bank’s four main areas of responsibility are monetary policy, promoting a safe, sound, and efficient financial system, issuing and distributing currency, and being the fiscal agent for Canada.

Foreign Exchange and Remittances

Foreign Exchange Policies

Canada has a free floating exchange rate.

Remittance Policies

The Canadian dollar is fully convertible and the central bank does not place time restrictions on remittances. Canada provides some incentives for Canadian investment in developing countries through programs offered by Global Affairs Canada.

Sovereign Wealth Funds

Canada does not have a sovereign wealth fund, but the province of Alberta has the Heritage Savings Trust Fund established to manage the province’s share of petroleum royalties. The fund’s net financial assets were US12.9 billion (C17.4 billion) on March 31, 2018. It is invested in a globally diversified portfolio of public and private equity, fixed income, and real assets. The fund follows the voluntary code of good practices known as the “Santiago Principles” and participates in the IMF-hosted International Working Group of SWFs. 45 percent of the Heritage Fund is currently held in equity investments, 14 percent of which are Canadian equities. The fund is currently heavily invested in the U.S. dollar (16 percent of total currency) with more than USD2.9 billion in reserves.

Canada has more than 40 state-owned enterprises (SOEs) at the federal level, with the majority of assets held by three federal crown corporations: Export Development Canada, Farm Credit Canada, and Business Development Bank of Canada. Canada also has over 100 SOEs at the provincial level that contribute to a variety of sectors including finance; power, electricity and utilities; and transportation. The Treasury Board Secretariat provides an annual report to Parliament regarding the governance and performance of Canada’s federal crown corporations and other corporate interests.

The Canadian government lists SOEs as “Government Business Enterprises” (GBE). A list is available at http://www.osfi-bsif.gc.ca/Eng/fi-if/rtn-rlv/fr-rf/dti-id/Pages/GBE.aspx   and includes both federal and provincial enterprises.

There are no restrictions on the ability of private enterprises to compete with SOEs. The functions of most Canadian crown corporations have limited appeal to the private sector. The activities of some SOEs such as VIA Rail and Canada Post do overlap with private enterprise. As such, they are subject to the rules of the Competition Act to prevent abuse of dominance and other anti-competitive practices. Foreign investors are also able to challenge SOEs under the NAFTA and WTO.

Privatization Program

Federal and provincial privatizations are considered on a case-by-case basis, and there are no overall limitations with regard to foreign ownership. As an example, the federal Ministry of Transport did not impose any limitations in the 1995 privatization of Canadian National Railway, whose majority shareholders are now U.S. persons.

Canada encourages Canadian companies to observe the OECD Guidelines for Multinational Enterprises in their operations abroad and provides a National Contact Point for dealing with issues that arise in relation to Canadian companies. Canada’s Corporate Social Responsibility strategy, “Doing Business the Canadian Way: A Strategy to Advance Corporate Social Responsibility in Canada’s Extractive Sector Abroad” is available on the Global Affairs Canada website: http://www.international.gc.ca/trade-agreements-accords-commerciaux/topics-domaines/other-autre/csr-strat-rse.aspx?lang=eng  .

Despite the increased level of official attention paid to Responsible Business Conduct, the activities of Canadian mining companies abroad remain the subject of some critical attention and have prompted calls for the government to move beyond voluntary measures. Canada is a supporter of the Extractive Industries Transparency Initiative (EITI).

Canada’s National Contact Point for the OECD Guidelines for Multinational Enterprises

International Trade Portfolio Division
Global Affairs Canada
125 Sussex Drive
Ottawa, Ontario K1A 0G2
Tel: (1-343) 203-2341
Fax: (1-613) 944-1574
Email: ncp.pcn@international.gc.ca
Web: www.ncp.gc.ca  / www.pcn.gc.ca 

On an international scale, corruption in Canada is low and similar to that found in the U.S.. In general, the type of due diligence that would be required in the U.S. to avoid corrupt practices would be appropriate in Canada. Canada is a party to the UN Convention Against Corruption. Canada is a party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, as well as the Inter-American Convention Against Corruption.

Canada’s Criminal Code prohibits corruption, bribery, influence peddling, extortion, and abuse of office. The 1998 Corruption of Foreign Public Officials Act prohibits individuals and businesses from bribing foreign government officials to obtain influence and prohibits destruction or falsification of books and records to conceal corrupt payments. The law has extended jurisdiction that permits Canadian courts to prosecute corruption committed by companies and individuals abroad. Canada’s anti-corruption legislation is vigorously enforced, and companies and officials guilty of violating Canadian law are being effectively investigated, prosecuted, and convicted of corruption-related crimes. In March 2014, Public Works and Government Services Canada (now Public Services and Procurement Canada, or PSPC) revised its Integrity Framework for government procurement to ban companies or their foreign affiliates for 10 years from winning government contracts if they have been convicted of corruption. In August 2015, the Canadian government revised the framework to allow suppliers to apply to have their ineligibility reduced to five years where the causes of conduct are addressed and no longer penalized a supplier for the actions of an affiliate in which it had no involvement. PSPC has a Code of Conduct for Procurement, which counters conflict-of-interest in awarding contracts. Canadian firms operating abroad must declare whether they or an affiliate are under charge or have been convicted under Canada’s anti-corruption laws during the past five years in order to receive help from the Trade Commissioner Service. U.S. firms have not identified corruption as an obstacle to FDI in Canada.

Resources to Report Corruption

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

Mario Dion
Conflict of Interest and Ethics Commissioner (for appointed and elected officials, House of Commons)
Office of the Conflict of Interest and Ethics Commissioner
Parliament of Canada
66 Slater Street, 22nd Floor
Ottawa, Ontario

(Mailing address)
Office of the Conflict of Interest and Ethics Commissioner
Parliament of Canada
Centre Block, P.O. Box 16
Ottawa, Ontario
K1A 0A6
Pierre Legault

Office of the Senate Ethics Officer (for appointed Senators)
Thomas D’Arcy McGee Building
Parliament of Canada
90 Sparks St., Room 526
Ottawa, ON K1P 5B4

Political violence occurs in Canada to about the same extent as it does in the U.S.

The federal government and provincial/territorial governments share jurisdiction for labor regulation and standards. Federal employees and those employed in the railroad, airline, and banking sector are covered under the federally administered Canada Labor Code. Employees in most other sectors come under provincial labor codes. As the laws vary somewhat from one jurisdiction to another, it is advisable to contact a federal or provincial labor office for specifics, such as minimum wage and benefit requirements.

Canada’s unemployment rate stood at 5.8 percent in January 2019. Total employment increased  1.8 percent on a year-over-year basis.. Analysts note that Canada’s labor story varies significantly by province, with resource-dependent provinces affected more adversely than non-resource dependent provinces as a result of lower oil and other commodity prices.

Canada faces a labor shortage in skilled trades’ professions, such as carpenters, engineers, and electricians. Canada launched several initiatives including the Global Skills Visa, announced in November 2016, to address its skilled labor shortage, including through immigration reform, the inclusion of labor mobility provisions in free trade agreements, including the Canada-EU CETA agreement, and the Temporary Foreign Worker Program (TFWP).

The TFWP is jointly managed by Human Resources and Skills Development Canada (HRSDC) and Citizenship and Immigration Canada (CIC) and is divided into two categories: the International Mobility Program (IMP), which primarily includes high skillhigh wage professions, and the TFWP, which refers to primarily low skilled workers. The majority of U.S. temporary workers fall under the more highly skilled IMP stream. The number of temporary foreign workers a business can employ is limited. For more information, see the TFWP website: http://www.cic.gc.ca/english/resources/publications/employers/temp-foreign-worker-program.asp  

Canadian labor unions are independent from the government. Canada has labor dispute mechanisms in place and unions practice collective bargaining. In Canada less than one in three employees belonged to a union or was covered by a collective agreement in 2015, the most recent year for which data is available. In 2015, there were 776 unions in Canada. Eight of those unions – five of which were national and three international – represented 100,000 or more workers each and comprised over 45 percent of all unionized workers in Canada (https://www.canada.ca/en/employment-social-development/services/collective-bargaining-data/reports/union-coverage.html  ). In June 2017 parliament repealed legislation public service unions had claimed contravened International Labor Organization conventions by limiting the number of persons who could strike.

The U.S. Overseas Private Investment Corporation does not operate in Canada.

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

*Host Country Source, Office of the Chief Economist, 2017 FDI Stats, Global Affairs Canada.

Note: Data converted to U.S. dollars using yearly average currency conversions from IRS

Table 3: Sources and Destination of FDI

Table 4: Sources of Portfolio Investment

Katherine Musgrove
Economic Officer
490 Sussex Drive, Ottawa Ontario
Email: musgroveka@state.gov

Policies Towards Foreign Direct Investment

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

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

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

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

Limits on Foreign Control and Right to Private Ownership and Establishment

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

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

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

Ownership Restrictions

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

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

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

Examples of foreign investments requiring Chinese control include:

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

Examples of foreign investment equity caps include:

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

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

Other Investment Policy Reviews

Organization for Economic Cooperation and Development (OECD)

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

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

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

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

World Trade Organization (WTO)

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

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

Business Facilitation

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

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

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

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

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

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

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

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

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

Outward Investment

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

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

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

A list of China’s signed BITs:

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

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

China’s signed FTAs:

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

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

Transparency of the Regulatory System

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

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

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

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

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

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

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

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

International Regulatory Considerations

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

Legal System and Judicial Independence

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

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

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

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

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

Laws and Regulations on Foreign Direct Investment

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

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

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

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

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

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

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

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

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

FDI Laws on Investment Approvals

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

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

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

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

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

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

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

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

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

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

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

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

Foreign Investment Law

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

Free Trade Zone Foreign Investment Laws

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

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

Competition and Anti-Trust Laws

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

Anti-Monopoly Law

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

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

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

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

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

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

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

Expropriation and Compensation

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

Dispute Settlement

ICSID Convention and New York Convention

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

Investor-State Dispute Settlement

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

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

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

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

International Commercial Arbitration and Foreign Courts

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

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

Bankruptcy Regulations

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

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

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

Investment Incentives

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

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

Foreign Trade Zones/Free Ports/Trade Facilitation

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

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

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

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

Performance and Data Localization Requirements

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

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

Real Property

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

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

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

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

Intellectual Property Rights

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

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

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

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

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

Capital Markets and Portfolio Investment

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

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

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

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

Money and Banking System

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

Foreign Exchange and Remittances

Foreign Exchange Policies

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

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

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

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

Remittance Policies

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

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

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

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

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

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

Sovereign Wealth Funds

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

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

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

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

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

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

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

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

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

OECD Guidelines on Corporate Governance

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

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

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

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

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

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

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

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

Investment Restrictions in “Vital Industries and Key Fields”

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

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

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

Privatization Program

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

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

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

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

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

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

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

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

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

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

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

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

President Xi Jinping’s Anti-Corruption Efforts

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

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

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

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

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

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

Resources to Report Corruption

The following government organization receives public reports of corruption:

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

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

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

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

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

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

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

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

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

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

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

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

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

Table 3: Sources and Destination of FDI

Source: IMF Coordinated Direct Investment Survey (CDIS)

Table 4: Sources of Portfolio Investment

Data not available.

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

Other Useful Online Resources

Chinese Government

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

United States Government

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

Policies Towards Foreign Direct Investment

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, who report they 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 introduced by the Macron Administration, but it 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 does maintain a national security review mechanism. 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, screening, 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 Montebourg Decree.

In 2018, the government held equity positions in approximately 81 firms. Most of the positions were relatively small, but did include provisions, which prevent foreign takeover of these firms. Exceptions, where the government had large holdings included, among others, Aeroports de Paris (50.6 percent), Engie, and Renault. In January 2018, the government sold 4.0 percent of its holding in Engie, lowering its stake to 23.64 percent of the energy company. The government also sold 5.0 percent of its stake in Renault, resulting in its ownership of 15.01 percent of the automaker.

Other Investment Policy Reviews

Given the level of development and stability of the investment climate, France has not recently been the subject of international organizations’ investment policy reviews. The OECD Economic Forecast for France (November 2018) 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 to promote 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 finance and potential equity acquisitions. Business France recently unveiled a website in English to help prospective businesses considering 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 has made innovation one of his priorities with a EUR 10 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 a brand “French Tech” to promote France as a location for start-ups and high-growth digital companies. In addition to offices in 17 French cities, French Tech offices have been established in cities including New York, San Francisco, Los Angeles, Shanghai, Hong Kong, Vietnam, Moscow, Berlin, and 14 others.

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

Outward Investment

French firms invest more in the United States than in any other country and support approximately 678,000 American jobs. Total French investment in the United States reached USD 275.5 billion in 2018. France was our eighth-largest trading partner with approximately USD 128 billion in bilateral trade in 2018. The business promotion agency Business France also assists French firms with outward investment. There is no restriction on outward investment.

Investments in France by other EU member states are governed by the provisions of the Treaty of Rome and by European Union Law. France has Bilateral Investment Treaties (BITs) with 96 countries:  Albania, Algeria, Argentina, Armenia, Azerbaijan, Bahrain, Bangladesh, Bosnia and Herzegovina, Bulgaria, Cambodia, Chile, China, the Democratic Republic of the Congo, Costa Rica, Croatia, Cuba, Czech Republic, Djibouti, Dominican Republic, Ecuador, Egypt, El Salvador, Equatorial Guinea, Estonia, Ethiopia, Georgia, Guatemala, Haiti, Honduras, Hong Kong, Hungary, India, Iran, Israel, Jamaica, Jordan, Kazakhstan, Korea (South), Kuwait, Kyrgyz Republic, Laos, Latvia, Lebanon, Liberia, Libya, Lithuania, North Macedonia (FYROM), Madagascar, Malaysia, Malta, Mexico, Moldova, Mongolia, Montenegro, Morocco, Mozambique, Namibia, Nepal, Nicaragua, Nigeria, Oman, Pakistan, Panama, Paraguay, Peru, Philippines, Poland, Qatar, Romania, Russian Federation, Saudi Arabia, Senegal, Serbia, Seychelles, Singapore, Slovakia, Slovenia, Sri Lanka, Sudan, Tajikistan, Trinidad and Tobago, Tunisia, Turkey, Turkmenistan, Uganda, Ukraine, United Arab Emirates, Uruguay, Uzbekistan, Venezuela, Vietnam, Yemen, and Zambia.

Bilateral Investment Treaties between France and the following countries have been signed but are not in force:  Belarus, Brazil, Chad, Colombia, Ghana, Iraq, Kenya, and Zimbabwe. France previously had BITs with Mauritius and Syria; new BITs with these two countries have been signed but have not yet entered into force.

UNCTAD maintains the most current list of ratified and non-ratified BITs, including links to each document:http://investmentpolicyhub.unctad.org/IIA/CountryBits/72#iiaInnerMenu.  

The United States and France have enjoyed a Navigation and Commerce Treaty since 1822, which guarantees national treatment of U.S. citizens. Since 1994, a Convention between the Government of the United States of America and the Government of the French Republic continues to be in force for the avoidance of double taxation and the prevention of fiscal evasion.

The Macron government temporarily raised corporate taxes in 2017 after the country’s Constitutional Court ordered the state to pay back 10 billion euros (USD 11.6 billion) in unlawful taxes on investor dividends. From a nominal corporate tax rate of 33.3 percent in 2016, the temporary corporate tax rate rose to 38.3 percent in 2017 for companies with turnover in excess of 1.0 billion euros and to 43.3 percent for those with revenues in excess of 3.0 billion euros.

In early 2019 the government demonstrated its intent to lower corporate taxes over the medium term. The 2018 tax law reduces corporate tax on profits over 500,000 euros (USD 596,000) to 31 percent for 2019, 28 percent in 2020, 26.5 percent in 2021 and 25 percent in 2022.

France has tax agreements with 127 countries:  Albania, Algeria, Andorra, Argentina, Armenia, Australia, Austria, Azerbaijan, Bahrain, Bangladesh, Belarus, Belgium, Benin, Bolivia, Bosnia and Herzegovina, Botswana, Brazil, Bulgaria, Burkina Faso, Cameroon, Canada, Cambodia, Central African Republic, Chile, China, Cyprus, the Democratic Republic of the Congo, Croatia, Czech Republic, Denmark, Ecuador, Egypt, Equatorial Guinea, Estonia, Ethiopia, Finland, Gabon, Georgia, Ghana, Greece, Guinea, Hong Kong, Hungary, India, Indonesia, Iran, Ireland, Island, Ivory Coast, Israel, Italia, Jamaica, Japan, Jordan, Kazakhstan, Kenya, Korea (South), Kosovo, Kuwait, Kyrgyz Republic, Latvia, Lebanon, Libya, Lithuania, Luxemburg, Macedonia (FYRM), Madagascar, Malaysia, Malawi, Mali, Malta, Mauritania, Mauritius Island, Mayotte, Mexico, Monaco, Mongolia, Montenegro, Morocco, Namibia, Netherlands, New Zealand, New Caledonia, Niger, Nigeria, Norway, Oman, Pakistan, Panama, Philippines, Poland, French Polynesia, Portugal, Qatar, Quebec, Romania, Russian Federation, Saudi Arabia, Saint-Martin, Saint Pierre and Miquelon, Senegal, Serbia, Singapore, South Africa, Spain, Slovakia, Slovenia, Sri Lanka, Sweden, Switzerland, Syria, Tajikistan, Taiwan, Thailand, Togo, Trinidad and Tobago, Tunisia, Turkey, Turkmenistan, Ukraine, United Arab Emirates, United Kingdom, Uruguay, Uzbekistan, Venezuela, Vietnam, Zambia, and Zimbabwe.  A bilateral tax agreement between France and Colombia has been signed but is not in force. Ref:https://www.impots.gouv.fr/portail/les-conventions-internationales  

Transparency of the Regulatory System

France’s government has made considerable progress in the last decade on the transparency and accessibility of its regulatory system. The French 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 French 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 Macron 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, major reforms have extended the investigative and decision-making powers of France’s Competition Authority. As a result, the Authority has completed 50 enforcement investigations by end of 2016, with 14 decisions leading to sanctions of 203 million EUR (USD 251 million). 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.

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. 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).

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 Anti-Trust Laws

Major reforms have extended the investigative and decision-making powers of France’s Competition Authority. 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.

France’s Competition Authority launches regular in-depth investigations into various sectors of the economy, which may lead to formal investigations and fines. On March 6, 2018, the Authority announced that after a two-year examination of the French online advertising market, it may open a full inquiry into the overwhelmingly dominant position of Google and Facebook in internet advertising markets.

Expropriation and Compensation

Government 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 of that decree, 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.

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 French Civil Code envisions several mechanisms of alternative dispute resolution (ADR) including out-of-court arbitration and conciliation where a judicial conciliator puts an end to a dispute. France is a member of UNCITRAL. Local courts recognize and enforce foreign arbitral awards as mentioned above. 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.

Investor-State Dispute Settlement

The President of the Tribunal de Grande Instance (High Civil Court of First 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.

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 2019 Doing Business Index, France was ranked 32nd of 190 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.

Investment Incentives

France offers financial incentives, generally equally available to both French and foreign investors. The government provides incentives for capital investment in small companies. For instance, a French company or a subsidiary of a foreign firm that would invest in a minority shareholding (less than 20 percent) of a small, innovative SME would benefit from a five year, linear amortization of their investment. To qualify, SMEs must allocate at least 15 percent of their spending on research.

Incentivizing research and development (R&D) and innovation is a high priority for the French government. Business France, the country’s export and investment promotion agency, reported that R&D operations accounted for 10 percent of foreign investments projects in 2018 and created or maintained 2,793 jobs, up 23 percent from last year. The United States is the leading foreign investor in R&D in France, accounting for 26 percent of 2018 investment decisions. International companies may join France’s 71 innovation clusters, increasing access to both production inputs and technical benefits of geographical proximity. Other components of this policy include: the Innovative New Company (Jeune Enterprise Innovante) and the French Young Entrepreneurs Initiative.

Foreign Trade Zones/Free Ports/Trade Facilitation

France is subject to all EU free trade zone regulations. These allow member countries to designate portions of their customs’ territory as duty-free, where value-added activity is limited. France has several duty-free zones, which benefit from exemptions on customs for storage of goods coming from outside of the European Union. The French Customs Service administers them, and provides details on its website (http://www.douane.gouv.fr). French legal texts are published online at http://legifrance.gouv.fr.

In September 2018, President Macron announced the extension of 44 Urban Free Zones (ZFU) in low-income neighborhoods and municipalities with at least 10,000 residents. The program provides incentives for employers, who have created 600 new jobs since 2016. Incentives include exemption from payment of payroll taxes and certain social contributions for five years, financed by EUR 15 million a year in State funds.  

Performance and Data Localization Requirements

While there are no mandatory performance requirements established by law, the French government will generally require commitments regarding employment or R&D from both foreign and domestic investors seeking government financial incentives. Incentives like PAT regional planning grants (Prime d’Amenagement du Territoire pour l’Industrie et les Services) and related R&D subsidies are based on the number of jobs created, and authorities have occasionally sought commitments as part of the approval process for acquisitions by foreign investors. PAT has been revised to benefit SMEs, with the objective of promoting the development of businesses in priority regional zones, including EUR 30 million in direct government subsidies. In 2018, a reform of the national security review system expanded the list of sensitive sectors subject to prior authorization by the Ministry of Economy and Finance. Decree 2018-1057 of November 29, 2018, expanded the scope of activities under review to include:  artificial intelligence, data storage, and the space sector, when the direct objective of this investment pertains to national defense, national security, public order and public authority. A new set of measures amending the review mechanism were included in the proposed PACTE law (Plan d’Action pour la Croissance et la Transformation des Entreprises), which was still under review at the end of 2018. Parliamentary leaders from most parties said the PACTE would be approved during the first quarter of 2019. The law would toughen sanctions on both sides of an acquisition for non-compliance with investment review mechanism.

The French government imposes the same conditions on domestic and foreign investors in cultural industries:  all purveyors of movies and television programs (i.e., television broadcasters, telecoms operators, internet service providers and video services) must invest a percentage of their revenues to finance French film and television productions. They must also abide by broadcasting cultural content quotas (minimum 40 percent French, 20 percent EU).

Real Property

Real property rights are regulated by the French civil code and are uniformly enforced. In the World Bank’s Doing Business Report (DBR), France ranks 32nd of 190 on registering property. French civil-law notaries (notaires) – highly specialized lawyers in private practice appointed as public officers by the Justice Ministry – handle residential and commercial conveyance and registration, contract drafting, company formation, successions, and estate planning. The official system of land registration (cadastre) is maintained by the French public land registry under the auspices of the French tax authority (Direction Generale des Finances Publiques or DGFiP), available online at http://www.cadastre.gouv.fr  . Mortgages are widely available, usually for a 15-year period.

Intellectual Property Rights

France is a strong defender of intellectual property rights. Under the French system, patents and trademarks protect industrial property, while copyrights protect literary/artistic property. By virtue of the Paris Convention and the Washington Treaty regarding industrial property, U.S. nationals have a priority period following filing of an application for a U.S. patent or trademark in which to file a corresponding application in France:  twelve months for patents and six months for trademarks.

Counterfeiting is a costly problem for French companies, and the government of France maintains strong legal protections and a robust enforcement mechanism to combat trafficking in counterfeit goods — from copies of luxury goods to fake medications — as well as the theft and illegal use of intellectual property. The French Intellectual Property Code has been updated repeatedly over the years to face this challenge.  Parliament recently passed a law reinforcing France’s anti-counterfeiting law and its implementation of EU directives on intellectual property rights. The new legislation increases the Euro amount for damages to companies that are victims of counterfeiting and extends trademark protection to smartcard technology, certain geographic indications, plants, and agricultural seeds. The new legislation also increases the statute of limitations for civil suits from three to ten years and strengthens the powers of customs officials to seize fake goods sent by mail or express freight.

The government also reports on seizures of counterfeit goods. In 2018, French Customs seized 5.4 million counterfeited goods, down from 8.5 million counterfeited goods in 2017. This sharp drop has been attributed to an increase of online purchases of fake goods, which are harder to control. France’s top private sector anti-counterfeiting organization, UNIFAB, called on the government in 2018 to launch a national public awareness campaign. France has robust laws against online piracy. A government agency called the High Authority for the Dissemination of Artistic Works and the Protection of Rights on Internet (Haute Autorite pour la Diffusion des Œuvres et la Protection des droits sur Internet – HADOPI) administers a “graduated response” system of warnings and fines. It has taken enforcement action against several online pirate sites, including Megaupload. HADOPI cooperates closely with the U.S. Patent and Trademark Office (USPTO) including pursuing voluntary arrangements that target intermediaries that facilitate or fund pirate sites. (Note that one of HADOPI’s tasks is to ensure that the technical measures used to protect works do not prevent the right of individuals to make personal copies of television programs for their private use.) In October 2018, HADOPI released a study showing that 27 percent of French people acquired and consumed music, films and television series through illegal sites (44 percent for television series and 42 percent for films). This figure has remained steady over the past few years. Hadopi further noted a 6 percent increase in the use of legal sites for downloading media to 48 percent in 2018. Offenders risk fines of between EUR 1,500 and EUR 300,000 and/or up to three years imprisonment. For additional information about national laws and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/  .

France does not appear on USTR’s 2019 Special 301 Report, but it is mentioned throughout the 2018 Notorious Markets List with regard to illicit streaming and copyright infringement websites.

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 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 Marche 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 Autorite des Marches Financiers (AMF or Financial Markets Authority), the French equivalent of the U.S. Securities and Exchange Commission. Small and medium-size enterprises (SMEs) may also list on EnterNext, a new subsidiary of the Euronext Group. 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. The French banking sector is healthy. Non-performing loans were 3.1 percent in France at the end of 2017, compared to a ratio of 3.6 percent in the previous year. The French banking industry is notable for its universal banking model: a single bank offers a full range of financial business lines: retail banking, specialist finance, corporate and investment banking, asset management and insurance.

Four French banks are ranked among the world’s 20 largest. The assets of France’s largest banks totaled EUR 7.5 trillion (USD 8.47 trillion) in 2018. Acting on a proposal from the Banque de France in June 2018, the High Council for Financial Stability (HCSF) told the country’s largest banks to raise the “countercyclical capital buffer” from zero to 0.25 percent of their bank’s risk-weighted assets. HCSF cited international “factors of economic and political uncertainty that could put growth at risk.”

France has a central bank, namely the Banque de France, that 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. The 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 Stabilite Financiere) 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 (ACPR – Autorite de Controle Prudentiel et de Resolution) 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 1,028 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

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.

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 April 11, 2018 to April 12, 2019 was 1 USD to 0.88 euro.

France is a founding member of the OECD-based Financial Action Task Force (FATF, a 34-nation 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.

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 (Banque Publique d’Investissement – BPI, now known as Bpifrance) supports small and-medium term enterprises (SMEs), larger enterprises (Entreprises de Taille Intermedaire) and innovating businesses. 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. Bpifrance has minority stakes in 214 firms and 56 investment funds that invest in businesses. It also provides export insurance.

The 12 listed entities in which the French State maintains stakes are Aeroports de Paris (50.63 percent), Airbus Group (11.03 percent), Air France-KLM (14.29 percent), CNP Assurances (holds 1.11 percent; controls 66 percent), Dexia (5.73 percent), EDF (83.66 percent), ENGIE (23.64 percent), Orange (a direct 13.39 percent stake and a 9.60 percent stake through Bpifrance), Renault (15.1 percent), Safran (10.81 percent of shares and 21.9 percent of voting rights), and Thales 25.71 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 81 firms, in a variety of sectors.

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

France, as a member of the European Union, is party to the Agreement on Government Procurement (GPA) within the framework of the World Trade Organization. Companies owned or controlled by the state behave largely like other companies in France and are subject to the same laws and tax code. The Boards of SOEs operate according to accepted French corporate governance principles as set out in the (private sector) AFEP-MEDEF Code of Corporate Governance. SOEs are required by law to publish an annual report, and the French Court of Audit conducts financial audits on all entities in which the state holds a majority interest. The French government appoints representatives to the Boards of Directors of all companies in which it holds significant numbers of shares, and manages its portfolio through a special unit attached to the Ministry for the Economy and Finance Ministry, the shareholding agency APE (Agence de Participations de l’Etat). A recent APE annual report highlighted the government’s strategy to keep a sufficient level of control in strategically important companies while scaling back its shareholdings in traditional industrial sectors to invest in fast-growing companies in key sectors for economic growth.

Privatization Program

The government has partially privatized many large companies, including Air France, Orange, Renault, PSA, and ENGIE in order to create a 10 billion EUR fund for innovation and research. However, the government continues to maintain a strong presence in some sectors, particularly power, public transport, and defense industries.

There is general awareness of standards for responsible business conduct (RBC) in France. The country has established a National Contact Point (NCP) for the OECD Guidelines for Multinational Enterprises, coordinated and chaired by the Directorate General of the Treasury in the Ministry for the Economy and Finance. Its members represent State Administrations (Ministries in charge of Economy and Finance, Labor and Employment, Foreign Affairs, Ecology, Sustainable Development and Energy), six French Trade Unions (CFDT, CGT, FO, CFE-CGC, CFTC, UNSA) and one employers’ organization, MEDEF. The NCP promotes the Guidelines and ensures their application. It provides relevant information and handles inquiries. It examines the specific instances referred to it, offers its good offices to the parties (discussion, exchange of information) and may act as a mediator in disputes, if appropriate.

The French Office of the NCP promotes the OECD Guidelines in a manner that is relevant to specific sectors. In specific instances, the NCP conducts fact-finding to assist parties in resolving disputes, and posts final statements on any recommendations for future action with regard to the Guidelines. The NCP may also monitor how its recommendations are implemented. In April 2017, the French NCP signed a two-year partnership with Global Compact France to increase sharing of information and activity between the two organizations.

In France, corporate governance standards are the product of a combination of legislative provisions and the recommendations of the AFEP-MEDEF code (two employers’ organizations). The code meets the expectations of shareholders and various stakeholders, as well as of the European Commission. The code was revised in November 2016 to add principles for the determination of remuneration and independence of directors, and now includes corporate social and environmental responsibility standards.

Also relating to transparency, the EU passed a new regulation in May 2017 to stem the trade in conflict minerals and, in particular, to stop conflict minerals and metals from being exported to the EU; to prevent global and EU smelters and refiners from using conflict minerals; and to protect mine workers from being abused. The regulation goes into effect January 1, 2021, and will then apply directly to French law.

France has played an active role in negotiating the ISO 26000 standards, the International Finance Corporation Performance Standards, the OECD Guidelines for Multinational Enterprises, and the UN Guiding Principles on Business and Human Rights. France has signed on to the Extractive Industries Transparency Initiative (EITI), although, it has not yet been fully implemented. Since 2017, large companies based in France and having at least 5,000 employees are now required to establish and implement a corporate plan to identify and assess any risks to human rights, fundamental freedoms, workers’ health, safety, and risk to the environment from activities of their company and its affiliates.

In line with President Macron’s campaign promise to clean up French politics, the French parliament adopted in September 2017 the law on “Restoring Confidence in Public Life.” The new law bans elected officials from employing family members, or working as a lobbyist or consultant while in office. It also bans lobbyists from paying parliamentary, ministerial, or presidential staff and requires parliamentarians to submit receipts for expenses.

France’s “Transparency, Anti-corruption, and Economic Modernization Law,” also known as the “Loi Sapin II, came into effect on June 1, 2017. It brought France’s legislation in line with European and international standards. Key aspects of the law include: creating a new anti-corruption agency; establishing “deferred prosecution” for defendants in corruption cases and prosecuting companies (French or foreign) suspected of bribing foreign public officials abroad; requiring lobbyists to register with national institutions; and expanding legal protections for whistleblowers. The Sapin II law also established a High Authority for Transparency in Public Life (HATVP). The HATVP promotes transparency in public life by publishing the declarations of assets and interests it is legally authorized to share publicly. After review, declarations of assets and statements of interests of members of the government are published on the High Authority’s website under open license. The declarations of interests of members of Parliament and mayors of big cities and towns, but also of regions are also available on the website. In addition, the declarations of assets of parliamentarians can be accessed in certain governmental buildings, though not published on the internet.

The U.S. embassy in Paris has received no specific complaints from U.S. firms of unfair competition in France in recent years. France ranked 21rd of 180 on Transparency International’s (TI) 2018 corruption perceptions index. See https://www.transparency.org/country/FRA.

Resources to Report Corruption

The Central Office for the Prevention of Corruption (Service Central de Prevention de la Corruption or SCPC) was replaced in 2017 by the new national anti-corruption agency – the Agence Francaise Anticorruption (AFA). The AFA is charged with preventing corruption by establishing anti-corruption programs, making recommendations, and centralizing and disseminating information to prevent and detect corrupt officials and company executives. The AFA will also administrative authority to review the anticorruption compliance mechanisms in the private sector, in local authorities and in other government agencies.

Contact information for Transparency International’s French affiliate:

Transparency International France
14, passage Dubail
75010 Paris
Tel: (+33) 1 84 16 95 65
Email: contact@transparency-france.org

France is a politically stable country. Occasionally, large demonstrations and protests occur (sometimes organized to occur simultaneously in multiple French cities); these normally don’t 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. In March 2018, railway workers, teachers, students, and air traffic controllers went on strike to protest President Macron’s reforms. Rolling two-day strikes of the national rail system took place from April to June 2018, but a railways labor agreement was reached in early summer. The reform of the state controlled SNCF railway company gradually introduces competition on some railways and changes to SNCF unemployment benefits and pension system.

From mid-November, Paris and other cities in France faced weekly “Gilets Jaunes” Yellow Vest demonstrations initiated by protestors upset over the high cost of living, taxes, and social exclusion. 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.

According to the 2018 American Chamber of Commerce in France – Bain Barometer Survey on the attitudes of U.S. investors in France, 86 percent of American investors were positive about the overall investment climate in France and the prospects for continued reforms to the economy. Among the U.S. investors, 62 percent found the Yellow Vest protests to be a nuisance, but 42 percent of U.S. firms planned to hire new employees in France over the next two to three years.

In recent years, more than 230 people have been killed in terrorist attacks in France, including the January 2015 assault on the satirical magazine Charlie Hebdo, the November 2015 Bataclan concert hall and national stadium attacks, and the 2016 Bastille Day truck attack in Nice. While terrorists continue to target French interests, since July 2016 attacks have been smaller in scale and most often perpetrated by lone actors inspired by, but with little direct connection to, ISIS or other international terrorist organizations. French security agencies continue to disrupt plots and cells, and their efforts have been aided by recent legislation and executive measures which strengthen search and detention authorities. 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.

France’s private sector labor force is a major asset in attracting foreign investment. With a return to growth (1.5 percent in 2018) and a drop in unemployment to 8.8 percent in 2018 from 8.9 percent in 2017, President Macron launched a labor market reform to reduce regulations and spur new hiring. Five ordinances (executive orders), which came into effect on January 1, 2018, introduced measures easing companies’ ability to fire workers including by capping potential damage claims in cases of wrongful dismissal, and a one-year time limit for making claims, which business organizations have requested for several decades. In order to make these proposals acceptable to labor unions, Labor Minister Penicaud increased regular required severance pay by 25 percent. For example, an employee paid a monthly EUR 2,000 and fired after 10 years will be entitled to a severance pay of EUR 5,000, instead of the previous EUR 4,000.

Mandatory company employee councils for consultations on economic, social and public safety issues have been reduced from three to one participants. Companies of all sizes are now able to initiate wide-scale voluntary layoffs with severance provisions for employees for any reason without fear of lawsuit, but with the agreement of labor unions representing a majority of employees. Finally, foreign-owned companies no longer have to justify job cuts in France on the basis of their global turnover, but can base them on poor performance in France. These measures have been welcomed by the business community.

The number of apprenticeships in France has increased by 7.7 percent in 2018 and now totals 318,000 in both the public and private sectors, according to Labor Ministry figures. Apprenticeships, like vocational training, have been placed under the direct management of the government via a newly created agency called France Compétences. Growth of apprenticeship and reform of vocational training help to explain the recent drop in the unemployment rate. The unemployment rate fell to 8.8 percent in the fourth quarter of 2018 from 9.1 percent in the previous period. Youth unemployment was at 20.8 percent in 2018, from 22.3 percent in 2017. The number of job-seekers over age 50 remains steady at 6.4 percent, down from 6.7 percent in 2017.

Given France’s high per capita income, investments in France do not qualify for investment insurance or guarantees offered by the Overseas Private Investment Corporation (OPIC).

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

Table 3: Sources and Destination of FDI

Table 4: Sources of Portfolio Investment

Peter Chisholm
Economic Officer
U.S. Embassy
2 Avenue Gabriel
75008 Paris, France
Tel: +33.1.43.12.2000
FranceICSeditor@state.gov
https://fr.usembassy.gov/business/

Special Section on Monaco

The Principality of Monaco, the world’s second smallest country by area, has an open economy that welcomes foreign investment.  Monaco enjoys a high standard of living and low unemployment.  With the exception of French citizens, foreigners (and Monegasques) actually living and working in Monaco are not subject to personal income tax.  Corporations may benefit from various tax incentives.  There are no restrictions preventing foreigners and non-residents from buying property or opening bank or brokerage accounts in Monaco, though some banks have levied fees on American accounts.  Non-residents likely account for more than half of real estate investments.  Monaco is well known for its security and political stability.

Note: the Principality of Monaco is not covered by the World Bank’s Doing Business Report, Transparency International’s Country Corruption Report, or the Heritage Foundation’s Economic Freedom Index report.

Investment Regime of Monaco

Monaco’s economic and regulatory system is closely tied to that of France, and Monaco uses the Euro as its currency.  The convention of May 1, 1963 brought French and Monegasque territories, including territorial waters, under a customs union resulting in the application of French customs law in Monaco.  Although Monaco is not a full member of the European Union, the customs union with France makes it subject to EU customs laws, thus guaranteeing that the transfer of goods and services from and into Monaco remains within the single European market.

Economic activity within Monaco, including commercial, handicraft and industrial activity, is strictly monitored by the government.  Prior approval from the Direction de l’Expansion Economique is required before conducting any economic activity in the principality, and this applies to foreign companies which may establish a branch or an administrative unit in the principality. Monegasque authorities issue approvals based on type of business; approval is personal and may not be transferred.  Any change in the terms requires a new approval.  The government is streamlining the approval process by reducing the number of documents required to nine, or six for individual authorizations.

A body called Espace Entreprises Monaco Business Office helps new investors.  The Monaco Welcome and Business office (MWBO) assists individuals and entrepreneurs in relocating to the Principality of Monaco.  In the financial sector, creation of any financial organization is subject to the approval of both the French CECEI (Committee for Credit and Investment Institutions) in Paris and of Monegasque financial supervisory authorities.  Offshore companies are subject to the same due diligence and suspicious transaction reporting regulations as other banking institutions.

Monaco has taken a number of initiatives to promote economic activity and make company operations more transparent while maintaining high ethical standards, including:

• creation of the legal status of Limited Liability Company;
• adoption of systems to combat money laundering, organized crime and corruption (through the creation of the Service d’Information et de Contrôle sur les Circuits Financiers, SICCFIN: http://www.siccfin.gouv.mc); and
• special exemptions for new companies and research.

In Monaco, there is no direct taxation, with two exceptions:

• companies earning more than 25% of their turnover (revenue) outside of the principality, and companies whose activities consist of earning revenues from patents and literary or artistic property rights, subject to a tax of 33.33% on profits, and
• French nationals unable to prove that they resided in the principality for five years before October 31, 1962 are subject to the French income tax.

To encourage the creation of economic activity, the Principality of Monaco offers tax exemptions to new companies developing a new activity.  These new companies enjoy 100% exemption from corporate tax in the first two years, and then gradually assume normal tax obligations by the sixth year  A research tax credit was additionally created in March 2009.

On July 12, 2016, The European Union and Monaco signed an agreement making Monaco’s tax compliance regulations and automatic exchange of financial information stronger and equivalent to measures in force in the EU.  The EU-Monaco agreement entered into force in 2018.  Monaco is now classified as “largely compliant” by OECD tax transparency standards, alongside the U.S and Germany. The principality has signed 33 (32 are in force) tax information exchange agreements (TIEA), including one with the United States on September 8, 2009.

Size of the Economy of Monaco

Monaco’s GDP was EUR 5.68 billion in 2017,  EUR 5.85 billion in 2016, 5.64 billion in 2015, up 5.4% from 5.32 billion in 2014 and 4.94 billion in 2013 (Source: IMSEE – Monaco Statistics http://www.monacostatistics.mc/Economy-and-Finance/GDP).  The country’s budget comes from taxes on industry, trade, and services; a vibrant tourism sector; and several government-owned enterprises, most notably the country’s famous casinos.  Approximately 50% of government revenue  comes from the Value Added Tax (VAT) which is collected by French authorities and disbursed to Monaco according to an agreed formula.

There is a high concentration of financial professionals in Monaco, as might be expected in this center of international business.  French banking law applies in Monaco, subjecting banks to the same level of supervision as in France.  Some 33 banks and 54 financial companies operate in Monaco (Source: CMB: Compagnie Monégasque de Banque).  Recent figures show that Monaco’s outsized financial sector manages well over EUR 750 billion for a clientele that is 46% non-resident.

Policies Towards Foreign Direct Investment

Germany has an open and welcoming attitude towards FDI.  The 1956 U.S.-Federal Republic of Germany Treaty of Friendship, Commerce and Navigation affords U.S. investors national treatment and provides for the free movement of capital between the United States and Germany. As an OECD member, Germany adheres to the OECD National Treatment Instrument and the OECD Codes of Liberalization of Capital Movements and of Invisible Operations.  The Foreign Trade and Payments Act and the Foreign Trade and Payments Ordinance provide the legal basis for the Federal Ministry for Economic Affairs and Energy to review acquisitions of domestic companies by foreign buyers, to assess whether these transactions pose a risk to the public order or national security (for example, when the investment pertains to critical infrastructure).  For many decades, Germany has experienced significant inbound investment, which is widely recognized as a considerable contributor to Germany’s growth and prosperity. The German government and industry actively encourage foreign investment. U.S. investment continues to account for a significant share of Germany’s FDI. The investment-related challenges foreign companies face are generally the same as for domestic firms, for example, high marginal income tax rates and labor laws that complicate hiring and dismissals.

Limits on Foreign Control and Right to Private Ownership and Establishment

Under German law, a foreign-owned company registered in the Federal Republic of Germany as a GmbH (limited liability company) or an AG (joint stock company) is treated the same as a German-owned company.  There are no special nationality requirements for directors or shareholders.

However, Germany does prohibit the foreign provision of employee placement services, such as providing temporary office support, domestic help, or executive search services.

While Germany’s Foreign Economic Law permits national security screening of inbound direct investment in individual transactions, in practice no investments have been blocked to date.  Growing Chinese investment activities and acquisitions of German businesses in recent years – including of Mittelstand (mid-sized) industrial market leaders – led German authorities to amend domestic investment screening provisions in 2017, clarifying their scope and giving authorities more time to conduct reviews.  The government further lowered the threshold for the screening of acquisitions in critical infrastructure and sensitive sectors in 2018, to 10 percent of voting rights of a German company. The amendment also added media companies to the list of sensitive sectors to which the lower threshold applies, to prevent foreign actors from engaging in disinformation.  In a prominent case in 2016, the German government withdrew its approval and announced a re-examination of the acquisition of German semi-conductor producer Aixtron by China’s Fujian Grand Chip Investment Fund based on national security concerns.

Other Investment Policy Reviews

The World Bank Group’s “Doing Business 2019” and Economist Intelligence Unit both provide additional information on Germany investment climate.  The American Chamber of Commerce in Germany publishes results of an annual survey of U.S. investors in Germany on business and investment sentiment (“AmCham Germany Transatlantic Business Barometer”).

Business Facilitation

Before engaging in commercial activities, companies and business operators must register in public directories, the two most significant of which are the commercial register (Handelsregister) and the trade office register (Gewerberegister).

Applications for registration at the commercial register, which is publically available under www.handelsregister.de  , are electronically filed in publicly certified form through a notary.  The commercial register provides information about all relevant relationships between merchants and commercial companies, including names of partners and managing directors, capital stock, liability limitations, and insolvency proceedings.  Registration costs vary depending on the size of the company.

Germany Trade and Invest (GTAI), the country’s economic development agency, can assist in the registration processes (https://www.gtai.de/GTAI/Navigation/EN/Invest/Investment-guide/Establishing-a-company/business-registration.html  ) and advise investors, including micro-, small-, and medium-sized enterprises (MSMEs), on how to obtain incentives.

In the EU, MSMEs are defined as follows:

• Micro-enterprises:  less than 10 employees and less than €2 million annual turnover or less than €2 million in balance sheet total.
• Small-enterprises:  less than 50 employees and less than €10 million annual turnover or less than €10 million in balance sheet total.
• Medium-sized enterprises:  less than 250 employees and less than €50 million annual turnover or less than €43 million in balance sheet total.

Outward Investment

The Federal Government provides guarantees for investments by German-based companies in developing and emerging economies and countries in transition in order to insure them against political risks.  In order to receive guarantees, the investment must have adequate legal protection in the host country. The Federal Government does not insure against commercial risks.

Germany does not have a bilateral investment treaty (BIT) with the United States. However, a Friendship, Commerce and Navigation (FCN) treaty dating from 1956 contains many BIT-relevant provisions including national treatment, most-favored nation, free capital flows, and full protection and security.

Germany has bilateral investment treaties in force with 126 countries and territories.  Treaties with former sovereign entities (including Czechoslovakia, the Soviet Union, Sudan, and Yugoslavia) continue to apply in an additional seven cases.  These are indicated with an asterisk (*) and have not been taken into account in regard to the total number of treaties. Treaties are in force with the following states, territories, or former sovereign entities.  For a full list of treaties containing investment provisions that are currently in force, see the UNCTAD Navigator at http://investmentpolicyhub.unctad.org/IIA/CountryBits/78#iiaInnerMenu  .

Afghanistan; Albania; Algeria; Angola; Antigua and Barbuda; Argentina; Armenia; Azerbaijan; Bahrain; Bangladesh; Barbados; Belarus; Benin; Bosnia and Herzegovina; Botswana; Brunei; Bulgaria; Burkina Faso; Burundi; Cambodia; Cameroon; Cape Verde; Central African Republic; Chad; Chile; China (People’s Republic); Congo (Republic); Congo (Democratic Republic); Costa Rica; Croatia; Cuba; Czechoslovakia; Czech Republic*; Dominica; Egypt; El Salvador; Estonia; Eswatini; Ethiopia; Gabon; Georgia; Ghana; Greece; Guatemala; Guinea; Guyana; Haiti; Honduras; Hong Kong; Hungary; Iran; Ivory Coast; Jamaica; Jordan; Kazakhstan; Kenya; Republic of Korea; Kosovo*; Kuwait; Kyrgyzstan; Laos; Latvia; Lebanon; Lesotho; Liberia; Libya; Lithuania; Madagascar; Malaysia; Mali; Malta; Mauritania; Mauritius; Mexico; Moldova; Mongolia; Montenegro*; Morocco; Mozambique; Namibia; Nepal; Nicaragua; Niger; Nigeria; North Macedonia; Oman; Pakistan; Palestinian Territories; Panama; Papua New Guinea; Paraguay; Peru; Philippines; Poland; Portugal; Qatar; Romania; Russia*; Rwanda; Saudi Arabia; Senegal; Serbia*; Sierra Leone; Singapore; Slovak Republic*; Slovenia; Somalia; South Sudan*; Soviet Union; Sri Lanka; St. Lucia; St. Vincent and the Grenadines; Sudan; Syria; Tajikistan; Tanzania; Thailand; Togo; Trinidad & Tobago; Tunisia; Turkey; Turkmenistan; Uganda; Ukraine; United Arab Emirates; Uruguay; Uzbekistan; Venezuela; Vietnam; Yemen; Yugoslavia; Zambia; and Zimbabwe.

A BIT with Bolivia was terminated in May 2014, a BIT with South Africa was terminated in October 2014, BITs with India and Indonesia were terminated in June 2017, and a BIT with Ecuador was terminated in May 2018.  The current BIT with Poland will be terminated in October 2019.

Germany has ratified treaties with the following countries and territories that have not yet entered into force:

Bilateral Taxation Treaties:

Taxation of U.S. firms within Germany is governed by the “Convention for the Avoidance of Double Taxation with Respect to Taxes on Income.” This treaty has been in effect since 1989 and was extended in 1991 to the territory of the former German Democratic Republic. With respect to income taxes, both countries agreed to grant credit for their respective federal income taxes on taxes paid on profits by enterprises located in each other’s territory.  A Protocol of 2006 updates the existing tax treaty and includes several changes, including a zero-rate provision for subsidiary-parent dividends, a more restrictive limitation on benefits provision, and a mandatory binding arbitration provision. In 2013, Germany and the United States signed an agreement on legal and administrative cooperation and information exchange with regard to the U.S. Foreign Account Tax Compliance Act. (Full document at https://www.bundesfinanzministerium.de/Content/DE/Standardartikel/Themen/Steuern/Internationales_
Steuerrecht/Staatenbezogene_Informationen/Laender_A_Z/Verein_Staaten/2013-10-15-USA-Abkommen-FATCA.html  ).

As of January 2019, Germany had bilateral tax treaties with a total of 96 countries, including with the United States, and, regarding inheritance taxes, with 6 countries.  It has special bilateral treaties with respect to income and assets by shipping and aerospace companies with 10 countries and has treaties relating to the exchange of information and administrative assistance with 27 countries.  Germany has initiated and/or is renegotiating new income and wealth tax treaties with 64 countries, special bilateral treaties with respect to income and assets by shipping and aerospace companies with 2 countries, and information exchange and administrative assistance treaties with 7 countries.

Transparency of the Regulatory System

Germany has transparent and effective laws and policies to promote competition, including antitrust laws.  The legal, regulatory and accounting systems are complex but transparent and consistent with international norms.

Formally, the public consultation by the federal government is regulated by the Joint Rules of Procedure, which specify that ministries must consult early and extensively with a range of stakeholders on all new legislative proposals.  In practice, laws and regulations in Germany are routinely published in draft, and public comments are solicited. According to the Joint Procedural Rules, ministries should consult the concerned industries’ associations (rather than single companies), consumer organizations, environmental, and other NGOs.  The consultation period generally takes two to eight weeks.

The German Institute for Standardization (DIN) is open to foreign members.

International Regulatory Considerations

As a member of the European Union, Germany must observe and implement directives and regulations adopted by the EU.  EU regulations are binding and enter into force as immediately applicable law. Directives, on the other hand, constitute a type of framework law that is to be implemented by the Member States in their respective legislative processes, which is regularly observed in Germany.

EU Member States must implement directives within a specified period of time.  Should a deadline not be met, the Member State may suffer the initiation of an infringement procedure, which could result in high fines.  Germany has a set of rules that prescribe how to break down any payment of fines devolving on the Federal Government and the federal states (Länder).  Both bear part of the costs depending on their responsibility within legislation and the respective part they played in non-compliance.

The federal states have a say over European affairs through the Bundesrat (upper chamber of parliament).  The Federal Government is required to instruct the Bundesrat at an early stage on all EU plans that are relevant for the federal states.

The federal government notifies draft technical regulations to the WTO Committee on Technical Barriers to Trade (TBT) through the Federal Ministry of Economic Affairs and Energy.

Legal System and Judicial Independence

German law is both predictable and reliable.  Companies can effectively enforce property and contractual rights.  Germany’s well-established enforcement laws and official enforcement services ensure that investors can assert their rights.  German courts are fully available to foreign investors in an investment dispute.

The judicial system is independent, and the federal government does not interfere in the court system.  The legislature sets the systemic and structural parameters, while lawyers and civil law notaries use the law to shape and organize specific situations.  Judges are highly competent. International studies and empirical data have attested that Germany offers an efficient court system committed to due process and the rule of law.

In Germany, most important legal issues and matters are governed by comprehensive legislation in the form of statutes, codes and regulations.  Primary legislation in the area of business law includes:

• the Civil Code (Bürgerliches Gesetzbuch, abbreviated as BGB), which contains general rules on the formation, performance and enforcement of contracts and on the basic types of contractual agreements for legal transactions between private entities;
• the Commercial Code (Handelsgesetzbuch, abbreviated as HGB), which contains special rules concerning transactions among businesses and commercial partnerships;
• the Private Limited Companies Act (GmbH-Gesetz) and the Public Limited Companies Act (Aktiengesetz), covering the two most common corporate structures in Germany – the ‘GmbH’ and the ‘Aktiengesellschaft’; and
• the Act on Unfair Competition (Gesetz gegen den unlauteren Wettbewerb, abbreviated as UWG), which prohibits misleading advertising and unfair business practices.

Germany has specialized courts for administrative law, labor law, social law, and finance and tax law.  In 2019, the first German district court for civil matters (in Frankfurt) introduced the possibility to hear international trade disputes in English.  Other federal states are currently discussing plans to introduce these specialized chambers as well. The Federal Patent Court hears cases on patents, trademarks, and utility rights which are related to decisions by the German Patent and Trademarks Office.  Both the German Patent Office (Deutsches Patentamt) and the European Patent Office are headquartered in Munich.

Laws and Regulations on Foreign Direct Investment

The Federal Ministry for Economic Affairs and Energy may review acquisitions of domestic companies by foreign buyers in cases where investors seek to acquire at least 25 percent of the voting rights to assess whether these transactions pose a risk to the public order or national security of the Federal Republic of Germany.  In the case of acquisitions of critical infrastructure and companies in sensitive sectors, the threshold for triggering an investment review by the government is 10 percent. The Foreign Trade and Payments Act and the Foreign Trade and Payments Ordinance provide the legal basis for screening investments. To our knowledge, the Federal Ministry for Economic Affairs and Energy had not prohibited any acquisitions as of April 2019.

There is no requirement for investors to obtain approval for any acquisition, but they must notify the Federal Ministry for Economic Affairs and Energy if the target company operates critical infrastructure.  In that case, or if the company provides services related to critical infrastructure or is a media company, the threshold for initiating an investment review is the acquisition of at least 10 percent of voting rights.  The Federal Ministry for Economic Affairs and Energy may launch a review within three months after obtaining knowledge of the acquisition; the review must be concluded within four months after receipt of the full set of relevant documents.  An investor may also request a binding certificate of non-objection from the Federal Ministry for Economic Affairs and Energy in advance of the planned acquisition to obtain legal certainty at an early stage. If the Federal Ministry for Economic Affairs and Energy does not open an in-depth review within two months from the receipt of the request, the certificate shall be deemed as granted.

Special rules apply for the acquisition of companies that operate in sensitive security areas, including defense and IT security.  In contrast to the cross-sectoral rules, the sensitive acquisitions must be notified in written form including basic information of the planned acquisition, the buyer, the domestic company that is subject of the acquisition and the respective fields of business.  The Federal Ministry for Economic Affairs and Energy may open a formal review procedure within three months after receiving notification, or the acquisition shall be deemed as approved. If a review procedure is opened, the buyer is required to submit further documents.  The acquisition may be restricted or prohibited within three months after the full set of documents has been submitted.

The German government amended domestic investment screening provisions, effective June 2017, clarifying the scope for review and giving the government more time to conduct reviews, in reaction to an increasing number of acquisitions of German companies by foreign investors, particularly from China.  The amended provisions provide a clearer definition of sectors in which foreign investment can pose a “threat to public order and security,” including operators of critical infrastructure, developers of software to run critical infrastructure, telecommunications operators or companies involved in telecom surveillance, cloud computing network operators and service providers, and telematics companies.  All non-EU entities are now required to notify Federal Ministry for Economic Affairs and Energy in writing of any acquisition of or significant investment in a German company active in the above sectors. The new rules also extend the time to assess a cross-sector foreign investment from two to four months, and for investments in sensitive sectors, from one to three months, and introduce the possibility of retroactively initiating assessments for a period of five years after the conclusion of an acquisition. Indirect acquisitions such as those through a Germany- or EU-based affiliate company are now also explicitly subject to the new rules.  In 2018, the government further lowered the threshold for the screening of investments, allowing authorities to screen acquisitions by foreign entities of at least 10 percent of voting rights of German companies that operate critical infrastructure (down from 25 percent), as well as companies providing services related to critical infrastructure. The amendment also added media companies to the list of sensitive businesses to which the lower threshold applies, to prevent foreign actors to engage in disinformation.

Any decisions resulting from review procedures are subject to judicial review by the administrative courts.  The German Economic Development Agency (GTAI) provides extensive information for investors, including about the legal framework, labor-related issues and incentive programs, on their website: http://www.gtai.de/GTAI/Navigation/EN/Invest/investment-guide.html.

Competition and Anti-Trust Laws

German government ensures competition on a level playing field on the basis of two main legal codes:

The Law against Limiting Competition is the legal basis for the fight against cartels, merger control, and monitoring abuse.  State and Federal cartel authorities are in charge of enforcing anti-trust law. In exceptional cases, the Minister for Economics and Energy can provide a permit under specific conditions.  The last case was a merger of two retailers (Kaisers/Tengelmann and Edeka) to which a ministerial permit was granted in March 2016. A July 2017 amendment to the Cartel Law expanded the reach of the Federal Cartel Authority (FCA) to include internet and data-based business models; as a result, the FCA investigated Facebook’s data collection practices regarding potential abuse of market power.  A February 2019 decision affirming abuse by the FCA has been challenged by Facebook at a regional court.  In November 2018, the FCA initiated an investigation of Amazon over potential abuse of market power; a decision was pending as of April 2019.

The Law against Unfair Competition (amended last in 2016) can be invoked in regional courts.

Expropriation and Compensation

German law provides that private property can be expropriated for public purposes only in a non-discriminatory manner and in accordance with established principles of constitutional and international law.  There is due process and transparency of purpose, and investors and lenders to expropriated entities receive prompt, adequate, and effective compensation.

The Berlin state government is currently reviewing a petition for a referendum submitted by a citizens’ initiative which calls for the expropriation of residential apartments owned by large corporations.  At least one party in the governing coalition officially supports the proposal, whereas the others remain undecided. Certain long-running expropriation cases date back to the Nazi and communist regimes. During the 2008-9 global financial crisis, the parliament adopted a law allowing emergency expropriation if the insolvency of a bank would endanger the financial system, but the measure expired without having been used.

Dispute Settlement

ICSID Convention and New York Convention

Germany is a member of both the International Center for the Settlement of Investment Disputes (ICSID) and New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, meaning local courts must enforce international arbitration awards under certain conditions.

Investor-State Dispute Settlement

Investment disputes involving U.S. or other foreign investors in Germany are extremely rare. According to the UNCTAD database of treaty-based investor dispute settlement cases, Germany has been challenged a handful of times, none of which involved U.S. investors.  

International Commercial Arbitration and Foreign Courts

Germany has a domestic arbitration body called the German Institution for Dispute Settlement. ”Book 10” of the German Code of Civil Procedure addresses arbitration proceedings. The International Chamber of Commerce has an office in Berlin. In addition, chambers of commerce and industry offer arbitration services.

Bankruptcy Regulations

German insolvency law, as enshrined in the Insolvency Code, supports and promotes restructuring.  If a business or the owner of a business becomes insolvent, or a business is over-indebted, insolvency proceedings can be initiated by filing for insolvency; legal persons are obliged to do so.  Insolvency itself is not a crime, but deliberately late filing for insolvency is.

Under a regular insolvency procedure, the insolvent business is generally broken up in order to release as much money as possible through the sale of individual items or rights or parts of the company.  Proceeds can then be paid out to the creditors in the insolvency proceedings. The distribution of the monies to the creditors follows the detailed instructions of the Insolvency Code.

Equal treatment of creditors is enshrined in the Insolvency Code.  Some creditors have the right to claim property back. Post-adjudication preferred creditors are served out of insolvency assets during the insolvency procedure.  Ordinary creditors are served on the basis of quotas from the remaining insolvency assets. Secondary creditors, including shareholder loans, are only served if insolvency assets remain after all others have been served.  Germany ranks fourth in the global ranking of “Resolving Insolvency” in the World Bank’s Doing Business Report, with a recovery rate of 80.4 cents on the dollar.

Investment Incentives

Federal and state investment incentives – including investment grants, labor-related and R&D incentives, public loans, and public guarantees – are available to domestic and foreign investors alike.  Different incentives can be combined. In general, foreign and German investors have to meet the same criteria for eligibility.

Germany Trade & Invest, Germany’s federal economic development agency, provides comprehensive information on incentives in English at:  www.gtai.com/incentives-programs  .

Foreign Trade Zones/Free Ports/Trade Facilitation

There are currently two free ports in Germany operating under EU law:  Bremerhaven and Cuxhaven. The duty-free zones within the ports also permit value-added processing and manufacturing for EU-external markets, albeit with certain requirements.  All are open to both domestic and foreign entities. In recent years, falling tariffs and the progressive enlargement of the EU have eroded much of the utility and attractiveness of duty-free zones.

Performance and Data Localization Requirements

In general, there are no requirements for local sourcing, export percentage, or local or national ownership.  In some cases, however, there may be performance requirements tied to the incentive, such as creation of jobs or maintaining a certain level of employment for a prescribed length of time.

U.S. companies can generally obtain the visas and work permits required to do business in Germany.  U.S. Citizens may apply for work and residential permits from within Germany. Germany Trade & Invest offers detailed information online at www.gtai.com/coming-to-germany  .

There are no localization requirements for data storage in Germany.  However, in recent years German and European cloud providers have sought to market the domestic location of their servers as a competitive advantage.

Real Property

The German Government adheres to a policy of national treatment, which considers property owned by foreigners as fully protected under German law.  In Germany, mortgages approvals are based on recognized and reliable collateral. Secured interests in property, both chattel and real, are recognized and enforced.  According to the World Bank’s Doing Business Report, it takes an average of 52 days to register property in Germany.

The German Land Register Act dates back to 1897 and was last amended in 2017.  The land register mirrors private real property rights and provides information on the legal relationship of the estate.  It documents the owner, rights of third persons, liabilities and restrictions and how these rights relate to each other. Any change in property of real estate must be registered in the land registry to make the contract effective.  Land titles are now maintained in an electronic database and can be consulted by persons with a legitimate interest.

Intellectual Property Rights

Germany has a robust regime to protect intellectual property (IP) rights.  Legal structures are strong and enforcement is good. Nonetheless, internet piracy and counterfeit goods remain an issue, and specific infringing websites are included in the 2018 Notorious Markets List.  Germany has been a member of the World Intellectual Property Organization (WIPO) since 1970. The German Central Customs Authority annually publishes statistics on customs seizures of counterfeit and pirated goods.  The statistics for 2018 can be found under: https://www.zoll.de/SharedDocs/Broschueren/DE/Die-Zollverwaltung/jahresstatistik_2018.html?nn=287024  .  

Germany is also a party to the major international intellectual property protection agreements: the Bern Convention for the Protection of Literary and Artistic Works, the Paris Convention for the Protection of Industrial Property, the Universal Copyright Convention, the Geneva Phonograms Convention, the Patent Cooperation Treaty, the Brussels Satellite Convention, the Treaty of Rome on Neighboring Rights, and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).  Many of the latest developments in German IP law are derived from European legislation with the objective to make applications less burdensome and allow for European IP protection.

The following types of protection are available:

Copyrights:  National treatment is also granted to foreign copyright holders, including remuneration for private recordings.  Under the World Trade Organization (WTO) TRIPS Agreement, Germany also grants legal protection for U.S. performing artists against the commercial distribution of unauthorized live recordings in Germany.  Germany signed the World Intellectual Property Organization (WIPO)_Copyright Treaty and ratified it in 2003. Most rights holder organizations regard German authorities’ enforcement of intellectual property protections as effective.  In 2008, Germany implemented the EU enforcement directive with a national bill, thereby strengthening the privileges of rights holders and allowing for improved enforcement action.

Trademarks:  Foreigners may register trademarks subject to exactly the same terms as German nationals at the German Patent and Trade Mark Office.  Protection is valid for a period of ten years and can be extended in ten-year periods.

Patents:  Foreigners may register patents subject to the same terms as German nationals at the German Patent and Trade Mark Office.  Patents are granted for technical inventions which are new, involve an inventive step, and are industrially applicable. However, applicants having neither a domicile nor an establishment in Germany must appoint a patent attorney in Germany as a representative filing the patent application.  The documents must be submitted in German or with a translation into German. The duration of a patent is 20 years, beginning on the day following the invention patent application. Patent applicants can request accelerated examination when filing the application provided that the patent application was previously filed at the U.S. patent authority and that at least one claim had been determined to be allowable. There are a number of differences in patent law that a qualified patent attorney can explain to U.S. patent applicants.

Trade Secrets: Both technical and commercial trade secrets are protected in Germany by the Law Against Unfair Competition.  According to the law, the illegal passing of trade secrets to third parties – including the attempt to do so – for reasons related to competition, self-interest, the benefit of a third party, or with the intent to harm the business owner, is punishable with prison sentences of up to three years or a monetary fine.  In severe cases, including commercial-scale theft and those that involve passing trade secrets to foreign countries, courts can impose prison sentences of up to five years or a monetary fine.

U.S. grants of IP rights are valid in the United States only.  U.S. IPR owners should note that the EU operates on a “first-to-file” principle and not on the “first-inventor-to-file” principle, used in the United States.  It is possible to register for trademark and design protection nationally in Germany or with the European Union Trade Mark and/or Registered Community Design. These provide protection for industrial design or trademark in the entire EU market.  Both national trademarks and European Community Trade Marks (CTMs) can be applied for from the U.S. Patent and Trademark Office as part of an international trademark registration system (http://www.uspto.gov  ), or the applicant may apply directly for those trademarks from the European Union Intellectual Property Office (EUIPO) at https://euipo.europa.eu/ohimportal/en/home  .

For patents, the situation is slightly different but protection can still be gained via the U.S. Patent and Trademark Office (USPTO).  Although there is not yet a single EU-wide patent system, the European Patent Office (EPO) does grant individual European patents for the contracting states to the European Patent Convention (EPC), which entered into force in 1977.  The 38 contracting states include the entire EU membership and several additional European countries. As an alternative to filing patents for European protection with the USPTO, the EPO provides a convenient single point to file a patent in as many of these countries as an applicant would like: https://www.epo.org/index.html.

In addition, German law offers the possibility to register designs and utility models.

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

Country resources:

For additional information about how to protect intellectual property in Germany, please see Germany Trade & Invest website at http://www.gtai.de/GTAI/Navigation/EN/Invest/Investment-guide/The-legal-framework/patents-licensing-trade-marks.html  .

Statistics on the seizure of counterfeit goods are available through the German Customs Authority (Zoll):

https://www.zoll.de/SharedDocs/Broschueren/DE/Die-Zollverwaltung/jahresstatistik_2018.html?nn=287024  

Investors can identify IP lawyers in AmCham Germany’s Online Services Directory: https://www.amcham.de/services/overview/member-services/address-services-directory/   (under “legal references” select “intellectual property.”)

Businesses can also join the Anti-counterfeiting Association (APM)

http://www.markenpiraterie-apm.de/index.php?article_id=1&clang=1   or the Association for the  Enforcement of Copyrights (GVU) http://www.gvu.de  .

Capital Markets and Portfolio Investment

As an EU member state with a well-developed financial sector, Germany welcomes foreign portfolio investment and has an effective regulatory system.  Germany has a very open economy, routinely ranking among the top countries in the world for exports and inward and outward foreign direct investment.  As a member of the Eurozone, Germany does not have sole national authority over international payments, which are a shared task of the Eurosystem, comprised of the European Central Bank and the national central banks of the 19 member states that are part of the eurozone, including the German Central Bank (Bundesbank).  A European framework for screening of foreign investments, which entered into force in April 2019, provides a basis under European law to restrict capital movements into Germany. Global investors see Germany as a safe place to invest, as the real economy continues to outperform other EU countries and German sovereign bonds retain their “safe haven” status.

Listed companies and market participants in Germany must comply with the Securities Trading Act, which bans insider trading and market manipulation.  Compliance is monitored by the Federal Financial Supervisory Authority (BaFin) while oversight of stock exchanges is the responsibility of the state governments in Germany (with BaFin taking on any international responsibility).  Investment fund management in Germany is regulated by the Capital Investment Code (KAGB), which entered into force on July 22, 2013. The KAGB represents the implementation of additional financial market regulatory reforms, committed to in the aftermath of the global financial crisis.  The law went beyond the minimum requirements of the relevant EU directives and represents a comprehensive overhaul of all existing investment-related regulations in Germany with the aim of creating a system of rules to protect investors while also maintaining systemic financial stability.

Money and Banking System

Although corporate financing via capital markets is on the rise, Germany’s financial system remains mostly bank-based.  Bank loans are still the predominant form of funding for firms, particularly the small- and medium-sized enterprises that comprise Germany’s “Mittelstand,” or mid-sized industrial market leaders.  Credit is available at market-determined rates to both domestic and foreign investors, and a variety of credit instruments are available. Legal, regulatory and accounting systems are generally transparent and consistent with international banking norms.  Germany has a universal banking system regulated by federal authorities, and there have been no reports of a shortage of credit in the German economy. After 2010, Germany banned some forms of speculative trading, most importantly “naked short selling.” In 2013, Germany passed a law requiring banks to separate riskier activities such as proprietary trading into a legally separate, fully capitalized unit that has no guarantee or access to financing from the deposit-taking part of the bank.

Germany supports a worldwide financial transaction tax and is pursuing the introduction of such a tax along with several other Eurozone countries.

Germany has a modern banking sector but is considered “over-banked” resulting in low profit margins and a need for consolidation.  The country’s “three-pillar” banking system consists of private commercial banks, cooperative banks, and public banks (savings banks/Sparkassen and the regional state-owned banks/Landesbanken).  The private bank sector is dominated by Deutsche Bank and Commerzbank, with balance sheets of €1.35 trillion and €462 billion respectively (2018 figures). Commerzbank received €18 billion in financial assistance from the federal government in 2009, for which the government took a 25 percent stake in the bank (now reduced to 15.6 percent).  Deutsche Bank and Commerzbank confirmed in March 2019 that they are in merger talks, with the outcome unclear as of April 2019. A merger of the two institutions would create the Eurozone’s third-largest lender after HSBC and BNP Paribas with roughly €1.9 trillion in assets (USD 2.04 trillion), about 150,000 employees, about one-fifth of the private customers in Germany, but a market value of just €25 billion (USD 28.4 billion).  Germany’s regional state-owned banks (Landesbanken) were among the hardest hit by the global financial crisis and were forced to reduce their business activities but have lately stabilized again.

Foreign Exchange and Remittances

Foreign Exchange

As a member of the Eurozone, Germany uses the euro as its currency, along with 18 other EU countries.  The Eurozone has no restrictions on the transfer or conversion of its currency, and the exchange rate is freely determined in the foreign exchange market.

German authorities respect the independence of the European Central Bank (ECB), and thus have no scope to manipulate the bloc’s exchange rate.  In a February 2019 report, the European Commission (EC) concluded Germany’s persistently high current account surplus – the world’s largest in 2018 at USD 294 billion (7.8 percent of GDP) – “has slightly narrowed since 2016 and is expected to gradually decline due to a pick-up in domestic demand in the coming years whilst remaining at historically high levels over the forecast horizon.”  While low commodity prices and the weak euro exchange rate explain some of the surplus’ increase in 2015-2016, the persistence of Germany’s surplus is a matter of international controversy. German policymakers view the large surplus is the result of market forces rather than active government policies, while the EC and IMF have called on authorities to rebalance towards domestic sources of economic growth by expanding public investment, using available fiscal space, and other policy choices that boost domestic demand.

Germany is a member of the Financial Action Task Force (FATF) and is committed to further strengthening its national system for the prevention, detection and suppression of money laundering and terrorist financing.  In 2017, Germany’s Financial Intelligence Unit (FIU) was restructured and given more staff. It was transferred to the General Customs Directorate in the Federal Ministry of Finance. At the same time, its tasks and competencies were redefined taking into account the provisions of the Fourth EU Money Laundering Directive.  One focus is now on operational and strategic analysis. On June 26, 2017, legislation to implement the Fourth EU Money Laundering Directive and the European Funds Transfers Regulation (Geldtransfer-Verordnung) entered into force.  (The Act amends the German Money Laundering Act (Geldwäschegesetz – GwG) and a number of further laws).

There is no difficulty in obtaining foreign exchange.

Remittance Policies

There are no restrictions or delays on investment remittances or the inflow or outflow of profits.

Germany is the sixth-largest remittance-sending country worldwide.  Migrants in Germany posted USD 22.09 billion (0.6 percent of GDP) abroad in 2018 (World Bank, Bilateral Remittances Matrix 2018).  The most important receiving states for remittances from Germany are EU neighbors such as France, Poland, and Italy. Around USD 8 billion was sent to developing countries, out of which Lebanon, Vietnam, China, Nigeria and Serbia were the biggest receivers.  Remittance flows into Germany amounted to around USD 17.36 billion in 2017, approximately 0.4 percent of Germany’s GDP.

The issue of remittances played a role during the German G20 Presidency.  During its presidency, Germany passed an updated version of its “G20 National Remittance Plan.”  The document states that Germany’s focus will remain on “consumer protection, linking remittances to financial inclusion, creating enabling regulatory frameworks and generating research and data on diaspora and remittances dynamics.” The 2017 “G20 National Remittance Plan” can be found at https://www.gpfi.org/sites/default/files/documents/2017 percent20G20 percent20Financial percent20Inclusion percent20Action percent20Plan percent20final.pdf    

Sovereign Wealth Funds

The German government does not currently have a sovereign wealth fund or an asset management bureau.  Following German reunification, the federal government set up a public agency to manage the privatization of assets held by the former East Germany.  In 2000, the agency, known as TLG Immobilien, underwent a strategic reorientation from a privatization-focused agency to a profit-focused active portfolio manager of commercial and residential property.  In 2012, the federal government sold TLG Immobilien to private investors.

The formal term for state-owned enterprises (SOEs) in Germany translates as “public funds, institutions, or companies,” and refers to entities whose budget and administration are separate from those of the government, but in which the government has more than 50 percent of the capital shares or voting rights.  Appropriations for SOEs are included in public budgets, and SOEs can take two forms, either public or private law entities. Public law entities are recognized as legal personalities whose goal, tasks, and organization are established and defined via specific acts of legislation, with the best-known example being the publicly-owned promotional bank KfW (Kreditanstalt für Wiederaufbau).  The government can also resort to ownership or participation in an entity governed by private law if the following conditions are met: doing so fulfills an important state interest, there is no better or more economical alternative, the financial responsibility of the federal government is limited, the government has appropriate supervisory influence, yearly reports are published, and such control is approved by the Federal Finance Ministry and the ministry responsible for the subject matter.

Government oversight of SOEs is decentralized and handled by the ministry with the appropriate technical area of expertise.  The primary goal of such involvement is promoting public interests rather than generating profits. The government is required to close its ownership stake in a private entity if tasks change or technological progress provides more effective alternatives, though certain areas, particularly science and culture, remain permanent core government obligations.  German SOEs are subject to the same taxes and the same value added tax rebate policies as their private sector competitors. There are no laws or rules that seek to ensure a primary or leading role for SOEs in certain sectors or industries. Private enterprises have the same access to financing as SOEs, including access to state-owned banks such as KfW.

The Federal Statistics Office maintains a database of SOEs from all three levels of government (federal, state, and municipal) listing a total of 16,833 entities for 2016, or 0.5 percent of the total 3.5 million companies in Germany.  SOEs in 2016 had €547 billion in revenue and €529 billion in expenditures. Almost 40 percent of SOEs’ revenue was generated by water and energy suppliers, 13 percent by health and social services, and 12 percent by transportation-related entities.  Measured by number of companies rather than size, 88 percent of SOEs are owned by municipalities, 10 percent are owned by Germany’s 16 states, and 2 percent are owned by the federal government.

The Federal Finance Ministry is required to publish a detailed annual report on public funds, institutions, and companies in which the federal government has direct participation (including a minority share), or an indirect participation greater than 25 percent and with a nominal capital share worth more than €50,000.  The federal government held a direct participation in 106 companies and an indirect participation in 469 companies at the end of 2016, most prominently Deutsche Bahn (100 percent share), Deutsche Telekom (32 percent share), and Deutsche Post (21 percent share). Federal government ownership is concentrated in the areas of science, infrastructure, administration/increasing efficiency, economic development, defense, development policy, culture.  As the result of federal financial assistance packages from the federally-controlled Financial Market Stability Fund during the global financial crisis of 2008-9, the federal government still has a partial stake in several commercial banks, including a 15.6 percent share in Commerzbank, Germany’s second largest commercial bank. The 2017 annual report (with 2016 data) can be found here:

https://www.bundesfinanzministerium.de/Content/DE/Standardartikel/Themen/Bundesvermoegen/
Privatisierungs_und_Beteiligungspolitik/Beteiligungspolitik/Beteiligungsberichte/beteiligungsbericht-des-bundes-2017.pdf?__blob=publicationFile&v=7  

Publicly-owned banks also constitute one of the three pillars of Germany’s banking system (cooperative and commercial banks are the other two).  Germany’s savings banks are mainly owned by the municipalities, while the so-called Landesbanken are typically owned by regional savings bank associations and the state governments.  There are also many state-owned promotional/development banks which have taken on larger governmental roles in financing infrastructure. This increased role removes expenditures from public budgets, particularly helpful in light of Germany’s balanced budget rules, which go into effect for the states in 2020.

A longstanding, prominent case of a partially state-owned enterprise is automotive manufacturer Volkswagen, in which the state of Lower Saxony owns the fourth-largest share in the company at 12.7 percent share, but controls 20 percent of the voting rights.  The so-called Volkswagen Law, passed in 1960, limited individual shareholder’s voting rights in Volkswagen to a maximum of 20 percent regardless of the actual number of shares owned, so that Lower Saxony could veto any takeover attempts. In 2005, the European Commission successfully sued Germany at the European Court of Justice (ECJ), claiming the law impeded the free flow of capital.  The law was subsequently amended to remove the cap on voting rights, but Lower Saxony’s 20 percent share of voting rights was maintained, preserving its ability to block hostile takeovers.

The wholly federal government-owned railway company, Deutsche Bahn, was cleared by the European Commission in 2013 of allegations of abusing its dominant market position after Deutsche Bahn implemented a new, competitive pricing system.  A similar case brought by the German Federal Cartel Office against Deutsche Bahn was terminated in May 2016 after the company implemented a new pricing system.

Privatization Program

Germany does not have any privatization programs at this time.  German authorities treat foreigners equally in privatizations.

In December 2016, the Federal Government passed the National Action Plan for Business and Human Rights (NAP).  The action plan aims to apply the UN Guiding Principles for Business and Human Rights for the activities of German companies nationally as well as globally in their value and supply chains.  The 2018 coalition agreement for the 19th legislative period between the governing Christian Democratic parties, CDU/CSU, and the Social Democratic Party of Germany (SPD) states its commitment to the action plan, including the principles on public procurement.  It further states that, if the NAP 2020’s effective and comprehensive review comes to the conclusion that the voluntary due diligence approach of enterprises is insufficient, the government will initiate legislation for an EU-wide regulation. The government is currently reviewing and evaluating the German companies’ voluntary measures to respect human rights in their business operations under the NAP.  

Germany adheres to the OECD Guidelines for Multinational Enterprises; the National Contact Point (NCP) is housed in the Federal Ministry of Economic Affairs and Energy.  The NCP is supported by an advisory board composed of several ministries, business organizations, trade unions, and NGOs. This working group usually meets once a year to discuss all Guidelines-related issues.  The German NCP can be contacted through the Ministry’s website: https://www.bmwi.de/Redaktion/EN/Textsammlungen/Foreign-Trade/national-contact-point-ncp.html  .

There is general awareness of environmental, social, and governance issues among both producers and consumers in Germany, and surveys suggest that consumers increasingly care about the ecological and social impacts of the products they purchase.  In order to encourage businesses to factor environmental, social, and governance issues into their decision-making, the government provides information online and in hard copy. The federal government promotes corporate social responsibility (CSR) through awards and prizes, business fairs, and reports and newsletters.  The government also set up so called “sector dialogues” to connect companies and facilitate the exchange of best practices, and offers practice days to help nationally as well as internationally operating small- and medium-sized companies discern and implement their entrepreneurial due diligence under the NAP. To this end it has created a website on CSR in Germany (http://www.csr-in-deutschland.de/EN/Home/home.html   in English). The German government maintains and enforces domestic laws with respect to labor and employment rights, consumer protections, and environmental protections.  The German government does not waive labor and environmental laws to attract investment.

On the business side, the American Chamber of Commerce in Germany (AmCham Germany) is active in promoting standards of ecological, economic, and social responsibility and sustainability within their members’ entrepreneurial actions in keeping with the UN Sustainable Development Goals, adopted in 2015.  AmCham Germany issues publications on selected member companies’ approaches to CSR. Its Corporate Responsibility Committee serves as a platform to exchange best practices, identify trends, and discuss regulatory initiatives. Other business initiatives, platforms, and networks on sustainable corporate conduct and CSR exist.  In addition, Germany’s four leading business organizations regularly provide information on a common CSR internet portal to promote and illustrate companies’ engagement on CSR: www.csrgermany.de  .

Social reporting is voluntary, but publicly listed companies frequently include information on their CSR policies in annual shareholder reports and on their websites.

Civil society groups that work on CSR include 3p Consortium for Sustainable Management, Amnesty International Germany, Bund für Umwelt und Naturschutz Deutschland e. V. (BUND), CorA Corporate Accountability – Netzwerk Unternehmensverantwortung, Forest Stewardship Council (FSC), Germanwatch, Greenpeace Germany, Naturschutzbund Deutschland (NABU), Sneep (Studentisches Netzwerk zu Wirtschafts- und Unternehmensethik), Stiftung Warentest, Südwind – Institut für Ökonomie und Ökumene, TransFair – Verein zur Förderung des Fairen Handels mit der „Dritten Welt“ e. V., Transparency International, Verbraucherzentrale Bundesverband e.V., Bundesverband Die Verbraucher Initiative e.V., and the World Wide Fund for Nature (WWF, known as the „World Wildlife Fund“ in the United States).

Among industrialized countries, Germany ranks 11th out of 180, according to Transparency International’s 2018 Corruption Perceptions Index.  Some sectors including the automotive industry, construction sector, and public contracting, exhibit political influence and party finance remains only partially transparent.  Nevertheless, U.S. firms have not identified corruption as an impediment to investment in Germany. Germany is a signatory of the OECD Anti-Bribery Convention and a participating member of the OECD Working Group on Bribery.

Over the last two decades, Germany has increased penalties for the bribery of German officials, corrupt practices between companies, and price-fixing by companies competing for public contracts.  It has also strengthened anti-corruption provisions on financial support extended by the official export credit agency and has tightened the rules for public tenders. Government officials are forbidden from accepting gifts linked to their jobs.  Most state governments and local authorities have contact points for whistle-blowing and provisions for rotating personnel in areas prone to corruption. There are serious penalties for bribing officials and price fixing by companies competing for public contracts.

According to the Federal Criminal Office, in 2017, 63 percent of all corruption cases were directed towards the public administration (up from 49 percent in 2016), 22 percent towards the business sector (down from 30 percent in 2016), 12 percent towards law enforcement and judicial authorities (down from 18 percent in 2016), and 3 percent to political officials (same as in 2016).

A prominent corruption case concerns the “BER” Berlin Airport construction project. Proceedings were opened in October 2015 against a manager of the airport operating company. In October 2016, the Cottbus district court sentenced the manager to 3.5 years in prison and a fine of €150,000 (USD 160,000) on the grounds of corruption.  Two leading employees of a technical company working on electricity, heating, and sanitary equipment received suspended jail sentences.

Parliamentarians are subject to financial disclosure laws that require them to publish earnings from outside employment.  Disclosures are available to the public via the Bundestag website (next to the parliamentarians’ biographies) and in the Official Handbook of the Bundestag. Penalties for noncompliance can range from an administrative fine to as much as half of a parliamentarian’s annual salary.

Donations to political parties are legally permitted.  However, if they exceed €50,000, they must be reported to the President of the Bundestag.  Donations of €10,000 or more must be included in the party’s annual accountability report to the President of the Bundestag.

State prosecutors are generally responsible for investigating corruption cases, but not all state governments have prosecutors specializing in corruption.  Germany has successfully prosecuted hundreds of domestic corruption cases over the years, including large scale cases against major companies.

Media reports in recent years about bribery investigations against Siemens, Daimler, Deutsche Telekom, and Ferrostaal increased awareness of the problem of corruption.  As a result, an increasing number of listed companies and multinationals have expanded their compliance departments, tightened internal codes of conduct, established points of conducts, and offered more ethics training to employees.

The Federation of Germany Industries (BDI), the Association of German Chamber of Commerce and Industry (DIHK) and the International Chamber of Commerce (ICC) provide guidelines in paper and electronic format on how to prevent corruption in an effort to convince all including small- and medium- sized companies to catch up.  In addition, BDI provides model texts if companies with two different sets of compliance codes want to do business with each other.

UN Anticorruption Convention, OECD Convention on Combatting Bribery

Germany was a signatory to the UN Anti-Corruption Convention in 2003.  The Bundestag ratified the Convention in November 2014.

Germany adheres to the OECD Anti-Bribery Convention which criminalizes bribery of foreign public officials by German citizens and firms.  The necessary tax reform legislation ending the tax write-off for bribes in Germany and abroad became law in 1999. Germany actively enforces the convention and is increasingly better managing the risk of transnational corruption.

Germany participates in the relevant EU anti-corruption measures and signed two EU conventions against corruption.  However, while Germany ratified the Council of Europe Criminal Law Convention on Corruption in 2017, it has not yet ratified the Civil Law Convention on Corruption.

Resources to Report Corruption

There is no central government anti-corruption agency in Germany.

Contact at “watchdog” organization:

Prof. Dr. Edda Muller, Chair
Transparency International Germany
Alte Schonhauser Str. 44, 10119 Berlin
+49 30 549 898 0
office@transparency.de

The Federal Criminal Office publishes an annual report: “Lagebild Korruption” – the latest one covers 2017.

https://www.bka.de/SharedDocs/Downloads/DE/Publikationen/JahresberichteUndLagebilder/
Korruption/korruptionBundeslagebild2017.pdf?__blob=publicationFile&v=6 10  

Political acts of violence against either foreign or domestic business enterprises are extremely rare.  Isolated cases of violence directed at certain minorities and asylum seekers have not targeted U.S. investments or investors.

The German labor force is generally highly skilled, well-educated, and productive.  Employment in Germany has continued to rise for the thirteenth consecutive year and reached an all-time high of 44.8 million in 2018, an increase of 562,000 (or 1.3 percent) from 2017—the highest level since German reunification in 1990.

Simultaneously, unemployment has fallen by more than half since 2005, and reached in 2018 the lowest average annual value since German reunification.  In 2018, around 2.34 million people were registered as unemployed, corresponding to an unemployment rate of 5.2 percent, according to the Germany Federal Employment Agency.  Using internationally comparable data from the European Union’s statistical office Eurostat, Germany had an average annual unemployment rate of 3.4 percent in 2018, the second lowest rate in the European Union.  All employees are by law covered by the federal unemployment insurance that compensates for the lack of income for up to 24 months.

Germany’s national youth unemployment rate was 6.2 percent in 2018, the lowest in the EU.  The German vocational training system has gained international interest as a key contributor to Germany’s highly skilled workforce and its sustainably low youth unemployment rate. Germany’s so-called “dual vocational training,” a combination of theoretical courses taught at schools and practical application in the workplace, teaches and develops many of the skills employers need.  Each year, there are more than 500,000 apprenticeship positions available in more than 340 recognized training professions, in all sectors of the economy and public administration. Approximately 50 percent of students choose to start an apprenticeship. The government is promoting apprenticeship opportunities, in partnership with industry, through the “National Pact to Promote Training and Young Skilled Workers.”

An element of growing concern for German business is the aging and shrinking of the population, which will result in labor shortages in the future.  Official forecasts at the behest of the Federal Ministry of Labor and Social Affairs predict that the current working age population will shrink by almost 3 million between 2010 and 2030, resulting in an overall shortage of workforce and skilled labor.  Labor bottlenecks already constrain activity in many industries, occupations, and regions. According to the Federal Employment Agency, doctors; medical and geriatric nurses; mechanical, automotive, and electrical engineers; and IT professionals are in particular short supply.  The government has begun to enhance its efforts to ensure an adequate labor supply by improving programs to integrate women, elderly, young people, and foreign nationals into the labor market. The government has also facilitated the immigration of qualified workers.

Labor Relations

Germans consider the cooperation between labor unions and employer associations to be a fundamental principle of their social market economy and believe this has contributed to the country’s resilience during the economic and financial crisis.  Insofar as job security for members is a core objective for German labor unions, unions often show restraint in collective bargaining in weak economic times and often can negotiate higher wages in strong economic conditions. According to the Institute of Economic and Social Research (WSI), the number of workdays lost to labor actions increased significantly to 1 million in 2018, compared to 238,000 in 2017.  WSI assesses this unusual increase was mostly due to the labor conflict in the metal industry, which resulted in a large number of warning strikes at various companies and plants. However, in an international comparison, Germany is in the lower midrange with regards to strike numbers and intensity. All workers have the right to strike, except for civil servants (including teachers and police) and staff in sensitive or essential positions, such as members of the armed forces.

Germany’s constitution, federal legislation, and government regulations contain provisions designed to protect the right of employees to form and join independent unions of their choice. The overwhelming majority of unionized workers are members of one of the eight largest unions — largely grouped by industry or service sector — which are affiliates of the German Trade Union Confederation (Deutscher Gewerkschaftsbund, DGB).  Several smaller unions exist outside the DGB. Overall trade union membership has, however, been in decline over the last several years. In 2016, about 18.5 percent of the workforce and 26 percent of the whole population belonged to unions. Since peaking at around 12 million members shortly after German reunification, total DGB union membership has dropped to 5.9 million, IG Metall being the largest German labor union with 2.3 million members, followed by the influential service sector union Ver.di (1.9 million members).

The constitution and enabling legislation protect the right to collective bargaining, and agreements are legally binding to the parties.  In 2017, over three quarters (78 percent) of non-self-employed workers were directly or indirectly covered by a collective wage agreement, 59 percent of the labor force in the western part of the country and approximately 47 percent in the East.  On average, collective bargaining agreements in Germany were valid for 25 months in 2017.

By law, workers can elect a works council in any private company employing at least five people.  The rights of the works council include the right to be informed, to be consulted, and to participate in company decisions.  Works councils often help labor and management to settle problems before they become disputes and disrupt work. In addition, “co-determination” laws give the workforce in medium-sized or large companies (corporations, limited liability companies, partnerships limited by shares, co-operatives, and mutual insurance companies) significant voting representation on the firms’ supervisory boards.  This co-determination in the supervisory board extends to all company activities.

The strong collectively negotiated wage increases in 2018 and the rise of the federal Germany-wide statutory minimum wage to €9.19 (USD 10.32) on January 1, 2019, led to 3.1 percent nominal wage increase, the highest in Germany for eight years.

Labor costs increased by 2.6 percent in 2017.  With an average labor cost of €34.10 (USD 42.24) per hour, Germany ranked fifth among the 28 EU-members states (EU average: €26.80/USD 33.20) in 2017.  Since the introduction of the European common currency, the increases of the unit labor cost in Germany remained significantly below EU average.

OPIC programs were available for the new states of eastern Germany for several years during the early 1990s following reunification, but were later suspended due to economic and political progress which caused the region to “graduate” from OPIC coverage.

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

* Source for Host Country Data: Federal Statistical Office DESTATIS, Bundesbank; http://www.bundesbank.de   (German Central Bank, 2017 data to be published in April 2019, only available in €)

Table 3: Sources and Destination of FDI

Table 4: Sources of Portfolio Investment

Economic Section
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Policies Toward Foreign Direct Investment

Direct inward investment into Japan by foreign investors has been open and free since the Foreign Exchange and Foreign Trade Act (the Forex Act) was amended in 1998.  In general, the only requirement for foreign investors making investments in Japan is to submit an ex post facto report to the relevant ministries.

The Japanese Government explicitly promotes inward FDI and has established formal programs to attract it.  In 2013, the government of Prime Minister Shinzo Abe announced its intention to double Japan’s inward FDI stock to JPY 35 trillion (USD 318 billion) by 2020 and reiterated that commitment in its revised Japan Revitalization Strategy issued in August 2016.  At the end of June 2018, Japan’s inward FDI stock was JPY 29.9 trillion (USD 270 billion), a small increase over the previous year. The Abe Administration’s interest in attracting FDI is one component of the government’s strategy to reform and revitalize the Japanese economy, which continues to face the long-term challenges of low growth, an aging population, and a shrinking workforce.

In April 2014, the government established an “FDI Promotion Council” comprised of government ministers and private sector advisors.  The Council remains active and continues to release recommendations on improving Japan’s FDI environment. The Ministry of Economy, Trade and Industry (METI) and the Japan External Trade Organization (JETRO) are the lead agencies responsible for assisting foreign firms wishing to invest in Japan.  METI and JETRO have together created a “one-stop shop” for foreign investors, providing a single Tokyo location—with language assistance—where those seeking to establish a company in Japan can process the necessary paperwork (details are available at http://www.jetro.go.jp/en/invest/ibsc/  ).  Prefectural and city governments also have active programs to attract foreign investors, but they lack many of the financial tools U.S. states and municipalities use to attract investment.

Foreign investors seeking a presence in the Japanese market or seeking to acquire a Japanese firm through corporate takeovers may face additional challenges, many of which relate more to prevailing business practices rather than to government regulations, though it depends on the sector.  These include an insular and consensual business culture that has traditionally been resistant to unsolicited mergers and acquisitions (M&A), especially when initiated by non-Japanese entities; exclusive supplier networks and alliances between business groups that can restrict competition from foreign firms and domestic newcomers; cultural and linguistic challenges; and labor practices that tend to inhibit labor mobility.  Business leaders have communicated to the Embassy that regulatory and governmental barriers are more likely to exist in mature, heavily regulated sectors than in new industries.

The Japanese Government established an “Investment Advisor Assignment System” in April 2016 in which a State Minister acts as an advisor to select foreign companies with “important” investments in Japan.  The system aims to facilitate consultation between the Japanese Government and foreign firms. Of the nine companies selected to participate in this initiative to date, seven are from the United States.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign and domestic private enterprises have the right to establish and own business enterprises and engage in all forms of remunerative activity.  Japan has gradually eliminated most formal restrictions governing FDI. One remaining restriction limits foreign ownership in Japan’s former land-line monopoly telephone operator, Nippon Telegraph and Telephone (NTT), to 33 percent.  Japan’s Radio Law and separate Broadcasting Law also limit foreign investment in broadcasters to 20 percent, or 33 percent for broadcasters categorized as “facility-supplying.” Foreign ownership of Japanese companies invested in terrestrial broadcasters will be counted against these limits.  These limits do not apply to communication satellite facility owners, program suppliers or cable television operators.

The Foreign Exchange and Foreign Trade Act governs investment in sectors deemed to have national security or economic stability implications.  If a foreign investor wants to acquire over 10 percent of the shares of a listed company in certain designated sectors, it must provide prior notification and obtain approval from the Ministry of Finance and the ministry that regulates the specific industry.  Designated sectors include agriculture, aerospace, forestry, petroleum, electric/gas/water utilities, telecommunications, and leather manufacturing.

U.S. investors, relative to other foreign investors, are not disadvantaged or singled out by any ownership or control mechanisms, sector restrictions, or investment screening mechanisms.

Other Investment Policy Reviews

The World Trade Organization (WTO) conducted its most recent review of Japan’s trade policies in March 2017 (available at https://www.wto.org/english/tratop_e/tpr_e/tp451_e.htm  ).

The OECD released its biennial Japan economic survey results on April 15, 2019 (available at http://www.oecd.org/economy/surveys/japan-economic-snapshot/  ).

Business Facilitation

The Japan External Trade Organization (JETRO) is Japan’s investment promotion and facilitation agency.  JETRO operates six Invest Japan Business Support Centers (IBSCs) across Japan that provide consultation services on Japanese incorporation types, business registration, human resources, office establishment, and visa/residency issues.  Through its website (https://www.jetro.go.jp/en/invest/setting_up  /), the organization provides English-language information on Japanese business registration, visas, taxes, recruiting, labor regulations, and trademark/design systems and procedures in Japan.  While registration of corporate names and addresses can be completed through the internet, most business registration procedures must be completed in person. In addition, corporate seals and articles of incorporation of newly established companies must be verified by a notary.

According to the 2018 World Bank “Doing Business” Report, it takes 12 days to establish a local limited liability company in Japan.  JETRO reports that establishing a branch office of a foreign company requires one month, while setting up a subsidiary company takes two months.  While requirements vary according to the type of incorporation, a typical business must register with the Legal Affairs Bureau (Ministry of Justice), the Labor Standards Inspection Office (Ministry of Health, Labor, and Welfare), the Japan Pension Service, the district Public Employment Security Office, and the district tax bureau.  In April 2015, JETRO opened a one-stop business support center in Tokyo so that foreign companies can complete all necessary legal and administrative procedures in one location; however, this arrangement is not common throughout Japan. JETRO has announced its intent to develop a full online business registration system, but it was not operational as of March 2019.

No laws exist to explicitly prevent discrimination against women and minorities regarding registering and establishing a business. Neither special assistance nor mechanisms exist to aid women or underrepresented minorities.

Outward Investment

The Japan Bank for International Cooperation (JBIC) provides a variety of support to Japanese foreign direct investment.  Most support comes in the form of “overseas investment loans,” which can be provided to Japanese companies (investors), overseas Japanese affiliates (including joint ventures), and foreign governments in support of projects with Japanese content, typically infrastructure projects.  JBIC often seeks to support outward FDI projects that aim to develop or secure overseas resources that are of strategic importance to Japan, for example, construction of liquefied natural gas (LNG) export terminals to facilitate sales to Japan. More information is available at https://www.jbic.go.jp/en/index.html  .

There are no restrictions on outbound investment; however, not all countries have a treaty with Japan regarding foreign direct investment (e.g., Iran).

The 1953 U.S.-Japan Treaty of Friendship, Commerce, and Navigation gives national treatment and most favored nation treatment to U.S. investments in Japan.

As of March 2019, Japan had concluded 33 bilateral investment treaties (BITs):  Argentina, Armenia, Bangladesh, Cambodia, China, Colombia, Egypt, Hong Kong SAR, Iran, Iraq, Israel, Jordan, Kazakhstan, Kenya, South Korea, Kuwait, Laos,  Mongolia, Mozambique, Myanmar, Oman, Pakistan, Papua New Guinea, Peru, Russia, Saudi Arabia, Sri Lanka, Turkey, Ukraine, UAE, Uruguay, Uzbekistan, and Vietnam.  In addition, Japan has a trilateral investment agreement with China and South Korea. Japan also has 17 EPAs that include investment chapters (Association of Southeast Asian Nations, Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), European Union (EU), Singapore, Mexico, Malaysia, Philippines, Chile, Thailand, Brunei, Indonesia, Switzerland, Vietnam, India, Peru, Australia, and Mongolia)

On  December 30, 2018, Japan and ten other countries: Australia, Brunei, Canada, Chile, Malaysia, Mexico, Peru, New Zealand, Singapore, and Vietnam signed the CPTPP.  Australia, Canada, Japan, Mexico, New Zealand, Singapore, and Vietnam have already ratified the agreement. This agreement includes an investment chapter. The United States is not a signatory of this agreement.   The text of the agreement is available online (https://www.cas.go.jp/jp/tpp/naiyou/tpp_text_en.html#TPP11  

On February 1, 2019, the Japan – EU economic partnership agreement went into force.  This agreement includes a chapter on investment liberalization. The text of the agreement is available online (http://trade.ec.europa.eu/doclib/press/index.cfm?id=1684  ).

The United States and Japan have a double taxation treaty.  The current treaty allows Japan to tax the business profits of a U.S. resident only to the extent those profits are attributable to a permanent establishment in Japan.  It also provides measures to mitigate double taxation. This permanent establishment provision, combined with Japan’s high corporate tax rate that nears 30 percent, serves to encourage foreign and investment funds to keep their trading and investment operations off-shore.

In January 2013, the United States and Japan signed a revision to the bilateral income tax treaty, to bring it into closer conformity with the current tax treaty policies of the United States and Japan.  The revision is awaiting ratification by the U.S. Congress.

Japan has concluded 61 double taxation treaties that cover 71 countries and jurisdictions.  More information is available from the Ministry of Finance: http://www.mof.go.jp/english/tax_policy/tax_conventions/international_182.htm  

Transparency of the Regulatory System

Japan operates a highly centralized regulatory system in which national-level ministries and government organs play a dominant role.  Regulators are generally sophisticated and there is little evidence of explicit discrimination against foreign firms. Most draft regulations and impact assessments are released for public comment before implementation and are accessible through a unified portal (http://www.e-gov.go.jp/  ).  Law, regulations, and administrative procedures are generally available online in Japanese along with regular publication in an official gazette.  The Japanese government also actively maintains a body of unofficial English translations of some Japanese laws (http://www.japaneselawtranslation.go.jp/  ).

Some members of the foreign business community in Japan continue to express concern that Japanese regulators do not seek sufficient formal input from industry stakeholders, instead relying on informal connections between regulators and domestic firms to arrive at regulatory decisions.  This may have the effect of disadvantaging foreign firms which lack the benefit of deep relationships with local regulators. The United States has encouraged the Japanese government to improve public notice and comment procedures, to ensure consistency and transparency in rule-making, and to give fair consideration to comments received.  The National Trade Estimate Report on Foreign Trade Barriers, issued by the Office of the U.S. Trade Representative (USTR), contains a description of Japan’s regulatory regime as it affects foreign exporters and investors.

International Regulatory Considerations

The Japanese Industrial Standards Committee (JISC), administered by the Ministry of Economy, Trade, and Industry (METI), plays a central role in maintaining the Japan Industrial Standard (JIS), the country’s main body of standards.  JISC aims to align JIS with international standards: in 2016, the organization estimated that 58 percent of Japan’s standards were harmonized with their international counterparts. Nonetheless, Japan maintains a large number of Japan-specific standards that can complicate efforts to introduce new products to the country.  Japan is a member of the WTO and notifies the WTO Committee on Technical Barriers to Trade (TBT) of proposed regulations.

Legal System and Judicial Independence

Japan is primarily a civil law country based on codified law.  The Constitution and the five major legal codes (Civil, Civil Procedure, Commercial, Criminal, and Criminal Procedure) form the legal base of the system.  Japan has a fully independent judiciary and a consistently applied body of commercial law. However, if you are arrested in Japan, even for a minor offense, you may be held in detention without bail for several months or more during the investigation and legal proceedings.  An Intellectual Property High Court was established in 2005 to expedite trial proceedings in intellectual property (IP) cases.  Foreign judgments are recognized and enforced by Japanese courts under certain conditions.

Laws and Regulations on Foreign Direct Investment

Major laws affecting foreign direct investment (FDI) into Japan include the Foreign Exchange and Foreign Trade Act, the Companies Act, and the Financial Instruments and Exchange Act.  The Japanese government actively encourages FDI into Japan and has sought over the past decades to ease legal and administrative burdens on foreign investors, including with major reforms to the Companies Act in 2005 and the Financial Instruments and Exchange Act in 2008.  The Japanese government has not promulgated any significant new laws or regulations related to FDI in the past year.

Competition and Anti-Trust Laws

The Japan Fair Trade Commission (JFTC) holds sole responsibility for enforcing Japanese competition and anti-trust law, although public prosecutors may file criminal charges related to a JFTC accusation.  The JFTC also reviews proposed “business combinations” (i.e. mergers, acquisitions, increased shareholdings, etc.) to ensure that transactions do not “substantially […] restrain competition in any particular field of trade.”   On March 12, 2019, a bill to revise the Anti-Monopoly Law for the first time in six years was submitted to the Diet, after obtaining Cabinet approval. The revisions include: (i) more flexible implementation of the leniency program; (ii) extension of maximum calculation period for penalty charges, from three to ten years; and (iii) increasing the cap for penal charges for obstruction of investigations, etc. If approved by the Diet, the law will take effect no later than 18 months after its promulgation. JFTC also plans to change its Commission rulesto introduce the Attorney-Client privilege, only in the limited scope of “unreasonable restraint of trade,” such as cartels. This revision would not require Diet approval.  The Government of Japan expects both changes to take effect by the end of 2020.

Expropriation and Compensation

In the post-war period since 1945, the Japanese government has not expropriated any enterprises, and the expropriation or nationalization of foreign investments in Japan is highly unlikely.

Dispute Settlement

ICSID Convention and New York Convention

Japan has been a member of the International Centre for the Settlement of Investment Disputes (ICSID Convention) since 1967 and is also a party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention).

Enforcement of arbitral awards in Japan are provided for in Japan’s Arbitration Law.  Enforcement in other contracting states is also possible. The Supreme Court of Japan has denied the enforceability of awards for punitive damages, however.  The Arbitration Law provides that an arbitral award (irrespective of whether or not the seat of arbitration is in Japan) has the same effect as a final and binding judgment.  The Arbitration Law does not distinguish awards rendered in contracting states of the New York Convention and in non-contracting states.

Investor-State Dispute Settlement

There have been no major bilateral investment disputes in the past ten years.

International Commercial Arbitration and Foreign Courts

The Japan Commercial Arbitration Association (JCAA) is the sole permanent commercial arbitral institution in Japan.  Japan’s Arbitration Law is based on the United Nations Commission on International Trade Law “Model Law on International Commercial Arbitration” (UNCITRAL Model Law).  Local courts recognize and enforce foreign arbitral awards.

A wide range of Alternate Dispute Resolution (ADR) organizations also exist in Japan.  The Ministry of Justice (MOJ) has responsibility for regulating and accrediting ADR groups.  A Japanese-language list of accredited organizations is available on the MOJ website: http://www.moj.go.jp/KANBOU/ADR/index.html  .

Bankruptcy Regulations

The World Bank 2018 “Doing Business” Report ranked Japan first worldwide for resolving insolvency.  An insolvent company in Japan can face liquidation under the Bankruptcy Act or take one of four roads to reorganization: the Civil Rehabilitation Law; the Corporate Reorganization Law; corporate reorganization under the Commercial Code; or an out-of-court creditor agreement.  The Civil Rehabilitation Law focuses on corporate restructuring in contrast to liquidation, provides stronger protection of debtor assets prior to the start of restructuring procedures, eases requirements for initiating restructuring procedures, simplifies and rationalizes procedures for the examination and determination of liabilities, and improves procedures for approval of rehabilitation plans.

Out-of-court settlements in Japan tend to save time and expense but can lack transparency.  In practice, because 100 percent creditor consensus is required for out-of-court settlements and courts can sanction a reorganization plan with only a majority of creditors’ approval, the last stage of an out-of-court settlement is often a request for a judicial seal of approval.

There are three domestic credit reporting/credit monitoring agencies in Japan. They are not government-run.  They are: Japan Credit Information Reference Center Corp. (JICC; https://www.jicc.co.jp/english/index.html  ; member companies deal in consumer loans, finance, and credit); Credit Information Center (CIC; https://www.cic.co.jp/en/index.html  ; member companies deal in credit cards and credit); and Japan Bankers Association (JBA; https://www.zenginkyo.or.jp/pcic/  ; member companies deal in banking and bank-issued credit cards).  Credit card companies, such as Japan Credit Bureau (JCB), and large banks, such as Mitsubishi UFJ Financial Group (MUFG), also maintain independent databases to monitor and assess credit.

Per Japan’s Banking Act, data and scores from credit reports and credit monitoring databases must be used solely by financial institutions for financial lending purposes.  They are not provided to consumers themselves or to those performing background checks, such as landlords.  Increasingly, however, to get around the law real estate companies partner with a “credit guarantee association” and encourage or effectively require tenants to use its services.  According to a 2017 report from the Japan Property Management Association (JPMA), roughly 80 percent of renters in Japan used such a service. While financial institutions can share data to the databases and receive credit reports by joining the membership of a credit monitoring agency, the agencies themselves, as well as credit card companies and large banks, generally do not necessarily share data between each other.  As such, consumer credit information is generally underutilized and vertically siloed.

A government-run database, the Juminhyo or the “citizen documentation database,” is used for voter registration; confirmation of eligibility for national health insurance, national social security, and child allowances; and checks and registrations related to scholarships, welfare protection, stamp seals (signatures), and immunizations.  The database is strictly confidential, government-controlled, and not shared with third parties or private companies.

For the credit rating of businesses, there are at least seven credit rating agencies (CRAs) in Japan that perform such services, including Moody’s Japan, Standard & Poor’s Ratings Japan, Tokyo Shoko Research, and Teikoku Databank.  See Section 9 for more information on business vetting in Japan.

Investment Incentives

The Japan External Trade Organization (JETRO) maintains an English-language list of national and local investment incentives available to foreign investors on their website: https://www.jetro.go.jp/en/invest/incentive_programs/  .

Foreign Trade Zones/Free Ports/Trade Facilitation

Japan no longer has free-trade zones or free ports.  Customs authorities allow the bonding of warehousing and processing facilities adjacent to ports on a case-by-case basis.

The National Strategic Special Zones Advisory Council chaired by the Prime Minister has established a total of twelve National Strategic Special Zones (NSSZ) to implement selected deregulation measures intended to attract new investment and boost regional growth.  Under the NSSZ framework, designated regions request regulatory exceptions from the central government in support of specific strategic goals defined in each zone’s “master plan,” which focuses on a potential growth area such as labor, education, technology, agriculture, or healthcare.  Any exceptions approved by the central government can be implemented by other NSSZs in addition to the requesting zone. Foreign-owned businesses receive equal treatment in the NSSZs; some measures aim specifically to ease customs and immigration restrictions for foreign investors, such as the “Startup Visa” adopted by the Fukuoka NSSZ.

The Japanese government has also sought to encourage investment in the Tohoku (northeast) region which was devastated by the earthquake, tsunami, and nuclear “triple disaster” of March 11, 2011.  Areas affected by the disaster have been included in a “Special Zone for Reconstruction” that features eased regulatory burdens, tax incentives, and financial support to encourage heightened participation in the region’s economic recovery.

Performance and Data Localization Requirements

Japan does not maintain performance requirements or requirements for local management participation or local control in joint ventures.

Japan has no general restrictions on data storage.  Previously, separate and inconsistent privacy guidelines among Japanese ministries created a burdensome regulatory environment with regard to the storage and general treatment of personally identifiable information.  However, amendments to Japan’s Personal Information Protection Act, which came into full effect on May 30, 2017, transferred all enforcement powers from the individual ministries to an independent third party authority.  This Personal Information Protection Commission (PPC) issued guidelines for businesses on the protection of personal data and oversees implementation of the Personal Information Protection Act amendments, including new rules for the protection and electronic transmission of personal data.

Real Property

Secured interests in real property are recognized and enforced.  Mortgages are a standard lien on real property and must be recorded to be enforceable.  Japan has a reliable recording system. Property can be rented or leased but no sub-lease is legal without the owner’s consent.  In the World Bank’s 2018 “Doing Business” Report, Japan ranks 52 out of 190 economies in the category of Ease of Registering Property.  This is a result of the bureaucratic steps and fees associated with purchasing improved real property in Japan, even when it is already registered and has a clear title.  The required documentation for property purchases can be burdensome. Additionally, it is common practice in Japan for property appraisal values to be lower than the actual sale value, increasing the deposit required of the purchaser as the bank will provide financing only up to the appraisal value.

The Japanese Government is unsure of the titleholders to 4.1 million hectares of land in Japan, roughly 20 percent of all land and an area equivalent in size to the island of Kyushu, a government-sponsored study group noted in 2017.  According to a think tank expert on land use, 25 percent of all the land in Japan is registered to people who are no longer alive or otherwise unreachable. In 2015, the Ministry of Land, Infrastructure, Transportation and Tourism (MLIT) found that, of 400 randomly selected tracts of land, 46 percent was registered more than 30 years ago and 20 percent was registered more than 50 years ago.  A similar survey by the Ministry of Agriculture, Forestry and Fisheries (MAFF) found that 20 percent of farmland had a deceased owner and had not been re-registered. The government appointed a group of experts to study the matter, and the Unknown Land Owners Problem Study Group announced the results in a midterm report on June 26, 2017 and in a final report on December 13, 2017 (http://www.kok.or.jp/project/fumei.html  ).  It estimated that by 2040 the amount of land without titleholders will increase to 7.2 million hectares.  The primary reasons that land in Japan lacks a titleholder are: Japan’s population is declining; Japanese are increasingly moving from rural areas to urban areas; heirs are difficult to locate and there may be multiple heirs, especially if the deceased did not have children; and heirs do not re-register the land under their own names due to the cost of the initial and continuing taxes and the time and difficulty to change the title.  On June 6, 2018, the Japanese Diet enacted a special law to promote the use of unclaimed land in the public interest, as more and more properties are expected to become available amid the decreasing population.  The act goes into effect on June 1, 2019, and will enable the heads of local governments to authorize use of the unattended land for up to 10 years for public purposes such as community halls, parks, and health clinics. If the landowner appears and reclaims the land, the property will be returned after the term of the land-use contract ends.  If no one reclaims the land, the land-use period can be extended.

Virtually all the large banks, as well as some other private companies, offer loans to purchase property in Japan.

Intellectual Property Rights

Japan maintains a robust legal framework for intellectual property (IP) and provides reasonably strong enforcement to rights holders.  The U.S. Chamber of Commerce International IP Index ranked Japan’s intellectual property framework eighth worldwide in its 2019 report7.  While IP piracy remains a problem, its prevalence in Japan is similar to other developed markets.

Japan established a dedicated IP High Court in 2005 to speed decisions in intellectual property cases.  In 2017, cases before the court required an average of 7.3 months from commencement to disposition.  The number of cross-border IP-related litigations is increasing due to the globalization of business activities.  IP High Court judges have access to neutral technical advisors to aid in interpreting complex cases, but a constrained discovery system can limit the evidence that can be used at trial.  Typical awarded damages are considerably lower than those seen in the United States.

On December 8, 2017, Japan and the European Union (EU) finalized negotiations on an Economic Partnership Agreement, which includes provisions related to IP including geographic indications.  The agreement entered into force on February 1, 2019.

The Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) which entered into force on December 30, 2018 harmonizes intellectual property rights among the 11 member nations (including Japan).  However, the CPTPP suspended a number of provisions considered U.S. priorities in the original Trans-Pacific Partnership Agreement (TPP) chapter on IP in areas such as patents and pharmaceuticals, copyright, Internet service provider (ISP) liability, and IP rights enforcement.

Japan’s Customs and Tariff Bureau publishes a yearly report on good seizures, available online in English (http://www.customs.go.jp/mizugiwa/chiteki/pages/g_001_e.htm  ).  Japan seized USD 13.5 billion yen (USD 121.5 million) of goods in 2018, mostly due to intellectual property infringement.  China is by far the largest source of seized goods in Japan, accounting for 94 percent of all seizure cases and 89 percent of all seized goods by value.

U.S. stakeholders have recently expressed concern that Japan’s pharmaceutical reimbursement system does not adequately reward innovation and provide incentives for companies to invest in the research and development of advanced medical devices and innovative pharmaceuticals. Specifically, there are concerns that recent policy changes to the Price Maintenance Premium put Japanese companies at an advantage over U.S. companies.

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

Capital Markets and Portfolio Investment

Japan maintains no formal restrictions on inward portfolio investment.  Foreign capital plays an important role in Japan’s financial markets, with foreign investors responsible for the majority of trading volume in the country’s stock market.  Historically, many company managers and directors have resisted the actions of activist shareholders, especially foreign private equity funds, potentially limiting the attractiveness of Japan’s equity market to large-scale foreign portfolio investment, although there are signs of change.  Some firms have taken steps to facilitate the exercise of shareholder rights by foreign investors, including the use of electronic proxy voting. The Tokyo Stock Exchange (TSE) maintains an Electronic Voting Platform for Foreign and Institutional Investors. All holdings of TSE-listed stocks are required to transfer paper stock certificates into electronic form.

The Japan Exchange Group (JPX) operates Japan’s two largest stock exchanges – in Tokyo and Osaka – with cash equity trading consolidated on the TSE since July 2013 and derivatives trading consolidated on the Osaka Exchange since March 2014.

In January 2014, the TSE and Nikkei launched the JPX Nikkei 400 Index.  The Index puts a premium on company performance, particularly return on equity.  The inclusion in the Index is determined by such factors as three year average returns on equity, three year accumulated operating profits, and market capitalization, along with other metrics such as the number of external board members.  Inclusion in the index has become an unofficial “seal of approval” in corporate Japan, and many companies have taken steps, including undertaking share buybacks, to improve their return on equity. The Bank of Japan purchases JPX-Nikkei 400 ETFs as part of its monetary operations, and Japan’s massive Government Pension Investment Fund (GPIF) uses the JPX-Nikkei 400 index as an outside asset managers’ benchmark, putting an additional premium on membership in the index.

Japan does not restrict financial flows, and accepts obligations under International Monetary Fund (IMF) Article VIII.

Credit is available via multiple instruments, both public and private, although access by foreigners often depends upon visa status and the type of investment.

Money and Banking System

Banking services are easily accessible throughout Japan; it is home to three of the world’s largest private commercial banks as well as an extensive network of regional and local banks.  Most major international commercial banks are also present in Japan, and other quasi-governmental and non-governmental entities, such as the postal service and cooperative industry associations, also offer banking services (e.g., the Japan Agriculture Union offers services through its bank, Norinchukin Bank, to members of the organization).  Japan’s financial sector is generally acknowledged to be sound and resilient, with good capitalization and with a declining ratio of non-performing loans. While still healthy, most banks have experienced pressure on interest margins and profitability as a result of an extended period of low interest rates capped by the Bank of Japan’s introduction of a negative interest rate policy in 2016. 

The country’s three largest private commercial banks, often collectively referred to as the “megabanks,” are Mitsubishi UFJ Financial, Mizuho Financial, and Sumitomo Mitsui Financial.  Collectively, they hold assets approaching USD 7 trillion. Japan’s second largest bank by assets – with USD 2 trillion – is Japan Post Bank, a financial subsidiary of the Japan Post Group that is still majority state-owned.  Japan Post Bank offers services via 24,000 Japan Post office branches, at which Japan Post Bank services can be conducted, as well as Japan Post’s network of 29,100 ATMs nationwide.

A large number of foreign banks operate in Japan offering both banking and other financial services.  Like their domestic counterparts, foreign banks are regulated by the Japan Financial Services Agency. According to the IMF, there have been no observations of reduced or lost correspondent banking relationships in Japan.  There are 443 correspondent banking relationships available to the country’s central bank (main banks: 125; trust banks: 13; foreign banks: 50; credit unions: 251; other: 4).

Foreigners wishing to establish bank accounts must show a passport, visa, and foreigner residence card; temporary visitors may not open bank accounts in Japan.  Other requirements (e.g., evidence of utility registration and payment, Japanese-style signature seal, etc.) may vary according to institution. Language may be a barrier to obtaining services at some institutions; foreigners who do not speak Japanese should research in advance which banks are more likely to offer bilingual services.

Japan accounts for approximately half of the world’s trades of Bitcoin, the most prevalent blockchain currency (digital decentralized cryptographic currency).  Japanese regulators are encouraging “open banking” interactions between financial institutions and third-party developers of financial technology applications through application programming interfaces (“APIs”) when customers “opt-in” to share their information.  The government has set a target to have 80 banks adopt API standards by 2020.  Many of the largest banks are participating in various proofs of concept using blockchain technology.  While commercial banks have not yet formally adopted blockchain-powered systems for fund settlement, they are actively exploring options, and the largest banks have announced intentions to produce their own virtual currencies at some point.  The Bank of Japan is researching blockchain and its applications for national accounts, and established a “Fintech Center” to lead this effort.  The main banking regulator, the Japan Financial Services Agency (FSA) also encourages innovation with financial technologies, including sponsoring an annual conference on “fintech” in Japan.  In April 2017, amendments to the Act on Settlements of Funds went into effect, permitting the use of virtual currencies as a form of payment in Japan, but virtual currency is still not considered legal tender (e.g., commercial vendors may opt to accept virtual currencies for transactional payments, though virtual currency cannot be used as payment for taxes owed to the government).  The law also requires the registration of virtual currency exchange businesses.  There are currently 19 registered virtual currency exchanges; 1 other exchange operates while its registration is pending with FSA.

Foreign Exchange and Remittances

Foreign Exchange Policies

Generally, all foreign exchange transactions to and from Japan—including transfers of profits and dividends, interest, royalties and fees, repatriation of capital, and repayment of principal—are freely permitted.  Japan maintains an ex-post facto notification system for foreign exchange transactions that prohibits specified transactions, including certain foreign direct investments (e.g., from countries under international sanctions) or others that are listed in the appendix of the Foreign Exchange and Foreign Trade Act.

Japan has a floating exchange rate that fluctuates based on market principles.  Japan has not intervened in the foreign exchange markets since November 2011, and has joined statements of the G-7 and G-20 affirming that countries would not target exchange rates for competitive purposes.

Remittance Policies

Investment remittances are freely permitted.

Sovereign Wealth Funds

Japan does not operate a sovereign wealth fund.

Japan has privatized most former state-owned enterprises (SOEs).  Under the Postal Privatization Law, privatization of Japan Post group started in October 2007 by turning the public corporation into stock companies.  The stock sale of the Japan Post Holdings Co. and its two financial subsidiaries, Japan Post Insurance (JPI) and Japan Post Bank (JPB), began in November 2015 with an initial public offering that sold 11 percent of available shares in each of the three entities.  The postal service subsidiary, Japan Post Co., will remain a wholly owned subsidiary of Japan Post Holdings (JPH). The Japanese government conducted an additional public offering of stock in September 2017, reducing the government ownership in the holding company to approximately 57 percent.  There were no additional offerings of the stock in the bank or insurance subsidiaries: JPH currently owns 88.99 percent of the banking subsidiary and 89.00 percent of the insurance subsidiary. Follow-on sales of shares in the three companies will take place over time, as the Postal Privatization Law requires the government to sell a majority share (up to two-thirds of all shares) in JPH, and JPH to sell all shares of JPB and JPI, as soon as possible.  The Ministry of Finance announced in April 2019 that the government will sell additional shares of JPH. Media reported that as a result of the third sale of the government JPH share holdings possibly to be implemented as early as this fall, its holdings would account for slightly above one-third of outstanding shares, the lower limit specified in the Postal Privatization Law.

These offerings mark the final stage of Japan Post privatization begun under former Prime Minister Junichiro Koizumi almost a decade ago, and respond to long-standing criticism from commercial banks and insurers—both foreign and Japanese—that their government-owned Japan Post rivals have an unfair advantage.

While there has been significant progress since 2013 with regard to private suppliers’ access to the postal insurance network, the U.S. government has continued to raise concerns about the preferential treatment given to Japan Post and some quasi-governmental entities compared to private sector competitors and the impact of these advantages on the ability of private companies to compete on a level playing field.  A full description of U.S. government concerns with regard to the insurance sector, and efforts to address these concerns, is available in the United States Trade Representative’s National Trade Estimate (NTE) report for Japan.

Privatization Program

In sectors that were once dominated by state-owned enterprises but have been privatized, such as transportation, telecommunications, and package delivery, U.S. businesses report that Japanese firms sometimes receive favorable treatment in the form of improved market access and government cooperation.

The liberalization of Japan’s power sector, now more than 25 years in the making, took a step forward in April 2016 with the full liberalization of the retail sector. This has led to an influx of new electricity retailers, though the generation and transmission of electricity remain in the hands of the legacy utility companies, which have been privatized.  The liberalization is expected to come to a head with the legal “unbundling” of the monopolies by 2020.

American energy companies have reported increased opportunities in this sector, but the former utility monopolies still have immense power over the regulatory regime, market, and infrastructure.  For example, there is a wholesale market on which new retailers can buy electricity to sell to their customers, but the legacy utilities, which control most of the generation, sell very little power into that market.  This leaves new retailers in a supply crunch. Also, new entrants in power generation are given limited access to the power grid because the system is already at capacity with baseload generation from the legacy firms.

More information on the power sector from the Japanese Government can be obtained at: http://www.enecho.meti.go.jp/en/category/electricity_and_gas/electric/electricity_liberalization/what/  

Japanese corporate governance has been criticized for failing to sufficiently prioritize shareholder interests, due in part due to a lack of independent corporate directors and to cross-shareholding agreement among firms.  The Abe government has made corporate governance reform a core element of its economic agenda with the goal to reinvigorate Japan’s business sector by encouraging a stronger focus by management on earnings and shareholder value.

Progress has been made through efforts by the Financial Services Agency (FSA) and Tokyo Stock Exchange (TSE) to introduce non-binding reforms through changes to Japan’s Companies Act in 2014 and to adopt of a Corporate Governance Code (CSR) by in 2015.  Together with the Stewardship Code for institutional investors launched by the FSA in 2014, these initiatives encourage companies to put cash stockpiles to better use by increasing investment, raising dividends, and taking on more risk to boost Japan’s growth.  Positive results of these efforts are evidenced by rising shareholder returns, unwinding of cross-shareholdings, and increasing numbers of independent board members.  Moreover, more than 90 percent of listed firms now have two or more independent directors.

Awareness of corporate social responsibility among both producers and consumers in Japan is high, and foreign and local enterprises generally follow accepted CSR principles.  Business organizations also actively promote CSR. Japan encourages adherence to the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Afflicted and High-Risk Areas.

Japan’s penal code covers crimes of official corruption, and an individual convicted under these statutes is, depending on the nature of the crime, subject to prison sentences and possible fines.  With respect to corporate officers who accept bribes, Japanese law also provides for company directors to be subject to fines and/or imprisonment, and some judgments have been rendered against company directors.

The direct exchange of cash for favors from government officials in Japan is extremely rare.  However, the web of close relationships between Japanese companies, politicians, government organizations, and universities has been criticized for fostering an inwardly “cooperative”—or insular—business climate that is conducive to the awarding of contracts, positions, etc. within a tight circle of local players.  This phenomenon manifests itself most frequently and seriously in Japan through the rigging of bids on government public works projects. However, instances of bid rigging appear to have decreased over the past decade. Alleged bid rigging between construction companies was discovered on the Tokyo-Nagoya-Osaka maglev high-speed rail project in 2017, and the case is currently being prosecuted.

Japan’s Act on Elimination and Prevention of Involvement in Bid-Rigging authorizes the Japan Fair Trade Commission (JFTC) to demand that central and local government commissioning agencies take corrective measures to prevent continued complicity of officials in bid rigging activities and to report such measures to the JFTC.  The Act also contains provisions concerning disciplinary action against officials participating in bid rigging and compensation for overcharges when the officials caused damage to the government due to willful or grave negligence. Nevertheless, questions remain as to whether the Act’s disciplinary provisions are strong enough to ensure officials involved in illegal bid rigging are held accountable.

Japan has ratified the OECD Anti-Bribery Convention, which bans bribing foreign government officials.  However, there are continuing concerns over the effectiveness of Japan’s anti-bribery enforcement efforts, particularly the very small number of cases prosecuted by Japanese authorities compared to other OECD members.

For vetting potential local investment partners, companies may review credit reports on foreign companies which are available from many private-sector sources, including, in the United States, Dun & Bradstreet and Graydon International.  Additionally, a company may inquire about the International Company Profile (ICP), which is a background report on a specific foreign company that is prepared by commercial officers of the U.S. Commercial Service at the U.S. Embassy, Tokyo.

Resources to Report Corruption

Businesses or individuals may contact the Japan Fair Trade Commission (JFTC), with contact details at:  http://www.jftc.go.jp/en/about_jftc/contact_us.html  

Political violence is rare in Japan.  Acts of political violence involving U.S. business interests are virtually unknown.

Japan currently faces one of the tightest labor markets in decades, in part due to demographic decline, with a shortage of workers in sectors such as information services, hospitality, construction, transportation, maintenance, and security.  Unemployment is near a 25 year low, at 2.3 percent in March 2019. Traditionally, Japanese workers have been classified as either regular or non-regular employees. Companies recruit regular employees directly from schools or universities and provide an employment contract with no fixed duration, effectively guaranteeing them lifetime employment.  Non-regular employees are hired for a fixed period. Companies have increasingly relied on non-regular workers to fill short-term labor requirements and to reduce labor costs.

Japan has a robust structure for collective bargaining in which roughly 17 percent of workers are represented by unions active in nearly every industry, including textiles.  The government provides benefits for workers laid off for economic reasons through a national employment insurance program. Some National Strategic Special Zones allow for special employment of foreign workers in certain fields, but those and all other foreign workers are  subject to the same national labor laws and standards as Japanese workers. Japan has comprehensive labor dispute resolution mechanisms, including labor tribunals, mediation, and civil lawsuits. A Labor Standards Bureau oversees the enforcement of labor standards through a national network of Labor Bureaus and Labor Standards Inspection Offices.

The number of foreign workers is rising, but at just over 1.46 million as of October 2018, they still represent a fraction of Japan’s nearly 68 million-worker labor force.  The Japanese government has made additional changes to labor and immigration laws to facilitate the entry of larger numbers of skilled foreign workers in selected sectors. For example, the Immigration Control and Refugee Recognition Law was revised in 2014 to improve the “Points System” for highly skilled foreign professionals, easing the requirements for residency.  Special economic zones may permit foreign workers in certain categories, such as domestic employees and agricultural workers.

The Japanese government has also taken steps to expand the Technical Intern Training Program (TITP).  Originally intended as a skills-transfer program for workers from developing countries, TITP is currently used to address immediate labor shortages in specific sectors, such as construction and agriculture.  In 2014, the Japanese government expanded TITP in the construction sector through FY2020, the year of the Tokyo summer Olympics, extending the period of stay for construction workers under TITP from three years to five, and permitting re-entry of former interns and trainees for another two to three years.  In November 2017, the legislation that passed the Diet in November 2016 went into effect, which extended the period of stay under TITP to five years for more categories of workers, and strengthened supervision of the program and companies to deter human rights abuses. At the same time, nursing care service was added to the list of work categories permitted for TITP, and the government expanded oversight to address abuses of the program.

To address Japan’s acute labor shortage in specific industries, the Japanese government revised the Immigration Control and Refugee Recognition Law again in December 2018, to create new visa categories for lower-skilled foreign workers.  This marks a major turning point in Japan’s policy on foreign workers, which encouraged the entry of highly-skilled professionals, but had no visa category specifically for low-skilled foreign workers.  Ministerial Ordinances, Cabinet Orders, and Operating Guidelines were released in March 2019, laying out details of the program. Fourteen industries have been identified to be suffering from acute labor shortage, in which lower-skilled foreigners will be permitted to work under the “Specific Skills” status of residence.   The new system began on April 1, 2019. The Japanese government estimates that approximately 47,550 foreign workers will be accepted within the first year, and 345,000 will be accepted within five years.

Also, to address the labor shortage resulting from population decline and a rapidly aging society, Japan’s government has pursued measures to increase participation and retention of older workers and women in the labor force.  A law that went into force in April 2013 requires companies to introduce employment systems allowing employees reaching retirement age (generally set at 60) to continue working until age 65. Since 2013, the government has committed to increasing women’s economic participation as well.  The Women’s Empowerment Law passed in 2015 requires large companies to disclose statistics about the hiring and promotion of women, and to adopt action plans to improve their numbers. In the six years under the second Abe Administration since he became Prime Minister in 2012, approximately 3 million women have joined the labor force.

On June 29, 2018, the Diet passed the Workstyle Reform package bills.  The legislation revised eight labor laws, including the Labor Standards Law and Labor Contract Law.  The package introduces a legal cap on overtime work at less than 100 hour per month and 720 hours per year with penalties for violators, such as imprisonment of up to six months or fines of up to 300,000 yen.  A key provision, however, is the so-called “White Collar Exemption,” originally submitted to the Diet in 2015, which would implement a merit-based wage system for certain highly-skilled professionals and exempt firms from paying such workers overtime or premium overtime pay for late night, weekend, or holiday work.  In addition, an “equal-pay-for-equal-work” provision seeks to reduce compensation gaps between regular and non-regular employees.  Most measures took effect in April 1, 2019, although equal-pay provisions would be implemented from 2020.  The package offers some flexibility on implementation for small and medium-sized enterprises (SMEs).

Although independent labor unions play a role in the annual determination of wage scales throughout the economy, that role has been declining along with union membership.  Union members today make up only 17 percent of the labor force, down from 25 percent in 1990.

Japan has ratified 48 International Labor Organization (ILO) Conventions (including six of the eight core Conventions).  As part of its agreement in principle on the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) with 10 other trading partners, Japan agreed to adopt the fundamental labor rights stated in the ILO Declaration including freedom of association and the recognition of the right to collective bargaining, the elimination of forced labor and employment discrimination, and the abolition of child labor.  CPTPP entered force in Japan on December 30, 2018.

Overseas Private Investment Corporation (OPIC) insurance and finance programs are not available in Japan. However, OPIC and its Japanese counterpart, Japan Bank for International Cooperation, are supporting opportunities for U.S. investors to partner with Japanese investors in third countries.

Japan is a member of the Multilateral Investment Guarantee Agency (MIGA).  Japan’s capital subscription to MIGA is the second largest, after the United States.

Other foreign governments have very limited involvement in Japan’s domestic infrastructure development, and most financing and insurance is managed domestically. 

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

*2017 Nominal GDP data (Calendar Year Data) from “Annual Report on National Accounts for 2017”, Economic and Social Research Institute, Cabinet Office, Japanese Government, released on December 25, 2018  . (Note: uses 2017 yearly average exchange rate of 112.2 Yen to 1 U.S. Dollar)

** 2017 FDI data from “JETRO Invest Japan Report 2018 (Summary) and FDI stock, Japan’s Outward and Inward Foreign Direct Investment,” Japan External Trade Organization (JETRO).

The discrepancy between Japan’s accounting of U.S. FDI into Japan and U.S. accounting of that FDI can be attributed to methodological differences, specifically with regard to indirect investors, profits generated from reinvested earnings, and differing standards for which companies must report FDI.

Table 3: Sources and Destination of FDI

Table 4: Sources of Portfolio Investment

Michael Cavanaugh
Economic Section
U.S. Embassy Tokyo
1-10-5 Akasaka, Minato-ku, Tokyo 107-8420
Japan
+81 03-3224-5000

Policies Towards Foreign Direct Investment

Foreign investment in New Zealand is generally encouraged without discrimination.  New Zealand has an open and transparent economy, where businesses and investors can generally make commercial transactions with ease.  Successive governments accept that foreign investment is an important source of financing for New Zealand and a means to gain access to foreign technology, expertise, and global markets.  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 has embarked on a program of tighter screening of some forms of foreign investment.  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, and moved to restrict the availability of permits for oil and gas exploration.  This will be discussed below in a later section.

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 offers to help investors develop their plans, access opportunities, and facilitate connections with New Zealand-based private sector advisors: https://www.nzte.govt.nz/investment-and-funding/how-we-help.  Once investors independently complete their negotiations, due diligence, and receive confirmation of their investment, the NZTE offers aftercare advice. The NZTE works to channel investment into regional areas of New Zealand to build capability and to promote opportunities outside of the country’s main cities. 

In recent years new visa categories were created for investors and for entrepreneurs, and measures introduced to allow foreign investors – under certain circumstances – to bid alongside New Zealand businesses for contestable government funding for research and innovation grants.  Most of the programs which are operated by NZTE, the Ministry of Business, Innovation, and Employment (MBIE), and Callaghan Innovation, provide support through skills and knowledge, or supporting innovative business ventures. Grants are available, but many are co-funded, requiring some investment by the business owner, and extra conditions apply to non-resident applicants.  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

[Sectors:]

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 provider Spark New Zealand (Spark).

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.

Spark’s constitution requires at least half of its Board be New Zealand citizens, and at least one director must live in New Zealand.  It requires no person shall have a relevant interest in 10 percent or more of the voting shares without the consent of the Minister of Finance and the Spark Board, and no person who is not a New Zealand national can purchase a relevant interest in more than 49.9 percent of the total voting shares without approval from the Minister of Finance.  This telecommunications service obligation (TSO) – formerly known as the “Kiwishare obligation” – has been in operation since Spark’s privatization in 1990, and was motivated in part because of the vital emergency call service it provides. There are TSOs for charge-free local calling (provided by Spark and supported by Chorus), and for the services for deaf, hearing impaired, and speech impaired people (provided by Sprint International).

The establishment of telecommunications infrastructure provider Chorus resulted from a demerger of Spark in 2011.  Chorus owns most of the telephone infrastructure in New Zealand, and provides wholesale services to telecommunications retailers, including Spark.  The demerger freed Spark from the TSO, but obligated Chorus as a natural monopoly and infrastructure provider. To date the New Zealand government has granted approval to two private companies – in April 2012 and December 2017 – to exceed the 10 percent threshold, and increase their interest in Chorus up to 15 percent.

[National Security: TICSA]

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 April 2019 the government signaled it would be considering a “national interest” restriction on foreign investment, when it issued a document for public consultation  .

[Economic Security: OIO]

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, farm land, 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 68 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.

The Waitangi Tribunal was established by the Treaty of Waitangi Act 1975 to hear Maori claims relating to the loss of land and resources as a result of historical breaches by the Crown of the Treaty of Waitangi signed in 1840.  Maori land claims may not be lodged relating to privately owned land and affect only land owned by the Crown. Some private land titles are noted with a memorial recording that the land, when Crown land, would be subject to a claim and therefore repurchased by the Crown for market value at some future time.  No land in New Zealand has to date been the subject of a repurchase decision.

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 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.

For investments that require OIO screening, the investor 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 OIO Act and Regulations.  The OIO applies a counterfactual analysis to those benefit factors that are capable of having a counterfactual applied, 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.

For all four categories the threshold is higher for Australian investors.  Australian non-government investors are screened at NZD 530 million (USD 360 million) and Australian government investors at NZD 111 million (USD 75 million) for 2019, with both amounts reviewed each year in accordance with the 2013 Protocol on Investment to the New Zealand-Australia Closer Economic Relations Trade Agreement.  Separately, non-government investors from CPTPP countries face a screening threshold of NZD 200 million (USD 136 million).

The OIO Regulations set out the fee schedule for lodging new applications which can be costly, currently ranging between NZD 13,000 (USD 8,800) to NZD 54,000 (USD 36,700).  The Overseas Investment Act does not prescribe timeframes within which the OIO must make a decision on any consent applications, and current processing times regularly exceed six months.  In recent years some investors have abandoned their applications, and have been vocal in their frustration with 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.

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 2019 report New Zealand is ranked first in “Starting a Business,” “Registering Property,” “Getting Credit,” and is ranked second for “Protecting Minority Investors.”

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.  Under Phase 2 the AML/CFT was extended to lawyers, conveyancers from July 2018, accountants, and bookkeepers from October 2018, and realtors 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://www.companiesoffice.govt.nz/companies/learn-about/starting-a-company/register-an-overseas-company-other 

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 40,800) 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/index/all-tasks. 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 2018, the government introduced legislation that if enacted, will require non-resident suppliers of low-value import goods 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.

New Zealand currently has signed bilateral investment treaties (BITs) with four partners: Argentina (August 1999), Chile (July 1999), China (November 1988), and Hong Kong (July 1995), but only the BITs with China and Hong Kong have entered into force.  Besides these treaties, the country has concluded a number of economic agreements that also contain provisions on investment.

New Zealand has a Trade and Investment Framework Agreement with the United States that entered into force on October 2, 1992.  In July 2018 New Zealand and the United States resumed meetings under the Trade and Investment Framework Agreement (TIFA), which had been suspended after the United States entered negotiations for the Trans-Pacific Partnership (TPP) in 2008:  https://ustr.gov/about-us/policy-offices/press-office/press-releases/2018/july/united-states-and-new-zealand-meet.

New Zealand and Australia trade through a Closer Economic Relationship (CER), which is a free trade agreement eliminating all tariffs between the two countries.  However, the rules of origin under the CER do not permit products to enter Australia duty free from New Zealand unless the products are of at least 50 percent New Zealand origin.  Additionally, the last manufacturing process must be carried out in New Zealand. The enactment of the Free Trade Agreement (FTA) between Australia and the United States on January 1, 2005, removed any tariff disadvantage to U.S. firms that choose to re-export products from New Zealand to Australia.

New Zealand concluded a Closer Economic Partnership (CEP) agreement with Singapore that entered into force on January 1, 2001.  Negotiations to upgrade the agreement were concluded in November 2018. 

New Zealand concluded a CEP agreement with Thailand that entered into force on July 1, 2005.  The FTA contains a specific chapter on investment.

New Zealand has a Trade and Investment Framework Agreement with Mexico that entered into force on October 21, 1996.

New Zealand concluded an FTA with China that entered into force on October 1, 2008.  The FTA contains a specific chapter on investment. In November 2016, an agreement was reached to launch negotiations upgrade the agreement.  There have been six rounds of negotiations to date.

New Zealand and Malaysia signed an FTA that entered into force on August 1, 2010.  The FTA contains a specific chapter on investment.

New Zealand concluded a CEP with Hong Kong, which entered into force on January 1, 2011.

New Zealand has an agreement on Economic Cooperation with the Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu, which entered into force on December 1, 2013.  The agreement established rules between the two countries based on international best practice to facilitate investment flows and provide for the balanced protection of investment.

An FTA between New Zealand, Australia, and the Association of South East Asian Nations (ASEAN) entered into force January 1, 2010.  The FTA contains a specific chapter on investment.

New Zealand has an FTA with the Republic of Korea that entered into force December 20, 2015.  The FTA contains a specific chapter on investment.

New Zealand signed the Trans-Pacific Strategic Economic Partnership Agreement (the P4 Agreement) with Brunei, Chile, and Singapore that entered into force on May 28, 2006.

New Zealand concluded work on an FTA with the Gulf Cooperation Council (GCC) on October 31, 2009, but the agreement has not yet been signed.

New Zealand signed the Pacific Agreement on Closer Economic Relations Agreement (PACER Plus) with Australia, Cook Islands, Federated States of Micronesia, Fiji, Kiribati, Nauru, Niue, Palau, Papua New Guinea, Republic of Marshall Islands, Samoa, Solomon Islands, Tonga, Tuvalu, and Vanuatu on June 14, 2017.

New Zealand signed the Anti-Counterfeiting Trade Agreement (ACTA) on October 1, 2011.  The United States, Australia, Canada, the European Union, Japan, Korea, Morocco, Mexico, Singapore and Switzerland have also signed.  The ACTA requires ratification by six signatories and the New Zealand government’s consideration whether to ratify ACTA remains on hold.  New Zealand is also a party in negotiations for the Trade in Services Agreement (TiSA), and in January 2019 announced its intention to participate in negotiations to establish global e-commerce trade rules with other World Trade Organization (WTO) members. 

New Zealand reached agreement with the European Union (EU) to enter negotiations in October 2015.  Negotiations were launched in June 2018 and a second round was held in October. New Zealand has indicated progress on the FTA will continue without the United Kingdom after it leaves the European Union.

Negotiations continue for a bilateral FTA with India.  However negotiations for a Russia-Belarus-Kazakhstan FTA were suspended in May 2014.

In June 2017, New Zealand launched negotiations with the countries of the Pacific Alliance, including Chile, Colombia, Mexico, and Peru.  There have been six rounds of negotiations to date.

New Zealand joined the Regional Comprehensive Economic Partnership (RCEP), launched at the East Asia Summit in November 2012.  The RCEP covers 16 countries: the ten members of ASEAN (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam) and the six countries with which ASEAN has existing FTAs – Australia, China, India, Japan, Korea, and New Zealand.  There have been 25 rounds of negotiations to date.

In 2018 New Zealand signed and ratified the Comprehensive and Progressive Agreement for the Trans-Pacific Partnership (CPTPP) which entered into force on December 30, 2018 after it was ratified by six countries.  The CPTPP covers 11 countries: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam.

New Zealand has 40 bilateral income tax treaties and 19 information exchange agreements currently in force.  The Convention between the United States of America and New Zealand for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income signed in 1982 was replaced by a new treaty signed in December 2008, which came into force on November 12, 2010.  New Zealand (NZ) has an intergovernmental agreement with the United States for their Foreign Account Tax Compliance Act (FATCA), which entered into force on July 3, 2014.

In 2017, there were two rulings from the New Zealand Court of Appeal and the New Zealand High Court after cases were brought regarding the correct interpretation of New Zealand’s double tax agreements (DTAs).  A Court of Appeal decision (on the NZ-China DTA) ruled DTAs should be treated in the same manner as private contracts, rather than considering the international context and purposes of such treaties, in accordance with previous local and international rulings.  In another case that went to the Supreme Court and back, the High Court ruled against the Inland Revenue Department (IRD) Commissioner for issuing information product notices to a tax agent that were found to be “not necessary” as specified in the (NZ-Korea) DTA.

In April 2019 an update to the existing NZ-China DTA was signed.  The new agreement when in force updates the original 1986 agreement to provide clarity on the tax treatment of investment flows, include measures to prevent base erosion and profit shifting (BEPS), lower withholding taxes, and clarify methods to prevent double taxation:  http://taxpolicy.ird.govt.nz/tax-treaties/china.

In August 2018, an update to the NZ-Hong Kong DTA entered into force.  The amendment updates the original 2010 agreement to bring it in line with the majority of New Zealand’s other DTAs by enabling the automatic exchange of information (AEOI) between the two tax jurisdictions.  The AEOI initiative is an international response to combat off-shore tax evasion.

New Zealand is a party to the OECD’s Convention on Mutual Administrative Assistance in Tax Matters, and to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit-Shifting (MLI).  In August 2018 New Zealand completed its treaty examination process and ratified the MLI which allows New Zealand to adjust its existing DTAs with other participating countries rather than renegotiate each DTA individually from October 1, 2018. 

In June 2018, Parliament passed the Taxation (Neutralizing Base Erosion and Profit Shifting) Act, referred to as the “BEPS Tax Act.”  The Act is intended to address the ability of firms with presences in multiple countries from using (1) artificially high interest rates on loans from related parties to shift profits out of New Zealand (interest limitation rules); (2) artificial arrangements to avoid having a taxable presence in New Zealand; (3) transfer pricing payments to shift profits into their offshore group members that does not reflect the actual economic activities undertaken in New Zealand; and (4) hybrid and branch mismatches that exploit differences between countries’ tax rules to achieve an advantageous tax position.  The BEPS Tax Act also enhances the IRD’s ability to extract information from multinational firms held overseas to prevent firms from obstructing investigation through non-cooperation, and retains the discretion to fine firms for failing to comply with a request for information.

In February 2019, following consultation with the IRD, the government announced they will begin work to introduce a digital services tax and will issue a discussion document in May.  The government said the tax will be an interim measure while the OECD continues to work on an internationally agreed solution on how to include the digital economy within countries’ tax frameworks.  The value of cross-border digital services in New Zealand is estimated to be around NZD 2.7 billion (USD 1.8 billion). The tax would be between 2-3 percent on the revenue of multinational online companies’ generated from sales in New Zealand and could be enacted as early as 2020.

The Tax Working Group, which was an independent advisory body established by the government soon after it was elected in late 2017, released its final report in February 2019.  The group made 99 recommendations to overhaul New Zealand’s tax system, including the introduction of a capital gains tax on profits made from the sale of assets, excluding the family home and personal items such as cars, boats and art.  The Government ruled out implementing any of the recommendations before 2021 after the next general election in late 2020. In April 2019, the Labour party and previous party leaders campaigned on introducing a capital gains tax in general elections.  Historically, coalition partner New Zealand First has been opposed to such a tax.

In 2016 mandatory GST registration was extended to non-resident suppliers of cross-border remote services and digital downloads under the Taxation (Residential Land Withholding Tax, GST on Online Services, and Student Loans) Act.  It requires offshore suppliers to register and return GST if their taxable supplies to New Zealand exceed – or are expected to exceed – NZD 60,000 (USD 40,800) in a 12-month period. The IRD defines qualifying remote services including: e-books, movies and TV shows, online newspaper subscriptions, online supplies of games and software, webinars or distance learning courses, insurance services, gambling services, web design services, legal, accounting or consultancy services:  https://www.ird.govt.nz/index/all-tasks. Separate conditions apply to cross-border suppliers of telecommunication services.

In response to New Zealand retailers’ claims of a competitive disadvantage resulting from the high volume of low-value imported goods purchased online by New Zealand consumers, the government introduced a bill to Parliament in December 2018 that – if enacted – would require non-resident suppliers of low-value goods to register with IRD and collect GST at the point of sale.  Currently online purchases by New Zealand customers with a value of more than NZD 400 (USD 272) have GST and tariff duty collected at the border by Customs New Zealand. The bill would require non-resident suppliers of goods with sales to New Zealand customers that exceed or are expected to exceed NZD 60,000 in a 12-month period to charge GST on goods bought by a New Zealand customer that value NZD 1,000 (USD 680) or below, from October 1, 2019.  Customs New Zealand would retain the responsibility to collect GST on goods valued at more than NZD 1,000. The Taxation (Annual Rates for 2019-20, GST Offshore Supplier Registration, and Remedial Matters) Bill will have its Select Committee report due June 11, 2019: https://www.parliament.nz/en/pb/bills-and-laws/bills-proposed-laws/document/BILL_82431/taxation-annual-rates-for-2019-20-gst-offshore-supplier.

As mentioned in the previous section, GST registration requires the overseas company to: provide two pieces of evidence to prove the customer is a resident in New Zealand, such as their billing address or IP address, and file a GST return every quarter even if the company does not make any sales.

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 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: following 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 gazetted, or at the time of Ministerial release.  A 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 Regulatory Systems Amendment Bills 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. 

The vast majority of 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. The majority of standards in New Zealand are set in coordination with Australia.

The Resource Management Act 1991 (RMA) has drawn criticism from both 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, the Conservation Act 1986, Reserves Act 1977, Public Works Act 1981, and the Exclusive Economic Zone and Continental Shelf (Environmental Effects) Act 2013.  Broadly, the RLAA attempts to balance environmental management with the need to increase capacity for housing development. It also aims 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.

The Public Works Act (PWA) 1981 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.  Compulsory acquisition 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 land owner 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 came into force in November 2018.  It aims to simplify and modernize the law to make it more accessible and to improve certainty of property rights.  It empowers courts with limited discretion to restore a landowner’s registered title in cases of manifest injustice.

New Zealand enhanced its accountability and transparency by joining the Open Government Partnership in 2014.  Some of the 12 areas of commitment outlined in New Zealand’s third National Action Plan 2018-2020 include: make New Zealand’s secondary legislation readily accessible, public participation in policy development, and increase the visibility of government’s data stewardship:  http://ogp.org.nz/new-zealands-plan/third-national-action-plan-2018-2020/. In March 2018, New Zealand signed the Open Data Charter, which has been adopted by 69 governments. Statistics New Zealand is responsible for the management of the Government’s Open Government Information and Data Program:  https://www.data.govt.nz/open-data/open-government-data-programme/open-data-nz/. 

The Official Information Act 1982 (OIA) enables people to request official information held by Ministers and specified government agencies.  It contains rules on how such requests be handled and provides a right to complain to the Ombudsman in certain situations. The Office of the Ombudsman, the Ministry of Justice and, more recently, the State Services Commission provide guidance to help improve agencies’ performance on OIA practice and reporting on their compliance with the OIA.

The government is determining whether a full review of the OIA is needed by conducting a targeted engagement facilitated by the Ministry of Justice.  A public consultation process is open for a six week period in early 2019. This is in response to criticism of the government’s failure to be fully transparent on the performance of departments responding to OIA requests within the 20-working day deadline, with requests to the NZ Police (who receive about one-third of all OIA requests) being excluded from statistics reported by the State Services Commission (SSC).  In the last six months of 2018, NZ Police and the Earthquake Commission were responsible for more than half of all late OIA responses. The SSC also removes NZ Defense Force requests from the reporting statistics. In addition to timeliness, quality was found to be an issue in a media investigation that found of the 723 complaints to the Ombudsman during the same six months, only one fifth related to delays, more than half (51 per cent) of complaints related to requests being partially or fully refused:  https://www.stuff.co.nz/national/111181806/redacted–our-official-information-problems-and-how-to-fix-them.

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 agreed to in 2009.  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. 

New Zealand Medicines and Medical Devices Safety Authority (Medsafe), a business unit within the Ministry of Health, rules on applications for consent to distribute new and changed medicines and therapeutic products in New Zealand.  In their guidelines, Medsafe advises applicants that the technical data requirements applying in New Zealand are closely aligned with those currently applying in the European Union: https://medsafe.govt.nz/regulatory/current-guidelines.asp.  Medsafe also recognizes the technical guidelines published by the United States Food and Drug Administration (FDA). When guidelines issued by the International Conference on Harmonization, or the Committee for Proprietary Medicinal Products, or the FDA are formally adopted and come into force in the EU or the United States, then they are recognized by Medsafe.  While there is substantial harmonization between New Zealand and Australia for requirements showing evidence of the quality, safety and efficacy of medicines, there are Australian-specific requirements for some aspects of the quality control and stability data that are not relevant to New Zealand.

The Privacy Bill – if enacted – 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 two notices, the Disclosure Using Overseas Generally Accepted Accounting Principles (GAAP) Exemption and the Overseas Registered Banks and Licensed Insurers Exemption Notice, which 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 require a New Zealand qualified auditor.

In 2019, the government introduced the Financial Markets (Derivatives Margin and Benchmarking) Reform Amendment Bill to Parliament to better align New Zealand’s financial markets law with new international regulations, to help strengthen the resilience of global financial markets.  If enacted, the bill will 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/international-engagement/technical-barriers-to-trade/  

In 2017 the government established a website to provide a centralized point of contact for businesses to access information and support on non-tariff trade barriers (NTB).  The online portal allows exporters to 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. https://tradebarriers.govt.nz/  

New Zealand ratified the WTO Trade Facilitation Agreement (TFA) in September 2015 and 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 open, 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.

In 2016, the omnibus Judicature Modernization Bill was passed to improve and consolidate older pieces of legislation governing the New Zealand court system.  The legislation enables the sharing of court information, the establishment of a new judicial panel to hear certain commercial cases, increases the monetary limit of the District Court’s civil jurisdiction, and improves accessibility to final written judgments by publishing them online.

In 2018, the government continued efforts to modernize and improve the efficiency of the courts and tribunals system, by passing the Court Matters Bill and the Tribunal Powers and Procedures Legislation Bill.  Legislation to modernize and consolidate laws underpinning contracts and commercial transactions came into effect on September 1, 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 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 whether 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. 

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. For more see: http://www.linz.govt.nz/regulatory/overseas-investment

In situations where New Zealand companies are acquiring capital injections from overseas investors that require OIO approval, they must meet certain criteria regarding disclosure to shareholders and fulfil other responsibilities under the Companies Act 1993.  Failure to do so can affect the overseas company’s application process with the OIO.

The OIO Act allows for instances when Ministers may confer a discretionary exemption from the requirement to seek OIO consent.  Section 61D is sufficiently broad to enable Ministers to exercise their exemption power for unexpected or unusual circumstances that may not otherwise be provided for:  http://legislation.govt.nz/act/public/2005/0082/latest/LMS112019.html . Overseas persons seeking an exemption must contact the OIO before submitting their application.

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:  https://www.linz.govt.nz/overseas-investment/enforcement/enforcement-action-taken .

The government has made several changes to regulations and legislation governing foreign investment over the past year, and has signaled further changes by issuing a discussion document for public consultation. 

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.

In addition to placing emphasis on economic benefits, the government issued new rules that reduced the area threshold for foreign purchases of rural land so that 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. In its final report the Tax Working Group recommended a land tax to be levied by councils as a local tax. A feasibility report is expected in November 2019.

In the same Directive Letter from December 2017, the government issued new rules that overseas investors intending to reside in New Zealand, move within 12 months and become ordinarily resident within 24 months.

[OIO: Residential Property Land:]

As part of the government’s policy to improve housing affordability and reduce speculative behavior in the housing market, the Overseas Investment Amendment Act passed in August 2018 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. 

From 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. The government introduced a standing consent for qualifying overseas purchasers who may be granted pre-approval in advance of finding a specific property to buy.  A standing consent cannot be used for land that is sensitive for another reason such as land that adjoins a reserve. 

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: https://www.linz.govt.nz/overseas-investment/information-for-buying-or-building-one-home-live . 

OIO applicants not intending to reside will generally need to show: (1) they will convert the land to another use such as a business and are able to demonstrate this would have wider benefits to New Zealand; or (2) they will be developing the land and 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 dwelling/s once built (the “non-occupation condition”). If approved, applicants must also on-sell the dwelling/s, 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 amended Act 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:  http://legislation.govt.nz/regulation/public/2005/0220/latest/LMS109607.html . The overseas buyer would not have to fulfil the on-sale condition but will have to meet the non-occupation condition. A purchaser wishing to buy an apartment to which the exemption certificate does not apply, must apply for consent and if approved comply with the on-sale and non-occupation conditions according to Schedule 3 Section 4 (5) under the OIO Act:  http://legislation.govt.nz/act/public/2005/0082/latest/LMS111210.html  .

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 the overseas person is acquiring less than a 50 percent ownership interest or if they are acquiring an indirect ownership interest (i.e.  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.

[OIO: Forestry]

The elected government in 2017 indicated that forestry would be a priority in boosting regional development, and introduced it as its own portfolio:  https://www.beehive.govt.nz/portfolio/labour-led-government-2017-2020/forestry . The government also included the Forest Land directive as mentioned in the previous page.

In March 2018, the government announced forestry cutting rights be brought into the OIO screening regime, similar to the screening of investments that exists for leasehold and freehold forestry land.  In the OIO Amendment Act passed in August 2018, forestry rights and residential land, were brought in under the asset class of sensitive land: http://legislation.govt.nz/act/public/2018/0025/latest/DLM7512906.html .  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 have two other options if they wish to buy or lease land for forestry purposes (including converting farmland to forestry) or purchase forestry rights, the Special Forestry Test, and 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 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. 

[OIO Phase 2: Monopolies]

In April 2019 the government signaled it would be considering a “national interest” restriction on foreign investment, when it issued a document for public consultation:  https://treasury.govt.nz/publications/consultation/glance-overseas-investment-new-zealand . The rules would increase ministers’ ability to decline applications from foreign investors wanting to buy New Zealand assets, on the grounds of national security.  The government said they were mainly focusing the level of discretion on blocking the sale of large pieces of infrastructure that had “monopoly characteristics” and that were important to the functioning of the wider economy, on “national interest” grounds.  Public consultations will take place in 2019 and the government plans to pass any changes to the law it decides on in 2020. 

[OIO Phase 2: Water Bottling]

After campaigning in the general election on introducing a “water tax,” the government announced in April 2019 as part of its second phase of the overseas investment review whether more consideration be given to the regulations around planned water extraction or bottling on environmental, economic, and cultural wellbeing.  There has been concern about the extraction of water, particularly for water bottling for export, and the profit that overseas companies gain from a high-value resource without paying a charge. Water bottling is a small industry in New Zealand, accounting for less than 0.02 percent of total New Zealand water use in 2016. Currently, only a small proportion of water bottled is for export purposes, with the majority of consumption occurring within New Zealand.  The consultation document outlines two options to regulate water bottling for export.

[Non-OIO: Bright Line Test for Residential Investment:]

Outside of the OIO framework, the previous government passed the Taxation (Bright-line Test for Residential Land) Bill.  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 will also need to submit other taxpayer identification number held in countries where they pay tax on income.  To assist the IRD in ensuring investors 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.

[Non-OIO: Oil and Gas Ban:]

In the Energy and Mining sector the government passed the Crown Minerals (Petroleum) Amendment Act in November 2018, to restrict the acreage available for new oil and gas exploration permits to the onshore Taranaki region only.  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 as a means to raise New Zealand’s profile among international investors in the allocation of petroleum exploration permits. 

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. The ban does not cover the Taranaki area onland, where exploration licenses will still be available for the next three years.

The government estimates there is ten years’ worth of gas to be explored or mined under consented reserves, and also additional supplies from gas discovered in existing permits.  Analysis on the impact to the New Zealand economy has been primarily limited to the fiscal impact to the Government through taxes and royalties which is contained in the Regulatory Impact Statement (RIS) prepared in support of the law.  The RIS was conducted after the policy had already been announced in April 2018. 

Competition and Anti-Trust Laws

The Commerce Act of 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 a number of 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 ). 

In 2018 the government passed the Commerce Amendment Act to empower 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.

Market studies may be initiated by the Minister of Commerce and Consumer Affairs, or by the Commerce Commission on its own initiative.  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 repeals the cease-and-desist regime in the 1986 Commerce Act, and strengthens the information disclosure regulations for airports.

In November 2018, Parliament amended the Telecommunications Act to regulate the new fiber networks being rolled out for the national ultrafast broadband initiative:  https://comcom.govt.nz/regulated-industries/telecommunications/regulated-services/fibre-regulation/implementation-of-the-new-regulatory-framework-for-telecommunications .  The Act introduced a utility-style regulatory regime, similar to what exists for energy networks and airports, and has set the Commerce Commission the task of also regulating fiber networks, which they will implement a framework for over the next three years. 

The Dairy Industry Restructuring Act of 2001 (DIR) authorized the amalgamation of New Zealand’s two largest dairy co-operatives to create Fonterra Co-operative Group Limited (Fonterra).  The DIR is designed to manage Fonterra’s dominant position in the dairy market, until sufficient competition has emerged. A review by the Commerce Commission in 2016 found competition was not yet sufficient to warrant the removal of the DIR provisions, but it made recommendations to create a pathway to deregulation.  One of the most contentious issues in the Act was the issue of open entry, which requires Fonterra to accept all milk from new suppliers. The co-operative claims this part of the legislation is no longer needed because the dairy industry had become highly competitive in recent years. The government is continuing its review of the DIR it embarked on in 2017 to determine if the Act still meets its objectives, if it has created unintended consequences, and if it is still needed in its current form:  https://www.mpi.govt.nz/law-and-policy/legal-overviews/primary-production/dairy-industry-restructuring-act/dairy-industry-restructuring-act-2001-review/ . 

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 of 2001, the Telecommunications (New Regulatory Framework) Amendment Bill passed in November 2018.  It 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. 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 Bill, 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 that ensures 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 is conducting a study during 2019 of the mobile network operators, and in part will look into whether the process for 5G spectrum allocation will impact the ability of new mobile network operators to enter the market.

In March 2019, the government announced it freed up space on the spectrum in order 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:  https://www.stuff.co.nz/business/111304958/government-clears-path-for-new-entrant-to-take-on-spark-vodafone-and-2degrees . 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 announced the first auction of 5G spectrum will be in early 2020, and ready for use by November 2022. The Government is also considering a cap on the amount of 5G spectrum given to a single operator to prevent monopolistic behavior, but also to set aside spectrum to deal with potential Treaty of Waitangi issues. 

The Commerce Commission has a regulatory role to promote competition within the electricity industry under the Commerce Act 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 is in the process of setting the default price-quality path that will apply to electricity distributors from 2020 to 2025. In its five-yearly review of the New Zealand energy market, the International Energy Agency made recommendations in 2017 for the structure, governance and regulation of the electricity distribution service sector, and for network regulation and retail market reforms to ensure efficient transmission pricing.  The New Zealand government has commissioned an independent Expert Advisory Panel to lead a review into electricity prices to investigate whether the electricity market is delivering a fair and equitable price to end-consumers. The review will also consider possible improvements to ensure the market and its governance structure will be appropriate in a changing technological environment. 

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 to New Zealand fuel distributor Z-Energy in 2016.  The Commerce Commission approved Z-Energy’s application to acquire 100 percent of the shares in Chevron New Zealand on the condition it divest 19 of its retail sites and one truck stop in locations where it considered competition would be substantially reduced as a result of the merger.  Z-Energy holds almost half of the market share for fuel distribution in New Zealand. In December 2018 the Commerce Commission commenced a market study looking into the factors that may affect competition for the supply of retail petrol and diesel used for land transport throughout New Zealand.  The purpose of the study is to consider and evaluate whether competition in the retail fuel market is promoting outcomes that benefit New Zealand consumers over the long-term. A final report is due December 2019. 

In August 2017 the Commerce (Cartels and Other Matters) Amendment Act was passed to enable 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.

In April 2019, the government passed the Commerce (Criminalization of Cartels) Amendment Bill to criminalize cartel behavior – a provision was removed from the 2017 amendment part-way through its passage through the Parliament.  The amendment means that individuals convicted of engaging in cartel conduct – price fixing, restricting output, or allocating markets – will face fines of up to NZD 500,000 (USD 340,000) and/or up to seven years imprisonment. 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.

Expropriation and Compensation

Expropriation is generally not an issue in New Zealand, and there are no outstanding cases.  New Zealand ranks first in the World Bank’s 2017 Doing Business report for “registering property” and for “protecting minority investors.”

The government’s KiwiBuild program aims to build 100,000 affordable homes over ten years, with half being in Auckland.  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 drawn out court cases against the Government based largely on the compensation offered.  Several large areas of residential land in Christchurch were deemed “red zones,” 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, and the health and well being of residents was at risk from remaining in the area for prolonged periods. 

In August 2015 the Government offered the 2007 value of all land and of insured homes, but did not offer to pay for uninsured homes, affecting about 100 homeowners.  More than 7,000 people accepted red-zone buy-out offers, about 135 did not, with some wanting to stay on in their homes. The Christchurch City council is legally required to provide services to the red zone, such as collecting sewage which it did initially did.  A group of 16 red-zone residents who had sold their uninsured properties ultimately won a case in 2017, when a Court of Appeal judgment ruled the Government made an “unlawful” decision to discriminate against uninsured homeowners. A previous offer made in 2012, for 50 per cent of the rateable value to owners of uninsured Christchurch red zone land was deemed unlawful in the Court of Appeal in 2013.  The government has demolished about 7,000 homes in the flat land red zone, or about 99 per cent of Crown owned properties: 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.

Investment disputes brought against other foreigners by the New Zealand government have been largely due to non-compliance of the investors’ obligations under the OIO Act or their failure to gain OIO approval before making their investment.

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 as mentioned previously.

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).

An amendment to the Arbitration Act 1996 in March 2017 provided for the appointment of 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 in the event that the appointed body does not act, or there is a dispute about the process of the appointed body. Since then 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.

In May 2019 the Arbitration Amendment Bill 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://www.companiesoffice.govt.nz/companies/learn-about/overseas-companies/managing-an-overseas-company-in-new-zealand

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 of1993 and the Criminal Proceeds (Recovery) Act of 2009.  The Official Assignee administers all bankruptcies, No Asset Procedures, Summary Installment Orders, and some liquidations. The Official Assignee administers bankruptcies and liquidations by collecting and selling assets to repay creditors.  It will ask the bankrupt or company directors for information to help them identify and deal with the assets. The money recovered is paid to creditors who have made a claim, and the order in which payments are made is set out in the relevant Acts.  Creditors can log in to the Insolvency and Trustee Service website to track the progress of the administration and how long it is likely to take. The time will depend on several things such as the type and number of assets the debtor has.

In the World Bank’s Doing Business 2019 Report New Zealand is ranked 31st in “resolving insolvency”.  Despite a high recovery rate (84.1 cents per dollar compared with 70.5 cents for the average across high-income OECD countries), New Zealand scores lower on the strength of its insolvency framework.  Specific weaknesses identified in the survey include the management of debtors’ assets, the reorganization proceedings, and particularly on the participation of creditors. The survey notes New Zealand’s insolvency framework does not require approval by the creditors for sale of substantial assets, nor does it provide creditors the right to request information from the insolvency representative.

In August 2018, the government revived the Insolvency Practitioners Bill by reopening public consultation and Select Committee review, after the bill stalled in 2013.  The government has made significant changes to the bill, aiming to introduce a coregulatory licensing framework, rather than a “negative licensing system” that would have empowered the Registrar of Companies to ban people from acting as a liquidator or receiver.  As the revised bill currently stands, insolvency practitioners would be required to be licensed by an accredited body under a new stand-alone Act. In addition, the bill requires that insolvency practitioners would have to provide information and assistance to an insolvency practitioner that replaces them; imposes obligations on insolvency practitioners to provide detailed reports on insolvency engagements; and empowers courts to compensate people suffering as a result of an insolvency practitioner’s failure to comply with any relevant laws and sanction insolvency practitioners who fail to comply with any relevant laws.

Investment Incentives

New Zealand has no specific economic incentive regime because of its free trade policy.  The New Zealand government, through its bodies such as Tourism New Zealand and NZTE, provides assistance in certain sectors such as tourism and the export of locally manufactured goods.  The government generally does not have a practice of jointly financing foreign direct investment projects.

In the Media and Entertainment sector, the New Zealand Film Commission administers a grant for international film and television productions on behalf of the Ministry for Culture and Heritage and MBIE.  Established in 2014, the New Zealand Screen Production Grant provides rebates for international productions of 20 percent on specified goods and services purchased in New Zealand. An additional five percent is available for productions that meet a significant economic benefit points test for New Zealand. 

Callaghan Innovation is a stand-alone Crown Entity established in February 2013.  It connects businesses with research organizations offering services, and the opportunity to apply for government funding and grants that support business innovation and capability building.  Callaghan Innovation requires businesses applying for any of their research and development grants to have at least one director who is resident in New Zealand and to have been incorporated in New Zealand, have a center of management in New Zealand, or have a head office in New Zealand.  For more information see: http://www.business.govt.nz/support-and-advice/grants-incentives   

Foreign Trade Zones/Free Ports/Trade Facilitation

New Zealand does not have any foreign trade zones or duty-free ports.

Performance and Data Localization Requirements

The government of New Zealand does not maintain any measures that are alleged to violate the Trade Related Investment Measures text in the WTO.  There are no government mandated requirements for company performance or local employment, and foreign investors that do not require OIO approval are treated equally with domestic investors.  As mentioned previously, some overseas investors that require OIO approval must comply with legal obligations governing OIO satisfying the benefit to New Zealand test through local employment, using domestic content in goods, or promising the introduction of a new technology to New Zealand.  Investors requiring OIO approval also must maintain “good character”, and reporting requirements. Investors are generally required to report annually to the OIO for up to five years from consent, but if benefits are expected to occur after that five-year period, monitoring will reflect the time span within which benefits will occur.  Failure to meet obligations under the investors’ consent can result in fines, court orders, or forced disposal of their investment. 

There have been several recent cases taken against OIO consent holders for failing to maintain the requirement of “good character.”  In 2017 a majority shareholder of a winery was ordered to divest his interest in the company by the OIO after he was sentenced to four years imprisonment for fraud in the United States.  In 2019 the New Zealand High Court imposed civil penalties on a director for breaching the good character conditions of his company’s consent when it bought a controlling interest (50.2 percent) in New Zealand’s largest agricultural services company in 2011:  https://www.linz.govt.nz/news/2019-03/agria-ordered-pay-220000-for-overseas-investment-breach. The breaches of the overseas investment good character conditions arise from an investigation by United States Securities and Exchange Commission (SEC) concerning alleged violations of United States securities law.  The director was found to have been involved in fraudulent accounting and share price manipulation in the United States. As part of the settlement reached with the OIO the director’s company agreed to divest its interest in the company below 50 percent (to 46.5 percent). A government-commissioned independent review in 2016 found the good character test to be robust after questions were asked whether it was being used consistently and accurately.  LINZ reports on enforcement actions taken since 2015 on its website: https://www.linz.govt.nz/overseas-investment/enforcement/enforcement-action-taken  . 

Businesses wanting to establish in New Zealand and seeking to relocate their employees to New Zealand will need to apply for and satisfy the conditions of the Employees of Relocating Business Resident Visa:  https://www.immigration.govt.nz/new-zealand-visas/apply-for-a-visa/about-visa/relocating-with-an-employer-resident-visa  .  These conditions include providing evidence the business is up and running, have the support of NZTE, and provide a letter from the business CEO.  Immigration New Zealand may grant temporary work visas to key employees to get the business established and resident visas once the business is operating.  Applicants must provide evidence the business is up and running, such as a certificate of incorporation, tax records, and documents showing a business site has been purchased or leased.  Immigration New Zealand also considers if the relocation benefits New Zealand, if the business is trading profitably (or has the potential to do so in the next 12 months), and contributing to economic growth by, for example introducing new technology, management or technical skills; enhancing existing technology, management or technical skills; introducing new products or services; enhancing existing products or services; creating new export markets; expanding existing export markets; creating at least one full-time job for a New Zealander.  Visa holders can bring family, and after meeting conditions of the visa may be eligible to live and work in New Zealand indefinitely.

New Zealand supports the ability to transfer data across borders, and to not force businesses to store their data within any particular jurisdiction.  While data localization and cloud computing is not specifically legislated for, all businesses must comply with the Privacy Act 1993 to protect customers’ “personal information.” However under certain circumstances approval is required from the Commissioner of Inland Revenue to store electronic business and tax records outside of New Zealand, and under Section 23   of the Tax Administration Act 1994.  Alternatively, tax payers can use an IRD authorized third party to store their information without having to seek individual approval.  It remains the taxpayer’s responsibility to meet their obligations to retain business records for the retention period (usually seven years) required under the Act.

From October 2018, the Customs and Excise Act – which replaces the 1996 Act – allows customers who are required to keep Customs-related records to apply to Customs New Zealand, to store their business records outside of New Zealand.  Under the 1996 Act it was an offence for businesses to not store physical records in New Zealand or their electronic records with a New Zealand-based cloud storage provider. Under the new legislation a business can apply for permission to keep their Customs-related business records outside New Zealand, including in a cloud storage facility that is not based in New Zealand.  Businesses denied permission must still be required to store business records in New Zealand, including with New Zealand-based cloud providers.

New Zealand is considering e-commerce issues in trade agreements, including upgrades of existing FTAs, and in January 2019 joined other WTO members to launch negotiations on E-Commerce.  In CPTPP these rules come with a “public policy safeguard”, which gives governments the discretion to control the movement and storage of data for legitimate public policy objectives, such as cybersecurity, and the protection of privacy and data.

In March 2018 the government introduced the Privacy Bill into Parliament to repeal and replace the Privacy Act 1993.  The bill aims to strengthen the protection of confidential and personal information and modernize privacy regulations.  It also aims to incorporate provisions included in the European General Data Protection Regulation (GDPR), however the select committee report on the bill released in March 2019 advised against strict alignment with the GDPR. 

In its current form, the Bill would apply to all actions by a New Zealand agency regardless of where that agency is located, and would apply to all personal information collected or held by a New Zealand agency regardless of where that information is collected or held, or where the relevant individual is located.

The bill extends the current law to apply to agencies located outside of New Zealand as long as that agency is “carrying on business in New Zealand.” It would apply to personal information collected in the course of such business, again regardless of where the agency is located and where the information is held.  Additionally, it will apply regardless of whether that agency charges monetary payment, or makes a profit from its business in New Zealand. The intent is to ensure that global businesses doing business in New Zealand, irrespective of where the individual or the agency is located, comply with the new Privacy Act.

A provision affecting cloud service providers places the onus of liability for privacy breaches on the customer, as long as the provider is not using or disclosing that customer’s information for its own purposes.

The bill includes a new information privacy principle has been added for the off-shoring of personal information similar to that in the GDPR.  Agencies wanting to disclose personal information to an overseas person will need to apply for an exemption if the individual authorizes but is expressly informed their information may not have comparable protection as the New Zealand Privacy act, the overseas person is conducting business in New Zealand and is therefore subject to the act or the overseas person is a participant in a prescribed binding scheme.

New Zealand does not have any requirements for foreign information technology (IT) providers to turn over source code or provide access to encryption.  There may be obligations on individuals to assist authorities under Section 130 of the Search and Surveillance Act 2012. An agency with search authority in terms of data held in a computer system or other data storage device may require a specified person to provide access information that is reasonable to allow the agency exercising the search power to access that data.  This could include a requirement that they decrypt information which is necessary to access a particular device. The search power cannot be used to require the specified person to give information intending to incriminate them. Failure to assist a person exercising a search power under section 130(1), without reasonable excuse, is a criminal offence punishable with imprisonment for up to three months.  A specified person is (1) a user of a computer system or other data storage device or an Internet site who has relevant knowledge of that system, device, or site; or (2) a person who provides an Internet service or maintains an Internet site and who holds access information. A user is (1) owns, leases, possesses, or controls the system, device, or site; or (2) is entitled, by reason of an account or other arrangement, to access data on an Internet site; or (3) is an employee of a specified person described previously.

The Act includes powers to search and notification requirements of search power in connection to a “remote access search” defined in the Act as a search of a thing such as an Internet data storage facility that does not have a physical address that a person can enter and search.

Such mandatory demands as mentioned are legal obligations that must be complied with, and are made under a search warrant.  The Privacy Act permits disclosure in such a case. The organization can only disclose the information requested and any excess information provided will be in breach of the Privacy Act unless it is able to be provided as part of a voluntary request.

If an organization is ordered a voluntary demand, then it is not required to provide the information, but it may do so if it believes (1) there is a serious threat to health and safety of the public, the individual concerned, or any other individual; or (2) the maintenance of law exception (to avoid prejudice to the maintenance of the law by any public sector agency, including the prevention, detection, investigation, prosecution, and punishment of offences).  Both of these exceptions are expected to exist under the Privacy Bill.

The Customs and Excise Act 2018 sets specific legal thresholds for Customs officers to search passengers’ electronic devices, and imposes a fine of NZD 5,000 (USD 3,400) if they refuse to hand over passwords, pins, or encryption keys to access the device.  The officer must have “reasonable cause to suspect,” that the passenger has been or is about to be involved in the commission of relevant offending.

There are many laws that establish rules to protect privacy or confidentiality in particular situations, such as the Tax Administration Act.  As such there is not a particular government agency that enforces all privacy law, however the Office of the Privacy Commissioner is empowered through the Privacy Act 1993 and has a wide ability to consider developments or actions that affect personal privacy.  Separately, New Zealand courts have developed a privacy tort allowing individuals to sue another for breach of privacy.

Real Property

New Zealand recognizes and enforces secured interest in property, both movable and real.  Most privately owned land in New Zealand is regulated by the Land Transfer Act 2017. These provisions set forth the issuance of land titles, the registration of interest in land against land titles, and guarantee of title by the State.  The Registrar-General of Land develops standards and sets an assurance program for the land rights registration system. New Zealand’s legal system protects and facilitates acquisition and disposition of all property rights.

The Land Transfer Act – which was enacted in November 2018 and repealed the Land Transfer Act 1952 – maintains the Torrens system of land title in which land ownership is transferred through registration of title instead of deeds, a system which has been in operation in New Zealand since the nineteenth century.  The new Act aims to improve the certainty of property rights, modernize, simplify and consolidate land transfer legislation. It empowers courts with limited discretion to restore a landowner’s registered title in rare cases, in the event of fraud or other illegality, where it is warranted to avoid a manifestly unjust result.  The Act includes new provisions to prevent mortgage fraud, to protect Maori freehold land, and to extend the Registrar-General’s powers to withhold personal information to protect personal safety.

As mentioned in Section 2, overseas persons wanting to purchase certain types of land must apply to the OIO for approval.

Land leasing by foreign or non-resident investors is governed by the OIO Act.  About eight percent of New Zealand land is owned by the Crown. The Land Act 1948 created pastoral leases which run for 33 years and can be continually renewed.  Rent is reviewed every 11 years, basing the rent on how much stock the land can carry for pastoral farming. The Crown Pastoral Land Act 1998 and its amendments contain provisions governing pastoral leases that apply to foreign and domestic lease holders.  Holders of pastoral leases have exclusive possession of the land, and the right to graze the land, but require permission to carry out other activities on their lease. 

Lessees can gain freehold title over part of the land under a voluntary process known as tenure review.  Under this process, areas of the lease can be restored to full Crown ownership, usually as conservation land managed by the Department of Conservation.  In February 2019 the government announced an end to tenure review because it has resulted in more intensive farming and subdivision on the 353,000 hectares of land which has been freeholded, affecting the landscape and biodiversity of the land.  With tenure review ending, the remaining Crown pastoral lease properties, currently 171 covering 1.2 million hectares of Crown pastoral land, will continue to be managed under the regulatory system for Crown pastoral lands. In April 2019 there had been 2,500 submissions for feedback to the government on the future management of the South Island high country. 

The types of land ownership in New Zealand are: Freehold title, Leasehold title, Unit title, Strata title, and cross-lease.  The majority of land in New Zealand is freehold. LINZ holds property title records that show a property’s proprietors, legal description and the rights and restrictions registered against the property title, such as a mortgage, easement or covenant.  A title plan is the plan deposited by LINZ when the title was created. Property titles do not contain information about the value of the property.

No land tax is payable, but the local government authorities are empowered to levy taxes, termed as “rates,” on all properties within their territorial boundaries.  Rates are assessed on either assessed annual rental value, land value or capital value. There is no stamp duty in New Zealand. 

In general, New Zealand requires GST be returned on all land sales and claimed on all land purchases unless the property is used solely for making “exempt supplies” (such as residential accommodation), or the GST is charged at 0 percent or “zero-rated.”  When land is transferred between GST-registered parties, the transaction must be zero-rated for GST, provided that the purchaser intends to use the land to make taxable supplies and the land is not intended to be used as a principal place of residence by the purchaser.  Where the transaction is zero-rated, no GST would be added to the sale price, no GST should be returned by the vendor, and no GST should be claimed by the purchaser. The purchaser may be required to account for GST if the property will be partly used for making exempt supplies. 

When commercial property is sold, GST may need to be added to the purchase price.  A purchaser who pays the tax may be entitled to a refund. A mortgagee sale is subject to GST if the mortgagor would be liable to pay GST on the sale.

While there is no comprehensive capital gains tax in New Zealand, profits made on the sale of any asset (including land) is assessable as income, where the IRD determines the asset is purchased as part of a dealing or investment business, or for the purpose of resale, or where there was an undertaking or scheme entered into for the purpose of making a profit.  Profits from the sale of land are taxable, where construction, development or subdivision is involved, and if a consent or zoning change has or will benefit the land, and if the land is sold within ten years. For residential land the requirement is five years.

Mortgages and liens are available in New Zealand.  There is no permanent government policy as such that discriminates lending to foreigners.  However the Reserve Bank of New Zealand (RBNZ) introduced a macro-prudential tool as a means to curb rising house prices.  In October 2013, the RBNZ introduced a series of temporary loan-to-valuation ratio restrictions on banks’ lending to (domestic and foreign) investors and owner-occupiers wanting to purchase residential housing. 

During 2018, the RBNZ started a process of easing these restrictions due to the new Government’s housing market policies.  From January 1, 2019, banks are limited to lending residential investors who have less than a 30 percent deposit, to be no more than 5 percent of their total new lending in that category; and no more than 20 percent of banks’ new lending to owner-occupiers who have a deposit of less than 20 percent. 

A registered memorandum of mortgage is the usual form used to create a lien on real estate to secure an indebtedness.  There is no mortgage recording or mortgage tax in New Zealand. However from October 22, 2018 all non-resident purchasers must complete a Residential Land Statement declaring they are eligible to buy residential property in New Zealand, before signing any sale and purchase agreement:  https://www.linz.govt.nz/overseas-investment/information-for-buying-or-building-one-home-live#statement. Failure to do so could incur significant penalties under the Overseas Investment Act. 

When a lien secured by real property is foreclosed, there is a statutory process that must be followed which overrides the mortgage form itself as well as legal costs relating to foreclosing a lien on real property.  There are no restrictions on foreign lenders securing their advances over real estate in New Zealand. Nevertheless, on any mortgagee sale, lenders need to comply with the requirements concerning foreign ownership of land if the buyer or the land falls within certain criteria.

There are some statutory controls imposed on the amount of interest which may be charged on a loan secured by real property (and private and government agencies that monitor and report on interest charges) that ensure that interest rates and costs are not excessive or illegal.  There are no laws that that restrict the ability to make a borrower or guarantor personally liable for indebtedness secured by real property.

Property legally purchased but unoccupied can generally not revert to other owners.  The Land Transfer Act 2017 repealed the Land Transfer Amendment Act 1963 which previously outlined the process for cases of “adverse possession” or “squatters’ rights.”  Section 155 of the Land Transfer Act 2017 allows a person to apply to the Registrar-General of Land for a record of title in that person’s name as owner of the freehold estate in land if: a record of title has already been created for the estate; the person has been in adverse possession of the land for a continuous period of at least 20 years and continues in adverse possession of the land; and the possession would have entitled the person to apply for a title to the freehold estate in the land if the land were not subject to the Act.  The section applies to diverse instances, such as the case where an entire section is being occupied by someone unconnected to the registered owner, or in the case of a “boundary adjustment” between two properties. Section 159 of the Act lists instances when applications may not be made, such as land owned by the Crown, Māori land, or land occupied by the applicant – where the applicant owns an adjoining property – because of a mistaken marking of a boundary.

Intellectual Property Rights

New Zealand has a generally strong record on intellectual property rights (IPR) protection and is an active participant in international efforts to strengthen IPR enforcement globally.  It is a party to nine World Intellectual Property Organization (WIPO) treaties and participates in the Trade Related Aspects of Intellectual Property Rights (TRIPS) Council. 

In March 2019, New Zealand entered into force the WIPO Copyright Treaty, the WIPO Performances and Phonograms Treaty, the Budapest Treaty and the Berne Convention.  It implemented the Madrid Treaty in December 2012, allowing New Zealand companies to file international trademarks through the Intellectual Property Office of New Zealand (IPONZ).  Since 2013, an online portal hosted on the IPONZ and IP Australia websites has allowed applicants to apply for patent protection simultaneously in Australia and New Zealand with a single examiner assessing both applications according to the respective countries’ laws.

New Zealand is a party to the multilateral ACTA, which is aimed at establishing a comprehensive international framework that will assist parties to the agreement in their efforts to effectively combat the infringement of intellectual property rights, in particular the proliferation of counterfeiting and piracy.

Changes to copyright regulations bestow copyright protection in New Zealand for nationals of countries which have recently joined the WTO, the Berne Convention for the Protection of Literary and Artistic Works, and the Universal Copyright Treaty from January 2017.  The change is reciprocal protecting New Zealand copyright owners in those countries.

There are about ten statutes that provide civil and criminal enforcement procedures for IPR owners in New Zealand.  The Copyright Act 1994 and the Trade Marks Act 2002 impose civil liability for activities that constitute copyright and trademark infringement.  Both Acts also contain criminal offences for the infringement of copyright works in the course of business and the counterfeiting of registered trademarks for trade purposes.  The Fair Trading Act 1986 imposes criminal liability for the forging of a trademark, falsely using a trademark or sign in a way that is likely to mislead or deceive, and trading in products bearing misleading and deceptive trade descriptions.

The government is reviewing the Copyright Act 1994 in light of significant technological changes since the last review in 2004.   . New Zealand had agreed to tougher IPR and copyright protections under the TPP agreement, but the CPTPP suspended some of the original TPP copyright obligations, such as increasing rights protection from 50 years to 70 years.  In November 2018, MBIE, which administers the Act, released a 135-page Issues Paper which summarizes the operation of the New Zealand copyright regime, its shortcomings, and the wide range of issues that need to be addressed. 

New Zealand has amended some legislation to comply with obligations under CPTPP.  Customs New Zealand has had its powers to act on its own initiative to temporarily detain imported or exported goods that it suspects infringe copyright or trademarks.  Previous policy to cover the infringing label or sticker, or simply removing the infringing part such as a logo will no longer be sufficient. Customs New Zealand now has authority to inspect and detain any goods in its control suspected of being pirated.  The New Zealand High Court has been empowered to award additional damages for trade mark infringement, and unless exceptional circumstances exist, the courts must order the destruction of counterfeit goods. This will be in addition to the existing availability of compensatory damages under the Trade Marks Act 2002. 

New Zealand will retain its existing copyright term for creative works – and minimum required under the Berne Convention – of the life of the author plus 50 years after their death for films, sound recordings, books, screenplays, music, lyrics and artistic works.  New Zealand will not be required to provide stronger protection for technological protection measures (TPMs) which act as “digital locks” to protect copyright work, nor provide stronger protection for rights management information; nor alter its internet service provider liability provisions for copyright infringement. 

The Copyright Tribunal hears disputes about copyright licensing agreements under the Act and applications about illegal uploading and downloading of copyrighted work.  The Copyright (Infringing File Sharing) Amendment Act 2011 put in place a three notice regime, issuing alleged infringers up to three warnings within a nine month period, before ruling that infringement has occurred.  The legislation enables copyright owners to seek the suspension of the internet account for up to six months through the District Court.

The CPTPP will require New Zealand to provide a 12-month grace period for patent applicants.  Under this requirement, inventors will not be deprived of their ability to be granted a patent in New Zealand if an inventor makes their invention public, provided the inventor files the patent application within 12 months of disclosure.  This is important for many New Zealand businesses who will now not lose the right to patent their invention through accidental disclosure. In addition, pharmaceutical patent holders (who have provided their details to Medsafe) will have to be informed of someone seeking to use their drug’s clinical trial data before marketing approval is granted. 

The Smoke-free Environments (Tobacco Standardized Packaging) Amendment Act passed in September 2016, and from June 2018, all tobacco packets will be the same standard dark brown/green background color as Australia.  New pictures and health warnings will be enlarged to cover at least 75 percent of the front of tobacco packs, and all tobacco company marketing imagery will be removed. The Smoke-free Environments Regulations 2017 standardize the appearance of tobacco manufacturers’ brand names. 

In November 2018, the Government announced plans to regulate vaping and smokeless tobacco products in New Zealand.  An amendment to the Smoke-free Environments Act 1990 is expected to be passed this year limit the areas people can use such products, and change the way they are displayed in retail stores, similar to other tobacco products.  The government has indicated a public consultation process will occur before an amendment is passed.

New Zealand meets the minimum requirements of the TRIPS Agreement, providing patent protection for 20 years from the date of filing.  The Patents Act 2013 brought New Zealand patent law into substantial conformity with Australian law. Consistent with Australian patent law, an ‘absolute novelty’ standard is introduced as well as a requirement that all applications be examined for “obviousness” and utility.  The Patents Act stops short of precluding from patentability all computer software and has a provision for patenting “embedded software.”

New Zealand currently provides data exclusivity of five years from the date of marketing approval for a new pharmaceutical under Section 23B of the Medicines Act 1981.  Data protection on pharmaceuticals applies from the date of marketing approval, regardless of whether it is granted before or after the expiration of the 20-year patent.  Under section 74 of the Agricultural Compounds and Veterinary Medicines Act 1997 data protection for non-innovative agricultural and veterinary products (products including reformulations and new uses), and from November 2016 data protection is available for ten years for innovative trade name products. 

From July 2017 New Zealand wine and spirit makers can register the geographical origins of their products under the Geographical Indications (Wine and Spirits) Registration Act 2006 .  The Act and its amendments are administered by IPONZ and aims to protect wine and spirit markers’ products, to allow the registration of New Zealand geographical indications overseas, and to enforce action for falsely claiming a product comes from a certain region.

.  The most commonly intercepted item by Customs New Zealand is fake toys, according to an Official Information Act request  .   Electronics were the second most commonly intercepted item, followed by clothing and accessories.  Most items originate from China, the United Kingdom, Vietnam, and Hong Kong.

New Zealand is not on the USTR’s Special 301 report list.

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

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 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. The NZASB’s accounting standards are based largely on international accounting standards, and generally accepted accounting principles.

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 2017 the market capitalization of listed domestic companies in New Zealand was 46 percent of GDP, at USD 95 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 has exceeded NZD 1 trillion (USD 680 billion) since in 2016. Between December 2015 and December 2018, the value of residential property increased 28 percent to NZD 1.12 trillion (USD 762 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.

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 1.1 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 smaller finance companies.

New Zealand’s banking system relies on offshore wholesale funding markets as a result of low levels of domestic savings.  Banks are able to 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 report the total assets of registered banks to be about NZD 556 billion (USD 378 billion) as of March 2019.  They estimate the amount of non-performing loans to be about NZD 3.7 billion (USD 2.5 billion) for December 2018. Approximately 0.7 percent of bank loans are non-performing.

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. 

All New Zealand’s banks have more tier 1 capital than the current minimum with the RBNZ estimating it averages about 12 percent.  The RBNZ expect with better capitalized banks, will improve the strength of the banking system and make bank failures less frequent.  The RBNZ admit higher capital requirements could make it more expensive for New Zealanders to borrow. A higher capital ratio could impact the RBNZ monetary policy rate and the New Zealand currency.

The RBNZ acknowledge the proposals take New Zealand to the higher end of international norms, but cite Basel Committee estimates that will put New Zealand in the third quartile.  The RBNZ has estimated the extra capital the big four Australian-owned banks will need to raise to meet its current proposals would be about NZD 20 billion (USD 13.6 billion).

Rating agency risk assessments of the large New Zealand banks is heavily influenced by expectations of support from the Australian parent banks.  While the implicit support of the parent banks is valuable, it can also present risk if they are placed on negative outlook. Ratings agency Standard & Poor’s (S&P) have said the current RBNZ proposals could place a burden on the Australian parents of New Zealand’s four major banks because the potential implications are material and complex due to cross-border regulatory issues.  Banks would also need to replace capital if they implement the additional proposal to exclude quasi-equity instruments, usually fixed interest securities that can be converted to equity if a bank gets into difficulties, from qualifying as tier 1 capital. S&P are skeptical that additional capital requirements would improve the banks’ credit ratings because they equalize their ratings on the New Zealand banks with the credit profiles of their respective parent groups, and the parent banks are highly likely to provide timely financial support for the New Zealand major banks, if needed.  Further the proposals are unlikely to affect the parent bank ratings but they will likely need to strengthen their consolidated group capital to meet RBNZ requirements. If ratings agencies do not raise their assessment, then the improved “safety” of New Zealand banks are unlikely to get access to cheaper credit as suggested.

Similarly, Fitch Ratings called the proposals radical and highly conservative relative to international peers.  But were in favor of banks’ increasing their resilience to potential threats to the stability of the financial system.

While the Zealand banking system has one of the lowest ratios of non-performing loans to gross lending in the OECD, macro prudential measures introduced in October 2013 have introduced loan-to-value ratio restrictions, defined as those with loans greater than 80 percent of value.  In the intervening years these tools have been tweaked by the RBNZ to reduce banks’ risk exposure during an escalation of house prices and debt, and several banks announced they would at least temporarily cease lending to foreigners for residential property purchases.

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. In 2018 there were over 2.8 million KiwiSaver members, and the amount invested in KiwiSaver schemes is estimated to be NZD 50 billion (USD 34 billion).

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. The cap for workers has gradually increased over time from 5,000 when the RSE was established in 2007, to 12,850 in November 2018.  Other people who use remittance services include recently resettled refugees, and other migrant workers particularly in the hospitality and construction sectors. 

The tightening of anti-money laundering and combatting terrorism financing laws has 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.  From 2018 the law has been extended to lawyers, conveyancers, accountants, and bookkeepers, and from January 2019 it has been extended to realtors.

Financial institutions have had to comply with the AML/CFT Act since 2013 (Phase 1 sectors remitters, trust and company service providers, casinos, payment providers, lenders and other financial 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 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 2017, the Tongan Development Bank in partnership with the World Bank Group launched a remittance facility, the ‘Ave Pa’anga Pau voucher, for use between New Zealand and Tonga:  http://www.avepaanga.co.nz/. The voucher is purchased online in New Zealand and redeemed or remitted to a bank account in Tonga. The Tonga Development Bank receives the funds only via electronic payments in New Zealand before disbursing them in Tonga using the liquidity obtained by importers.

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.

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 initial 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 10.1 billion) to the fund, after which it temporarily halted contributions during the GFC. In December 2017 the newly elected government resumed contributions, with the Fund receiving an estimated NZD 500 million (USD 340 million) payment in the year to June 2018.  Planned contributions will be NZD 1 billion (USD 680 million) in the year to June 2019, NZD 1.5 billion (USD 1 billion) to June 2020, and NZD 2.2 billion (USD 1.5 billion) to June 2021. 

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.

In February 2019, the fund was valued at NZD 41.2 billion (USD 28 billion) of which 45.8 percent was in North America, 19.3 percent in Europe, 13.9 percent in New Zealand, 10.2 percent in Asia excluding Japan, 6.1 percent in Japan, and 2.7 percent in Australia.

Following an announcement in October 2016 the NZSF significantly reduced its exposure to both fossil fuel reserves and carbon emissions, divesting assets of value USD 690 million from 297 companies by August 2017.  The NZSF claims its global passive equity portfolio – about 40 per cent of the total fund – is “low-carbon.” However remaining investments include at least 29 airlines and over 300 companies within the oil and gas sector and the metals and mining sector.

In April 2019, 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 prohibited under recently enacted New Zealand law.  For several years the fund has explicitly excluded companies that are directly involved in the manufacture of cluster munitions, the manufacture or testing of nuclear explosive devices, the manufacture of anti-personnel mines, the manufacture of 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.

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, 2018 New Zealand State-Owned Enterprises held NZD 61.7 billion (USD 42 billion) assets, earned NZD 16.9 billion (USD 11.5 billion) in revenue and yielded an operating gain of NZD 861 million (USD 585 million).  Crown entities held NZD 150 billion (USD 102 billion) assets, earned NZD 40.5 billion (USD 27.5 billion) and yielded an operating loss of NZD 474 million (USD 322 million). Air New Zealand made the largest net gain for the financial year of NZD 628 million (USD 427 million).

Most of New Zealand’s SOEs are concentrated in the energy and transportation sectors.  Private enterprises are allowed to compete with public enterprises under the same terms and conditions with respect to markets, credit, and other business operations.  For example, Contact Energy, a publicly listed company, is allowed to sell energy in direct competition with Meridian Energy Limited, which is an SOE. Under SOE Continuous Disclosure Rules, SOEs are required to continuously report on any matter that may materially affect their commercial value.

New Zealand has a history of bailing out SOEs, including Air New Zealand, and the Bank of New Zealand.  In 2013 it loaned funds at a lower than market rate to coal producer Solid Energy which ultimately went into receivership.  As mentioned previously, the government also bailed out a private non-bank financial company in 2012 to prevent catastrophic losses to local investors.

Overseas investors can apply to the OIO for consent to invest in an SOE or purchase Crown land in cases of sensitive land and significant business interests.  When the government sold part of its ownership – not through the OIO – in Air New Zealand and three energy companies in 2014, overseas investors were able to purchase shares on the secondary market, after an initial offering to New Zealand investors.  LINZ manages over 2 million hectares of land on behalf of the Crown, and manages land and property behalf of other Crown agencies. The Crown land and property data is available through the LINZ Data Service and identifies state coal and railway reserves, pastoral leases, Crown-owned Canterbury red zone properties and other land managed by LINZ.

Privatization Program

In 2019 the Treasury established the Infrastructure Transaction Unit to improve the quality of infrastructure procurement and delivery in New Zealand.  In addition to supporting major infrastructure projects, the unit has been tasked to coordinate Treasury’s Public Private Partnership (PPP) Program. The PPP manages long term contracts for the delivery of a specific service, where the provision of that service requires the construction of a new asset, or the enhancement of an existing asset, that is financed from private sources on a non-recourse basis and where full legal ownership of the asset is retained by the Crown.

New Zealand governments have embarked on several privatization programs since the 1980s, as a means to reduce government debt, move non-strategic businesses to the private sector to improve efficiency, and raise economic growth.  More recent projects include the construction of state highways, schools, and prisons: https://treasury.govt.nz/information-and-services/nz-economy/infrastructure/nz-infrastructure-commission/infrastructure-transactions-unit/public-private-partnerships/projects .

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. 

After Spark was privatized in 1990, the government retained a Kiwishare obligation of at least 10 percent due in large part to its emergency services.  Since Chorus demerged from Spark, only the former has a restriction on foreign ownership as mentioned in the earlier section.

The Treasury runs a transparent PPP procurement process that includes developing a business case, an Expression of Interest (EOI) stage to short-list bidders to participate in the Request for Proposals Stage, followed by a negotiation during the preferred bidder stage:  https://treasury.govt.nz/information-and-services/nz-economy/infrastructure/nz-infrastructure-commission/infrastructure-transactions-unit/public-private-partnerships/guidance/procurement-process . The procuring entity is required to publish the invitation for EOI on the Government Electronic Tenders Service (https://www.gets.govt.nz/ExternalIndex.htm ) or appropriate equivalent. 

The New Zealand government actively promotes corporate social responsibility (CSR), which is widely practiced throughout the country.  There are a number of New Zealand NGOs that are dedicated to facilitating and strengthening CSR, including the New Zealand Business Council for Sustainable Development, the Sustainable Business Network, and the American Chamber of Commerce in New Zealand. 

New Zealand is committed to both the OECD due diligence guidance for responsible supply chains of minerals from conflict-affected and high-risk areas, and the OECD Guidelines for Multinational Enterprises.  Multi-national businesses are the main focus, such as a New Zealand company that operates overseas, or a foreign-owned company operating in New Zealand. The guidance can also be applied to businesses with only domestic operations that form part of an international supply chain.  Individuals wishing to complain about the activity of a multi-national business that happened in another country, will need to contact the National Contact Points of that country. In New Zealand, MBIE is the NCP to carry out the government’s responsibilities under the guidelines.

To help businesses meet their responsibilities, MBIE has developed a short version of the guidelines to assess the social responsibility ‘health’ of enterprises, and for assessing the actions of governments adhering to the guidelines.  If further action is needed, MBIE provide resolution assistance, such as mediation, but do not adjudicate or duplicate other tribunals that assess compliance with New Zealand law. MBIE is assisted by a liaison group that meets once a year, with representatives from other government agencies, industry associations, and NGOs.

U.S. firms have not identified corruption as an obstacle to investing in New Zealand.  New Zealand is renowned for its efforts to ensure a transparent, competitive, and corruption-free government procurement system.  Stiff penalties against bribery of government officials as well as those accepting bribes are strictly enforced. The Ministry of Justice provides guidance on its website for businesses to create their own anti-corruption policies, particularly improving understanding of the New Zealand laws on facilitation payments.

New Zealand consistently achieves top ratings in Transparency International’s Perceptions of Corruption Perception Index.  In 2018, Transparency International ranked New Zealand 2nd out of 180 countries and territories, scoring 87 out of 100. Transparency International noted that New Zealand is one of several top ranking countries that conduct “moderate and limited enforcement of foreign bribery.”  Their 2018 Exporting Corruption report recommended the removal of the facilitation payment exception for the bribery of foreign public officials, improve whistleblower protection, introduce requirements for auditors to disclose suspicions of foreign bribery, establish comprehensive mechanisms to ensure transparency of New Zealand trust companies, such as public registers that include information on beneficial ownership, fund and develop active investigation mechanisms, remove the requirement that the Attorney General consent to foreign bribery prosecutions, introduce a positive requirement for commercial organizations to prevent foreign bribery:  https://www.transparency.org.nz/new-zealand-needs-increase-efforts-fight-foreign-bribery/. Transparency International New Zealand have listed examples of corruption occurring in the country over the past decade: https://www.transparency.org.nz/newsletter/transparency-times-january-2019/.

New Zealand joined the WTO Government Procurement Agreement (GPA) in 2012, citing benefits for exporters, while noting that there would be little change for foreign companies bidding within New Zealand’s totally deregulated government procurement system.  New Zealand’s accession to the GPA, came into effect in August 2015. New Zealand supports multilateral efforts to increase transparency of government procurement regimes. New Zealand also engages with Pacific island countries in capacity building projects to bolster transparency and anti-corruption efforts.  CPTPP contains a chapter on Transparency and Anti-Corruption which affirms parties’ commitments to eliminate bribery and corruption in international trade and investment, and outlines measures parties can implement to combat corruption.

New Zealand Government Procurement and Property (NZGPP) delivers MBIE’s procurement and property functional leadership objectives including the management of the Government Electronic Tenders Service (GETS) platform.  The NZGPP sets out the Government Rules of Sourcing which must be followed by New Zealand government departments, the Police, the Defense Force, and most Crown entities. All other New Zealand government agencies are encouraged to follow the Rules.  A range of additional mechanisms are used to bind agencies to applying the rules, including the Whole of Government Direction under section 107 of the Crown Entities Act 2004. Information on the rules is available at the MBIE site under: www.procurement.govt.nz

Internationally, New Zealand has signed and ratified the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.  In October 2006, the OECD examined New Zealand for compliance with the convention. New Zealand has also signed and ratified the UN Convention against Transnational Organized Crime.  In 2003, New Zealand signed the UN Convention against Corruption and ratified it in December 2015.

The legal framework for combating corruption in New Zealand consists of domestic and international legal and administrative methods.  Domestically, New Zealand’s criminal offences related to bribery are contained in the Crimes Act 1961 and the Secret Commissions Act 1910. 

The New Zealand government has a strong code of conduct, the Standards of Integrity and Conduct, which applies to all State Services employees and is rigorously enforced.  The Independent Police Conduct Authority considers complaints against New Zealand Police and the Office of the Judicial Conduct Commissioner was established in August 2005 to deal with complaints about the conduct of judges.  New Zealand’s Office of the Controller and Auditor-General and the Office of the Ombudsman take an active role in uncovering and exposing corrupt practices. The Protected Disclosures Act 2000 was enacted to protect public and private sector employees who engage in “whistleblowing.”

The Ministry of Justice is responsible for drafting and administering the Anti-Money Laundering and Countering Financing of Terrorism (AML/CFT) legislation and regulations.  It also provides guidance online to companies and NGOs in how to combat corruption and bribery. The New Zealand Police Financial Intelligence Unit collates information required under AML/CFT legislation.

The first phase of the AML/CFT Act 2009 came into full effect in June 2013.  The AML/CFT Amendment Act 2015 strengthened the foreign bribery offence to respond to recommendations made by the OECD Working Group on Bribery, and increased penalties for bribery and corruption in the private sector to bring them into line with public sector bribery offences.

The second phase of the AML/CFT will be enacted in 2018 after the Anti-Money Laundering and Countering Financing of Terrorism Amendment Act 2017 was passed in August 2017.  It will extend the 2009 Act to cover lawyers, conveyancers, accountants, real estate agents, and sports and racing betting. Businesses that deal in certain high-value goods, such as motor vehicles, jewelry and art, will also have obligations when they accept or make large cash transactions.

Businesses will be allotted time to comply with the Act and compliance costs are estimated to be USD 554 million and USD 762 million over ten years.  The New Zealand Police Financial Intelligence Unit estimate that NZD 1.35 billion (USD 918 million) of domestic criminal proceeds is generated for laundering in New Zealand each year, driven in part by New Zealand’s reputation as a safe and non-corrupt country.

The second phase of the AML/CFT legislation was enacted earlier than planned following a review of New Zealand’s foreign trust regime in 2016.  Following the “Panama Papers” incident in April 2016, an independent inquiry found New Zealand’s tax treatment of foreign trusts to be appropriate, but recommended changes to the regime’s disclosure requirements, which were subsequently legislated to dispel concerns New Zealand was operating as a “tax haven”.  The Taxation (Business Tax, Exchange of Information, and Remedial Matters) Act 2017 amended the Tax Administration Act 1994 for foreign trust registration and disclosure. The changes are intended to deter offshore parties from misusing New Zealand foreign trusts, and reaffirm New Zealand’s reputation as being free of corruption.

In August 2017 the government introduced the Trusts Bill to replace the Trustee Act 1956 and the Perpetuities Act 1964 to make trust law more accessible, clarify and simplify core trust principles and essential obligations for trustees, and preserve the flexibility of the common law to allow trust law to continue to evolve through the courts.  If passed, the Trusts Bill will be the first significant change to New Zealand’s trusts legislation, and will cover all trusts including family trusts and those for corporate structures. It is estimated that there are between 300,000 and 500,000 trusts in New Zealand.

In 2019 members of the Justice Select Committee requested a wider review of the issue of foreign interference through politicized social media campaigns, and from foreign donations to political candidates standing in New Zealand elections.  The inquiry resulted from a standardized review of the 2017 general election and 2016 local body elections. In April 2019, New Zealand intelligence agencies acknowledged political donations as a legally sanctioned form of participation in New Zealand politics, but raised concerns when aspects of a donation is obscured or is channeled in a way that prevents scrutiny of the origin of the donation, with the goal to covertly build and project influence.  The Committee is considering ways New Zealand can improve upon the transparency of the regulatory regimes governing New Zealand elections. The identity of political donors is currently only required for donations above NZD 30,000 (USD 20,400), and allows for donors seeking anonymity to need only split a large donation to fit below the declaration threshold.

Resources to Report Corruption

The Serious Fraud Office and the New Zealand Police investigate bribery and corruption matters.  Agencies such as the Office of the Controller and Auditor-General and the Office of the Ombudsmen act as watchdogs for public sector corruption.  These agencies independently report on and investigate state sector activities.

Serious Fraud Office
P.O.  Box 7124 – Wellesley Street
Auckland, 1141
New Zealand
www.sfo.govt.nz  

Transparency International New Zealand is the recognized New Zealand representative of Transparency International, the global civil society organization against corruption.

Transparency International New Zealand
P.O.  Box 5248 – Lambton Quay
Wellington, 6145
New Zealand
www.transparency.org.nz  

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 New Zealand labor market is experiencing a tightening in labor market conditions with the unemployment rate at historically low levels as the country’s net migration rate has only just started to level off after a prolonged period of record population growth.  The rise in net migration is comprised of international students, professionals, and returning New Zealand citizens. Youth unemployment (age 15-19 years) remains high at around 19.8 percent, compared with the overall rate of 4.2 percent for March 2019. The unemployment rate for those aged 15-24 years is 12.3 percent.

New Zealand operates a Recognized Seasonal Employer Scheme that allows the horticulture and viticulture industry to recruit workers from the Pacific Islands for seasonal work to supplement the New Zealand workforce.  There have been prosecutions and convictions for the exploitation of migrant workers, with reports that the hospitality, agriculture, viticulture, and construction industries are most effected. New Zealand recruitment agencies that recruit workers from abroad must utilize a licensed immigration adviser. 

Immigration advice is regulated under the Immigration Advisers Licensing Act 2007.  The act also established the Immigration Advisers Authority (IAA), the Registrar of Immigration Advisers, and the Immigration Advisers Complaints and Disciplinary Tribunal.  The licensing regime aims to protect consumers and enhance New Zealand’s reputation as a destination for migrants. 

Some foreign migrant workers were reported to have been charged excessive recruitment fees, experienced unjustified salary deductions, nonpayment or underpayment of wages, excessively long working hours, and restrictions on their movement.  Reportedly, some had their passports confiscated and contracts altered.

New Zealand has consistently maintained an active and visible presence in the International Labour Organization (ILO), being a founding member in 1919, and its representatives have attended the annual International Labour Conferences since 1935.  The ILO and the government of New Zealand have collaborated on a number of initiatives, including the elimination of child labor in Fiji, employment creation in Indonesia, the improvement of labor laws in Cambodia, rural development assistance in Timor-Leste, and the RSE Scheme.

In November 2017 the government announced the number of labor inspectorates will increase from 60 to 110 over a three-year period.  Between 2014 and 2017, the number of labor inspectors rose from 41 to 60. By 2020, the government will have added another 50 inspectors, at a cost of about NZD 9 million (USD 6.1 million).  The government seeks to take a more proactive approach to enforcing employment law in New Zealand, because the migrant worker population has increased rapidly in recent years and the resources to protect those workers have not kept up with the increase.

Workers with skills on the immediate lists will find it easier to apply for temporary work visas and, in the case of long-term shortages, resident visas.  However MBIE operates under strict criteria in order for occupations to be listed. Immediate skill shortages exist mainly in the construction, trades, engineering, health, agriculture, and forestry industries.  For more see: https://www.immigration.govt.nz/about-us/policy-and-law/how-the-immigration-system-operates/skill-shortage-lists

The government provides funding for a range of apprentice programs, particularly in the construction trades.  The Building and Construction Industry Training Organization (BCITO) is the largest provider of construction trade apprenticeships in New Zealand.  The BCITO is appointed by the government to develop and implement industry qualifications for the building and construction sector. For more see: https://www.govt.nz/browse/education/training-and-apprenticeships/apprenticeships/

Labor laws are generally well enforced, and disputes are usually handled by the New Zealand Employment Relations Authority.  Its decisions may be appealed in an Employment Court. MBIE is responsible for enforcement of laws governing work conditions.  A number of employment statutes govern the workplace in New Zealand. The most important is the Employment Relations Act (ERA) 2000, which repealed the Employment Contracts Act 1991.  Other key legislation includes the Health and Safety at Work Act 2015, Holidays Act 2003, Minimum Wage Act 1983, the Equal Pay Act 1972, the Parental Leave and Employment Protection Act 1987, and Wages Protection Act 1983.

MBIE provides guidance for employers on minimum standards of employment mandated by law, guidelines to help promote the employment relationship, and optional guidelines that are useful in some roles or industries.  Agreements on severance and redundancy packages are usually negotiated in individual agreements. For more see: https://www.employment.govt.nz/

The ERA requires registered unions to file annual membership returns with the Companies Office.  The Council of Trade Unions estimate total union membership at 407,300 for the December 2018 quarter, representing about 18.8 percent of all employees in New Zealand.  

About 413,800 (19 per cent of all employees in New Zealand) were on a collective agreement, over 1.5 million (69 percent) were on an individual agreement, 118,300 (5.5 percent) had no agreement (which is illegal under local law), and a further 6 percent did not know what kind of employment agreement they had.  By industry, the Health Care, Education, and Public Administration sectors have the highest proportion of union members, followed by Transport, and Manufacturing. Over 2018, union membership grew by 20 percent in Public Administration and Safety, Education grew by 3 percent, Health Care and Social Assistance grew by 4 percent, while Manufacturing fell by 11 percent.

The law provides for the right of workers to form and join independent unions of their choice without previous authorization or excessive requirements, to bargain collectively, and to conduct legal strikes, with some restrictions.  Contractors cannot join unions, bargain collectively, or conduct strike action. Police have the right to organize and bargain collectively, but sworn police officers (excluding clerical and support staff) do not have the right to strike or take any form of industrial action. 

Industrial action by employees who work for providers of key services are subject to certain procedural requirements, such as mandatory notice of a period determined by the service.  New Zealand considers a broader range of key “essential services” than international standards, including: the production and supply of petroleum products; utilities, emergency workers; the manufacture of certain pharmaceuticals, workers in corrections and penal institutions; airports; dairy production; and animal slaughtering, processing, and related inspection services. 

The number of work stoppages has been on a downward trend according to data from MBIE and Statistics NZ.  In 2017 there were six stoppages involving approximately 421 employees totaling 370 person-days of work lost.  This compares to 60 work stoppages in 2005 involving 17,752 employees totaling 30,028 person-days of work lost.  Work stoppages include strikes initiated by unions and lockouts initiated by employers, compiled from the record of strike or lockout forms submitted to MBIE under section 98 of the Employment Relations Act 2000.  The data does not cover other forms of industrial action such as authorized stop-work meetings, strike notices, protest marches, and public rallies. 

Industrial action appears to have increased under the new government during 2018, with some estimates from media sources as high as 70,000 people striking during the year, including nurses, teachers, junior doctors, aged care and support workers, bus drivers, port workers, fast-food workers, retail workers, steel workers, and public servants.  A planned three-day strike in December 2018 by almost 1,000 members of the Air New Zealand engineers union following a pay dispute was canceled. The strike would have disrupted almost 42,000 customers booked to travel on domestic and international flights. In the year to March 2019, public sector and private sector wage inflation both were 2 percent, with Statistics New Zealand saying was the result of collective agreements continuing to push up annual wage inflation, such as the nurses’ collective agreement, which was signed in early August 2018.  Other collective agreements over 2018 included that for the New Zealand Police, and agreements for welfare and social workers. 

The Labour-led government campaigned on a promise to lift the minimum wage to NZD20 (USD 13.60) by April 2021.  From April 1, 2019 the minimum wage for adult employees who are 16 and over and are not new entrants or trainees is NZD 17.70 (USD 12.04) per hour.  The new entrants and training minimum wage is NZD 14.16 (USD 9.63) per hour. In recent years some local government agencies have raised minimum wages for their staff up from the government mandated rate to a “living wage” estimated to be NZD 21.15 (USD 14.38) in 2019.

In December 2018, the government passed the Employment Relations Amendment Bill which aimed to restore employment law when the Labour party last led government in 2008.  The amendments are wide ranging and employers have increased compliance obligations. This includes reinstating minimum standards for rest and meal breaks, allowing union representatives to enter a workplace for the purpose of the union’s business without the consent of the employer, and restricting the 90-day trial – which allowed any employer to dismiss an employee in their first 90-days without reason – to employers with less than 20 employees.  Employers with more than 19 employees can no longer use this trial period provision from May 2019.

The government also campaigned in 2017 on repealing the Employment Relations (Film Production Work) Amendment Bill 2010, which put limits on the ability of workers on film productions to collective bargaining.  Commonly referred to as the “Hobbit law,” the period during which the amendment took effect has seen several large-scale productions filmed in New Zealand. In 2017 New Zealand’s screen industry earned revenue of NZD 3.5 billion (USD 2.4 billion), which was an increase of 8 percent on 2016.  Production and post-production businesses earned revenue of NZD 1.9 billion (USD 1.3 billion), with NZD 792 million (USD 539 million) (42 percent) coming from overseas sources. The Film Industry Working Group established by the government in January 2018, reported back in October with recommendations that include keeping parts of the current law but also allowing contractors to bargain collectively at certain occupation levels. 

New Zealand underwent its most significant workplace health and safety reform leading to the Health and Safety at Work Act 2015 and the formation of the work health and safety regulator WorkSafe New Zealand.  MBIE is the primary policy agency for workplace health and safety.

In December 2017, the government amended the Parental Leave and Employment Protection Act 1987 to increase the duration of parental leave payments in two stages.  From July 1, 2018 parental leave would increase from 18 weeks to 22 weeks, and from July 1, 2020 a further increase to 26 weeks.

The New Zealand government has an adequate labor inspectorate system to identify and remediate labor violations and hold violators accountable.  The MBIE Labor Inspectorate investigates and prosecutes unfair labor practices, such as instances of forced or child labor, and the harassment or dismissal of union members.  Employers who breach employment standards law banned from recruiting further migrant workers. Employers who have incurred an employment standards-related penalty will be banned from recruiting migrant labor for a term ranging from six months to two years, depending on the severity of the case.  For more: https://www.employment.govt.nz/resolving-problems/steps-to-resolve/labour-inspectorate/

The Health and Safety at Work Act 2015 sets out the health and safety duties for work carried out by a New Zealand business.  The Act contains provisions that affect how duties apply where the work involves foreign vessels. These provisions take account of the international law principle that foreign vessels are subject to the law that applies in the flag state they are registered under.  Generally New Zealand law does not apply to the management of a foreign-flagged vessel, but does apply to a New Zealand business that does work on that vessel. Two exceptions when the law does apply, if the New Zealand business is operating a foreign-flagged vessel under a “demise charter” arrangement, or when the foreign flagged vessel is operating between New Zealand and a workplace in the New Zealand exclusive economic zone or on the continental shelf; and that workplace is carrying out an activity associated with mineral extraction (e.g.  a drilling platform or fixed ship) that is regulated under the Exclusive Economic Zone (Environmental Effects) Act 2012 or the Crown Minerals Act 1991.

The Fisheries (Foreign Charter Vessels and Other Matters) Bill 2014 has required all foreign charter fishing vessels to reflag to New Zealand and operate under New Zealand’s full legal jurisdiction since May 2016.  The legislation was part of a range of measures that followed a Ministerial inquiry in 2012 into questionable safety, labor and fishing practices on some foreign-owned vessels. Other measures the government introduced include: compulsory individual New Zealand bank accounts for crew members; observers on all foreign-owned fishing vessels; and independent audits of charter parties to ensure crew visa requirements – including wages – are being adhered to.

In March 2017, the New Zealand government’s ratification of the ILO’s Maritime Labor Convention (MLC) came into effect.  While New Zealand law is already largely consistent with the MLC, ratification gives the Government jurisdiction to inspect and verify working conditions of crews on foreign ships in New Zealand waters.  More than 99 per cent of New Zealand’s export goods by volume are transported on foreign ships. About 890 foreign commercial cargo and cruise ships visit New Zealand each year.

In December 2017, Parliament passed an amendment to the Maritime Transport Act 1994 to implement the intergovernmental International Oil Pollution Compensation’s Supplementary Fund Protocol, 2003.  Accession to the Fund gives New Zealand access to compensation in the event of a major marine oil spill from an oil tanker, and exercises New Zealand’s right to exclude the costs of wreck removal, cargo removal and remediating damage due to hazardous substances from liability limits.  Accession to the Protocol was prompted in part by New Zealand’s worst maritime environmental disaster in October 2011 when a Greek flagged cargo ship ran aground creating a 331 ton oil spill resulting in NZD 500 million (USD 340 million) in clean-up costs.

As an OECD member country and developed nation, New Zealand is not eligible for OPIC programs.  Although the New Zealand government does not provide OPIC-like services to encourage New Zealand investment in developing countries, New Zealand is a member of the Multilateral Investment Guarantee Agency (MIGA).  It also has an export insurance program administered under the New Zealand Export Credit Office (NZECO) within the New Zealand Treasury. Its purpose is to support the internationalization of New Zealand exporters through the provision of trade credit insurance and financial guarantees that cover a range of political and commercial risks associated with doing international business.  NZECO’s financial guarantees and insurance policies are fully backed by the New Zealand Government through the Minister of Finance. The maximum aggregate liability under the scheme is NZD 740 million (USD 503 million).

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

* 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 2017 was released in July 2018.   Statistics New Zealand data available at www.stats.govt.nz  

Table 3: Sources and Destination of FDI

Table 4: Sources of Portfolio Investment

Economic Officer
U.S. Embassy Wellington
PO Box 1190
Wellington 6140
New Zealand
+64-4-462-6000

Policies Towards Foreign Direct Investment

With the exception of a heavily protected agricultural sector, foreign investment into Switzerland is generally not hampered by significant barriers, with no reported discrimination against foreign investors or foreign-owned investments.  Incidents of trade discrimination do exist, for example with regards to agricultural goods such as bovine genetics products. Some city and cantonal governments offer access to an ombudsman, who may address a wide variety of issues involving individuals and the government, but does not focus exclusively on investment issues.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign and domestic enterprises may engage in various forms of remunerative activities in Switzerland and may freely establish, acquire, and dispose of interests in business enterprises in Switzerland.  There are, however, some investment restrictions in areas under state monopolies, including certain types of public transportation, postal services, alcohol and spirits, aerospace and defense, certain types of insurance and banking services, and the trade in salt.  Restrictions (in the form of domicile requirements) also exist in air and maritime transport, hydroelectric and nuclear power, operation of oil and gas pipelines, and the transportation of explosive materials. Additionally, the following legal restrictions apply within Switzerland:

Corporate boards: The board of directors of a company registered in Switzerland must consist of a majority of Swiss citizens residing in Switzerland; at least one member of the board of directors who is authorized to represent the company (i.e., to sign legal documents) must be domiciled in Switzerland.  If the board of directors consists of a single person, this person must have Swiss citizenship and be domiciled in Switzerland. Foreign controlled companies usually meet these requirements by nominating Swiss directors who hold shares and perform functions on a fiduciary basis. Mitigating these requirements is the fact that the manager of a company need not be a Swiss citizen and, with the exception of banks, company shares can be controlled by foreigners.  The establishment of a commercial presence by persons or enterprises without legal status under Swiss law requires an establishment authorization according to cantonal law. The aforementioned requirements do not generally pose a major hardship or impediment for U.S. investors.

Hostile takeovers: Swiss corporate shares can be issued both as registered shares (in the name of the holder) or bearer shares.  Provided the shares are not listed on a stock exchange, Swiss companies may, in their articles of incorporation, impose certain restrictions on the transfer of registered shares to prevent hostile takeovers by foreign or domestic companies (article 685a of the Code of Obligations).  Hostile takeovers can also be annulled by public companies; however, legislation introduced in 1992 made this practice more difficult.  Public companies must cite in their statutes significant justification (relevant to the survival, conduct, and purpose of their business) to prevent or hinder a takeover by a foreign entity.  Furthermore, public corporations may limit the number of registered shares that can be held by any shareholder to a percentage of the issued registered stock. In practice, many corporations limit the number of shares to 2-5 percent of the relevant stock.  Under the public takeover provisions of the 2015 Federal Act on Financial Market Infrastructures and Market Conduct in Securities and Derivatives Trading and its 2019 amendments, a formal notification is required when an investor purchases more than 3 percent of a Swiss company’s shares.  An “opt-out” clause is available for firms which do not want to be taken over by a hostile bidder, but such opt-outs must be approved by a super-majority of shareholders and must take place well in advance of any takeover attempt.

Banking: Those wishing to establish banking operations in Switzerland must obtain prior approval from the Swiss Financial Market Supervisory Authority (FINMA), a largely independent agency, administered under the Swiss Federal Department of Finance.  FINMA promotes confidence in financial markets and works to protect customers, creditors, and investors. FINMA approval of bank operations is generally granted if the following conditions are met: reciprocity on the part of the foreign state; the foreign bank’s name must not give the impression that the bank is Swiss; the bank must adhere to Swiss monetary and credit policy; and a majority of the bank’s management must have their permanent residence in Switzerland.  Otherwise, foreign banks are subject to the same regulatory requirements as domestic banks.

Banks organized under Swiss law must inform FINMA before they open a branch, subsidiary, or representation abroad.  Foreign or domestic investors must inform FINMA before acquiring or disposing of a qualified majority of shares of a bank organized under Swiss law.  If exceptional temporary capital outflows threaten Swiss monetary policy, the Swiss National Bank, the country’s independent central bank, may require other institutions to seek approval before selling foreign bonds or other financial instruments.  On December 20, 2008, government deposit insurance of individual current accounts held in Swiss banks was raised from CHF 30,000 to CHF 100,000.

Insurance: A federal ordinance requires the placement of all risks physically situated in Switzerland with companies located in the country.  Therefore, it is necessary for foreign insurers wishing to provide liability coverage in Switzerland to establish a subsidiary or branch in-country.

U.S. investors have not identified any specific restrictions that create market access challenges for foreign investors.

Other Investment Policy Reviews

The World Trade Organization’s (WTO) September 2017 Trade Policy Review of Switzerland and Liechtenstein includes investment information.  Other reports containing elements referring to the investment climate in Switzerland include the OECD Economic Survey of November 2017.

• Link to the WTO report: https://www.wto.org/english/tratop_e/tpr_e/tp_rep_e.htm#bycountry  

• Link to the OECD reports / papers: https://www.oecd-ilibrary.org/economics/oecd-economic-surveys-switzerland_19990464;jsessionid=174m5wrgvwd7j.x-oecd-live-02  

Business Facilitation

The Swiss government-affiliated non-profit organization Switzerland Global Enterprise (SGE) has a nationwide mandate to attract foreign business to Switzerland on behalf of the Swiss Confederation.  SGE promotes Switzerland as an economic hub and fosters exports, imports, and investments. Larger regional offices include the Greater Geneva-Berne Area (that covers large parts of Western Switzerland), the Greater Zurich Area, and the Basel Area.  Each canton has a business promotion office dedicated to helping facilitate real estate location, beneficial tax arrangements, and employee recruitment plans. These regional and cantonal investment promotion agencies do not require a minimum investment or job-creation threshold in order to provide assistance. However, these offices generally focus resources on attracting medium-sized entities that have the potential to create between 50 and 249 jobs in their region.

References:

• The Swiss government’s online portal (“easygov”) is Switzerland’s online registration website and includes links to the main local interlocutors for business related questions: https://www.easygov.swiss/easygov/#/  
• Switzerland Global Enterprise connects companies with potential host regions: https://www.s-ge.com/en/investment-promotion  
• Some of the larger promotion offices are:
  • Invest Western Switzerland Area: https://www.ggba-switzerland.ch/  
  • Greater Zurich Area: https://www.greaterzuricharea.com  
  • Basel Area: https://www.baselarea.ch/  

Switzerland has a dual system for granting work permits and allowing foreigners to create their own companies in Switzerland.  Employees who are citizens of the EU/EFTA area can benefit from the EU Free Movement of Persons Agreement. U.S. citizens who are not citizens of an EU/EFTA country and want to become self-employed in Switzerland must meet Swiss labor market requirements.  The criteria for admittance, usually not creating a hindrance for U.S. persons, are contained in the Federal Act on Foreign Nationals (FNA), the Decree on Admittance, Residence and Employment (VZAE) and the provisions of the FNA and the VZAE.

• The Federal Act on Foreign Nationals (FNA) (unofficial English translation): https://www.admin.ch/opc/en/classified-compilation/20020232/index.html  
• Decree on Admittance, Residence and Employment (VZAE) (not available in English): https://www.admin.ch/opc/de/classified-compilation/20070993/index.html  
• Provisions of the FNA and the VZAE (not available in English): https://www.ejpd.admin.ch/dam/data/bfm/rechtsgrundlagen/weisungen/auslaender/weisungen-aug-d.pdf 

Setting up a company in Switzerland requires registration at the relevant cantonal Commercial Registry.  The cost for registering a company is typically USD 1,300 – USD 15,200, depending on the company type. These costs mainly cover the Public Notary and entry into the Commercial Registry.

Other steps/procedures for registration include: 1) placing paid-in capital in an escrow account with a bank; 2) drafting articles of association in the presence of a notary public; 3) filing a deed certifying the articles of association with the local commercial register to obtain a legal entity registration; 4) paying the stamp tax at a post office or bank after receiving an assessment by mail; 5) registering for VAT; and 6) enrolling employees in the social insurance system (federal and cantonal authorities).

The World Bank Doing Business Report 2019 ranks Switzerland 38th in the ease of doing business among the 190 countries surveyed, and  77th in the ease of starting a business, with a  six-step registration process and 10 days required to set up a company.

Outward Investment

While Switzerland does not explicitly promote or incentivize outward investment, Switzerland’s export promotion agency Switzerland Global Enterprise facilitates overseas market entry for Swiss companies through its Swiss Business Hubs in several countries, including the United States.  Switzerland does not restrict domestic investors from investing abroad.

The United States and Switzerland do not have a bilateral investment agreement (BIT).  Switzerland has concluded numerous investment protection treaties with developing and emerging market economies; over 112 BITs and 29 relevant Free Trade Agreements (FTAs) with investment commitments are in force.

See the UNCTAD Investment Policy Hub for a full listing of BITs: https://investmentpolicyhub.unctad.org/IIA/CountryBits/203#iiaInnerMenu  

Currently, Switzerland is in various stages of discussions regarding FTAs with Algeria, Belarus, India, Kazakhstan, Malaysia, MERCOSUR, Russia, Thailand, and Vietnam.

Switzerland concluded an Income Tax Treaty with the United States in 1996.  https://www.irs.gov/businesses/international-businesses/switzerland-tax-treaty-documents  

A 2009 Protocol to this Treaty – ratified by Switzerland but not by the U.S. Senate – has not yet entered into force.

Transparency of the Regulatory System

The Swiss government uses transparent policies and effective laws to foster a competitive investment climate.  Proposed laws and regulations are open for three-month public comment from interested parties, interest groups, cantons, and cities before being discussed within the bicameral parliament.  Proposals may be subject to facultative or automatic referenda that allow Swiss voters to reject or accept the proposals. Only in rare instances – such as the case of the extension of a moratorium until 2021 on planting GMO crops – are regulations reviewed on the basis of political or customer preferences rather than solely on the basis of scientific analysis.

Transparency of Public Finances and Debt Obligations

The Swiss government regularly publishes financial reports that provide transparency regarding planned expenditures and/or expenditures that have been approved and carried out, as well as projected and realized receipts.  Through its annual budgeting