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Iceland

Executive Summary

Iceland is an island country located between North America and Europe in the Atlantic Ocean, near the Arctic Circle with an advanced economy that centers around three primary sectors:  fisheries, tourism, and aluminum production.  Until recently, U.S. investment in Iceland has mostly been centered in the aluminum sector, with Alcoa and Century Aluminum operating plants in Iceland.  However, U.S. portfolio investments in Iceland have been steadily increasing in recent years.  Iceland’s convenient location between the United States and Europe, its high levels of education, connectivity, and English proficiency, and a general appreciation for U.S. products make Iceland a promising market for U.S. companies.  Furthermore, around 700,000 American tourists visited Iceland in 2018.

There is broad recognition within the Icelandic government that foreign direct investment (FDI) is a key contributor to the country’s economic revival after the 2008 financial collapse.  As part of its investment promotion strategy, the Icelandic government operates a public-private agency called “Invest in Iceland” that facilitates foreign investment by providing information to potential investors and promoting investment incentives.  Iceland has identified the following “key sectors” in Iceland; tourism; algae culture; data centers; and life sciences.  Iceland offers incentives to foreign investors in certain industries.

Tourism has been a growing force behind Iceland’s economy in the past decade, with opportunities for investors in high-end tourism, including luxury resorts and hotels.  The number of tourists in Iceland grew by more than 400 percent between 2010 and 2018, reaching more than 2.3 million in 2018.  However, tourism in Iceland contracted in 2019, and the COVID-19 pandemic has had drastic effects on tourism, and the overall economy.  The government has announced measures to bolster the tourism economy and has committed to building out tourism-related infrastructure.

The startup and innovation communities in Iceland are flourishing, with the IT and biotech sectors growing fast.  Iceland’s IT sector spans all areas of the digital economy: data management systems, workflow systems, communications solutions, wireless data systems, mobile systems, Internet solutions, e-commerce content and solutions, gaming, healthcare solutions and fisheries technology systems are all exported to overseas markets.  The Icelandic energy grid derives 99 percent of its power from renewable resources, making it uniquely attractive for energy-dependent industries.  For instance, the data center industry in Iceland is expanding.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2019 11 of 198 http://www.transparency.org/
research/cpi/overview
World Bank’s Doing Business Report 2019 26 of 190 http://www.doingbusiness.org/
en/rankings
Global Innovation Index 2019 20 of 129 https://www.globalinnovationindex.org/
analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2018 N/A http://apps.bea.gov/international/
factsheet/
World Bank GNI per capita 2018 $68,120 http://data.worldbank.org/indicator/
NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

The government of Iceland maintains an open investment climate.  The Act on Incentives for Initial Investments, which came into force in 2015, is intended to “promote initial investment in commercial operations, the competitiveness of Iceland and regional development by specifying what incentives are permitted in respect of initial investments in Iceland, and how they should be used.”  The Act does not apply to investments in airports, energy production, financial institutions, insurance operations, or securities.  For more information, see the English translation of the act: (https://www.stjornarradid.is/library/01–Frettatengt—myndir-og-skrar/ANR/Act-on-incentives-for-initial-investments-in-Iceland-English-2015.pdf ).

As part of its investment promotion strategy, the Icelandic government operates a public-private agency called “Invest in Iceland” that facilitates foreign investment by providing information to potential investors and promotes investment incentives.  There is a debate, however, within Iceland over balancing energy-intensive FDI with the environmental impact associated with certain projects.  That said, energy-intensive industries long dominated by aluminum smelting, have expanded to include silicon production plants and data centers.  For further resources see: (http://www.invest.is/doing-business/incentives-and-support ).

Tourism has been a growing force behind Iceland’s economy in the past decade, with opportunities for investors in high-end tourism, including luxury resorts and hotels.  The number of tourists in Iceland grew by more than 400 percent between 2010 and 2018, reaching more than 2.3 million in 2018.  However, tourism in Iceland contracted in 2019 with visitors falling just below 2 million, which can be largely attributed to the fall of Icelandic budget airline WOW Air.  The COVID-19 pandemic has had drastic effects on tourism, as well as on Iceland’s overall economy, which is expected to contract in 2020.  The sector is facing numerous bankruptcies due to COVID-19 closures and travel bans.  The government has announced measures to bolster the tourism economy and has committed to building out tourism-related infrastructure.

Isavia, a public company that handles the operation and development of Keflavik International Airport is about to embark on $1-2 billion capital works project to expand the airport.  Tenders will be published on Isavia’s website https://utbod.isavia.is/aspx/Home  and https://ted.europa.eu/TED/ .  Projects include extension of buildings, baggage screening and baggage handling systems, self-check in stations, waiting areas and retail/dining areas, check-in areas, bag-drop off areas, security areas, airbridges/gates for remote stands, re-modelling of existing terminal, de-icing platforms, new runway, new taxiway, and a new ATC tower.  However, due to the COVID-19 pandemic, most tenders have been postponed.

The startup and innovation communities in Iceland are flourishing, with IT and biotech startups seeking investors.  Foreign investment in the fisheries sector is restricted, as well as in the energy sector (hydropower and geothermal exploitation rights other than for personal use and energy processing and transportation are limited to Icelandic citizens and legal persons, and individuals and legal persons who reside in the European Economic Area).  The wind energy sector is growing in Iceland, and the legal framework is still being developed for that sector.

Limits on Foreign Control and Right to Private Ownership and Establishment

The 1991 Act on “foreign investments for commercial purposes” limits foreign ownership of fishing rights and fish processing companies (only Icelandic citizens or companies that are controlled by Icelandic citizens and have less than 25 percent foreign shareholders can own or control fishing companies); of hydropower and geothermal exploitation rights other than for personal use and energy processing and transportation (only Icelandic citizens and legal persons, and individuals and legal persons who reside in the European Economic Area (EEA) can hold those rights); and of aviation operators (Icelandic ownership of aviation companies needs to be at least 51 percent, and this does not apply to individuals and legal persons that have EEA citizenship).  The law further stipulates that foreign states, sub-national governments, or other foreign authorities are prohibited from investing in Iceland for commercial purposes, although the Minister of Tourism, Industries, and Innovation may grant exemptions.  The responsibility to inform the relevant ministry of both new investments and investments in companies that the party in question has already invested in lies with the investor, or with the Icelandic company that the foreign individual or entity invested in (this does not apply to EEA citizens or residents).

However, the 1991 Act does not stipulate how foreign investment is screened or monitored by relevant authorities, only that the Minister of Tourism, Industries, and Innovation handles permits and monitors the execution of this legislation.  The Minister can block foreign investments if he/she considers it a “threat to national security or goes against public policy, public safety or public health or if there are serious economic, societal or environmental complications in specific industries or in specific areas, that is likely to persist…”  The law further states that the “Minister has the authority to stop foreign investment in systematically important companies if such investment entails systematic risk.”  If an investment has already taken place, the Minister of Tourism, Industries, and Innovation has the authority to compel the foreign person or entity in question to sell.

Other Investment Policy Reviews

Iceland has been a World Trade Organization (WTO) member since 1995 and a member of GATT since 1968.  The WTO conducted its fifth Trade Policy Review of Iceland in 2017 (https://www.wto.org/english/tratop_e/tpr_e/s361_e.pdf ).

The review notes that “with a small population and limited natural resources, apart from energy and fish, trade remains important but the range of exports is limited to tourism, fish and fish products, and aluminium and products thereof.  Therefore, the country remains vulnerable to shocks, including the appreciation of the ISK, overheating of the economy, and Brexit.  Furthermore, despite uncertainties relating to Brexit, as growth picks up in the EU, Iceland’s main trading partner, opportunities for trade in goods and services should continue to improve.”

The Organization for Economic Cooperation and Development (OECD) and UN Cooperation for Trade and Development (UNCTAD) have not conducted Investment Policy Reviews for Iceland.

Business Facilitation

Businesses are registered with Iceland Revenue and Customs (Skatturinn) (http://www.rsk.is/english/ ).  Applications for the registration of businesses can be filled in online, however some forms are in Icelandic only and it is therefore necessary for foreign businesses to contract a local representative to complete the paperwork.  New business registration, which takes only a few business days to process, is the only hurdle to establishing a company in Iceland.  The website of the Business Registry in Iceland is http://www.rsk.is/fyrirtaekjaskra  (Icelandic only).

Services offered by Invest in Iceland, a public-private agency that promotes and facilitates foreign investment in Iceland (http://www.invest.is ), are free of charge to all potential foreign investors.  Invest in Iceland can provide information on investment opportunities in Iceland; collect data on the business environment, arrange site visits and plan contacts with local authorities; arrange meetings with local business partner and professional consultants; influence legislation and lobby on behalf of foreign investors (https://www.invest.is/at-your-service/what-we-do ).  Invest in Iceland offers detailed information on how to establish a company on its website (http://www.invest.is/doing-business/establishing-a-company ). Its sister agencies, Promote Iceland (https://www.islandsstofa.is/en ) and Film in Iceland (http://www.filminiceland.com ), aim to enhance Iceland’s reputation as a tourist destination and as a destination for filming movies and television productions.

According to the World Bank, Iceland’s GDP was $25.9 billion in 2018 (source: https://data.worldbank.org/country/iceland ).  Iceland is currently ranked number 64 out of 190 economies on The World Bank’s ease of starting a business list, and number 26 on the ease of doing business list (source: https://www.doingbusiness.org/en/data/exploretopics/starting-a-business#close ).

Outward Investment

The Icelandic Government along with other stakeholders promote exports of Icelandic goods and services through the public-private agency Islandsstofa, also known as Promote Iceland (https://www.islandsstofa.is/en ).  Promote Iceland helps Icelandic businesses in the main industry sectors export products and services, including fisheries (seafood and technology), agricultural produce (including organic lamb meat), high-tech products and solutions (software, prosthetics, etc.), and services (tourism).  Promote Iceland has been very active in the United States and Canada in recent years.  A trade commissioner represents the Icelandic Ministry of Foreign Affairs in New York, facilitating exports to the United States and promoting business relations between the two countries.  Promote Iceland also promotes exports to the U.K., Northern and Southern Europe, and more recently to Asia (China and Japan).

Iceland imposed capital controls following the economic collapse in late 2008, which largely prevented Icelandic investors and pensions funds from investing outside of Iceland.  The government lifted capital controls on March 14, 2017.

6. Financial Sector

Capital Markets and Portfolio Investment

Capital controls were lifted in March 2017 after more than eight years of restricting the free movement of capital.  New foreign currency inflows fall under the Rules on Special Reserve Requirements for new Currency Inflows, no. 223/2019 which took effect on March 6, 2019, and replaced the older Rules no. 490/2016 on the same subject.  The rules contain provisions on the implementation of special reserve requirements for new foreign currency inflows, including the special reserve base, holding period, special reserve ratio, settlement currency, and interest rates on deposit institutions’ capital flow accounts with the Central Bank of Iceland and Central Bank certificates of deposit.  The rules set the interest rate on capital flow accounts with the Central Bank of Iceland and Central Bank certificates of deposits at 0 percent and specify the Icelandic krona as the settlement currency.  The current rules set the holding period at one year and the special reserve ratio at 0 percent.  For more information see the Central Bank of Iceland’s website (https://www.cb.is/foreign-exch/capital-flow-measures/ ).

Foreign portfolio investment has increased significantly over the past four to five years in Iceland after being dormant in the years following the economic crash.  U.S. investment funds have been particularly active on the Icelandic stock exchange.  The Icelandic stock exchange operates under the name Nasdaq Iceland.  For companies listed on Nasdaq Iceland, follow this link:  (http://www.nasdaqomxnordic.com/hlutabref/Skrad-fyrirtaeki/iceland ).

The private sector has access to financing through the commercial banks and pensions funds.

The IMF 2019 Article IV Consultation report states that “the de jure exchange rate arrangement is free floating, and the de facto exchange rate arrangement under the IMF classification system is floating.  In the period from November 2018 to October 31, 2019, the Central Bank of Iceland (CBI) intervened in the foreign exchange market on 14 of the 248 working days.  The CBI publishes daily data on its foreign exchange intervention with a lag.  Iceland has accepted the obligations under Article VIII, Sections 2(a), 3, and 4 and maintains no exchange restrictions subject to Fund jurisdiction under Article VIII, Section 2(a).  Iceland continues to maintain certain measures that constitute exchange restrictions imposed for security reasons based on UN Security Council Resolutions.”

(source:  https://www.imf.org/en/Publications/CR/Issues/2019/12/19/Iceland-2019-Article-IV-Consultation-Press-Release-and-Staff-Report-48891 ).

Money and Banking System

The Central Bank of Iceland is an independent institution owned by the State and operates under the auspices of the Prime Minister.  Its objective is to promote price stability, financial stability, and sound and secure financial activities.  The bank also maintains international reserves and promotes a safe, effective financial system, including domestic and cross-border payment intermediation. For more information see the Central Bank of Iceland’s website (https://www.cb.is/ ).

The Icelandic banking sector is generally healthy.  The Central Bank of Iceland has since the financial collapse of 2008 introduced stringent measures to ensure that the financial system remains “safe, stable, and effective”.  For more information see the Central Bank webpage (https://www.cb.is/financial-stability/ ).  There are three commercial banks in Iceland, Landsbankinn, Islandsbanki, and Arion Bank.  The Government of Iceland took over operations of the banks during the financial collapse in September and October 2008.  Landsbankinn (formerly known as Landsbanki Islands) and Islandsbanki (formerly known as Glitnir) are government owned (the government of Iceland owns 98.2 percent shares in Landsbankinn and 100 percent shares in Islandsbanki), while Arion Bank (formerly known as Kaupthing Bank) has been privatized.  Arion Bank is listed on the Icelandic stock exchange Nasdaq Iceland.  There is one investment bank in Iceland, Kvika, which is listed on Nasdaq Iceland.  The Minister of Finance is seeking to privatize Landsbankinn and Islandsbanki.  Icelandic pension funds offer loans and mortgages and are active investors in Icelandic companies.  There are no foreign banks operating in Iceland.

All companies have access to regular commercial banking services in Iceland.  Businesses have access to financing with the commercial banks, but  banks have reduced corporate lending in the past months due to the current economic climate (the Icelandic economy had started to cool in late 2019).

Establishing a bank account in Iceland requires a local personal identification number known as a “kennitala.”  Foreign nationals should contact Registers Iceland for more information on how to register in Iceland (https://www.skra.is/english/individuals/ ).

Foreign Exchange and Remittances

Foreign Exchange

The Act on Investment by Non-residents in Business Enterprises no. 34/1991 and no. 46/1996 states that “non-residents who invest in Icelandic enterprises shall have the right to convert into any currency, for which the Central Bank of Iceland maintains a regular exchange rate any dividends received or other profits and proceeds from sales of investments.” (Source: https://www.stjornarradid.is/media/atvinnuvegaraduneyti-media/media/acrobat/act-no-34-1991-on-investment-by-non-residents-in-business-enterprises.pdf ).  In 2008, however, the Central Bank of Iceland temporarily imposed capital controls to prevent a massive capital outflow following the collapse of the financial sector; those restrictions were largely lifted in March 2017.  Transactions involving imports and exports of goods and services, travel, interest payments, contractual installment payments and salaries were still permitted under the capital controls.

The Annual Report on Exchange Arrangements and Exchange Restrictions 2018, published by the International Monetary Fund (IMF), states that “Iceland fully eliminated exchange restrictions on conversions and transfers related to current international transactions with bonds.” “Iceland progressively relaxed and finally eliminated restrictions on withdrawing foreign currency cash from resident’s domestic foreign exchange accounts and eased rules governing transfers abroad for some financial transactions.  It also gradually eased and eventually removed the requirement that residents repatriate foreign currency acquired abroad.”

(source:https://www.imf.org/en/Publications/Annual-Report-on-Exchange-Arrangements-and-Exchange-Restrictions/Issues/2019/04/24/Annual-Report-on-Exchange-Arrangements-and-Exchange-Restrictions-2018-46162 ).

The Central Bank of Iceland publishes the official exchange rate on its website (https://www.cb.is/statistics/official-exchange-rate/ ).  “The exchange rate of the Icelandic krona is determined in the foreign exchange market, which is open between 9:15hrs. and 16:00 hrs. on weekdays.  Once a day, the Central Bank of Iceland fixes the official exchange rate of the krona against foreign currencies, for use as a reference in official agreements, court cases, and other contracts between parties that do not specify another reference exchange rate; cf. Article 19 of the Act on the Central Bank of Iceland, and fixes the official exchange rate index at the same time.  This is done between 10:45 hrs. and 11:00 hrs. each morning that regulated foreign exchange markets are in operation.   Under extraordinary circumstances, the Central Bank may temporarily suspend its quotation of the exchange rate of the krona.”

Remittance Policies

New foreign currency inflows fall under the Rules on Special Reserve Requirements for new Currency Inflows, no. 223/2019 which took effect on March 6, 2019, and replaced the older rules no. 490/2016 on the same subject.  The rules contain provisions on the implementation of special reserve requirements for new foreign currency inflows, including the special reserve base, holding period, special reserve ratio, settlement currency, and interest rates on deposit institutions’ capital flow accounts with the Central Bank of Iceland and Central Bank certificates of deposit.  The rules set the interest rate on capital flow accounts with the Central Bank of Iceland and Central Bank certificates of deposits at 0 percent and specify the Icelandic krona as the settlement currency.  The Foreign Exchange Act no. 87/1992 and the Act no. 42/2016 Amending the Foreign Exchange Act state that the holding period may range up to five years and that the special reserve ratio may range up to 75 percent; however, the aforementioned rules set the holding period at one year and the special reserve ratio at 0 percent.  For more information see the Central Bank of Iceland’s website (https://www.cb.is/foreign-exch/capital-flow-measures/ ).

Sovereign Wealth Funds

The Government of Iceland has proposed establishing a sovereign wealth fund, called the National Fund of Iceland.  The bill to establish the fund has not passed through Parliament.  The stated purpose of the fund is “to serve as a sort of disaster relief reserve for the nation, when the Treasury suffers a financial blow in connection with severe, unforeseen shocks to the national economy, either due to a plunge in revenues or the cost of relief measures that the government has considered unavoidable to undertake.”

7. State-Owned Enterprises

The Icelandic Government owns wholly or majority shares in 36 companies, including systematically important companies such as energy companies, the Icelandic National Broadcasting Service (RUV) and Iceland Post. Other notable SOEs are Islandsbanki and Landsbankinn (two out of three commercial banks in Iceland), Isavia (public company that operates Keflavik International Airport), and ATVR (the only company allowed to sell alcohol to the general public).  Here you can find a list of SOEs (https://www.stjornarradid.is/verkefni/rekstur-og-eignir-rikisins/felog-i-eigu-rikisins/ ).  Total assets of SOEs in 2018 amounted to 4,953 billion ISK (approx. 35.7 billion USD) and SOEs employed around 6,400 people that same year.  In terms of assets and equity, Landsbankinn (one of three commercial banks in Iceland) is the largest SOE in Iceland, and Isavia employs the most people (source: https://www.stjornarradid.is/verkefni/rekstur-og-eignir-rikisins/felog-i-eigu-rikisins/ ).

State-owned enterprises (SOEs) generally compete under the same terms and conditions as private enterprises, except in the energy production and distribution sector.  Private enterprises have similar access to financing as SOEs through the banking system.

As an OECD member, Iceland adheres to the OECD Guidelines on Corporate Governance.  The Iceland Chamber of Commerce in Iceland, NASDAQ OMX Iceland and the Confederation of Icelandic Employers have issued guidelines that mirror the OECD Guidelines on Corporate Governance.  Iceland is party to the Government Procurement Agreement (GPA) within the framework of the World Trade Organization (WTO).

For SOEs operating within the private sector in a competitive environment, the general guideline from the Icelandic government is that all decisions of the board of the SOE should ensure a level playing field and spur competition in the market.

In the midst of the banking crisis, the state, through the Financial Supervisory Authority (FME), took over Iceland’s three largest commercial banks, which collapsed in October 2008, and subsequently took over several savings banks to allow for uninterrupted banking services in the country.  The government has stated its intention to privatize Landsbanki and Islandsbanki, but a timeline for privatization has not been announced.  The Bank Shares Management Company, established by the state in 2009, manages state-owned shares in financial companies.

The government of Iceland has acquired stakes in many companies through its ownership of shares in the banks; however, it is the policy of the government not to interfere with internal or day-to-day management decisions of these companies.  Instead, in 2009, the state established the Bank Shares Management Company to manage the state-owned shares in financial companies.  The board of this entity, consisting of individuals appointed by the Minister of Finance, appoints a selection committee, which in turn chooses the State representative to sit on the boards of the various companies.

While most energy producers are either owned by the state or municipalities, there is free competition in the energy market.  That said, potential foreign investment in critical sectors like energy is likely to be met by demands for Icelandic ownership, either formally or from the public.  For example, a Canadian company, Magma Energy, acquired a 95 percent stake in the energy production company HS Orka in 2010, but later sold a 33.4 percent stake to the Icelandic pension funds in the face of intense public pressure.

Iceland’s universal healthcare system is mainly state-operated.  However, few legal restrictions to private medical practice exist; private clinics are required to maintain an agreement regarding payment for services with the Icelandic state, a foreign state, or an insurance company.

Privatization Program

There are no privatization programs in Iceland at the moment.  However, the government of Iceland now owns two commercial banks (Landsbankinn and Islandsbanki) and has stated that it intends to privatize both.  The government took ownership of the banks when the Icelandic banking system collapsed in 2008.  Minister of Finance and Economic Affairs, Bjarni Benediktsson, intends to sell all government of Iceland shares in Islandsbanki, but wants the government to remain a large shareholder in Landsbankinn, with around 40 percent of shares. However, plans to privatize the commercial banks have been put on hold due to uncertainties surrounding the COVID-19 pandemic.

9. Corruption

Isolated cases of corruption have been known to occur, but are not an obstacle to foreign investment in Iceland or a recognized issue of concern in the government.  In 2019 Iceland ranked 11 out of 198 economies on the Transparency International’s Corruption Perceptions Index.  Iceland has signed the UN Convention against Corruption.  Iceland is a member of the OECD Convention on Combatting Bribery.

The Council of Europe body Group of States Against Corruption (GRECO) published its fifth evaluation report on Iceland on April 12, 2018.  The key findings were concerns that Iceland currently has no dedicated government-wide policy plan on anti-corruption and that its existing agency and institution-specific codes of conduct were not sufficiently detailed and are often implemented in an ad hoc manner.  For more information, see the GRECO report (https://rm.coe.int/fifth-evaluation-round-preventing-corruption-and-promoting-integrity-i/16807b8218 ).

In the wake of the financial collapse in Iceland in 2008, a Code of Conduct for Staff in the Government Offices of Iceland was established in 2012, “with the purpose of promoting professional methods and of confidence in public administration.”  The code of conduct addresses workplace relations and procedures; behavior and conduct; conflicts of interest and shared interests; communication with the media, public and surveillance bodies; and responsibility and monitoring for Government Offices staff.  For more information see the Government of Iceland’s website (https://www.government.is/ministries/prime-ministers-office/code-of-conduct-for-staff/ ).  The code does not extend to family members of officials or political parties.

Resources to Report Corruption

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

Ragna Bjarnadottir
Director
Ministry of Justice
Solvholsgata 7, 101 Reykjavik, Iceland
+354-545-9000
ragna.bjarnadottir@dmr.is / dmr@dmr.is

Contact at a “watchdog” organization:

Valgerdur Bjarnadottir
Chairman
Gagnsæi (Icelandic chapter of Transparency International)
Gimli, Haskolatorg, 101 Reykjavik, Iceland
fyrirspurnir@gagnsaei.is / transparency@transparency.is

10. Political and Security Environment

Politically motivated violence in Iceland is rare, and Iceland consistently ranks among the world’s safest countries.  In early 2014, frustration among voters regarding the then-governing Progressive Party-Independence Party coalition government’s refusal to hold a referendum on EU accession led to the largest protests since the financial collapse; these protests did not include violence.  Non-violent protests also led to a governmental reorganization and early elections, following the 2016 “Panama Papers” scandal.  Following the collapse of the government of the Progressive Party and the Independence Party in the wake of the Panama Papers scandal, snap elections were called.  Since the November 2017 formation of the current coalition government comprising the Independence Party, Progressive Party, and the Left-Green Movement, there has been relative political stability in Iceland.

There have been individual cases of politically motivated vandalism of foreign holdings in recent years, directed primarily at the aluminum industry.

India

Executive Summary

India’s GDP growth in 2019 declined to the slowest rate in over six years. Prior to the onset of the COVID-19 pandemic, the International Monetary Fund had reduced its growth prediction for FY 2020 to 4.8 percent from a previous estimate of 6.1 percent. The slowing growth reflected a sharp decline in private sector consumption and reduced activity in manufacturing, agriculture, and construction. The stock of foreign direct investment (FDI) in India has declined a full percentage point over the last six years according to data from the Department for Promotion of Industry and Internal Trade (DPIIT). This mirrors a similar drop in Indian private investment during the same period.

Non-performing assets continue to hold back banks’ profits and restrict their lending, particularly in the state banking sector. The collapse of the non-bank financial company Infrastructure Leasing & Financial Services (IL&FS) in 2018 led to a credit crunch that largely continued throughout 2019 and hampered consumer lending.

Demographic increases mean India must generate over ten million new jobs every year – a challenge for the economy and policy makers. While difficult to measure, given the large size of the informal economy, several recent studies, in 2017-18 suggest India’s unemployment rate has risen significantly, perhaps event to a 40-year high.

The Government of India has announced several measures to stimulate growth, including lowering the corporate tax rate, creating lower personal income tax brackets, implementing tax exemptions for startups, establishing ambitious targets for divestment of state-owned enterprises, withdrawing a surcharge imposed on foreign portfolio investors, and providing cash infusions into public sector banks. India’s central bank, the Reserve Bank of India (RBI), also adopted a monetary policy that was accommodative of growth, reducing interest rates by a cumulative 135 basis points throughout 2019 to 5.15 percent. However, transmission remained a problem as banks, already struggling with large volumes of non-performing assets pressuring their balance sheets, were hesitant to lend or pass on the RBI’s rate cuts to consumers.

The government actively courts foreign investment. In 2017, the government implemented moderate reforms aimed at easing investments in sectors such as single brand retail, pharmaceuticals, and private security. It also relaxed onerous rules for foreign investment in the construction sector. In August 2019, the government announced a new package of liberalization measures removing restrictions on FDI in multiple sectors to help spur the slowing economy. The new measures included permitting investments in coal mining and contract manufacturing through the so-called Automatic Route. India has continued to make major gains in the World Bank’s Ease of Doing Business rankings in 2019, moving up 14 places to number 63 out of 190 economies evaluated. This jump follows India’s gain of 23 places in 2018 and 30 places in 2017.

Nonetheless, India remains a difficult place to do business and additional economic reforms are necessary to ensure sustainable and inclusive growth. In April 2018, the RBI, announced, without prior stakeholder consultation, that all payment system providers must store their Indian transaction data only in India. The RBI mandate to store all “data related to payments systems” only in India went into effect on October 15, 2018, despite repeated requests by industry and the U.S. officials for a delay to allow for more consultations. In July 2019, the RBI, again without prior stakeholder consultation, retroactively expanded the scope of its 2018 data localization requirement to include banks, creating potential liabilities going back to late 2018. The RBI policy overwhelmingly and disproportionately affects U.S. banks and investors, who depend on the free flow of data both to achieve economies of scale and to protect customers by providing global real-time monitoring and analysis of fraud trends and cybersecurity. U.S. payments companies have been able to implement the mandate for the most part, though at great cost and potential damage to the long-term security of their Indian customer base, which will receive fewer services and no longer benefit from global fraud detection and AML/CFT protocols. Similarly, U.S. banks have been able to comply with RBI’s expanded mandate, though incurring significant compliance costs and increased risk of cybersecurity vulnerabilities.

In addition to the RBI data localization directive for payments companies, the government formally introduced its draft Data Protection Bill in December 2019, which contains restrictions on all cross-border transfers of personal data in India. The Bill is currently under review by a Joint Parliamentary Committee and stipulates that personal data that are considered “critical” can only be stored in India. The Bill is based on the conclusions of a ten-person Committee of Experts, established by the Ministry of Information Technology (MeitY) in July 2017.

On December 26, 2018, India unveiled new restrictions on foreign-owned e-commerce operations without any prior notification or opportunity to submit public comments. While Indian officials argue that these restrictions were mere “clarifications” of existing policy, the new guidelines constituted a major regulatory change that created several extensive new regulatory requirements and onerous compliance procedures. The disruption to foreign investors’ businesses was exacerbated by the refusal to extend the February 1, 2019 deadline for implementation.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2019 80 of 180 https://www.transparency.org/
cpi2019
World Bank’s Doing Business Report 2019 63 of 190 https://www.doingbusiness.org/
en/rankings?region=south-asia
Global Innovation Index 2019 52 of 127 https://www.wipo.int/
global_innovation_index/en/2019/
U.S. FDI in partner country ($M USD, stock positions) 2018 $44,458 https://apps.bea.gov/
international/factsheet
World Bank GNI per capita 2018 $2009.98 http://data.worldbank.org/indicator/
NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies toward Foreign Direct Investment

Changes in India’s foreign investment rules are notified in two different ways: (1) Press Notes issued by the Department for Promotion of Industry and Internal Trade (DPIIT) for the vast majority of sectors, and (2) legislative action for insurance, pension funds, and state-owned enterprises in the coal sector. (Note: in January 2019, the government of India changed the name of DIPP to Department for Promotion of Industry and Internal Trade (DPIIT). End Note). FDI proposals in sensitive sectors will, however, require the additional approval of the Home Ministry.

The DPIIT, under the Ministry of Commerce and Industry, is the nodal investment promotion agency, responsible for the formulation of FDI policy and the facilitation of FDI inflows. It compiles all policies related to India’s FDI regime into a single document to make it easier for investors to understand, and this consolidated policy is updated every year. The updated policy can be accessed at: http://dipp.nic.in/foreign-direct-investment/foreign-direct-investment-policy.  DPIIT, through the Foreign Investment Implementation Authority (FIIA), plays an active role in resolving foreign investors’ project implementation problems and disseminates information about the Indian investment climate to promote investments. The Department establishes bilateral economic cooperation agreements in the region and encourages and facilitates foreign technology collaborations with Indian companies and DPIIT oftentimes consults with ministries and stakeholders, but some relevant stakeholders report being left out of consultations.

Limits on Foreign Control and Right to Private Ownership and Establishment

In most sectors, foreign and domestic private entities can establish and own businesses and engage in remunerative activities. Several sectors of the economy continue to retain equity limits for foreign capital as well as management and control restrictions, which deter investment. For example, the 2015 Insurance Act raised FDI caps from 26 percent to 49 percent, but also limits for foreign capital as well as management and control restrictions, which deter investment. For example, the 2015 Insurance Act raised FDI caps from 26 percent to 49 percent, but also mandated that insurance companies retain “Indian management and control.” Similarly, in 2016, India allowed up to 100 percent FDI in domestic airlines; however, the issue of substantial ownership and effective control (SOEC) rules which mandate majority control by Indian nationals have not yet been clarified. A list of investment caps is accessible at: http://dipp.nic.in/foreign-direct-investment/foreign-direct-investment-policy .

In 2017, the government implemented moderate reforms aimed at easing investments in sectors including single-brand retail, pharmaceuticals, and private security. It also relaxed onerous rules for foreign investment in the construction sector. All FDI must be reviewed under either an “Automatic Route” or “Government Route” process. The Automatic Route simply requires a foreign investor to notify the Reserve Bank of India of the investment. In contrast, investments requiring review under the Government Route must obtain the approval of the ministry with jurisdiction over the appropriate sector along with the concurrence of DPIIT. In August 2019, the government announced a new package of liberalization measures removing restrictions on FDI in multiple additional sectors to help spur the slowing economy. The new measures included permitting investments in coal mining and contract manufacturing through the Automatic Route. The new rules also eased restrictions on investment in single-brand retail.

Screening of FDI

Since the abolition of the Foreign Investment Promotion Board in 2017, appropriate ministries have screened FDI. FDI inflows were mostly directed towards the largest metropolitan areas – Delhi, Mumbai, Bangalore, Hyderabad, Chennai – and the state of Gujarat. The services sector garnered the largest percentage of FDI. Further FDI statistics available at: http://dipp.nic.in/publications/fdi-statistics. 

Other Investment Policy Reviews

2019 OECD Economic Survey of India: http://www.oecd.org/economy/india-economic-snapshot/ 

2015 WTO Trade Policy Review: https://docs.wto.org/dol2fe/Pages/FE_Search/FE_S_S009-  DP.aspx?language=E&CatalogueIdList=131827,6391,16935,35446,11982&CurrentCatal  ogueIdIndex=0&FullTextHash=&HasEnglishRecord=True&HasFrenchRecord=True&H  asSpanishRecord=True 

2015-2020 Government of India Foreign Trade Policy: http://dgft.gov.in/ForeignTradePolicy 

Business Facilitation

DPIIT is responsible for formulation and implementation of promotional and developmental measures for growth of the industrial sector, keeping in view national priorities and socio- economic objectives. While individual lead ministries look after the production, distribution, development and planning aspects of specific industries allocated to them, DPIIT is responsible for the overall industrial policy. It is also responsible for facilitating and increasing the FDI flows to the country.

Invest India  is the official investment promotion and facilitation agency of the Government of India, which is managed in partnership with DPIIT, state governments, and business chambers. Invest India specialists work with investors through their investment lifecycle to provide support with market entry strategies, deep dive industry analysis, partner search, and policy advocacy as required. Businesses can register online through the Ministry of Corporate Affairs website: http://www.mca.gov.in/ . After the registration, all new investments require industrial approvals and clearances from relevant authorities, including regulatory bodies and local governments. To fast-track the approval process, especially in case of major projects, Prime Minister Modi has started the Pro-Active Governance and Timely Implementation (PRAGATI initiative) – a digital, multi-modal platform to speed the government’s approval process. Per the Prime Minister’s Office as of November 2019 a total of 265 project proposals worth around $169 billion related to 17 sectors were cleared through PRAGATI. Prime Minister Modi personally monitors the process, to ensure compliance in meeting PRAGATI project deadlines. In December 2014, the Modi government also approved the formation of an Inter-Ministerial Committee, led by the DPIIT, to help track investment proposals that require inter-ministerial approvals. Business and government sources report this committee meets informally and on an ad hoc basis as they receive reports from business chambers and affected companies of stalled projects.

Outward Investment

According to the Reserve Bank of India (RBI), India’s central bank, the total overseas direct investment (ODI) outflow from India till December 2019 was $18.86 billion. According to the U.S. Bureau of Economic Analysis, Indian direct investment into the U.S. was $9.9 billion in 2017. RBI contends that the growth in magnitude and spread (in terms of geography, nature and types of business activities) of ODI from India reflects the increasing appetite and capacity of Indian investors.

6. Financial Sector

Capital Markets and Portfolio Investment

Total market capitalization of the Indian equity market stood around $2.2 trillion as of December 31, 2019. The benchmark Standard and Poor’s (S&P) BSE (erstwhile Bombay Stock Exchange) Sensex recorded gains of about 14 percent in 2019. Nonetheless, Indian equity markets were tumultuous throughout 2019. The BSE Sensex generally gained from the beginning of the year until July 5, when Finance Minister Nirmala Sitharaman introduced a tax increase on foreign portfolio investment in her post-election Union Budget for the remainder for FY 2020.  The Sensex declined, erasing all previous gains for the year as the new tax led to a rapid exodus of foreign portfolio investors from the market.  The market continued to fluctuate even after the tax increase was repealed on August 23 until September 20, when the Finance Minister made a surprise announcement to slash corporate tax rates.  After that, the Sensex surged and hit a record high of 41,854 on December 20. However, even as the benchmark Sensex hit record highs, the midcap and small cap indices disappointed investors with a year of negative returns.  The Sensex’s advance was driven by a handful of stocks; two in particular Reliance Industries Ltd. and ICICI Bank Ltd. accounted for about half the gain.   Foreign portfolio investors (FPIs), pumped a net of over $14 billion into India’s equity markets in 2019, making it their highest such infusion in six years.  In 2018, FPIs pulled out $ 4.64 billion from the market.  Domestic money also continued to flow into equity markets via systematic investment plans (SIP) of mutual funds.  SIP assets under management hit an all-time high of $43.94 billion in November, according to data from the Association of Mutual Funds of India.

Foreign portfolio investors (FPIs), pumped a net of over $14 billion into India’s equity markets in 2019, making it their highest such infusion in six years.  In 2018, FPIs pulled out $ 4.64 billion from the market.  Domestic money also continued to flow into equity markets via systematic investment plans (SIP) of mutual funds.  SIP assets under management hit an all-time high of $43.94 billion in November, according to data from the Association of Mutual Funds of India.

The Securities and Exchange Board of India (SEBI) is considered one of the most progressive and well-run of India’s regulatory bodies.  It regulates India’s securities markets, including enforcement activities, and is India’s direct counterpart to the U.S. Securities and Exchange Commission (SEC).  SEBI oversees three national exchanges: the BSE Ltd. (formerly the Bombay Stock Exchange), the National Stock Exchange (NSE), and the Metropolitan Stock Exchange.  SEBI also regulates the three national commodity exchanges: the Multi Commodity Exchange (MCX), the National Commodity & Derivatives Exchange Limited, and the National Multi-Commodity Exchange.

Foreign venture capital investors (FVCIs) must register with SEBI to invest in Indian firms.  They can also set up domestic asset management companies to manage funds.  All such investments are allowed under the automatic route, subject to SEBI and RBI regulations, and to FDI policy.  FVCIs can invest in many sectors, including software, information technology, pharmaceuticals and drugs, biotechnology, nanotechnology, biofuels, agriculture, and infrastructure.  Companies incorporated outside India can raise capital in India’s capital markets through the issuance of Indian Depository Receipts (IDRs) based on SEBI guidelines.  Standard Chartered Bank, a British bank which was the first foreign entity to list in India in June 2010, remains the only foreign firm to have issued IDRs.

Companies incorporated outside India can raise capital in India’s capital markets through the issuance of Indian Depository Receipts (IDRs) based on SEBI guidelines.  Standard Chartered Bank, a British bank which was the first foreign entity to list in India in June 2010, remains the only foreign firm to have issued IDRs.  External commercial borrowing (ECB), or direct lending to Indian entities by foreign institutions, is allowed if it conforms to parameters such as minimum maturity, permitted and non-permitted end-uses, maximum all-in-cost ceiling as prescribed by the RBI, funds are used for outward FDI, or for domestic investment in industry, infrastructure, hotels, hospitals, software, self-help groups or microfinance activities, or to buy shares in the disinvestment of public sector entities: https://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=47736.

Total external commercial borrowings through both the approval and automatic route increased 61.45 percent year-on-year to $50.15 billion as of December 2019, according to the Reserve Bank of India’s data.

The RBI has taken a number of steps in the past few years to bring the activities of the offshore Indian rupee market in Non Deliverable Forwards (NDF) onshore, in order to deepen domestic markets, enhance downstream benefits, and generally obviate the need for an NDF market.  FPIs with access to currency futures or the exchange-traded currency options market can hedge onshore currency risks in India and may directly trade in corporate bonds. In October 2019, the RBI allowed banks to freely offer foreign exchange quotes to non-resident Indians at all times and said trading on rupee derivatives would be allowed and settled in foreign currencies in the International Financial Services Centers (IFSCs).  This was based on the recommendations of the task force on offshore rupee markets to examine and recommend appropriate policy measures to ensure the stability of the external value of the Rupee (https://m.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=937).    The International Financial Services Centre at Gujarat International Financial Tec-City (GIFT City) in Gujarat is being developed to compete with global financial hubs.  The BSE was the first to start operations there, in January 2016.  The NSE and domestic banks including Yes Bank, Federal Bank, ICICI Bank, Kotak Mahindra Bank, IDBI Bank, State Bank of India, and IndusInd Bank have started IFSC banking units in GIFT city.  Standard Chartered Bank and Bank of America started operations in GIFT City in 2019.

The International Financial Services Centre at Gujarat International Financial Tec-City (GIFT City) in Gujarat is being developed to compete with global financial hubs.  The BSE was the first to start operations there, in January 2016.  The NSE and domestic banks including Yes Bank, Federal Bank, ICICI Bank, Kotak Mahindra Bank, IDBI Bank, State Bank of India, and IndusInd Bank have started IFSC banking units in GIFT city.  Standard Chartered Bank and Bank of America started operations in GIFT City in 2019.

Money and Banking System

The public sector remains predominant in the banking sector, with public sector banks (PSBs) accounting for about 66 percent of total banking sector assets. Although most large PSBs are listed on exchanges, the government’s stakes in these banks often exceeds the 51 percent legal minimum. Aside from the large number of state-owned banks, directed lending and mandatory holdings of government paper are key facets of the banking sector. The RBI requires commercial banks and foreign banks with more than 20 branches to allocate 40 percent of their loans to priority sectors which include agriculture, small and medium enterprises, export-oriented companies, and social infrastructure. Additionally, all banks are required to invest 18.25 percent of their net demand and time liabilities in government securities. The RBI plans to reduce this by 25 basis points every quarter until the investment requirement reaches 18 percent of their net demand and time liabilities.

PSBs currently face two significant hurdles: capital constraints and poor asset quality. As of September 2019, gross non-performing loans represented 9.3 percent of total loans in the banking system, with the public sector banks having an even larger share at 12.7 percent of their loan portfolio. The PSBs’ asset quality deterioration in recent years is driven by their exposure to a broad range of industrial sectors including infrastructure, metals and mining, textiles, and aviation. With the new bankruptcy law (IBC) in place, banks are making progress in non-performing asset recognition and resolution. As of December 2019, the resolution processes have been approved in 190 cases Lengthy legal challenges have posed the greatest obstacle, as time spent on litigation was not counted against the 270 day deadline.

In July 2019, Parliament amended the IBC to require final resolution within 330 days including litigation time. To address asset quality challenges faced by public sector banks, the government injected $30 billion into public sector banks in recent years. The capitalization largely aimed to address the capital inadequacy of public sector banks and marginally provide for growth capital. Following the recapitalization, public sector banks’ total capital adequacy ratio (CRAR) improved to 13.5 percent in September 2019 from 12.2 in March 2019. In 2019, the Indian authorities also announced a consolidation plan entailing a merger of 10 public sector banks into 4, thereby reducing the total number of public sector banks from 18 to 12.

Women in the Financial Sector

Women in India receive a smaller portion of financial support relative to men, especially in rural and semi-urban areas. In 2015, the Modi government started the Micro Units Development and Refinance Agency Ltd. (MUDRA), which supports the development of micro-enterprises. The initiative encourages women’s participation and offers collateral-free loans of around $15,000. The Acting Finance Minister Piyush Goyal while delivering the 2019 budget speech mentioned that 70 percent of the beneficiaries of MUDRA initiative are women. Under the MUDRA initiative, 155.6 million loans have been disbursed amounting to $103 billion. Following the Global Entrepreneurship Summit (GES) 2017, government agency the National Institute for Transforming India (NITI Aayog), launched a Women’s Entrepreneurship Platform, https://wep.gov.in/, a single window information hub which provides information on a range of issues including access to finance, marketing, existing government programs, incubators, public and private initiatives, and mentoring. About 5,000 members are currently registered and using the services of the portal said a NITI Aayog officer who has an oversight of the project.

Foreign Exchange and Remittances

Foreign Exchange

The RBI, under the Liberalized Remittance Scheme, allows individuals to remit up to $250,000 per fiscal year (April-March) out of the country for permitted current account transactions (private visit, gift/donation, going abroad on employment, emigration, maintenance of close relatives abroad, business trip, medical treatment abroad, studies abroad) and certain capital account transactions (opening of foreign currency account abroad with a bank, purchase of property abroad, making investments abroad, setting up Wholly Owned Subsidiaries and Joint Ventures outside of India, extending loans). The INR is fully convertible only in current account transactions, as regulated under the Foreign Exchange Management Act regulations of 2000 (https://www.rbi.org.in/Scripts/Fema.aspx ).

Foreign exchange withdrawal is prohibited for remittance of lottery winnings; income from racing, riding or any other hobby; purchase of lottery tickets, banned or proscribed magazines; football pools and sweepstakes; payment of commission on exports made towards equity investment in Joint Ventures or Wholly Owned Subsidiaries of Indian companies abroad; and remittance of interest income on funds held in a Non-Resident Special Rupee Scheme Account (https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10193#sdi ). Furthermore, the following transactions require the approval of the Central Government: cultural tours; remittance of hiring charges for transponders for television channels under the Ministry of Information and Broadcasting, and Internet Service Providers under the Ministry of Communication and Information Technology; remittance of prize money and sponsorship of sports activity abroad if the amount involved exceeds $100,000; advertisement in foreign print media for purposes other than promotion of tourism, foreign investments and international bidding (over $10,000) by a state government and its public sector undertakings (PSUs); and multi-modal transport operators paying remittances to their agents abroad. RBI approval is required for acquiring foreign currency above certain limits for specific purposes including remittances for: maintenance of close relatives abroad; any consultancy services; funds exceeding 5 percent of investment brought into India or USD $100,000, whichever is higher, by an entity in India by way of reimbursement of pre-incorporation expenses.

Capital account transactions are open to foreign investors, though subject to various clearances. NRI investment in real estate, remittance of proceeds from the sale of assets, and remittance of proceeds from the sale of shares may be subject to approval by the RBI or FIPB.

FIIs may transfer funds from INR to foreign currency accounts and back at market exchange rates. They may also repatriate capital, capital gains, dividends, interest income, and compensation from the sale of rights offerings without RBI approval. The RBI also authorizes automatic approval to Indian industry for payments associated with foreign collaboration agreements, royalties, and lump sum fees for technology transfer, and payments for the use of trademarks and brand names. Royalties and lump sum payments are taxed at 10 percent.

The RBI has periodically released guidelines to all banks, financial institutions, NBFCs, and payment system providers regarding Know Your Customer (KYC) and reporting requirements under Foreign Account Tax Compliance Act (FATCA)/Common Reporting Standards (CRS). The government’s July 7, 2015 notification (https://rbidocs.rbi.org.in/rdocs/content/pdfs/CKYCR2611215_AN.pdf ) amended the Prevention of Money Laundering (Maintenance of Records) Rules, 2005, (Rules), for setting up of the Central KYC Records Registry (CKYCR)—a registry to receive, store, safeguard and retrieve the KYC records in digital form of clients.

Remittance Policies

Remittances are permitted on all investments and profits earned by foreign companies in India once taxes have been paid. Nonetheless, certain sectors are subject to special conditions, including construction, development projects, and defense, wherein the foreign investment is subject to a lock-in period. Profits and dividend remittances as current account transactions are permitted without RBI approval following payment of a dividend distribution tax.

Foreign banks may remit profits and surpluses to their headquarters, subject to compliance with the Banking Regulation Act, 1949. Banks are permitted to offer foreign currency-INR swaps without limits for the purpose of hedging customers’ foreign currency liabilities. They may also offer forward coverage to non-resident entities on FDI deployed since 1993.

Sovereign Wealth Funds

The FY 2016 the Indian government established the National Infrastructure Investment Fund (NIIF), touted as India’s first sovereign wealth fund to promote investments in the infrastructure sector. The government agreed to contribute $3 billion to the fund, while an additional $3 billion will be raised from the private sector primarily from sovereign wealth funds, multilateral agencies, endowment funds, pension funds, insurers, and foreign central banks. So far, the Canada Pension Plan Investment Board (CPPIB), Abu Dhabi Investment Authority, Australian Super, Ontario Teachers’ Pension Plan, Temasek, Axis Bank, HDFC Group, ICICI Bank and Kotak Mahindra Life Insurance have committed investments into the NIIF Master Fund, alongside Government of India. NIIF Master Fund now has $2.1 billion in commitments with a focus on core infrastructure sectors including transportation, energy and urban infrastructure.

7. State-Owned Enterprises

The government owns or controls interests in key sectors with significant economic impact, including infrastructure, oil, gas, mining, and manufacturing. The Department of Public Enterprises (http://dpe.gov.in ), controls and formulates all the policies pertaining to SOEs, and is headed by a minister to whom the senior management reports. The Comptroller and Auditor General audits the SOEs. The government has taken a number of steps to improve the performance of SOEs, also called the Central Public Sector Enterprises (CPSEs), including improvements to corporate governance. Reforms carried out in the 1990s focused on liberalization and deregulation of most sectors and disinvestment of government shares. These and other steps to strengthen CPSE boards and enhance transparency evolved into a more comprehensive governance approach, culminating in the Guidelines on Corporate Governance of State-Owned Enterprises issued in 2007 and their mandatory implementation beginning in 2010. Governance reforms gained prominence for several reasons: the important role that CPSEs continue to play in the Indian economy; increased pressure on CPSEs to improve their competitiveness as a result of exposure to competition and hard budget constraints; and new listings of CPSEs on capital markets.

According to the Public Enterprise Survey 2018-19 as of March 2019 there were 348 central public sector enterprises (CPSEs) with a total investment of $234 billion, of which 248 are operating CPSEs. The report puts the number of profit-making CPSEs at 178, while 70 CPSEs were incurring losses. The government tried to unsuccessfully privatize the state-run loss- incurring airline Air India.

Foreign investments are allowed in the CPSEs in all sectors. The Master List of CPSEs can be accessed at http://www.bsepsu.com/list-cpse.asp.  While the CPSEs face the same tax burden as the private sector, on issues like procurement of land they receive streamlined licensing that private sector enterprises do not.

Privatization Program

Despite the financial upside to disinvestment in loss-making state-owned enterprises (SOEs), the government has not generally privatized its assets as they have led to job losses in the past, and therefore engender political risks. Instead, the government has adopted a gradual disinvestment policy that dilutes government stakes in public enterprises without sacrificing control. Such disinvestment has been undertaken both as fiscal support and as a means of improving the efficiency of SOEs.

In recent years, however the government has begun to look to disinvestment proceeds as a major source of revenue to finance its fiscal deficit. For the first time in seven years, the government met its disinvestment target in fiscal year 2017-18, generating $15.38 billion against a target of $11.15 billion. For FY 2020, the government increased the disinvestment target of $12.3 billion but managed to generate only $2.5 billion till December 2019 The Government of India’s plan to sell state-owned carrier Air India could not happen in FY 2020. The Indian Government constituted inter-ministerial panel recommended 100 percent stake sale in Air India to make it more lucrative as against a 76 percent stake sale last year. Government did say that they have received some good bids, but the process might go to a back burner because of the COVID19 pandemic and its resulting impact on the economy.

Foreign institutional investors can participate in these disinvestment programs subject to these limits: 24 percent of the paid-up capital of the Indian company and 10 percent for non-resident Indians and persons of Indian origin. The limit is 20 percent of the paid-up capital in the case of public sector banks. There is no bidding process. The shares of the SOEs being disinvested are sold in the open market. Detailed policy procedures relating to disinvestment in India can be accessed at: https://dipam.gov.in/disinvestment-policy 

9. Corruption

India is a signatory to the United Nation’s Conventions Against Corruption and is a member of the G20 Working Group against corruption. India showed marginal improvement and scored 41 out of 100 in Transparency International’s 2018 Corruption Perception Index, with a ranking of 78 out of the 180 countries surveyed (as compared to a score of 40 out of 100 and ranked 81 in 2017).

Corruption is addressed by the following laws: the Companies Act, 2013; the Prevention of Money Laundering Act, 2002; the Prevention of Corruption Act, 1988; the Code of Criminal Procedures, 1973; the Indian Contract Act, 1872; and the Indian Penal Code of 1860. Anti- corruption laws amended since 2004 have granted additional powers to vigilance departments in government ministries at the central and state levels. The amendments also elevated the Central Vigilance Commission (CVC) to be a statutory body. In addition, the Comptroller and Auditor General is charged with performing audits on public-private-partnership contracts in the infrastructure sector on the basis of allegations of revenue loss to the exchequer.

In November 2016, the Modi government ordered that INR 1000 and 500 notes, comprising approximately 86 percent of cash in circulation, be demonetized to curb “black money,” corruption, and the financing of terrorism. An August 2018 RBI report stated 99 percent of demonetized cash was deposited in legitimate bank accounts, leading analysts to question if the exercise enabled criminals to launder money into the banking system. Digital transactions increased due to demonetization, as mobile banking inclusion jumped from 40 percent to 60 percent of the populace. India is investigating 1.8 million bank accounts and 200 individuals associated with unusual deposits during demonetization, and banks’ suspicious transaction reports quadrupled to 473,000 in 2016. On August 7, SEBI directed stock exchanges to restrict trading and audit 162 suspected shell companies on the basis of large cash deposits during demonetization.

The Benami Transactions (Prohibition) Amendment Act of 2016 entered into effect in November 2016, and strengthened the legal and administrative procedures of the Benami Transactions Act 1988, which was ultimately never notified. (Note: A benami property is held by one person, but paid for by another, often with illicit funds.) Analysts expect the government to issue a roadmap in 2017-2018 to begin implementing the Act. In May 2017, the Real Estate (Regulation and Development) Act, 2016 came into effect. The Act will regulate India’s real estate sector, which is notorious for its corruption and lack of transparency.

In November 2016, India and Switzerland signed a joint declaration to enter into an Agreement on the Exchange of Information (AEOI) to automatically share financial information on accounts held by Indian residents, beginning in 2018. India also amended its Double Taxation Avoidance Agreement with Singapore, Cyprus, and Mauritius in 2016 to prevent income tax evasion. The move follows the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, which replaced the Income Tax (IT) Act of 1961 regarding the taxation of foreign income. The new Act penalizes the concealment of foreign income, as well as provides criminal liability for foreign income tax evasion.

In February 2014, the government enacted the Whistleblower Act, intended to protect anti- corruption activists, but it has yet to be implemented. Experts believe that the prosecution of corruption has been effective only among the lower levels of the bureaucracy; senior bureaucrats have generally been spared. Businesses consistently cite corruption as a significant obstacle to FDI in India and identify government procurement as a process particularly vulnerable to corruption. To make the Whistle Blowers Protection Act, 2014 more effective, the government proposed an amendment bill in 2015. This bill is still pending with the Upper House of Parliament; however anti-corruption activists have expressed concern that the bill will dilute the Act by creating exemptions for state authorities, allowing them to stay out of reach of whistleblowers.

The Companies Act of 2013 established rules related to corruption in the private sector by mandating mechanisms for the protection of whistle blowers, industry codes of conduct, and the appointment of independent directors to company boards. As yet, the government has established no monitoring mechanism, and it is unclear the extent to which these protections have been instituted. No legislation focuses particularly on the protection of NGOs working on corruption issues, though the Whistleblowers Protection Act, 2011, may afford some protection once it has been fully implemented.

In 2013, Parliament enacted the Lokpal and Lokayuktas Act 2013, which created a national anti- corruption ombudsman and requires states to create state-level ombudsmen within one year of the law’s passage. Till December 2018, the government had not appointed an ombudsman. (Note: An ombudsman was finally appointed in March 2019.)

UN Anticorruption Convention, OECD Convention on Combatting Bribery

India is a signatory to the United Nations Conventions against Corruption and is a member of the G20 Working Group against Corruption. India is not party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.

Resources to Report Corruption

Matt Ingeneri
Economic Growth Unit Chief U.S. Embassy New Delhi Shantipath, Chanakyapuri New Delhi
+91 11 2419 8000 ingeneripm@state.gov

Ashutosh Kumar Mishra
Executive Director
Transparency International, India
Lajpat Bhawan, Room no.4
Lajpat Nagar,
New Delhi – 110024 +91 11 2646 0826
info@transparencyindia.org

10. Political and Security Environment

Prime Minister Modi’s BJP-led National Democratic Alliance government won a decisive mandate in the May 2019 elections, winning a larger majority in the Lok Sabha (lower house of Parliament) than in 2014. The new government’s first 100 days of its second term were marked by the removal of special constitutional status from the state of Jammu and Kashmir (J&K) The government’s decision to remove J&K autonomy was preceded by a heavy paramilitary build-up in the State, arrests of local opposition leaders, and cutting of mobile phone and Internet services. Internet connections have since been largely opened, but with continued severe limitations on data download speeds to the extent that everyday activities of Kashmiris often take hours or need to be completed outside the region.

A number of areas of India suffered from terrorist attacks by separatists, including Jammu and Kashmir and some states in India’s northeast.

In December 2019, the government passed the Citizenship Amendment Act (CAA), which promises fast-tracked citizenship to applicants from six minority religious groups from Afghanistan, Bangladesh, and Pakistan, but does not offer a similar privilege to Muslims from these countries. The new law sparked widespread protests that sometimes-included violence by demonstrators, government supporters, and security services.

Travelers to India are invited to visit the U.S. Department of State travel advisory website at: https://travel.state.gov/content/passports/en/country/india.html for the latest information and travel resources.

Indonesia

Executive Summary

Indonesia’s population of 268 million, GDP over USD 1 trillion, growing middle class, and stable economy all serve as attractive features to U.S. investors; however, different entities have noted that investing in Indonesia remains challenging.  Since 2014, the Indonesian government under President Joko (“Jokowi”) Widodo, now in his second and final five-year term,  has prioritized boosting infrastructure investment and human capital development to support Indonesia’s economic growth goals.  As he began his second term in October 2019, President Jokowi announced sweeping plans to pass omnibus laws aimed at improving Indonesia’s economic competitiveness by lowering corporate taxes, reforming rigid labor laws, and reducing bureaucratic and regulatory barriers to investment.  However, with the fallout from the Covid-19 pandemic, the government shifted its focus to providing fiscal and monetary stimulus to support the economy.  Regardless of the outcome of further reforms, factors such as a decentralized decision-making process, legal and regulatory uncertainty, economic nationalism, and powerful domestic vested interests in both the private and public sectors, create a complex investment climate.  Other factors relevant to investors include: government requirements, both formal and informal, to partner with Indonesian companies, and to manufacture or purchase goods and services locally; restrictions on some imports and exports; and pressure to make substantial, long-term investment commitments.  Despite recent limits placed on its authority, the Indonesian Corruption Eradication Commission (KPK) continues to investigate and prosecute corruption cases.  However, investors still cite corruption as an obstacle to pursuing opportunities in Indonesia.

Other barriers to foreign investment that have been reported include difficulties in government coordination, the slow rate of land acquisition for infrastructure projects, weak enforcement of contracts, bureaucratic inefficiency, and ambiguous legislation in regards to tax enforcement. Businesses also face difficulty from changes to rules at government discretion with little or no notice and opportunity for comment, and lack of consultation with stakeholders in the development of laws and regulations.  Investors have noted that many new regulations are difficult to understand and often not properly communicated to those affected.  In addition, companies have complained about the complexity of inter-ministerial coordination that continues to delay some processes important to companies, such as securing business licenses and import permits.  In response, in July 2018 the government launched a “one stop shop” for licenses and permits via an online single submission (OSS) system at the Indonesia Investment Coordinating Board (BKPM).  Indonesia restricts foreign investment in some sectors through a Negative Investment List that Indonesian officials have indicated will be scrapped as part of omnibus legislation.  The latest version, issued in 2016, details the sectors in which foreign investment is restricted and outlines the foreign equity limits in a number of other sectors.  The 2016 Negative Investment List allows greater foreign investments in some sectors, including e-commerce, film, tourism, and logistics.  In health care, the 2016 list loosens restrictions on foreign investment in categories such as hospital management services and manufacturing of raw materials for medicines, but tightens restrictions in others such as mental rehabilitation, dental and specialty clinics, nursing services, and the manufacture and distribution of medical devices. Companies have reported that energy and mining still face significant foreign investment barriers.

Indonesia began to abrogate its more than 60 existing Bilateral Investment Treaties (BITs) in 2014, allowing some of the agreements to expire in order to be renegotiated.  The United States does not have a BIT with Indonesia.

Despite the challenges that industry has reported, Indonesia continues to attract significant foreign investment.  Singapore, Netherlands, United States, Japan and Hong Kong were among the top sources of foreign investment in the country in 2018 (latest available full-year data). Private consumption is the backbone of the largest economy in ASEAN, making Indonesia a promising destination for a wide range of companies, ranging from consumer products and financial services, to digital start-ups and franchisors.  Indonesia has ambitious plans to improve its infrastructure with a focus on expanding access to energy, strengthening its maritime transport corridors, which includes building roads, ports, railways and airports, as well as improving agricultural production, telecommunications, and broadband networks throughout the country. Indonesia continues to attract U.S. franchises and consumer product manufacturers.  UN agencies and the World Bank have recommended that Indonesia do more to grow financial and investor support for women-owned businesses, noting obstacles that women-owned business sometimes face in early-stage financing.

Table 1
Measure Year Index or Rank Website Address
TI Corruption Perceptions index 2019 85 of 180 https://www.transparency.org/cpi2019
World Bank’s Doing Business Report “Ease of Doing Business” 2020 73 of 190 http://www.doingbusiness.org/rankings
Global Innovation Index 2019 85 of 126 https://www.globalinnovationindex.org/
analysis-indicator
U.S. FDI in partner country ($M USD, stock positions) 2018 $11,140 M  https://apps.bea.gov/international/
factsheet/
World Bank GNI per capita 2018 $3,840 https://data.worldbank.org/indicator/
NY.GNP.PCAP.CD?locations=ID

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

With GDP growth of 5.02 percent in 2019, Indonesia is an attractive destination for foreign direct investment (FDI) due to its young population, strong domestic demand, stable political situation, and well-regarded macroeconomic policy.  Indonesian government officials often state that they welcome increased FDI, aiming to create jobs and spur economic growth, and court foreign investors, notably focusing on infrastructure development and export-oriented manufacturing.  Foreign investors, however, have complained about vague and conflicting regulations,  bureaucratic inefficiencies, ambiguous legislation in regards to  tax enforcement, poor existing infrastructure, rigid labor laws, sanctity of contract issues, and corruption.

The Indonesia Investment Coordinating Board, or BKPM, serves as an investment promotion agency, a regulatory body, and the agency in charge of approving planned investments in Indonesia.  As such, it is the first point of contact for foreign investors, particularly in manufacturing, industrial, and non-financial services sectors.  BKPM’s OSS system streamlines 492 licensing and permitting processes through the issuance of Government Regulation No.24/2018 on Electronic Integrated Business Licensing Services.  While the OSS system is operational, overlapping authority for permit issuance across ministries and government institutions, both at the national and subnational level, remains challenging.  Special expedited licensing services are available for investors meeting certain criteria, such as making investments in excess of approximately IDR100 billion (USD 6.6 million) or employing 1,000 local workers. The government has provided investment incentives particularly for “pioneer” sectors, (please see the section on Industrial Policies)

To further improve the investment climate, the government drafted an omnibus law on job creation to amend dozens of prevailing laws deemed to hamper investment.  In February 2020, the draft omnibus law was submitted to the legislature for deliberation.

Limits on Foreign Control and Right to Private Ownership and Establishment

Restrictions on FDI are, for the most part, outlined in Presidential Decree No.44/2016, commonly referred to as the Negative Investment List or the DNI. The DNI aims to consolidate FDI restrictions from numerous decrees and regulations, in order to create greater certainty for foreign and domestic investors.  The 2016 revision to the list eased restrictions in a number of previously closed or restricted fields.  Previously closed sectors, including the film industry (including filming, editing, captioning, production, showing, and distribution of films), on-line marketplaces with a value in excess of IDR 100 billion (USD 6.6 million), restaurants, cold chain storage, informal education, hospital management services, and manufacturing of raw materials for medicine, are now open for 100 percent foreign ownership.  The 2016 list also raises the foreign investment cap in the following sectors, though not fully to 100 percent:  online marketplaces under IDR 100 billion (USD 6.6 million), tourism sectors, distribution and warehouse facilities, logistics, and manufacturing and distribution of medical devices.  In certain sectors, restrictions are liberalized for foreign investors from other ASEAN countries.  Though the energy sector saw little change in the 2016 revision, foreign investment in construction of geothermal power plants up to 10 MW is permitted with an ownership cap of 67 percent, while the operation and maintenance of such plants is capped at 49 percent foreign ownership.  For investment in certain sectors, such as mining and higher education, the 2016 DNI is useful only as a starting point for due diligence, as additional licenses and permits are required by individual ministries.  A number of sensitive business areas, involving, for example, alcoholic beverages, ocean salvage, certain fisheries, and the production of some hazardous substances, remain closed to foreign investment or are otherwise restricted.

Foreign investment in small-scale and home industries (i.e. forestry, fisheries, small plantations, certain retail sectors) is reserved for micro, small and medium enterprises (MSMEs) or requires a partnership between a foreign investor and local entity.  Even where the 2016 DNI revisions lifted limits on foreign ownership, certain sectors remain subject to other restrictions imposed by separate laws and regulations.  As part of President Jokowi’s second-term economic reform agenda, Indonesian ministers have stated their interest in revising the 2016 DNI through a new presidential regulation that will be issued in 2020.  This new Investment Priorities List, or DPI, will incentivize investment into certain sectors, notably export-oriented manufacturing, digital technology projects, labor-intensive industries, and value-added processing, with the aim to spur innovation and reduce Indonesia’s current account deficit.  The government also intends to shorten the list of restricted sectors to six categories including cannabis, gambling, and chemical weapons..

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

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

The government issued Trade Minister Regulation 71/2019 to revoke the requirement for eighty percent local content and limitation of outlet numbers in the franchise industry.  Nevertheless, the government encourages companies to utilize domestic goods and services that meet franchisor quality standards.

Other Investment Policy Reviews

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

The last OECD Investment Policy Review of Indonesia, conducted in 2010, can be found on the OECD website:

http://www.oecd.org/daf/inv/investmentfordevelopment/indonesia-investmentpolicyreview-oecd.htm 

The 2019 UNCTAD Report on ASEAN Investment can be found here: https://unctad.org/en/pages/PublicationWebflyer.aspx?publicationid=2568 

Business Facilitation

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

Once an investor has obtained a NIB, he/she may apply for a business license.  At this stage, investors must:  document their legal claim to the proposed project land/location; provide an environmental impact statement (AMDAL); show proof of submission of an investment realization report; and provide a recommendation from relevant ministries as necessary. Investors also need to apply for commercial and/or operational licenses prior to commencing commercial operations.  Special expedited licensing services are also available for investors meeting certain criteria, such as making investments in excess of approximately IDR 100 billion (USD 6.6 million) or employing 1,000 local workers.  After obtaining a NIB, investors in some designated industrial estates can immediately start project construction.

Foreign investors are generally prohibited from investing in MSMEs in Indonesia, although the 2016 Negative Investment List opened some opportunities for partnerships in farming and catalog and online retail.  In accordance with the Indonesian SMEs Law No. 20/2008, MSMEs are defined as enterprises with net assets less than IDR10 billion (USD 0.7 million) or with total annual sales under IDR50 billion (USD 3.3 million).  However, the Indonesian Central Bureau of Statistics defines MSMEs as enterprises with fewer than 99 employees.  The government provides assistance to MSMEs, including: expanded access to business credit for MSMEs in farming, fishery, manufacturing, creative business, trading and services sectors; a tax exemption for MSMEs with annual sales under IDR 200 million (USD 13,000); and assistance with international promotion.

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

BKPM is responsible for issuing “investment licenses” (the term used to encompass both NIB and business licenses) to foreign entities and has taken steps to simplify the application process. The OSS serves as an online portal which allows foreign investors to apply for and track the status of licenses and other services online.  The OSS coordinates many of the permits issued by more than a dozen ministries and agencies required for investment approval.  In November 2019, the government through Presidential Instruction 7/2019 appointed BKPM as the main institution to issue business permits and to grant investment incentives which have been delegated from all ministries and government institutions. BKPM has also been tasked to review policies deemed unfavorable for investors.  In addition, BKPM now issues soft-copy investment and business licenses.  While the OSS’s goal is to help streamline investment approvals, investments in the mining, oil and gas, plantation, and most other sectors still require multiple licenses from related ministries and authorities.  Likewise, certain tax and land permits, among others, typically must be obtained from local government authorities.  Though Indonesian companies are only required to obtain one approval at the local level, businesses report that foreign companies often must seek additional approvals in order to establish a business.

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

Outward Investment

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

6. Financial Sector

Capital Markets and Portfolio Investment

The Indonesia Stock Exchange (IDX) index has 668 listed companies as of December 2019 with a daily trading volume of USD 650 million and market capitalization of USD 521 billion. Over the past five years, there has been a 34 percent increase of the number listed companies, but the IDX is dominated by its top 20 listed companies, which represent 59.26 percent of the market cap. There were 50 initial public offerings in 2019 – seven fewer than 2018. As of January 2020, domestic entities conducted more than 67.97 percent  of total IDX stock trades.

In November 2018, IDX introduced T+2 settlement, with sellers now receiving proceeds within two days instead of the previous standard of three days (T+3). In 2011, the IDX launched the Indonesian Sharia Stock Index (ISSI), its first index of sharia-compliant companies, primarily to attract greater investment from Middle East companies and investors. This was followed in 2017 by the IDX’s introduction the first online sharia stock trading platform. As of December 2019, the ISSI is composed of 429 stocks that are a part of IDX’s Jakarta Composite Index (JCI), with a total market cap of USD 267 billion.

Government treasury bonds are the most liquid bonds offered by Indonesia. Corporate bonds are less liquid due to less public knowledge of the product. The government also issues sukuk (Islamic treasury notes) treasury bills as part of its effort to diversify Islamic debt instruments and increase their liquidity. Indonesia’s sovereign debt as of December 2019 was rated as BBB- by Standard and Poor, BBB by Fitch Ratings and Baa2 by Moody’s.

OJK began overseeing capital markets and non-banking institutions in 2013, replacing the Capital Market and Financial Institution Supervisory Board. In 2014, OJK also assumed BI’s supervisory role over commercial banks. Foreigners have access to the Indonesian capital markets and are a major source of portfolio investment (including 38.57 percent of government securities). Indonesia respects International Monetary Fund (IMF) Article VIII by refraining from restrictions on payments and transfers for current international transactions. Foreign ownership of Indonesian companies may be limited in certain industries or sectors, such as those outlined in the DNI.

Money and Banking System

Although there is some concern regarding the operations of the many small and medium sized family-owned banks, the banking system is generally considered sound, with banks enjoying some of the widest net interest margins in the region. As of August 2019, the 10 top banks had IDR 5,210 trillion (USD 372 billion) in total assets. Loans grew 6.08 percent in 2019 compared to 11.5 percent in2018. Gross non-performing loans in December 2019 remained at 2.53 percent from 2.4 percent the previous year. For 2020, the Financial Services Authority (OJK) project annual credit growth at 12-14 percent and deposit growth around 10-12 percent for Indonesia’s banking industry.

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

On March 16, OJK  issued OJK Regulation Number 12/POJK.03/2020 on commercial bank consolidation. The regulation aims to strengthen the structure, and competitiveness of the national banking industry by increasing bank capital and the encouraging consolidation of banks in Indonesia. This regulation generally consists of two main regulations concerning bank consolidation policies, as well as  increasing minimum core capital for commercial banks and increasing Capital Equivalency Maintained Assets for foreign banks with branch offices by least IDR 3 trillion, by December 31, 2022.

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

Growing digitalization of banking services, spurred on by innovative payment technologies in the financial technology (fintech) sector, complements the conventional banking sector. Peer-to-peer (P2P) lending companies recorded a triple-digit increase in 2008 and e-payment services have grown more than six-fold since 2012. Indonesian policymakers are hopeful that these fintech services can reach underserved or unbanked populations and micro-, small-, and medium-sized enterprises (MSMEs), with estimates that in 2020, fintech lending will hit IDR 223 trillion (USD 13.61 billion) in loan disbursements.

Foreign Exchange and Remittances

Foreign Exchange

The rupiah (IDR), the local currency, is freely convertible. Currently, banks must report all foreign exchange transactions and foreign obligations to the central bank, Bank Indonesia (BI). With respect to the physical movement of currency, any person taking rupiah bank notes into or out of Indonesia in the amount of IDR 100 million (approximately USD 6,600) or more, or the equivalent in another currency, must report the amount to DGCE. The limit for any person or entity to bring foreign currency bank notes into or out of Indonesia is the equivalent of IDR 1 billion (USD 66,000).

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

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

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

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

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

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

Remittance Policies

The government places no restrictions or time limitations on investment remittances. However, certain reporting requirements exist. Banks should adopt Know Your Customer (KYC) principles to carefully identify customers’ profile to match transactions. Carrying rupiah bank notes of more than IDR 100 million (approximately USD 6,600) in cash out of Indonesia requires prior approval from BI, as well as verifying the funds with Indonesian Customs upon arrival. Indonesia does not engage in currency manipulation.

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

Sovereign Wealth Funds

As of mid-2020, Indonesia is still preparing to establish a sovereign wealth fund, despite macroeconomic and budgetary pressures from the pandemic response. When established, it is expected the fund will operate as a state-owned investment fund that will aim to attract foreign capital, including from foreign sovereign wealth funds, and invest that capital in long-term Indonesian assets. According to Indonesian government officials, the fund will consist of a master portfolio with sector-specific sub-funds, such as infrastructure, oil and gas, health, tourism, and digital technologies. The sovereign wealth fund will be authorized by the planned passage of the omnibus bill on job creation, which includes 14 articles to set up the fund and facilitate greater cooperation with foreign partners. This cooperation includes authorizing the fund to be set up in foreign jurisdictions and allowing foreigners as general partners of the fund.

In 2015, the Finance Ministry authorized one of those SOEs, PT Sarana Multi Infrastruktur (SMI) to manage the assets of the Pusat Investasi Pemerintah (PIP), or Government Investment Center (which had previously been seen as a potential sovereign wealth fund). Indonesia does not participate in the IMF’s Working Group on Sovereign Wealth Funds.

7. State-Owned Enterprises

Indonesia had 114 state-owned enterprises (SOEs) and 28 subsidiaries divided into 12 sectors as of December 2019, 10 of which contributed more than 85 percent of total SOE profit. Of the 114 SOEs, 17 are listed on the Indonesian stock exchange. In addition, 14 are special purpose entities under the SOE Ministry (BUMN), with one SOE, the Indonesian Infrastructure Guarantee Fund, under the Ministry of Finance. Since mid-2016, the Indonesian government has been publicizing plans to consolidate SOEs into six holding companies based on sector of operations. In November 2017, Indonesia announced the creation of a mining holding company, PT Inalum, the first of the six planned SOE-holding companies.

Since his appointment by President Jokowi in November 2019, Minister of SOEs Erick Thohir  has underscored the need to reform SOEs in line with President Jokowi’s second-term economic agenda. Thohir has noted the need to liquidate underperforming SOEs, ensure that SOEs improve their efficiency by focusing on core business operations, and introduce better corporate governance principles. Thohir has spoken publicly about his intent to push SOEs to undertake initial public offerings (IPOs) on the IDX.

Information regarding the SOEs can be found at the SOE Ministry website (http://www.bumn.go.id/ ) (Indonesian language only).

There are also an unknown number of SOEs owned by regional or local governments. SOEs are present in almost all sectors/industries including banking (finance), tourism (travel), agriculture, forestry, mining, construction, fishing, energy, and telecommunications (information and communications).

In the third quarter of 2019 (the most recent data available), SOEs have contributed USD 22 billion of tax payments, non-tax payments, and dividends to the Indonesian state. SOEs also contributed a profit of USD 131 billion, with total assets of 626 billion, liabilties of USD 429 billion, and equities of USD 196 billion.

Indonesia is not a party to the WTO’s Government Procurement Agreement. Private enterprises can compete with SOEs under the same terms and conditions with respect to access to markets, credit, and other business operations. However, in reality, many sectors report that SOEs receive strong preference for government projects. SOEs purchase some goods and services from private sector and foreign firms. SOEs publish an annual report and are audited by the Supreme Audit Agency (BPK), the Financial and Development Supervisory Agency (BPKP), and external and internal auditors.

Privatization Program

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

9. Corruption

President Jokowi was elected in 2014 on a strong good-governance platform. However, corruption remains a serious problem according to some U.S. companies. The Indonesian government has issued detailed directions on combating corruption in targeted ministries and agencies, and the 2018 release of the updated and streamlined National Anti-Corruption Strategy mandates corruption prevention efforts across the government in three focus areas (licenses, state finances, and law enforcement reform). The Corruption Eradication Commission (KPK) was established in 2002 as the lead government agency to investigate and prosecute corruption.  KPK is one of the most trusted and respected institutions in Indonesia. The KPK has taken steps to encourage companies to establish effective internal controls, ethics, and compliance programs to detect and prevent bribery of public officials. By law, the KPK is authorized to conduct investigations, file indictments, and prosecute corruption cases involving law enforcement officers, government executives, or other parties connected to corrupt acts committed by those entities; attracting the “attention and the dismay” of the general public; and/or involving a loss to the state of at least IDR 1 billion (approximately USD 66,000).  The government began prosecuting companies who engage in public corruption under new corporate criminal liability guidance issued in a 2016 Supreme Court regulation, with the first conviction of a corporate entity in January 2019.  Presidential decree No. 13/2018 issued in March 2018 clarifies the definition of beneficial ownership and outlines annual reporting requirements and sanctions for non-compliance.

Indonesia’s ranking in Transparency International’s Corruption Perceptions Index in 2019 improved to 85 out of 180 countries surveyed, compared to 89 out of 180 countries in 2018.  Indonesia’s score of public corruption in the country, according to Transparency International, improved to 40 in 2019 (scale of 0/very corrupt to 100/very clean).  At the beginning of President Jokowi’s term in 2014, Indonesia’s score was  34. Indonesia ranks 4th of the 10 ASEAN countries.

Nonetheless, according to certain reports, corruption remains pervasive despite laws to combat it. Some have noted that KPK leadership, along with the commission’s investigators and prosecutors, are sometimes harassed, intimidated, or attacked due to their anticorruption work. In early 2019, a Molotov cocktail and bomb components were placed outside the homes of two KPK commissioners, and in 2017 unidentified assailants committed an acid attack against a senior KPK investigator. Police have not identified the perpetrators of either attack. The Indonesian National Police and Attorney General’s Office also investigate and prosecute corruption cases; however, neither have the same organizational capacity or track-record of the KPK. Giving or accepting a bribe is a criminal act, with possible fines ranging from USD 3,850 to USD 77,000 and imprisonment up to a maximum of 20 years or life imprisonment, depending on the severity of the charge.

On September 2019, the Indonesia House of Representatives (DPR) passed Law No. 19/2019 on the Corruption Eradication Commission (KPK) which revised the KPK’s original charter. This revised law introduced several changes relating to the authority and supervision of the KPK, including KPK’s status as a state agency under the authority of the executive branch (it was previously an independent body outside of the judicial, legislative, or executive branches) and establishment of a Supervisory Council to oversee certain KPK activities.  The new law also changed the KPK’s status as a separate law enforcement authority and mandated the KPK to provide performance review reports to the President, the DPR RI, and the supervisory board.  Finally, the KPK’s previous independent authority to terminate corruption investigations and prosecutions, as well as authorize wiretaps, searches, arrests, and asset seizures, has now been transferred to the Supervisory Council.  Many observers view these changes as limiting KPK’s ability to pursue corruption investigations without political interference.

Indonesia ratified the UN Convention against Corruption in September 2006. Indonesia has not yet acceded to the OECD Anti-Bribery Convention, but attends meetings of the OECD Anti-Corruption Working Group. In 2014, Indonesia chaired the Open Government Partnership, a multilateral platform to promote transparency, empower citizens, fight corruption, and strengthen governance. Several civil society organizations function as vocal and competent corruption watchdogs, including Transparency International Indonesia and Indonesia Corruption Watch.

Resources to Report Corruption

Komisi Pemberantasan Korupsi (Anti-Corruption Commission)
Jln. Kuningan Persada Kav 4, Setiabudi
Jakarta Selatan 12950
Email: informasi@kpk.go.id

Indonesia Corruption Watch
Jl. Kalibata Timur IV/D No. 6 Jakarta Selatan 12740
Tel: +6221.7901885 or +6221.7994015
Email: info@antikorupsi.org

10. Political and Security Environment

As in other democracies, politically motivated demonstrations occasionally occur throughout Indonesia, but are not a major or ongoing concern for most foreign investors.

Since the large-scale Bali bombings in 2002 that killed over 200 people, Indonesian authorities have aggressively and successfully continued to pursue terrorist cells throughout the country, disrupting multiple aspirational plots. Despite these successes, violent extremist networks and terrorist cells remain intact and have the capacity to become operational and conduct attacks with little or no warning, as do lone wolf-style ISIS sympathizers.

According to the industry, foreign investors in Papua face certain unique challenges. Indonesian security forces occasionally conduct operations against the Free Papua Movement, a small armed separatist group that is most active in the central highlands region. Low-intensity communal, tribal, and political conflict also exists in Papua and has caused deaths and injuries. Anti-government protests have resulted in deaths and injuries, and violence has been committed against employees and contractors of a U.S. company there, including the death of a New Zealand citizen in an attack on March 30, 2020. Additionally, racially-motivated attacks against ethnic Papuans living in East Java province led to violence in Papua and West Papua in late 2019, including riots in Wamena, Papua that left dozens dead and thousands more displaced.

Travelers to Indonesia can visit the U.S. Department of State travel advisory website for the latest information and travel resources: https://travel.state.gov/content/travel/en/international-travel/International-Travel-Country-Information-Pages/Indonesia.html.

Iraq

Executive Summary

The Government of Iraq (GOI) continues to face reconstruction challenges after the defeat of the ISIS physical caliphate, an uneven security environment, an economy primarily dependent on oil revenues, and deep institutional corruption. Widespread street protests that began October 2019 led to the resignation of then Prime Minister Adil Abd al-Mahdi, amid calls for greater government accountability, improved government services, and more jobs. After two other PM-designates were unsuccessful, the Iraqi Council of Representatives approved Mustafa al-Kadhimi, his political platform, and some proposed cabinet ministers on May 7, 2020.

An uneven security environment, including the threat of resurgent extremist groups, remains an impediment to investment in many parts of the country. Other lingering effects of the fight against ISIS include major disruptions of key domestic and international trade routes and the destruction of economic infrastructure, especially in the ISIS-controlled territory in Mosul and parts of northern and western Iraq. Some militia groups that participated in the fight against ISIS remained deployed even after the completion of combat operations. Some militia also appear to be under only marginal government control and have been implicated in a range of criminal and extralegal activities, including extortion. However, the security situation varies throughout the country and is generally less problematic in the Iraqi Kurdistan Region (IKR).

Despite these challenges, the Iraqi market offers some potential for U.S. exporters. Iraq imports large volumes of agricultural commodities, machinery, consumer goods, and defense articles. While non-oil bilateral trade with the United States was just over USD1 billion in 2019, Iraq’s economy had an estimated GDP of USD200 billion.  Government contracts and tenders are the source of most commercial opportunities in Iraq in all sectors, including the significant oil and gas sectors, and have been financed almost entirely by oil revenues. Increasingly, the GOI has asked investors and sellers to provide financing options and allow for deferred payments. Although there has been slow progress in negotiating flare-gas-capture projects on associated gas-to-oil production and licensing the exploration of free gas fields, Iraq announced the release of a national gas plan in early 2020, which identified several long-term investment projects to modernize and increase the capacity of the country’s gas industry.

Investors in Iraq continue to face extreme challenges resolving issues with GOI entities, including procurement disputes, receiving timely payments, and winning public tenders. Difficulties with corruption, customs regulations, irregular and high tax liabilities, unclear visa and residency permit procedures, arbitrary application of e-regulations, lack of alternative dispute resolution mechanisms, electricity shortages, and lack of access to financing remain common complaints from companies operating in Iraq. Shifting and unevenly enforced regulations create additional burdens for investors. The GOI currently operates 192 state-owned enterprises (SOEs), a legacy from decades of statist economic policy.

Investors in the IKR face many of the same challenges as investors elsewhere in Iraq, but have a pro-business, visa-on-arrival option and traditionally more stable security situation. However, the region’s economy has struggled to recover from the 2014 ISIS offensive, the drop in oil prices, and the aftermath of the 2017 Kurdish independence referendum. Key factors in the IKR’s ability to attract business and investment interests include: stable oil prices, budget support to the Kurdistan Regional Government (KRG) from the central government, and agreements between the GOI and KRG on a unified customs system and the shipment of Kirkuk oil through the IKR pipeline to Turkey.

Numerous efforts to facilitate business climate improvements saw positive movement in the past year. Since November 2018, the U.S. Embassy Baghdad Trade and Investment Team has operated as a partner post of the U.S. Commercial Service, supported by its office at the U.S. Embassy Amman. As a result, the U.S. Embassy in Baghdad now offers eight fee-based services, including market reports, local partner matching, and trade missions.

The U.S. government and the GOI have revived the 2005 U.S.-Iraq Strategic Framework Agreement and the Trade and Investment Framework Agreement (TIFA), and held the second TIFA meeting in June 2019 with good success. The American Chamber of Commerce in Iraq, having relaunched in October 2015, provides a platform for commercial advocacy for the U.S. business community. Local businesses also are re-energizing an American Chamber of Commerce presence in the IKR.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2019 162 of 180 http://www.transparency.org/
research/cpi/overview
World Bank’s Doing Business Report 2019 172 of 190 http://www.doingbusiness.org/
en/rankings
Global Innovation Index 2019 Not Ranked https://www.globalinnovationindex.org/
analysis-indicator
U.S. FDI in partner country ($M USD, stock positions) 2018 2,216 https://apps.bea.gov/international/
factsheet/factsheet.cfm
World Bank GNI per capita 2019 5,740 http://data.worldbank.org/indicator/
NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

The GOI has publicly and repeatedly stated its desire to attract foreign investment as part of national plans to strengthen local industries and promote the “Made in Iraq” brand. Although the GOI partnered with the World Bank and Kuwaiti government to host the Kuwait International Conference for the Reconstruction of Iraq in February 2018, the GOI has yet to follow through on commitments made at the conference to reform processes and regulations that hinder investment. Iraq has claimed that countries have not followed through on their financial pledges, either.

Iraq operates under its National Investment Law (Investment Law), amended in December 2015. The Investment Law outlines improved investment terms for foreign investors, the purchase of land in Iraq for certain projects, and an investment license process. The purchase of land for commercial or residential development remains extremely difficult. Since 2015, Iraq has been a party to the International Convention on the Settlement of Investment Disputes between States and Nations of Other States (ICSID).

Foreign investors continue to encounter bureaucratic challenges, corruption, and a weak banking sector, which make it difficult to successfully conclude investment deals. State-owned banks in Iraq serve predominantly to settle the payroll of the country’s public sector. Privately-owned banks, until recently, served almost entirely as currency exchange businesses. Some privately-owned banks have begun commercial lending programs, but Iraq’s lack of a credit monitoring system, insufficient legal guarantees for lenders, and limited connections to international banks hinder commercial lending. The financial sector in the IKR is still recovering from years of financial instability, and the Central Bank of Iraq (CBI) levied sanctions against the IKR’s financial institutions immediately following the Kurdistan independence referendum in September 2017.

Recently, the GOI has been exploring financing options to pay for large scale development projects rather than relying on its previous practice of funding investments entirely from current annual budget outlays.

According to Iraqi law, a foreign investor is entitled to make investments in Iraq on terms no less favorable than those applicable to an Iraqi investor, and the amount of foreign participation is not limited. However, Iraq’s Investment Law limits foreign direct and indirect ownership of most natural resources, particularly the extraction and processing of natural resources. It does allow foreign ownership of land to be used for residential projects and co-ownership of land to be used for industrial projects when an Iraqi partner is participating.

Despite this legal equity between foreign and domestic investment, the GOI reserves the right to screen foreign direct investment. The screening process is vague, although it does not appear to have been used to block foreign investment. Still, bureaucratic barriers to foreign direct investment, such as a requirement to place a significant portion of the capital investment in an Iraqi bank prior to receiving a license, remain significant.

The IKR operates under a 2006 investment law and its supporting regulations. The KRG is generally open to public-private partnerships and long-term financing, as demonstrated by the KRG’s oil and gas sector contracts that increase production. Legislation to amend the investment law to broaden its reach to potential investors remains pending in the Iraqi Kurdistan Parliament (IKP).

The GOI established the National Investment Commission (NIC) in 2007, along with its provincial counterparts Provincial Investment Commissions (PICs), as provided under Investment Law 13 (2006). This cabinet-level organization provides policy recommendations to the Prime Minister and support to current and potential investors in Iraq. The NIC’s “One Stop Shop” is intended to guide investors through the investment process, though investors have reported challenges using NIC services. The NIC can also grant investment licenses and facilitate visa and residency permit issuances for business travelers. In November 2019, the Council of Ministers enforced a retirement requirement for government officials, ending the term of Dr. Sami al-Araji as the Chairman of the NIC, and replacing him with an acting chairman until a new chairman is assigned.

Limits on Foreign Control and Right to Private Ownership and Establishment

Iraqi law stipulates that 50 percent of a project’s workers must be Iraqi nationals in order to obtain an investment license (National Investment Regulation No. 2, 2009). Investors must prioritize Iraqi citizens before hiring non-Iraqi workers. The GOI pressures foreign companies to hire more local employees and has encouraged foreign companies to partner with local industries and purchase Iraqi-made products.

The GOI generally favors SOEs and state-controlled banks in competitions for government tenders and investment. This preference discriminates against both local and foreign investors.

Other Investment Policy Reviews

In the past three years, the GOI did not conduct any investment policy reviews through the Organization for Economic Cooperation and Development (OECD), the World Trade Organization (WTO), or the United Nations Conference on Trade and Development (UNCTAD).

Business Facilitation

Foreign investors interested in establishing an office in Iraq or bidding on a public tender are required to register as a foreign business with the Ministry of Trade’s Companies Registration Department. The procedure costs and time to obtain a business license can be found at https://baghdad.eregulations.org/procedure/21?l=en . Many international companies use a local agent to assist in this process, due to its complexity. The GOI is working with UNCTAD to streamline the business registration process. The KRG is also working to put the business registration process and procedures online. Initial steps have been completed in both projects.

The KRG offers business registration for companies seeking business only in the IKR; however, companies that seek business in both the IKR and greater Iraq must register with the GOI Ministry of Trade.

Iraqi laws give the NIC and PICs authority to provide information, sign contracts, and facilitate registration for new foreign and domestic investors. The NIC offers investor facilitation services on transactions including work permit applications, visa approval letters, customs procedures, and business registration. Investors can request these services through the NIC website: http://investpromo.gov.iq/ . The NIC does not exclude businesses from taking advantage of its services based on the number of employees or the size of the investment project. The NIC can also connect investors with the appropriate provincial investment council.

These official investment commissions do struggle to operate amid unclear lines of authority, budget constraints, and the absence of regulations and standard operating procedures. Importantly, the investment commissions lack the authority to resolve investors’ bureaucratic obstacles with other Iraqi ministries.

To incorporate a company in Iraq, an investor must first obtain a statement from an Iraqi bank showing a minimum capital deposit. All investors must also apply for an investment license from the appropriate national, regional, or provincial investment commission. Companies must register with the Ministry of Finance’s General Commission for Taxation (GCT) and register employees for social security (if applicable). Companies receive their tax identification number as part of registering their business with the Ministry of Trade. Companies that provide security are also required to register with the Ministry of the Interior.

The Kurdistan Board of Investment (BOI) manages an investment licensing process in the IKR that can take from three to six months and may involve more than one KRG ministry or entity, depending on the sector of investment. Due to oversaturated commercial and residential real estate markets, the BOI has moved away from approving licenses in these sectors but may still grant them on a case-by-case basis. Businesses reported some difficulties establishing local connections, obtaining qualified staff, and meeting import regulations. Some businesses have reported that the KRG has not provided all of the promised support infrastructure such as water, electricity, or wastewater services, as required under the investment law framework. Additional information is available at the BOI’s website: http://www.kurdistaninvestment.org/ .

Outward Investment

Iraq does not restrict domestic investors from investing abroad.

6. Financial Sector

Capital Markets and Portfolio Investment

Iraq remains one of the most under-banked countries in the Middle East.  The Iraqi banking system includes 68 private banks and seven state-owned banks.  As of early 2020, 20 foreign banks have licensed branches in Iraq and several others have strategic investments in Iraqi banks.  The three largest banks in Iraq are Rafidain Bank, Rasheed Bank, and the Trade Bank of Iraq (TBI), which account for roughly 85 percent of Iraq’s banking sector assets.  Iraq’s economy remains primarily cash based, with many banks acting as little more than ATMs.  Rafidain and Rasheed offer standard banking products but primarily provide pension and government salary payments to individual Iraqis.

Credit is difficult to obtain and expensive.  Iraq ranks 186 out of 190 in terms of ease of getting credit in the World Bank’s 2020 Doing Business Report.  Although the volume of lending by privately-owned banks is growing, most privately-owned banks do more wire transfers and other fee-based exchange services than lending.  Businesses are largely self-financed or between individuals in private transactions.  State-owned banks mainly make financial transfers from the government to provincial authorities or individuals, rather than business loans.

The CBI introduced a small and medium enterprise lending program in 2015, in which 35 of the 48 private banks have participated.  In early 2020, it launched a real estate lending initiative, and an Islamic finance consolidation program.

The main purpose of TBI is to provide financial and related services to facilitate trade, particularly through letters of credit.  Although CBI granted private banks permission to issue letters of credit below USD50 million, TBI continues to process nearly all government letters of credit.

Money and Banking System

Although banking sector reform was a priority of Iraq’s IMF Stand-By Arrangement, the GOI has had only incremental success reforming its two largest state-owned banks, Rafidain and Rasheed.  Private banks are mostly active in currency exchanges and wire transfers.  CBI is Iraq’s central bank, headquartered in Baghdad, with branches in Basrah and Erbil.  CBI’s Erbil branch, and the IKR’s state-owned banking system, are now electronically linked to the CBI system.   The CBI now has full supervisory authority over the financial sector in the IKR, including the banks and non-bank financial institutions.

Foreign Exchange and Remittances

Foreign Exchange

The currency of Iraq is the dinar (IQD).  Iraqi authorities confirm that in practice, there are no restrictions on current and capital transactions involving currency exchange as long as valid documentation supports underlying transactions.  The Investment Law allows investors to repatriate capital brought into Iraq, along with proceeds.  Funds can be associated with any form of investment and freely converted into any world currency.  The Investment Law also allows investors to maintain accounts at banks licensed to operate in Iraq and transfer capital inside or outside of the country.

The GOI’s monetary policy since 2003 has focused on ensuring price stability primarily by maintaining a de facto peg between the IQD and the USD, while seeking exchange rate predictability by supplying U.S. dollars to the Iraqi market.  Banks may engage in spot transactions in any currency; however, they are not allowed to engage in forward transactions in Iraqi dinars for speculative purposes through auction but can do so through wire transfer.  There are no taxes or subsidies on purchases or sales of foreign exchange.

Remittance Policies

There are no recent changes to Iraq’s remittance policies.  Foreign nationals are allowed to remit their earnings, including U.S. dollars, in compliance with Iraqi law.  Iraq does not engage in currency manipulation.  Iraq is listed as a jurisdiction with strategic deficiencies according to the Financial Action Task Force.

Sovereign Wealth Funds

Iraq does not have a sovereign wealth fund.

7. State-Owned Enterprises

tableSOEs are active across all sectors in Iraq. GOI ministries currently own and operate over 192 SOEs, a legacy of the state planning system. The GOI’s continued support of unprofitable entities places a substantial fiscal burden on Iraq, as many SOEs are unproductive. These firms employ over half a million Iraqis, many of whom are underemployed. The degree to which SOEs compete with private companies varies by sector; SOEs face the most competition in the market for consumer goods. The GOI had expressed a commitment to reforming the SOEs and taking steps toward privatization as part of its previous international financing programs.

Iraqi law permits SOEs to partner with foreign companies. When parent ministries wish to initiate a partnership for an SOE under their purview, they generally advertise the tender on their ministry’s website. Partnerships are negotiated on a case-by-case basis, and require the respective minister’s approval. The Ministry of Industry and Minerals (MIM), which oversees the largest number of Iraq’s SOEs, established the following requirements for partnerships: minimum duration to three years, the foreign company must register a company office in Iraq, and the foreign company must participate in the production of goods. Foreign companies have faced challenges in partnerships because the GOI has, at times, cut subsidies to SOEs after partnerships were formed and due to conflicts between the parent ministry and the GOI’s official policy. In addition, the MIM has often required that the foreign investor pay all SOE employees’ salaries regardless of whether they are working on the agreed project.

GOI entities are required to give preferential treatment to SOEs, under multiple laws. A 2009 Council of Ministers’ decision requires all Iraqi government agencies to procure goods from SOEs unless SOEs cannot fulfill the quality and quantity requirements of the tender. A Board of Supreme Audit decision requires government agencies to award SOEs tenders if their bids are no more than 10 percent higher than other bids. Furthermore, some GOI entities, including the MIM, have also issued their own internal regulations requiring tenders to select Iraqi SOEs, unless Iraqi SOEs state that they cannot fulfill the order. Sometimes a foreign firm must form a partnership with an Iraqi firm to fulfill SOE-promulgated tenders. Further, SOEs are exempt from the bid bond and performance bond requirements that private businesses are subject to.

As a result of years of sanctions and war, most of these SOEs suffer from sclerotic management and dependence on GOI contracts. Many of them are not commercially viable due to bloated payrolls and obsolete equipment, although some have adapted and are producing goods for the domestic market. In 2015, the MIM developed a plan to restructure its 59 SOEs. Under the proposed plan, the MIM would rate SOEs based on their profitability and degree of government dependence. The government would then sell or shut down unprofitable SOEs that are unable to cover payroll obligations. However, no action to implement this plan has been undertaken. Another attempt at reform under the 2017 Federal General Budget Law would have expanded the potential role of private investment in SOE reform, giving governorates the mandate to expand partnerships with the private sector, with approval of the governorate’s council.

Iraq is not party to the Government Procurement Agreement within the framework of the WTO.

Iraqi law supports a degree of autonomy in the selection process of an SOE’s board of directors. For example, it requires that a minister’s sole appointment to a board of directors receive the approval of an “opinion board.” Nevertheless, in practice, the majority of board members have close personal and political connections to their parent ministry’s leadership.

SOEs do not adhere to OECD Guidelines. Iraq does not have a centralized ownership entity that exercises ownership rights for each of the SOEs. SOEs are required to seek their parent ministry’s approval for certain categories of financial decisions and operation expansions. However, in practice, SOEs defer to the parent ministry for the vast majority of decisions. SOEs submit financial reports to their parent ministry’s audit departments and the Board of Supreme Audit. These reports are not published and sometimes exclude salary expenses.

Privatization Program

The GOI has repeatedly announced that it plans to reorganize failing SOEs across multiple sectors.  Additionally, the GOI is eager to modernize Iraq’s financial and banking institutions.  There are, however, no concrete timelines for these initiatives, and entrenched patronage networks tying SOEs to ministries remain a stumbling block.  Presumably, foreign investors would have an opportunity to invest in privatization projects.  The IMF Stand-By Arrangement had required the GOI to conduct an audit of state-owned banks and the World Bank’s Development Policy Loan had required Iraq to audit SOEs.

9. Corruption

Iraq ranked 162 out of 180 on Transparency International’s 2019 Corruption Perception Index. Public corruption is a major obstacle to economic development and political stability. Corruption is pervasive in government procurement, in the awarding of licenses or concessions, dispute settlement, and customs.

While large-scale investment opportunities exist in Iraq, corruption remains a significant impediment to conducting business, and foreign investors can expect to contend with corruption in many forms, at all levels. While the GOI has moved toward greater effectiveness in reducing opportunities for procurement corruption in sectors such as electricity, oil, and gas, credible reports of corruption in government procurement are widespread, with examples ranging from bribery and kickbacks to awards involving companies connected to political leaders. Investors may come under pressure to take on well-connected local partners to avoid systemic bureaucratic hurdles to doing business. Similarly, there are credible reports of corruption involving large-scale problems with government payrolls, ranging from “ghost” employees and salary skimming to nepotism and patronage in personnel decisions.

Moving goods into and out of the country continues to be difficult, and bribery of or extortion by port officials is commonplace; Iraq ranks 181 out of 190 countries in the category of “Trading Across Borders” in the World Bank’s 2020 Doing Business report.

U.S. firms frequently identify corruption as a significant obstacle to foreign direct investment, particularly in government contracts and procurement, as well as performance requirements and performance bonds.

Several institutions have specific mandates to address corruption in Iraq. The Commission of Integrity, initially established under the Coalition Provisional Authority (CPA), is an independent government agency responsible for pursuing anti-corruption investigations, upholding the enforcement of laws, and preventing crime. The COI investigates government corruption allegations and refers completed cases to the Iraqi judiciary. COI Law No. 30, passed in 2011, updated the CPA provisions by granting the COI broader responsibilities and jurisdiction through three newly created directorates: asset recovery, research and studies, and the Anti-Corruption Academy. On October 28, the COR abrogated CPA Order 57, which had established Inspectors General (IGs) for each of Iraq’s ministries. Similar to the role of IGs in the U.S. government, these offices had been responsible for inspections, audits, and investigations within their ministries, although detractors claimed they in fact added another layer of bureaucracy and corruption.

The Board of Supreme Audit, established in 1927, is an analogue to the U.S. government’s General Accountability Office. It is a financially and administratively independent body that derives its authority from Law 31 of 2011 — the Law of the Board of Supreme Audit. It is charged with fiscal and regulatory oversight of all publicly-funded bodies in Iraq and auditing all federal revenues, including any revenues received from the IKR.

None of these organizations have provided an effective check on public corruption.

Neither the Commission for Integrity nor the IGs has effective jurisdiction within the IKR. The Kurdistan Board of Supreme Audit is responsible for auditing regional revenues with IKP and GOI oversight. The IKP established a regional Commission of Integrity in late 2013 and increased its jurisdiction the next year to include other branches of the KRG and money laundering.

Iraq is a party but not a signatory to the UN Anticorruption Convention. Iraq is not a party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.

Resources to Report Corruption

According to Iraqi law, any person or legal entity has the right to submit corruption-related complaints to the Commission for Integrity and the inspector general of a GOI ministry or body.

Commission for Integrity
Department of Complaints and Reports
Mobile: 07901988559
Landline: 07600000030
Hotline@nazaha.iq

10. Political and Security Environment

Iraqi forces continue to carry out counter-terrorism operations against ISIS cells throughout the country.  Terrorist attacks within the IKR occur less frequently than in other parts of Iraq, although the KRG, U.S. government facilities, and Western interests remain possible targets. In addition, anti-U.S. sectarian militias may threaten U.S. citizens and companies throughout Iraq.

The Department of State maintains a Level Four Travel Advisory for Iraq and advises travelers not to travel to Iraq due to terrorism, kidnapping, and armed conflict.  U.S. government personnel in Iraq are required to live and work under strict security guidelines.  State Department guidance to U.S. businesses in Iraq advises the use of protective security details.  Detailed security information is available on the U.S. Embassy website: http://iraq.usembassy.gov/.  Some U.S. and third-country business people travel throughout much of Iraq; however, in general their movement is restricted and most travel with security advisors and protective security teams.

Ireland

Executive Summary

The COVID-19 crisis has already had a serious impact on Ireland’s economy in 2020 and will continue to do so in 2021.  An economy bustling with activity with a forecasted budget surplus turned by mid-March to an economy with surging unemployment with a virtual shut-down.  Ireland’s government introduced emergency wage measures for out-of-work employees as the unemployment rate surged from 5 to 22 percent.  This sudden unexpected expenditure, the need for additional sovereign borrowing, and lack of economic activity will push Ireland to a budget deficit in 2020 and 2021.  The government is hopeful its emergency measures will help businesses and its once-sound economy to quickly return from its COVID-19 enforced hibernation.

The Irish government actively promotes foreign direct investment (FDI) and has had considerable success in attracting U.S. investment, in particular.  There are over 700 U.S. subsidiaries in Ireland operating primarily in the following sectors: chemicals, bio-pharmaceuticals and medical devices, computer hardware and software, internet and digital media; electronics, and financial services.

One of Ireland’s most attractive features as an FDI destination is its 12.5 percent corporate tax (since 2003).  Firms also choose Ireland for other factors including the quality and flexibility of the English-speaking workforce; the availability of a multilingual labor force; cooperative labor relations; political stability; and pro-business government policies and regulators.  Additional positive features include a transparent judicial system; transportation links; proximity to the United States and Europe; and Ireland’s geographic location making it well placed in time zones to support investment in Asia and the Americas.  Ireland benefits from its membership of the European Union (EU) and a barrier-free access to a market of almost 500 million consumers.  In addition, the clustering of existing successful companies has created an ecosystem attractive to new firms.  The United Kingdom’s (UK) departure from the EU, or Brexit, leaves Ireland as the only remaining English-speaking country in the EU and may make Ireland even more attractive as a destination for FDI.

The Irish government treats all firms incorporated in Ireland on an equal basis.  Ireland’s judicial system is transparent and upholds the sanctity of contracts, as well as laws affecting foreign investment.  Conversely, Ireland’s ability to attract investment are often marred by: high labor and operating costs (such as for energy); skilled-labor shortages; Eurozone-risk; a sometimes-deficient infrastructure (such as in transportation, housing, energy and broadband Internet); uncertainty in EU policies on some regulatory matters; and absolute price levels among the highest in Europe.

A formal screening process for foreign investment in Ireland is still being developed.  At present, investors looking to receive government grants or assistance through one of the four state agencies responsible for promoting foreign investment in Ireland are often required to meet certain employment and investment criteria.

Ireland uses the euro as its national currency and enjoys full current and capital account liberalization.

The government recognizes and enforces secured interests in property, both chattel and real estate.  Ireland is a member of the World Intellectual Property Organization (WIPO) and a party to the International Convention for the Protection of Intellectual Property.

Several state-owned enterprises (SOEs) operate in Ireland in the energy, broadcasting, and transportation sectors.  All of Ireland’s SOEs are open to competition for market share.

The United States and Ireland do not have a Bilateral Investment Treaty, but since 1950 have shared a Friendship, Commerce, and Navigation Treaty, which provides for national treatment of U.S. investors.  The two countries have also shared a Tax Treaty since 1998, supplemented in December 2012 with an agreement to improve international tax compliance and to implement the U.S. Foreign Account Tax Compliance Act (FATCA).

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2019 18 of 175 http://www.transparency.org/
research/cpi/overview
World Bank’s Doing Business Report 2019 24 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2019 12 of 129 https://www.globalinnovationindex.org/
analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2018 $442,167 http://apps.bea.gov/international/factsheet/
World Bank GNI per capita 2018 US$ 61,390 http://data.worldbank.org/
indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

The Irish government actively promotes FDI, a strategy that has fueled economic growth since the mid-1990s.  The principal goal of Ireland’s investment promotion has been employment creation, especially in technology-intensive and high-skill industries.  More recently, the government has focused on Ireland’s international competitiveness by encouraging foreign-owned companies to enhance research and development (R&D) activities and to deliver higher-value goods and services.

The Irish government’s actions have achieved considerable success in attracting U.S. investment in particular.  The stock of American FDI in Ireland stood at USD 442 billion in 2018, more than the U.S. total for China, India, Russia, Brazil, and South Africa (the so-called BRICS countries) combined.  There are approximately 700 U.S. subsidiaries currently in Ireland employing roughly 160,000 people and supporting work for another 128,000.  This figure represents a significant proportion of the 2.36 million people employed in Ireland.  U.S. firms operate primarily in the following sectors:  chemicals, bio-pharmaceuticals and medical devices, computer hardware and software, internet and digital media; electronics, and financial services.

U.S. investment has been particularly important to the growth and modernization of Irish industry over the past 25 years, providing new technology, export capabilities, management and manufacturing best practices, and employment opportunities.  The activities of U.S. firms in Ireland span from the manufacturing of high-tech electronics, computer products, medical devices, and pharmaceuticals to retailing, banking, finance, and other services.  More recently, Ireland has also become an important R&D center for U.S. firms in Europe, and a magnet for U.S. internet and digital media investment.  Industry leaders like Google, Amazon, eBay, PayPal, Facebook, Twitter, LinkedIn, Electronic Arts and cybersecurity firms like Tenable, Forcepoint, AT&T Cybersecurity, McAfee use Ireland as the hub or important part of their respective European, and sometimes Middle Eastern, African, and/or Indian operations.

U.S. companies are attracted to Ireland as an exporting sales and support platform to the EU market of almost 500 million consumers and other global markets, mainly the Middle East and Africa.  Ireland is a successful FDI destination for many reasons, including a corporate tax rate of 12.5 percent for all domestic and foreign firms; a well-educated, English-speaking workforce; the availability of a multilingual labor force; cooperative labor relations; political stability; and pro-business government policies and regulators.  Ireland also benefits from a transparent judicial system; good transportation links; proximity to the United States and Europe, and the drawing power of existing companies operating successfully in Ireland (a so-called “clustering” effect).

Conversely, factors that negatively affect Ireland’s ability to attract investment include high labor and operating costs (such as for energy); sporadic skilled-labor shortages; the fall-out from the COVID-19 pandemic; and sometimes-deficient infrastructure (such as in transportation, energy and broadband quality).  Ireland also suffers from housing and high-quality office space shortages; uncertainty in EU policies on some regulatory matters; and absolute price levels that are among the highest in Europe.  Some Irish government agencies have in the past expressed concern that energy costs and the reliability of energy supply could also undermine Ireland’s attractiveness as a FDI destination.  The American Chamber of Commerce in Ireland has called for greater attention to a “skills gap” in the supply of Irish graduates to the high technology sector.  It also has asserted that high personal income tax rates can make attracting talent from abroad difficult.

In 2013, Ireland became the first country in the Eurozone to exit a financial bailout program from the EU, European Central Bank, and International Monetary Fund (EU/ECB/IMF, or so-called Troika).  Compliance with the terms of the Troika program came at a substantial economic cost with gross domestic product (GDP) stagnation and austerity measures, while dealing with high unemployment (which hit 15 percent).  Strong economic progress followed through government-backed initiatives to attract investment and stimulate job creation and employment.  This aided economic recovery and Ireland’s economy was the one of the fastest growing economies in the Eurozone area annually to 2019.  The high unemployment levels fell dramatically and by the end of 2019 reached 4.7 percent.  In addition, the Irish government has successfully returned to international sovereign debt markets and successful treasury bonds sales, at low interest rates, exemplify renewed international confidence in Ireland’s economic progress.

Brexit and its Implications for Ireland

The UK’s exit from the EU leaves Ireland as the only remaining English-speaking country in the bloc.  Ireland is the only EU country to share a land border with the UK.  The future trading relationship between the UK and the EU will affect Ireland’s economic performance.  A significance trade risk includes the imposition of trade tariffs following the transition period due to end December 31, 2020.  Ireland will also lose a close EU ally on policy matters, particularly free trade and business friendly open markets.  Ireland is heavily dependent on the UK as an export market, especially for food products, and sectors such as food and agri-business may be hardest hit.  Ireland also sources many imports from the UK and cost rises are likely if supply chains are disrupted.  Irish trade with its EU colleagues may also be impacted as Irish trade to the EU often uses the UK as a land-bridge for trucking products.  A number of UK-based firms (including US firms) have moved headquarters or opened subsidiary offices in Ireland to facilitate ease of business with other EU countries. Initial econometric models from the Irish Department of Finance and the Central Bank of Ireland (CBI) in 2019 suggested Brexit would cut Ireland’s economic growth modestly in the near term.  Revised modelling is anticipated post COVID-19.

Industrial Promotion

Six government departments and organizations have responsibility to promote investment into Ireland by foreign companies:

  • The Industrial Development Authority of Ireland (IDA Ireland) has overall responsibility for promoting and facilitating FDI in all areas of the country. IDA Ireland is also responsible for attracting foreign financial and insurance firms to Dublin’s International Financial Services Center (IFSC). IDA Ireland maintains seven U.S. offices (in New York, NY; Boston, MA; Chicago, IL; Mountain View, CA; Irvine, CA; Atlanta, GA; and Austin, TX), as well as offices throughout Europe and Asia.
  • Enterprise Ireland (EI) promotes joint ventures and strategic alliances between indigenous and foreign companies. The agency assists entrepreneurs establish in Ireland and also assists foreign firms that wish to establish food and drink manufacturing operations in Ireland. EI has five existing offices in the United States (New York, NY; Austin, TX; Boston, MA; Chicago, IL; and Mountain View, CA); is planning on opening an office in Seattle, WA and has offices in Europe, South America, the Middle East, and Asia.
  • Shannon Group (formerly the Shannon Free Airport Development Company) promotes FDI in the Shannon Free Zone (SFZ) and owns properties in the Shannon region as potential green-field investment sites. Since 2006, the responsibility for investment by Irish firms in the Shannon region has passed to Enterprise Ireland while IDA Ireland remains responsible for FDI in the region.
  • Udaras na Gaeltachta (Udaras) has responsibility for economic development in those areas of Ireland where the predominant language is Irish, and works with IDA Ireland to promote overseas investment in these regions.
  • Department of Foreign Affairs and Trade (DFAT) has responsibility for economic messaging and supporting the country’s trade promotion agenda as well as diaspora engagement to attract investment.
  • Department of Business, Enterprise and Innovation (DBEI) supports the creation of jobs by promoting the development of a competitive business environment in which enterprises will operate with high standards and grow in sustainable markets.

Limits on Foreign Control and Right to Private Ownership and Establishment

Irish law allows foreign corporations (registered under the Companies Act 2014 or previous legislation and known locally as a public limited company, or plc for short) to conduct business in Ireland.  Any company incorporated abroad that establishes a branch in Ireland must file certain papers with the Registrar of Companies.  A foreign corporation with a branch in Ireland will have the same standing in Irish law for purposes of contracts, etc., as a domestic company incorporated in Ireland.  Private businesses are not competitively disadvantaged to public enterprises with respect to access to markets, credit, and other business operations.

No barriers exist to participation by foreign entities in the purchase of state-owned Irish companies.  Residents of Ireland may, however, be given priority in share allocations over all other investors.  An example of this was the 1998 sale of the state-owned telecommunications company Eircom when Irish residents received priority in share allocations.  The government privatized the national airline Aer Lingus through a stock market flotation in 2005, but chose to retain about a one-quarter stake.  At that time, U.S. investors purchased shares in the sale.  The International Airlines Group (IAG) purchased the Government’s remaining stake in the airline in 2015, and subsequently took an overall controlling interest which it continues to hold.

Citizens of countries other than Ireland and EU member states can acquire land for private residential or industrial purposes.  Under Section 45 of the Land Act, 1965, all non-EU nationals must obtain the written consent of the Land Commission before acquiring an interest in land zoned for agricultural use.  There are many equine stud farms and racing facilities owned by foreign nationals.  No restrictions exist on the acquisition of urban land.

Ireland does not yet have formal investment screening legislation but is in the process of developing it.  As an EU member, Ireland will have to implement any future common EU investment screening regulations or directives.

Other Investment Policy Reviews

The Economist Intelligence Unit and World Bank’s Doing Business 2019 provide current information on Ireland’s investment policies.

Business Facilitation

All firms must register with the Companies Registration Office (CRO online at www.cro.ie ).  The CRO, as well as registering companies, can also register a business/trading name, a non-Ireland based foreign company (external company), or a limited partnership.  Any firm or company registered under the Companies Act 2014 becomes a body corporate as and from the date mentioned in its certificate of incorporation.  The CRO website permits online data submission.  Firms must submit a signed paper copy of this online application to the CRO, unless the applicant company has already registered with www.revenue.ie (the website of Ireland’s tax collecting authority, the Office of the Revenue Commissioners).

Outward Investment

Enterprise Ireland assists Irish firms in developing partnerships with foreign firms mainly to develop and grow indigenous firms.

6. Financial Sector

Capital Markets and Portfolio Investment

Capital markets and portfolio investments operate freely with no discrimination between Irish and foreign firms.  In some instances, development authorities and commercial banks facilitate loan packages to foreign firms with favorable credit terms.  All loans are offered on market terms.  There was limited credit available, especially to small and medium-sized enterprises (SMEs), after the financial crisis of 2008.  Bank balance sheets have since improved with lending levels increasing as the health of the economy improved.  The government established the Strategic Banking Corporation of Ireland (SBCI) to ensure SMEs had access to credit available at market terms.  Irish legal, regulatory, and accounting systems are transparent and consistent with international norms and provide a secure environment for portfolio investment.  The current capital gains tax rate is 33 percent (since December 2012).

Euronext, an EU-based grouping of stock exchange operators in 2018 acquired and operates the Irish Stock Exchange (ISE), now known as Euronext Dublin.

Money and Banking System

The Irish banking sector, like many worldwide, came under intense pressure in 2007 and 2008 following the collapse of Ireland’s construction industry and the end of Ireland’s property boom.  A number of Ireland’s financial lenders were severely under-capitalized and required government bailouts to survive. The government fearing a flight of private investments, introduced temporary guarantees (still in operation) to personal depositors in 2008 to ensure that deposits remained in Ireland.  Anglo Irish Bank (Anglo), a bank heavily involved in construction and property lending, failed and was resolved by the government.  The government then took majority stakes in several other lenders, effectively nationalized two banks and acquired a significant proportion of a third.  The National Asset Management Agency (NAMA), established in 2009, acquired most of the property-related loan books of the Irish banks (including Anglo) at a fraction of their book value.

The government (with its increased exposure to bank debts) and a rising budget deficit had difficulty in placing sovereign debt on international bond markets following the economic crash of 2008.  By November 2010 it had to seek assistance from the Troika (International Monetary Fund (IMF), EU and European Central Bank (ECB)).  The Troika and Irish government agreed a rescue package of EUR 85 ($110) billion with EUR 67.5 ($88) billion of this provided by the Troika, to cover government deficits and costs related to the bank recapitalizations.  The government took effective control of Allied Irish Bank (AIB), following a further recapitalization by the end of 2010.  The government subsequently took into state control, and then resolved, two building societies, Irish Nationwide Building Society and Educational Building Society.  The government also helped to re-capitalize Irish Life and Permanent (the banking portion of which was spun off and now operates under the name Permanent TSB) and the Bank of Ireland (BOI).  The government, in line with Troika bailout program recommendations, forced Irish banks to deleverage their non-core assets to limit Ireland’s banks to effectively service domestic banking demand.  BOI succeeded in remaining non-nationalized by realizing capital from the sale of non-essential portfolios as well as by some targeted burden sharing with some of its bondholders.  The government sold just over 28 percent of its shareholding in AIB Bank in July 2017, but it still retains the remainder of the shareholding.

Ireland exited the Troika program in 2013 and shortly thereafter re-entered sovereign debt markets.  International financing rates continued to fall to record lows for Irish debt, and Ireland fully repaid IMF loans by bond sales secured at better less expensive rates.  Ireland also paid off some bilateral loans extended to it by Denmark and Sweden ahead of schedule in 2017, by securing funding from international markets at lower rates.

Ireland’s retail banking sector is now healthy and well capitalized in line with ECB rules on bank capitalizations.  The stock of non-performing loans on bank balance sheets remains high; and banks continue to divest themselves of these loans through bundle sales to investors.

The Central Bank of Ireland (CBI) is responsible for both central banking and financial regulation.  The CBI is a member of the European System of Central Banks (ESCB), whose primary objective is to maintain price stability in the euro area.

There are a large number of U.S. banks with operations in Ireland, many of whom are located in Dublin’s International Financial Services Center (IFSC) Dublin.  The IFSC originally functioned somewhat like a business park for financial services firms who located there to take advantage of tax breaks.  Financial firms, irrespective of their location in Ireland, are now treated equally like all firms for taxation.  U.S. banks located in Ireland provide a range of financial services to clients in Europe and worldwide.  Among these firms are State Street, Citigroup, Merrill Lynch, Wells Fargo, JP Morgan, and Northern Trust.  The regulation of the international banks operating throughout Ireland falls under the jurisdiction of the CBI.

Ireland is part of the Eurozone, and therefore does not have an independent monetary policy.  The ECB formulates and implements monetary policy for the Eurozone; the CBI implements that policy at the national level.  The Governor of the CBI is a member of the ECB’s Governing Council and has an equal say as other ECB governors in the formulation of Eurozone monetary and interest rate policy.  The CBI also issues euro currency in Ireland, acts as manager of the official external reserves of gold and foreign currency, conducts research and analysis on economic and financial matters, oversees the domestic payment and settlement systems, and manages investment assets on behalf of the State.

Foreign Exchange and Remittances

Foreign Exchange

Ireland uses the euro as its national currency and enjoys full current and capital account liberalization.  Foreign exchange is easily available at market rates.  Ireland is a member of the Financial Action Task Force (FATF).

Remittance Policies

There are no restrictions or significant reported delays in the conversion or repatriation of investment capital, earnings, interest, or royalties, nor are there any announced plans to change remittance policies.  Likewise, there are no limitations on the import of capital into Ireland.

Sovereign Wealth Funds

The National Treasury Management Agency (NTMA) is the asset management bureau of the government.  Day-to-day funding for government operations is normally through the sale of sovereign debt worldwide, which is the responsibility of the NTMA.  The NTMA is also responsible for investing Irish government funds, such as the national pension funds, in financial instruments worldwide.  Ireland suspended issuing sovereign debt upon entering the Troika bailout program in 2010 but has been successfully placing Irish debt since Ireland’s 2013 exit from the Troika program,

The NTMA also has oversight of the National Asset Management Agency (NAMA), the agency established to take on, and dispose of, the property-related loan books of Ireland’s bailed-out banks.

The government created the Ireland Strategic Investment Fund (ISIF) in 2014 with a statutory mandate to invest on a commercial basis to support economic activity and employment in Ireland.  The dual objective mandate of the ISIF – investment return and economic impact –requires all of its investments to generate returns as well as having a positive (i.e. job-creating) economic impact in Ireland.  The ISIF assisted a number of small and medium sized enterprises during Ireland’s economic revival.

7. State-Owned Enterprises

There are a number of SOEs in Ireland in the energy, broadcasting, and transportation sectors.  Eirgrid is the SOE with responsibility of managing and operating the electricity grid on the island of Ireland.  (Eirgrid has a sister company SONI in Northern Ireland).  There are two energy SOEs – Electric Ireland (for electricity) and Ervia, formerly Bord Gáis Eireann, (for natural gas).  Raidió Teilifís Éireann (RTE) operates the national broadcasting (radio and television) service while Córas Iompair Éireann (CIE) provides bus and train transportation throughout the country.  The government privatized both Eircom (the national telecommunication service) and Aer Lingus (the national airline).  CIE

Israel

Executive Summary

Israel has an entrepreneurial spirit and a creative, highly educated, skilled, and diverse workforce. It is a leader in innovation in a variety of sectors, and many Israeli start-ups find good partners in U.S. companies. Popularly known as “Start-Up Nation,” Israel invests heavily in education and scientific research. U.S. firms account for nearly two-thirds of the more than 300 research and development (R&D) centers established by multinational companies in Israel. Israel has the third most companies listed on the NASDAQ, after the United States and China. Various Israeli government agencies, led by the Israel Innovation Authority, fund incubators for early stage technology start-ups, and Israel provides extensive support for new ideas and technologies while also seeking to develop traditional industries. Private venture capital funds have flourished in Israel in recent years.

The fundamentals of the Israeli economy are strong, and a 2018 International Monetary Fund (IMF) report said Israel’s economy is thriving, enjoying solid growth and historically low unemployment. With low inflation and fiscal deficits that have usually met targets, most analysts consider Israeli government economic policies as generally sound and supportive of growth. Israel seeks to provide supportive conditions for companies looking to invest in Israel, through laws that encourage capital and industrial R&D investment. Incentives and benefits include grants, reduced tax rates, tax exemptions, and other tax-related benefits.

The U.S.-Israeli bilateral economic and commercial relationship is strong, anchored by two-way trade in goods that reached USD 33.9 billion in 2019, according to the U.S. Census Bureau, and extensive commercial ties, particularly in high-tech and R&D. The total stock of Israeli foreign direct investment (FDI) in the United States was USD 38.5 billion in 2018, according to the U.S. Department of Commerce. This year marks the 35th anniversary of the U.S.-Israel Free Trade Agreement (FTA), the United States’ first-ever FTA. Since the signing of the FTA, the Israeli economy has undergone a dramatic transformation, moving from a protected, low-end manufacturing and agriculture-led economy to one that is diverse, open, and led by a cutting-edge high-tech sector.

The Israeli government generally continues to take slow, deliberate actions to remove some trade barriers and encourage capital investment, including foreign investment. The continued existence of trade barriers and monopolies, however, have contributed significantly to the high cost of living and the lack of competition in key sectors. The Israeli government maintains some protective trade policies, usually in favor of domestic producers.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2019 35 of 175 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2019 35 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2019 10 of 129 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2018 $27.1 billion https://apps.bea.gov/international/factsheet/
World Bank GNI per capita 2018 $40,920 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Israel is open to foreign investment and the government actively encourages and supports the inflow of foreign capital.

The Israeli Ministry of Economy and Industry’s ‘Invest in Israel’ office serves as the government’s investment promotion agency facilitating foreign investment. ‘Invest in Israel’ offers a wide range of services including guidance on Israeli laws, regulation, taxes, incentives, and costs, and facilitation of business connections with peer companies and industry leaders for new investors. ‘Invest in Israel’ also organizes familiarization tours for potential investors and employs a team of advisors for each region of the world.

Limits on Foreign Control and Right to Private Ownership and Establishment

The Israeli legal system protects the rights of both foreign and domestic entities to establish and own business enterprises, as well as the right to engage in remunerative activity. Private enterprises are free to establish, acquire, and dispose of interests in business enterprises. As part of ongoing privatization efforts, the Israeli government encourages foreign investment in privatizing government-owned entities.

Israel’s policies aim to equalize competition between private and public enterprises, although the existence of monopolies and oligopolies in several sectors stifles competition. In the case of designated monopolies, defined as entities that supply more than 50 percent of the market, the government controls prices.

Israel established a centralized investment screening (approval) mechanism for certain inbound foreign investments in October 2019. Investments in regulated industries (e.g., banking and insurance) require approval by the relevant regulator. Investments in certain sectors may require a government license. Other regulations may apply, usually on a national treatment basis.

Other Investment Policy Reviews

The World Trade Organization (WTO) conducted its fifth and latest trade policy review of Israel in July 2018. In the past three years, the Israeli government has not conducted any investment policy reviews through the Organization for Economic Cooperation and Development (OECD) or the United Nations Conference on Trade and Development (UNCTAD). The OECD concluded an Economic Survey of Israel in March 2018.

The 2018 OECD Economic Survey of Israel can be found at http://www.mof.gov.il/Releases/SiteAssets/Pages/OECD18/2018-oecd-economic-survey-Israel.pdf 

Business Facilitation

The Israeli government is fairly open and receptive to companies wishing to register businesses in Israel. Israel ranked 28th in the “Starting a Business” category of the World Bank’s 2020 Doing Business Report, rising seventeen places from its 2019 ranking. Israel continues to institute reforms to make it easier to do business in Israel, but some challenges remain.

The business registration process in Israel is relatively clear and straightforward. Four procedures are required to register a standard private limited company and take 12 days to complete, on average, according to the Ministry of Finance. The foreign investor must obtain company registration documents through a recognized attorney with the Ministry of Justice and obtain a tax identification number for company taxation and for value added taxes (VAT) from the Ministry of Finance. The cost to register a company averages around USD 1,000 depending on attorney and legal fees.

The Israeli Ministry of Economy and Industry’s “Invest in Israel” website provides useful information for companies interested in starting a business or investing in Israel. The website is http://www.investinisrael.gov.il/Pages/default.aspx .

Outward Investment

6. Financial Sector

Capital Markets and Portfolio Investment

The Israeli government is supportive of foreign portfolio investment. The Tel Aviv Stock Exchange (TASE) is Israel’s only public stock exchange.

Financial institutions in Israel allocate credit on market terms. For many years, banks issued credit to only a handful of individuals and corporate entities, some of whom held controlling interests in banks. However, in recent years, banks significantly reduced their exposure to large borrowers following the introduction of stronger regulatory restrictions on preferential lending practices.

The primary profit center for Israeli banks is consumer-banking fees. Various credit instruments are available to the private sector and foreign investors can receive credit on the local market. Legal, regulatory, and accounting systems are transparent and conform to international norms, although the prevalence of inflation-adjusted accounting means there are differences from U.S. accounting principles.

In the case of publicly traded firms where ownership is widely dispersed, the practice of “cross-shareholding” and “stable shareholder” arrangements to prevent mergers and acquisitions is common, but not directed particularly at preventing potential foreign investment. Israel has no laws or regulations regarding the adoption by private firms of articles of incorporation or association that limit or prohibit foreign investment, participation, or control.

Money and Banking System

The Bank of Israel (BOI) is Israel’s Central Bank and regulates all banking activity and monetary policy. In general, Israel has a healthy banking system that offers most of the same services as the U.S. banking system. Fees for normal banking transactions are significantly higher in Israel than in the United States and some services do not meet U.S. standards. There are 12 commercial banks and four foreign banks operating in Israel, according to the BOI. Five major banks, led by Bank Hapoalim and Bank Leumi, the two largest banks, dominate Israel’s banking sector. Bank Hapoalim and Bank Leumi control nearly 60 percent of Israel’s credit market. The State of Israel holds 6 percent of Bank Leumi’s shares. All of Israel’s other banks are privatized.

Foreign Exchange and Remittances

Foreign Exchange

Israel completed its foreign exchange liberalization process on January 1, 2003, when it removed the last restrictions on the freedom of institutional investors to invest abroad. The Israeli shekel is a freely convertible currency and there are no foreign currency controls. The BOI maintains the option to intervene in foreign currency trading in the event of movements in the exchange rate not in line with fundamental economic conditions, or if the BOI assesses the foreign exchange market is not functioning appropriately. Israeli citizens can invest without restriction in foreign markets. Foreign investors can open shekel accounts that allow them to invest freely in Israeli companies and securities. These shekel accounts are fully convertible into foreign exchange. Israel’s foreign exchange reserves totaled USD 133.5 billion at the end of April 2020.

Transfers of currency are protected by Article VII of the International Monetary Fund (IMF) Articles of Agreement: http://www.imf.org/External/Pubs/FT/AA/index.htm#art7

Remittance Policies

Most foreign currency transactions must be carried out through an authorized dealer. An authorized dealer is a banking institution licensed to arrange, inter alia, foreign currency transactions for its clients. The authorized dealer must report large foreign exchange transactions to the Controller of Foreign Currency. There are no limitations or significant delays in the remittance of profits, debt service, or capital gains.

Sovereign Wealth Funds

Israel passed legislation to establish the Israel Citizens’ Wealth Fund, a sovereign wealth fund managed by the BOI, in 2014 to offset the effect of natural gas production on the exchange rate. The original date for beginning the fund’s operations was 2018, but has been postponed until late 2021. The law establishing the fund states that it will begin operating a month after the state’s tax revenues from natural gas exceed USD 280 million (1 billion New Israeli Shekels).

7. State-Owned Enterprises

Israel established the Government Companies Authority (GCA) following the passage of the Government Companies Law. The GCA is an auxiliary unit of the Ministry of Finance. It is the administrative agency for state-owned companies in charge of supervision, privatization, and implementation of structural changes. The Israeli state only provides support for commercial SOEs in exceptional cases. The GCA leads the recruitment process for SOE board members. Board appointments are subject to the approval of a committee, which confirms whether candidates meet the minimum board member criteria set forth by law.

The GCA oversees some 100 companies, including commercial and noncommercial companies, government subsidiaries, and companies under mixed government-private ownership. Among these companies are some of the biggest and most complex in the Israeli economy, such as the Israel Electric Corporation, Israel Aerospace Industries, Rafael Advanced Defense Systems, Israel Postal Company, Mekorot Israel National Water Company, Israel Natural Gas Lines, the Ashdod, Haifa, and Eilat Port Companies, Israel Railways, Petroleum and Energy Infrastructures and the Israel National Roads Company. The GCA does not publish a publicly available list of SOEs.

Israel is party to the Government Procurement Agreement (GPA) of the World Trade Organization.

Privatization Program

In late 2014, Israel’s cabinet approved a privatization plan allowing the government to issue minority stakes of up to 49 percent in state-owned companies on the Tel Aviv Stock Exchange over a three-year period, a plan estimated to increase government revenue by USD 4.1 billion. The plan aimed to sell stakes in Israel’s electric company, water provider, railway, post office and some defense-related contractors. The GCA will likely auction minority stakes in a public bidding process without formal restrictions on the participation of foreign investors. Restrictions on foreign investors could be possible in the case of companies deemed to be of strategic significance.

Israel’s interministerial privatization committee approved plans in January 2020 to sell off the Port of Haifa , Israel’s largest shipping hub. The incoming owner will be required to invest approximately USD 280 million (1 billion NIS) in the port, including the cost of upgrading infrastructure and financing the layoff of an estimated 200 workers. That same committee voted to enable private investment in Israel Post in an effort to sell up to 40 percent of the government’s shares in Israel Post.

9. Corruption

Bribery and other forms of corruption are illegal under several Israeli laws and Civil Service regulations. Israel became a signatory to the OECD Bribery convention in November 2008 and a full member of the OECD in May 2010. Israel ranks 35 out of 180 countries in Transparency International’s 2019 Corruption Perceptions Index, dropping one place from its 2018 ranking. Several Israeli NGOs focus on public sector ethics in Israel and Transparency International has a local chapter.

Israel is a signatory of the OECD Convention on Combatting Bribery of Foreign Public Officials in International Business Transactions.

The Israeli National Police, state comptroller, Attorney General, and Accountant General are responsible for combating official corruption. These entities operate effectively and independently and are sufficiently resourced. NGOs that focus on anticorruption efforts operate freely without government interference.

The international NGO Transparency International closely monitors corruption in Israel.

Resources to Report Corruption

Ministry of Justice
Office of the Director General
29 Salah a-Din Street Jerusalem
02-6466533, 02-6466534, 02-6466535
mancal@justice.gov.il

Transparency International Israel
Ms. Ifat Zamir
Tel Aviv University, Faculty of Management +972 3 640 9176
+972 3 640 9176
ifat@ti-israel.org

10. Political and Security Environment

For the latest safety and security information regarding Israel and the current travel advisory level, see the Travel Advisory for Israel, the West Bank, and Gaza (https://travel.state.gov/content/travel/en/traveladvisories/traveladvisories/israel-west-bank-and-gaza-travel-advisory.html).

The security situation remains complex in Israel and the West Bank, and can change quickly depending on the political environment, recent events, and geographic location. Terrorist groups and lone-wolf terrorists continue plotting possible attacks in Israel, the West Bank, and Gaza. Terrorists may attack with little or no warning, targeting tourist locations, transportation hubs, markets or shopping malls, and local government facilities. Violence can occur in Jerusalem and the West Bank without warning. Terror attacks in Jerusalem and the West Bank have resulted in the deaths and injury of U.S. citizens and others. Hamas, a U.S. government-designated foreign terrorist organization, controls security in Gaza. The security environment within Gaza and on its borders is dangerous and volatile.

Italy

Executive Summary

Italy’s economy, the eighth largest in the world, is fully diversified, and dominated by small and medium-sized firms (SMEs), which comprise 99.9 percent of Italian businesses.  Yet Italy continues to attract less foreign direct investment than many other European industrialized nations.  The government’s efforts to implement new investment promotion policies to position Italy as a desirable investment destination have been undermined in part by Italy’s slow economic growth, unpredictable tax regime, multi-layered bureaucracy, and  time-consuming and often inconsistent legal and regulatory procedures.

There were several significant investment-related policy developments during 2019, including enactment of a digital services tax (DST) that primarily targets tech firms and media companies; the Italian government’s extension of its Golden Power investment screening authority to procurement of 5G-related goods and services from non-EU suppliers; and the government’s March 2019 signing of a memorandum of understanding (MOU) with China to endorse partnership with the Belt and Road Initiative (BRI).  While the MOU is neither a treaty nor an agreement, Italy’s signature signaled the Italian government’s keen interest in attracting investment from China in its infrastructure.

Italy’s relatively affluent domestic market, access to the European Common Market, proximity to emerging economies in North Africa and the Middle East, and assorted centers of excellence in scientific and information technology research, remain attractive to many investors.  The government remains open to foreign investment in shares of Italian companies and continues to make information available online to prospective investors.  Tourism is an important source of external revenue, as are exports of pharmaceutical products, furniture, industrial machinery and machine tools, electrical appliances, automobiles and auto parts, food, and wine, as well as textiles/fashion.  The sectors that have attracted significant foreign investment include telecommunications, transportation, energy, and pharmaceuticals.

Italy is an original member of the 19-nation Eurozone.  Germany, France, the United States, the United Kingdom, Spain, and Switzerland are Italy’s most important trading partners, with China continuing to gain ground.  Italy’s economy outperformed expectations for 2019, with modest GDP growth of 0.3%, (exceeding consensus projections of 0.2%); a government budget deficit of 1.6% of GDP, the lowest level registered since 2009, and an unchanged public debt to GDP percentage of 134.8%.  Another positive factor was that government borrowing fell from 2.2% of GDP in 2018 to 1.6% of GDP in 2019.  The significant decrease in debt servicing costs reflected the decrease in yields on Italian government bonds during 2019.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2019 51 of 180 http://www.transparency.org/
research/cpi/overview
World Bank’s Doing Business Report 2019 58 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2019 30 of 129 https://www.globalinnovationindex.org/
analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2018 $38,479 https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data
World Bank GNI per capita 2018 $33,730 http://data.worldbank.org/
indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Italy welcomes foreign direct investment (FDI).  As a European Union (EU) member state, Italy is bound by the European Union’s treaties and laws.  Under the EU treaties with the United States, as well as OECD commitments, Italy is generally obliged to provide national treatment to U.S. investors established in Italy or in another EU member state.

EU and Italian antitrust laws provide Italian authorities with the right to review mergers and acquisitions for market dominance.  In addition, the Italian government may block mergers and acquisitions involving foreign firms under the “Golden Power” law if the proposed transactions raise national security concerns.  This law was enacted in 2012 and further implemented with decrees or legislation in 2015, 2017, and 2019.  The Golden Power law allows the Government of Italy (GOI) to block foreign acquisition of companies operating in strategic sectors (identified as defense/national security, energy, transportation, telecommunications, critical infrastructure, sensitive technology, and nuclear and space technology).  In March 2019, the GOI issued a decree expanding the Golden Power authority to cover the purchase of goods and services related to the planning, realization, maintenance, and management of broadband communications networks using 5G technology.  The GOI’s Golden Power authority applies in all cases in which the potential purchaser is a non-EU company.  The authority extends to cases involving EU companies if the target of the acquisition engages in defense/national security activities.  In this respect, the GOI has a say regarding the ownership of private companies as well as ones in which the government has a stake.  An interagency group led by the Prime Minister’s office reviews acquisition applications and prepares the dossiers/ recommendations for the Council of Ministers’ decisions.

According to the latest figures available from the Italian Trade Agency (ITA), foreign investors own significant shares of 12,768 Italian companies.  As of the end of 2019, these companies employed 1,211,872 workers with overall sales of EUR 573.6 billion.  ITA operates under the umbrella of the Italian Ministry of Economic Development.

The Italian Trade Agency (ITA) promotes foreign investment through Invest in Italy:  http://www.investinitaly.com/en/ .  The Foreign Investments Attraction Department is a dedicated unit of ITA for facilitating the establishment and the development of foreign companies in Italy.  As of April 2019, ITA maintained a presence in 65 countries to assist foreign investors.

Additionally, Invitalia is the national agency for inward investment and economic development and is part of the Italian Ministry of Economy and Finance.  The agency focuses on strategic sectors for development and employment.  It places an emphasis on southern Italy, where investment and development lag in comparison to the rest of the country.  Invitalia finances projects both large and small, supporting entrepreneurs with concrete development plans, especially in innovative and high-value-added sectors.  For more information, see https://www.invitalia.it/eng .  The Ministry of Economic Development also has a program to attract innovative investments:  https://www.mise.gov.it .

Italy’s main business association (Confindustria) also provides assistance to companies in Italy:  https://www.confindustria.it/en .

Limits on Foreign Control and Right to Private Ownership and Establishment

Under EU treaties and OECD obligations, Italy is generally obliged to provide national treatment to U.S. investors established in Italy or in another EU member state.

EU and Italian antitrust laws provide national authorities with the right to review mergers and acquisitions over a certain financial threshold.  The Italian government may block mergers and acquisitions involving foreign firms to protect the national strategic interest or in retaliation if the government of the foreign firm applies discriminatory measures against Italian firms.  Foreign investors in the defense or aircraft manufacturing sectors are more likely to encounter resistance from the many ministries involved in reviewing foreign acquisitions than foreign investors in other sectors.

Italy maintains a formal national security screening process for inbound foreign investment in the sectors of defense/national security, transportation, energy, telecommunications, critical infrastructure, sensitive technology, and nuclear and space technology under its “Golden Power” legislation, and where there may be market concentration (antitrust) issues.  Italy’s Golden Power legislation was expanded in March 2019 to include the purchase of goods and services related to the planning, realization, maintenance, and management of broadband communications networks using 5G technology.

Other Investment Policy Reviews

An OECD Economic Survey was published for Italy in April 2019.  See   https://www.oecd.org/economy/surveys/Italy-2019-OECD-economic-survey-overview.pdf 

Business Facilitation

Italy has a business registration website, available in Italian and English, administered through the Union of Italian Chambers of Commerce: http://www.registroimprese.it.   The online business registration process is clear and complete, and available to foreign companies.  Before registering a company online, applicants must obtain a certified e-mail address and digital signature, a process that may take up to five days.  A notary is required to certify the documentation.  The precise steps required for the registration process depend on the type of business being registered.  The minimum capital requirement also varies by type of business. Generally, companies must obtain a value-added tax account number (partita IVA) from the Italian Revenue Agency; register with the social security agency (Istituto Nazionale della Previdenza Sociale INPS); verify adequate capital and insurance coverage with the Italian workers’ compensation agency Istituto Nazionale per L’Assicurazione contro gli Infortuni sul Lavoro (INAIL); and, notify the regional office of the Ministry of Labor.  According to the World Bank Doing Business Index 2020, Italy’s ranking decreased from 67 to 98 out of 190 countries in terms of the ease of starting a business:  it takes six procedures and 11 days to start a business in Italy.  Additional licenses may be required, depending on the type of business to be conducted.

Invitalia and the Italian Trade Agency’s Foreign Direct Investment Unit assist those wanting to set up a new business in Italy.  Many Italian localities also have one-stop shops to serve as a single point of contact for, and provide advice to, potential investors on applying for necessary licenses and authorizations at both the local and national level.  These services are available to all investors.

Outward Investment

Italy neither promotes, restricts, nor incentivizes outward investment, nor restricts domestic investors from investing abroad.

6. Financial Sector

Capital Markets and Portfolio Investment

The GOI welcomes foreign portfolio investments, which are generally subject to the same reporting and disclosure requirements as domestic transactions.  Financial resources flow relatively freely in Italian financial markets and capital is allocated mostly on market terms.  Foreign participation in Italian capital markets is not restricted.  In practice, many of Italy’s largest publicly-traded companies have foreign owners among their primary shareholders.  While foreign investors may obtain capital in local markets and have access to a variety of credit instruments, gaining access to equity capital is difficult.  Italy has a relatively underdeveloped capital market and businesses have a long-standing preference for credit financing.  The limited venture capital available is usually provided by established commercial banks and a handful of venture capital funds.

The London Stock Exchange owns Italy’s only stock exchange:  the Milan Stock Exchange (Borsa Italiana).  The exchange is relatively small — 375 listed companies and a market capitalization of only 36.6 percent of GDP at the end of December 2019.  Although the exchange remains primarily a source of capital for larger Italian firms, Borsa Italiana created “AIM Italia” in 2012 as an alternative exchange with streamlined filing and reporting requirements to encourage SMEs to seek equity financing.  Additionally, the GOI recognizes that Italian firms remain overly reliant on bank financing and has initiated some programs to encourage alternative forms of financing, including venture capital and corporate bonds.  While financial experts have held that slow CONSOB processes and cultural biases against private equity have limited equity financing in Italy, the Italian Association of Private Equity, Venture Capital, and Private Debt (AIFI) indicate investment by private equity funds in Italy decreased by 26 percent from 2018 to 2019, totaling EUR 7,223 million – still a low figure given the size of Italy’s economy.

The Italian Companies and Stock Exchange Commission (CONSOB), is the Italian securities regulatory body:  http://www.consob.it .

Italy’s financial markets are regulated by the Italian securities regulator (CONSOB), Italy’s central bank (the Bank of Italy), and the Institute for the Supervision of Insurance (IVASS).  CONSOB supervises and regulates Italy’s securities markets (e.g., the Milan Stock Exchange).  The European Central Bank (ECB) assumed direct supervisory responsibilities for the 12 largest Italian banks in 2019 and indirect supervision for less significant Italian banks through the Bank of Italy.  IVASS supervises and regulates insurance companies.  Liquidity in the primary markets (e.g., the Milan exchanges) is sufficient to enter and exit sizeable positions, though Italian capital markets are small by international standards.  Liquidity may be limited for certain less-frequently traded investments (e.g., bonds traded on the secondary and OTC markets).

Italian policies generally facilitate the flow of financial resources to markets.  Dividends and royalties paid to non-Italians may be subject to a withholding tax, unless covered by a tax treaty.  Dividends paid to permanent establishments of non-resident corporations in Italy are not subject to the withholding tax.

Italy imposed a financial transactions tax (FTT, a.k.a. Tobin Tax) beginning in 2013.  Financial trading is taxed at 0.1 percent in regulated markets and 0.2 percent in unregulated markets.  The FTT applies to daily balances rather than to each transaction.  The FTT applies to trade in derivatives as well, with fees ranging from EUR 0.025 to EUR 200.  High-frequency trading is also subject to a 0.02 percent tax on trades occurring every 0.5 seconds or faster (e.g., automated trading).  The FTT does not apply to “market makers,” pension and small-cap funds, transactions involving donations or inheritances, purchases of derivatives to cover exchange/interest-rate/raw-materials (commodity market) risks, and financial instruments for companies with a capitalization of less than EUR 500 million.

There are no restrictions on foreigners engaging in portfolio investment in Italy.  Financial services companies incorporated in another EU member state may offer investment services and products in Italy without establishing a local presence.

Since April 2020, investors, Italian or foreign, acquiring a stake in excess of one percent of a publicly traded Italian firm must inform CONSOB but do not need its approval.  Earlier the limit was three percent for non-SMEs and five percent for SMEs.

Any Italian or foreign investor seeking to acquire or increase its stake in an Italian bank equal to or greater than ten percent must receive prior authorization from the BOI.  Acquisitions of holdings that would change the controlling interest of a banking group must be communicated to the BOI at least 30 days in advance of the closing of the transactions.  Approval and advance authorization by the Italian Insurance Supervisory Authority IVASS are required for any significant acquisition in ownership, portfolio transfer, or merger of insurers or reinsurers.   Regulators retain the discretion to reject proposed acquisitions on prudential grounds (e.g., insufficient capital in the merged entity).

Italy has sought to curb widespread tax evasion by improving enforcement and changing popular attitudes.  GOI actions include a public communications effort to reduce tolerance of tax evasion; increased and visible financial police controls on businesses (e.g., raids on businesses in vacation spots at peak holiday periods); and audits requiring individuals to document their income.  In 2014 Italy’s Parliament approved the enabling legislation for a package of tax reforms, many of which entered into force in 2015.  The tax reforms aim to institutionalize OECD best practices to encourage taxpayer compliance, including by reducing the administrative burden for taxpayers through the increased use of technology such as e-filing, pre-completed tax returns, and automated screenings of tax returns for errors and omissions prior to a formal audit.  The reforms also offer additional certainty for taxpayers through programs such as cooperative compliance and advance tax rulings (i.e., binding opinions on tax treatment of transactions in advance) for prospective investors.

The GOI and the Bank of Italy have accepted and respect IMF obligations, including Article VIII.

Money and Banking System

Despite isolated problems at individual Italian banks, the banking system remains sound and capital ratios exceed regulatory thresholds.  However, Italian banks’ profit margins have suffered since 2011 as a result of tightening European supervisory standards and requirements to increase banks’ capital.  The recession brought a pronounced worsening of the quality of banks’ assets, which further dampened banks’ profitability.  The ratio of non-performing loans (NPLs) to total outstanding loans decreased significantly since its height in 2017.  Currently net NPLs stand at EUR 26 billion (February 2020 data).  In the last quarter of 2019, the ratio of new NPLs to outstanding loans was equal to 1.2%, against a level of 2.1% in the last quarter of 2007, on the eve of the global financial crisis.  The share of NPLs in banks’ total loans continues to fall, also thanks to large-scale disposals made by a large number of banks.  At the end of December 2019, The BOI) reported the NPL ratio was 3.3%, net of provisions — down from 9.8% in December 2015.

The GOI is also taking steps to facilitate acquisitions of NPLs by outside investors.  In December 2016, the GOI created a EUR 20 billion bank rescue fund to assist struggling Italian banks in need of liquidity or capital support.  Italy’s fourth-largest bank, Monte dei Paschi di Siena (MPS), became the first bank to avail itself of this fund in January 2019.  The GOI also facilitated the sale of two struggling “Veneto banks” (Banca Popolare di Vicenza and Veneto Banca) to Intesa San Paolo in mid-2017.  In January 2019, Banca Carige, the smallest Italian bank under ECB supervision, was put under special administration.

Italy’s central bank, the BOI, is a member of the euro system and the European Central Bank (ECB).  In addition to ECB supervision of larger Italian banks, BOI maintains strict supervisory standards.  The Italian banking system weathered the 2007-2013 financial crisis without resorting to government intervention.

The banking system in Italy has consolidated since the financial crisis, though additional consolidation is needed, according to the OECD and ECB.  In 2018, the Italian banking landscape included 58 (down from 70) banking groups comprising 100 banks (down from 129), 327 (down from 393) banks not belonging to a banking group, and 78 (down from 82) branches of foreign banks.  The GOI is taking further steps to encourage consolidation and facilitate acquisitions by outside investors.  The Italian banking sector remains overly concentrated on physical bank branches for delivering services, further contributing to sector-wide inefficiency and low profitability.  Electronic banking is available in Italy, but adoption remains below euro-zone averages and non-cash transactions are relatively uncommon.

In July 2019, Italy’s largest bank by assets, UniCredit, reported plans to cut 10,000 jobs from its global workforce under its new business plan.  This includes jobs across Europe as well as in Italy where the bank has the largest number of employees.  According to media reports, UniCredit’s business plan aims to cut labor costs by 10 percent through 2020-2023, with workforce reductions mostly handled via early retirements.  According to analysts, Italy’s banking sector is overstaffed by an estimated 275,000 workers.  Technological changes and evolution of the banking core business, combined with the reduced margins of profitability have pushed small and big banks, like UniCredit, to cut costs.

In 2019, the BOI said the profitability of Italian banks was broadly in line with that of European peers.  The BOI noted that the annualized return of return on equity (ROE) at 5.0% net of extraordinary components was below the estimated cost of equity, and it expects further benefits from ongoing restructuring and consolidation in the banking sector.  The process is especially strong among small cooperative banks, and the new framework is expected to strengthen their capacity to attract investors.

Most non-insurance investment products are marketed by banks, and tend to be debt instruments.  Italian retail investors are conservative, valuing the safety of government bonds over most other investment vehicles.  Less than ten percent of Italian households own Italian company stocks directly.  Several banks have established private banking divisions to cater to high-net-worth individuals with a broad array of investment choices, including equities and mutual funds.

Credit is allocated on market terms, with foreign investors eligible to receive credit in Italy.  In general, credit in Italy remains largely bank-driven.  In practice, foreigners may encounter limited access to finance, as Italian banks may be reluctant to lend to prospective borrowers (even Italians) absent a preexisting relationship.  Although a wide array of credit instruments are available, bank credit remains constrained.  Weak demand, combined with risk aversion by banks, continues to limit lending, especially to smaller firms.

The Ministry of Economy and Finance and BOI have indicated interest in blockchain technologies to transform the banking sector.  The Association of Italian Banks (ABI) continued its testing of an application through 2019, with a growing number of banks scheduled to take part in pilot projects throughout 2020.  By the end of 2020 the Italian banking sector is expected to have distributed ledger technology at the core of the country’s banking system.

According to the Financial Action Task Force, Italy has a strong legal and institutional framework to fight money laundering and terrorist financing and authorities have a good understanding of the risks the country faces.  There are areas where improvements are needed, such as its money-laundering investigative and prosecutorial action on risks associated with self-laundering, stand-alone money laundering, and foreign predicate offenses, and the abuse of legal persons.

Foreign Exchange and Remittances

Foreign Exchange

In accordance with EU directives, Italy has no foreign exchange controls.  There are no restrictions on currency transfers; there are only reporting requirements.  Banks are required to report any transaction over EUR 1,000 due to money laundering and terrorism financing concerns.  Profits, payments, and currency transfers may be freely repatriated.  Residents and non-residents may hold foreign exchange accounts.  In 2016, the GOI raised the limit on cash payments for goods or services to EUR 3,000.  Payments above this amount must be made electronically.  Enforcement remains uneven.  The rule exempts e-money services, banks, and other financial institutions, but not payment services companies.

Italy is a member of the European Monetary Union (EMU), with the euro as its official currency.  Exchange rates are floating.

Remittance Policies

There are no limitations on remittances, though transactions above EUR 1,000 must be reported. In December 2018 Parliament passed a decree which imposed a 1.5 percent tax on remittances sent outside of the EU via money transfer.  The government estimates that the tax on remittances to countries outside of the EU will raise several hundred million euros per year.

Sovereign Wealth Funds

The state-owned national development bank Cassa Depositi e Prestiti (CDP) launched a strategic wealth fund in 2011, now called CDP Equity (formerly Fondo Strategico Italiano – FSI).  CDP Equity has EUR 3.5 billion in capital and has invested EUR 3.7 billion in eleven portfolio companies.  CDP Equity generally adopts a passive role by purchasing minority interests as a non-managerial investor.  It does not hold a majority stake in any of its portfolio companies.  CDP Equity invests solely in Italian companies with the goal of furthering the expansion of companies in growth sectors.  CDP Equity provides information on its funding, investment policies, criteria, and procedures on its website (http://en.cdpequity.it/ ).  CDP Equity is open to capital investments from outside institutional investors, including foreign investors.  CDP Equity is a member of the International Working Group of Sovereign Wealth Funds and follows the Santiago Principles.

7. State-Owned Enterprises

The Italian government has in the past owned and operated a number of monopoly or dominant companies in certain strategic sectors.  However, beginning in the 1990s and through the early 2000s, the government began to privatize most of these state-owned enterprises (SOEs).  Notwithstanding this privatization effort, the GOI retains 100 percent ownership of the national railroad company (Ferrovie dello Stato) and road network company (ANAS), both of which merged in January 2018.  The GOI holds a 99.56 percent share of RAI, the national radio and television broadcasting network; and retains a controlling interest, either directly and/or through the state-controlled sovereign wealth fund Cassa Depositi e Prestiti (CDP), in companies such as shipbuilder Fincantieri (71.6 percent), postal and financial services provider Poste Italiane (65 percent), electricity provider ENEL (23.6 percent), oil and gas major Eni (30 percent), defense conglomerate Leonardo-Finmeccanica (30.2 percent), natural gas transmission company Snam (30.1 percent), as well as electricity transmission provider Terna (29.85 percent).

However, these companies are operating in a competitive environment (domestically and internationally) and are increasingly responsive to market-driven decision-making rather than GOI demands.  In addition, many of the state-controlled entities are publicly traded, which provides additional transparency and corporate governance obligations, including equitable treatment for non-governmental minority shareholders.  Italy’s parastatals (CDP, Ferrovie dello Stato, Eni, ENEL, ENAV, Poste Italiane and Leonardo) generated EUR 2.4 billion return on investment in 2018 for the GOI.  The largest contributor was CDP (EUR 1.256 billion) and the second largest was Eni (EUR 671 million).

SOEs are subject to the same tax treatment and budget constraints as fully private firms.  Additionally, industries with SOEs remain open to private competition.

As an EU member, Italy is covered by EU government procurement rules.  As an OECD member, Italy adheres to the Guidelines on Corporate Governance of State-owned Enterprises.

Privatization Program

In 2016 the Italian government committed to privatize EUR 16 billion in state-owned assets, although ensuing privatizations have not achieved this target.  The privatizations fall into two categories:  minority stakes in SOEs and underutilized real estate holdings.  In 2016, the GOI sold a minority stake in the air traffic controller (ENAV).  Revenues in 2016 were well below expectations due to the unfavorable markets that resulted in the postponement of other planned privatizations, including a minority share of the national rail network (Ferrovie dello Stato) and the national postal provider (Poste Italiane).    The GOI’s budget planning document estimates that in 2020-2021 it will accrue EUR 3 billion in revenues from privatizations.

The GOI solicits and actively encourages foreign investors to participate in its privatizations, which are non-discriminatory and transparent.  The GOI sells SOE shares through the Milan Stock Exchange (Borsa Italiana), while real estate sales are conducted through public bidding processes (typically online).  The Italian Public Property Agency (Agenzia del Demanio) administers real estate sales:  https://venditaimmobili.agenziademanio.it/AsteDemanio/sito.php .  The Agency has created a centralized registry with information on individual parcels for sale or long-term lease: http://www.investinitalyrealestate.com/en/ .

9. Corruption

Corruption and organized crime continue to be significant impediments to investment and economic growth in parts of Italy, despite efforts by successive governments to reduce risks.  Italian law provides criminal penalties for corruption by officials.  The government has usually implemented these laws effectively, but officials sometimes have engaged in corrupt practices with impunity.  While anti-corruption laws and trials garner headlines, they have been only somewhat effective in stopping corruption.  Italy has steadily improved in Transparency International’s Corruption Perceptions Index, in overall rank and score every year since 2014, and ranked 51 in the 2019 Index.

In December 2018 Italy’s Parliament passed an anti-corruption bill that introduced new provisions to combat corruption in the public sector and regulate campaign finance.  The measures in the bill changed the statute of limitations for corruption-related crimes as well as other crimes and made it more difficult for people to “run out the clock” on their respective cases.  Italy’s anti-money-laundering laws also apply to public officials, defined as any person who has been entrusted with important political functions, as well as their immediate family members.  (This encompasses anyone from the head of state to members of the executive body in state-owned companies.)

U.S. individuals and firms operating or investing in foreign markets should take the time to become familiar with the anticorruption laws of both the foreign country and the United States in order to comply with them and, where appropriate, they should seek the advice of legal counsel.  While the U.S. Embassy has not received specific complaints of corruption from U.S. companies operating in Italy, commercial and economic officers are familiar with high-profile cases that may affect U.S. companies.  The Embassy has received requests for assistance from companies facing a lack of transparency and complicated bureaucracy, particularly in the sphere of government procurement and specifically in the aerospace industry.  There have been no reports of government failure to protect NGOs that investigate corruption (such as Transparency International Italy).

Italy has signed and ratified the UN Anticorruption Convention and the OECD Convention on Combatting Bribery.

Resources to Report Corruption

Autorità Nazionale Anticorruzione (ANAC)
Via Marco Minghetti, 10 – 00187 Roma
Phone:  +39 06 367231
Fax:  +39 06 36723274
Email:  protocollo@pec.anticorruzione.it

Contact Info page:  http://www.anticorruzione.it/portal/public/classic/MenuServizio/Contatti 

ANAC’s whistleblowing web page is:  http://www.anticorruzione.it/portal/public/classic/Servizi/ServiziOnline/SegnalazioneWhistleblowing 

Transparency International Italia
P.le Carlo Maciachini 11
20159 Milano – Italy
T:  +39 02 40093560
F:  +39 02 406829
E:  info@transparency.it
General web site:  www.transparency.it 
Corruption Specific:  https://www.transparency.it/alac/ 

10. Political and Security Environment

Politically motivated violence in Italy is rare and most often connected to Italian internal developments or social issues.  Italian authorities and foreign diplomatic facilities have found bombs outside public buildings, have received bomb threats, and have been targets of letter bombs, fire bombs, and Molotov cocktails in the past several years.  These attacks have generally occurred at night, and they have not targeted or injured U.S. citizens.  Political violence is not a threat to foreign investments in Italy, but corruption, especially associated with organized crime, can be a major hindrance, particularly in the south.

Italy-specific travel information and advisories can be found at: www.travel.state.gov.

Jamaica

Executive Summary

The Government of Jamaica (GOJ) considers foreign direct investment (FDI) a key driver for economic growth and in recent years has undertaken macroeconomic reforms that have improved its investment climate. Jamaica continued to reap benefits from its fiscal consolidation program following it successful graduation from consecutive International Monetary Fund (IMF) programs. The debt-to-GDP ratio has moderated from a peak of near 150 percent of GDP in 2013 to near 90 percent at the end of March 2020, the lowest it has been in two decades. The attendant expansion in fiscal space allowed the government to boost capital spending and reduce taxes. Under its IMF programs, the GOJ also replaced its discretionary investment incentives with legislation that simplified the income tax regime and codified tax benefits for investors. These efforts have contributed to Jamaica’s improvement in the World Bank’s Doing Business Report (DBR), from a ranking of 90 out of 190 countries in 2013 to 71 in 2020. Jamaica recently reduced or removed several distortionary taxes across a range of economic sectors. Jamaica’s improving creditworthiness, record-setting stock market performance, and proposed financial sector reforms should stimulate further local investments in productive sectors.

In anticipation of the shocks expected from the COVID-19 pandemic, the government announced a stimulus package to assist both businesses and individuals. As a contingency, the government also requested access to the IMF’s Rapid Financing Instrument (RFI). Despite projections for economic contraction of between three and five percent this year, Jamaica’s improving economic fundamentals should allow it to better withstand the shock.

Jamaica received $775 million in FDI in 2018 (latest available data), a $113 million drop over the previous year. According to the 2019 UNCTAD World Investment Report, this positioned Jamaica as the second highest FDI destination in the English-Speaking Caribbean and among the top five of Small Island Developing States. The United States, Canada, Spain, Mexico, and China continued to drive FDI in 2018. Up to the onset of COVID-19 the tourism, mining, energy, and construction sectors led investment inflows into the island. Most of these sectors, though hard hit by the global pandemic, are expected to rebound when the situation abates. Business process outsourcing (BPO), including customer service and back office support, continued to attract local and overseas investment. Investments in improved air, sea, and land transportation have reduced time and costs for transporting goods and have created opportunities in logistics.

Jamaica’s high crime rate, corruption, and comparatively high taxes have stymied its investment prospects. The country’s corruption perception ranking, by Transparency International, worsened from 70 (2018) to 74 (2019) of 175 countries. Despite laws that prescribe criminal penalties for corrupt acts by officials, there were still reports of government corruption during the year, with a minister and another public official facing several criminal charges. Measures implemented to address crime in continued into 2020, including the continuation of States of Emergency and Zones of Special Operations in several high crime areas of the island. While these efforts have resulted in the lowering crimes, Jamaica remained among the countries with the highest homicide rate in the world.

With energy price a major component of the cost of doing business, the government has instituted a number of policies to address the structural impediment. In early 2020, the government published its Integrated Resource Plan (IRP), outlining the country’s electricity roadmap for the next two decades. The document has projected 1,164 MW of new generation capacity at a cost of $7.3 billion, including fuel cost and the replacement of retired plants. Renewable sources are projected to generate 50 percent of electricity by 2037, with Liquified Natural Gas (LNG), introduced in 2016, providing the other 50 percent. The increased investment in new generation is expected to increase efficiency and reduce the price of electricity to consumers.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 74 of 180 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2019 71 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 81 of 126 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, stock positions) 2018 USD 167 http://apps.bea.gov/international/factsheet/
World Bank GNI per capita 2018 USD 4,970 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

The Government of Jamaica (GOJ) is open to foreign investment in all sectors of the economy. The GOJ has made significant structural changes to its economy, under International Monetary Fund (IMF) guidance over the past six years, resulting in an improved investment environment. Since 2013, Jamaica’s Parliament passed numerous pieces of legislation to improve the business environment and support economic growth through a simplified tax system and broadened tax base. The establishment of credit bureaus and a Collateral Registry under the Secured Interest in Personal Property (SIPP) legislation are improving access to credit. Jamaica made starting a business easier by consolidating forms and made electricity less expensive by reducing the cost of external connection works. The GOJ implemented an electronic platform for the payment of taxes and has established a 90-day window for development approvals.

The GOJ’s public procurement regime was amended, with effect from April 2019, to include provisions for domestic margins of preference, affording preferential treatment to Jamaican suppliers in public contracts in some circumstances, and setting aside a portion of the government’s procurement budget for local micro, small, and medium enterprises. Notwithstanding, U.S. businesses are encouraged to participate in GOJ open procurements, many of which are published in media and via the government’s electronic procurement website: https://www.gojep.gov.jm/ .

With Jamaica’s debt to GDP ratio having decreased to near 90 percent, the government continued to use the fiscal space to reduce and/or abolish a number of distortionary taxes and reduced the sales tax by 1.5 percentage points to 15 percent effective April 2020.

Jamaica’s commitment to regulatory reform is an intentional effort to become a more attractive destination for foreign investment. According to the World Bank’s “Doing Business 2020” report, Jamaica ranked 71 out of 190 economies, above average compared to Latin American and Caribbean countries. The country improved or held firm on all metrices assessed in the 2020 report, moving most significantly in the area registering property. The GoJ replaced the Ad Valorem Stamp Duty rate payable on the registration of collateral, such as property used to secure loan instruments, with a flat rate duty. Additionally, the transfer tax, payable on the change of ownership from one person to another, was also reduced during the year from five to two percent. Jamaica is ranked 80 out of 140 countries in the World Economic Forum’s 2019 Global Competitiveness Index. Bureaucracy remains a major impediment, with the country continuing to underperform in the areas of trading across borders, paying taxes, and enforcing contracts.

Jamaica’s trade and investment promotion agency, Jamaica Promotions Corporation (JAMPRO), is the GOJ agency responsible for promoting business opportunities to local and foreign investors. While JAMPRO does not institute general criteria for FDI, the institution targets specific sectors for investment and promotes Jamaican exports (see http://www.jamaicatradeandinvest.org/ ).

JAMPRO and the Jamaica Business Development Corporation assist micro, small, and medium-sized enterprises (MSME) primarily through business facilitation and capacity building. MSMEs tend to consist of less than 10 employees. Such fee-based services would be made available to foreign-owned MSMEs (see https://www.jbdc.net/ ).

Limits on Foreign Control and Right to Private Ownership and Establishment

All private entities, foreign and domestic, are entitled to establish and own business enterprises, as well as to engage in all forms of remunerative activity subject to, inter alia, labor, registration, and environmental requirements. Jamaica does not impose limits on foreign ownership or control and local laws do not distinguish between local and foreign investors. There are no sector-specific restrictions that impede market access. A 2017 amendment to the Companies Act requires companies to disclose beneficial owners to the Companies Office of Jamaica (ORC).  The law mandates that the company retains records of legal and beneficial owners for seven years. The GOJ has proposed new legislation on the incorporation and operation of International Business Companies (IBC), which is designed to attract and facilitate a wide variety of international business activities to include: (1) holding companies providing asset protection for intellectual property rights, real property, and the shares of other companies; (2) serving as vehicles for licensing and franchising; (3) conducting international trade, and investment activities; (4) acting as special purpose vehicles in international financial transactions; and, (5) serving as the international headquarters for global companies.

The U.S. government is not aware of any discrimination against foreign investors at the time of initial investment or after the investment is made. However, under the Companies Act, investors are required to either establish a local company or register a branch office of a foreign-owned enterprise. Branches of companies incorporated abroad must register with the Registrar of Companies if they intend to operate in Jamaica. There are no laws or regulations requiring firms to adopt articles of incorporation or association that limit or prohibit foreign investment, participation, or control. Incentives are available to local and foreign investors alike, including various levels of tax relief.

Other Investment Policy Reviews

Jamaica concluded a third-party trade policy review through the WTO in September 2017. The WTO Secretariat’s recommendations are listed here: https://www.wto.org/english/tratop_e/tpr_e/tp459_e.htm 

Jamaica has not undertaken any investment policy reviews within the last three years in conjunction with the Organization for Economic Cooperation and Development (OECD) or United Nations Conference on Trade and Development (UNCTAD). The GOJ’s previous WTO review took place in 2011 and an OECD review took place in 2004.

Business Facilitation

Businesses can register using the “Super Form,” a single Business Registration Form for New Companies and Business Names. The ORC acts as a “one-stop-shop,” effectively reducing the registration time to between one and three days. Foreign companies can register using these forms, with or without the assistance of an attorney or notary. The “Super Form” can be accessed under Forms at the ORC’s website (https://www.orcjamaica.com ).

Outward Investment

While the GOJ does not actively promote an outward investment program, it does not restrict domestic investors from investing abroad.

6. Financial Sector

Capital Markets and Portfolio Investment

Credit is available at market terms, and foreigners are allowed to borrow freely on the local market at market-determined rates of interest. A relatively effective regulatory system was established to encourage and facilitate portfolio investment. Jamaica has had its own stock exchange, the Jamaica Stock Exchange (JSE), since 1969. The JSE was the top performing capital market indices in 2018 and was among the top five performers in 2019. The Financial Services Commission (FSC) and the Bank of Jamaica (BOJ), the central bank, regulate these activities. Jamaica adheres to IMF Article VIII by refraining from restrictions on payments and transfers for current international transactions.

Money and Banking System

At the end of 2019 there were 11 deposit-taking institutions (DTIs) consisting of eight commercial banks, one merchant bank (Licensed under the Financial Institutions Act) and two building societies. The number of credit unions shrank from 47 at the end of 2009 to 25 at the end of 2019. Commercial banks held assets of approximately $12 billion and liabilities of $10 billion at the end of 2019. Non-performing loans (NPL) of $140 million at end December 2019, were 2.2 percent of total loans. Five of the country’s eight commercial banks are foreign-owned. After a financial sector crisis in the mid-1990s led to consolidations, the sector has remained largely stable.

In October 2018, the GOJ took legislative steps to modernize and make the central bank operationally independent through the tabling of amendments to the Bank of Jamaica (BOJ) Act. The modernization program includes, inter alia, the institutionalization of the central bank independence, improved governance, and the transitioning of monetary policy towards inflation targeting. These developments follow previous strengthening of the BOJ, in 2015, when it undertook independent responsibility for banking supervision. Jamaica’s financial governance framework is in line with international standards and legislative amendments continue to enhance the BOJ’s regulatory powers.

Foreign Exchange and Remittances

Foreign Exchange

There are no restrictions on holding funds or on converting, transferring, or repatriating funds associated with an investment. In 2017, the BOJ implemented a new system called the BOJ Foreign Exchange Intervention & Trading Tool (B-FXITT) for the sale and purchase of foreign exchange (FX) to market players. The new system is a more efficient and transparent way of intervening in the FX market to smooth out demand and supply conditions.

Investment-related funds are freely convertible to regularly traded currencies, particularly into United States, Canadian dollars, and United Kingdom pounds. However, foreign exchange transactions must be conducted through authorized foreign exchange dealers, “cambios,” and bureau de change. Foreign exchange is generally available and investors are free to remit their investment returns.

Remittance Policies

The country’s financial system is fully liberalized and subject to market conditions. There is no required waiting period for the remittance of investment returns. Any person or company can purchase instruments denominated in foreign currency. There are no restrictions or limitations on the inflow or outflow of funds for the remittance of profits or revenue. The country does not possess the financial muscle to engage in currency manipulation.

Jamaica was listed among the Major Money Laundering Jurisdictions in the U.S. Department of State’s 2019 International Narcotics Control Strategy Report (INCSR), while noting that the GoJ has enacted legislation to address corruption.

In February 2020, Jamaica was grey listed by the Financial Action Task Force, for failing to address some of the deficiencies identified in the 2017 Caribbean Financial Action Task Force Mutual Evaluation Report (MER) on anti-money laundering and counter-terrorist financing measures (https://www.cfatf-gafic.org/index.php/documents/4th-round-meval-reports ).

Having entered an Observation Period following the 2017 publication of the MER, Jamaica’s progression towards remedying partially and non-compliant areas was slow. GoJ has developed a FAFT action plan which includes developing a broader understanding of its money laundering/terrorist financing risk and including all financial institutions and designated non-financial businesses and professions in the AML/CFT regime, and ensuring adequate risk-based supervision in all sectors.

Sovereign Wealth Funds

Jamaica does not have a sovereign wealth fund or an asset management bureau.

7. State-Owned Enterprises

A legacy initiative of Jamaica’s Stand-By Agreement with the IMF, is the reformation of the public sector to include State-Owned Enterprises (SOEs). Jamaican SOEs are most active in the agriculture, mining, energy, and transport sectors of the economy. Of 148 public bodies, 55 are self-financing and are therefore considered SOEs as either limited liability entities established under the Companies Act of Jamaica or statutory bodies created by individual enabling legislation. SOEs generally do not receive preferential access to government contracts. SOEs must adhere to the provisions of the GOJ (Revised) Handbook of Public Sector Procurement Procedures and are expected to participate in a bidding process to provide goods and services to the government. SOEs also provide services to private sector firms. SOEs must report quarterly on all contracts above a prescribed limit to the Integrity Commission. Since 2002, SOEs have been subject to the same tax requirements as private enterprises and are required to purchase government-owned land and raw material and execute these transactions on similar terms as private entities.

Jamaica’s Public Bodies Management and Accountability Act (PBMA) requires SOEs to prepare annual corporate plans and budgets, which must be debated and approved by Parliament. As part of the GOJ’s economic reform agenda, SOE performance is monitored against agreed targets and goals, with oversight provided by stakeholders including representatives of civil society. The GOJ prioritized divestment of SOEs, particularly the most inefficient, as part of its IMF reform commitments. Private firms compete with SOEs on fair terms and SOEs generally lack the same profitability motives as private enterprises, leading to the GOJ’s absorbing the debt of loss-making public sector enterprises.

Jamaica’s public bodies report to their respective Board of Directors appointed by the responsible portfolio minister and while no general rules guide the allocation of SOE board positions, some entities allocate seats to specific stakeholders. In 2012, the GOJ approved a Corporate Governance Framework (CGF) under which persons appointed to boards should possess the skills and competencies required for the effective functioning of the entity. With some board members being selected on the basis of their political affiliation, the government is in the process of developing new board policy guidelines. The Jamaican court system, while slow, is respected for being fair and balanced and in many cases has ruled against the GOJ and its agents.

Privatization Program

As a condition of Jamaica’s Stand-By Agreement with the IMF, the GOJ identified a number of public assets to be privatized from various sectors. Jamaica actively courts foreign investors as part of its divestment strategy. In certain instances, the government encourages local participation. Restrictions may be placed on certain assets due to national security considerations. Privatization can occur through sale, lease, or concession. Transactions are generally executed through public tenders but the GOJ reserves the right to accept unsolicited proposals for projects deemed to be strategic. The Development Bank of Jamaica, which oversees the privatization program, is mandated to ensure that the process is fair and transparent. When some entities are being privatized, advertisements are placed locally and through international publications, such as the Financial Times, New York Times, and Wall Street Journal, to attract foreign investors. Foreign investors won most of the privatization bids in the last decade.

While the time taken to divest assets depends on state of readiness and complexity, on average transactions take between 18 and 24 months. The process involves pre-feasibility and due diligence assessments; feasibility studies; pre-qualification of bidders; and a public tender. In 2019, the GoJ divested two of its major assets through initial public offerings: a 62-megawatt wind farm, through a public offering, which raised almost $40 million, and a toll highway, which raised almost $90 million. In 2018, the GOJ signed a 25-year concession for the management and development of the Norman Manley International Airport in Kingston. Other large privatizations include the 2003 privatization of Sangster International Airport in Montego Bay and the 2015 privatization of the Kingston Container Terminal port facility. The GOJ also seeks to divest assets owned by large government entities such as the Urban Development Corporation and the Factories Corporation of Jamaica.

List of current privatization transactions can be found at http://dbankjm.com/current-transactions/ 

9. Corruption

Jamaican law provides criminal penalties for corruption by public officials, however, there is at least circumstantial evidence that some officials engage in corrupt practice. There were also reports of government corruption in 2019 and it remained a significant problem of public concern. Media and civil society organizations continued to criticize the government for being slow and at times reluctant to tackle corruption .

Under the Corruption Prevention Act, public servants can be imprisoned for up to 10 years and fined as much as USD 100,000 if found guilty of engaging in acts of bribery, including bribes to foreign public officials.

In 2017, Jamaica passed an Integrity Commission Act that consolidated three agencies with anti-corruption mandates into a single entity, the Integrity Commission, which now has limited prosecutorial powers.  The three agencies are the precursor Integrity Commission, which received and monitored statutory declarations from parliamentarians; the Office of the Contractor General (OCG), which monitored government contracts; and the Commission for the Prevention of Corruption, which received the financial filings of specified public servants. A key area of concern for corruption is in government procurement. However, successful prosecutions – particularly for high-level corruption – are rare.

Two Ministers of government demitted office between 2018 and March 2019, in the wake of corruption allegations.

Corruption, and its apparent linkages with organized crime, appear to be one of the root causes of Jamaica’s high crime rate and economic stagnation.  In 2019, Transparency International gave Jamaica a score of 43 out of a possible 100 on the Corruption Perception Index (CPI), demoting the island four spots from its ranking of 70th in 2018 to 74th globally.

UN Anticorruption Convention, OECD Convention on Combatting Bribery

Jamaica ratified major international corruption instruments, including the Inter-American Convention Against Corruption and the United Nations Convention Against Corruption. Jamaica is not party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.

Resources to Report Corruption

Major Organised Crime and Anti-Corruption Agency (MOCA)
24hr Hotline:
1-800-CORRUPT (1-800-267-7878)
Email: info@moca.gov.jm

National Integrity Action
2 Holborn Road
Kingston 10, Jamaica
Phone: 1 876 906 4371/ Fax: 876-754-7951
Email: info@niajamaica.org

10. Political and Security Environment

Crime poses a greater threat to foreign investment in Jamaica than political violence, as the country has not experienced any major political violence since the early 1980s. Violent crime, rooted in poverty, unemployment, and transnational criminal organizations, is a serious problem in Jamaica. Sporadic gang violence and shootings are concentrated in specific inner-city neighborhoods, but can occur elsewhere. There were 1,326 murders in Jamaica in 2019, giving the island a homicide rate of 47.4 per 100,000, marginally higher than 2018’s rate of 47 but 21.9 percent lower than in 2017. Jamaica had the second highest homicide rate in the Caribbean and Latin America in 2019. Jamaica also faces a significant problem with extortion in certain urban commercial areas and on large construction project sites. The security challenges increase the cost of doing business as companies spend on additional security measures.

The U.S. Department of State Travel Advisory (in May 2020) assessed Jamaica at Level 2, indicating travelers should exercise increased caution. U.S. companies with personnel assigned to Jamaica are strongly advised to conduct security and cultural awareness training.

Please refer to the Jamaica 2019 Crime and Safety Report from the Department of State’s Overseas Security Advisory Council (OSAC) for additional information (https://www.osac.gov/Country/Jamaica/Detail ).

Japan

Executive Summary

Japan is the world’s third largest economy, the United States’ fourth largest trading partner,

and was the third largest contributor to U.S. foreign direct investment (FDI) in 2018.  The Japanese government actively welcomes and solicits foreign investment and has set ambitious goals for increasing inbound FDI.  Despite Japan’s wealth, high level of development, and general acceptance of foreign investment, inbound FDI stocks, as a share of GDP, are the lowest in the OECD.

Japan’s legal and regulatory climate is highly supportive of investors in many respects.  Courts are independent, but attorney-client privilege does not exist in civil, criminal or administrative matters.  There is no right to have counsel present during criminal or administrative interviews. The country’s regulatory system is improving transparency and developing new regulations in line with international norms.  Capital markets are deep and broadly available to foreign investors.  Japan maintains strong protections for intellectual property rights with generally robust enforcement.  The country remains a large, wealthy, and sophisticated market with world-class corporations, research facilities, and technologies.  Nearly all foreign exchange transactions, including transfers of profits, dividends, royalties, repatriation of capital, and repayment of principal, are freely permitted.  The sectors that have historically attracted the largest foreign direct investment in Japan are electrical machinery, finance, and insurance.

On the other hand, foreign investors in the Japanese market continue to face numerous challenges.  A traditional aversion towards mergers and acquisitions within corporate Japan has inhibited foreign investment, and weak corporate governance has led to low returns on equity and cash hoarding among Japanese firms, although business practices are improving in both areas.  Investors and business owners must also grapple with inflexible labor laws and a highly regimented labor recruitment system that can significantly increase the cost and difficulty of managing human resources.  The Japanese government has recognized many of these challenges and is pursuing initiatives to improve investment conditions.

Levels of corruption in Japan are low, but deep relationships between firms and suppliers may limit competition in certain sectors and inhibit the entry of foreign firms into local markets.

Future changes in Japan’s investment climate are largely contingent on the success of structural reforms to the Japanese economy. Efforts to strengthen corporate governance and increase female and senior citizen labor force participation have the potential to improve Japan’s economic performance.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 18 of 180 http://www.transparency.org/
research/cpi/overview
World Bank’s Doing Business Report “Ease of Doing Business” 2019 29 of 190 http://www.doingbusiness.org/rankings
Global Innovation Index 2018 15 of 127 https://www.globalinnovationindex.org/
analysis-indicator
U.S. FDI in partner country (M USD, stock positions) 2017 USD 129,064  https://apps.bea.gov/international/factsheet/
World Bank GNI per capita 2018 USD 41,310 http://data.worldbank.org/
indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

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 Act was amended in 2019, updating Japan’s foreign investment review regime.  The legislation becomes effective in May 2020 and lowers the ownership threshold for pre-approval notification to the government for foreign investors to 1 percent from 10 percent in industries that could pose risks to national security.  There are waivers for certain categories of investors.

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 2018, Japan’s inward FDI stock was JPY 30.7 trillion (USD 285 billion), 6.2 percent 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.

The government’s “FDI Promotion Council,” comprised of government ministers and private sector advisors, releases recommendations on improving Japan’s FDI environment.  In a May 2018 report  ( http://www.invest-japan.go.jp/documents/pdf/support_program_en.pdf ), the council decided to launch the Support Program for Regional Foreign Direct Investment in Japan, recommending that local governments formulate a plan to attract foreign companies to their regions.

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; a lack of independent directors on many company boards (even though this is changing); 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 participating in this initiative, 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 one 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 weapons manufacturers, nuclear power, agriculture, aerospace, forestry, petroleum, electric/gas/water utilities, telecommunications, and leather manufacturing.  There are waivers for certain categories of investors.

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/japan/economic-survey-japan.htm ).

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 online, 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 2020 World Bank “Doing Business” Report, it takes eleven 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.  JETRO operates a one-stop business support center in Tokyo so that foreign companies can complete all necessary legal and administrative procedures in one location. In 2017, JETRO launched an online business registration system that allows businesses to register company documents  but cannot be used for the registration of immigration documentation.

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 .

Nippon Export and Investment Insurance (NEXI) supports outward investment by providing exporters and investors insurance that protects them against risks and uncertainty in foreign countries that is not covered by private-sector insurers.

Japan also employs specialized agencies and public private partnerships to target outward investment in specific sectors.  For example, the Fund Corporation for the Overseas Development of Japan’s Information and Communications Technology and Postal Services (JICT) supports overseas investment in global telecommunications, broadcasting, and postal businesses.

Similarly, the Japan Overseas Infrastructure Investment Corporation for Transport and Urban Development (JOIN) is a government-funded corporation to invest and participate in transport and urban development projects that involve Japanese companies.  The fund specializes in overseas infrastructure investment projects such as bullet trains, airports, and green city projects with Japanese companies, banks, institutions (i.e., JICA, JBIC, NEXI), and governments.

Finally, the Japan Oil, Gas and Metals National Corporation (JOGMEC) is a Japanese government entity administered by the Agency for Natural Resources and Energy under METI.  JOGMEC provides equity capital and liability guarantees to Japanese companies for oil and natural gas exploration and production projects.

Japan places no restrictions on outbound investment.

6. Financial Sector

Capital Markets and Portfolio Investment

Japan maintains no formal restrictions on inward portfolio investment except for certain provisions covering national security.  Foreign capital plays an important role in Japan’s financial markets, with foreign investors comprising the majority of trading shares 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.  Companies included are determined by such factors as three-year average returns on equity, three-year accumulated operating profits and market capitalization, along with others 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 ROE.  The Bank of Japan has purchased JPX-Nikkei 400 ETFs as part of its monetary operations, and Japan’s massive Government Pension Investment Fund (GPIF) has also invested in JPX-Nikkei 400 ETFs, putting an additional premium on membership in the index.

Japan does not restrict financial flows, and accepts obligations under 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 many 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.  For example, 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 more than USD 2 trillion – is Japan Post Bank, a financial subsidiary of the Japan Post Group that is still majority state-owned, 56.9 percent as of September 2019.  Japan Post Bank offers services via 24,367 Japan Post office branches, at which Japan Post Bank services can be conducted, as well as Japan Post’s network of 29,800 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 438 correspondent banking relationships available to the country’s central bank (main banks: 123; trust banks: 13; foreign banks: 50; credit unions: 248; 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.

In 2017 Japan accounted 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 22-registered virtual currency exchanges in Japan.

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 and 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.

7. State-Owned Enterprises

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 IPO that sold 11 percent of available shares in each of the three entities.  The postal service subsidiary, Japan Post Co., remains a wholly owned subsidiary of 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 but in their insurance subsidiary which took place in April 2019:  JPH currently owns 88.99 percent of the banking subsidiary and 64.48 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 government planned to implement the third sale of its JPH share holdings in 2019 but did not do so on the back of sluggish share performance.

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 previously dominated by state-owned enterprises but now 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.

Deregulation of Japan’s power sector took a step forward in April 2016 with the full liberalization of the retail sector.  This has led to increased competition from new entrants in the retail electricity market.  While the generation and transmission of electricity remain in the hands of the legacy power utilities, new electricity retailers reached a 16 per cent market share of the total volume of electricity sold as of September 2019.  Japan expects to implement the third phase of its power sector reforms in April 2020 by “unbundling” legacy monopolies and legally separating the transmission and distribution businesses from the vertically integrated power utility companies.

American energy companies have reported increased opportunities in this sector, but the legacy power utilities still have an unfair advantage over the regulatory regime, market, and infrastructure.  For example, while a wholesale market allows new retailers to buy electricity for sale to customers, legacy utilities, which control most of the generation, sell very little power into that market.  This limits the supply of electricity that new retailers can sell to consumers  Also, as the large power utilities still control transmission and distribution lines, new entrants in power generation are not be able to compete due to limited access to power grids.

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/ 

9. Corruption

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 .

10. Political and Security Environment

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

Jordan

Executive Summary

Jordan is a Middle Eastern country centrally located on desert plateaus in southwest Asia and strategically positioned to serve as a regional business platform. Since King Abdullah II’s 1999 ascension to the throne, Jordan has taken steps to encourage foreign investment and to develop an outward-oriented, market-based, and globally competitive economy. Jordan is also uniquely poised as a platform to host investments focused on the reconstruction of Iraq and projects in regional markets.

Jordan’s economy grew by two percent in 2019, despite ongoing domestic and regional challenges. Jordan’s economic growth has been slowed for several years by series of exogenous shocks, starting with the Global Financial Crisis in 2008, followed by the Arab Spring in 2011 which resulted in interruptions of energy imports, the 2015 closure of Jordan’s borders with Iraq (reopened in August 2017) and Syria (partially re-opened in 2018), and an influx of Syrian refugees. By October 2019, foreign direct investment had dropped 29 percent from its level at the end of 2018 and 67 percent from 2017 levels.

During this same period, the government ran large annual budget deficits but has been able to reduce its near-term financing gap with loans, foreign assistance, and savings from economic reform measures enacted as part of an International Monetary Fund (IMF) Extended Fund Facility program that began in August 2016. On March 25, 2020, the IMF Board approved a USD 1.3 billion Extended Fund Facility program for Jordan centered on increasing economic growth, job creation, and transparency while and strengthening fiscal stability and social spending.

The COVID-19 outbreak poses a huge burden on the Jordanian economy. The IMF forecasts a 3.4 percent contraction in Jordan’s Gross Domestic Product (GDP) for 2020 as a result of the pandemic. The government of Jordan implemented a set of measures to contain the spread of the virus, which entailed a strict curfew and lockdown of schools, colleges and 75 percent of all economic activity. The IMF Mission Chief to Jordan commended the government’s measures to defeat the pandemic, stating “Jordan will reap from the tough measures the government put in place in the coming weeks and months.” The IMF approved Jordan to receive additional credit from the Rapid Financing Instrument, to help manage its fiscal obligations during the pandemic.

In parallel, Jordan introduced plans to mitigate the negative impact on the economy in the short and medium terms. The Central Bank of Jordan (CBJ) injected JD 1.5 billion (USD 2.1 billion) to reduce hardships in the banking system. It also lowered the lending rate and allowed borrowers to reschedule their loans until the end of 2020. The CBJ launched a JD 500 million (USD 706 million) loan guarantee program at competitive interest rates to help small and medium enterprises (SMEs) resume their operations and pay their operational costs. The government also announced measures to alleviate financial and operational burdens on businesses by postponing General Sales Tax (GST) payment and customs fees, reducing the cost of labor by exempting companies from paying social security retirement insurance for three months starting in March 2020, reducing energy costs for the industrial sector, and facilitating control procedures on incoming goods by reducing inspection rate of essential products, in addition to halting judicial procedures on defaulting individuals/companies.

In response to the COVID-19 crisis, the Prime Minister formed specialized, public-private sector teams focused on setting manufacturing priorities, balancing domestic needs with export obligations, outlining production plans, and developing an enabling environment to ensure sustainability, focusing on sectors that excelled during the crisis, and have great potential to expand. The sector-focused teams are: pharmaceutical manufacturing team; food manufacturing team; medical devices and sterilization manufacturing team.

International reports and metrics indicate that Jordan’s overall investment environment is improving. Jordan was selected as one of the top three most improved business climates in the World Bank’s “Doing Business Report 2020,” jumping 29 places from 104 to 75. Jordan advanced 33 points in the simplified tax services index for implementing an electronic filing and payment system for labor taxes. In ease of getting credit, Jordan ranked on par with the United States and Australia. In the World Economic Forum’s 2019 Global Competitiveness Report Jordan ranked 40, advancing six points in its domestic competition indicator. Jordan also ranks sixty-third on the 2018 Global Entrepreneurship Index, and twenty-ninth on the Global Innovation Index.

The Jordanian Investment Law grants equal treatment to local and foreign investors and grants incentives for local and foreign investment in industry, agriculture, tourism, hospitals, transportation, energy, and water distribution. In 2017, Jordan passed amendments to the Companies’ Law and a law to regulate and unify monitoring and inspection of economic activities. The government implemented additional reforms in 2018, including the Insolvency Law, Movable Assets and Secured Lending Law and Bylaw, the Venture Capital bylaw, and a new Income Tax Law. In January 2020, The Jordan Investment Commission (JIC) implemented an investors grievances bylaw which enables investors to file complaints concerning decisions issued by government agencies.

In 2020, Jordan endorsed a new Public Private Partnership Law to support the government’s commitment to broadening the utilization of the public-private sectors partnership and encouraging the private sector to play a larger role in overall economic activity.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2019 60 of 175 http://www.transparency.org/
research/cpi/overview
World Bank’s Doing Business Report 2019 75 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2019 86 of 129 https://www.globalinnovationindex.org/
analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2019 USD 179 https://apps.bea.gov/international/factsheet/
World Bank GNI per capita 2019 USD 4200 http://data.worldbank.org/
indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Jordan is largely open to foreign investment, and the government is committed to supporting foreign investment. Foreign and local investors are treated equally under the law. The Jordan Investment Commission is the body responsible for implementing the 2014 Investment Law and promoting new and existing investment in Jordan, through a range of measures to incentivize and facilitate investment procedures. The Investment Council, established by the law, which is comprised of the Prime Minister, ministers with economic portfolios, and representatives from the private sector, oversees the management and development of the national investment policy, and is responsible for legislative and economic reforms to facilitate investment.

Investment Law No. 30/2014 identifies the Commission as the key reference point for investors and grants additional authorities to the Investment Window to facilitate and accelerate investment registration. The President of the Commission and the administrative team supervise and centrally approve investment-related matters within the guidelines set by the Investment Council and approved by the government.

The Investment Commission can expedite the provision of government services and provide a number of investment incentives, tax, and customs exemptions. An investment-dedicated “One Window” (https://www.jic.gov.jo/en/  ) provides information and technical assistance to investors, with a mandate to simplify registration and licensing procedures for investment projects that benefit from the Investment Law. In 2018, the Commission launched a “Follow-Up and After Care” section with an aim to remove obstacles facing investors and find appropriate solutions as part of the investment process.

Limits on Foreign Control and Right to Private Ownership and Establishment

Investment and property laws allow domestic and foreign entities to establish businesses that engage in remunerative activities. Foreign companies may open regional and branch offices, branch offices may carry out full business activities, and regional offices may serve as liaisons between head offices and Jordanian or regional clients. The Ministry of Industry, Trade and Supply’s Companies Control Department implements the government’s policy on the establishment of regional and branch offices.

Foreign nationals and firms are permitted to own or lease property in Jordan for investment purposes and are allowed one residence for personal use, provided that their home country permits reciprocal property ownership rights for Jordanians. Depending on the size and location of the property, the Land and Survey Department, the Ministry of Finance, and/or the Cabinet may need to approve foreign ownership of land and property, which must then be developed within five years after the date of approval.

In April 2019, the government amended its regulations governing foreign ownership, expanding ownership percentage in some economic activities, while maintaining the following restrictions::

  • Foreigners are prohibited from wholly or partially owning investigation and security services, stone quarrying operations for construction purposes, customs clearance services, and bakeries of all kinds; and are prohibited from trading in weapons and fireworks. The Cabinet, however, may approve foreign ownership of projects in these sectors upon the recommendation of the Investment Council. To qualify for the exemption, projects must be categorized as being highly valuable to the national economy.
  • Investors are limited to 50 percent ownership in certain businesses and services, including retail and wholesale trading, engineering consultancy services, exchange houses apart from banks and financial services companies, maritime, air and land transportation services, and related services.
  • Foreign firms may not import goods without appointing an agent registered in Jordan; the agent may be a branch office or a wholly owned subsidiary of the foreign firm. The agent’s connection to the foreign company must be direct, without a sub-agent or intermediary. The Commercial Agents and Intermediaries Law No. 28/2001 governs contractual agreements between foreign firms and commercial agents. Private foreign entities, whether licensed under sole foreign ownership or as a joint venture, compete on an equal basis with local companies.

However, according to the Bilateral Investment Treaty with Jordan, U.S. investors are granted several exceptions and are accorded the same treatment as Jordanian nationals, allowing U.S. investors to maintain 100 percent ownership in some restricted businesses. The most up-to-date listing of limitations on investments is available in the FTA Annex 3.1 and may be found at http://www.ustr.gov/trade-agreements/free-trade-agreements/jordan-fta/final-text.

For national security purposes, foreign investors must undergo security screening through the Ministry of Interior, which can be finalized through the “One Window” located at the Investment Commission.

Other Investment Policy Reviews

Jordan has been a World Trade Organization (WTO) member since 2000. The WTO conducted Jordan’s second Trade Policy Review  in November 2015.

In 2012, the United States and Jordan agreed to Statements of Principles for International Investment and for Information and Communication Technology Services, and a Trade and Investment Partnership Bilateral Action Plan, each of which is designed to increase transparency, openness, and governmental and private sector cooperation. The two parties also began discussions on a Customs Administration and Trade Facilitation Agreement. All current treaties and agreements in force between the United States and Jordan may be found here: https://www.state.gov/s/l/treaty/tif/.

In follow up on OECD’s Investment Policy Review of Jordan and Jordan’s adherence to the OECD Declaration on International Investment and Multinational Enterprises in 2013, the MENA-OECD competitiveness program issued a report in 2018 entitled “Enhancing the legal framework for sustainable investment: Lessons from Jordan” (http://www.oecd.org/mena/competitiveness/Enhancing-the-Legal-Framework-for-Sustainable-Investment-Lessons-from-Jorden.pdf ).

Business Facilitation

Businesses in Jordan need to register with the Ministry of Industry, Trade, and Supply’s Companies Control Department, or the Chambers of Commerce or Industry depending on the type of business they conduct; open a bank account, obtain a tax identification number, and obtain a VAT number. They also need to obtain a vocational license from the municipality, receive a health inspection, and register with the Social Security Corporation. In November 2017, the government issued a decision to cancel all non-security related pre-approvals for registering a business and require all approvals before starting operations.

The “Investment Window” at the Jordan Investment Commission (www.jic.gov.jo ) serves as a comprehensive investment center for investors. The window provides its services to both local and foreign investors, particularly those in the agricultural sector, medical, tourism, industrial, ICT-Business Process Outsourcing (BPO), and energy sectors. In 2018, the commission introduced a fast track for investors at Queen Alia International Airport.

In 2017, the Commission further streamlined procedures to register and license investment projects in development zones, introducing a Fast Track Investment Window, reducing the number of committee approvals from 23 to 13, and reducing registration procedures from 15 to 5. These changes reduced the typical time period required to register in development zones from five days to one day. Additionally, the time period to grant exemptions under the investment law has been reduced from two weeks to one, and the time period to grant exemptions under the decisions of the Prime Minister from seven days to one.

Jordan has also adopted a single security approval to replace the 11 approvals that were previously required for new investors. The new approval covers registering and licensing the company, obtaining driving licenses for investors, possessing immovable property for the establishment of investment projects in the industrial and developing zones, in addition to granting residence permits to non-Jordanian investors and their family members. The Companies Control Department has developed and launched a portal for online registration: http://www.ccd.gov.jo/ 

The commission has published a number of online guides, including the investor guide (https://www.jic.gov.jo/en/investor-guide/ ).

In November 2019, under the Jordan Investment Commission’s (JIC), the government introduced several new services including the issuance and renewal investor IDs, issuance and renewal of IDs for investors’ family members, registration of institutions in development zones, first-time registration of individual institutions, changing the method of use, registration and renewal of subscriptions to the Amman Chamber of Commerce (ACC), amendments to subscriptions to the ACC, and issuance of environmental permits. The introduction of these electronic services reduced the time period needed to grant or renew an investor card (an ID card for investors used to facilitate various transactions) to one day. (https://www.jic.gov.jo/en/ ).

In accordance with the Investor Grievances Bylaw No. 163 of 2019, the JIC established a unit to follow up on and address investor complaints, with the aim to resolve legal disputes outside of the formal court proceedings and reduce related cost.

In the 2020 World Bank Group’s Doing Business report  Jordan ranked 75 out of 190. This improvement was attributed to reforms regarding the legal rights of borrowers and lenders, the introduction of a unified legal framework for secured transactions, launching a notice-based collateral registry, improvements to the insolvency law, and implementation of an electronic filing and payment for labor taxes and other mandatory contributions. The number of payments that businesses need to file every year was also cut from twenty-three to nine.

Outward Investment

Jordan does not have a mechanism in place to specifically incentivize outward investment.

6. Financial Sector

Capital Markets and Portfolio Investment

There are three key capital market institutions: the Jordan Securities Commission (JSC), the Amman Stock Exchange (ASE), and the Securities Depository Center (SDC). The ASE launched an Internet Trading Service in 2010, providing an opportunity for investors to engage in securities trading independent of geographic location.

Jordan’s stock market is among the most open among its regional competitors, with no cap on foreign ownership. At the end of 2018, non-Jordanian ownership in companies listed on the ASE represented 51.6 percent of the total market value (35.8 percent Arab investors and 15.7 percent for non-Arab investors). Jordanian ownership in the financial sector was 56.5 percent, 18.3 percent in the services sector and 61.4 percent in the industrial sector. All investors, both foreign and domestic, are permitted to open margin accounts and to engage in short selling (commercial banks hold securities for their clients in a sub-account format).

In spite of recent reforms and technological advances, the ASE suffers from intermittent liquidity problems and low trading activity. The financial market peaked in 2007-2008, with average trading volumes topping USD 118 million per day. Following the global economic downturn, the market declined precipitously, with market capitalization falling from USD 41 billion in 2007 to USD 21 billion as of Dec 31, 2019.

By the end of 2019, the ASE price index had dropped 1815.2 points (4.9 percent) over the same period in 2018, while trading volume declined 31.6 percent, only totaling USD 2.3 billion.

In 2019, the total net profits of listed companies increased to USD 1.3 billion (according to preliminary financial statements provided to the ASE), a slight increase of 0.3 percent over 2018.

Money and Banking System

Jordan has 25 banks, including commercial banks, Islamic banks, and foreign bank branches (Jordan does not distinguish between investment banks and commercial banks.) Banks continue to be profitable and well capitalized with deposits being the primary funding base, and indicators remain strong largely due to strict regulations on lending, particularly mortgage lending. Liquidity ratios and provisioning remain high, while non-performing loan ratios modestly decreased over the past couple of years. Jordan’s rate of non-performing loans, as a percentage of all bank loans, was 4.2 percent in 2017, and reached 4.6 percent in the first half of 2018.

Banking law No. 28 of 2000 does not discriminate between local and foreign banks, however capital requirements differ. The minimum capital requirements for foreign banks are JD 50 million (USD 70.6 million), and JD 100 million (USD 141 million) for local banks. The law also protects depositors’ interests, diminishes money market risk, guards against the concentration of lending, and includes articles on electronic banking practices and anti-money laundering. The CBJ set up an independent Deposit Insurance Corporation (DIC) in 2000 that insures deposits up to JOD 50,000 (USD 71,000). The DIC also acts as the liquidator of banks as directed by the CBJ.

In January 2017, the CBJ established the “Jordan Payments and Clearing Company,” with an aim to establish and develop digital retail and micro payments along with the investment in innovative technology and digital financial services.

There is no legal impediment to applying block-chain technologies in banking transactions. TheCentral Bank actively supports the technology and is running two pilot projects deploying block- chain technologies: the Mobile Payment System (JoMoPay), and another for the verification of bank documents.

Foreign Exchange and Remittances

Foreign Exchange

The Central Bank of Jordan (CBJ) supervises and licenses all currency exchange businesses. These entities are exempt from paying commissions on exchange transactions and therefore enjoy a competitive edge over banks.

The Jordanian Dinar (JD or JOD) is fully convertible for all commercial and capital transactions. Since 1995, the JD has been pegged to the U.S. dollar at an exchange rate of JD 1 to USD 1.41.

Other notable foreign exchange regulations include:

  • Non-residents are allowed to open bank accounts in foreign currencies. These accounts are exempted from all transfer-related commission fees charged by the CBJ.
  • Banks are permitted to purchase unlimited amounts of foreign currency from their clients in exchange for JODs on a forward basis. Banks are permitted to sell foreign currencies in exchange for JODs on a forward basis for the purpose of covering the value of imports.
  • There is no restriction on the amount of foreign currency that residents may hold in bank accounts, and there is no ceiling on the amount residents may transfer abroad. Banks do not require prior CBJ approval for a transfer of funds, including investment-related transfers.

Jordanian law entitles foreigners to remit abroad all returns, profits, and proceeds arising from the liquidation of investment projects. Non-Jordanian workers are permitted to transfer their salaries and compensation abroad.

Remittance Policies

Jordanian law entitles foreigners to remit abroad all returns, profits, and proceeds arising from the liquidation of investment projects. Non-Jordanian workers are permitted to transfer their salaries and compensation abroad.

Sovereign Wealth Funds

Jordan does not have a sovereign wealth fund.

7. State-Owned Enterprises

A number of state-owned enterprises (SOEs) exist in Jordan. Seventeen SOEs of different sizes and mandates are fully owned by the government, five of which were established in 2016 and are not yet operational. Wholly-owned SOEs employ around 3,000 individuals, with assets exceeding USD 11 billion.

Most of the operational SOEs are small in terms of the size of operations, assets, number of employees, and income. The largest SOEs are: National Electrical Power Company (NEPCO), Samra Electric Power Company, the Yarmouk Water Company, and Aqaba Development Corporation (ADC).

Jordan’s economy is private sector led, accounting for 71 percent of GDP and 75 percent of net cumulative investment. SOEs in Jordan exercise delegated governmental powers and operating in fields that are not yet open for investment, such as managing the transmission and distribution of electrical power and water. Other activities include logistics, mining, storage and inventory management of strategic products, in addition to economic development activities. The government supports these companies as necessary, for example, the government has issued and guaranteed Treasury bonds for NEPCO since 2011 to ensure continuous power supply for the country.

SOEs generally compete on largely equal terms with private enterprises with respect to access to markets, credit, and other business operations. The law does not provide preferential treatment to SOEs, and they are held accountable by their Board of Directors, typically chaired by the sector-relevant Minister and the Audit Bureau.

The government, enterprises and NGOs are progressively taking initiatives to incorporate Responsible Business Conduct into their practices.

Jordan is not a party to the Government Procurement Agreement.

Privatization Program

Over the last fifteen years, the Jordanian government has engaged in a wide-scale privatization program, including in the telecom, energy, and transportation sectors. The few remaining government assets not privatized, including Jordan Silos and Supply Company, have elicited little private sector interest.

In 2020, Jordan published a new Public Private Partnership Law to support the government’s commitment to broadening the utilization of public-private sector partnerships (PPPs) and encouraging the private sector to play a larger role in the economy. The law does not limit PPPs to certain sectors, or nationalities. A PPP unit housed at the Prime Ministry supports the government in identifying and prioritizing projects and their implementation. The unit has already identified a list of potential PPP projects in several sectors; water, energy, transport, tourism, education, health, environment and information and communication technology.

9. Corruption

Jordan was the first Middle Eastern country to sign and ratify the United Nations Convention against Corruption (UNCAC) in 2005 and has initiated several reforms in similar spirit over the last two decades; including a code of conduct for the public sector in 2006. Furthermore, the government drafted an action plan to address corruption with Jordan’s National Integrity System (NIS), developed in 2012.

Jordanian Anti-Corruption law defines corruption as any act that violates official duties, all acts related to favoritism and nepotism that could deprive others from their legitimate rights, economic crimes, and misuse of power. However, the use of family, business, and other personal connections to advance personal business interests is endemic and regarded by many Jordanians as part of the culture. In 2006, Parliament approved an Illicit Gains Law, which officially required public office holders and specified government officials to declare their assets. The 2018 amendments to the Illicit Gain Law expanded the employees subject to the financial disclosure requirement to include heads and members of ad hoc municipal councils, executive directors of municipalities and heads and members of governorate councils. The Law requires the prime minister, Cabinet members, and senior employees to provide financial disclosures for themselves, their spouses, and minor children.

In 2006, Parliament also enacted an Anti-Corruption Law that created the Anti-Corruption Commission (ACC) to investigate allegations of corruption. In 2016, the Integrity and Anti-Corruption Commission (“IACC”) came into force by Law No. 13/2016 (“IACC Law”). Two Authorities were merged into one, repealing the Bureau of Ombudsman Law No. 11 of 2008 and the Anti-Corruption Law No. 62/2006.

The IACC received 790 new investigation files on corruption in 2018, of which 173 cases were referred to the Public Prosecutor in the commission, 342 files were closed and archived because either corruption offenses were found and therefore no administrative action was required to correct / rectify the situation, and 275 files still are under investigation.

In 2018, the government issued the Code of Governance Practices of Policies and Legislative Instruments in Government Departments, to improve the predictability of legal and regulatory framework governing the business environment.

In July 2019, Parliament amended the IACC Law granting the IACC more authority to access asset disclosure filings. The amendment empowers the commission to request asset seizures, international travel bans, and suspension of officials under investigation for corruption. The amendment also increases the IACC’s administrative autonomy by enabling the commission to update its own regulations and protecting IACC board members and the chairperson from arbitrary dismissal.

The IACC opened 609 new investigations in 2019. The IACC referred 234 cases to the courts for prosecution, closed 316 for lack of evidence, and transferred three cases within the commission. Another 56 cases remained under investigation.

A new Audit Bureau Law was enacted in October 2018 to strengthen the Bureau performance, capacity and independence in line with INTOSAI standards.

Other related laws include the Penal/Criminal Code, Anti-Money Laundering Law, Right to Access Information Law, and the Economic Crimes Law.

Jordan is not a party to the OECD Convention on Combatting Bribery.

Resources to Report Corruption

H.E. Mohannad Hijazi
Chairman
Jordan Integrity and Anti-Corruption Commission (JIACC)
P.O. Box 5000, Amman, 11953, Jordan
+962 6 550 3150

Contact at “watchdog” organization:

Sawsan Gharaibeh
Director
+962 079 905 2555
swmkgf@gmail.com

And/ Or

Abeer Mdanat
Executive Director
Rasheed Coalition
P.O. Box 582662, Amman, 111585, Jordan
+962 5 585 2528
amdanat@rasheedti.org

10. Political and Security Environment

While politically motivated violence is rare in Jordan, the threat of terrorism remains high. Terrorist organizations, including the self-proclaimed Islamic State of Iraq and Syria (ISIS), its affiliates, and sympathizers, have successfully conducted attacks in Jordan and continue to plot assaults in the country. Jordan’s prominent role in the Defeat-ISIS Coalition and its shared borders with Iraq and Syria maintains potential for future terrorist incidents. Within the last year, Jordanian authorities have disrupted terrorist plots. Visitors should consult current State Department public announcements at www.travel.state.gov before traveling to Jordan.

Peaceful protests occur frequently but are usually limited to a few hundred (and often only a few dozen) participants. Most demonstrations focus on frustration with perceived economic inequality and corruption or on the Israeli-Palestinian conflict and the status of Jerusalem.

Kazakhstan

Executive Summary

Since its independence in 1991, Kazakhstan has made significant progress toward creating a market economy and has achieved considerable results in its efforts to attract foreign investment. As of January 1, 2020, the stock of foreign direct investment in Kazakhstan totaled USD 161.2 billion, including USD 36.5 billion from the United States, according to official statistics from the Kazakhstani government.

While Kazakhstan’s vast hydrocarbon and mineral reserves remain the backbone of the economy, the government continues to make incremental progress toward its goal of diversifying the country’s economy by improving the investment climate.  Kazakhstan’s efforts to remove bureaucratic barriers have been moderately successful, and in 2020 Kazakhstan ranked 25 out of 190 in the World Bank’s annual Doing Business Report.

The government maintains an active dialogue with foreign investors, through the President’s Foreign Investors Council and the Prime Minister’s Council for Improvement of the Investment Climate.

Kazakhstan joined the World Trade Organization (WTO) in 2015.  In June 2017 Kazakhstan joined the Organization for Economic Co-operation and Development (OECD) Declaration on International Investment and Multinational Enterprises and became an associated member of the OECD Investment Committee.

Despite institutional and legal reforms, concerns remain about corruption, bureaucracy, arbitrary law enforcement, and limited access to a skilled workforce in certain regions.  The government’s tendency to legislate preferences for domestic companies, to favor an import-substitution policy, to challenge contractual rights and the use of foreign labor, and to intervene in companies’ operations continues to concern foreign investors.  Foreign firms cite the need for better rule of law, deeper investment in human capital, improved transport and logistics infrastructure, a more open and flexible trade policy, a more favorable work-permit regime and a more customer-friendly tax administration.

In July 2018 the government of Kazakhstan officially opened the Astana International Financial Center (AIFC), an ambitious project modelled on the Dubai International Financial Center, which aims to offer foreign investors an alternative jurisdiction for operations, with tax holidays, flexible labor rules, a Common Law-based legal system, a separate court and arbitration center, and flexibility to carry out transactions in any currency.  In April 2019 the government announced its intention to use the AIFC as a regional investment hub to attract foreign investment to Kazakhstan.  The government recommended foreign investors use the law of the AIFC as applicable law for contracts with Kazakhstan.

Table 1 : Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2019 113 of 180 https://www.transparency.org/cpi2019
World Bank’s Doing Business Report “Ease of Doing Business” 2020 25 of 190 http://www.doingbusiness.org/rankings
Global Innovation Index 2019 79 of 129 https://www.globalinnovationindex.org/
U.S. FDI in partner country (M USD, stock positions) 2012 $12,512 http://apps.bea.gov/
international/factsheet/
World Bank GNI per capita 2018 $8,070 https://data.worldbank.org/
indicator/ny.gnp.pcap.cd

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Kazakhstan has attracted significant foreign investment since independence.  According to official statistics, as of January 1, 2020, the total stock of foreign direct investment (by the directional principle) in Kazakhstan totaled USD 161.2 billion, primarily in the oil and gas sector.  International financial institutions consider Kazakhstan to be an attractive destination for their operations, and international firms have established regional headquarters in Kazakhstan.

In June 2017 Kazakhstan joined the OECD Declaration on International Investment and Multinational Enterprises and became an associate member of the OECD Investment Committee.

In its Strategic Plan of Development for the current period (through 2025), the government stated that raising the living standards of Kazakhstan’s citizens to the level of OECD countries is one of the plan’s strategic goals.

In August 2017 the government adopted a new 2018-2022 National Investment Strategy, developed in cooperation with the World Bank, which outlined new coordinating measures on investment climate improvements, privatization plans, and economic diversification policies.  The strategy aims to increase annual FDI inflows as a percentage of GDP from 13.2 percent in 2018 to 19 percent in 2022.

The government of Kazakhstan has incrementally improved the business climate for foreign investors, and national legislation does not discriminate against foreign investors.  Corruption, lack of rule of law and excessive bureaucracy, however, do remain serious obstacles to foreign investment.

Over the last couple of years, the government has undertaken a number of structural changes aimed at improving how the government attracts foreign investment.  In April 2019 the Prime Minister announced the creation of the Coordination Council for Attracting Foreign Investment, which the Prime Minister will chair.  He will also act as Investment Ombudsman.  In December 2018 the Investment Committee was transferred to the Ministry of Foreign Affairs, which is now in charge of attracting and facilitating activities of foreign investors.  The Investment Committee at the Ministry of Foreign Affairs takes responsibility for investment climate policy issues and works with potential and current investors, while the Ministry of National Economy interacts on investment climate matters with international organizations like the OECD, WTO, and the United Nations Conference on Trade and Development (UNCTAD).  Each regional municipality designates a representative to work with investors, and Kazakhstani foreign diplomatic missions are charged with attracting foreign investments.  Specially designated front offices in Kazakhstan’s overseas embassies promote Kazakhstan as a destination for foreign investment.  In addition, the Astana International Financial Center (AIFC, see details in Section 3) operates as a regional investment hub, with tax, legal, and other benefits.  In 2019, the government founded Kazakhstan’s Direct Investment Fund, which is located at the AIFC and expected to attract private investments for diversifying Kazakhstan’s economy.  The state company KazakhInvest is also located in the AIFC and offers investors a single-window for government services.

The government maintains a dialogue with foreign investors through the Foreign Investors’ Council chaired by the President, as well as through the Council for Improving the Investment Climate chaired by the Prime Minister.

The COVID-19 pandemic and unprecedented low oil prices changed the country’s economic development plans.  In March 2020, the government approved a USD 13.7 billion stimulus package, mostly oriented at  income smoothing, supporting local businesses and implementing an import-substitution policy.

Limits on Foreign Control and Right to Private Ownership and Establishment

By law, foreign and domestic private firms may establish and own business enterprises.

While no sectors of the economy are legally closed to investors, restrictions on foreign ownership exist, including a 20 percent ceiling on foreign ownership of media outlets, a 49 percent limit on domestic and international air transportation services, and a 49 percent limit on telecommunication services.  The December 2017 Code on Subsoil and Subsoil Use (the Code) mandates the share of the national company Kazatomprom be no less than 51 percent in new uranium producing joint ventures.

As a result of its WTO accession, Kazakhstan formally removed this limit for telecommunication companies, except for the country’s main telecommunications operator, KazakhTeleCom.  Still, to acquire more than 49 percent of shares in a telecommunication company, foreign investors must obtain a government waiver.  No constraints limit the participation of foreign capital in the banking and insurance sectors.  Starting from January 2020 the restriction on opening branches of foreign banks and insurance companies was lifted in compliance with the country’s WTO commitments.  In addition, foreign citizens and companies are restricted from participating in private security businesses.  The law limits the participation of offshore companies in banks and insurance companies and prohibits foreign ownership of pension funds and agricultural land.

Foreign investors have complained about the irregular application of laws and regulations and interpret such behavior as efforts to extract bribes.  The enforcement process, widely viewed as opaque and arbitrary, is not publicly transparent.  Some investors report harassment by the tax authorities via unannounced audits, inspections, and other methods.  The authorities have used criminal charges in civil disputes as a pressure tactic.

Foreign Investment in the Energy & Mining Industries

Despite substantial investment in Kazakhstan’s energy sector, companies remain concerned about the risk of the government legislating or otherwise advocating for preferences for domestic companies, and creating mechanisms for government intervention in foreign companies’ operations, particularly in procurement decisions.  Recent developments range from a major reduction to a full annulment of work permits for some categories of foreign workforce.  (For more details, please see Part 5,  Performance and Data Localization Requirements.)

In April 2008 Kazakhstan introduced a customs duty on crude oil and gas condensate exports.  In general, oil-related revenue in Kazakhstan goes to the National Fund, a sovereign wealth fund that is financed by direct taxes paid by petroleum industry companies, other fees paid by the oil industry, revenues from privatization of mining and manufacturing assets and from the disposal of agricultural land.  In contrast, the customs duty on crude oil and gas condensate exports is an indirect tax that goes to the government’s budget.  Companies that pay taxes on mineral and crude oil exports are exempt from that export duty.  The government adopted a 2016 resolution that pegged the export customs duty to global oil prices – as the global oil price drops and approaches USD 25 per barrel, the duty rate approaches zero.

The Code defines “strategic deposits and areas” and restricts the government’s preemptive right to acquire exploration and production contracts to these areas, which helps to reduce significantly the approvals required for non-strategic objects.  The government approves and publishes the list of strategic deposits on its website.  The list has not changed since its approval on June 28, 2018: http://www.government.kz/ru/postanovleniya/postanovleniya-pravitelstva-rk-za-iyun-2018-goda/1015356-ob-utverzhdenii-perechnya-strategicheskikh-uchastkov-nedr.html.

The Code entitles the government to terminate a contract unilaterally “if actions of a subsoil user with a strategic deposit result in changes to Kazakhstan’s economic interests in a manner that threatens national security.”  The Article does not define “economic interests.”  The Code, if properly implemented, appears to be a step forward in improving the investment climate, including the streamlining of procedures to obtain exploration licenses and to convert exploration licenses into production licenses.  The Code, however, appears to retain burdensome government oversight over mining companies’ operations.

The Ministry of Energy announced in April 2018 that Kazakhstan is ready to launch a CO2 emissions trading system.  It is unclear, however, when actual quota trading will begin.  In January 2018, the government adopted a National Allocation Plan for 2018-2020, and in February 2018 the Ministry of Energy announced the creation of an online CO2 emissions reporting and monitoring system.  The system is not operational, and it is likely to be launched after the new Environmental Code is passed into law; the draft Code is currently in the lower chamber of parliament.  Some companies have expressed concern that Kazakhstan’s trading system will suffer from insufficient liquidity, particularly as power consumption and oil and commodity production levels increase.  The successor of the Energy Ministry for environmental issues, the Ministry of Ecology, Geology, and Natural Resources, started drafting the 2050 National Low Carbon Development Strategy in October 2019.

Other Investment Policy Reviews

Kazakhstan announced in 2011 its desire to join the Organization for Economic Co-operation and Development.  To meet OECD requirements, the government will need to continue to reform its institutions and amend its investment legislation.  The OECD presented its second Investment Policy Review of Kazakhstan in June 2017, available at:  https://www.oecd.org/countries/kazakhstan/oecd-investment-policy-reviews-kazakhstan-2017-9789264269606-en.htm 

The OECD review recommended Kazakhstan undertake corporate governance reforms at state-owned enterprises (SOEs), implement a more efficient tax system, further liberalize its trade policy, and introduce responsible business conduct principles and standards.  OECD also said it is carefully monitoring the country’s privatization program that aims to decrease the SOE share in the economy to 15 percent of GDP by 2020.

In 2019 the OECD and the government launched a two-year project on improving the legal environment for business in Kazakhstan.

Business Facilitation

The 2020 World Bank’s Doing Business Report ranked Kazakhstan 25 out of 190 countries in the “Ease of Doing Business” category, and 22 out of 190 in the “Starting a Business” category.  The report noted Kazakhstan made starting a business easier by registering companies for value added tax at the time of incorporation.  The report noted Kazakhstan’s progress in the categories of dealing with construction permits, registering property, getting credit, and resolving insolvency.  Online registration of any business is possible through the website https://egov.kz/cms/en 

In addition to a standard package of documents required for local businesses, non-residents should submit electronic copies of their IDs and any certification of their companies from the country of origin.  Both documents should be translated and notarized.  Foreign investors also have access to a “single window” service, which simplifies many business procedures.  Investors may learn more about these services here: https://invest.gov.kz/invest-guide/business-starting/registration/ .

According to the World Bank, it takes four procedures and five days to establish a foreign-owned limited liability company (LLC) in Almaty.  This is faster than the average for Eastern Europe and Central Asia and OECD high income countries.  A foreign-owned company registered in Kazakhstan is considered a domestic company for Kazakhstan currency regulation purposes.  Under the Law on Currency Regulation and Currency Control, residents may open bank accounts in foreign currency in Kazakhstani banks without any restrictions.

In 2019-2020, the government undertook some measures facilitating business operations for investors.  The General Prosecutor’s Office adopted an order in January 2020 that would decriminalize the tax errors of prompt taxpayers.  In July 2019 the government adopted the Road Map for further attraction of foreign investments.  In order to facilitate the work of foreign investors, the government recommended using the law of the Astana International Financial Center (AIFC) as the applicable law for investment contracts with Kazakhstan and planned other measures to showcase the AIFC as an investment hub, including tax preferences, liberalization of visa and migration rules, and the creation of additional international transportation and media links.

Outward Investment

The government neither incentivizes nor restricts outward investment.

6. Financial Sector

Capital Markets and Portfolio Investment

Kazakhstan maintains a stable macroeconomic framework, although weak banks inhibit the financial sector’s development (described further in next section), valuation and accounting practices are inconsistent, and large state-owned enterprises that dominate the economy face challenges in preparing complete financial reporting.  Capital markets remain underdeveloped and illiquid, with small equity and debt markets dominated by state-owned companies and lacking in retail investors.  Most domestic borrowers obtain credit from Kazakhstani banks, although foreign investors often find margins and collateral requirements onerous, and it is usually cheaper and easier for foreign investors to use retained earnings or borrow from their home country. The government actively seeks to attract foreign direct investment, including portfolio investment.  Foreign clients may only trade via local brokerage companies or after registering at the Kazakhstan Stock Exchange (KASE) or at the AIFC.

KASE, in operation since 1993, trades a variety of instruments, including equities and funds, corporate bonds, sovereign debt, foreign currencies, repurchase agreements (REPO) and derivatives, with 200 listed companies in total.  Most of KASE’s trading is comprised of money market (87 percent) and foreign exchange (10 percent).  As of March 31, 2020, stock market capitalization was USD 37.3 billion, while the corporate bond market was USD 31 billion. The Single Accumulating Pension Fund, the key source of the country’s local currency liquidity, accumulated $26.1 billion as of March 31, 2020.

In 2018, the government launched the Astana International Financial Center (AIFC), a regional financial hub modeled after the Dubai International Financial Center.  The AIFC has its own stock exchange (AIX), regulator, and court (see Part 4).  The AIFC has partnered with the Shanghai Stock Exchange, NASDAQ, Goldman Sachs International, the Silk Road Fund, and others.  AIX currently has 53 listings, including 24 traded on its platform.

Kazakhstan is bound by Article 8 of the International Monetary Fund’s Articles of Agreement, adopted in 1996, which prohibits government restrictions on currency conversions or the repatriation of investment profits.  Money transfers associated with foreign investments, whether inside or outside of the country, are unrestricted; however, Kazakhstan’s currency legislation requires that a currency contract must be presented to the servicing bank if the transfer exceeds USD 10,000.  Money transfers over USD 50,000 require the servicing bank to notify the transaction to the authorities, so the transferring bank may require the transferring parties, whether resident or non-resident, to provide information for that notification.

Money and Banking System

Kazakhstan has 27 commercial banks.  As of March 1, 2019, the five largest banks (Halyk Bank, Sberbank-Kazakhstan, Forte Bank, Kaspi Bank and Bank CenterCredit) held assets of approximately USD 43.6 billion, accounting for 62.2 percent of the total banking sector.

Kazakhstan’s banking system remains impaired by legacy non-performing loans, poor risk management, weak corporate governance practices at some banks and significant related-party exposures.  Over the past several years the government has undertaken a number of measures to strengthen the sector, including capital injections, enhanced oversight, and expanded regulatory authorities.  In 2019, the NBK initiated an asset quality review (AQR) of 14 major banks jointly holding 87 percent of banking assets as of April 1, 2019.  According to NBK officials, the AQR showed sufficient capitalization on average across the 14 banks and set out individual corrective measure plans for each of the banks to improve risk management.  As of March 2020, the ratio of non-performing loans to banking assets was 8.9 percent, down from 31.2 percent in January 2014.  The COVID-19 pandemic and the fall in global oil prices may pose additional risks to Kazakhstan’s banking sector.

Kazakhstan has a central bank system, led by the National Bank of Kazakhstan (NBK).  In January 2020, parliament established the Agency for Regulation and Development after Financial Market (ARDFM), which assumed the NBK’s role as main financial regulator overseeing banks, insurance companies, stock market, microcredit organizations, debt collection agencies, and credit bureaus.  The National Bank of Kazakhstan (NBK) retains its core central bank functions as well as management of the country’s sovereign wealth fund and pension system assets.  The NBK and ARDFM as its successor is committed to move gradually to Basel III regulatory standard.  As of May 2020, Basel III methodology applies to capital and liquidity calculation with required regulatory ratios gradually changing to match the standard.

Currently foreign banks are allowed to operate in the country only through their local subsidiaries.  Starting December 16, 2020, as a part of Kazakhstan’s WTO commitments, foreign banks will be allowed to operate via branches subject to compliance with regulatory norms prescribed by the NBK and ARDFM.

Foreigners may open bank accounts in local banks if they have a local tax registration number.

Foreign Exchange and Remittances

Foreign Exchange

There are no restrictions or limitations placed on foreign investors in converting, transferring, or repatriating funds associated with an investment (e.g. remittances of investment capital, earnings, loan or lease payments, or royalties).  Funds associated with any form of investment may be freely converted into any world currency, though local markets may be limited to major world currencies.

As of July 2019, foreign company branches are treated as residents, except for branches of foreign banks and insurance companies or non-financial organizations treated as non-residents based on previously made special agreements with Kazakhstan.  Foreign banks and insurance companies’ branches will be treated as residents from December 2020.  With some exceptions, foreign currency transactions between residents are forbidden.  There are no restrictions on foreign currency operations between residents and non-residents, unless specified otherwise by local foreign currency legislation.  Companies registered with AIFC are not subject to currency and settlement restrictions.

Kazakhstan abandoned its currency peg in favor of a free-floating exchange rate and inflation-targeting monetary regime in August 2015, although the National Bank admits to intervening in foreign exchange markets to combat excess volatility.  Kazakhstan maintains sufficient international reserves according to the IMF.  As of March 2020, international reserves at the National Bank, including foreign currency and gold, and National Fund assets totaled USD 87.4 billion.

Remittance Policies

The U.S. Mission in Kazakhstan is not aware of any concerns about remittance policies or the availability of foreign exchange conversion for the remittance of profits.  Local currency legislation permits non-residents to freely receive and transfer dividends, interest and other income on deposits, securities, loans, and other currency transactions with residents.  However, such remittances would be subject to the reporting requirements described in the “Capital Markets and Portfolio Investment” Section above.  There are no time limitations on remittances; and timelines to remit investment returns depend on internal procedures of the servicing bank. Residents seeking to transfer property or money to a non-resident in excess of USD 500,000 are required to register the contract with the NBK.

Sovereign Wealth Funds

The National Fund of the Republic of Kazakhstan was established to support the country’s social and economic development via accumulation of financial and other assets, as well as to reduce the country’s dependence on oil sector and external shocks.  The Fund’s assets are generated from direct taxes and other payments from oil companies, public property privatization, sale of public farm lands, and investment income.  The government, through the Ministry of Finance, controls the National Fund, while the NBK acts as National Fund’s trustee and asset manager. The NBK selects external asset managers from internationally-recognized investment companies or banks to oversee a part of the National Fund’s assets.  Information about external asset managers and assets they manage is confidential.  As of March 2020, the National Fund’s assets were USD 57 billion or around 37 percent of GDP.

The government receives regular transfers from the National Fund for general state budget support, as well as special purpose transfers ordered by the President.  The National Fund is required to retain a minimum balance of no less than 30 percent of GDP.

Kazakhstan is not a member of the IMF-hosted International Working Group of Sovereign Wealth Funds.

7. State-Owned Enterprises

According to the Ministry of Finance, as of January 1, 2020, the government owns 3,661 state-owned enterprises (SOEs), including all forms of SOEs from small veterinary inspection offices, departments on anti-monopoly policy or hospitals in regions to large national companies,  controlling energy, transport,  agricultural finance and product development.

In 2019, President Tokayev introduced a moratorium on establishing new parastatal companies that will be effective until the end of 2021.  A bill on improving the business climate approved  by the Majilis, the lower Chamber of Parliament, in April 2020 makes it more difficult to establish new parastatal companies.  Despite these positive developments, the share of SOEs in the economy is still large.  According to the 2017 OECD Investment Policy Review, SOE assets amount to USD 48-64 billion, approximately 30-40 percent of GDP; their net income was approximately USD 2 billion.  The preferential status of parastatal companies remains unchanged; parastatals enjoy greater access to subsidies and government support.

The lists of SOEs is available at: http://www.minfin.gov.kz/irj/portal/anonymous?NavigationTarget=ROLES://portal_content/mf/kz.ecc.roles/kz.ecc.anonymous/kz.ecc.anonymous/kz.ecc.anonym_activities/activities/statistics_fldr 

The National Welfare Fund Samruk-Kazyna (SK) is Kazakhstan’s largest national holding company, and manages key SOEs in the oil and gas, energy, mining, transportation, and communication sectors.  At the end of 2018, SK had 317 subsidiaries and employed around 300,000 people.  By some estimates, SK controls around half of Kazakhstan’s economy, and is the nation’s largest buyer of goods and services.  In 2018, SK reported USD 74.3 billion in assets and USD 3.3 billion in consolidated net profit.  Created in 2008, SK’s official purpose is to facilitate economic diversification and to increase effective corporate governance.  In 2018, First President Nazarbayev approved SK’s new strategy, which declared the effective management of its companies, restructuring and diversification of assets and investment projects, and compliance with the principles of sustainable development as its priority goals.  To follow this new strategy, early in 2020, SK removed the Prime Minister from the Board and elected four independent directors, one of which became the Chairman of the Board.  Kazakhstani government participation in the Board is limited to three individuals: the Aide to the President, the Minister of National Economy and the CEO of Samruk-Kazyna.  SK Portfolio companies are required to have corporate governance standards and independent boards.  Despite these moves, the government maintains significant influence in SK.  First President Nazarbayev is the life-long Chairman of the Managing Council of SK, and can make decisions on SK activity.  SK has special rights not afforded to other companies, such as the ability to conclude large transactions among members of its holding companies without public notification.  SK has the pre-emptive right to buy strategic facilities and bankrupt assets, and is exempt from government procurement procedures.  Critically, the government can transfer state-owned property to SK, easing the transfer of state property to private owners.  More information is available at http://sk.kz/ .

In addition to SK, the government created the national managing holding company Baiterek in 2013 to provide financial and investment support to non-extractive industries, drive economic diversification, and improve corporate governance in government subsidiaries.  Baiterek is comprised of the Development Bank of Kazakhstan, the Investment Fund of Kazakhstan, the Housing and Construction Savings Bank, the National Mortgage Company, the National Agency for Technological Development, the Distressed Asset Fund, and other financial and development institutions.  Unlike SK, the Prime Minister remains the Chairman of the Board, assisted by several cabinet ministers and independent directors.  In 2019, Baiterek had USD 13.8 billion in assets and earned USD 104.5 million in net profit.  At the end of 2018, Baiterek held a 48 percent share of the country’s market of long-term crediting of the non-extractive sectors.   Please see https://www.baiterek.gov.kz/en 

Other SOEs include KazAgro, which manages state agricultural holdings such as the state wheat purchasing agent National Food Contract Corporation, farm equipment subsidy provider KazAgroFinance, and the Agrarian Credit Corporation, an agricultural insurance company (http://www.kazagro.kz/ ).  The national holding company Zerde is charged with creating modern information and communication infrastructure, using new technologies, and stimulating investments in the communication sector (http://zerde.gov.kz/ ).

Officially, private enterprises compete with public enterprises under the same terms and conditions.  In some cases, SOEs enjoy better access to natural resources, credit, and licenses than private entities.

In its 2017 Investment Review, the OECD recommended Kazakhstani authorities identify new ways to ensure that all corporate governance standards applicable to private companies apply to SOEs.  Samruk-Kazyna adopted a new Corporate Governance Code in 2015.  The Code, which applies to all SK subsidiaries, specified the role of the government as ultimate shareholder, underlined the role of the Board of directors and risk management, and called for transparency and accountability.

Privatization Program

As part of its overall plan to reduce the share of Kazakhstan’s SOEs to the OECD average of 15 percent of the economy, the government is conducting a large-scale privatization campaign.  By law and in practice, foreign investors may participate in privatization projects.  The public bidding process is established in law.  Government reports on this campaign are available at: https://privatization.gosreestr.kz/ 

As of April 2020, 499 out of 873 organizations planned for privatization have been sold for 315.8 billion tenge, or USD 734.5 million. The government sells small, state-owned and municipal enterprises through electronic auctions.

SK plans to offer institutional investors non-controlling shares in following national companies via initial public offerings (IPOs), secondary public offerings (SPO) and sale to strategic investors:  state oil company KazMunayGas, uranium mining company KazAtomProm, national airline Air Astana,  national telecom operator Kazakhtelecom, railway operator Kazakhstan Temir Zholy, KazPost, and Samruk–Energy, Tau-Ken Samruk, and Qazaq Air.  Samruk-Kazyna sold 15 percent of its stake in KazAtomProm in a dual-listed IPO on the London Exchange and the Astana International Stock Exchange in 2018.  Information on privatization of SK assets is available here: https://sk.kz/investors/privatization/information-on-assets-and-facilities/?lang=en 

9. Corruption

Kazakhstan’s rating in Transparency International’s (TI) 2019 Corruption Perceptions Index is 34/100, ranking Kazakhstan 113 out of 180 countries rated – a relatively weak score, but the best in Central Asia.  According to the report, corruption remains a serious challenge for Kazakhstan, amplified by the instability of the economy.  In its March 2019 report on the fourth round of monitoring under the Istanbul Action Plan, OECD stated a lack of progress on 9 of 29 recommendations, including: implementation of a holistic anti-corruption policy in the private sector, ensuring independence of the anti-corruption agency, detailed integrity rules for political officials, independence of the judiciary and judges, mandatory anti-corruption screening of all draft laws, bringing the Law on Access to Information in line with international standards, effective and dissuasive liability of legal entities for corruption crimes; and ensuring the effectiveness of investigative and prosecutorial practices to combat corruption crimes.

The 2015-2025 Anti-Corruption Strategy focuses on measures to prevent the conditions that foster corruption, rather than fighting the consequences of corruption.  The Criminal Code imposes tough criminal liability and punishment for corruption, eliminates suspension of sentences for corruption-related crimes, and introduces a lifetime ban on employment in the civil service with mandatory forfeiture of title, rank, grade and state awards.  The Law on Countering Corruption introduces broader definitions of corruption and risks, anticorruption monitoring and analysis, and stronger financial accountability measures.  The Law on Government Procurement prohibits companies, the managers of which are directly related to decision makers of contracting government agencies, from participation in tenders.  The Law on Countering Corruption states that private companies should undertake measures to prevent corruption, while business associations can develop codes of conduct for specific industries.

The Agency for Countering Corruption presents its report on countering corruption annually. Kazakhstan ratified the UN Convention against Corruption in 2008.  It has been a participant of the Istanbul Anti-Corruption Action Plan of the OECD Anti-Corruption Network since 2004, the International Association of Anti-Corruption Agencies since 2009, and the International Counter-Corruption Council of CIS member-states since 2013.  Kazakhstan became a member of the Group of States against Corruption (GRECO) in January 2020.  The government and local business entities are aware of the legal restrictions placed on business abroad, such as the Foreign Corrupt Practices Act and the UK Bribery Act.

Despite provisions in laws, however, corruption allegations are noted in nearly all sectors, including extractive industries, infrastructure projects, state procurements, and the banking sector.  The International Finance Corporation’s Enterprise Survey that gathers responses from thousands of small and medium-sized enterprises in each of more than 100 countries, finds that respondents indicate corruption as the most severe obstacle to doing business in Kazakhstan.  For more information, please see: http://www.enterprisesurveys.org/data/exploreeconomies/2013/kazakhstan#corruption 

Transparency International Kazakhstan conducted a survey in 2019 to assess the corruption perception of 1,824 representatives of small businesses and individual entrepreneurs.  A total of 76.1 percent of respondents reported that they can develop their business without corruption.

The legal framework controlling corruption has been eased and loopholes exist.  In 2018 the president signed into law a set of criminal legislation amendments  mitigating punishment for acts of corruption by officials, including decriminalizing official inaction, hindrance to business activity, and falsification of documents; significantly reducing the amounts of fines for taking bribes; and reinstituting a statute of limitation for corruption crimes.  The largest loophole surrounds the first president and his family.  The Law on the First President of the Republic of Kazakhstan—Leader of the Nation establishes blanket immunity for First President Nazarbayev and members of his family from arrest, detention, search or interrogation.  Journalists and advocates for fiscal transparency are reported to have faced frequent harassment, administrative pressure, and there are reports of disappearances and unaccounted deaths.

Resources to Report Corruption

Under the Law On Countering Corruption, all government, quasi-government entities, and officials are responsible for countering corruption.  Along with the Anti-Corruption Agency, prosecutors, national security agencies, police, tax inspectors, military police, and border guard service members are responsible for the detection, termination, disclosure, investigation, and prevention of corruption crimes, and for holding the perpetrators liable within their competence.

Transparency International maintains a national chapter in Kazakhstan.

Contact at the government agency responsible for combating corruption:

Alik Shpekbayev
Chairman
Agency for Civil Service Affairs and Countering Corruption
37 Seyfullin Street, Astana
+7 (7172) 909002
a.shpekbaev@kyzmet.gov.kz

Contact at a “watchdog” organization:

Olga Shiyan
Executive Director
Civic Foundation “Transparency Kazakhstan”
Office 308/2
89 Dosmuhamedov str,
Business Center Caspi
Almaty 050012
+7 (727) 292 0970; +7 771 589 4507
oshiyantikaz@gmail.com

10. Political and Security Environment

There have been no reported incidents of politically-motivated violence against foreign investment projects, and although small-scale protests do occur, large-scale civil disturbances are infrequent.  In June 2016, individuals described by the government as Salafist militants attacked a gun shop and a military unit, killing 8 and injuring 37 people in the Aktobe region of northwestern Kazakhstan.

Kazakhstan generally enjoys good relations with its neighbors. Although the presidential transition in neighboring Uzbekistan has opened the door to greater regional cooperation, including on border issues, Kazakhstan continues to exercise vigilance against possible penetration of its borders by extremist groups.  The government also remains concerned about the potential return of foreign terrorist fighters from Syria and Iraq.

After close to three decades, President Nursultan Nazarbayev resigned as president March 20, 2019, and was succeeded by Kassym-Jomart Tokayev, the former Senate Chairman and next in line of constitutional succession.  On April 9, 2019, President Tokayev announced that Kazakhstan would hold early presidential elections June 9, 2019.

In the June 9 election, the first without First President Nazarbayev, President Tokayev was elected to a full term with 71 percent of the vote.  The Organization for Security and Cooperation in Europe (OSCE) published a preliminary assessment of the election June 10, noting in its press release that “a lack of regard for fundamental rights, including detentions of peaceful protestors, and widespread voting irregularities on election day, showed scant respect for democratic standards.”  In the March 2016 election for the Mazhilis (lower house of Parliament), Kazakhstan’s largest party, Nur-Otan, received 82 percent of the vote, while the business-friendly Ak Zhol party and the Communist People’s party each received 7 percent.  All three parties supported Nazarbayev and his policies.  The OSCE similarly critiqued the March 2016 election for its lack of adherence to OSCE standards for democratic elections.

Kenya

Executive Summary

Kenya has a positive investment climate that has made it attractive to international firms seeking a location for regional or pan-African operations. The novel coronavirus pandemic has affected the short-term economic outlook, but the country remains resilient in addressing the health and economic challenges. In July 2020 the U.S. and Kenya launched negotiations for a Free Trade Agreement, the first in sub-Saharan Africa. In the World Bank’s 2020 Doing Business report Kenya improved 7 places, ranking 56 of 190 economies reviewed. In the last three years, it has moved up 54 places on this index. Year-on-year, Kenya continues to improve its regulatory framework and its attractiveness as a destination for foreign direct investment. Despite this progress in the ease of doing business rankings, U.S. businesses operating in Kenya still face aggressive tax collection attempts and significant bureaucratic processes and delays in issuing necessary business licenses. Corruption remains endemic and Transparency International’s (TI) 2019 Global Corruption Perception Index ranked Kenya 137 out of 198 countries, worsening by seven spots compared to 2018.

Kenya has strong telecommunications infrastructure, a robust financial sector, a developed logistics hub, and extensive aviation connections throughout Africa, Europe, and Asia. In 2018, Kenya Airways initiated direct flights to New York City in the United States. Mombasa Port is the gateway for most of the East African trade. Kenya’s membership in the East African Community (EAC), the Africa Continental Free Trade Area (AfCFTA), and other regional trade blocs provides growing access to larger regional markets.

In 2017 and 2018 Kenya instituted broad reforms to improve its business environment, including passage of the Tax Laws (amended) Bill (2018) and the Finance Act (2018), establishing new procedures and provisions relating to taxes, simplifying registration procedures for small businesses, reducing the cost of construction permits, easing the payment of taxes through the iTax platform, and establishing a single window system to speed movement of goods across borders. But the Finance Act 2019 introduced taxes to non-resident ship owners, and the Finance Act 2020 enacted a 1.5 percent Digital Service Tax (DST), which will be implemented in January 2021. The oscillation between business reforms and conflicting taxation policies has raised uncertainty over the Government of Kenya’s (GOK) long term plans for improving the investment climate.

Kenya’s macroeconomic fundamentals remain among the strongest in Africa, with five to six percent GDP growth over the past five years, six to eight percent inflation, improving infrastructure, and strong consumer demand from a growing middle class. However, GDP growth is projected to slow to 1.5-2.0 percent in 2020 due to COVID-19. The GOK has responded by loosening fiscal policies like corporate income tax and other measures to cushion companies and individuals. There is relative political stability due to the Building Bridges Initiative (BBI) and President Kenyatta has remained focused on his second term “Big Four” development agenda, seeking to provide universal healthcare coverage; establish national food security; build 500,000 affordable new homes; and increase employment by doubling the manufacturing sector’s share of the economy.

The World Bank’s annual Kenya Economic Update, released in April 2020, cites some short term economic risks to Kenya’s continued growth such as the locust invasion, COVID-19 pandemic, and flooding, but also noted positive developments including measures taken by the GOK and the Central Bank of Kenya to reduce the impacts of these risks. American companies continue to show strong interest to establish or expand their business presence and engagement in Kenya, especially following President Kenyatta’s August 2018 and February 2020 meetings with President Trump in Washington, D.C. Sectors offering the most opportunities for investors include: agro-processing, financial services, energy, extractives, transportation, infrastructure, retail, restaurants, technology, health care, and mobile banking.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2019 137 of 198 http://www.transparency.org/
research/cpi/overview
World Bank’s Doing Business Report 2020 56 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2019 77 of 126 https://www.globalinnovationindex.org/
analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2019 $353 http://apps.bea.gov/international/factsheet/
World Bank GNI per capita 2019 $1,750 http://data.worldbank.org/
indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Kenya has enjoyed a steadily improving environment for foreign direct investment (FDI). Foreign investors seeking to establish a presence in Kenya generally receive the same treatment as local investors, and multinational companies make up a large percentage of Kenya’s industrial sector. The government’s export promotion programs do not distinguish between goods produced by local or foreign-owned firms. The major regulations governing FDI are found in the Investment Promotion Act (2004). Other important documents that provide the legal framework for FDI include the 2010 Constitution of Kenya, the Companies Ordinance, the Private Public Partnership Act (2013), the Foreign Investment Protection Act (1990), and the Companies Act (2015). GOK membership in the World Bank’s Multilateral Investment Guarantee Agency (MIGA) provides an opportunity to insure FDI against non-commercial risk. In November 2019, KenInvest launched the Kenya Investment Policy (KIP) and the County Investment Handbook (CIH) (http://www.invest.go.ke/publications/) which aim to increase foreign direct investment in the country. The investment policy intends to guide laws being drafted to promote and facilitate investments in Kenya.

The Central Bank has successfully maintained macroeconomic stability with relatively low inflation and stable exchange rates. The National Treasury is increasingly focused on efforts to ensure prudent debt management. Kenya puts significant effort into assuring the health and growth of its tourism industry. To strengthen Kenya’s manufacturing capacity, the government offers incentives to produce goods for export.

Investment Promotion Agency

Kenya Investment Authority (KenInvest), the country’s official investment promotion agency, is viewed favorably by international investors (http://www.invest.go.ke/). KenInvest’s mandate is to promote and facilitate investment by assisting investors in obtaining the licenses necessary to invest and by providing other assistance and incentives to facilitate smoother operations. To help investors navigate local regulations, KenInvest has developed an online database known as eRegulations, designed to provide investors and entrepreneurs with full transparency on Kenya’s investment-related regulations and procedures (https://eregulations.invest.go.ke/?l=en ).

KenInvest is part of the National Business and Economic Response of the GOK and has been instrumental in assessing and relaying information about the private sector effects of Covid-19 to inform policy measures during the pandemic. The agency is also tracking post-Covid-19 investment sectors.

The GOK prioritizes investment retention and maintains an ongoing dialogue with investors. All proposed legislation must pass through a period of public consultation in which investors have an opportunity to offer feedback. Private sector representatives can serve as board members on Kenya’s state-owned enterprises. Since 2013, the Kenya Private Sector Alliance (KEPSA), the apex private sector business association, has had bi-annual round table meetings with President Kenyatta and his cabinet. Investors’ concerns are considered by a Cabinet committee on the ease of doing business, chaired by President Kenyatta. The American Chamber of Commerce has also taken an increasingly active role in engaging the GOK on Kenya’s business environment, often providing a forum for dialogue.

Limits on Foreign Control and Right to Private Ownership and Establishment

The government provides the right for foreign and domestic private entities to establish and own business enterprises and engage in all forms of remunerative activity. In an effort to encourage foreign investment, the GOK in 2015 repealed regulations that imposed a 75 percent foreign ownership limitation for firms listed on the Nairobi Securities Exchange, allowing such firms to be 100 percent foreign-owned. Also in 2015, the government established regulations requiring Kenyans own at least 15 percent of the share capital of derivatives exchanges, through which derivatives such as options and futures can be traded.

Kenya considered imposing “local content” requirements on foreign investments under the Companies Act (2015), which initially contained language requiring all foreign companies to demonstrate at least 30 percent of shareholding by Kenyan citizens by birth. United States business associations, however, raised concerns over the bill, pointing to its lack of clarity and the possibility such measures could run afoul of Kenya’s commitments under the WTO. After the U.S. government also raised the issue with the Kenyan government, the clause was repealed.

Kenya’s National Information and Communications Technology (ICT) policy guidelines, published in August 2020, increase the requirement for Kenyan ownership in foreign companies providing ICT services from 20% to 30%, and broadens its applicability within the telecommunications, postal, courier, and broadcasting industries. The foreign entities will have 3 years to comply with the increased local equity participation rule. The Mining Act (2016) restricts foreign participation in the mining sector and reserves the acquisition of mineral rights to Kenyan companies, requiring 60 percent Kenyan ownership of mineral dealerships and artisanal mining companies. The Private Security Regulations Act (2016) restricts foreign participation in the private security sector by requiring that at least 25 percent of shares in private security firms be held by Kenyans. The National Construction Authority Act (2011) imposes local content restrictions on “foreign contractors,” defined as companies incorporated outside Kenya or with more than 50 percent ownership by non-Kenyan citizens. The act requires foreign contractors to enter into subcontracts or joint ventures assuring that at least 30 percent of the contract work is done by local firms. Regulations implementing these requirements remain in process. The Kenya Insurance Act (2010) restricts foreign capital investment to two-thirds, with no single person controlling more than 25 percent of an insurers’ capital.

Other Investment Policy Reviews

In 2019, the World Trade Organization conducted a trade policy review for the East Africa Community (EAC), of which Kenya is a member (https://www.wto.org/english/tratop_e/tpr_e/tp484_e.htm).

Business Facilitation

In 2011, the GOK established a state agency called KenTrade to address trading partners’ concerns regarding the complexity of trading regulations and procedures. KenTrade is mandated to facilitate cross-border trade and to implement the National Electronic Single Window System. In 2017, KenTrade launched InfoTrade Kenya, located at infotrade.gov.ke, which provides a host of investment products and services to prospective investors in Kenya. The site documents the process of exporting and importing by product, by steps, by paperwork, and by individuals, including contact information for officials’ responsible relevant permits or approvals.

In February 2019, Kenya implemented a new Integrated Customs Management System (iCMS) which includes automated valuation benchmarking, automated release of green-channel cargo, importer validation and declaration, and linkage with iTax. The iCMS features enable Customs to efficiently manage revenue and security related risks for imports, exports and goods on transit and transshipment.

The Movable Property Security Rights Bill (2017) enhanced the ability of individuals to secure financing through movable assets, including using intellectual property rights as collateral. The Nairobi International Financial Centre Act (2017) seeks to provide a legal framework to facilitate and support the development of an efficient and competitive financial services sector in Kenya. The act created the Nairobi Financial Centre Authority to establish and maintain an efficient operating framework to attract and retain firms. The Kenya Trade Remedies Act (2017) provides the legal and institutional framework for Kenya’s application of trade remedies consistent with World Trade Organization (WTO) law, which requires a domestic institution to both receive complaints and undertake investigations in line with the WTO Agreements. To date, however, Kenya has implemented only 7.5 percent of its commitments under the WTO Trade Facilitation Agreement, which it ratified in 2015. In 2020, Kenya launched the Kenya Trade Remedies Agency for the investigation and imposition of anti-dumping, countervailing duty, and trade safeguards, to protect domestic industries from unfair trade practices.

The Companies Amendment Act (2017) amended the prior Companies Act clarifying ambiguities in the act and conforms to global trends and best practices. The act amends provisions on the extent of directors’ liabilities, on the extent of directors’ disclosures, and on shareholder remedies to better protect investors, including minority investors. The amended act eliminates the requirement for small enterprises to have lawyers register their firms, the requirement for company secretaries for small businesses, and the need for small businesses to hold annual general meetings, saving regulatory compliance and operational costs.

The Business Registration Services (BRS) Act (2015) established a state corporation known as the Business Registration Service to ensure effective administration of the laws relating to the incorporation, registration, operation and management of companies, partnerships, and firms. The BRS also devolves to the counties business registration services such as registration of business names and promoting local business ideas/legal entities, thus reducing costs of registration. The Companies Act (2015) covers the registration and management of both public and private corporations.

In 2014, the GOK established a Business Environment Delivery Unit to address challenges facing investors in the country. The unit focuses on reducing the bureaucratic steps related to setting up and doing business in the country. Separately, the Business Regulatory Reform Unit operates a website (http://www.businesslicense.or.ke/ ) offering online business registration and providing information on how to access detailed information on additional relevant business licenses and permits, including requirements, costs, application forms, and contact details for the relevant regulatory agency. In 2013, the GOK initiated the Access to Government Procurement Opportunities program, requiring all public procurement entities to set aside a minimum of 30 percent of their annual procurement spending facilitate the participation of youth, women, and persons with disabilities (https://agpo.go.ke/ ).

An investment guide to Kenya, also referred to as iGuide Kenya, can be found at http://www.theiguides.org/public-docs/guides/kenya/about# . iGuides designed by UNCTAD and the International Chamber of Commerce provide investors with up-to-date information on business costs, licensing requirements, opportunities, and conditions in developing countries. Kenya is a member of UNCTAD’s international network of transparent investment procedures.

Outward Investment

The GOK does not promote or incentivize outward investment. Despite this, Kenya is evolving into an outward investor in tourism, manufacturing, retail, finance, education, and media. Outward investment has been focused in the East Africa Community and select central African countries, taking advantage of the EAC preferential access between the EAC member countries. The EAC advocates for free movement of capital across the six member states – Burundi, Kenya, Rwanda, South Sudan, Tanzania, and Uganda.

6. Financial Sector

Capital Markets and Portfolio Investment

Kenya developed the draft Financial Markets Conduct bill (2018) to consolidate and harmonize the financial sector in the country. Among the proposals in the draft bill is the establishment of the financial markets conduct authority to be the sole body to regulate providers of financial products and services to retail financial customers and to curb irresponsible financial market practices, a move that will create a conflict with the current financial markets regulators. Though relatively small by Western standards, Kenya’s capital markets are the deepest and most sophisticated in East Africa. The Nairobi Securities Exchange (NSE) is the best ranked exchange in sub-Saharan Africa in terms of performance in the last decade. NSE operates under the jurisdiction of the Capital Markets Authority of Kenya. It is a full member of the World Federation of Exchange, a founder member of the African Securities Exchanges Association (ASEA) and the East African Securities Exchanges Association (EASEA). The NSE is a member of the Association of Futures Market and is a partner exchange in the United Nations-led SSE initiative. Foreign investor participation has always been high and a key determinant of the market performance in the NSE. The NSE in July 2019 launched the derivatives market that will facilitate trading in future contracts on the Kenyan market and will be regulated by the Capital Market Authority of Kenya. The bond market is underdeveloped and dominated by trading in government debt securities. The government domestic debt market, however, is deep and liquid. Long-term corporate bond issuances are uncommon, leading to a lack of long-term investment capital.

In November 2019, Kenya repealed the interest rate capping law passed in 2016 which had had the unintended consequence of slowing private sector credit growth. There are no restrictions for foreign investors to seek credit in the domestic financial market although it still struggles to fund big ticket projects. Legal, regulatory, and accounting systems are generally aligned with international norms. The Kenyan National Treasury has launched its mobile money platform government bond to retail investors locally dubbed M-Akiba purchased at USD 30 on their mobile phones. M-Akiba has generated over 500,000 accounts for the Central Depository and Settlement Corporation and The National Treasury has made initial pay-outs to bond holders. The GOK expects to issue USD 10 million over this platform in 2019 in an effort to deepen financial inclusion and financial literacy.

According to the African Private Equity and Venture Capital Association (AVCA) 2014-2019 report on venture capital performance in Africa, Kenya is assessed as having a well-developed venture capitalist ecosystem ranking second in sub-Saharan Africa and accounted for 18 percent of the deals between 2014-2019 in Africa. The report further states that over 20 percent of the deals in the period were for companies that were headquartered outside Africa which sought expansion into the region’s markets.

The Central Bank of Kenya (CBK) is working with regulators in EAC member states through the Capital Market Development Committee (CMDC) and East African Securities Regulatory Authorities (EASRA) on a regional integration initiative and has successfully introduced cross-listing of equity shares. The combined use of both the Central Depository and Settlement Corporation (CDSC) and an automated trading system has moved the Kenyan securities market to globally accepted standards. Kenya is a full (ordinary) member of the International Organization of Securities Commissions Money and Banking System.

Money and Banking System

The Kenyan banking sector in 2020 included 40 operating commercial banks, one mortgage finance company, 13 microfinance banks, nine representative offices of foreign banks, 70 foreign exchange bureaus, 15 money remittance providers, and three credit reference bureaus which are licensed and regulated by the Central Bank of Kenya. Kenya also has 12 deposit-taking microfinance institutions. There has been increased foreign interest in Kenya’s banking sector with foreign owned banks making up 15 of the 40 operating banks. Major international banks operating in Kenya include Citibank, Absa bank (formerly Barclays bank Africa), Bank of India, Standard Bank (South Africa), and Standard Chartered. Kenya’s banking sector has been affected by the COVID-19 pandemic. According to the CBK, 32 out of 39 commercial banks restructured their loans to accommodate those affected. Non-performing loans (NPLs) rose to 13.1 percent in April 2020 fueled by the pandemic, however previous NPLs have averaged above 10 percent. The Banking sector has 12 listed banks in the Nairobi Securities Exchange which owned 89 percent of the banking assets in 2019.

In March 2017, CBK lifted its moratorium on licensing new banks, issued in November 2015 following the collapse of Imperial Bank and Dubai Bank. The CBK’s decision to restart licensing signaled a return of stability in the Kenyan banking sector. In 2018, Societé Generale (France) also set up a representative office in Nairobi. Foreign banks can apply for license to set up operations in Kenya and are guided by the CBK’s prudential guidelines 2013.

In November 2019, the Government of Kenya (GOK) enacted the Banking Amendment Act 2019, which effectively repealed the section within the Banking (Amendment) Act (2016) that capped the maximum interest rate banks can charge on commercial loans at four percent above Central Bank of Kenya’s (CBK) benchmark lending rate. This repeal effectively provides financial institutions flexibility with regards to pricing the risk of lending.

In the ongoing land registry digitization process, the Kenyan Government is working on a database, known as the single source of truth (SSOT), to eliminate fake title deeds in the Ministry of Lands. The SSOT database development plan is premised on blockchain technology – distributed ledger technology – as the primary reference for all land transactions. The SSOT database would help the land transaction process to be efficient, open, and transparent. The blockchain taskforce presented its 2019 report to the Ministry of Information, Communication Technology, Innovations and Youth Affairs on the viability and opportunities of the blockchain technology which is yet to be implemented.

The percentage of Kenya’s total population with access to financial services through conventional or mobile banking platforms is approximately 80 percent. According to the World Bank, M-Pesa, Kenya’s largest mobile banking platform, processes more transactions within Kenya each year than Western Union does globally. Data from the Communication Authority of Kenya shows that in the 3 months to December 2019, 30 million Kenyans had active mobile money subscriptions. The 2017 National ICT Masterplan envisages the sector contributing at least 10 percent of GDP, up from 4.7 percent in 2015. Several mobile money platforms have achieved international interoperability, allowing the Kenyan diaspora to conduct financial transactions in Kenya from abroad.

Foreign Exchange and Remittances

Foreign Exchange Policies

Kenya has no restrictions on converting or transferring funds associated with investment. Kenyan law requires the declaration to customs of amounts greater than KSH 1,000,000 (approximately USD 10,000) or the equivalent in foreign currencies for non-residents as a formal check against money laundering. Kenya is an open economy with a liberalized capital account and a floating exchange rate. The CBK engages in volatility controls aimed exclusively at smoothing temporary market fluctuations. Between June 2015 and June 2016, the Kenyan shilling declined 3.5 percent after a sharp decline of 15 percent during the same period in 2014/2015. In 2018, foreign exchange reserves remained relatively steady. The average inflation rate was 5.2 percent in 2019 and the average rate on 91-day treasury bills had fallen to 7.2 percent in 2019. According to CBK figures, the average exchange rate was KSH 101.99to USD 1.00 in 2019.

Remittance Policies

Kenya’s Foreign Investment Protection Act (FIPA) guarantees capital repatriation and remittance of dividends and interest to foreign investors, who are free to convert and repatriate profits including un-capitalized retained profits (proceeds of an investment after payment of the relevant taxes and the principal and interest associated with any loan).

Foreign currency is readily available from commercial banks and foreign exchange bureaus and can be freely bought and sold by local and foreign investors. The Central Bank of Kenya Act (2014), however, states that all foreign exchange dealers are required to obtain and retain appropriate documents for all transactions above the equivalent of KSH 1,000,000 (approximately USD 10,000). Kenya has 15 money remittance providers as at 2020 following the operationalization of money remittance regulations in April 2013.

Kenya is listed as a country of primary concern for money laundering and financial crime by the State Department’s Bureau of International Narcotics and Law Enforcement. Kenya was removed from the inter-governmental Financial Action Task Force (FATF) Watchlist in 2014 following progress in creating the legal and institutional framework to combat money laundering and terrorism financing.

Sovereign Wealth Funds

In 2019, the National Treasury published the Kenya Sovereign Wealth Fund policy (2019) and the Kenya Sovereign Wealth Fund Bill (2019) for stakeholders’ comments as a constitutional procedure. The fund would receive income from any future privatization proceeds, dividends from state corporations, oil and gas, and minerals revenues due to the national government, revenue from other natural resources, and funds from any other source. The Kenya Information and Communications Act (2009) provides for the establishment of a Universal Service Fund (USF). The purpose of the USF is to fund national projects that have significant impact on the availability and accessibility of ICT services in rural, remote, and poor urban areas. During the COVID-19 pandemic, the USF committee has partnered with the Kenya Institute of Curriculum Development to digitize the education curriculum for online learning.

7. State-Owned Enterprises

In 2013, the Presidential Task Force on Parastatal Reforms (PTFPR) published a list of all state-owned enterprises (SOEs) and recommended proposals to reduce the number of State Corporations from 262 to 187 to eliminate redundant functions between parastatals; close or dispose of non-performing organizations; consolidate functions wherever possible; and reduce the workforce — however, progress is slow. The taskforce’s report can be found at (https://drive.google.com/file/d/0BytnSZLruS3GQmxHc1VtZkhVVW8/edit ) SOEs’ boards are independently appointed and published in the Kenya Gazette notices by respective Cabinet Secretary. The State Corporations Advisory Committee is mandated by the State Corporations Act 2015 to advise on matters of SOEs. Financial operations of most SOEs are not readily available due to their opaque operating procedures despite being public entities, only those that are listed in the Nairobi Securities Exchange publish their financial positions as guided by the Capital Markets Authority guidelines. Corporate governance in SOEs is guided by the 2010 Constitution chapter 6 on integrity, Leadership and Integrity Act 2012 and the Public Officer Ethics Act 2003 which provide integrity and ethical requirements governing the conduct of State and public officers.

In general, competitive equality is the standard applied to private enterprises in competition with public enterprises. Certain parastatals, however, have enjoyed preferential access to markets. Examples include Kenya Reinsurance, which enjoys a guaranteed market share; Kenya Seed Company, which has fewer marketing barriers than its foreign competitors; and the National Oil Corporation of Kenya (NOCK), which benefits from retail market outlets developed with government funds. Some state corporations have also benefited from easier access to government guarantees, subsidies, or credit at favorable interest rates. In addition, “partial listings” on the Nairobi Securities Exchange offer parastatals the benefit of financing through equity and GOK loans (or guarantees) without being completely privatized.

In August 2020, the executive reorganized the management of SOEs in the cargo transportation sector and mandated the Industrial and Commercial Development Corporation (ICDC) to oversee rail, pipeline and port operations through a holding company called Kenya Transport and Logistics Network (KTLN). ICDC assumes a coordinating role over the Kenya Ports Authority (KPA), Kenya Railways Corporation (KRC) and Kenya Pipeline Company (KPC). KTLN is aimed at lowering the cost of doing business in the country, which will be achieved through the provision of port, rail, and pipeline infrastructure in a cost effective and efficient manner.

SOE procurement from the private sector is guided by the Public Procurement and Asset Disposal Act 2015 and the published Public Procurement and Asset Disposal Regulations 2020 which introduced exemptions from the Act for procurement on bilateral/multilateral basis commonly referred to government to government procurement; introduced E-procurement procedures; and preferences and reservations which gives preferences to the “Buy Kenya Build Kenya” strategy (http://kenyalaw.org/kl/fileadmin/pdfdownloads/LegalNotices/2020/LN69_2020.pdf ). The amendment reserves 30 percent government supply contracts for youth, women, and small and medium enterprises. Kenya is neither party to the Government Procurement Agreement (GPA) within the framework of the World Trade Organization (WTO) nor an Observer Government.

Privatization Program

The Privatization Act 2003 establishes the Privatization Commission (PC) which is mandated to formulate, manage, and implement Kenya’s Privatization Program. GOK has been committed to implementing a comprehensive public enterprises reform program to increase private sector participation in the economy. The privatization commission ( https://www.pc.go.ke/  ) is fully constituted with a board which is responsible for the privatization program. The PC has 26 approved privatization programs (https://www.pc.go.ke/sites/default/files/2019-06/APPROVED%20PRIVATIZATION%20PROGRAMME.pdf  ). In 2020, GOK is implementing a sugar taskforce report that proposed privatization of some state-owned sugar firms to increase their efficiency and productivity. The process of privatization involves open bids by interested investors including foreign investors.

9. Corruption

Many businesses deem corruption to be pervasive and entrenched in Kenya. Transparency International’s (TI) 2019 Global Corruption Perception Index ranks Kenya 137 out of 198 countries, six places lower than in 2018 and Kenya’s score of 28 remains below the sub-Saharan Africa average of 32. Historical lack of political will, limited progress in prosecuting past corruption cases, and the slow pace of reform in key sectors were reasons cited for Kenya’s chronic low ranking. Corruption has been reported to be an impediment to FDI, with local media reporting allegations of high-level corruption related to health, energy, ICT, and infrastructure contracts. There are many reports that corruption often influences the outcomes of government tenders, and U.S. firms have had limited success bidding on public procurements. In 2018, President Kenyatta began a public campaign against corruption. The Anti-Corruption agencies mandated to fight corruption have been inconsistent in coordinating activities, especially in bringing cases against senior officials. However, there were cabinet level arrests in 2019 that signaled a commitment by the GOK to fight corruption. Despite these efforts, much still remains to be done in convicting high profile suspects.

In 2020, a high-level conviction was secured for a Member of Parliament setting a precedent for top officials’ convictions. Relevant legislation and regulations include the Anti-Corruption and Economic Crimes Act (2003), the Public Officers Ethics Act (2003), the Code of Ethics Act for Public Servants (2004), the Public Procurement and Disposal Act (2010), the Leadership and Integrity Act (2012), and the Bribery Act (2016). The Access to Information Act (2016) also provides mechanisms through which private citizens can obtain information on government activities; implementation of this act is ongoing. The Ethics and Anti-Corruption Commission (EACC) monitors and enforces compliance with the above legislation.

The Leadership and Integrity Act (2012) requires public officers to register potential conflicts of interest with the relevant commissions. The law identifies interests that public officials must register, including directorships in public or private companies, remunerated employment, securities holdings, and contracts for supply of goods or services, among others. The law requires candidates seeking appointment to non-elective public offices to declare their wealth, political affiliations, and relationships with other senior public officers. This requirement is in addition to background screening on education, tax compliance, leadership, and integrity.

The law requires that all public officers declare their income, assets, and liabilities every two years. Public officers must also include the income, assets, and liabilities of their spouses and dependent children under the age of 18. Information contained in these declarations is not publicly available, and requests to obtain and publish this information must be approved by the relevant commission. Any person who publishes or makes public information contained in public officer declarations without permission may be subject to fine or imprisonment.

On August 31, 2016, the president signed into law the Access to Information Act (2016) although the government has not yet issued regulations required to fully operationalize the act. The law allows citizens to request government information and requires government entities and private entities doing business with the government proactively to disclose certain information, such as government contracts. The act also provides a mechanism to request a review of the government’s failure to disclose requested information, along with penalties for failures to disclose. The act exempts certain information from disclosure on grounds of national security.

The private sector-supported Bribery Act (2016) stiffened penalties for corruption in public tendering and requires private firms participating in such tenders to sign a code of ethics and develop measures to prevent bribery. Both the Bill of Rights of the 2010 Constitution and the Access to Information Act (2016) provide protections to NGOs, investigative journalism, and individuals involved in investigating corruption. The Witness Protection Act (2006) calls for the protection of witnesses in criminal cases and created an independent Witness Protection Agency. A draft Whistleblowers Protection Bill (2016) is currently stalled in Parliament.

Kenya is a signatory to the UN Convention Against Corruption (UNCAC) and in 2016 published the results of a peer review process on UNCAC compliance: (https://www.unodc.org/documents/treaties/UNCAC/CountryVisitFinalReports/2015_09_28_Kenya_Final_Country_Report.pdf ). Kenya is also a signatory to the UN Anticorruption Convention and the OECD Convention on Combatting Bribery, and a member of the Open Government Partnership. Kenya is not a signatory to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. Kenya is also a signatory to the East African Community’s Protocol on Preventing and Combating Corruption.

Resources to Report Corruption

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

Rev. Eliud Wabukala (Ret.)
Chairperson and Commissioner
Ethics and Anti-Corruption Commission
P.O. Box 61130 00200 Nairobi, Kenya
Phones: +254 (0)20-271-7318, (0)20-310-722, (0)729-888-881/2/3
Report corruption online: https://eacc.go.ke/default/report-corruption/ 

Contact at “watchdog” organization:

Sheila Masinde
Executive Director
Transparency International Kenya
Phone: +254 (0)722-296-589
Report corruption online: https://www.tikenya.org/ 

10. Political and Security Environment

Political tensions over the protracted and contentious 2017 election cycle spilled well into 2018. In March 2018, however, President Kenyatta and opposition National Super Alliance (NASA) leader Raila Odinga publicly shook hands and pledged to work together to heal the political, social, and economic divides revealed by the election. The 2017 electoral period had been marred by violence that claimed the lives of nearly 100 Kenyans, a contentious political atmosphere pitting the ruling Jubilee Party against NASA, and political interference and attacks by both sides on key institutions. In November 2017, the Kenyan Supreme Court unanimously upheld the October 2017 repeat presidential election results and President Uhuru Kenyatta’s win in an election boycotted by NASA leader Raila Odinga. The court’s ruling brought a close to Kenya’s protracted 2017 election cycle, a period that included the Supreme Court’s historic September 2017 annulment of the August 2017 presidential election and the unprecedented repeat election. In November 2019, the Building Bridges Initiative Advisory Taskforce, established by President Kenyatta in May 2018 as part of his pledge to work with Odinga, issued a report recommending reforms to address nine areas: lack of a national ethos, responsibilities and rights of citizenship; ethnic antagonism and competition; divisive elections; inclusivity; shared prosperity; corruption; devolution; and safety and security.

The United States’ Travel Advisory for Kenya advises U.S. citizens to exercise increased caution due to the threat of crime and terrorism, and not to travel to counties bordering Somalia and to certain coastal areas due to terrorism. Instability in Somalia has heightened security concerns and led to increased security measures aimed at businesses and public institutions around the country. Tensions flare occasionally within and between ethnic communities. Regional conflict, most notably in Ethiopia, Somalia, and South Sudan, sometimes have spill-over effects in Kenya. There could be an increase in refugees escaping drought and instability in neighboring countries, adding to the large refugee population already in Kenya from several countries. Security expenditures represent a substantial operating expense for businesses in Kenya.

Kenya and its neighbors are working together to mitigate the threats of terrorism and insecurity through African-led initiatives such as the African Union Mission in Somalia (AMISOM) and the nascent Eastern African Standby Force (EASF). Despite attacks against Kenyan forces in Somalia, the GOK has maintained its commitment to promoting peace and stability in Somalia.

Kosovo

Executive Summary

Despite being one of Europe’s youngest and poorest countries, Kosovo has recorded positive economic growth rates, averaging almost four percent, during the last decade.  Kosovo has potential to attract foreign direct investment, but that potential is constrained by failure to address several serious structural issues including: limited regional and global economic integration; political instability and interference in the economy; corruption; an unreliable energy supply; a large informal sector; difficulty establishing property rights, and tenuous rule of law, including a glaring lack of contract enforcement.  The country’s ability to sustain growth relies significantly on international financial support and remittances.

The COVID-19 pandemic is unlikely to lead to significant permanent changes in investment policies.  As of April 2020, the government had enacted several emergency relief measures that did not require legislative changes.  These measures are all temporary and focused on maintaining employment levels and helping businesses maintain liquidity.  As such, they do not affect the broader investment policy environment.  The government also announced a package of economic recovery measures, but as of April 2020, it was still working on finalizing the package.

Many international financial institutions have forecasted economic growth rates in Kosovo to fall from a pre-pandemic projection of four percent positive growth to a post-pandemic contraction of up to five percent.  This includes the IMF (-5 percent), World Bank (-4.5 percent) and European Bank for Reconstruction and Development (-4.5 percent).

In 2019, net flow of foreign direct investment (FDI) in Kosovo was estimated at USD 292 million, close to the 10-year annual average of USD 296 million.  The stock of portfolio investment in 2019 totaled USD 2.05 billion, with equity securities of USD 1.67 billion, and debt securities of USD 385 million.  Real estate and leasing activities are the largest beneficiaries of FDI, followed by financial services and energy.  The food, IT, infrastructure, and energy sectors are growing and are likely to attract new FDI.

Though justice sector remains weak in implementation, Kosovo’s laws and regulations are consistent with international benchmarks for supporting and protecting investment.  Kosovo has a flat corporate tax of 10 percent.  In 2016, Kosovo ratified a strategic investment law intended to ease market access for investors in key sectors, and the government partnered with USAID and other international donors to launch the Kosovo Credit Guarantee Fund, which improves access to credit.  With USAID assistance, the Government of Kosovo continued a series of business environment reforms which contributed to improving Kosovo’s ranking and score in the World Bank Doing Business Report over the years.  In the 2020 Doing Business Report, Kosovo ranked 57 out of 190 economics surveyed and was recognized as one of the top 20 most improved economies in the world.

Property rights and interests are enforced, but weaknesses in the legal system and difficulties associated with establishing title to real estate, in part due to competing claims arising from the history of conflict with Serbia, can make enforcement difficult.  Kosovo has a good legal framework for protecting intellectual property rights (IPR), but enforcement remains weak, largely due to lack of resources.  While IPR theft occurs in Kosovo, it is not widespread.

All legal, regulatory, and accounting systems in Kosovo are modeled on EU standards and international best practices.  Publicly-listed companies are required to comply with international accounting standards.  Investors should note that despite regulatory requirements for public consultation and establishment of an online platform for public comments (http://konsultimet.rks-gov.net), some business groups complain that regulations are passed with little substantive discussion or stakeholder input.

Recently, the political environment has been characterized by short electoral cycles and prolonged periods of caretaker governments.  (For example, the current government, formed in February 2020 collapsed 50 days later and has been in caretaker status since).  While the environment in the country is growing increasingly politicized, the Embassy is not aware of any damage to commercial projects or installations.

The public consistently ranks Kosovo’s high unemployment rate (officially 25.7 percent in 2019) as among its greatest concerns.  Unemployment levels for first-time job seekers and women are considerably higher than the official rate.  Many experts cite a skills gap and high reservation wage as significant contributing factors.

Despite the challenges, Kosovo has attracted a number of significant investors including several international firms and U.S. franchises.  Some investors have been attracted to Kosovo’s relatively young population, low labor costs, relative proximity to the EU market, and natural resources.  Kosovo does provide preferential access to the EU market through a Stabilization and Association Agreement (SAA).

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2019 101 of 175 http://www.transparency.org/
research/cpi/overview
World Bank’s Doing Business Report 2020 57 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2019 N/A https://www.globalinnovationindex.org/
analysis-indicator
U.S. FDI in partner country ($M USD, stock positions) 2018 USD 213 Million http://data.imf.org/CDIS
World Bank GNI per capita 2018 4,220 http://data.worldbank.org/
indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Kosovo welcomes FDI.  Kosovo’s laws do not discriminate against foreign investors.  The current caretaker government (as the government before it) – including the Prime Minister’s Office; Ministry of Economy, Employment, Trade, Industry, Entrepreneurship, and Strategic Investments (MEETIESI); and the Ministry of Finance and Transfers – recognizes the importance of FDI to the expansion of the private sector.

Kosovo Investment Enterprise and Support Agency’s (KIESA)’s mission is to promote and support foreign investments.  The agency is tasked with offering a menu of services, including: assistance and advice on starting a business in Kosovo, assistance with applying for a site in a special economic zone or as a business incubator, facilitation of meetings with different state institutions, and participation in business-to-business meetings and conferences.

Limits on Foreign Control and Right to Private Ownership and Establishment

The laws and regulations on establishing and owning business enterprises and engaging in all forms of remunerative activity apply equally to foreign and domestic private entities.  Kosovo legislation does not interfere with the establishment, acquisition, expansion, or sale of interests in enterprises by private entities.  Under Kosovo law, foreign firms operating in Kosovo are granted the same privileges as local businesses.  Kosovo does not have an investment screening mechanism.

We have heard no reports of restrictions from U.S. investors.  There are no licensing restrictions particular to foreign investors and no requirement for mandatory domestic partners for joint ventures.

Other Investment Policy Reviews

Kosovo is not a member of OECD, WTO, or UNCTAD; there are no investment policy reviews from these organizations.  In February 2017 the Pristina think tank, Group for Legal and Political Studies, published the report, “How ‘friendly’ is Kosovo for Foreign Direct Investments: A Policy Review of Gaps from a Regional Market Perspective ”.

Business Facilitation

The government has taken steps to remove barriers to facilitate businesses’ operations and improve related government services With USAID’s assistance, the Government of Kosovo continued a series of business climate reforms which contributed to Kosovo’s improved ranking in the World Bank Doing Business Index over the years.  Kosovo currently ranks 57 out of 190 economics surveyed and was recognized as one of the top 20 most improved economies in the world.  This was largely due to Kosovo’s high scores in the categories of “ease of registering a business” and “transferring property.”  Per the amended Law on Support to Small and Medium Enterprises, KIESA offers support to both domestic and foreign-owned micro, small, and medium enterprises (MSMEs), without any specific eligibility criteria.  Such services include voucher programs for training and advisory services, investment facilitation, assistance to women and young business owners, and the provision of business space with complete infrastructure at industrial parks, at minimal cost.

The Kosovo Business Registration Agency (KBRA), part of the Ministry of Economy, Employment, Trade, Industry, Entrepreneurship, and Strategic Investments, registers all new businesses, business closures, and business modifications.  The KBRA website is available in English and can be accessed at arbk.rks-gov.net.  As of April 2020, some steps in the registration process can be completed online.  Successful registrants will receive a business-registration certificate, a fiscal number, and a VAT number.  New businesses must register employees for tax and pension programs with the Tax Administration under the Ministry of Finance and Transfers.  Business registration generally takes one day for an individual business and up to three days for joint ventures.  A notary is not required when opening a new business unless the business registration also involves a transfer of real property.

Outward Investment

Kosovo does not promote or incentivize outward investment.  There are no restrictions on investments abroad.

6. Financial Sector

Capital Markets and Portfolio Investment

Kosovo has an open-market economy and the market determines interest rates.  Individual banks conduct risk analysis and determine credit allocation. Foreign and domestic investors can get credit on the local market.  Access to credit for the private sector is limited but improving.

The country generally has a positive attitude towards foreign portfolio investment.  Kosovo does not have a stock exchange. The regulatory system conforms with EU directives and international standards.  There are no restrictions beyond normal regulatory requirements related to capital sourcing, fit, and properness of the investors.  The CBK has taken all required measures to improve policies for the free flow of financial resources.  Requirements under the SAA with the EU oblige the free flow of capital.  The government respects the IMF’s Article VIII conditions on the flow of capital.

Money and Banking System

Kosovo has 10 commercial banks (of which 8 are foreign) and 20 micro-financial institutions (of which 12 are foreign).  The official currency of Kosovo is the euro, although the country is not a member of the Eurozone.  In the absence of an independent monetary policy, prices are highly responsive to market trends in the larger Eurozone.

Kosovo’s private banking sector remains well capitalized and profitable.  Difficult economic conditions, weak contract enforcement, and a risk-averse posture have limited banks’ lending activities, although marked improvement occurred in the past several years.  In February 2020, the rate of non-performing loans was 2.5 percent, the lowest rate in the last ten years.  The three largest banks own 56.4 percent of the total 4.8 billion euros of assets in the entire banking sector.  Despite positive trends, relatively little lending is directed toward long-term investment activities.  Interest rates have dropped significantly in recent years, from an average of about 12.7 percent in 2012 to an average of 6.3 percent in 2020.  Slower lending is notable in the northern part of Kosovo due to a weak judiciary, informal business activities, and fewer qualified borrowers.

The Central Bank of Kosovo (CBK) is an independent government body responsible for fostering the development of competitive, sound, and transparent practices in the banking and financial sectors.  It supervises and regulates Kosovo’s banking sector, insurance industry, pension funds, and micro-finance institutions.  The CBK also performs other standard central bank tasks, including cash management, transfers, clearing, management of funds deposited by the Ministry of Finance and other public institutions, collection of financial data, and management of a credit register.

Foreign banks and branches can establish operations in the country.  They are subject to the same licensing requirements and regulations as local banks.  The country has not lost any correspondent banking relationships in the past three years and no such relationship is currently in jeopardy.  There are no restrictions on foreigners opening bank accounts; they can do so upon submission of valid identification documentation.

Kosovo is a signatory country to the United States’ Foreign Account Tax Compliance Act (FATCA), aimed at addressing tax evasion by U.S. citizens or permanent residents with foreign bank accounts.  For more information, visit the FATCA website: https://www.irs.gov/Businesses/Corporations/Foreign-Account-Tax-Compliance-Act-FATCA .

Foreign Exchange and Remittances

Foreign Exchange

The Foreign Investment Law guarantees the unrestricted use of income from foreign investment following payment of taxes and other liabilities.  This guarantee includes the right to transfer funds to other foreign markets or foreign-currency conversions, which must be processed in accordance with EU banking procedures.  Conversions are made at the market rate of exchange. Foreign investors are permitted to open bank accounts in any currency.  Kosovo adopted the euro in 2002, but is not a Eurozone member.  The CBK administers euro exchange rates on a daily basis as referenced by the European Central Bank.

Remittance Policies

Remittances are a significant source of income for Kosovo’s population, representing over 12 percent of GDP (or over USD 925 million) in 2019.  The majority of remittances come from Kosovo’s diaspora in European countries, particularly Germany and Switzerland.  The Central Bank reports that remittances are mainly used for personal consumption, not for investment purposes.

Kosovo does not apply any type of capital controls or limitations on international capital flows.  As such, access to foreign exchange for investment remittances is fully liberalized.

Sovereign Wealth Funds

Kosovo does not have any sovereign wealth funds.

7. State-Owned Enterprises

Kosovo has 63 state-owned enterprises (SOEs), 44 of which are municipality managed.  These enterprises are a legacy of the Yugoslav era and include entities involved in telecommunications, waste management, water supply, mining, and transportation.  SOEs are generally governed by government-appointed boards.  The Ministry of Economy, Employment, Trade, Industry, Entrepreneurship, and Strategic Investments monitors SOE operations with a light hand.

Private companies can compete with SOEs in terms of market share and other incentives in relevant sectors.  State-owned enterprises are subject to the same tax laws as private companies.  There are no state-owned banks, development banks, or sovereign funds in Kosovo.

The majority of Kosovo’s SOEs are either regulated or operate at a loss and depend on government subsidies for their survival.  SOEs do not receive a larger percentage of government contracts in sectors that are open to foreign competition.  However, the government interprets procurement law in a way that considers SOEs to be public authorities and prevents contracting authorities from procuring goods from other sources if SOEs offer such goods and/or services.  SOEs purchase goods and services from the private sector, including international firms.

Privatization Program

Kosovo has been progressively privatizing SOE assets since the early 2000s.  The Privatization Agency of Kosovo (PAK), an independent agency, is responsible for the disposition of Kosovo’s SOE assets.  PAK plans to finalize all remaining privatizations over the next three to four years, pending legal challenges.  There has been a freeze on privatization of land assets since December 2017.  The privatization process is open to foreign investors and follows Kosovo’s public procurement procedures. PAK provides a live feed of bidding day procedures on its website (http://www.pak-ks.org/ ).  The website also includes bidding information, the results of sales, and other information.

Kosovo adopted the Law on Strategic Investment in 2016 in an effort to boost foreign direct investment.  Through the law, the government can transfer ownership of lands under administration of PAK to the state and offer it to strategic investors.  The law also enables Kosovo to negotiate directly with potential strategic investors without going through tendering procedures in special cases.  The media has criticized some bidding processes as non-transparent and illegal.

9. Corruption

Opinion polls attest to the public perception that corruption is widespread in public procurement and local and international businesses regularly cite corruption, especially in the form of political interference, as one of Kosovo’s largest obstacles to attracting investment.  Kosovo has enacted strong legislation to combat corruption, but the government has thus far been unsuccessful in efforts to investigate, prosecute, jail, and confiscate the assets of corrupt individuals.  The government has enacted other measures to address corruption, including a requirement to conduct all public procurement electronically and to publish the names of contract winners.  The government also recently dismissed the boards of several SOEs, citing mismanagement.

The Kurti government, which started its mandate in February 2020, but fell in March 2020 and as of May 2020 was in caretaker status, took a number of concrete steps to combat corruption and political interference, but given its short tenure was not able to institutionalize all of its measures and change the perception of political interference in public administration and the judicial system.  The Anti-Corruption Agency and the Office of Auditor General are the government agencies mandated to fight corruption.

The Law on Prevention of Conflict of Interest and Discharge in Public Function as well as the Law on Declaration, Origin, and Control of Property of Public Officials are intended to combat nepotism.  They require senior public officials and their family members to disclose their property and its origins.  The Criminal Code also punishes bribery and corruption.

The Embassy is unaware of any government activity to encourage private companies to establish internal codes of conduct.  The embassy is also unaware of local industry or non-profit groups that offer services for vetting potential local investment partners.

In 2016, the Kosovo Assembly approved amendments to the Law on Anti-Money Laundering.  The EU-compliant law supported Kosovo’s membership in the Egmont Group, a network of 152 Financial Intelligence Units (FIU) where the members exchange expertise to combat money laundering and terrorist financing.  Money laundering is believed to be most common in the real estate, construction, and gambling sectors.  Kosovo’s FIU is an independent governmental agency that leads Kosovo’s efforts to investigate economic crimes.

U.S. companies operating in Kosovo must adhere to FCPA requirements.  Kosovo participated in 2013 as an observer member in the anti-corruption conference organized by the United Nations Convention Against Corruption (UNCAC), and has attended several international conferences on anti-corruption with the support of the Council of Europe and UNDP.  Kosovo’s laws protect NGOs that investigate corruption.

Resources to Report Corruption

Shaip Havolli
Director, Kosovo Anti-Corruption Agency
Nazim Gafurri Street, No. 31, Pristina, Kosovo
+381 38 518 980
Email: shaip.havolli@rks-gov.net

Hilmi Jashari
OMBUDSMAN
The Republic of Kosovo OMBUDSPERSON Institution
Str. “MIGJENI”, no. 21, Pristina, Kosovo
+383 (0) 38 223 782
Email: hilmi.Jashari@oik-rks.org

Ismet Kryeziu
Executive Director
Kosovo Democratic Institute
Bajram Kelmendi Street, n/45, Pristina, Kosovo
+381 38 248 038
Email: ikryeziu@kdi-kosova.org

Jeta Xharra
Executive Director
Balkan Investigative Reporting Network Kosovo
Menza e studenteve, kati i pare, 10000 Prishtine, Kosovo
+ 381 38 22 44 98
Email: jeta@birn.eu.com

10. Political and Security Environment

Recently, the political environment has been characterized by short electoral cycles and prolonged periods of caretaker governments.  While the environment in the country is growing increasingly politicized, the Embassy is not aware of any damage to commercial projects or installations.

The current administration took up its mandate in February 2020, but a motion of no confidence led to its fall 50 days later.  The government formation followed lengthy period of coalition negotiations and certification of the October 2019 election results.  The previous administration succeeded the May 2017, motion of no confidence, and was formed in September 2017 with a one-vote majority (61 out of 120) in the Assembly.  The government lost its majority in the Assembly in October 2018 and found it increasingly difficult to pass legislation through the Assembly.  The prime minister resigned in July 2019, and elections were held in October 2019.

Kosovo is not a member of the United Nations and neighboring Serbia and Bosnia and Herzegovina are among the countries that do not recognize its statehood.  In November 2018, Kosovo imposed a 100 percent tariff on all goods from Serbia and Bosnia and Herzegovina, in part in response to Serbia’s lobbying against Kosovo’s membership in INTERPOL and other international bodies.  The current administration lifted the tariff on raw materials in March 2020 and removed tariffs on all goods in April.  In April, the government also began enforcing an agreement with Serbia on phytosanitary documentation.  Although it warned it would apply additional such “reciprocal measures,” no new measures had been enacted as of May 2020.

Opposition members in the Kosovo Assembly released teargas on March 21, 2018 in protest of the final vote for border demarcation with Montenegro.  The voting session was interrupted on four separate occasions when some MPs released tear gas inside the chamber.  In August 2016, the Assembly building was hit by a rocket-propelled grenade.  Opposition party members were tried for the attack, but a conviction was overturned in November 2017 and is pending a retrial. There were no serious injuries reported from these incidents.

Kuwait

Executive Summary

Kuwait is a country of 1.4 million citizens and 3.3 million expatriates.  It occupies a land mass slightly smaller than New Jersey, but possesses six percent of the world’s proven oil reserves and is a global top ten oil exporter.  The economy is heavily dependent upon oil production and related industries, which are almost wholly owned and operated by the government. The energy sector accounts for more than half of GDP and close to 90 percent of government revenue. The fall in oil prices after OPEC+ failed to agree on production targets in 2019 greatly exacerbated Kuwait’s fiscal deficit. This was only heightened with the onset of the COVID-19 pandemic, which resulted in dramatically reduced oil demand in the first and second quarters of 2020. No one can predict what a post-pandemic economy will look like, except that it is likely to be very different from what it has been. In the background looms the prospect for economic reforms and diversification as outlined by the government in its national development plan, called New Kuwait Vision 2035.

As it develops the private sector to reduce the country’s dependence upon oil, the government faces two central challenges. It must improve the business climate to enable the private sector, and prepare its citizens to successfully work in the private sector. The government has made progress on the business climate, improving from 97 to 83 among 190 countries the World Bank’s 2020 Doing Business Report. Nonetheless, Kuwait remains the lowest ranked of its fellow Gulf Cooperation Council (GCC) countries. Preparing Kuwaitis to work successfully in the private sector and compete internationally may be more difficult. Today, more than 85 percent of all Kuwaitis with jobs work in the public sector, where they receive generous salaries and benefits. Convincing young Kuwaitis that their future is in the private sector will require changing in social attitudes and raising the level of local education so that they may compete internationally.

With a view to attracting foreign investment the government passed a new foreign direct investment law in 2013 that permits up to 100 percent foreign ownership of a business, if approved by the Kuwait Direct Investment Promotion Authority (KDIPA).  All other foreign businesses must abide by existing law that mandates that Kuwaitis, or a GCC national, own at least 51 percent of any enterprise. In approving applications from foreign investors seeking 100 percent ownership, KDIPA looks for job creation, the provision of training and education to Kuwaiti citizens, technology transfer, diversification of national income sources, contribution to exports, support for small- and medium-sized enterprises, and the utilization of Kuwaiti products and services.  KDIPA reported that it had sponsored 37 foreign firms, including six U.S. companies. KDIPA may also provide certain investment incentives such as tax benefits, customs duties relief, and permission to recruit certain foreign employees.

The government remains committed to executing its long-term Vision 2035 national development plan, which focusses on improving the country’s economic infrastructure, such as the construction of new airports, ports, roads, industrial cities, large residential developments, hospitals, a railroad, and a metro rail.  The Northern Gateway initiative, which encompasses the Five Islands or Silk City projects, envisions public and private sector investment in the establishment of an international economic zone that could exceed USD 400 billion over several decades.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2019 85 of 180 https://www.transparency.org/
cpi2019?/news/feature/cpi-2019
World Bank’s Doing Business Report 2020 83 of 190 http://www.doingbusiness.org/
en/rankings
Global Innovation Index 2019 60 of 129 https://www.globalinnovationindex.org/
analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2018 $313 million https://apps.bea.gov/international/
factsheet/factsheet.cfm?Area=506
World Bank GNI per capita 2018 $34,290 https://data.worldbank.org/indicator/NY.GNP.PCAP.CD?locations=KW

6. Financial Sector

Capital Markets and Portfolio Investment

Foreign financial investment firms operating in Kuwait characterize the government’s attitude toward foreign portfolio investment as welcoming.  An effective regulatory system exists to encourage and facilitate portfolio investment. Existing policies and infrastructure facilitate the free flow of financial resources into the capital market.  Government bodies comply with guidelines outlined by IMF Article VIII and refrain from restricting payments and transfers on current international transactions. In November 2015, the Capital Markets Authority issued a regulation covering portfolio management, but it does not apply to foreign investors.

The privatized stock exchange, named the Boursa, lists 172 companies.  In February 2019, a consortium led by Kuwait National Investment Company that included the Athens Stock Exchange won a tender to acquire 44 percent of the Kuwaiti Boursa.  In December 2019, the Capital Markets Authority sold its 50 percent stake in the Kuwaiti Boursa as part of an Initial Public Offering. The offering was oversubscribed by more than 8.5 times. Kuwait’s Public Institution for Social Security owns the remaining six percent of shares.

FTSE Russell upgraded the status of the Boursa to Secondary Emerging Market in 2017.  In March 2019, MSCI announced a proposal to reclassify the MSCI Kuwait Index from Frontier to Emerging Markets. MSCI aims to implement the potential reclassification to coincide with the May 2020 Semi-Annual Index Review.

While the debt market is not well developed, local banks have the capacity to meet domestic demand.  Credit is allocated on market terms. Foreign investors can obtain local credit on terms that correspond to collateral provided and intended use of financing.  The private sector has access to a variety of credit instruments. The Central Bank restricts commercial banks’ use of structured and complex derivatives but permits routine hedging and trading for non-speculative purposes.  In March 2017, the government issued USD 8 billion in five- and ten-year notes but was unable to secure approval from the National Assembly for issuance of 30-year notes.

Money and Banking System

The Central Bank of Kuwait reported that banking sector assets totaled KD 72.77 billion (USD 232.42 billion) in March 2020.

Twenty-two banks operate in Kuwait: five conventional local banks, five Islamic banks, 11 foreign banks, and one specialized bank.  Conventional banks include: National Bank of Kuwait, Commercial Bank of Kuwait, Gulf Bank, Al-Ahli Bank of Kuwait, and Burgan Bank. Sharia-compliant banks include Kuwait Finance House, Boubyan Bank, Kuwait International Bank, Al-Ahli United Bank, and Warba Bank.  Foreign banks include: BNP Paribas, HSBC, Citibank, Qatar National Bank, Doha Bank, Dubai-based Mashreq Bank, the Bank of Muscat, Riyadh-based Al Rajhi Bank (the largest Sharia-compliant bank in the world), the Bank of Bahrain and Kuwait (BBK), the Industrial and Commercial Bank of China (ICBC), and Union National Bank.  The government-owned Industrial Bank of Kuwait provides medium- and long-term financing to industrial companies and Kuwaiti citizens through customized financing packages. In December 2018, the Ministry of Commerce and Industry began permitting more than 49 percent foreign ownership in local banks with the approval of the Central Bank of Kuwait.

Following the global financial crisis in 2008 when large losses reduced confidence in the local banking sector, the Council of Ministers and the National Assembly passed legislation to guarantee deposits at local banks to rebuild confidence.

Foreign banks can offer retail services.  In 2013, the Central Bank announced that foreign banks could open multiple branches on a case-by-case basis.  In 2017, the Al-Rajhi Bank opened its second branch. Qatar National Bank received CBK’s approval in 2014 and opened its second branch in 2018.  Kuwaiti law restricts foreign banks from offering investment banking services. Foreign banks are subject to a maximum credit concentration equivalent to less than half the limit of the largest local bank and are prohibited from directing clients to borrow from external branches of their bank.  Foreign banks may also open representative offices.

Foreign Exchange and Remittances

Foreign Exchange

The Kuwaiti dinar has been tied to an undisclosed and changing basket of major currencies since May 2007.  Reverse engineering suggests that the U.S. dollar accounts for some 70-80 percent of this basket. Foreign exchange purchases must be processed through a bank or licensed foreign exchange dealer.  Equity, loan capital, interest, dividends, profits, royalties, fees, and personal savings can be transferred into or out of Kuwait without hindrance. The Foreign Direct Investment Law permits investors to transfer all or part of their investment to another foreign or domestic investor, including cash transfers.

Remittance Policies

No restrictions exist on the inflow or outflow of remittances, profits, or revenue.  Foreign investors may elect to remit through a legal parallel market, including one using convertible, negotiable instruments.  Nevertheless, each investor must ensure compliance with Kuwait’s anti-money laundering laws. Time limitations or waiting periods do not apply to remittances.  Kuwait is not known to engage in currency manipulation. The Central Bank advises buy, sell, and middle rates daily.

Sovereign Wealth Funds

The Kuwait Investment Authority (KIA) manages the Kuwait General Reserve Fund and the Kuwait Fund for Future Generations.  By law, ten percent of oil revenues must be deposited each year into the Fund for Future Generations. KIA management reports to a Board of Directors that is appointed by the Council of Ministers.  The Minister of Finance chairs the board; other members include the Minister of Oil, the Central Bank Governor, the Undersecretary of the Ministry of Finance, and five representatives from Kuwait’s private sector (three of whom must not hold any other public office).  An internal audit office reports directly to the Board of Directors and an external auditor. This information is provided to the State Audit Bureau, which audits KIA continuously and reports annually to the National Assembly.

The 1982 law establishing the KIA prohibits the public disclosure of the size of sovereign wealth holdings and asset allocations.  KIA conducts closed-door presentations for the Council of Ministers and the National Assembly on the full details of all funds under its management, including its strategic asset allocation, benchmarks, and rates of return.  The Sovereign Wealth Fund Institute estimated that KIA manages one of the world’s largest sovereign funds with more than USD 533 billion in assets as of May 2020.

7. State-Owned Enterprises

The energy sector is dominated by parastatals, as law precludes private participation in most sector activities.  Outside the energy sector, Kuwait has few fully state-owned enterprises (SOEs). One notable exception is Kuwait Airways.  No published list of SOEs exists. The government owns shares in various Kuwaiti companies through the Fund for Future Generations managed by the KIA or the Social Security Fund managed by Kuwait’s Public Institution for Social Security.  SOEs are permitted to control their own budgets.

Privatization Program

The National Assembly has passed several privatization laws since 2008.  One legal stipulation is that Kuwaiti employees have the right to retain their jobs in a privatized company for at least five years with the same salary and benefits.  Another stipulation is that the privatization of any public service must offer shares as follows: 40 percent of shares reserved for Kuwaiti citizens;

  • 40 percent of shares reserved for Kuwaiti citizens;
  • 20 percent of shares retained by the government;
  • five percent of shares distributed to Kuwaiti employees, both former and current; and
  • the remaining 35 percent of shares sold at auction to a local or foreign investor.

Telecommunications is the largest service sector in Kuwait.  The Ministry of Communications owns and operates landlines and owns a fiber optic network.  Internet providers may access both landlines and fiber optic networks. Three private mobile telephone companies provide cellular telephone and data services to the country.  The government owns a significant minority interest in each, but foreign companies own majority interests in two of them. In 2014, the National Assembly passed legislation creating the independent Communication and Information Technology Regulatory Authority (CITRA), in part to prepare for the liberalization of mobile communications and Internet markets.  Officially opened in 2016, CITRA serves as the primary national telecom regulator and cybersecurity agency. CITRA also has a mandate to attract hi-tech investment.

9. Corruption

Corruption is criminalized, and several investigations and trials involving current or former government officials accused of malfeasance are active.

Transparency International’s 2019 Corruption Perceptions Index ranked Kuwait 85 out of 180 countries.  Within the GCC, Kuwait ranked behind UAE, Qatar, Saudi Arabia, and Oman, ahead of only Bahrain.  According to Transparency International, Kuwait’s numeric score of 40 (out of 100) indicated that the country has a serious corruption problem.

The often-lengthy procurement process in Kuwait occasionally results in accusations of attempted bribery or the offering of other inducements by bidders.  In 1996, the government passed Law No. 25, which required all companies securing contracts with the government valued at KD 100,000 (USD 330,000) or more to report all payments made to Kuwaiti agents or advisors while securing the contract.  The law similarly requires entities and individuals to report any payments they received as compensation for securing government contracts.

Kuwait signed the UN Convention Against Corruption in 2003 and ratified it in 2007.  In 2016, the National Assembly passed legislation to establish the Anti-Corruption Authority, also known as Nazaha (integrity).  The legislation was passed to comply with the United Nations Convention Against Corruption. Nazaha has sent several cases to the Public Prosecution Office for failure to comply with financial disclosure requirements.

Resources to Report Corruption

Contact information for the government agency responsible for combating corruption is as follows:

Mr. Abdulrahman Nimash Al-Nimash.
President
Kuwait Anti-Corruption Authority (Nazaha)
Shamiya, Block 2, Opposite Wahran Park, Kuwait City, Kuwait
Tel:  +965 2464-0200/118
Email: contact@nazaha.gov.kw

10. Political and Security Environment

The U.S. Embassy occasionally receives threat information indicating possible targeting of official and private U.S. citizens for terrorist attacks.  Soft targets are vulnerable to terrorist attack, although many have made improvements to their perimeters and internal security. There have been no terror incidents in Kuwait since 2016.  There have been no attacks targeting businesses or infrastructure. Since late 2013, Kuwait has seen no large-scale, politically motivated demonstrations. U.S. citizens are encouraged to enroll in the U.S. Department of State’s Smart Traveler Enrollment Program (STEP) for up-to-date information from the Embassy.  The Department of State shares credible threat information through its Consular Information Program, including Travel Advisories, Alerts, and Country Information for Kuwait, available at https://travel.state.gov/content/travel.html or the Embassy’s website: https://kw.usembassy.gov/.

Kyrgyz Republic

Executive Summary

The Kyrgyz Republic has undergone waves of political upheaval and severe economic downturns since its independence in 1991, resulting in an unfavorable investment climate for investors with low tolerance for risk of political instability. The violent arrest and detention of former President Atambaev by state security forces in August 2019 alarmed potential investors anticipating continued stability and positive investment prospects. Corruption continues to be a major constraint to business development, particularly in the state customs and border agencies, despite President Sooronbai Jeenbekov’s campaign to stamp out corruption in business regulation and to increase transparency in the public procurement process. The country’s judicial system is not fully independent and susceptible to external political influence. While the legal and regulatory framework is set up to be in accordance with international norms, poor implementation and weak enforcement, particularly with respect to intellectual property rights protection, is an endemic problem.

Kyrgyz government officials speak optimistically of factors they say indicate an improving investment climate. The government has identified FDI as a key component to growing the economy in the coming years and has created a strategic roadmap for economic development designed to facilitate this growth. The government is taking steps to streamline the process of starting a business, as well as its tax regime. The newly established Institute of the Business Ombudsman, intended to instill greater confidence in the business community, is charged with advocating for the protection of rights and freedoms of foreign and domestic business entities. Under the “Digitalization Kyrgyzstan” initiative for 2019-2023, the development of information and communication technology infrastructure is aimed at improving the regulatory framework for incentivizing innovation and protecting intellectual property.

Stifled progress in improvements to the business legal and regulatory framework deters foreign investors from entering the Kyrgyz market. The Kyrgyz economy continues to rely heavily on the mining and agricultural sectors. Kumtor Gold Company and the parent company Centerra Gold Inc. completed a new strategic agreement with the government in August 2019 after nearly two years of contentious disputes, further dampening the country’s investment image. The government retains a poor track record in international arbitration cases, and in the last five years, foreign investors have filed twenty different lawsuits against the Kyrgyz government.

The Kyrgyz Republic struggles to meet basic infrastructure needs. Disruptions in the supply of electricity remain a problem, especially outside the capital, Bishkek. Power plants, roads, and canals are dilapidated and in need of major capital investment. Chinese infrastructure projects, primarily implemented with non-market loans from the Export-Import Bank of China, tend to improve market access predominantly for Chinese companies.

The Kyrgyz Republic has yet to reap the economic benefits of membership within the Eurasian Economic Union (EAEU), following the country’s August 2015 accession into the customs union whose current members also include Russia, Kazakhstan, Armenia, and Belarus. Harmonized tariff schedules have left Kyrgyz producers and suppliers struggling to compete with cheaper import goods produced by other EAEU member states, in addition to non-member states that have signed Free Trade Agreements with the EAEU. An increase in non-tariff measures, to which the Kyrgyz government and businesses alike have struggled to adapt, create further barriers for Kyrgyz producers. The slow development of technical infrastructure to ensure compliance with EAEU sanitary and phytosanitary standards and quality control have precluded Kyrgyz goods from target markets within the customs union. Persistent reliance on Russia as a source of remittances, imports, and financial support subjects the economy to Russian influence and makes it vulnerable to external shocks to the Russian economy.

The Kyrgyz government remains very open to foreign direct investment, particularly from U.S. and European countries. Kyrgyz entrepreneurs increasingly are purchasing franchise licenses of major U.S.-based companies, particularly in the food service and retail sectors. The Kyrgyz Republic has also experienced a modest uptick in interest from U.S. corporations seeking to bid on infrastructure development projects funded by international financial institutions.

The COVID-19 pandemic significantly disrupted any positive momentum in the Kyrgyz Republic’s economy over the last year. Assuming that the economic downturn will last for at least the first half of 2020, the IMF assessed that real GDP growth will drop to 0.4 percent in 2020. Nearly all sectors face acute setbacks for recovery with the prolongation of emergency quarantine restrictions for an indefinite period. The closure of regional borders, particularly with China and Kazakhstan, caused mass supply chain disruptions, particularly for intermediary materials and equipment, necessary for agricultural, mining, and construction activities. The collapse of global oil prices coupled with high rates of unemployment among migrant workers, in addition to depreciation of the Kyrgyz som exchange rate against the U.S. dollar, have depressed remittance earnings. Local businesses are struggling to adapt to current conditions, but the domestic information technology sector may experience a boom as more local enterprises aim to transition to e-commerce and online platforms. Despite having accepted close to USD 500 million in concessional loans and grants from international donor organizations in response to COVID-19, the Kyrgyz Republic’s public debt in the long-term is expected to remain at 60 percent of GDP and the risk of debt distress will remain moderate.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2019 126 of 180 http://www.transparency.org/
research/cpi/overview
World Bank’s Doing Business Report 2019 80 of 190 http://www.doingbusiness.org/
en/rankings
Global Innovation Index 2019 90 of 129 https://www.globalinnovationindex.org/
analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2018 27 http://apps.bea.gov/international/
factsheet/
World Bank GNI per capita (USD) 2018 $1,221 http://data.worldbank.org/indicator/
NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

The Kyrgyz Republic is open to foreign direct investment and the government publicly recognizes that foreign direct investment is an important component to economic development. While the government has implemented laws to entice foreign investment, application of these laws, however, inconsistent application and onerous bureaucracy continue to deter foreign investors. In particular, government activities, including demands for renegotiation of operating contracts, invasive and time-consuming audits, levies of large retroactive fines, and disputes over licenses, pose significant impediments to attracting foreign investment.

Since 1993, the United States has a bilateral investment treaty with the Kyrgyz Republic that encourages and offers reciprocal protection of investment. The Kyrgyz Republic has an Investment and Trade Promotion and Protection Agency of the Kyrgyz Republic under the Ministry of Economy (IPPA). The IPPA serves as a vehicle for maintaining an ongoing dialogue with foreign investors and advocates for investing in the Kyrgyz Republic. The agency participates in the development and implementation of measures to attract and stimulate investment activity. Its mandate is to coordinate with state bodies, local municipalities, business entities, and non-state actors to promote investment and support investors in the Kyrgyz Republic, including private investment and public-private partnerships, as well as assist local exporters to promote Kyrgyz goods to external markets, and develop Free Economic Zones (FEZ). The IPPA has investor support programs to help guide investors through the registration process and conducts outreach aimed at helping create an environment conducive to foreign investment. The IPPA often coordinates with international donor organizations on hosting round- tables discussions, exchanges, and capacity building workshops in the field of economic development.

In August 2019, the Supervisory Board of the Institute of the Business Ombudsman appointed former UK Ambassador to the Kyrgyz Republic, Robin Ord-Smith, as Business Ombudsman. The Institute of Business Ombudsman was created in January 2019 is a non-state body, funded by external donor sources, to protect the rights, freedoms and legitimate interests of business entities, both local and foreign. The selection of a foreigner to head the Institute sends a positive signal to business associations and foreign investors of the country’s commitment to improving transparency mechanisms for regulating business activities.

The government has established several committees and councils to coordinate cooperation between the business associations and government bodies. Since 2017, the Business and Entrepreneurship Development Council regularly convenes MPs, business community representatives from various sectors of the economy to discuss measures to improve the investment, promotion of entrepreneurship, and legislation to facilitate doing business in the Kyrgyz Republic. The Committee on Development of Industry and Entrepreneurship under the President of the Kyrgyz Republic serves as a platform for entrepreneurs to turn to in case if their grievances are not addressed by the government. The respective presidential decree to establish the Committee under the National Council on Sustainable Development of the Kyrgyz Republic was signed on December 24, 2019 with the Provisions and the following amendment to include Vice-Prime-Minister on economic development, Business Ombudsman and heads of business associations. Once this structure fully launches, there will be platforms to raise investment climate and other business concerns at the offices of the President, Parliament and Prime Minister. The Kyrgyz government also interacts with the business community via a number of local associations that serve as a voice for entrepreneurs and corporations, including the American Chamber of Commerce in the Kyrgyz Republic (AmCham), and the International Business Council (IBC), among others. The Ministry of Economy, Parliamentary Business and Entrepreneurship Development Council, and other government bodies often seek the opinion of these associations during the formulation of policy.

Limits on Foreign Control and Right to Private Ownership and Establishment

While there are still no official limits on foreign control, a large investor in a politically sensitive industry may find that the government imposes investor-specific requirements such as a high percentage of local workforce employment or a minimum number of local seats on a board of directors. Foreigners have the right to establish and own businesses, and there have been no allegations on market access restrictions from U.S. investors since 2016.

By law, the Kyrgyz Republic guarantees equal treatment to investors and places no limit on foreign ownership or control. In the last two years, there were no known cases of sector-specific restrictions, limitations or requirements applied to foreign ownership and control. In April 2017, amendments to the “Law on Mass Media” to limit foreign ownership of television (excluding radio and print media) broadcasters to 35 percent, was signed by the President and entered into force in June 2017.

Post is unaware of any formal investment screening processes in the Kyrgyz Republic.

Other Investment Policy Reviews

In 2016, the International Finance Corporation (IFC), a member of the World Bank Group, released a report on the Kyrgyz investment climate in January 2016. The report is available at: https://documents.worldbank.org/en/publication/documents-reports/documentdetail/259411467997285741/investment-climate-in-kyrgyz-republic-views-of-foreign-investors-results-of-the-survey-of-foreign-investors-operating-and-non-operating   here. The Investment Policy Review (IPR) of The Kyrgyz Republic for 2016 by UNCTAD is available at https://unctad.org/en/pages/PublicationWebflyer.aspx?publicationid=1436 .

Business Facilitation

Starting a business in the Kyrgyz Republic has become easier in the elimination of the minimum capital requirement for business registration, abolishment of certain registration fees, and reduced registration time. The Kyrgyz Republic does not have a business registration website. Registration of legal entities, branches, or representative offices in the Kyrgyz Republic is based on “registration by notification” and the “one stop-shop” practice. State registration of a legal entity is completed within three business days from the date of filing the necessary documents for a specified fee. The Kyrgyz Republic ranked in the top quintile of the World Bank’s 2019 Doing Business report (42nd out of 190 countries surveyed) in “Starting a Business.” From May 2, 2018 to May 1, 2019, 115 economies implemented 294 business regulatory reforms across the 10 areas measured by Doing Business.

Outward Investment

Post is not aware of host government efforts to promote outward investment from the Kyrgyz Republic, nor of any instances in which the government sought to restrict domestic investors from investing abroad.

6. Financial Sector

Capital Markets and Portfolio Investment

The Kyrgyz government is generally open toward foreign portfolio investment, though experts from international financial institutions (IFIs) have noted that capital markets in the Kyrgyz Republic remain underdeveloped. The economy of the Kyrgyz Republic is primarily cash-based, although non-cash consumer transactions, such as debit cards and transaction machines, have quadrupled in the last five years. In 2019, Moody’s Investors Services assigned the Kyrgyz Republic a sovereign credit rating of B2. The government debt market is small and limited to short maturities, though Kyrgyz bonds are available for foreign ownership. Broadly, credit is allocated on market terms, but experts have noted that the presence of the Russian-Kyrgyz Development Fund subsidized sources of credit have introduced market distortions. Bank loans remain the primary source of private sector credit, and local portfolio investors often highlight the need to develop additional financial instruments in the Kyrgyz Republic.

There are two stock exchanges in the Kyrgyz Republic (Kyrgyz Stock Exchange and Stock Exchange The Kyrgyz Republic), but all transactions are conducted through the Kyrgyz Stock Exchange. In 2019, the total value of transactions amounted to USD 6.1 billion Kyrgyz soms (approximately USD 87 billion). The small market lacks sufficient liquidity to enter and exit sizeable positions. Since 1995, the Kyrgyz Republic has accepted IMF Article VIII obligations. Foreign investors are able to acquire loans on the local market if the business is operating on the territory of the Kyrgyz Republic and collateral meets the requirements of local banks. The average interest rate for loans in USD is between 10-15 percent.

Money and Banking System

The National Bank of the Kyrgyz Republic (NBKR) is a nominally independent body whose mandate is to achieve and maintain price stability through monetary policy. The Bank is also tasked with maintaining the safety and reliability of the banking and payment systems. The NBKR licenses, regulates, and supervises credit institutions. The penetration level of the banking sector is 42 percent.

According to the IMF, the Kyrgyz banking system at present remains well capitalized with still sizeable, non-performing loans (NPLs). NPLs increased from 7.5 percent to 8.0 percent in 2019, with restructured loans in excess of 20 percent. Net capital adequacy ratio increased from 23.7 percent to 24.0 percent in 2019. Total assets in the Kyrgyz banking system in 2019 equaled approximately USD 3.6 billion. As of August 2019, the Kyrgyz Republic’s three largest banks by total assets were Kyrgyz Investment and Credit Bank (KICB; approximately USD 418 million), Optima Bank (approximately USD 520.7 million), and Aiyl Bank (approximately USD 434.5 million).

There are currently 23 commercial banks in the Kyrgyz Republic, with 323 operating branches throughout the country; the five largest banks comprise 51.7 percent of the total market. No U.S. bank operates in the Kyrgyz Republic and Kyrgyz banks do not maintain correspondent accounts from U.S. financial institutions. There are eight foreign banks operating in the Kyrgyz Republic: Demir Bank, National Bank of Pakistan, Halyk Bank, Optima Bank, Finca Bank, and Kompanion Bank are entirely foreign held. Other banks are partially foreign held, including KICB and BTA Bank, Kyrgyz-Swiss Bank. KICB has multinational organizations as shareholders including the European Bank for Reconstruction and Development (EBRD), Economic Finance Corporation, the Aga Khan Fund for Economic Development and others.

The micro-finance sector in the Kyrgyz Republic is robust, representing nearly 10 percent the market size of the banking sector. Trade accounted for 25.4 percent of the total loan portfolio of the banking sector, followed by agriculture (18.9 percent) and consumer loans (11.7 percent). The microfinance sector in the Kyrgyz Republic is rapidly growing. In 2019, around 140 microfinance companies, 95 credit unions, 220 pawnshops and 401 currency exchange offices operated in the Kyrgyz Republic. Over the last four years, the three largest microfinance companies (Bai-Tushum, FINCA, and Kompanion) transformed into banks with full banking licenses.

Foreign Exchange and Remittances

Foreign Exchange

Foreign exchange is widely available and rates are competitive. The local currency, the Kyrgyz som, is freely convertible and stable compared to other currencies in the region. While the som is a floating currency, the NBKR periodically intervenes in the market to mitigate the risk of exchange rate shocks. Given significant currency fluctuations among Post-Soviet countries in 2019, the Kyrgyz som was one of the most stable currencies, with the dollar exchange rate dropping 0.3 percent over the year. In 2019, the NBKR conducted six foreign exchange interventions and in total, sold USD 143.5 million. The NBKR conducts weekly inter-bank currency auctions, in which competitive bids determine market-based transaction prices. Banks usually clear payments within a single business day. Complaints of currency conversion issues are rare. With occasional exceptions in the agricultural and energy sectors, barter transactions have largely been phased out.

Remittance Policies

Remittances typically account for 25-30 percent of GDP. In 2019 net remittances reached $1.8 billion, a 16 percent reduction from 2018. In July 2019, the Central Bank of Russia lowered the cap on money transfers per month to the Kyrgyz Republic to 100,000 rubles (approximately USD 1,590 based on July exchange rates). The Financial Action Task Force (FATF) assessed that in 2019, the Kyrgyz Republic made “significant progress in addressing technical compliance deficiencies to combat money laundering and financial crimes.”

Sovereign Wealth Funds

The Kyrgyz Republic’s Sovereign Wealth Fund originated from proceeds of the Kumtor gold mine and is composed of shares in the parent company of the gold mine operator, Centerra Gold. The Kyrgyz Republic owns roughly 77.4 million shares of the company, which are currently valued at USD 404 million.

7. State-Owned Enterprises

There are approximately 106 SOEs in the Kyrgyz Republic that play a significant role in the local economy. The State Property Management Fund of the Kyrgyz Republic (www.fgi.gov/kg) is the public executive authority representing the interests of the state. The purpose of the Fund is to ensure the efficiency of the use, management, and privatization of state property. Information on allocations to and earnings from SOEs is included in budget execution reports and is published (in Russian) on the Kyrgyz Treasury’s website.

Information as of 2017 on assets, earnings, profitability, working capital, and other financial indicators is available on the State Property Management Fund’s website (http://finance.page.kg/index.php?act=svod_profit ) The State Property Management Fund also reviews the budgets for the largest SOEs, while the Accounting Chamber reviews the accounts of all SOEs and publishes audit reports on their website (www.esep.kg).

Broadly, the country does not fully adhere to the OECD Guidelines on Corporate Governance of SOEs. Cronyism and corruption within SOEs as a major obstacle to the Kyrgyz Republic’s economic development. The Heritage Foundation’s 2017 Index of Economic Freedom report noted, elected officials appoint company board members based on political loyalty rather than professional skills and corporate governance knowledge. Positions on boards of directors are frequently used as rewards for political support, and the dynamic has reinforced the patronage system and resulted in poor economic performance and public service delivery. The Foundation also assessed that rule of law remains weak and the state lacks the capacity to enforce contracts and sufficiently protect property rights.

The government has attempted to improve transparency on contracts and bidding processes. Due to widespread corruption, there are common complaints that only individual government officials have access to government contracts and bidding processes. SOEs purchase goods and services from the private firms and usually place the calls for bids either on their websites or in public newspapers, as required. Private enterprises have the same access to financing as SOEs and are subject to the same tax burden. In some cases, SOEs have preferential access to land and raw materials. However, transparency initiatives attempt to hold the government accountable in such proceedings.

In 2019, the Kyrgyz government established the National Managing Company JSC, a central holding company, to manage all 106 SOEs. The National Managing Company is wholly-owned by the Kyrgyz Government with a charter capital of USD 1.3 million. The intention of the centralized management system is to support poor-performing SOEs by facilitating more effective decision-making aimed at attracting management talent, additional resources, and investments in strategic SOE enterprises. Based on government assessments, as of November 2019, 51 companies out of 106 SOEs and 22 JSCs out of 52 were operating at a loss.

Privatization Program

The Kyrgyz government periodically auctions rights to subsoil usage and broadcasts tender announcements, including disseminating information to diplomatic missions, in order to attract foreign investors. There are no restrictions on foreign investors participating in privatization programs. The privatization process is not well defined and is subject to change. There is ongoing deliberation on the privatization of other state-owned assets, such as the postal service and the capital’s international airport, but lack of interest by private partners has stalled any potential moves.

The Kyrgyz government is no longer actively pursuing sale of its 100 percent stake in Megacom, the country’s largest telecommunications company. In 2015, the Kyrgyz government agreed to privatize AlfaTelecom (operating as MegaCom). In February 2017, the government authorities arrested the head of Parliament’s leading opposition faction, charging him with corruption based on allegations that he received a bribe from a Russian businessman in connection with the sale of a MegaCom stake in 2010. After years of delays, the Kyrgyz government announced it would auction its 100 percent stake in MegaCom in July 2017. To date, the Kyrgyz government has been unable to divest itself of the telecommunications firm.

Foreign investors – both companies and individuals – are generally able to participate in public auctions of state owned properties unless specifically prohibited in the terms and conditions. There are, however, some land legislation restrictions concerning the property rights of foreigners. Information about terms and conditions of SOE sales are posted on the State Property Management Fund’s website (www.fgi.gov.kg ).

9. Corruption

Corruption remains a serious problem at all levels of Kyrgyz society and in all sectors of the economy. According to Transparency International’s 2019 Corruption Perception Index, the Kyrgyz Republic ranked 126 out of 176 countries rated, climbing from its position of 132 in 2016. Kyrgyz politicians and citizens alike are aware of the systemic corruption, but the problem has shown to be difficult to fight. Moreover, many in the Kyrgyz Republic view paying of bribes as the most efficient way to receive government assistance and many, albeit indirectly, gain benefits from corrupt practices.

The Kyrgyz Republic is a signatory of the UN Anticorruption Convention but is not party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. The anticorruption service within the State Committee on National Security has taken action against a limited number of ministers and parliamentarians. Over the past year, instances of corruption-related arrests against public figures from the political opposition have increased.

In 2019, President Jeenbekov announced urgent measures to clean up state bodies and purge unscrupulous state actors, but a string of corruption scandals has fueled public criticism of the government’s ineffectiveness to combat public corruption. All companies are recommended to establish internal codes of conduct that, among other things, prohibit bribery of public officials, but such codes are unevenly applied and enforced. There are laws that criminalize giving and accepting of bribe, establish penalties ranging from a small administrative fine to a prison sentence, but the government’s active enforcement of these laws is uneven. In November 2019, Azattyk, the Kyrgyz affiliate of Radio Free Europe, together with the Center for the Study of Corruption and Organized Crime (OCCRP) and the independent online outlet Kloop.kg, published a series of investigations that exposed mass corruption within the highest levels of the Kyrgyz State Customs Service that resulted in the laundering and smuggling or illicit transfer of USD 700 million dollars out of the Kyrgyz Republic.

Public procurement remains an area prone to corruption. In December 2019, the Kyrgyz courts convicted and sentenced former Prime Minister Sapar Isakov and former chairman of National Energy Holding Aybek Kaliyev to prison on corruption charges for their role in awarding the USD 386 million modernization project of the Bishkek Central Heating Plant to the Chinese company TBEA without implementing proper tender procedures. The corruption investigation opened in February 2018, after massive technical failures at the Bishkek Central Heating Plant left the capital without heating and water during a severe cold snap the previous month. With support from international donors, the Kyrgyz government has since prioritized advancements in e-governance, with the aim of increasing transparency in public procurement.

Corruption, including bribery, raises the costs and risks of doing business in the Kyrgyz Republic. It has had a corrosive impact on both market opportunities for U.S. companies and the broader business climate. It also deters international investment, stifles economic growth and development, distorts prices, and undermines rule of law. It is important for U.S. companies, regardless of their size, to assess the business climate in the relevant sector in which they will be operating or investing, and to have an effective compliance program or measures to prevent and detect corruption, including bribery. U.S. individuals and firms operating or investing in foreign markets should take the time to become familiar with the relevant anticorruption laws of both the Kyrgyz Republic and the United States in order to properly comply with them, and where appropriate, they should seek the advice of legal counsel.

UN Anticorruption Convention, OECD Convention on Combatting Bribery

The Kyrgyz Republic ratified the UN Anticorruption Convention in September 2005. The Kyrgyz Republic is not a party to the OECD Convention on Combatting Bribery.

Resources to Report Corruption

Hotline of the Anti-corruption Service of the State Committee for National Security: Bishkek
Zhibek-Zholu Street
+996 (312) 660020
aks.gknb@gmail.com

Contact at “watchdog” organization:

Mukanova N.A., General Secretary
Anticorruption Business Council of the Kyrgyz Republic
Ministry of Economy 114 Chui Avenue, Bishkek
+996 312 895 496
secretariat.adc@gmail.com
www.adc.kg

10. Political and Security Environment

The Kyrgyz Republic has a history of political upheaval that resurfaced in the summer of 2019, after years of relative stability. Since independence, the Kyrgyz Republic has had 30 different prime ministers, often necessitating a change in cabinet members with the introduction of each new head of government. In 2005, and again in 2010, mass protests against government corruption precipitated the ouster of the country’s elected president. From 2010, the country experienced a period of relative political stability, and in October 2015, the Kyrgyz Republic successfully conducted competitive national parliamentary elections, and a nationwide Constitutional Referendum was held in December 2016. With the historic election and inauguration of President Sooronbai Jeenbekov in 2017, the Kyrgyz Republic witnessed Central Asia’s first transition from one democratically elected president to another. Although President Jeenbekov was the hand-picked successor of Atambaev, the current and former leaders have since turned against each other.

On August 7, 2019, state security forces conducted a raid to arrest former President Atambaev at his residence on the outskirts of Bishkek. The arrest took place after Atambaev refused multiple summons to submit to police questioning in an ongoing corruption investigation concerning the ex-President’s role in the release of a political ally in 2013. Clashes between the police and the former President’s supporters lasted two days, resulting in the fatal shooting of one police officer and the wounding of 80 additional citizens. The ex-President remains in pre-trial detention and faces charges of murder, attempted murder, threatening or assaulting representatives of authorities, hostage taking, and forced seizures of power. In 2016, ISIS efforts to recruit Kyrgyzstani fighters to Syria continued to generate headlines. Supporters of extremist groups such as the Islamic Movement of Uzbekistan (IMU), Al-Qaeda, and the Eastern Turkistan Islamic Movement (ETIM) remain active in Central Asia. These groups have expressed anti-U.S. sentiments and could potentially target U.S.-affiliated concerns. In August 2016, a suicide bomber, reportedly affiliated with ETIM and trained in Syria, detonated a vehicle-borne improvised explosive device inside the Chinese Embassy compound in Bishkek, located less than 200 yards from the U.S. Embassy. The attack reportedly killed the perpetrator and injured four others, in addition to causing extensive damage. The United States has cooperated with the Kyrgyz Government to improve border and internal security and efforts to stem the flow of fighters to Syria are ongoing.

In 2016, ISIS efforts to recruit Kyrgyzstani fighters to Syria continued to generate headlines. Supporters of extremist groups such as the Islamic Movement of Uzbekistan (IMU), Al-Qaeda, and the Eastern Turkistan Islamic Movement (ETIM) remain active in Central Asia. These groups have expressed anti-U.S. sentiments and could potentially target U.S.-affiliated concerns. In August 2016, a suicide bomber, reportedly affiliated with ETIM and trained in Syria, detonated a vehicle-borne improvised explosive device inside the Chinese Embassy compound in Bishkek, located less than 200 yards from the U.S. Embassy. The attack reportedly killed the perpetrator and injured four others, in addition to causing extensive damage. The United States has cooperated with the Kyrgyz Government to improve border and internal security and efforts to stem the flow of fighters to Syria are ongoing.

Interethnic tensions persist in the southern part of the country, but remain relatively contained from the rest of the country. In Batken region, demarcation along portions of the Kyrgyz-Uzbek and Kyrgyz-Tajik borders are in dispute. These disputed areas occasionally experience skirmishes between border guards that have resulted in cross-fire violence, sometimes involving civilians.

In the recent past, the extractive resources companies have been the target of localized instability in 2018 and 2019, after relative calm in 2015 and 2016. The Kyrgyz government has used aggressive tactics for political or economic leverage in negotiations with international organizations. For example, in an apparent response to Centerra Gold’s acquisition of an American mining company – which the Kyrgyz Republic perceived as an attempt to dilute its influence over and benefits from the Kumtor Gold venture – the Kyrgyz government raided Kumtor Gold’s offices in 2016, enforced travel restrictions on all expatriate staff and their family members, and issued an injunction to prevent repatriation of company assets. Protestors have targeted various installations, at times resorting to vandalism and violence. In 2019, the majority Chinese company Zhong Ji Mining suspended operations at the Solton-Sary gold mine following violent clashes with hundreds of local residents who blamed the company for environmental degradation. In December 2019, hundreds of protestors demanded local authorities of the Naryn Free Economic Trade Zone to cancel the land lease of a Chinese-Kyrgyz enterprise that was developing a major customs and trade logistics complex. Chinese investment projects continue to be treated with more significant scrutiny and pushback by local residents, relative to Russian, Korean, Japanese, and Western investment initiatives.

Laos

Executive Summary

Laos, officially the Lao People’s Democratic Republic (Lao PDR), is a rapidly growing developing economy at the heart of Southeast Asia, bordered by Burma, Cambodia, China, Thailand, and Vietnam.  Laos’ economic growth over the last decade averaged just below eight percent, placing Laos amongst the fastest growing economies in the world.  According to the World Bank, Laos’ GDP growth fell from 6.3 percent in 2018 to 4.8 percent in 2019 due primarily to natural disasters that affected the agricultural sector.  The COVID-19 outbreak is expected to further intensify the country’s macroeconomic vulnerabilities in 2020, with limited fiscal and foreign currency buffers constraining the ability of the Government of Lao PDR to mitigate the economic impacts of the pandemic.  Over the last 30 years, Laos has made slow but steady progress in implementing reforms and building the institutions necessary for a market economy, culminating in accession to the World Trade Organization (WTO) in February 2013.  The Lao government’s commitment to WTO accession and the creation of the ASEAN Economic Community (AEC) in 2015 led to major reforms of economic policies and regulations aimed at improving the business and investment environment.  Nonetheless, within ASEAN Laos ranks only ahead of Burma in the World Bank’s “Ease of Doing Business’ rankings.  The Lao government is increasingly tying its economic fortunes to the economic integration of ASEAN and export-led development and is seeking to move toward greener growth and sustainable development.

The exploitation of natural resources and development of hydropower drove the rapid economic growth over the last decade, with both sectors largely led by foreign investors. However, the Lao government recognizes that growth opportunities in these industries are finite and employ few people, and has therefore recently began prioritizing and expanding the development of high-value agriculture, light manufacturing, and tourism, while continuing to develop energy resources and related electrical transmission capacity to export to neighboring countries.

The Lao government hopes to leverage its lengthy land borders with Burma, China, Thailand, and Vietnam to transform Laos from “land-locked” to “land-linked,” thereby further integrating the Lao economy with the larger economies of the countries along its borders. The government hopes to increase exports of agriculture, manufactured goods, and electricity to its more industrialized neighbors, and sees significant growth opportunities resulting from the China-Laos Railway, which will connect Kunming in Yunnan Province with Vientiane, Laos. The railway is expected to be completed and operational by 2021.  Some businesses and international investors are beginning to use Laos as a low-cost export base to sell goods within the region and to the United States and Europe.  The emergence of light manufacturing has begun to help Laos integrate into regional supply chains, and improving infrastructure should facilitate this process, making Laos a legitimate locale for regional manufacturers seeking to diversify from existing production bases in Thailand, Vietnam, and China.  New Special Economic Zones (SEZs) in Vientiane and Savannakhet have attracted major manufacturers from Europe, North America, and Japan.

Economic progress and trade expansion in Laos remain hampered by a shortage of workers with technical skills, weak education and health care systems, and poor—although improving—transportation infrastructure.  Institutions, especially in the justice sector, remain highly underdeveloped and regulatory capacity is low. Despite recent efforts and some improvements, corruption is rampant and is a major obstacle for foreign investors.

Corruption, policy and regulatory ambiguity, and the uneven application of laws remain disincentives to further foreign investment in the country.  The Lao government, under the administration of the new Prime Minister Thongloun Sisoulith is making efforts to improve the business environment.  Its current five-year plan (2016 – 2020) directs the government to formulate “policies that would attract investments” and to “begin to implement public investment and investment promotion laws.”  The Prime Minister’s publicly-stated goal is to see Laos improve its World Bank Ease of Doing Business ranking, and in February 2018, he issued a Prime Minister order laying out specific steps ministries were to take in order to improve the business environment.  These efforts are having some impact – for example, it now takes to less than 40 days to obtain a business license, whereas just 4 years ago it took 174 days, and other nonessential steps were eliminated.  The current administration remains active against corrupt practices, with the government and National Assembly in 2019 disciplining hundreds of officials for corruption-related offenses.  Despite these efforts, the Laos’ Ease of Doing Business ranking has fallen from 139 in 2016 to 154 in 2019.  Furthermore, the multiple ministries, laws, and regulations affecting foreign investment into Laos create confusion, and thus, require many potential investors engage either local partners or law firms to navigate the confusing bureaucracy, or turn their efforts entirely toward other countries in the region.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2019 130 of 180 http://www.transparency.org/
research/cpi/overview
World Bank’s Doing Business Report 2019 154 of 190 http://www.doingbusiness.org/
en/rankings
Global Innovation Index 2019 Not Ranked https://www.globalinnovationindex.org/
analysis-indicator
U.S. FDI in partner country ($M USD, stock positions) 2019 No Data Available https://apps.bea.gov/international/
factsheet/factsheet.cfm?Area=615
World Bank GNI per capita 2019 $ 2,450 http://data.worldbank.org/indicator/
NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Toward Foreign Direct Investment

The Lao government officially welcomes both domestic and foreign investment as it seeks to keep growth rates high and graduate from Least Developed Country status by 2024.  The pace of foreign investment has increased over the last several years.  According to Lao government statistics, mining and hydropower account for 95.7 percent of Foreign Direct Investment (FDI), and agriculture accounted for only 2 percent of FDI in 2019  China, Thailand, France, Vietnam, and Japan are the largest sources of foreign investment, with China accounting for a significant share of  all FDI in Laos.  The government’s Investment Promotion Department encourages investment through its website www.investlaos.gov.la , and holds an annual dialogue with the private sector and foreign business chambers though the Lao Business Forum process.

The 2009 Law on Investment promotion was amended in November 2016, with 32 new articles introduced and 59 existing articles revised.  Notably, the new law, an English version of which can be found at www.investlaos.gov.la , clarifies investment incentives, transfers responsibility for SEZs from the Prime Minister’s office to the Ministry of Planning and Investment, and removes strict registered capital requirements for opening a business, deferring instead to the relevant ministry.  Foreigners may invest in any sector or business except in cases where the government deems the investment to be detrimental to national security, health, or national traditions, or that have a negative impact on the natural environment.  Nevertheless, even in cases where full foreign ownership is permitted, many foreign companies seek a local partner.  Companies involved in large FDI projects, especially in mining and hydropower, often either find it advantageous or are required to give the government partial ownership.

Foreign investors are typically required to go through several procedural steps prior to commencing operations.  Many foreign business owners and potential investors claim the process is overly complex and regulations are erratically applied, particularly to foreigner investors.  Investors also express confusion about the roles of different ministries, as multiple ministries become involved in the approval process.  In the case of general investment licenses (as opposed to concessionary licenses, which are issued by Ministry of Planning and Investment), foreign investors are required to obtain multiple permits, including an annual business registration from the Ministry of Industry and Commerce (MOIC), a tax registration from the Ministry of Finance, a business logo registration from the Ministry of Public Security, permits from each line ministry related to the investment (i.e., MOIC for manufacturing, and Ministry of Energy and Mines for power sector development), appropriate permits from local authorities, and an import-export license, if applicable.  Obtaining the necessary permits can be challenging and time consuming, especially in areas outside the capital.

There are several possible vehicles for foreign investment.  Foreign partners in a joint venture must contribute at least 30 percent of the company’s registered capital.  Wholly foreign-owned companies may be entirely new or a branch of an existing foreign enterprise.  Equity in medium and large-sized SOEs can be obtained through a joint venture with the Lao government.

Reliable statistics are difficult to obtain, yet with the slowdown of the world economy, there is no question that foreign investment has begun to fluctuate in comparison to previous years.  According to the United Nations Conference on Trade and Development (UNCTAD), FDI inflows to Laos decreased 17 percent to USD 1.3 billion in 2018 after peaking in 2017 but still 30 percent higher than 2016.  Laos received around USD 1.07 billion in FDI from China in 2019.  Total FDI stock in Laos has increased from USD 5.7 billion in 2016 to USD 8.6 billion in 2018.

Limits on Foreign Control and Right to Private Ownership and Establishment

As discussed above, even though foreigners may invest in most sectors or businesses (subject to previously noted exceptions), many foreign companies seek a local partner in order to navigate byzantine official and unofficial processes.  Companies involved in large FDI projects, especially in mining and hydropower, often either find it advantageous or are required to give the government partial ownership.

Other Investment Policy Reviews

The OECD releases its most recent investment policy review of Laos on July 11, 2017.  More details can be found at http://www.oecd.org/daf/inv/investment-policy/oecd-investment-policy-reviews-lao-pdr-2017-9789264276055-en.htm 

Business Facilitation

Laos does not have a central business registration website yet, but the Ministry of Industry and Commerce (MOIC) has improved its online enterprise registration site, http://www.erm.gov.la , to accelerate the registration process. As discussed above, over the last four years the total time for business registration has been reduced significantly. The timelines and the different government agencies involved in the process can still vary considerably, however, depending on locations and the type of business.  As a result, many investors and even locals often hire consultancies or law firms to shepherd the labor-intensive registration process.

The Lao government has attempted to streamline business registration using a one-stop shop model.  For general business activities, this service is in the MOIC, http://www.erm.gov.la.  For activities requiring a government concession, the service is in the Ministry of Planning and Investment.  For SEZs, one-stop registration is run through the Ministry of Planning and Investment or in special one-stop service offices within the SEZs themselves (under the authority of the Ministry of Planning and Investment), as is the case at Savan Seno SEZ.

Business owners give the one-stop shop concept mixed reviews.  Many acknowledge that it is an improvement but describe it as an incomplete reform with several additional steps that must still be taken outside of the single stop.  Businesses also complain that there are often different registration requirements at the central and provincial levels.

Outward Investment

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

6. Financial Sector

Capital Markets and Portfolio Investment

Laos does not have a well-developed capital market, although government policies increasingly support the formation of capital and free flow of financial resources.  The Lao Securities Exchange (LSX) began operations in 2011 with two stocks listed, both of them state-owned – the Banque Pour l’Commerce Exterieur (BCEL), and the power generation arm of the electrical utility, Electricite du Laos – Generation (EDL-Gen).  In 2012, the Lao government increased the proportion of shares that foreigners can hold on the LSX from 10 to 20 percent.  As of March 2020, there are eleven companies listed on the LSX: BCEL, EDL-Gen, Petroleum Trading Laos (fuel stations), Lao World (property development and management), Souvanny Home Center (home goods retail), Phousy Construction and Development (Construction and real estate development), Lao Cement (LCC), Mahathuen Leasing (leasing), Lao Agrotech (palm oil plantation and extraction factory), Vientiane Center (property development and management), and Lao ASEAN Leasing (LALCO) ( financing and leasing).  News and information about the LSX is available at http://www.lsx.com.la/ .

Businesses report that they are often unable to exchange kip into foreign currencies through central or local banks.  Analysts suggest that concerns about dollar reserves may have led to temporary problems in the convertibility of the national currency.  Private banks allege that the Bank of Lao PDR withholds dollar reserves.  The Bank of Lao PDR alleges that the private banks already hold sizable reserves and have been reluctant to give foreign exchange to their customers in order to maintain unreasonably high reserves.  The tightness in the forex market led to a temporary 5-10 percent divergence between official and gray-market currency rates in late 2019 and early 2020, and since 2017 the Lao kip has depreciated against both the dollar and Thai baht.

Lao and foreign companies alike, and especially small- and medium-sized enterprises (SMEs), note the lack of long-term credit in the domestic market.  Loans repayable over more than five years are very rare, and the choice of credit instruments in the local market is limited.  The Credit Information Bureau, developed to help inject more credit into markets, still has very little information and has not yet succeeded in mitigating lender concerns about risk.

Money and Banking System

The banking system is under the supervision of the Bank of Lao PDR, the nation’s central bank, and includes more than 40 banks, most of them commercial.  Private foreign banks can establish branches in all provinces of Laos.  ATMs have become ubiquitous in urban centers.  Technical assistance to Laos’ financial sector has led to some reforms and significant improvements to Laos’ regulatory regime on anti-money laundering and countering the financing of terrorism, but overall capacity within the financial governance structure remains poor.

The banking system is dominated by large, government-owned banks.  The health of the banking sector is difficult to determine given the lack of reliable data, though banks are widely believed to be poorly regulated and there is broad concern about bad debts and non-performing loans that have yet to be fully reconciled by the state-run banks, in particular.  The IMF and others have encouraged the Bank of Lao PDR to facilitate recapitalization of the state-owned banks to improve the resilience of the sector.

While publicly available data is difficult to find, non-performing loans are widely believed to be a major concern in the financial sector, fueled in part by years of rapid growth in private lending.  The government’s fiscal difficulties in 2013 and 2014 led to non-payment on government infrastructure projects.  The construction companies implementing the projects in turn could not pay back loans for capital used in construction.  Many analysts believe the full effects of the government’s fiscal difficulties have not yet worked their way through the economy.  In recent years Laos is projected to continue running a budget deficit of 4-5 percent, which coupled with rising public or publicly held debt estimated over 60 percent of GDP, add to concerns about Laos’ fiscal outlook.   In 2018 Laos passed a new law on Public Debt Management aimed at reducing the debt-to-GDP ratio in the coming years.

Foreign Exchange and Remittances

Foreign Exchange

There are no published, formal restrictions on foreign exchange conversion, though restrictions have previously been reported, and because the market for Lao kip is relatively small, the currency is rarely convertible outside the immediate region.  Laos persistently maintains low levels of foreign reserves, which are estimated to cover only 1.1 months’ worth of total imports.  The reserve buffer is expected to remain relatively low due to structurally weak export growth in the non-resource sector and debt service payments. The decline in reserves was due to a drawdown of government deposits primarily for external debt service payments, some intervention in the foreign exchange market to manage the volatility of the currency (notwithstanding a more flexible currency), and financing the continuing current account deficit. The Bank of the Lao PDR (BOL) occasionally imposes daily limits on converting funds from Lao kip into U.S. dollars and Thai baht, or restricts the sectors able to convert Lao kip into dollars, sometimes leading to difficulties in obtaining foreign exchange in Laos.

In order to facilitate business transactions, foreign investors generally open commercial bank accounts in both local and foreign convertible currency at domestic and foreign banks in Laos.  The Enterprise Accounting Law places no limitations on foreign investors transferring after-tax profits, income from technology transfer, initial capital, interest, wages and salaries, or other remittances to the company’s home country or third countries provided that they request approval from the Lao government.  Foreign enterprises must report on their performance annually and submit annual financial statements to the Ministry of Planning and Investment (MPI).

According to a recent report from Laos’ National Institute for Economic Research (NIER), the increasing demand for USD and Thai Baht for the import of capital equipment for projects and consumer goods,  coupled with growing demand for foreign currency to pay off foreign debts has resulted in a depreciation of the exchange rate in 2019. The official nominal kip/U.S. dollar reference rate depreciated by 3.59% in 2019, while the kip/Baht exchange rate depreciated by 7.59%.

Remittance Policies

There have been no recent changes to remittance law or policy in Laos.  Formally, all remittances abroad, transfers into Laos, foreign loans, and payments not denominated in Lao kip must be approved by the BOL.  In practice, many remittances are understood to flow into Laos informally, and relatively easily, from a sizeable Lao workforce based in Thailand.  Remittance-related rules can be vague and official practice is reportedly inconsistent.

Sovereign Wealth Funds

There are no known sovereign wealth funds in Laos.

7. State-Owned Enterprises

The Lao government maintains ownership stakes in key sectors of the economy such as telecommunications, energy, finance, airlines, and mining.  Where state interests conflict with private ownership, the state is in a position of advantage.

There is no centralized, publicly available list of Lao State-Owned Enterprises (SOEs).  The Lao government’s most recent figures report that there are now more than 187 SOEs in Lao PDR. 133 SOEs are 51 – 100 percent State owned. The registered capital was more than USD 26 billion. At the end of 2017, the total assets of 60 SOEs managed by State Property Management Department of Ministry of Finance was more than USD 13 billion (80.51percent of GDP). The net profit from SOEs was around USD 156 million of which USD 105 million was the Government dividends.  The government occasionally floats the idea of increasing private ownership in SOEs such as Lao Airlines through partial listings on the LSX, or spinning off parts of larger enterprises, such as the state electrical utility, EDL.

The government has not specified a code or policy for its management of SOEs and has not adopted OECD guidelines for Corporate Governance of SOEs.  There is no single government body that oversees SOEs.  Several separate government entities exercise SOE ownership in different industries.  SOE senior management does not uniformly report to a line minister.  Comprehensive information on boards of directors or their independence is not publicly available.  While there is scant evidence one way or the other, private businesses generally assume that court decisions would favor an SOE over another party in an investment dispute.

Privatization Program

There is no formal SOE privatization program, though Prime Minister Thongloun has openly discussed subjecting some SOEs to greater competition and possible privatization, and the government has over the past several years occasionally floated ideas for increasing private ownership in some SOEs through partial listings on the LSX, or through spinning off and privatizing parts of others.

9. Corruption

Corruption is a serious problem in Laos that affects all levels of the economy.  The Lao government has developed several anti-corruption laws but enforcement remains weak.   Since assuming office in early 2016, Prime Minister Thongloun Sisoulith has put a renewed focus on government anti-corruption efforts, and Lao media and the National Assembly now regularly report on corruption challenge and the sacking of disciplining of corrupt officials.  In September 2009, Laos ratified the United Nations Convention against Corruption.

Domestic and international firms have repeatedly identified corruption as a problem in the business environment and a major detractor for international firms exploring investment or business activities in the local market.

The Lao State Inspection and Anti-Corruption Authority (SIAA), an independent, ministry-level body, is charged with analyzing corruption at the national level and serves as a central office for gathering details and evidence of suspected corruption.  Additionally, each ministry and province contains an SIAA office independent from the organization in which it is housed.  These SIAA offices feed into the SIAA’s central system.

According to Lao law, both giving and accepting bribes are criminal acts punishable by fine and/or imprisonment.  Nonetheless, foreign businesses frequently cite corruption as an obstacle to operating in Laos.  Often characterized as a fee for urgent service, officials commonly accept bribes for the purpose of approving or expediting applications.  Laos is not a signatory to the OECD Convention on Combating Bribery.

In 2014, an asset declaration regime entered into force for government officials, which required them to declare income, assets and debts for themselves and their family members; this was further strengthened in 2017 and 2018.  Officials are now required to file a declaration of any assets valued over USD 2,500, including land, structures, vehicles and equipment, as well as cash, gold, and financial instruments.  These declarations are reportedly held privately and securely by the government.  If a corruption complaint is made against an official, the SIAA can compare the sealed declaration with the official’s current wealth.  Whether this program has worked or is working remains unclear.

Resources to Report Corruption

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

Mr. Viengkeo PhonAsa,
Director General
Anti-Corruption Department, State Inspection and Anti-Corruption Authority
Sivilay Village, Xaythany District, Vientiane Capital, 13th South Road
Tel: office:, 021 715032; Fax: 021 715006; cell: 020 2222 5432

10. Political and Security Environment

Laos is generally a peaceful and politically stable country.  The risk of political violence directed at foreign enterprises or businesspersons is low.  There was a string of unexplained attacks on vehicles traveling in remote areas of Xaysomboun province in late 2015 and 2016 which caused several diplomatic missions to issue travel warnings to their citizens, but such incidents have not been repeated in recent years.  There has been little-to-no political violence in the last decade, and Laos’ political stability is an attractive feature for foreign investors.

Latvia

Executive Summary

Located in the Baltic region of northeastern Europe, Latvia is a member of the EU, Eurozone, NATO, OECD, and the World Trade Organization (WTO).  The Latvian government recognizes that, as a small country, it must attract foreign investment in order to foster economic growth, and thus has pursued liberal economic policies and developed infrastructure to position itself as a transportation hub.  According to the 2019 World Bank’s Doing Business Report, Latvia is ranked 19th out of 190 countries in terms of ease of doing business, which is same as the previous year.  As a member of the European Union, Latvia applies EU laws and regulations, and, according to current legislation, foreign investors possess the same rights and obligations as local investors (with certain exceptions).  Any foreign investor is entitled to establish and own a company in Latvia and has the opportunity to acquire a temporary residence permit.

Latvia provides several advantages to potential investors, including:

Regional Hub: Despite ongoing tensions between Russia and the European Union, Latvia remains a transportation and logistics bridge between West and East, providing strategic access to both the EU market and to Russia and Central Asia.  Latvia’s three ice-free ports are connected to the country’s rail and road networks and to the largest international airport in the Baltic region (Riga International Airport (RIX)).  Latvia’s road network is connected to both European and Central Asian road networks.  The railroads connect Latvia with the other Baltic states, Russia, and Belarus, with further connections extending into Central Asia and China.

Workforce: Latvia’s workforce is highly educated and multilingual, and its culture promotes hard work and dependability.  Labor costs in Latvia are the fourth lowest in the EU.

Competitive Tax system: Latvia ranked 3rd in the OECD’s 2019 International Tax Competitiveness Index Rankings.  To further boost its competitiveness, the Latvian government has abolished taxes on reinvested profits and has established special incentives for foreign and domestic investment.  There are five special economic zones (SEZs) in Latvia: Riga Free Port, Ventspils Free Port, Liepaja Special Economic Zone, Rezekne Special Economic Zone, and Latgale Special Economic Zone, which provide various tax benefits for investors.  Latgale Special Economic Zone covers a large part of Latgale, which is the most economically challenged region in Latvia, bordering Russia and Belarus.

Latvia’s GDP grew by 2.2 percent in 2019 yet in the last quarter of 2019 GDP growth slowed to 1.0%, which was the weakest growth since the third quarter of 2016.  Commentators attributed the slowdown to increased global uncertainty and unfavorable developments the transport sector, which saw a swift reduction of cargo turnover in ports and railways.  In addition, financial services decreased by 10.7% year on year, owing to Latvian government implementation of strong anti-money laundering (AML) legislation and increased oversight of the financial sector.  The most competitive sectors in Latvia include woodworking, metalworking, transportation, IT, green tech, healthcare, life science, food processing, and finance.  Recent reports suggest that some of the most significant challenges investors encounter in Latvia are a shortage of available workforce, demography, quality of education and a significant shadow economy.

The non-resident banking sector has come under increased regulatory scrutiny in recent years because of inadequate compliance with international AML standards.  On August 23, 2018, MONEYVAL, a Council of Europe agency that assesses member states’ compliance with AML standards, issued a report that found Latvia deficient in several assessment categories.  The Government of Latvia has been working to restore confidence in its financial institutions and has passed several pieces of reform legislation.

In late 2019 and early 2020, MONEYVAL and the Financial Action Task Force (FATF) concluded that Latvia has developed and implemented strong enough reforms for combating financial crimes to avoid increased monitoring via the so-called “grey list.”  While it will continue enhanced monitoring under MONEYVAL to continue strengthening the system, with this decision, Latvia became the first member state under the MONEYVAL review to successfully implement all 40 FATF recommendations.

Despite these advantages, investors note a perceived lack of fairness and transparency with Latvian public procurements.  A number of companies, including foreign companies, have complained that bidding requirements are sometimes written with the assistance of potential contractors or couched in terms that exclude all but “preferred” contractors.

The chart below shows Latvia’s ranking on several prominent international measures of interest to potential investors.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2019 44 of 180 http://www.transparency.org/
research/cpi/overview
World Bank’s Doing Business Report 2019 19 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2019 34 of 129 https://www.globalinnovationindex.org/
analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2018 191* http://data.imf.org/regular.aspx?key=61227424
World Bank GNI per capita 2018 USD 16,510 http://data.worldbank.org/
indicator/NY.GNP.PCAP.CD

*These figures significantly underestimate the value of U.S. investment in Latvia due to the fact that these do not account for investments by U.S. firms through their European subsidiaries.

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

The Latvian government actively encourages foreign direct investment (FDI) and works with investors to improve the country’s business climate.  To strengthen these efforts, the Latvian government introduced the POLARIS process (http://www.liaa.gov.lv/en/invest-latvia/investment-services-and-contacts/polaris-process ), a mechanism designed to create an alliance between the public sector (including national and local governments), the private sector (including national and international companies), and major Latvian academic and research institutions to encourage FDI and spur economic growth.  The Latvian government also meets annually with the Foreign Investors Council in Latvia (FICIL), which represents large foreign companies and chambers of commerce, with the express purposes of improving the business environment and encouraging foreign investment.  The Coordination Council for Large and Strategically Important Investment Projects is chaired by the prime minister.  In January 2020, FICIL published its Sentiment Index 2019 – a survey of current foreign investors on the investment climate in Latvia.  It is available at: https://www.ficil.lv/sentiment-index/  .

Limits on Foreign Control and Right to Private Ownership and Establishment

Latvian legislation, on the basis of national security concerns, requires governmental approval prior to transfers of significant ownership interests in the energy, telecommunications, and media sectors.  Detailed information is available here: https://investmentpolicy.unctad.org/investment-policy-monitor/measures/3257/acquisition-of-a-company-of-significance-to-national-security-requires-a-permit-from-the-government-of-latvia 

With these limited exceptions, physical and legal persons who are citizens of Latvia or of other EU countries may freely purchase real property.  In general, physical and legal persons who are citizens of non-EU countries (third-country nationals) may also freely purchase developed real property.  However, third-country nationals may not directly purchase certain types of agricultural, forest, and undeveloped land.  Such persons may acquire ownership interest in such land through a company registered in the Register of Enterprises of the Republic of Latvia, provided that more than 50 percent of the company is owned by: (a) Latvian citizens and/or Latvian governmental entities; and/or (b) physical or legal persons from countries with which Latvia signed and ratified an international agreement on the promotion and protection of investments on or before December 31, 1996; or for agreements concluded after this date, so long as such agreements provide for reciprocal rights to land acquisition.  The United States and Latvia have such an agreement (a bilateral investment treaty in force since 1996).  In addition, foreign investors can lease land without restriction for up to 99 years.  The Law on Land Privatization in Rural Areas allows EU citizens to purchase Latvia’s agricultural land and forests.  Other restrictions apply (to both Latvian citizens and foreigners) regarding the acquisition of land in Latvia’s border areas, Baltic Sea and Gulf of Riga dune areas, and other protected areas.

In May 2017, the President of Latvia promulgated the amendments to the Law on Land Privatization in Rural Areas to simplify and clarify the process for local farmers to purchase land.  The law, however, also prohibits foreigners who are not permanently residing in Latvia from purchasing agricultural land and required that any person wishing to purchase agricultural land must speak Latvian and be able to present plans for the future use of the land for agricultural purposes in Latvian.

The Latvian constitution guarantees the right to private ownership.  Both domestic and foreign private entities have the right to establish and own business enterprises and engage in all forms of commercial activity, except those expressly prohibited by law.

Other Investment Policy Reviews

The Organization for Economic Cooperation and Development (OECD) published an Economic Survey of Latvia in May 2019 (http://www.oecd.org/economy/latvia-economic-snapshot/ ).  Although there have been no trade policy reviews specifically involving Latvia, the WTO completed its latest review of the European Union in February 2020.  (https://www.wto.org/english/tratop_e/tpr_e/tp495_e.htm ).  Additionally, in October 2017, the World Bank published a review of Latvia’s tax system (http://documents.worldbank.org/curated/en/587291508511990249/Latvia-tax-review )).  Previously, the World Bank carried out a similar review of Latvia’s port infrastructure in 2013 (http://www.worldbank.org/en/news/press-release/2013/11/27/world-bank-reviews-competitiveness-of-latvian-ports ).

Business Facilitation

Latvia has implemented special legislation to encourage startup ventures through favorable tax treatment.  For more information please see here: http://www.liaa.gov.lv/en/invest-latvia/start-up-ecosystem  and here: https://labsoflatvia.com/en/resources .

The official website of the Latvian Commercial Register has been fully revised and now provides detailed information in English on business registration process in Latvia – https://www.ur.gov.lv/en/ .  The World Bank’s Doing Business project has performed a detailed review of the business registration process in Latvia, which is available here: http://www.doingbusiness.org/data/exploreeconomies/latvia/#starting-a-business .

In addition, the Latvian Investment and Development Agency has prepared a guide with step-by-step information on starting a business in Latvia: http://www.liaa.gov.lv/en/trade/market-entry/business-forms-and-registration .  The agency prides itself on the fact that a business can be registered in Latvia in a single day.

Using the European Commission definitions of micro, small, and medium enterprises (MSMEs), Latvia has established a special tax regime for microenterprises.  Under the microenterprise tax, qualifying businesses (those employing up to five employees and with less than 40,000 euros in revenue) pay a single tax that covers social security contributions, personal income tax, and business risk tax for employees, and includes corporate income tax if the micro business taxpayer is a limited liability company.  This special tax regime is available to foreign nationals.  For additional details on the microenterprise tax, see:  https://www.vid.gov.lv/en/node/57223 

Outward Investment

The Latvian government does not incentivize outward investment or restrict Latvians from investing overseas.

6. Financial Sector

Capital Markets and Portfolio Investment

Latvian government policies do not interfere with the free flow of financial resources or the allocation of credit.  Local bank loans are available to foreign investors.

Money and Banking System

Latvia’s retail banking sector, which is composed primarily of Scandinavian retail banks, generally maintains a positive reputation.  Latvian banks servicing non-resident clients, however, have come under increased scrutiny for inadequate compliance with anti-money laundering standards.  In 2018, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) identified Latvia’s third-largest bank as a “foreign bank of primary money laundering concern” and issued a proposed rule prohibiting U.S. banks from doing business with or on behalf of the bank.  The Latvian bank regulator has also levied fines against several non-resident banks for AML violations in recent years.

Latvia is a member of the Council of Europe Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL), a FATF-style regional body.  On August 23, 2018, MONEYVAL issued a report finding that Latvia’s AML regime was in substantial compliance with only one out of eleven assessment categories, was in moderate compliance with eight areas, but in low compliance with two areas.  In late 2019 and early 2020, MONEYVAL and the Financial Action Task Force (FATF) concluded that Latvia has developed and implemented strong enough reforms for combating financial crimes to avoid increased monitoring via the so-called “grey list.”  While it will continue enhanced monitoring under MONEYVAL to continue strengthening the system, with this decision, Latvia became the first member state under the MONEYVAL review to successfully implement all 40 FATF recommendations. The most recent MONEYVAL report can be found at: https://rm.coe.int/anti-money-laundering-and-counter-terrorist-financing-measures-latvia-/16809988c1 .

According to Latvian banking regulators, its regulatory framework for commercial banking incorporates all principal requirements of EU directives, including a unified capital and financial markets regulator.  Existing banking legislation includes provisions on accounting and financial statements (including adherence to international accounting), minimum initial capital requirements, capital adequacy requirements, large exposures, restrictions on insider lending, open foreign exchange positions, and loan-loss provisions.  An Anti-Money Laundering Law and Deposit Guarantee Law have been adopted.  An independent anti-money laundering unit (FIU) operates under the supervision of the Ministry of Interior.  Some of the banking regulations, such as capital adequacy and loan-loss provisions, reportedly exceed EU requirements.

According to the Finance Latvia Association, total assets of the country’s banks at the end of 2019 stood at 23.20 billion euros.  More information is available at: https://www.financelatvia.eu/en/industry-data/ .

Securities markets are regulated by the Law on the Consolidated Capital Markets Regulator, the Law on the Financial Instrument Market, and several other laws and regulations.

The NASDAQ/OMX Riga Stock Exchange (RSE) (www.nasdaqomxbaltic.com ) operates in Latvia, and the securities market is based on the continental European model.  Latvia, together with Estonia and Lithuania have agreed to create a pan-Baltic capital market by creating a single index classification for the entire Baltic region.  Latvia is currently rated by various index providers as a frontier market due to its small size and limited liquidity.  More information is available here: https://www.ebrd.com/news/2019/latvia-takes-next-step-toward-a-panbaltic-capital-market.html 

Foreign Exchange and Remittances

Foreign Exchange

The currency of Latvia is the euro.  There are no restrictions on exchanging currencies or capital movement and foreign investors are allowed to extract their profits in any currency with no restraints.  As of April 17, 2020, one euro is worth USD  1.0888.  Details available here: https://www.ecb.europa.eu/stats/policy_and_exchange_rates/euro_reference_exchange_rates/html/eurofxref-graph-usd.en.html 

Remittance Policies

Latvian law provides for unrestricted repatriation of profits associated with an investment.  Investors can freely convert local currency into foreign exchange at market rates, and have no difficulty obtaining foreign exchange from Latvian commercial banks for investment remittances.  Exchange rates and other financial information can be obtained at the European Central Bank web site:  https://www.ecb.europa.eu/stats/exchange/eurofxref/html/index.en.html .

Sovereign Wealth Funds

Latvia does not have a sovereign wealth fund.

7. State-Owned Enterprises

Private enterprises may compete with public enterprises on the same terms and conditions with respect to access to markets, credit, and other business operations such as licenses and supplies.  The Latvian government has implemented the requirements of the EU’s Third Energy Package with respect to the electricity sector, including opening the electricity market to private power producers and allowing them to compete on an equal footing with Latvenergo, the state-owned power company.  The country’s natural gas market has also been liberalized, creating competition among privately owned gas suppliers.

SOEs are active in the energy and mining, aerospace and defense, services, information and communication, automotive and ground transportation, and forestry sectors.

Latvia as a member of the EU is a party to the Government Procurement Agreement within the framework of the World Trade Organization, and SOEs are covered under the agreement.

Detailed information on Latvian SOEs is available in the OECD Review of the Corporate Governance of State-Owned Enterprises in Latvia, which is available here:  http://www.oecd.org/daf/ca/oecd-review-corporate-governance-soe-latvia.htm .

Senior managers of major SOEs in Latvia report to independent boards of directors, which in turn report to the line ministries.  SOEs are operating under the Law On Public Persons Enterprises and Capital Shares Governance.  The law also establishes an entity that coordinates state enterprise ownership and requires annual aggregate reporting.  Detailed information on Latvian SOEs is available here: http://www.valstskapitals.gov.lv/en/  .

For additional information please see here: http://www.oecd.org/latvia/corporate-governance-in-latvia-9789264268180-en.htm .

Privatization Program

The Law on Privatization of State and Municipal Property governs the privatization process in Latvia. State JSC “Posessor” (https://www.possessor.gov.lv/ )  uses a case-by-case approach to determine the method of privatization for each state enterprise.  The three allowable methods are:  public offering, auction for selected bidders, and international tender.  For some of the largest privatized companies, a percentage of shares may be sold publicly on the NASDAQ OMX Riga Stock Exchange.  The government may maintain shares in companies deemed important to the state’s strategic interests.  Privatization of small and medium-sized state enterprises is considered to be largely complete.

Latvian law designates six State Joint Stock Companies that cannot be privatized:  Latvenergo (Energy and Mining), Latvijas Pasts (Postal Services), Riga International Airport, Latvijas Dzelzcels (Automotive and Ground Transportation), Latvijas Gaisa Satiksme (Aerospace and Defense), and Latvijas Valsts Mezi (Forestry).  Other large companies in which the Latvian government holds a controlling interest include airBaltic (Travel), TET (Information and Communication), Latvian Mobile Telephone (Information and Communication), and Conexus Baltic Grid (Energy).  While Latvia sold a 20 percent stake in national carrier airBaltic to a private investor in early 2016, the government to date has not been successful in finding a strategic investor for the airline.

9. Corruption

Latvian law enforcement institutions, foreign business representatives, and non-governmental organizations have identified corruption and the perception of corruption as persistent problems in Latvia.  According to the 2019 Corruption Perception Index by Transparency International, Latvia ranks 44th out of 180 countries (in order from the lowest perceived level of public sector corruption to the highest).

In an effort to strengthen its anti-corruption programs, the Latvian government has adopted several laws and regulations, including the Law on Money Laundering and the Law on Conflicts of Interest.  The Conflicts of Interest Law imposes restrictions and requirements on public officials and their relatives.  Several provisions of the law deal with the previously widespread practice of holding several positions simultaneously, often in both the public and private sector.  The law includes a comprehensive list of state and municipal jobs that cannot be combined with additional employment.  Moreover, the law expanded the scope of the term state official to include members of boards and councils of companies with state or municipal capital exceeding 50 percent.  Latvia became a member of the OECD Anti-Bribery Convention in 2014.  In line with OECD recommendations the government is working to strengthen anti-corruption enforcement and improve the functioning of its independent agency, the Anti-Corruption Bureau (KNAB).

Under Latvian law, it is a crime to offer, accept, or facilitate a bribe.  Although the law stipulates heavy penalties for bribery, a limited number of government officials have been prosecuted and convicted of corruption to date.  The law also provides the possibility of withdrawing charges against a person giving a bribe in cases where the bribe has been extorted, or in cases where the person voluntarily reports these incidents and actively assists the investigation.  In addition, the Latvian government has adopted a whistleblower law that requires all government agencies and large companies to establish protocols to accept whistleblower complaints and protect whistleblowers from reprisals.

KNAB is the institution with primary responsibility for combating corruption and carrying out operational activities in response to suspected or alleged corruption.  The Prosecutor General’s Office also plays an important role in fighting corruption.

KNAB has also established a Public Consultative Council to help increase public participation in implementing its anti-corruption policies, increasing public awareness, and strengthening connections between the agency and the public.  More information is available here: https://www.knab.gov.lv/en/knab/consultative/public/ .

There is a perceived lack of fairness and transparency in the public procurement process in Latvia.  A number of companies, including foreign companies, have complained that bidding requirements are sometimes written with the assistance of potential contractors or couched in terms that exclude all but preferred contractors.

A Cabinet of Ministers regulation provides for public access to government information, and the government generally provided citizens such access.  There have been no reports the government has denied noncitizens or foreign media access to government information.

Resources to Report Corruption

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

Corruption Prevention and Combating Bureau
Citadeles iela 1, Riga, LV 1010, Latvia
+371 67356161
knab@knab.gov.lv

Contact at “watchdog” organization:

Delna (Latvian affiliate of Transparency International)
Citadeles iela 8, Riga, LV-1010
+371 67285585
ti@delna.lv

10. Political and Security Environment

There have been no reports of political violence or politically motivated damage to foreign investors’ projects or installations.  The likelihood of widespread civil disturbances is very low.  While Latvia has experienced peaceful demonstrations related to internal political issues, there have been rare incidents when these have devolved into crimes against property, such as breaking shop windows or damaging parked cars.  U.S. citizens are cautioned to avoid any large public demonstrations since even peaceful demonstrations can turn confrontational.  The Embassy provides periodic notices to U.S. citizens in Latvia, which can be found on the Embassy’s web site: http://riga.usembassy.gov/.

Lebanon

Executive Summary

Lebanon’s economy is in crisis.  GDP contraction could top 20 percent in 2020, the local currency has lost more than 60 percent of its value on secondary exchange markets, and most banks are dollar insolvent.  Since October 2019, Lebanon’s financial sector imposed ad hoc capital controls, preventing most Lebanese from transferring any money overseas or withdrawing dollars from their bank accounts, despite the fact that 75 percent of accounts in Lebanese banks are denominated in dollars.  On March 7, 2020, Lebanon announced it would default on and restructure its nearly USD 31 billion in dollar-denominated debt, the first such default in Lebanon’s history.  On April 30, the government published an economic plan with a focus on restructuring its financial sector and attracting foreign assistance; the next day Lebanon signed an official request for IMF assistance.  Most analysts assess that Lebanon’s near- and medium-term economic future is bleak, with likely fiscal austerity, continuing capital controls, further devaluation, and a potential loss of value applied to wealthy accountholders to recapitalize the banking sector.  The Minister of Finance in May said Lebanon needs USD 28 billion in financial assistance over the next four years.  The World Bank projected that the poverty rate will reach 40-50 percent by the end of this year.

These developments hold consequences for Lebanon’s potential as a destination for foreign investment.  Much depends on how Lebanon implements overdue economic and governance reforms, including in connection with its negotiation and implementation of a potential IMF program.  If the country is able to implement necessary reforms, attract foreign capital, stabilize the exchange rate, and recapitalize its financial sector, opportunities remain for U.S. companies.  To date, Lebanon has the legal underpinnings of a free-market economy, a highly-educated labor force, and limited restrictions on investors.  The most alluring sector is the energy sector, particularly for power production, renewable energies, and oil and gas exploration, though challenges remain with corruption and a lack of transparency.  Information and communication technology, healthcare, safety and security, waste management, and franchising have historically attracted U.S. investments.  However, corruption and a lack of transparency have continued to cause frustration among local and foreign businesses.  Other concerns include over-regulation, arbitrary licensing, outdated legislation, ineffectual courts, high taxes and fees, poor economic infrastructure, and a fragmented and opaque tendering and procurement processes.  Social unrest driven by a decline in public services and growing food insecurity may further hamper the investment climate.

If Lebanon is able to reform its business environment – a likely condition as part of an overarching IMF program – it may one day regain its role as a hub for foreign investment in the Middle East.  Lebanon’s economic crisis is likely to be long and painful, however, and recovery can only be accelerated through quick but careful implementation of reforms.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2019 137 of 180 http://www.transparency.org/
research/cpi/overview
World Bank’s Doing Business Report 2019 143 of 190 http://www.doingbusiness.org/
en/rankings
Global Innovation Index 2019 88 of 129 https://www.globalinnovationindex.org/
analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2019 $407 million  https://apps.bea.gov/international/
factsheet
/
World Bank GNI per capita 2019 $7,600 http://data.worldbank.org/indicator/
NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Lebanon is open to Foreign Direct Investment (FDI).  The Investment Development Authority of Lebanon (IDAL) is the national authority responsible for promoting local and foreign investment in Lebanon covering eight priority sectors:  industry, media, technology, telecommunications, tourism, agriculture, and agroindustry.  IDAL has the authority to award licenses and permits for new investment in specific sectors.  It also grants special incentives and tax exemptions for projects implemented by local and foreign investors based on an investment’s geographic location, sector, and number of jobs created (Investment Law No. 360).  IDAL publishes its investment incentives online by sector at http://investinlebanon.gov.lb/en/sectors_in_focus .

IDAL seeks to facilitate international and local partnerships through joint ventures, equity participation, acquisition, and other mechanisms.  Moreover, it provides business intelligence, market studies, and legal and administrative advice to potential investors.  In February 2018, IDAL established the Business Support Unit (BSU), which provides free legal, accounting, and financial advice to startups across sectors.  IDAL is mandated by law to attract, facilitate, and retain investment in Lebanon.  There are currently no formal mechanisms for investor dialogue, although IDAL plans to establish an Investor Advisory Committee, which was discussed with UNCTAD when IDAL launched its Investor Policy Review in 2017.  IDAL is involved in providing after-care services to local and foreign investors alike, and following Lebanon’s unfolding financial crisis and the spread of COVID-19, IDAL has held a series of roundtables and webinars with investors to identify their issues and work with relevant government agencies to solve them.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign private entities may establish, acquire, and dispose of interests in business enterprises and may engage in all types of remunerative activities.  Lebanese law allows the establishment of joint-stock corporations, limited liability, and offshore and holding companies.

According to UNCTAD’s latest investment policy review of Lebanon, the country allows only Lebanese nationals to obtain licenses to manufacture and trade products related to defense and weapons (Legislative Decree 137 of 12 June 1959, Weapons and Ammunition Law).  Only Lebanese nationals can own political newspapers and all broadcast media (Press Law of 14 September 1962, Broadcast Law 382 of 4 November 1994).  A series of regulatory requirements also effectively restrict FDI in other instances:  Two sectors, fixed line telephony and energy transmission, are closed to domestic and foreign investors as they are currently operated by state-owned enterprises, which have a de facto monopoly.  Only Lebanese nationals are permitted to practice law.

Legislative Decree No. 35 (August 5, 1967), under the Lebanese Commercial Code, permits foreigners to own and manage 100 percent of limited liability companies (LLC or Société à Responsabilité Limitée – SARL), except if the company engages in certain commercial activities such as exclusive commercial representation.  In these cases, Lebanese citizens must hold a majority of capital, and the manager must be Lebanese (Legislative Decree No. 34 dated August 5, 1967).  An amendment introduced in 2019 allowed the formation of  LLCs by only one person.

Legislative Decree No. 304 of the Commercial Code (December 24, 1942) governs joint-stock corporations (Société Anonyme Libanaise – SAL), and was amended by Law No. 126 on March 29, 2019.  Limitations related to foreign participation stipulate that: 1) one-third of the board of directors should be Lebanese (Article 144 amended); 2) board members can be either shareholders or non-shareholders (Article 147 amended); 3) one-third of capital shares should be held by Lebanese for companies that provide public utility services (Article 78); and 4) capital shares and management in cases of exclusive commercial representation are limited (Legislative Decree No. 34 dated August 5, 1967).  Banking, insurance, and cargo, which can only operate as JSCs, are required to have a Lebanese majority on the board, which makes them, in practice, restricted for FDI.

Holding and offshore companies are structured as joint-stock corporations and governed by Legislative Decree No. 45 (on holdings) and Legislative Decree No. 46 (on offshore companies), both dated June 24, 1983.  The law on offshore companies was amended by Law No. 85, dated October 18, 2018, whereby all board members may be non-Lebanese (Article 2, para 4) and the company may be formed by one person (Article 1 in the amendment of the Commercial Code).  A foreign non-resident chairman/general manager of a holding or an offshore company is exempt from the obligation of holding work and residency permits.  Law No. 772, dated November 2006, exempts holding companies from the obligation to have two Lebanese persons or legal entities on their board of directors.  All offshore companies must register with the Beirut Commercial Registry.  The law does not permit offshore banking, trust, and insurance companies to operate in Lebanon.

There are size and quota limits that effectively curb foreign ownership of real estate as well.  Law No. 296, dated April 3, 2001, amended the 1969 Law No. 11614 that governs acquisition of property by foreigners.  The 2001 law eased legal limits on foreign ownership of property to encourage investment in Lebanon, especially in industry and tourism, abolished discrimination for property ownership between Arab and non-Arab nationals, and set real estate registration fees at approximately six percent for both Lebanese and foreign investors.  The law permits foreigners to acquire up to 3,000 square meters (around 32,000 square feet) of real estate without a permit but requires cabinet approval for acquisitions exceeding this threshold.  The cumulative real estate acquisition by foreigners may not exceed three percent of total land in any district.  Cumulative real estate acquisition by foreigners in the Beirut region may not exceed ten percent of the total land area.  The law prohibits individuals not holding an internationally-recognized nationality from acquiring property in Lebanon.  In practice, this restriction attempts to prevent Palestinian refugees who are long-term residents in Lebanon from owning property.

The Lebanese Government does not review FDI transactions for national security considerations.

Other Investment Policy Reviews

Lebanon is not a member of either the Organization for Economic Cooperation and Development (OECD) or the World Trade Organization (WTO).  The United Nations Conference on Trade and Development (UNCTAD), in collaboration with IDAL, published a comprehensive Investment Policy Review for Lebanon in December 2018, which it officially launched in Beirut in March 2019.  The report provides a thorough assessment of Lebanon’s business environment, with concrete short-, medium-, and long-term recommendations to revitalize Lebanon’s investment climate.  These include creating an FDI promotion strategy and passing or amending legislation, rules, and regulations in the taxation, labor, competition, and governance regimes towards a more conducive business environment.  The full report is available at  https://unctad.org/en/PublicationsLibrary/diaepcb2017d11_en.pdf 

Business Facilitation

According to the World Bank’s Doing Business Report, Lebanon ranks 151 out of 190 countries in ease of starting a business.  Lebanon does not have a business registration website; rather, IDAL provides an information portal about doing businesses in Lebanon and outlines requirements at http://investinlebanon.gov.lb/en/doing_business .

According to UNCTAD, company establishment is cumbersome and costly in Lebanon.  It takes, on average, more than 15 days to establish an LLC with 15 employees or more in Beirut.  Companies must typically register with one of five trade registers (Beirut, Bekaa, Mount Lebanon, North and South), overseen by a magistrate, that operate in the country and are closest to the company’s location.  LLCs and JSCs must also retain the services of a lawyer and one auditor on a yearly basis, pay registration fees at the Ministries of Finance and Justice, and register employees at the National Social Security Fund (NSSF).  Foreign companies seeking to establish branches in Lebanon must additionally register at the Ministry of Economy.  Online establishment is not available for companies wishing to incorporate in Lebanon, and information on establishment is scattered.  Foreign branches and representative offices can be partly registered online, but heavy administrative requirements remain. All foreign documents must be certified by the trade register in the company’s country of incorporation and legalized by the Lebanese embassy or consulate there, and translated into Arabic.

Outward Investment

Lebanon neither promotes nor incentivizes outward investment, nor does it restrict domestic investors from investing abroad.  However, informal ad hoc capital controls imposed by the Lebanese financial sector since October 2019 prevent most external transfers, deterring outward investment from Lebanon.

6. Financial Sector

Capital Markets and Portfolio Investment

There are no restrictions on portfolio investment, and foreign investors may invest in Lebanese equities and fixed income certificates.  While legally Lebanon is a free market economy and does not restrict the movement of capital into or out of the country, Lebanon’s financial sector imposed ad hoc capital controls on financial outflows from Lebanon since October 2019 due to dollar illiquidity.  There are de facto restrictions on outbound payments and transfers for current international transactions, although these have yet to be codified into law.  Money transfer services such as Western Union and MoneyGram must now disburse inbound transfers in local currency.  The Banking Control Commission of Lebanon (BCCL) has a department which oversees and conducts on-site and off-site audits of money exchange institutions and electronic money transfer firms operating in Lebanon using a risk-based supervision approach.

Credit is allocated on market terms, and foreign investors may obtain credit facilities on the local market.  However, as Lebanon entered its economic crisis in  the fall of 2019 and defaulted on its dollar-denominated debt in March 2020, local and international credit is virtually nonexistent. The private sector may access overdrafts and discounted treasury bills in addition to a variety of credit instruments, such as housing, consumer, or personal loans, as well as corporate loans for SMEs.

Government legislation allows the listing of tradable stocks on the Beirut Stock Exchange (BSE).  By regulation, an investor should inform the BSE when her/his portfolio of shares in any listed company reaches ten percent and five percent in any listed bank.  For an investor to acquire more than five percent of shares of any listed bank requires prior approval from the Central Bank.  Currently, the BSE lists six commercial banks, four companies including Solidere — one of the largest publicly held companies in the region — and eight sovereign Eurobond issues (all in U.S. dollars).  However, the BSE suffers from a lack of liquidity and low trading volumes in the absence of significant institutional and foreign investors and had an annual trading volume of only 2.6 percent of market capitalization in 2019.  Weak market turnover discourages investors from committing funds to the market and discourages issuers from seeking listings on the BSE.

Traditional businesses owned by commercially powerful families dominate most sectors.  The government is trying to improve the transparency of such firms to help solidify an emerging capital market for company shares.  The Cabinet approved in September 2017 a decree to establish the Beirut Stock Exchange SAL (BSE SAL) as a joint-stock company that will replace the current BSE.  Initially, the Lebanese state will own the capital of BSE SAL and will privatize the company within one year.  The delay in the process triggered the CMA to issue in January 2019 a Request for Proposal (RFP) for an electronic trading platform that will allow trading in products not traded in the BSE, such as foreign currencies, commodities, and listed SMEs and start-ups.  The CMA has granted the winning consortium of Bank Audi and the Athens Stock Exchange (ATHEX) a license to set up and operate an electronic trading platform (ETP).  The consortium will contribute capital of $20 million to a special purpose vehicle (SPV) that will be created to operate the platform.  The consortium has opened the door for banks and financial institutions to also contribute to the SPV’s capital.  After ten years of operating the ETP, the consortium will have to list nearly 60 percent of the SPV shares on the ETP.  More information can be found on:  www.cma.gov.lb/.  Lebanon hosts the headquarters of the Arab Stock Exchanges.

Money and Banking System

Lebanon’s financial sector entered an unprecedented crisis in late 2019.  Lebanon relied on dollar inflows from abroad to finance imports and public spending and to maintain the Lebanese lira-to-USD peg, in place since 1997.  Those dollars were deposited in Lebanese banks, which in turn lent them to the state in the form of deposits at the Central Bank or Lebanese debt instruments.  Nearly 70 percent of bank assets are tied to the sovereign in those two forms.  As dollar inflows dried up and banking sector assets were tied to long-term deposits at the Central Bank and illiquid debt instruments, banks had trouble meeting their dollar obligations to clients.

This illiquidity continued for rest of 2019 and the first quarter of 2020, during which most banks stopped providing any dollars to clients.  Banks are no longer serving their core functions:  making productive loans or allowing those with dollar deposits to withdraw them.  Clients cannot transfer money overseas, except in “emergency” cases, as determined by individual banks.  Lebanon has yet to adopt formal capital controls legislation, but most economic analysts believe such a law is necessary to preserve what limited foreign currency is left in the country and provide a level playing field to all Lebanese.  At the behest of the Central Bank, in April 2020, banks began providing Lebanese lira at rates double the official pegged rate to customers with dollar-denominated accounts.

Lebanon’s default on its dollar-denominated debt in March 2020 – Lebanese banks at the time held $12.7 billion in Lebanon’s dollar bonds – further eroded the balance sheets of Lebanese banks.  Analysts estimate that perhaps 30 percent of loans from Lebanese banks are non-performing.  This number is expected to rise in 2020.  Bankers report that correspondent banks overseas have stopped providing them with lines of credits – or only provide facilities with onerous conditions – further hampering bank efficacy in Lebanon.  On April 30, the Cabinet approved an economic rescue plan, which noted the Lebanese financial sector experienced losses of nearly USD 80 billion, meaning that it will be unable to repay all what it owes to Lebanese with dollar-denominated accounts.  The economic plan hints at a potential “haircut” on dollar deposits, in which wealthy account holders could lose some of their deposits to help recapitalize banks after shareholders “bail-in” (convert their deposits into bank shares) their financial institutions.

The Lebanese banking sector covers the entire country with 1,051 operating commercial and investment bank branches as of November 2019.  There are 4,757 residents per branch in Lebanon (assuming five million inhabitants), which compares favorably to regional and emerging markets.  According to World Bank Development indicators, there are 534 depositors with commercial banks per 1,000 adults, 215 borrowers from commercial banks per 1,000 adults, and 38 ATMs per 100,000 adults.  The total domestic assets of Lebanon’s five largest commercial banks reached approximately $115 billion as of the end of 2019 (about 51.4 percent of total banking assets), according to Central Bank data.

Lebanon’s Central Bank was established in 1963.  Lebanon’s Central Bank imposes strict compliance with regulations on banks and financial institutions, and commercial banks, in turn, maintain strict compliance regimes.  However, the United States designated Jammal Trust Bank in August 2019 as a Specially Designated Global Terrorist for its role in financing Foreign Terrorist Organization Hizballah.  Foreign banks and branches need the Central Bank’s approval to establish operations in Lebanon.  Moreover, any shareholder with more than five percent of a bank’s share capital must obtain prior approval from the Central Bank to acquire additional shares in that bank, and must inform the Central Bank when selling shares.  In addition, any shareholder needs to obtain prior approval from the Central Bank if he/she wants to become a board member.   The use of cryptocurrencies is prohibited in Lebanon by the Central Bank.  The Central Bank announced that it is developing a digital currency that it plans to issue in Lebanese Pounds for domestic use only.

There are no restrictions in Lebanon on a foreigner or non-resident’s ability to open a bank account in local currency or foreign currencies, provided they abide by Lebanese compliance rules and regulations.  Banks claim they have stringent inquiry mechanisms to ensure compliance with international and domestic regulations and implement Lebanon’s anti-money laundering and counter-terror finance laws.  Banks inform customers of Know-Your-Customer requirements and ask them about the purpose of opening new accounts and about the sources of funds to be deposited.  Lebanese banks note they are compliant with the Foreign Account Tax Compliance Act (FATCA).  Lebanon adopted the OECD Common Reporting Standards since January 1, 2018.

Foreign Exchange and Remittances

Foreign Exchange

For the first time in Lebanon’s history, commercial banks in late 2019 introduced ad hoc capital controls on Lebanese depositors to stem the outflow of foreign currency.  Depending on a client’s individual bank and account size, he or she is subject to strict limits on foreign transfers for “emergency” purposes only, as defined by a client’s bank.  Clients with Lebanese lira (LBP) denominated accounts can only convert their lira to dollars outside of banks at licensed and unlicensed money exchange houses.

As of May 2020, Lebanon in practice had several different exchange rates.  Since 1997, the LBP has been pegged to the U.S. dollar at 1,507.5 LBP to USD.  However, as Lebanese continue to demand scarce dollars in the Lebanese financial system, the currency has depreciated on secondary markets.  The Central Bank only made dollars available to importers at the official rate for imports of fuel, wheat, and medicine.  For inbound electronic transfers, the Central Bank set the rate at 3,800 LBP/1 USD as of May 2020.  Licensed money exchange houses have sold dollars for as high as 4,400 LBP/1 USD, but as of May 2020, most had closed in response to a government crackdown on purported price gouging.  Unlicensed money exchange houses – the black market – continued to sell dollars in May 2020 at rates ranging from 4,000 to 4,500 LBP/1 USD.  Banks allowed clients to withdraw LBP from their dollar-denominated accounts at 3,000 LBP/1 USD.  Finally, banks offered another preferential exchange rate for those willing to bring new dollar banknotes to bank counters.  Different stores and shops offered varying exchange rate conversions at ad hoc rates as well.

The conversion of foreign currencies or precious metals is unfettered.  Lebanon’s Central Bank posts a daily local currency-exchange rate on its website:  http://www.bdl.gov.lb/ .  Lebanon has one of the most heavily dollarized economies in the world, and businesses commonly accept payment (and return change) in a combination of LBP and U.S. Dollars.

Remittance Policies

While capital controls curtailed the ability of those holding dollar-denominated bank accounts in Lebanon to withdraw or transfer their currencies overseas, those in Lebanon with access to “fresh dollars” (i.e., new dollar bills from abroad or not within the local financial system) were able to access, withdraw, and transfer overseas dollars.  For the vast majority of Lebanese and businesses in Lebanon, remitting any money overseas, including investment returns, remained nearly impossible.  Analysts believe capital controls must continue for the foreseeable future to prevent a bank run and preserve the limited foreign currency remaining in Lebanon.

Sovereign Wealth Funds

Lebanon does not have a sovereign wealth fund.  The government’s economic rescue plan, approved by the Cabinet on April 30, calls for the creation of a Public Asset Management Company that would include state assets and properties to help restore depositors’ funds and boost economic recovery.  Lebanon’s Offshore Petroleum Resource Law states that proceeds generated from oil and gas exploration must be deposited in a Sovereign Wealth Fund.  Creating the fund requires a separate law, which the government has yet to adopt.  Lebanon currently receives no proceeds from natural resources that could flow into a sovereign wealth fund.

7. State-Owned Enterprises

The Lebanese government maintains several state-owned monopolies.  State-owned Ogero owns and operates all fixed line telecommunications in Lebanon, while the two mobile operators, Touch and Alfa, are also owned by the state.  While they were previously managed by Kuwait’s Zain and Egypt’s Orascom Telecom, the Ministry of Telecommunications took over management of the two mobile operators and will prepare tenders for new management contracts later in 2020.  Electricité du Liban (EdL) provides nationwide electricity production and transmission, and four regional authorities provide water service.

La Régie des Tabacs et Tombacs conducts tobacco procurement, manufacturing, and sales, and Casino du Liban operates as a mixed public-private enterprise.  The Central Bank owns 99.23 percent of the air carrier Middle East Airlines, whose monopoly is scheduled to end in 2024.  Other major state-owned enterprises or public institutions include the Beirut, Tripoli, Sidon, and Tyre ports, the Rashid Karami International Fair (in northern Lebanon), the Sports City Center, and real estate development institution Elyssar.  The government also owns shares in Intra Investment Co., a mixed public-private investment company that owns 96.62 percent of Finance Bank, a Lebanese commercial bank.

There is no uniform definition of State-Owned Enterprises (SOEs), and each has separate internal by-laws.  Decree 4517 (dated 1972) establishes two types of public institutions, one administrative category that involves public enterprises such as the Lebanese University, and a second that holds commercial institutions such as EdL and La Régie.  The Ministry of Finance maintains an unpublished list of SOEs and public institutions.  SOEs and public institutions may purchase or supply goods or services from the private sector or foreign firms.  Their procurement process is governed by separate regulations but under the same terms and conditions as public procurement.  SOEs and public institutions benefit from certain tax exemptions.

The state electricity monopoly restricts production to EdL alone, but numerous private investors operate unregulated generators across the country and sell electricity to citizens at significantly higher rates during the country’s frequent power cuts.  EdL awarded several concessions to privately-owned companies for power distribution in specific regions, and these companies are interested in meeting customer demand.  Independent Power Producers (IPP) may provide municipalities with 10 MW of electricity without receiving a direct concession from EdL.  In April 2014, Parliament granted the Cabinet authority through 2018 to license private companies to generate electricity (Law 288).  On April 17, 2019, Parliament extended Law 288 and granted the Public Tender Office authority to oversee electricity contracts as part of the government’s electricity sector reform.  Law 462 of 2002 called for the corporatization and privatization of the electricity sector, and the creation of an electricity regulatory authority (ERA).  However, as implementation of the privatization law stalled, Law 288 delegated issuance of production permits and licenses for new electricity projects from ERA to the Lebanese government.  Since 2012, EdL has contracted three private companies to manage bill collection, maintenance, and power distribution.

Lebanon’s SOEs report to shareholders, whereas public institutions are subject to oversight by the concerned ministries as well as by the Ministry of Finance.  Public institutions require the approval of concerned ministries for major business decisions.  SOEs may independently prepare their budgets, which must be approved only by their board of directors.  The SOEs and public institutions are required by law to publish an annual report, submit their books for independent audits, and transmit their books to the Court of Audit.

The Lebanese Government currently has no formal plans to privatize SOEs or public institutions.  The April 30 economic reform plan did not specify any government privatization plans other than noting it would likely sell Casino du Liban.  The plan also suggested the creation of a Public Asset Management Company (PAMC) to hold government assets, including government stakes in the “main state-owned enterprises and real estate.”  Profits from the PAMC would go to fund capital increases of the Central Bank, which would in turn allow it to repay its liabilities to the local financial sector.  The plan did not specify which state-owned assets would go into the PAMC or which would be privatized.  Some political leaders and economists have called for SOE privatization to be a larger part of the government’s reform efforts.  The Governor of the Central Bank previously stated plans to list 25 percent of Middle East Airlines (which is 99.23 percent owned by the Central Bank) on the BSE, but this has not happened.

SOEs and public institutions have independent boards staffed primarily by politically-affiliated individuals, appointed by the Cabinet for public institutions, and by shareholders for SOEs.  These boards always include a cabinet-appointed Government Commissioner who reports to the concerned ministries.  SOEs do not currently adhere to the Organization for Economic and Cooperative Development (OECD) Corporate Governance Guidelines.

Privatization Program

Lebanon enacted laws in 2002 for the privatization of the telecom sector (Law 431) and the electricity sector (Law 462).  However, neither has been implemented.

Parliament passed a two-year law authorizing the Cabinet to issue Independent Power Producers (IPP) licenses to investors in April 2014.  It later amended the law to extend its application through April 2018.  On April 17, 2019, Parliament passed a new law extending the application of Law 288 through April 2021, granting the Tender Office authority to tender IPP projects.  The Ministry of Energy and Water launched tenders in March 2017 for solar power plants under the IPP law and has issued three wind power plants licenses under IPP.  It planned to issue tenders for two combined cycle gas turbine IPPs in September 2019, but those efforts stalled.  The government reportedly now aims to procure IPPs on a bilateral government-to-company negotiation process.

The High Council for Privatization and Partnerships (HCP) manages privatization and public-private sector partnership (PPP) projects.  In accordance with the provisions of the Privatization Law 228 and the PPP Law 48, the HCP conducts competitive tendering processes for both privatization and PPP projects.  The PPP law introduced a legal framework to attract local and international private investments in infrastructure projects.  The PPP legislation is published on the HCP website http://hcp.gov.lb .  The HCP has yet to fully manage or complete any privatization project.

The Capital Markets Law calls for the corporatization and subsequent privatization of the Beirut Stock Exchange (BSE) within a two-year period from the date that the Capital Markets Authority (CMA) is appointed.  The Cabinet appointed the CMA in June 2012, and in September 2017 issued a decree to corporatize the BSE.  The corporatization has yet to occur.

9. Corruption

U.S. firms have identified corruption as an obstacle to FDI, including in government procurement, award of contracts, dispute resolution, customs, and taxation.  A key demand of the anti-government protest movement that led to resignation of the previous government in October 2019 was stricter anti-corruption measures.  Corruption is reportedly more pervasive in government contracts (primarily in procurement and public works), taxation, and real estate registration, than in private sector transactions.  Lebanese law provides criminal penalties for official corruption, but they are not implemented effectively.  For instance, Lebanon does not effectively enforce the Illicit Wealth Law.  The Illicit Wealth Law applies to all state employees, government and senior officials, and municipality members and extends to family members.  The law does not extend to political parties.  The legislation has articles to counter conflict-of interest in awarding contracts and government procurement, but they are not enforced.  The Access to Information Law is not effectively implemented.

In April 2020, Parliament approved several laws seen as key to anti-corruption efforts:  an anti-corruption law targeting public sector employee and creating a National Committee to Combat Corruption, and a law to lift immunity of (low-level) public service employees.  Implementations of these laws will be critical to their success.  In May 2020, the government approved its National Anti-Corruption Strategy, while Parliament approved a law allowing the committee and Lebanon’s Financial Intelligence Unit to lift bank secrecy for top government officials.  It also approved a law changing appointments of top civil servants to a merit-based system, but implementation for all of these changes remains key to determining how they will combat entrenched corruption.

Lebanon ratified the UN Anticorruption Convention in April 2009.  Lebanon is not a signatory to the OECD Convention on Combatting Bribery of Foreign Public Officials in International Business Transactions.

As for civil society, the Lebanese Transparency Association (LTA) is a key advocate for stronger anti-corruption enforcement.  The LTA also established the Lebanese Advocacy and Legal Advice Center (LALAC) to inform citizens of their rights and to encourage victims and witnesses to take action against cases of corruption.  LALAC operates a hotline for victims and witnesses to report cases of corruption and receive free legal advice and assistance with their case.  The program is currently funded by Transparency International (TI) and the German Foreign Office.  LTA also conducted several workshops targeting municipalities, public servants, investigative journalists, and civil society groups promoting access to information right in Lebanon.

Resources to Report Corruption

Lebanese Transparency Association
Sami El Solh Avenue, Kaloot Bldg, 9th Floor
Badaro, Beirut
P.O. Box 50-552, Lebanon
Tel/Fax: +961-1-388113/4/5
Cell: 70-035777
Email: info@transparency-lebanon.org

10. Political and Security Environment

Sustained anti-government protests began on October 17, 2019, and  led to resignation of the previous government on October 29.  The protests continued for months, with demonstrators demanding an end to corruption, poor governance, and economic stagnation.  A new government, which drew support from Foreign Terrorist Organization (FTO) Hizballah, did not form until January 21, 2020.  Public demonstrations continued since October, albeit with lesser frequency.  Since October 2019, some protests have turned violent and targeted property, particularly banks and public institutions.

Hizballah continued fighting in Syria on behalf of the Assad regime, while some Lebanese Sunnis reportedly lent support to the Syrian opposition.  Lebanon continues to host more refugees per capita than any other country in the world.  The refugee presence led to increased social tensions and competition for low-skill jobs, and strained infrastructure and provision of public services.

The U.S. government considers the potential threat to U.S. Embassy personnel assigned to Beirut sufficiently serious enough to require all official personnel to live and work under security restrictions.  These limitations occasionally prevent the movement of U.S. Embassy officials and the provision of consular services in certain areas of the country.  U.S. citizen visitors are encouraged to contact the Embassy’s Consular Section for the most recent safety and security information concerning travel to Lebanon.  On March 18, 2020, the Department of State required the ordered departure of non-emergency U.S. government employees and associated family members in Lebanon due to COVID-19-related concerns, including travel restrictions and quarantine procedures that affected commercial flights.  More information may be found at https://lb.usembassy.gov/u-s-citizen-services.

Liberia

Executive Summary

Liberia offers opportunities for investment in mining, agriculture, forestry (timber), and financial services.  A commodities-based economy, Liberia relies on imports for more than half of its cereal needs, including rice, Liberia’s most important staple food. The COVID-19 pandemic has negatively affected all sectors of the economy, and the International Monetary Fund projects negative two and a half percent growth for 2020.

Liberia would require considerable foreign direct investment (FDI) to fulfill its development goals and potential.  However, low human development indicators and poor roads and lack of reliable internet access throughout most of the country constrain investment and development.

Most of Liberia lacks power supply, though efforts to expand access to electricity are ongoing through development of a grid from the Mount Coffee Hydropower Plant, the West Africa Power Pool’s cross border electrification projects, and other internationally supported energy projects.

The 2020 World Bank Doing Business Report ranked Liberia as 184th out of 190 economies in trading across borders, 184th in dealing with construction permits, and 180th in registering property.  Corruption is endemic in Liberia. The 2019 Transparency International Corruption Perceptions Index ranks Liberia at 137th out of 180, down from 120th in 2018. More promisingly, the Doing Business Report ranked Liberia as 75th in starting a business and 76th in paying taxes.

The Government of Liberia formed a Business Climate Working Group (BCWG) in 2018 to improve the investment climate.  The BCWG held several fora, including one in May 2019 entitled “Resolving Constraints to Trading Across Borders.” With the implementation of an IMF-supported program to improve fiscal and monetary policies, Liberia may soon experience a more favorable environment for private investment.  The business climate could also improve with increased collaboration between business chambers, industry associations and the Liberian government, as well as through continued and persistent efforts of international donors.

Following frequently lengthy negotiations with the government, investors developing long term concessions for agricultural or extractive businesses report facing resistance from local communities, which claim the government has not consulted with them about land use.  Further, communities and employees expect concessionaires and other private investors to provide significant support including education, healthcare, and housing.

Liberia is a country rich in natural resources, agricultural land, and abundant rainfall. Agribusiness and extractive industries investors in particular may find that Liberia merits careful consideration.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2019 137 of 180 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2020 175 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2019 NA https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in Liberia ($M USD, historical stock positions) 2018 USD 236 https://apps.bea.gov/international/factsheet/
World Bank GNI per capita 2019 USD 580 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment (FDI)

Government officials frequently announce that “Liberia is open for business” and formed a Business Climate Working Group (BCWG) to improve the investment climate in 2018. A March 2019 BCWG-led forum resulted in the cancellation of Import Permit Declaration requirements and extended residency visas and work permits from one to five years. However, a weak legal and regulatory framework, lack of transparency in contract award processes, and corruption continue to inhibit foreign direct investment.

The 2010 Investment Act prohibits and restricts market access for foreign investors, including U.S. investors, in certain economic sectors or industries. See “Limits on Foreign Control and Right to Foreign Ownership and Establishment”, below for more detail.

Charged with facilitating foreign investment in Liberia, the National Investment Commission (NIC) develops investment strategies, designs investment policies, and executes investment programs to attract foreign investment and negotiate investment contracts or concessions.

The NIC and private sector groups, such as the Liberia Chamber of Commerce (LCC), facilitate dialogue through formal business roundtables on investment climate issues. They also meet with investors and government officials to discuss and suggest solutions to critical policy issues.  However, some business leaders report difficulties in obtaining meetings with government representatives to discuss new policies perceived to damage the business climate.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign and domestic private entities may own and establish business enterprises in many sectors. Only Liberian citizens, however, may own land. Per the Investment Act (“The Act”) and Revenue Code, only Liberian citizens may operate businesses in the following sectors and industries:

(1) Supply of sand

(2) Block making

(3) Peddling

(4) Travel agencies

(5) Retail sale of rice and cement

(6) Ice making and sale of ice

(7) Tire repair shops

(8) Auto repair shops with an investment of less than USD 550,000

(9) Shoe repair shops

(10) Retail sale of timber and planks

(11) Operation of gas stations

(12) Video clubs

(13) Operation of taxis

(14) Importation or sale of second-hand or used clothing

(15) Distribution in Liberia of locally manufactured products

(16) Importation and sale of used cars (except authorized dealerships, which may deal in certified used vehicles of their make)

The Act also sets minimum capital investment thresholds for foreign investors in certain other business activities, industries, and enterprises. (See Section 16 of the Act http://www.moci.gov.lr/doc/TheInvestmentActof2010(1).pdf ) For enterprises owned exclusively by non-Liberians, the Act requires no less than USD 500,000 in investment capital. For foreigner investors partnering with Liberians, the Act requires no less than USD 300,000 in total capital investment and at least 25 percent aggregate Liberian ownership. The Liberian constitution restricts land ownership to citizens, but non-Liberians may hold long-term leases. See Real Property, below for further detail.

Liberia does not maintain an investment screening mechanism for inbound foreign investment.

Other Investment Policy Reviews

The government has not undergone a third-party investment policy review in the past three years.

Business Facilitation

All businesses must register with and obtain authorization from the Liberia Business Registry (LBR)  to conduct business or provide services in Liberia.  LBR services are available to local and foreign companies at its head office in Monrovia. See http://lbr.gov.lr/ .

Most of Liberia’s commercial laws and regulations are not publicly available online.

The NIC chairs an ad hoc cabinet-level Inter-Ministerial Concessions Committee (IMCC) that convenes often lengthy bidding and negotiation processes for long term investment contracts such as concessions.  The establishment of a concession requires ratification by the national legislature, approval by the President, and printing of handbills. The Liberia Revenue Authority (LRA) handles tax payment processes and administration. The National Social Security and Welfare Corporation (NASSCORP) handles related social security processes.

According to the World Bank, establishing a business requires five procedures and 18 days. Foreign companies must obtain investment approval from the NIC if they seek investment incentives. Foreign companies must use local counsel when establishing a subsidiary. If the subsidiary will engage in manufacturing and international trade, it must obtain a trade license from the LBR.

For more information about investment laws, bilateral investment treaties, and other treaties with investment provisions, please see: https://investmentpolicy.unctad.org/country-navigator/121/liberia .

Outward Investment

The government neither promotes nor incentivizes outward investment but neither does it restrict Liberian citizens from investing abroad.

6. Financial Sector

Capital Markets and Portfolio Investment

The Liberian government welcomes foreign investment, although Liberia does not have a well-developed domestic capital market. Private sector investors have limited credit and investment options. In 2019, the Central Bank of Liberia (CBL) issued T-bills, but there were few subscribers. The CBL respects IMF Article VIII and does not implement restrictions on payments and transfers for current international transactions. Many foreign investors prefer to obtain credit from and retain profits in foreign banking institutions.

Money and Banking System

Nine commercial banks, branch outlets including payment windows/annexes, a development finance company, and a deposit taking microfinance institution provide banking services within Liberia.  Eight of the commercial banks are foreign banks. Numerous licensed foreign exchange bureaus, microfinance institutions, credit unions, rural community finance institutions, and village savings and loan associations (“susus”) also provide financial services.  However, the health of the financial sector is concerning. According to a 2019 report by the Central Bank of Liberia (CBL), most of the commercial banks’ assets were held in instruments such as Liberian government bonds and T-bills which cannot easily be converted into liquid assets (cash), which has resulted in cash availability issues. Starting in 2018, commercial banks and businesses have reported considerable difficulty in accessing Liberian dollars, including withdrawals from saving accounts of private individuals at commercial banks and by commercial banks at the CBL.  In addition, since 2019, commercial banks, businesses, and private individuals have had difficulties accessing U.S. dollars.

The issue of non-performing loans (NPLs) remains a major challenge in the banking sector and continues to negatively affect profitability.  Commercial banks face persistent challenges in profit generation and loan repayment.

Foreign banks or branches can establish operations in Liberia, subject to regulations set out by the CBL.

Foreign Exchange and Remittances

Foreign Exchange

Foreign investors may convert, transfer, and repatriate funds associated with an investment (e.g., remittances of investment capital, earnings, loans, lease payments, and royalties).  Liberian law allows for the transfer of dividends and net profits after tax to investors’ home countries.

Liberia has a floating exchange rate system. Both the Liberian Dollar (LD) and U.S. Dollar (USD) are legal tender. Market supply and demand dictates the exchange rate. The CBL displays and requires commercial banks and licensed money exchange bureaus to display daily LD to USD market exchange rates.  In addition to commercial banks, licensed foreign exchange bureaus, petrol stations, supermarkets, and other stores provide exchange services. Many unregistered or unlicensed money exchangers exchange money throughout the country.

Remittance Policies

Liberia permits 100 percent repatriation of funds and does not have currency exchange restrictions.

Remittances may be sent to Liberia through Western Union, MoneyGram, RIA Money Transfer, and wire transfer.

Sovereign Wealth Funds

The government does not maintain a Sovereign Wealth Fund (SWF) or similar entity.

7. State-Owned Enterprises

The President of Liberia appoints Boards of Directors to govern wholly-government-owned, semi-autonomous state-owned enterprises (SOEs).  The Public Financial Management (PFM) Act requires SOEs to submit periodic financial statements to their boards.

SOEs employ more than 10,000 people in sea and airport services, electricity supply, oil and gas, water and sewage, agriculture, forestry, maritime, petroleum importation and storage, and information and communication technology services. Not all SOEs are profitable. Liberia does not publish a list of SOEs. Some SOEs maintain their own websites.

Privatization Program

Liberia does not have a privatization program or policy.

9. Corruption

Liberia suffers from corruption in both the public and private sectors. Some officials engage in corrupt practices with impunity. Liberia has laws against economic sabotage, mismanagement of funds, bribery, and other corruption-related acts, including conflicts of interest. In 2019, Transparency International lowered Liberia’s rank from 120 to 137 out of 180 countries in its corruption perception index. See https://www.transparency.org/country/LBR  .

The Liberia Anti-Corruption Commission  (LACC) cannot directly prosecute corruption cases. It must first submit/refer cases to the Ministry of Justice  (MOJ) for prosecution. If the MOJ does not prosecute within 90 days, the LACC may then take those cases to court. The LACC continues to seek public support for the establishment of a specialized court to exclusively try corruption cases.

Foreign investors generally report that corruption is most pervasive in government procurement, contract and concession awards, customs and taxation systems, regulatory systems, performance requirements, and government payments systems.  Multinational firms often report paying fees not stipulated in investment agreements. No laws explicitly protect NGOs that investigate corruption.

Liberia is signatory to the Economic Community of West African States (ECOWAS) Protocol on the Fight against Corruption, the African Union Convention on Preventing and Combating Corruption (AUCPCC), and the UN Convention against Corruption (UNCAC).

Resources to Report Corruption

Contact at government agencies responsible for combating corruption:

Baba Borkai, Chief Investigator
Liberia Anti-Corruption Commission (LACC), Monrovia, http://lacc.gov.lr/ 
bborkai@lacc.gov.lr

Toll free: (+231) 777-313131
Email: bborkai@lacc.gov.lr

Contact at a “watchdog” organization (local or nongovernmental organization operating in Liberia that monitors corruption):

Anderson Miamen, Executive Director
Center for Transparency and Accountability in Liberia (CENTAL)
Tel: (+231) 886-818855
Email: admiamen@gmail.com

10. Political and Security Environment

President George Manneh Weah’s inauguration in January 2018 marked the first peaceful transfer of power from one democratically elected president to another since 1944.  Increasing freedom of speech for Liberians as well as the relatively free media landscape in the country has led to vigorous pursuit of civil liberties, resulting in active, often acrimonious political debates and organized, non-violent demonstrations.  In 2019, the government signed into law the Kamara Abdullah Kamara Act of Press Freedom to strengthen its commitment to several legal instruments it previously signed, such as the Freedom of Information Act and the Table Mountain Declaration.  Numerous radio stations and newspapers distribute news throughout the country. The government has identified land disputes and high rates of youth and urban unemployment as potential threats to security, peace, and political stability.

The Government of Liberia has shouldered national security responsibility since the United Nations Mission in Liberia (UNMIL) officially withdrew from the country in March 2018.  Protests and demonstrations may occur with little warning. The United States and other international donors continue to assist in the education and training of the Armed Forces of Liberia and law enforcement agencies.

Libya

Executive Summary

Libya presents a challenging investment climate.  Reconstruction needs, severely underserved consumer demand, and abundant natural resources provide many opportunities for domestic and foreign investors, and the Government of National Accord (GNA) has repeatedly expressed interest in receiving greater foreign investment.  Nonetheless, the country’s prospects for foreign investment continue to be hampered by:  1) persistent political instability and security risks posed by the ongoing civil conflict and by the presence of non-state militias and extremist and terrorist groups; 2) non-state actors’ seizure of key economic infrastructure, including major oil and gas terminals since January 2020; and 3) opaque bureaucracy, onerous regulations, and widespread rent-seeking activity in public administration.  The Libyan government has a long history of not honoring contracts and payments, and several U.S. firms continue to be owed back payments for work done before and after the 2011 revolution. The sectors that have historically attracted the most significant investment into Libya are:  oil and gas, electricity, and infrastructure.

Libya’s civil conflict reignited in April 2019 when Khalifa Haftar’s Libyan National Army (LNA), based in the east of Libya, launched a military offensive to seize Tripoli.  LNA-aligned forces have repeatedly attacked civilian infrastructure in greater Tripoli, and attacks against Tripoli’s Migita Airport have forced its closure on multiple occasions.  The LNA and its political allies have undermined key national institutions, including the Central Bank and the National Oil Corporation (NOC), by standing up parallel structures and attempting to use such entities to finance its activities.

Libya holds Africa’s largest (and the world’s ninth largest) proven oil reserves and Africa’s fifth largest gas reserves.  Most government revenues derive from the sale of crude oil.  Prior to the January 2020 LNA-orchestrated oil shutdown of five oil terminals and two oilfields in the southwest, Libya’s oil production had been making a gradual recovery from repeated attacks on oil infrastructure by ISIS-Libya and other armed groups in 2016, reaching an estimated high of 1.3 million barrels per day (bpd).  Technocrats heading the NOC, an independent, apolitical institution, continue to lay the groundwork for long-term development and stabilization of the energy sector.

The Privatization and Investment Board (PIB), supervised by the Ministry of Economy, is the primary governmental body for encouraging private foreign investment in Libya.

The Investment Law of 2010 provides the primary legal framework for foreign investment promotion. Passed prior to the 2011 revolution that toppled the Qadhafi regime, the law lifted many FDI restrictions and provided a series of incentives to encourage private investment.  No significant laws related to investment have been passed since the revolution.

Perceived corruption is deeply embedded in Libya and is widespread at all levels of public administration.  The lack of transparency or accountability mechanisms in the management of oil reserves and revenues, the issuance of government contracts, and the enforcement of often ambiguous regulations continue to provide the government with substantial opportunities for rent-seeking activities.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2019 168 of 180 http://www.transparency.org/
research/cpi/overview
World Bank’s Doing Business Report 2019 186 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index N/A N/A https://www.globalinnovationindex.org/
analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2019 $908 https://apps.bea.gov/
international/factsheet/
World Bank GNI per capita 2019 $7,640 http://data.worldbank.org/
indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

The Libyan government’s efforts to attract FDI, primarily through the PIB and NOC, are relatively recent.  Until the 1990s FDI was only permitted in the oil sector through sovereign contracts to which the state was a party.  A number of foreign investment laws were passed in subsequent years to encourage and regulate FDI, culminating in “Law No. 9 of the year 1378 PD (2010) Regarding Investment Promotion” (known as the 2010 Investment Law).  Though promulgated prior to Libya’s 2011 revolution, the law remains in effect.  This new law lifted many FDI restrictions and provided a series of incentives to qualifying investments, such as tax and customs exemptions on equipment, a five-year income tax exemption, a tax exemption on reinvested profits and exemptions on production tax expert fees for goods produced for export markets.  It also allowed for investors to transfer net profits overseas, defer losses to future years, import necessary goods, and hire foreign labor if local labor was unavailable.  Foreign workers may acquire residency permits and entry reentry visas for five years and transfer earnings overseas.

The law regulates the establishment of foreign-owned companies and the setting up of branches in representative offices.  Branches are allowed to be opened in a large number of sectors, including:  construction for contracts over LYD 50 million; electricity works; oil exploration; drilling and installation projects; telecommunications construction and installation; industry; surveying and planning; installation and maintenance of medical machines and equipment; and hospital management.  However, the investment law restricts full foreign ownership of investment projects to projects worth over LYD 5 million, except in the case of limited liability companies, and requires 30 percent of workers to be Libya nationals and to receive training. Foreign investors are prevented from owning land or property in Libya and are allowed only the temporary leasing of real estate.  Investment in “strategic industries” – in particular, Libya’s upstream oil and gas sector, which is controlled by the NOC – requires a foreign entity to enter into a joint venture with a Libyan firm that will retain a majority stake in the enterprise.  It is not clearly defined which industries other than upstream oil and gas may be considered strategic.

The most important investment promotion institution Libya is the PIB, established in 2009 to assume responsibility for the Libyan privatization program and oversee and regulate FDI activities.  The PIB’s screening process for incoming FDI to Libya is not clearly defined; the bidding criteria and process for investment are not published or transparent, and it is therefore not clear whether foreign investors have faced discrimination.  The PIB states that it reviews bids or proposals for general consistency with Libya’s national security, sovereignty, and economic interest.  The Minister of Economy must give final approval to all FDI projects, at the recommendation of the PIB.  There is no information available on the timeline of the approval process or any potential outcomes of the process other than an affirmative or negative decision by the PIB or Minister of Economy.  The PIB maintains that it keeps all company information confidential.  U.S. firms have repeatedly expressed frustration about the slow pace by which the Libyan government makes business-related decisions.  Despite these complaints, some U.S. firms have successfully invested in Libya, particularly in the country’s oil and gas sector.

Limits on Foreign Control and Right to Private Ownership and Establishment

The ownership of real estate in Libya is restricted to Libyan nationals and wholly-owned Libyan companies.  The 2010 Investment Law permits the ownership of real estate in Libya by locally established project vehicles of foreign investors.  However, such ownership is limited to leasehold ownership only.  Foreign investors are allowed lease property from public holdings and private Libyan citizens, according to Article 17 of the 2010 Investment Law.  There is considerable ambiguity in both the public and private rental markets; many aspects of these arrangements are left to local officials.

Other Investment Policy Reviews

Libya has not undergone any recent investment policy reviews by the OECD, UNCTAD, WTO, or any other international body.

Business Facilitation

Business registration procedures in Libya are lengthy and complex.  The Ministry of Economy is the main institution for processing business registration requirements.  The Libyan government does not maintain an online information portal on regulations for new business registration or online registration functionality for registering a new business.  There are multiple corporate structures based on the type of business undertaken (e.g. limited liability, joint venture, branch office) and each has specific registration requirements.  Some requirements apply to all businesses, including:  obtaining a Commercial Register certificate, registering with the Chamber of Commerce and the tax and labor departments, and obtaining a working license.  If a company will be importing items, a statistical code will be required.  If the company will be obtaining letters of credit in Libya, a Central Bank code will be required.  A specialized agent must complete these tasks on behalf of the registering company.  For the simplest corporate structure (limited liability with no Central Bank code) the process can take two to three months if the registration agent is familiar with the procedures.

Outward Investment

Libya is a member of the Islamic Corporation for the Insurance of Investment and Export Credit, which provides investment and export credit insurance for entities in member states.   FDI outflows in 2018 were USD 315 million, compared to USD 2.7 billion in 2010.  The Libyan government does not formally promote or incentivize outward investment.  Stress in the banking sector has reduced liquidity, and this has negatively affected the ability of Libyan citizens to acquire the hard currency to invest abroad.

6. Financial Sector

Capital Markets and Portfolio Investment

The Libyan government passed a law in 2007 to establish a stock market, primarily to support privatization of SMEs, but it is not well-capitalized, has few listings, and does not have a high volume of trading.  Capital markets in Libya are underdeveloped, and the absence of a venture capital industry limits opportunities for SMEs with growth potential and innovative start-ups to access risk financing for their ventures.

Money and Banking System

Libya has been attempting to modernize its banking sector since before the revolution, including through a privatization program that has opened state-owned banks to private shareholders.  The Central Bank of Libya (CBL) owns the Libyan Foreign Bank, which operates as an offshore bank, with responsibility for satisfying Libya’s international banking needs (apart from foreign investment).  The banking system is governed by Law No. 1 of 2005, as amended by Law No. 46 of 2012 on Islamic banking.  In accordance with that amendment, Law No. 1 of 2013 prohibits interest in all civil and commercial transactions.  The banking modernization program has also been seeking, among other components, to establish electronic payment systems and expand private foreign exchange facilities.

The eastern branch of the Central Bank declared itself the legitimate Central Bank in 2014, though it is not recognized internationally as such, and since then the institution has been split between the legitimate CBL in Tripoli and the parallel CBL based in the eastern city of Al Bayda.  As Libya’s only legitimate Central Bank, the CBL in Tripoli is responsible for the receipt of all of Libya’s oil revenues, prints Libyan dinars, and controls the country’s foreign exchange reserves.  As a result, the split has reduced liquidity to eastern Libya, including to the LNA, eastern parallel institutions, and commercial banks.  In recent years, eastern authorities have imported counterfeit Libyan dinars from Russia in an attempt to stem the liquidity shortage. To access hard currency, eastern authorities have in the past issued junk bonds that it forced commercial banks to buy, used counterfeit dinars to buy hard currency on the black market, and illegally exported certain commodities, like scrap metal.  All the while, the parallel CBL has accrued vast debt which the legitimate CBL has no visibility on and which will need to be reconciled when the two banks eventually unify.

The CBL in Tripoli controls access to all foreign currency in Libya, and it provides Libyans access to hard currency by issuing letters of credit (LCs).  Access to LCs in Libya has historically been an issue, but with the 2018 implementation of a foreign exchange fee described in the next section, importers’ access to LCs had greatly increased.  However, since the shutdown in the oil and gas sector in January 2020, the CBL has restricted the issuance of LCs, as described in the next section.

The availability of financing on the local market is weak.  Libyan banks can only offer limited financial products, loans are often made on the basis of personal connections (rather than business plans), and public bank managers lack clear incentives to expand their portfolios.  Lack of financing acts as a brake on Libya’s development, hampering both the completion of existing projects and the start of new ones.  This has been particularly damaging in the housing sector, where small-scale projects often languish for lack of steady funding streams.  The World Bank ranked Libya 186 out of 190 economies on the ease of getting credit in 2019.

Foreign Exchange and Remittances

Foreign Exchange

The 2010 Investment Law provides investors the right to open an account in a convertible currency in a Libyan commercial bank and to obtain local and foreign financing.  The Libyan Banking Law (Law No. 1 of 2005) allows any Libyan person or entity to retain foreign exchange and conduct exchanges in that currency.  Libyan commercial banks are allowed to open accounts in foreign exchange and conduct cash payments and transfers (including abroad) in foreign currency.  Commercial banks operating in Libya may grant credit in foreign exchange and transact in foreign exchange among themselves.

The Central Bank charges a foreign exchange fee of 163 percent on sales of Libyan dinars for hard currency.  Government entities do not have to pay this fee, which has effectively created two exchange rates:  the official rate, to which the Libyan government has access, and a second rate – the official rate with the 163 percent fee – for all other buyers.  There is also a significant black market for hard currency that typically exchanges Libyan dinars for foreign exchange at three times the official rate or higher.  Entities engaging in foreign exchange must be licensed by the Central Bank.  Foreign exchange facilities are available at most large hotels and airports, and ATMs are becoming more widely available.  The importation of currency must be declared at time of entry.  The Central Bank’s Decree No. 1 of 2013 regulates foreign exchange, including by specifying authorities for the execution of foreign transfers, and by prescribing limits on the transfer of currency abroad for different public and private entities.

Most firms seeking to receive payment for services/products in Libya operate using letters of credit facilitated through foreign banks (often based in Europe).  Foreign energy companies remitting large sums often make arrangements for direct transfers to accounts offshore.  While the introduction of the foreign exchange fee in September 2018 greatly facilitated the Central Bank’s issuance of LCs, in response to the January 2020 oil shutdown the Central Bank has generally limited LCs to a minimum of $100,000 with a three-month limit to complete transactions.

Remittance Policies

The 2010 Investment Law allows for the remittance of net annual profits generated by an investment and of foreign invested capital in case of liquidation, expiration of the project period, or insurmountable impediments to the investment within the first six months.  As noted, the Central Bank charges a foreign exchange fee of 163 percent on sales of Libyan dinars for hard currency.

Sovereign Wealth Funds

Libya maintains a sovereign wealth fund called the Libya Investment Authority (LIA).  UN Security Council Resolution 1970 (2011) froze many of the LIA’s assets outside Libya.  The freeze on the LIA’s assets is intended to preserve Libya’s assets through its post-revolutionary transition for the benefit of all Libyans.  The most recent evaluation of the LIA’s assets in 2012 put their value at USD 67 billion.  The international community has provided technical assistance to the LIA to help it improve its governance, including adherence to the Santiago Principles, a set of 24 widely accepted best practices for the operation of sovereign wealth funds.  The LIA has agreed to make tangible progress on its draft governance guidelines and adherence with the Santiago Principles, including preparation of an annual report that contains an identification of assets and audited financials.

7. State-Owned Enterprises

The PIB Is responsible for matters related to privatization of state-owned enterprises (SOEs).  All enterprises in Libya were previously state-owned.  Except for the upstream oil and gas sector, no state-owned enterprise is considered to be efficient.  The state is deeply involved in utilities, oil and gas, agriculture, construction, real estate development and manufacturing, and the corporate economy.

Privatization Program

Libya has gone through three previous phases of privatization, the latest between 2003 and 2008 during which 360 SOEs ranging from small to large in various sectors were either fully or partially privatized or brought in private partners through public-private partnerships.  However, restrictions to individual shares and foreign ownership – individual investors’ share of the capital was restricted to 15 percent and local ownership had to be 30 percent – limited interest in the privatization program.  Accusations of fraud further discouraged investments.  Nonetheless, the food industry, healthcare, construction materials, downstream oil and gas, and education sectors are now partially or fully privatized.  Fragile governments and lack of security since 2011 have impeded implementation of further privatization programs.

9. Corruption

Foreign firms have identified corruption as an obstacle to FDI; corruption is pervasive in virtually all sectors of the economy, especially in government procurement.   Officials frequently engage with impunity in corrupt practices such as graft, bribery, nepotism, money laundering, human smuggling, and other criminal activities.  Although Libyan law provides some criminal penalties for corruption by officials, the government does not enforce the law effectively.  Internal conflict and the weakness of public institutions further undermine enforcement.  No financial disclosure laws, regulations, or codes of conduct require income and asset disclosure by appointed or elected officials.

The Libyan Audit Bureau (AB), the highest financial regulatory authority in the country, has made minimal efforts to improve transparency.  The Audit Bureau has investigated mismanagement at the General Electricity Company of Libya that had lowered production and led to acute power cuts.  Other economic institutions such as the Ministry of Finance and the Central Bank  published some economic data during the year.

On 10 July 2018, GNA Prime Minister al-Sarraj requested international support to conduct an audit of the two branches of the Central Bank ,and this request was endorsed by the UN Security Council (UNSC) on 13 September 2018 (UNSC Resolution 2434).  The audit of the two CBL branches, if implemented by Libyan authorities, is a means to restore the integrity, transparency and confidence in the Libyan financial system and create the conditions for the long-awaited unification of Libyan financial institutions.  However, as of May 2020, the Audit Bureau has obstructed payment to the international auditing firm that won the bid to conduct the audit because the AB claims that Libyan law provides it sole authority for conducing financial audits of Libyan government institutions.

Libya has signed and ratified the UN Anticorruption Convention.  It is not party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.

Resources to Report Corruption

Libya has several anti-corruption agencies and bodies, including, most notably, the National Anti-Corruption Commission, the Office of the Attorney General, the Administrative Control Authority, the Accountancy Bureau and the Financial Information Unit.

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

Akram Bannur
General Secretary
National Anti-Corruption Commission of Libya
+218 91 335 8583
Bannurakram@outlook.com

Contact at a “watchdog” organization (international, regional, local or nongovernmental organization operating in the country/economy that monitors corruption, such as Transparency International):

Ibrahim Ali
Chairman
Libyan Transparency International
+218916344442
info@transparency-libya.org

10. Political and Security Environment

There is a significant recent history of politically-motivated damage and seizure by force of economic infrastructure and installations, particularly in the oil and gas industry.  Most recently, forces allied with Libyan National Army Commander Haftar forced the near-total shutdown of Libya’s energy sector in January 2020.  Civil disturbances are a daily occurrence, with rival militias jockeying for control over the GNA’s political institutions and economic resources, and an ongoing civil conflict between the GNA and LNA.  These events significantly affect foreign firms’ willingness and ability to invest in Libya.

Lithuania

Executive Summary

Lithuania is strategically situated at the crossroads of Europe and Eurasia. It offers investors a diversified economy, EU rules and norms, a well-educated multilingual workforce, advanced IT infrastructure, low inflation, and a stable democratic government. The Lithuanian economy has been growing steadily since the 2009 economic crisis but will contract in 2020 due to economic fallout from the COVID-19 pandemic. However, most economists currently predict a relatively rapid recovery in 2021 thanks to budget surpluses and accumulated financial reserves prior to the crisis, as well as a well-diversified economy. The country joined the Eurozone in January 2015 and completed the accession process for the Organization for Economic Cooperation and Development (OECD) in May 2018. Lithuania’s income levels are lower than in most of the EU. Based on the average net monthly wage, Lithuania is 23rd of 28 EU member states. According to Bank of Lithuania statistics, at the end of 2019, the United States was Lithuania’s 16th largest investor, with cumulative investments totaling $245.4 million (1.2 percent of total FDI).

Following its election at the end of 2016, the current Lithuanian government focused on lowering barriers to investment, partnering with the private sector, and offering financial incentives for investors. In 2013, the government passed legislation which streamlined land-use planning, saving investors both time and money, and in July 2017, the government introduced the new Labor Code which is believed to better balance the interests of both employees and employers.

The government provides equal treatment to foreign and domestic investors, and sets few limitations on their activities. Foreign investors have the right to repatriate or reinvest profits without restriction, and can bring disputes to the International Center for the Settlement of Investment Disputes. Lithuania offers special incentives, such as tax concessions, to both small companies and strategic investors. Incentives are also available in seven Special Economic Zones located throughout the country.

U.S. executives report burdensome procedures to obtain business and residence permits, as well as some instances of low-level corruption in government. Transportation barriers, especially insufficient air links with European cities, remain a hindrance to investment, as does the lack of access to open, transparent information on tax collection and government procurement. Energy costs in Lithuania are declining as a result of energy source diversification upgrades and lower global oil prices.

Lithuania offers many investment opportunities in most of its economy sectors. The sectors which attracted most investment include Information and Communication Technology, Biotech, Metal Processing, Machinery and Electrical Equipment, Plastics, Furniture, Wood Processing and Paper Industry, Textiles and Clothing. Lithuania also offers opportunities for investment in the growing sectors of Real Estate and Construction, Business Process Outsourcing (BPO), Shared Services, Financial Technologies, Biotech and Lasers.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2019 35 of 180 http://www.transparency.org/
research/cpi/overview
World Bank’s Doing Business Report 2019 11 of 190 http://www.doingbusiness.org/
en/rankings
Global Innovation Index 2019 38 of 129 https://www.globalinnovationindex.org/
analysis-indicator
U.S. FDI in partner country ($M USD, stock positions) 2018 $ 154 http://apps.bea.gov/international/
factsheet/
World Bank GNI per capita 2018 $ 17,430 http://data.worldbank.org/indicator/
NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Lithuania’s laws assure equal protection for both foreign and domestic investors. No special permit is required from government authorities to invest foreign capital in Lithuania. State institutions have no right to interfere with the legal possession of foreign investors’ property. In the event of justified expropriation, investors are entitled to compensation equivalent to the market value of the property expropriated. The law obligates state institutions and officials to keep commercial secrets confidential and requires compensation for any loss or damage caused by illegal disclosure. As a member of European Union, Lithuania is subject to WTO investment requirements. Invest Lithuania is the government’s principal institution dedicated to attracting foreign investment. It serves as a one-stop-shop to: provide information on business costs, labor, tax and legal considerations, and other business concerns; facilitate the set up and launch of a company; provide help in accessing government financial support; and, advocate on behalf of investors for more business friendly laws. In addition to its offices in Vilnius and major Lithuanian cities, Invest Lithuania has representative offices in Belgium, Kazakhstan, and the United States (Chicago). Every year the government holds a conference with foreign investors to discuss their concerns and ways to improve investment climate in Lithuania.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign investors have the right to repatriate profits, income, or dividends, in cash or otherwise, or to reinvest the same without any limitation, after paying taxes. The law establishes no limits on foreign ownership or control. Foreign investors have free access to all sectors of the economy with some limited exceptions:

The Law on Investment prohibits investment of foreign capital in sectors related to the security and defense of the State.

The Law on Investment also requires government permission and licensing for commercial activities that may pose risks to human life, health, or the environment, including the manufacturing of, or trade in, weapons.

As of May 2014, foreign citizens are allowed to buy agricultural or forest land.

The Law on Investment specifically permits the following forms of investment in Lithuania: establishment of an enterprise or acquisition of a part, or the whole, of the authorized capital of an operating enterprise registered in Lithuania;

  • establishment of an enterprise or acquisition of a part, or the whole, of the authorized capital of an operating enterprise registered in Lithuania;
  • acquisition of securities of any type;
  • creation, acquisition, and increase in the value of long-term assets;
  • lending of funds or other assets to business entities in which the investor owns a stake, allowing control or considerable influence over the company; and
  • performance of concession or leasing agreements.

Foreign entities are allowed to establish branches or representative offices. There are no limits on foreign ownership or control. Foreign investors can contribute capital in the form of money, assets, or intellectual or industrial property rights. The State Property Bank screens the performance record and size of companies bidding on state or municipal property and has halted privatizations when it determined that the bidders were not suitable, i.e., for criminal or other reasons.

In 2018, the Lithuanian parliament passed a new edition of the law on the Protection of Objects Important to National Security. The law is aimed at enforcing additional safeguards to avoid threats related to investments into companies of strategic national importance, thus requiring a special government commission to screen investments in identified strategic sectors.

Other Investment Policy Reviews http://www.oecd.org/countries/lithuania/economic-survey-lithuania.htm 

http://www.oecd.org/countries/lithuania/economic-survey-lithuania.htm 

Business Facilitation

The process of company registration in Lithuania involves the following steps that can be accomplished online at http://www.registrucentras.lt/en/ :

1. Check and reserve the name of the company (limited liability company). It takes about one day and costs approximately $18.

2. Register at the Company Register, including registration with State Tax Inspectorate (the Lithuanian Revenue Authority) for corporate tax, VAT, and State Social Insurance Fund Board (SODRA). It takes one day and costs approximately $64.

3. Complete VAT registration. It takes three days to complete at no charge.

Outward Investment

The Lithuanian government neither incentivizes nor restricts outward investment.

6. Financial Sector

Capital Markets and Portfolio Investment

Government policies do not interfere with the free flow of financial resources or the allocation of credit. In 1994, Lithuania accepted the requirements of Article VIII of the Articles of Agreement of the International Monetary Fund to liberalize all current payments and to establish non-discriminatory currency agreements. Lithuania ensures the free movement of capital and does not plan to impose any restrictions. The government imposes no restrictions on credits related to commercial transactions or the provision of services, or on financial loans and credits. Non-residents may open accounts with commercial banks.

Money and Banking System

The banking system is stable, well-regulated, and conforms to EU standards. Currently there are 14 commercial banks holding a license from the Bank of Lithuania, nine foreign bank branches, two foreign bank representative offices, the Central Credit Union of Lithuania and 65 credit unions. Two hundred-eighty EU banks provide cross-border services in Lithuania without a branch operating in the country, and three financial institutions controlled by EU licensed foreign banks provide services without a branch. Nearly all foreign banks are headquartered in Sweden, Norway and Denmark. By the end of 2018 the total assets of major Lithuanian banks were $32.1 billion:

Swedbank – 32.9% (www.swedbank.lt )

SEB – 28.7% (www.seb.lt)

Luminor –20.8% (www.luminor.lt)

Other smaller banks:

Effective January 1, 2015, all of the banks are controlled by the European Central Bank and the Bank of Lithuania. There is no restriction on portfolio investment. The right of ownership to shares acquired through automatically matched trades is transferred on the third working day following the conclusion of the transaction. The Vilnius Stock Exchange is part of the OMX group of exchanges and offers access to 80 percent of all securities trading in the Nordic and Baltic marketplace. OMX is owned by the U.S. firm NASDAQ and the Dubai Bourse. The supervisory service at the Bank of Lithuania oversees commercial banks and credit unions, securities market, and insurance companies. Lithuanian law does not regulate hostile takeovers.

Foreign Exchange and Remittances

Foreign Exchange

Lithuania has no restrictions on foreign exchange.

Remittance Policies

Lithuanian remittance policies allow free and unrestricted transfers.

Sovereign Wealth Funds

Lithuania does not maintain any Sovereign Wealth Funds.

7. State-Owned Enterprises

At the beginning of 2019, the Lithuanian government was majority or full owner of 48 enterprises. Throughout 2017, the government consolidated many duplicative state-owned enterprises (SOEs) in response to OECD recommendations reducing the number of its companies from 130. The SOE sector is valued at approximately $5.8 billion and employs just over 42,000 people. The greatest number of SOEs by value are found in the electricity and gas sector (38%), followed by transportation (36%) and extractive industries including fishing, farming, and mining (21%). The transportation sector (which in Lithuania’s definition includes the postal service) accounts for over half of all SOE employment, followed by the electricity and gas sectors, which accounts for about one fifth. The largest SOE employers are Lithuanian Railways, Ignitis Group, and Lithuanian Post, which collectively employ over 23,000 people.

A list of SOEs is available at the Governance Coordination Center site: https://vkc.sipa.lt/apie-imones/vvi-sarasas/ 

In response to OECD recommendations issued during Lithuania’s accession process, the government passed several laws to reform SOE governance, addressing such issues as the hiring, firing, and oversight of top management, the introduction of independent board members to professionalize and depoliticize SOE boards and strengthen independent and pragmatic decision making, and a requirement for SOE CEOs to certify financial statements.

Privatization Program

The government has privatized most state enterprises and property, with foreign investors purchasing the majority of state assets privatized since 1990. These include companies in the banking and transportation sectors. Some foreign companies have complained about a lack of transparency or discrimination in certain privatization transactions. Major assets still under government control include the railway company (Lietuvos Gelezinkeliai), Lithuania’s three international airports (Vilnius, Kaunas, and Klaipeda), Lithuanian post (Lietuvos Pastas), as well as energy companies controlled by Ignitis Group holding company.

9. Corruption

A Eurobarometer survey on corruption conducted in 2017 showed that Lithuania lags behind other EU countries on scores concerning both perceptions and actual experience of corruption. Among the survey results: 93 percent of Lithuanian respondents said they think that corruption is widespread in Lithuania; 17 percent indicated that they were asked or expected to pay a bribe in the past 12 months; and 29 percent believe that the only way to succeed in business is to have political connections.

More than 50 governmental institutions regulate commerce in one way or another, creating opportunities for corrupt practices. Large foreign investors report few problems with corruption. On the contrary, most large investors report that high-level officials are often very helpful in solving problems fairly. In general, foreign investors say that corruption is not a significant obstacle to doing business in Lithuania and describe most of the bureaucrats they deal with in Lithuania as reasonable and fair. Small and medium enterprises (SMEs) perceive themselves as more vulnerable to petty bureaucrats and commonly complain about extortion. SMEs often complain that excessive red tape virtually requires the payment of “grease money” to obtain permits promptly. Business owners maintain that some government officials, on the other hand, view SMEs as likely tax-cheats and smugglers, and treat the owners and managers accordingly.

Paying or accepting a bribe is a criminal act. Lithuania established in 1997 the Special Investigation Service (Specialiuju Tyrimu Tarnyba) specifically to fight public sector corruption. The agency investigates approximately 100 cases of alleged corruption every year, but has yet to bring charges against high-level officials for corrupt practices. Lithuania ratified the UN Convention Against Corruption in December 2006. Transparency International (TI) also has a national chapter in Lithuania. TI ranked Lithuania 35th out of 180 in its 2019 Perceptions of Corruption Index with a score of 60 out of 100 (TI considers countries with a score below 50 to have serious problems with corruption.). Medical personnel, local government officials, among others, were cited by TI as prone to corruption.

Lithuania ratified the UN Anticorruption Convention in 2006 and acceded to the OECD Anti-Bribery Convention in 2017.

Resources to Report Corruption

Special Investigation Service
Jakšto g. 6, 01105 Vilnius, Lithuania
Tel: 370-5266333
Fax: 370-70663307
Email: pranesk@stt.lt

Transparency Internationa
Sergejus Muravjovas, Executive Director
Transparency International
Didžioji st. 5, LT–01128, Vilnius, Lithuania
Tel: 370 5 212 69 51
info@transparency.lt | skype: ti_lithuania

10. Political and Security Environment

Since its independence in 1991, Lithuania has not witnessed any incidents involving politically motivated damage to projects and/or installations.

Luxembourg

Executive Summary

Luxembourg, the only Grand Duchy in the world, is a landlocked country in northwestern Europe surrounded by Belgium, France, and Germany.  Despite its small landmass and small population (626,000), Luxembourg is the second-wealthiest country in the world when measured on a Gross Domestic Product (GDP) per capita basis.

Since 2002, the Luxembourg Government has proactively implemented policies and programs to support economic diversification and to attract foreign direct investment.  The Government focused on key innovative industries that showed promise for supporting economic growth: logistics, information, and communications technology (ICT), health technologies including biotechnology and biomedical research; clean energy technologies, and most recently, space technology and financial services technologies.

Prior to COVID pandemic, the economy had posted a GDP growth rate of 2.3%, higher than the EU average of 1.7%.  Given the economic impact of the COVID-19 pandemic, the Luxembourg government projects GDP to contract by 6% in 2020, with a projected rebound of 7% in 2021. Credit rating agencies Fitch and DBRS Morningstar confirmed Luxembourg’s “AAA” rating in September, with a stable outlook. Both agencies highlighted Luxembourg’s favorable position at the start of the crisis, made possible by implementing a prudent fiscal policy in recent years, thus enabling the government to react quickly to implement generous measures to support the economy.

Beyond  COVID, other factors that could impact growth include the possible introduction of a wealth tax and an inheritance tax. Although far from adopted, various officials have expressed support for the idea and it appears the Government will debate and consider the proposal.

Luxembourg continues to offer a diverse and stable platform and outsized growth potential for a wide variety of U.S. investments and trade within the EU and beyond. Although the full impact of COVID-19 has yet to be determined, Luxembourg remains a financial powerhouse as a result of the past exponential growth of the investment fund sector through the launch and development of cross-border funds (UCITS) in the 1990s.  Luxembourg is the world’s second-largest investment fund asset domicile, after only the United States, with approximately $5 trillion of assets in custody in financial institutions. This has been both an asset and a vulnerability. Foreign investors have taken full advantage. China has also.

Other factors enhancing Luxembourg’s investment climate include:

  • Luxembourg is consistently ranked as one of the world’s most open and transparent economies and has no restrictions on foreign ownership. Luxembourg is also consistently ranked as one of the world’s most competitive and least-corrupt economies.
  • Luxembourg ranks as the world’s safest city in the Mercer city index.
  • Over the past decade, Luxembourg has adopted major fiscal reforms to counter money-laundering, terrorist-financing, and tax evasion.

Luxembourg has not yet adopted national security screening of investments or meaningful cyber protections to meet the emerging risks of the digital economy.  However, as an EU member, it is expected to conform to the EU Framework on National Security Screening.

  • The Government of Luxembourg has actively supported the development of new sectors to diversify the country’s economy, given the dominance of the financial sector. Target sectors include space, logistics, and information technology, including financial technology and biomedicine.
  • Luxembourg launched its SpaceResources.lu initiative in 2016 and in 2017 announced a fund offering financial support for the space resources industry. More than 50 companies dedicated to space initiatives are now active in Luxembourg. Luxembourg added an additional space fund in early 2020 to further bolster its status as a space startup nation.
  • Luxembourg has positioned itself as “the gateway to Europe” to establish European company headquarter operations by virtue of its central European location and advanced road, railway, and air connectivity. Due to uncertainties related to Brexit and COVID-19, 50 insurers, asset managers and banking institutions decided pre-COVID-19 to re-locate their EU headquarters to Luxembourg or transfer a significant part of their activity to Luxembourg.
  • Luxembourg is actively seeking logistics companies to expand the new logistics hub at Luxembourg Airport, home to Cargolux, Europe’s largest all cargo airline. Inaugurated in 2017, the Luxembourg Intermodal Terminal (LIT) is ideally positioned as an international hub for the consolidation of multimodal transport flows across Europe and beyond. Renovations and expansion at the airport are underway
  • Luxembourg is also seeking ICT companies to use the existing high-security, state-of-the-art datacenters, affording high-speed internet connectivity to major international data hubs. Through various initiatives, Luxembourg has initiatives to attract financial technology and biomedical start-ups and small companies to make Luxembourg home.
Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2019 9 of 198 http://www.transparency.org/
research/cpi/overview
World Bank’s Doing Business Report 2019 72 of 190 http://www.doingbusiness.org/
en/rankings
Global Innovation Index 2019 18 of 129 https://www.globalinnovationindex.org/
analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2019 USD 766,099 http://apps.bea.gov/international/
factsheet/
World Bank GNI per capita 2019 USD 73,910 http://data.worldbank.org/
indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Luxembourg offers a public policy framework and political stability, which remain highly attractive for foreign investors, particularly for U.S. investors, given the focus on growth sectors and the historically strong bilateral relationship between the two countries.  The government has increased its outreach toward companies looking to expand in Europe. Luxembourg has been in the process of implementing the EU standards for the screening of foreign investment according to national security risk, to enter into force in the Fall of 2020. Unfortunately, high-risk Chinese investors have taken full advantage of the absence of national security screening, having established or purchased 8-9 banks including the International Bank of Luxembourg (BIL). In recent months, there are indications that the Chinese investors appear to be moving toward purchasing a number of sensitive space and technology companies .

In 2017, pre-COVID, Luxembourg’s Deputy Prime Minister and Minister of the Economy and Foreign Trade unveiled a strategy to promote economic growth focusing on attracting FDI and supporting companies’ moving into other markets.  The Luxembourg “Let’s Make It Happen” campaign, developed by the state Trade and Investment Board, focuses on five key objectives:

  • Improving Luxembourg-based companies’ access to international markets
  • Attracting FDI in a “targeted, service-oriented” way
  • Strengthening the country’s international “economic-promotion network”
  • Improving Luxembourg’s image as a “smart location” for high-performance business and industry
  • Ensuring the coherence of economic promotion efforts

There is no overall economic or industrial strategy that has discriminatory effects on foreign investors, either at a market-access or post-establishment phase of investment.  In fact, the opposite is true. Although legislation has been offered to address screening of national security risks, inadequate measures currently exist to protect existing and new investments from predatory Chinese infiltration efforts to mine sensitive data and technologies. Luxembourg strives to attract and retain foreign investors with its unique model of “easy-access to decision-makers” and its known ability to “act swiftly.”

The Trade and Investment Board has taken the lead in investment promotion and includes representatives from the ministries of Economy, Higher Education and Research, Finance, Foreign and European Affairs, and State.  Public-private trade associations such as FEDIL (Business Federation of Luxembourg, the main employers’ trade association), the Luxembourg Chamber of Commerce, and the Chamber of Skilled Trades and Crafts, as well as Luxinnovation, are also represented.

The Board is working in cooperation with Luxembourg embassies and trade and investment offices worldwide, as well as economic and commercial attachés, honorary consuls, and foreign trade advisers, to attract FDI and retain investors. In 2016, the Ministry of the Economy expanded the role of Luxinnovation to incorporate promotion of Luxembourg abroad and to attract FDI into the country.

In February 2020, DPM Schneider departed the government. The new Minister of the Economy, Franz Fayot, will share his priorities in the fall as shaped by the limitations imposed by the Coronavirus and the government’s broader priorities.

Limits on Foreign Control and Right to Private Ownership and Establishment

There is a right for foreign and domestic private entities to establish and own business enterprises and engage in all forms of remunerative activity.  There are no limits on foreign ownership or control, and there are no sector-specific restrictions.

General screening of foreign investment does exist in line with that of domestic investment, with routine and non-discriminatory screening mechanisms.  However, as noted above, inadequate screening devices exist to protect Luxembourg from Chinese predatory investment. There are no major sectors/matters in Luxembourg in which foreign investors are denied national (domestic) treatment.

Other Investment Policy Reviews

The World Bank’s Doing Business 2019 Economy Profile provides additional detail on Luxembourg’s investment climate.

Luxembourg is included in Trade Policy Reviews (TPRs) of the EU/EC; see the TPR gateway for explanations and background.

Business Facilitation

In terms of the United Nations Conference on Trade and Development (UNCTAD) Global Action Menu for Investment Facilitation, Luxembourg’s business facilitation efforts are aligned with most of the recommended action points.  Over the past decade, Luxembourg has been furthering accessibility and transparency in investment policies and regulations, as well as procedures relevant to investors.

The Government has improved the efficiency of investment administrative procedures, notably in the context of the overall “Digitization” movement to offer a multitude of government services online or electronically.  Pre-COVID, it took 2-3 months to register a business, depending on the complexity of the business itself. On a scale of 1 to 10, Luxembourg rates 6.5 in website registration clarity and completeness of instructions to register a limited liability company, according to the Global Enterprise Registration portal of the Global Entrepreneurship Network of UNCTAD.

The Government provides a website in multiple languages, including English, that explains the business registration process: http://www.guichet.public.lu/en .  A new business must register with the Registry of Commerce (Registre du Commerce: https://www.rcsl.lu/ .)  Foreign companies can use the site (after translating from the original French language), but it is best to consult with a local lawyer or fiduciary to complete the overall process.  It is necessary to engage a notary to submit the company’s by-laws for registration.

In 2017, the Government reduced the required minimum capitalization of a new company from 12,500 euro to just 1 euro (symbolic), to encourage start-up creation. Between January 2017 and January 2018, over 680 such simplified limited liability companies (Société à responsabilité limitée simplifiée SARL-S) have registered.  According to the Luxembourgish Chamber of Commerce, one client out of three has requested information on SARL-S.

After receiving a certificate from the Registry of Commerce, companies are required by law to register with and pay annual dues to the Luxembourg Chamber of Commerce (i.e. compulsory membership) , as well as the Social Security Administration, the Tax Administration (Administration des Contributions Directes) and the Value-Added-Tax Authority (TVA = taxe à la valeur ajoutée).  The company will receive an official registration number reflecting the date of inception of the entity, and this number will be used in all business transactions and correspondence with administrative authorities.

The House of Entrepreneurship, opened in 2016 within the Luxembourg Chamber of Commerce, also provides guidance on the entire registration and creation process of a business. In 2019, the House of Entrepreneurship was contacted 12,000 times.

The Ministry of Economy continues to support networks and associations acting in favor of female entrepreneurship. The Law of December 15, 2016 incorporated the principle of equal salaries in the Grand Duchy’s legislation, which makes illegal any difference in the salaries paid to men and women carrying out the same task or work of equal value. Notably, this has not yet translated into equality/parity of female ownership of businesses or the existence of females in leadership positions in major companies or employers.

In general, the most promising instruments, while outside the jurisdiction of the Ministry of Economy, are critical.  For example, there has been an increase in the number of childcare centers close to business districts which is helping dual career families better manage. And there have been major efforts on improving education and housing opportunities.

Outward Investment

The same government services website listed above, http://www.guichet.public.lu/en , includes an “International Trade” tab which provides guidance on outward investment by Luxembourgish companies on various topics including intra-EU trade and services; import, export, and transit; licensing; and transport.  The Luxembourg Government promotes outward investment via the Trade and Investment Board, which functions as a promotion entity for both inward and outward investment.

The “Let’s Make It Happen” initiative, among its many missions, is working to facilitate access to international markets for Luxembourgish companies and to strengthen Luxembourg’s international economic promotion network. Luxembourg does not restrict domestic investors from investing abroad.

6. Financial Sector

Capital Markets and Portfolio Investment

Luxembourg government policies, which reflect the European Union’s free movement of capital framework, facilitate the free flow of financial resources to support the product and factor markets.  Credit is allocated on market terms, and foreign investors can get credit on the local market, thanks to the sophisticated and extremely developed international financial sector, depending on the banks’ individual lending policies.

Since the financial crisis and tighter regulation through EU central banking authority and stability mechanisms, banks had become more selective in their lending practices pre-COVID.  The private sector has access to a variety of credit instruments, including those issued by the National Public Investment Agency (SNCI), and there is an effective regulatory system established to encourage and facilitate portfolio investment.

Luxembourg continues to be recognized as a model for fighting money-laundering activities within its banking system through the enactment of strict regulations and monitoring of fund sources. Indeed, the number of enforcements reflects the degree to which the government remains committed to fighting money-laundering.  The country has its own stock market, a sub-set of which was rebranded in 2016 as a “green exchange” to promote securities (primarily bonds in Luxembourg) reflecting ecologically sound investments.

Money and Banking System

Luxembourg’s banking system is sound and strong, having been shored up following the world financial crisis by emergency investments by the Government of Luxembourg in BGL BNP Paribas (formerly Banque Generale du Luxembourg and then Fortis) and in Banque Internationale a Luxembourg (BIL), formerly Dexia, in 2008.  Now, in response to COVID, the government has adopted initiatives to assure both liquidity and solvency of banks.

At the end of 2018, 127 credit institutions were operating, with total assets of EUR 900 billion during the first quarter of 2020 (USD 1,060 billion), and approximately 26,000 employees.

Luxembourg has a central bank, Banque Centrale de Luxembourg.  Foreign banks can establish operations, subject to the same regulations as Luxembourgish banks.

Due to the U.S. FATCA reporting requirements, local retail bank Raiffeisen refuses U.S. citizens as clients.  However, two banks have offered to serve U.S. citizen customers despite the additional reporting requirements: BIL and the State Bank and Savings Bank (Banque et Caisse d’Epargne de l’Etat).

On February 21, 2018, the Luxembourg House of Financial Technology (LHoFT) signed a Memorandum of Understanding (MoU) with the European FinTech platform, B-Hive, based in Brussels, and the Dutch Blockchain Coalition, that will favor collaboration in the field of distributed ledger technology, otherwise known as blockchain.  The MoU confirms mutual interest and defines the fields of collaboration, among other things, on how blockchain technology can benefit society and business in general or on how they can help define international and/or European standards for distributed ledger technology.

The Ministry of Finance is tracking developments very closely in the field of virtual currencies and has said it will adapt its legislation in accordance with the results of ongoing European and international studies. Luxembourg places virtual currencies under the legal regime of payment companies. The CSSF continues close supervision and oversight of virtual currencies.

Foreign Exchange and Remittances

Foreign Exchange

There are no restrictions on converting or transferring funds associated with an investment (including remittances of investment capital, earnings, loan repayments, lease payments) into a freely usable currency and at a legal market-clearing rate.  Luxembourg was an original proponent of the euro currency and adopted it immediately at inception as part of the 1999 “Eurozone” that replaced their former domestic currencies.  The European Central Bank is the authority in charge of the euro currency. Pre-COVID, Luxembourg had taken steps to move toward a “cashless” economy.

Remittance Policies

There have not been any recent changes to remittance policies with respect to access to foreign exchange for investment remittances.  There is no difficulty in obtaining foreign exchange, which has been freely traded since the 1960s, and the Luxembourg stock market trades in forty different currencies, is truly international and expanding rapidly.

An average 24-hour delay period is currently in effect for remitting investment returns such as dividends, return of capital, interest and principal on private foreign debt, lease payments, royalties and management fees through normal, legal channels. Investors can remit through a legal parallel market including one utilizing cash and convertible negotiable instruments (such as dollar-denominated host government bonds issued in lieu of immediate payments in dollars).  There is no limitation on the inflow or outflow of funds for remittances of profits, debt service, capital, capital gains, returns on intellectual property, or imported inputs.

Sovereign Wealth Funds

Luxembourg created a sovereign wealth fund in 2014. The fund is under the auspices of the Ministry of Finance and operates with 234 million euros of assets. Until the fund reaches 250 million euros of assets, it operates a conservative investment policy, with a portfolio of 57% of bonds, 40% of stocks and 3% of liquidities. The sovereign wealth fund only invests outside of Luxembourg and is audited by an independent audit company.

7. State-Owned Enterprises

The most prominent state-owned enterprise (SOE) in Luxembourg is POST (formerly P&T, postal and telecommunications), whose sole shareholder is the government of Luxembourg and whose board of directors is composed of civil servants.  POST responded to the competition created by private players in the market (Orange, Proximus) by transforming itself from a passive utility company into a commercial enterprise, recruiting from the corporate sector, and improving consumer products and services.  POST also publishes an annual report and communicates in a similar manner to a private company.

Another sector in which SOEs have been very active is the energy sector (electric and gas utilities), which is now liberalized as well.  Anyone can become a provider or distributor (via networks) of electricity and gas.  The former state electricity utility, Cegedel, was absorbed into a private company, Encevo, along with a nearby German utility and the former state gas utility, with an independent board of directors.  Creos, the new distribution network for energy, is jointly held by the government and private shareholders.

Finally, an important market which does retain barriers to entry is freight air transport, due to the dominance of the majority state-owned Cargolux. It is the largest consumer of U.S. production in Luxembourg in terms of value, owing to its all-Boeing fleet of 27 747-freighter aircraft (including 14 of the new-generation 747-8F, of which Cargolux was a launch customer). It received a capital increase from the Luxembourg government in return for a larger state ownership share of the company.

China has invested in Cargolux, with a Chinese regional fund currently holding approximately one-third of the shares.  Cargolux has aggressively expanded in China.

Private enterprises can compete with public enterprises in Luxembourg under the same terms and conditions in all respects.  All markets are now open or have been liberalized via EU directives to encourage market competition over monopolistic entities.  There is a national regulator (National Institute of Regulation), which sets forth regulations and standards for economic sectors, mostly derived from EU directives transposed into local law.  While markets continue to open, the government has maintained a large enough stake in critical sectors such as energy, to ensure national security.

OECD Guidelines on Corporate Governance of SOEs

Luxembourg is an OECD member with established practices consistent with OECD guidelines as far as SOEs are concerned.  There is no centralized ownership entity that exercises ownership rights for each of the SOEs.

In general, if the government has a share in an enterprise, government officials will receive board of directors’ seats on a comparable basis to other shareholders and in proportion to their share, with no formal management reporting directly to a line minister.

Court processes with regard to SOEs are transparent and non-discriminatory.

Privatization Program

Foreign investors can participate equally in ongoing privatization programs, and the bidding process is transparent with no barriers erected against foreign investors at the time of the initial investment or after the investment is made.  Moreover, there are no laws or regulations specifically authorizing private firms to adopt articles of incorporation or association, which limit or prohibit foreign investment, participation, or control, and there are no other practices by private firms to force local ownership or restrict foreign investment, participation in, or control of domestic enterprises.  There has been no evidence to suggest that potential conflicts of interest. Government officials sitting on boards of directors do not appear to have impacted freedom of investment in the private sector.

9. Corruption

Regulations are enforced by the strong but flexible Financial Sector Surveillance Commission (CSSF, which is equivalent to the U.S. Securities and Exchange Commission). U.S. firms have not identified corruption as an obstacle to FDI in Luxembourg.  There are no known areas or sectors where corruption is pervasive, whether in Government procurement, transfers, performance requirements, dispute settlement, regulatory system, or taxation.

Giving or accepting a bribe, including between a local company and a public official, is a criminal act subject to the penal code. Recently, a mayor was implicated in abusing his office for personal purposes.  Senior Government officials take anti-corruption efforts seriously.  International, regional, or local nongovernmental watchdog organizations do not operate in the country, given the low risk.

Luxembourg has laws, regulations, and penalties to combat corruption effectively, and they are enforced impartially with no disproportionate attention to foreign investors or any other group.  The country ranks very favorably on the World Bank’s corruption index.

Luxembourg has made anti-money laundering and suppression of terrorism financing a priority, given its status as a leading world financial center.  The government has taken the lead in freezing bank accounts suspected of being connected to terrorist networks, and since 2004 extended the law against money-laundering and terrorist financing to additional professional groups (including auditors, accountants, attorneys, and notaries).

On February 14, 2018, a new law implementing a substantial part of the fourth anti-money laundering (AML) directive was published in the Official Journal of Luxembourg.    Local police, responsible for combating corruption, also work closely with neighboring countries’ law enforcement officials, as well as with Interpol and Europol.

UN Anticorruption Convention, OECD Convention on Combatting Bribery

Luxembourg signed and ratified the UN Anticorruption Convention (signed December 2003 and ratified in November 2007).

Luxembourg is a party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions

Resources to Report Corruption

The Contacts at government agency or agencies are responsible for combating corruption are:

Director of Criminal and Judicial Affairs
Ministry of Justice
13 rue Erasme
L-1468 Luxembourg
Telephone: +352 247 84537
info@mj.etat.lu

Contact at “watchdog” organization

D. GOEDERT
Section Chief
Financial Sector Surveillance Commission (CSSF)
283, route d’Arlon L-1150 Luxembourg
+352 26 251 2217
EMAIL ADDRESS compta@cssf.lu / audit@cssf.lu

10. Political and Security Environment

Luxembourg has consistently ranked among the most politically stable and overall safest countries in the world.  There have been no recent incidents involving politically motivated damage to projects or installations.  The environment is not growing more politicized such that civil disturbances would be likely.

Of note,  many of the demonstrations which do occur in Luxembourg are not aimed at the Grand Duchy, but rather at the EU offices located within Luxembourg (for example, the European Court of Justice and periodic European ministerial meetings).  There are no known nascent insurrections, belligerent neighbors, or other politically motivated activities.

In response to the May 25, 2020 death of George Floyd in the United States, there was a protest of approximately 1,500 people outside the U.S. Embassy. It was peaceful and without incident.

Switzerland and Liechtenstein

Executive Summary

Switzerland is welcoming to international investors, with a positive overall investment climate. The Swiss federal government enacts laws and regulations governing corporate structure, the financial system, and immigration, and concludes international trade and investment treaties.  However, Switzerland’s 26 cantons (analogous to U.S. states) and largest municipalities have significant independence to shape investment policies locally, including incentives to attract investment.  This federal approach has helped the Swiss maintain long-term economic and political stability, a transparent legal system, extensive and reliable infrastructure, efficient capital markets, and an excellent quality of life for the country’s 8.4 million inhabitants.  Many U.S. firms base their European or regional headquarters in Switzerland, drawn to the country’s low corporate tax rates, productive and multilingual workforce, and well-maintained infrastructure and transportation networks.  U.S. companies also choose Switzerland as a gateway to markets in Eastern Europe, the Middle East, and beyond.  Furthermore, U.S. companies select Switzerland because hiring and firing practices are less restrictive than in other European locations, and due to the availability of a skilled workforce.

In 2019, the World Economic Forum rated Switzerland the world’s fifth most competitive economy.  This high ranking reflects the country’s sound institutional environment and high levels of technological and scientific research and development.  With very few exceptions, Switzerland welcomes foreign investment, accords national treatment, and does not impose, facilitate, or allow barriers to trade.  According to the OECD, Swiss public administration ranks high globally in output efficiency and enjoys the highest public confidence of any national government in the OECD.  Switzerland’s judiciary system posts the shortest trial length of any of the OECD’s 37 member countries.  The country’s competitive economy and openness to investment brought Switzerland’s cumulative inward direct investment to USD 1.3 trillion in 2018 (latest available figures) according to the Swiss National Bank, although nearly half of this amount is invested in regional hubs or headquarters that further invest in other countries.

Many of Switzerland’s cantons have used tax incentives to attract investment to their jurisdictions, including tax waivers for new firms for up to ten years in some cases.  However, following criticism from the European Union – as a bloc, Switzerland’s top trading partner – this practice was strongly curtailed by a new law passed in 2019.  The Federal Act on Tax Reform and Swiss Pension System Financing (TRAF) entered into force on January 1, 2020, obliging cantons to offer the same corporate tax rates to both Swiss and foreign companies.  However, the law allows cantons to continue to set their own cantonal rates and offer incentives for corporate investment through deductions and preferential tax treatment, for example for income derived from patents or expenses related to research and development.

Individual and corporate tax rates vary widely across Switzerland’s cantons.  In 2019, Zurich, which is sometimes used as a reference point for corporate location tax calculations within Switzerland, had a combined corporate tax rate of 21.15 percent, which includes municipal, cantonal, and federal tax. The effective tax rate in Zurich was expected to fall to 19.7 percent in 2020, according to PricewaterhouseCoopers.  The United States and Switzerland have a bilateral tax treaty, for which a new protocol on information sharing was ratified in 2019.

Key sectors that have attracted significant investments in Switzerland include IT, precision engineering, scientific instruments, pharmaceuticals, medical technology, and machine building.  Switzerland hosts a significant number of startups, including a sizeable ecosystem for companies in blockchain and distributed ledger technologies.

Switzerland is a highly innovative economy with strong overall intellectual property protection.  Switzerland enforces intellectual property rights linked to patents and trademarks effectively, and new amendments to the country’s Copyright Act to strengthen online copyright enforcement led to Switzerland’s removal from USTR’s Special 301 Watch List in 2020.

Some formerly public Swiss monopolies continue to retain market dominance despite partial or full privatization.  As a result, foreign investors sometimes find it difficult to enter these markets (e.g. telecommunications, certain types of public transportation, postal services, alcohol and spirits, aerospace and defense, certain types of insurances and banking services, and salt).  The Swiss agricultural sector remains protected and heavily subsidized, with direct subsidy payments comprising two-thirds of an average farm’s profits.  However, this is starting to change: newly negotiated trade agreements, including between the European Free Trade Association (of which Switzerland is a member) and Mercosur, contain provisions which would open Swiss markets to new levels of agricultural imports.

Liechtenstein

Liechtenstein’s investment conditions are identical in most key aspects to those in Switzerland, due to its integration into the Swiss economy.  The two countries form a customs union and Swiss authorities are responsible for implementing import and export regulations.

Both Liechtenstein and Switzerland are members of the European Free Trade Association (EFTA, including Iceland and Norway), an intergovernmental trade organization and free trade area that operates in parallel with the European Union (EU).  Liechtenstein participates in the EU single market through the European Economic Area (EEA), unlike Switzerland, which has opted for a set of bilateral agreements with the EU instead.

Liechtenstein has a stable and open economy employing 39,653 people (2018 – latest figures available), exceeding its domestic population of 39,137 (2018) and requiring a substantial number of foreign workers.  In 2018, 70.4 percent of the Liechtenstein workforce were foreigners, mainly Swiss, Austrians and Germans, most of whom commute daily to Liechtenstein.  Liechtenstein was granted an exception to the EU’s Free Movement of People Agreement, enabling the country not to grant residence permits to its workers.

Liechtenstein is one of the world’s wealthiest countries.  Liechtenstein’s gross domestic product per capita (at current USD) amounted to USD 179,258 in 2018.  According to the Liechtenstein Statistical Yearbook, the services sector, particularly in finance, accounts for three-fifths of Liechtenstein’s jobs, followed by the manufacturing sector (particularly mechanical engineering, machine tools, precision instruments, and dental products), which employs nearly 40 percent of the workforce.  Agriculture accounts for less than 1 percent of the country’s employment.

Liechtenstein’s corporate tax rate, at 12.5 percent, is one of the lowest in Europe.  Capital gains, inheritance, and gift taxes have been abolished.  The Embassy has no recorded complaints from U.S. investors stemming from market restrictions in Liechtenstein.  The United States and Liechtenstein do not have a bilateral income tax treaty.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2019 4 of 180 http://www.transparency.org/
research/cpi/overview
World Bank’s Doing Business Report 2019 36 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2019 1 of 129 https://www.globalinnovationindex.org/
analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2018 USD 278,044 https://www.bea.gov/data/intl-trade-investment/direct-investment-country-and-industry
World Bank GNI per capita 2018 USD 84,410 http://data.worldbank.org/
indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

With the exception of its agricultural sector, foreign investment into Switzerland is generally not hampered by significant barriers, with no reported discrimination against foreign investors or foreign-owned investments.  Incidents of trade discrimination do exist, for example with regards to agricultural goods such as bovine genetics products.

A Swiss government-affiliated non-profit organization, Switzerland Global Enterprise (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.  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 freely establish, acquire, and dispose of interests in business enterprises in Switzerland.  Switzerland does not maintain an investment screening mechanism for inbound foreign investment; the Federal Assembly instructed the Federal Council to prepare one in March 2020, a process expected to take two years.  There are some investment restrictions in areas under state monopolies, including certain types of public transportation, postal services, alcohol and spirits, aerospace and defense, certain types of insurance and banking services, and the trade in salt.  Restrictions (in the form of domicile requirements) also exist in air and maritime transport, hydroelectric and nuclear power, operation of oil and gas pipelines, and the transportation of explosive materials.  Additionally, the following legal restrictions apply within Switzerland:

Corporate boards: 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 company shares can be controlled by foreigners.  The establishment of a commercial presence by persons or enterprises without legal status under Swiss law requires a cantonal establishment authorization.  These requirements do not generally pose a major hardship or impediment for U.S. investors.

Hostile takeovers: Swiss corporate equity can be issued in the form of either registered shares (in the name of the holder) or bearer shares.  Provided the shares are not listed on a stock exchange, Swiss companies may, in their articles of incorporation, impose certain restrictions on the transfer of registered shares to prevent hostile takeovers by foreign or domestic companies (article 685a of the Code of Obligations).  Hostile takeovers can also be annulled by public companies under certain circumstances; the company must cite in its statutes significant justification (relevant to the survival, conduct, and purpose of 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 that do not want to be taken over by a hostile bidder, but such opt-outs must be approved by a super-majority of shareholders, and must take place well in advance of any takeover attempt.

Banking: Those wishing to establish banking operations in Switzerland must obtain prior approval from the Swiss Financial Market Supervisory Authority (FINMA), a largely independent agency administered under the Swiss Federal Department of Finance.  FINMA promotes confidence in financial markets and works to protect customers, creditors, and investors.  FINMA approval of bank operations is generally granted if the following conditions are met: reciprocity on the part of the foreign state; the foreign bank’s name must not give the impression that the bank is Swiss; the bank must adhere to Swiss monetary and credit policy; and a majority of the bank’s management must have their permanent residence in Switzerland.  Otherwise, foreign banks are subject to the same regulatory requirements as domestic banks.

Banks organized under Swiss law must inform FINMA before they open a branch, subsidiary, or representation abroad.  Foreign or domestic investors must inform FINMA before acquiring or disposing of a qualified majority of shares of a bank organized under Swiss law.  If exceptional temporary capital outflows threaten 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.  Government deposit insurance of individual current accounts held in Swiss banks is limited to CHF 100,000 per client per bank.

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 

Business Facilitation

The Swiss government-affiliated non-profit organization Switzerland Global Enterprise (SGE) has a mandate to attract foreign business to Switzerland on behalf of the Swiss Confederation.  SGE promotes Switzerland as an economic hub and fosters exports, imports, and investments.  Larger regional offices include the Greater Geneva-Berne Area (which covers large parts of Western Switzerland), the Greater Zurich Area, and the Basel Area.  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:

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.

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 2020 ranks Switzerland 36th in the ease of doing business among the 190 countries surveyed, and 81st 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.

6. Financial Sector

Capital Markets and Portfolio Investment

The Swiss government’s attitude toward foreign portfolio investment and market structures is positive, resulting in high global rankings by many indices.

The SIX Swiss stock exchange based in Zurich is one of the top stock markets worldwide based on market capitalization.

Money and Banking System

Switzerland is home to a sophisticated banking system that provides a high degree of service to both foreign and domestic entities.  Switzerland also has an effective regulatory system that encourages and facilitates portfolio investment.  The Swiss Bankers Association (SBA), a trade association of almost 300 member financial institutions, estimated that Switzerland’s banking sector managed assets amounting to approximately USD 7 trillion in 2018, almost half of which come from abroad.  The largest banks, UBS and Credit Suisse, have total assets of approximately USD 1 trillion and USD 800 million, respectively, while Raiffeisen Switzerland holds about USD 230 billion and Zurich Cantonal Bank holds roughly USD 170 billion.  Switzerland also maintains an independent central bank – the Swiss National Bank (SNB).

U.S. citizens who are resident in Switzerland may face difficulties in opening bank accounts at smaller Swiss banks as a result of the administrative costs of complying with additional regulatory and administrative procedures required for U.S. related person accounts under accepted disclosure rules.

The Swiss government created a blockchain task force in January 2018 to foster cooperation between the traditional banking sector and the nascent industry and to discuss potential legal and regulatory reforms to attract blockchain technologies while maintaining anti-money laundering controls.  In December 2018, the Swiss government endorsed a report on the legal framework for blockchain and distributed ledger technology (DLT) in the financial sector, with the goal of creating favorable conditions for Switzerland to evolve as a leading location for fintech and DLT companies.  In March 2019, the Swiss government-initiated consultations on adapting federal legislation to recent developments in DLT, and following these consultations sent a draft law to parliament in November 2019.  The law will be discussed by parliament over the course of 2020.

Several associations provide information about Swiss banks that offer services to U.S. clients.  For more information, see the following page at the U.S. Embassy Bern website:

Foreign Exchange and Remittances

Foreign Exchange

In January 2015 the Swiss National Bank (SNB) abandoned the Swiss franc’s euro peg (CHF 1.20 / EUR).  In the wake of the SNB’s announcement, the franc increased over 30 percent in value against the euro.  Perceived as a “safe haven” currency, the franc often strengthens during times of economic downturn or crisis.  As of May 2020, the franc traded at just over CHF 1.05 / EUR, and just over CHF 0.97 / USD.

Since 2015, the SNB has attempted to prevent further strengthening of the Swiss franc by instituting a negative interest rate for commercial bank deposits at the SNB, currently -0.75 percent, while continuing an expansionary monetary policy through intervention in the foreign currency market.  With the onset of the COVID-19 crisis in March 2020, the SNB assessed that the Swiss franc was “even more highly valued,” as compared to a previous assessment of “highly valued.”  The SNB announced it would implement loose monetary policies and stronger foreign currency interventions to stabilize the situation.  The strength of the franc lowers effective prices of imports to Switzerland, but also harms Swiss competitiveness as an export-oriented economy.

Remittance Policies

There are currently no restrictions on converting, repatriating, or transferring funds associated with an investment (including remittances of capital, earnings, loan repayments, lease payments, royalties) into a freely usable currency at the legal market clearing rate.

Sovereign Wealth Funds

Switzerland does not have a sovereign wealth fund or an asset management bureau.

7. State-Owned Enterprises

The Swiss Confederation is the largest or sole shareholder in Switzerland’s five state-owned enterprises (SOEs), active in the areas of ground transportation (SBB), information and communication (Swiss Post, Swisscom), defense (RUAG, which was divided into two companies in January – see below), and aviation / air traffic control (Skyguide).  These companies are typically responsible for “public function mandates,” but may also cover commercial activities (e.g., Swisscom in the area of telecommunications).

SOEs typically have commercial relationships with private industry.  Private sector competitors can compete with SOEs under the same terms and conditions with respect to access to markets, credit, and other business operations.  Additional publicly owned enterprises are controlled by the cantons in the areas of energy, water supply, and a number of subsectors.  SOEs and canton-owned companies may benefit from exclusive rights and privileges (some of which are listed in Table A 3.2 of the WTO Trade Policy Review – https://www.wto.org/english/tratop_e/tpr_e/tp455_e.htm ).

Switzerland is a party to the WTO Government Procurement Agreement (GPA).  Some areas are partly or fully exempted from the GPA, such as the management of drinking water, energy, transportation, telecommunications, and defense.  Private companies may encounter difficulties gaining business in these exempted sectors.

Privatization Program

In the aftermath of a 2016 cyberattack, the Federal Council reviewed RUAG’s structure in light of cybersecurity concerns for the Swiss military, and decided in June 2018 to split the company. Swiss defense and aerospace company RUAG was split into two holding companies as of January 1, 2020.  One, MRO Switzerland, will remain state-owned and provide essential technology and systems support to the Swiss military.  The other, RUAG International, includes non-armaments aviation and aerospace businesses, and will be fully privatized in the medium term, according to the Swiss government.

9. Corruption

Swiss law provides for criminal penalties, including imprisonment for up to five years, for official corruption, and the government generally implements these laws effectively.  Switzerland is ranked 4th of 180 countries in Transparency International’s Corruption Perceptions Index, reflecting low perceptions of corruption in society.  Under Swiss law, officials are not to accept anything that would “challenge their independence and capacity to act.”  The bribery of public officials is governed by the Swiss Criminal Code (Art. 322), while the bribery of private individuals is governed by the Federal Law Against Unfair Competition.  The law defines as granting an “undue advantage” either in exchange for a specific act, or in some cases for future behavior not related to a specific act.  Some officials may receive small gifts valued at no more than CHF 200 or CHF 300 for an entire year, which are not seen as “undue.” However, officials in some fields, such as financial regulators, may receive no advantages at all.  Transparency International has recommended that at the federal level a maximum sum should be set.

Investigating and prosecuting government corruption is a federal responsibility.  A majority of cantons requires members of cantonal parliaments to disclose their interests.  A joint working group comprising representatives of various federal government agencies works under the leadership of the Federal Department of Foreign Affairs to combat corruption.  Some multinational companies have set up internal hotlines to enable staff to report problems anonymously.

In 2009, Switzerland ratified the United Nations Convention against Corruption.  The Swiss government experts believe this ratification did not result in significant domestic changes, since passive and active corruption of public servants was already considered a crime under the Swiss Criminal Code.

A review by the Council of Europe’s Group of States against Corruption (GRECO) in 2017 recommended the adoption of a code of ethics/conduct, together with awareness-raising measures, for members of the federal parliament, judges, and the Office of the Attorney General (OAG) to avoid conflict of interests.  These measures needed to be accompanied by a reinforced monitoring of members of parliament’s compliance with their obligations.  In March 2018, the OECD Working Group on Bribery in International Business Transactions recommended that Switzerland adopt an appropriate legal framework to protect private sector whistleblowers from discrimination and disciplinary action, to ensure that sanctions imposed for foreign bribery against natural and legal persons are effective, proportionate, and dissuasive, and to ensure broader and more systematic publication of concluded foreign bribery cases.  The OECD Working Group positively highlighted Switzerland’s proactive policy on seizure and confiscation, its active involvement in mutual legal assistance, and its role as a promoter of cooperation in field of foreign bribery.  Regarding detection, the OECD Working Group commended the key role played by the Swiss Financial Intelligence Unit (MROS) in detecting foreign bribery.

A number of Swiss federal administrative authorities are involved in combating bribery.  The Swiss State Secretariat for Economic Affairs (SECO) deals with issues relating to the OECD Convention.  The Federal Office of Justice deals with those relating to the Council of Europe Convention, while the Federal Department of Foreign Affairs (MFA) deals with the UN Convention.  The power to prosecute and judge corruption offenses is shared between the relevant Swiss canton and the Swiss federal government.  For the federal government, the competent authorities are the Office of the Attorney General, the Federal Criminal Court, and the Federal Police.  In the cantons, the relevant actors are the cantonal judicial authorities and the cantonal police forces.

UN Anticorruption Convention, OECD Convention on Combatting Bribery

In 2001, Switzerland signed the Council of Europe’s Criminal Law Convention on Corruption.  In 1997, Switzerland signed the OECD Anti-Bribery Convention, which entered into force in 2000.  Switzerland signed the UN Convention against Corruption in 2003.  Switzerland ratified the UN Anticorruption Convention in 2009.

In order to implement the Council of Europe convention, the Swiss parliament amended the Penal Code to make bribery of foreign public officials a federal offense (Title Nineteen “Bribery”); these amendments entered into force in 2000.  In accordance with the revised 1997 OECD Anti-Bribery Convention, the Swiss parliament amended legislation on direct taxes of the Confederation, cantons, and townships to prohibit the tax deductibility of bribes; these amendments became effective on in 2001.

Switzerland maintains an effective legal and policy framework to combat domestic corruption.  U.S. firms investing in Switzerland have not raised with the Embassy any corruption concerns in recent years.

Resources to Report Corruption

Government Agency Contact:

Michel Huissoud
Director
Swiss Federal Audit Office
Monbijoustrasse 45
3003 Bern / Switzerland
Ph. +41 58 463 10 35
Messages can be submitted via https://www.bkms-system.ch/bkwebanon/report/clientInfo?cin=5efk11 

“Watchdog” Organization Contact:

Martin Hilti
Executive Director
Transparency International Switzerland
Schanzeneckstrasse 25
P.O. Box 8509
3001 Bern / Switzerland
Ph. +41 31 382 3550
E-Mail: info@transparency.ch

10. Political and Security Environment

There is minimal risk from civil unrest in Switzerland. Protests do occur in Switzerland, but authorities monitor protest activities. Urban areas regularly experience demonstrations, mostly on global trade and political issues, and some occasionally sparked by U.S. foreign policy.  Protests held during the annual World Economic Forum (WEF) occasionally draws protestors from several countries in Europe.  Historically, demonstrations have been peaceful, with protestors registering for police permits. Protestors have blocked traffic; spray-painted areas with graffiti, and on rare occasions, clashed with police. Political extremist or anarchist groups sometimes instigate civil unrest.  Right-wing activists have targeted refugees/asylum seekers/foreigners, while left-wing activists (who historically have demonstrated a greater propensity toward violence) usually target organizations involved with globalization, alleged fascism, and alleged police repression.  Swiss police have at their disposal tear gas and water cannons, which are rarely used.