Policies toward Foreign Direct Investment

The flotation of the EGP in November 2016 and the restart of Egypt’s interbank foreign exchange FX market as part of the IMF program was a first step in restoring investor confidence that immediately attracted increased portfolio investment and should lead to increased FDI over the long term.  The stable macro-economic outlook has allowed Egypt to focus on structural reforms to support strong economic growth. The next phase of reform has included a new investment law, an industrial licensing law, a bankruptcy law and other reforms to reduce regulatory overhang and improve the ease of doing business.  Successful implementation of these reforms could give greater confidence to foreign investors. Egypt’s government has announced plans to further improve its business climate through investment promotion, facilitation, efficient business services, and advocacy of more investor friendly policies.

With a few exceptions, Egypt does not legally discriminate between Egyptian nationals and foreigners in the formation and operation of private companies.  The 1997 Investment Incentives Law was designed to encourage domestic and foreign investment in targeted economic sectors and to promote decentralization of industry away from the Nile Valley.  The law allows 100 percent foreign ownership of investment projects and guarantees the right to remit income earned in Egypt and to repatriate capital.

The new Tenders Law No. 182 of 2018 requires the government to consider both price and best value in awarding contracts and to issue an explanation following refusal of a bid.  Nevertheless, the law contains preferences for Egyptian domestic contractors, who are accorded priority if their bids do not exceed the lowest foreign bid by more than 15 percent. Additionally the new law includes a wide range of reforms, such as establishing new rules in the contracting process on good governance, sustainable development goals, transparency, competition, equal opportunity, and an improved business environment.  Egyptian small- and medium-sized enterprises (SMEs) have the right under the new law to obtain up to 20 percent annually of the Government’s contracts. This aims to achieve a positive return on investment of public expenditures, along with controls to combat corruption.

The Capital Markets Law (Law 95 of 1992) and its amendments, including the most recent in February 2018, and related regulations govern Egypt’s capital markets.  Foreign investors are permitted to buy shares on the Egyptian Stock Exchange on the same basis as local investors.

The General Authority for Investment and Free Zones (GAFI) is an affiliate of the Ministry of Investment and International Cooperation (MIIC) and the principal government body regulating and facilitating investment in Egypt. ”The Investor Service Center (ISC)” is an administrative unit established within GAFI that provides ”one-stop-shop” services, easing the way for global investors looking for opportunities presented by Egypt’s domestic economy and the nation’s competitive advantages as an export hub for Europe, the Arab world, and Africa.

ISC provides a full start-to-end service to investors, including assistance related to company incorporation, establishment of company branches, approval of minutes of Board of Directors and General Assemblies, increase of capital, change of activity, liquidation procedures, and other corporate-related matters.  The Center also aims to issue licenses, approvals, and permits required for investment activities, within 60 days from the date of request submissions. Other services GAFI provides include:

• Advice and support to help in the evaluation of Egypt as a potential investment location;
• Identification of suitable locations and site selection options within Egypt;
• Assistance in identifying suitable Egyptian partners;
• Aftercare and dispute settlement services.​

ISC Branches are expected to be established in all Egyptian governorates.  Egypt maintains ongoing communication with investors through formal business roundtables, investment promotion events (conferences and seminars), and one-on-one investment meetings

Limits on Foreign Control and Right to Private Ownership and Establishment

The Egyptian Companies Law does not set any limitation on the number of foreigners, neither as shareholders nor as managers or board members, except for Limited Liability Companies where the only restriction is that one of the managers should be an Egyptian national.  In addition, companies are required to obtain a commercial and tax license, and pass a security clearance process. Companies are able to operate while undergoing the often lengthy security screening process. Nevertheless, if the firm is rejected, it must cease operations and undergo a lengthy appeals process.  Businesses have cited instances where Egyptian clients were hesitant to conclude long term business contracts with foreign firms that have yet to receive a security clearance. They have also expressed concern about seemingly arbitrary refusals, a lack of explanation when a security clearance is not issued, and the lengthy appeals process.  Although the GoE has made progress in streamlining the business registration process at GAFI, its apparent overall lack of familiarity or experience of Egyptians working closely with foreign nationals has sometimes led to inconsistent and questionable treatment by banks and government officials, thus, delaying registration.

Sector-specific limitations to investment include restrictions on foreign shareholding of companies owning lands in the Sinai Peninsula.  Likewise, the Import-Export Law requires companies wishing to register in the Import Registry to be 51 percent owned and managed by Egyptians.  In 2016, the Ministry of Trade prepared an amendment to the law allowing the registration of importing companies owned by foreign shareholders, but, as of April 2019, the law had not yet been submitted to Parliament.  Nevertheless, the new Investment Law does allow wholly foreign companies, which invest in Egypt to import goods and materials.

Land/Real Estate Law 15 of 1963 explicitly prohibits foreign individual or corporation ownership of agricultural land (defined as traditional agricultural land in the Nile Valley, Delta and Oases).  The ownership of land by foreigners is governed by three laws: Law No. 15 of 1963, Law No. 143 of 1981, and Law No. 230 of 1996.  Law No. 15 stipulates that no foreigners, whether natural or juristic persons, may acquire agricultural land.  Law No. 143 governs the acquisition and ownership of desert land. Certain limits are placed on the number of feddans (one feddan is equal to approximately one hectare) that may be owned by individuals, families, cooperatives, partnerships and corporations.  Partnerships are permitted to own 10,000 feddans. Joint stock companies are permitted to own 50,000 feddans.

Under Law No. 230 non-Egyptians are allowed to own real estate (vacant or built) only under the following conditions:

• Ownership is limited to two real estate properties in Egypt that serve as accommodation for the owner and his family (spouses and minors), in addition to the right to own real estate needed for activities licensed by the Egyptian Government.
• The area of each real estate property does not exceed 4,000 m².
• The real estate is not considered a historical site.

Exemption from the first and second conditions is subject to the approval of the Prime Minister. Ownership in tourist areas and new communities is subject to conditions established by the Cabinet of Ministers.  Non-Egyptians owning vacant real estate in Egypt must build within a period of five years from the date their ownership is registered by a notary public. Non-Egyptians cannot sell their real estate for five years after registration of ownership, unless the consent of the Prime Minister for an exemption is obtained.  http://www.gafi.gov.eg/English/StartaBusiness/Laws-and-  Regulations/Pages/BusinessLaws.aspx  

Other Investment Policy Reviews

The Organization for Economic Cooperation and Development (OECD) signed a declaration with Egypt on International Investment and Multinational Enterprises on July 11, 2007, at which time Egypt became the first Arab and African country to sign the OECD Declaration, marking a new stage in Egypt’s drive to attract more FDI.

The United Nations Conference of Trade Development (UNCTAD) signed in an Investment Policy Review with Egypt in June 1999 that recognized the efforts that the GoE had made to establish an adequate investment regulatory framework and improve the business environment.

The UNCTAD Review pointed out that overcoming the limited involvement of multinational companies in manufacturing sectors with export potential such as food, garments, and electronics, would require policy emphasis on infrastructure investments, promotion of  clusters of related enterprises, and self-sustaining development. Since the publication of its policy review on Egypt, UNCTAD has assisted the government with training diplomats on investment trends, policies, and promotion, and staff on FDI statistics.

Business Facilitation

GAFI’s new ISC was launched in February 2018 at a ceremony attended by President Sisi. The ISC provides a full start-to-end service to the investor as described above.  The new Investment Law also introduces ”Ratification Offices” to facilitate the obtaining of necessary approvals, permits, and licenses within 10 days of issuing a Ratification Certificate.

Investors may fulfill the technical requirements of obtaining the required licenses through these Ratification Offices, directly through the concerned authority, or through its representatives at the Investment Window at GAFI.  The Investor Service Center is required to issue licenses within 60 days from submission. Companies can also register online. MIIC and GAFI have also launched e-establishment, e-signature, and e-payment services to facilitate establishing companies.

Outward Investment

Egypt promotes and incentivizes outward investment.  According to the Egyptian government’s FDI Markets database for the period from January 2003 to February 2019, outward investment indicated that Egyptian companies implemented 241 Egyptian FDI projects.  The estimated total value of these projects, which employed about 48,204 workers, was USD 23.86 billion.

The following countries received the largest amount of Egyptian outward investment in terms of total project value:  United Arab Emirates (UAE), Saudi Arabia, Algeria, Jordan, Germany, Kenya, Libya, Morocco, Sudan, and Ethiopia. The UAE, Saudi Arabia and Algeria accounted for about 28.6 percent of the total amount.

Elsewedy Electric (Elsewedy Cables) was the largest Egyptian company investing abroad, implementing 19 projects with a total investment estimated to be USD 2.1 billion.

Egypt does not restrict domestic investors from investing abroad.

Egypt has signed 115 Bilateral Investment Treaties (BITs), out of which 74 BITs have entered into force.  The full list can be found at http://investmentpolicyhub.unctad.org/IIA.

The U.S.-Egypt Bilateral Investment Treaty provides for fair, equitable, and nondiscriminatory treatment for investors of both nations. The treaty includes provisions for international legal standards on expropriation and compensation; free financial transfers; and procedures for the settlement of investment disputes, including international arbitration.

In addition to BITs, Egypt is also a signatory to a wide variety of other agreements covering trade issues. Egypt joined the Common Market for Eastern and Southern Africa (COMESA) in June 1998.  In June 2001, Egypt signed an Association Agreement (AA) with the European Union (EU), which entered into force on June 1, 2004. The agreement provided immediate duty free access of Egyptian products into EU markets, while duty free access for EU products into the Egyptian market was phased in over a 12-year period ending in 2016.  In 2010, Egypt and the EU completed an agricultural annex to their agreement, liberalizing trade in over 90 percent of agricultural goods.

In July 1999, Egypt and the United States signed a Trade and Investment Framework Agreement (TIFA). The TIFA forum has been an effective forum to discuss tariff and non-tariff barriers and address issues affecting U.S. commercial interests.

Egypt is also a member of the Greater Arab Free Trade Agreement (GAFTA), and a member of the Agadir Agreement with Jordan, Morocco, and Tunisia, which relaxes rules of origin requirements on products jointly manufactured by the countries for export to Europe.  Egypt also has an FTA with Turkey, in force since March 2007, and an FTA with the Mercosur bloc of Latin American nations.

In 2004, Egypt and Israel signed an agreement to take advantage of the U.S. Government’s Qualifying Industrial Zone (QIZ) program.  The purpose of the QIZ program is to promote stronger ties between the region’s peace partners, as well as to generate employment and higher incomes, by granting duty-free access to goods produced in QIZs in Egypt using a specified percentage of Israeli and local input.  Under Egypt’s QIZ agreement, Egypt’s exports to the United States produced in certain industrial areas are eligible for duty-free treatment if they contain a minimum 10.5 percent Israeli content.

The industrial areas currently included in the QIZ program are Alexandria, areas in Greater Cairo such as Sixth of October, Tenth of Ramadan, Fifteenth of May, South of Giza, Shobra El-Khema, Nasr City, and Obour, areas in the Delta governorates such as Dakahleya, Damietta, Monofeya and Gharbeya, and areas in the Suez Canal such as Suez, Ismailia, Port Said, and other specified areas in Upper Egypt.  Egyptian exports to the United States through the QIZ program have mostly been ready-made garments and processed foods. The value of the Egyptian QIZ exports to the United States was approximately USD 877 million in 2018, up 16 percent from 2017.

Egypt has a bilateral tax treaty with the United States. Egypt also has tax agreements with 59 other countries, including UAE, Kuwait, Saudi Arabia, Mauritius, Bahrain, and Morocco.

The Egyptian Parliament passed and the government implemented a value added tax (VAT) in late 2016, which took the place of the General Sales Tax, as part of the IMF loan and economic reform program. Yet, the government decided to postpone the “Stock Market Capital Gains Tax” for three years as of early 2017. In 2016, there were a number of tax disputes between foreign investors and the government, but most of them were resolved through the Tax Department and the Economic Court.

Transparency of the Regulatory System

The Egyptian government has made efforts to improve the transparency of government policy and to support a fair, competitive marketplace.  Nevertheless, improving government transparency and consistency has proven difficult and reformers have faced strong resistance from entrenched bureaucratic and private interests.  Significant obstacles continue to hinder private investment, including the reportedly arbitrary imposition of bureaucratic impediments and the length of time needed to resolve them.  Nevertheless, the impetus for positive change driven by the government reform agenda augurs well for improvement in policy implementation and transparency.

Enactment of laws is the purview of the Parliament, while executive regulations are the domain of line ministries.  Under the Constitution, draft legislation can be presented by the president, the cabinet, and any member of parliament.  After submission, parliamentary committees review and approve, including any amendments.  Upon parliamentary approval, a judicial body reviews the constitutionality of any legislation before referring it to the president for his approval.  Although notice and full drafts of legislation are typically printed in the Official Gazette (similar to the Federal Register in the United States), in practice consultation with the public is limited.  In recent years, the Ministry of Trade and other government bodies have circulated draft legislation among concerned parties, including business associations and labor unions. This has been a welcome change from previous practice, but is not yet institutionalized across the government.

While Egyptian parliaments have historically held “social dialogue” sessions with concerned parties and private or civic organizations to discuss proposed legislation, it is unclear to what degree the current Parliament, seated in January 2016, will adopt a more inclusive approach to social dialogue.  Many aspects of the 2016 IMF program and related economic reforms stimulated parliament to engage more broadly with the public, marking some progress in this respect.

Accounting, legal, and regulatory procedures are transparent and consistent with international norms.  The Financial Regulatory Authority (FRA) supervises and regulates all non-banking financial markets and instruments, including capital markets, futures exchanges, insurance activities, mortgage finance, financial leasing, factoring, securitization, and microfinance.  It issues rules that facilitate market efficiency and transparency. FRA has issued legislation and regulatory decisions on non-banking financial laws which govern FRA’s work and the entities under its supervision. (http://www.fra.gov.eg/jtags/efsa_en/index_en.jsp  )

The criteria for awarding government contracts and licenses are made available when bid rounds are announced.  The process actually used to award contracts is broadly consistent with the procedural requirements set forth by law.  Further, set-aside requirements for small- and medium-sized enterprise (SME) participation in GoE procurement are increasingly highlighted. FRA maintains a centralized website where key regulations and laws are published: http://www.fra.gov.eg/content/efsa_en/efsa_pages_en/laws_efsa_en.htm  

The Parliament, seated in early 2016, and the independent “Administrative Control Authority” both ensure the government’s commitment to follow administrative processes at all levels of government.  Egypt does not have an online equivalent of the U.S. Federal Register and there is no centralized online location for key regulatory actions or their summaries.

The cabinet develops and submits proposed regulations to the president following discussion and consultation with the relevant ministry and informal consultation with other interest groups. Based on the recommendations provided in the proposal, including recommendations by the presidential advisors, the president issues “Presidential Decrees” that function as implementing regulations.  Presidential decrees are published in the “Official Gazette” for enforcement.

The specific government agency or entity responsible for enforcing the regulation works with other departments for implementation across the government.  Not all issued regulations are announced online. Theoretically, the enforcement process is legally reviewable.

Before a government regulation is implemented, there is an attempt to properly analyze and thoroughly debate proposed legislation and rules using appropriate available data.  But there are no laws requiring scientific studies or quantitative analysis of impacts of regulations. Not all public comments received by regulators are made public.

International Regulatory Considerations

In general, international standards are the main reference for Egyptian standards.  According to the Egyptian Organization for Standardization and Quality Control, approximately 7,000 national standards are aligned with international standards in various sectors.  In the absence of international standards, Egypt uses other references which are referred to in Ministerial decrees No. 180//1996 and No. 291//2003, which stipulate that in the absence of Egyptian standards, the producers and importers may use the following:

• European standards (EN)
• U.S. standards (ANSI)
• Japanese standards (JIS)

Egypt is a member of the WTO and participates actively in various committees.  Though Egypt ratified the Trade Facilitation Agreement (TFA) on June 22, 2017 by a vote of Parliament and issuance of presidential decree No. 149/2017, it has still not deposited its formal notification to the WTO. As of April 2019, the Ministry of Foreign Affairs was in the process of notifying the WTO.  Customs officials are reviewing Categories B and C. In March 2019, the Egyptian Customs Authority published an updated draft of the Customs Law on its website in Arabic for public comment. The law includes language for key TFA reforms, including advance rulings, separation of release, Single Window, authorized economic operators, post-clearance audits, e-payments, and more.

Legal System and Judicial Independence

Egypt’s legal system is a civil codified law system based on the French model.  If contractual disputes arise, claimants can sue for remedies through the court system or seek resolution through arbitration.  Egypt has written commercial and contractual laws. The country has a system of economic courts, specializing in private sector disputes, which have jurisdiction over cases related to economic and commercial matters, including intellectual property disputes.  The judiciary is set up as an independent branch of the government.

Regulations and enforcement actions can be appealed through Egypt’s courts, though appellants often complain about the very lengthy judicial process, which can often take years.  To enforce judgments of foreign courts in Egypt, the party seeking to enforce the judgment must obtain an exequatur (a legal document issued by governments allowing judgements to be enforced).  To apply for an exequatur, the normal procedures for initiating a lawsuit in Egypt must be satisfied. Moreover, several other conditions must be satisfied, including ensuring reciprocity between the Egyptian and foreign country’s courts, and verifying the competence of the court rendering the judgment.

Judges in Egypt are said to enjoy a high degree of public trust and are the designated monitors for general elections.  The Judiciary is proud of its independence and can point to a number of cases where a judge has made surprising decisions that run counter to the desires of the regime.  The judge’s ability to loosely interpret the law can sometimes lead to an uneven application of justice.  The system’s slowness and dependence on paper processes hurts its overall competence and reliability.  The executive branch claims to have no influence over the judiciary, but in practice political pressures seem to influence the courts on a case by case basis.  In the experience of the Embassy, judicial decisions are highly appealable at the national level and this appeal process is regularly used by litigants.

Laws and Regulations on Foreign Direct Investment

No specialized court exists for foreign investments. In 2016, the Import-Export Law was revised to allow companies wishing to register in the Import Registry to be 51 percent owned and managed by Egyptians; formerly the law required 100 percent Egyptian ownership and management.  In November 2016, the Supreme Investment Council also announced seventeen presidential decrees designed to spur investment or resolve longstanding issues. These include:

• Forming a “National Payments Council” that will work to restrict the handling of FX outside the banking sector;
• A decision to postpone for three years the capital gains tax on stock market transactions;
• Producers of agricultural crops that Egypt imports or exports will get tax exemptions;
• Five-year tax exemptions for manufacturers of “strategic” goods that Egypt imports or exports;
• Five-year tax exemptions for agriculture and industrial investments in Upper Egypt;
• Begin tendering land with utilities for industry in Upper Egypt for free as outlined by the Industrial Development Authority.

The Ministry of Investment and International Cooperation issued a new Investment Law that was discussed extensively with all stakeholders prior to its mid-2017 release.  New laws regarding Bankruptcy and Companies’ Law were also released in late 2017 and early 2018.

Competition and Anti-Trust Laws

The Egyptian Competition Authority (ECA) is the body tasked with ensuring free competition in the market and preventing anticompetitive practices.  The Authority operates under the Egyptian Competition Law, which covers three categories of violations: (1) cartels; (2) abuse of dominance; and (3) vertical restraints.  The ECA monitors the market, detects anti-competitive practices that are considered violations to the law, and takes measures to stop such violations. The Anti-Trust and Competition Protection Council (ACPC) monitors business practices of companies to ensure they comply with the standards of the free market.  The main challenges to competition in Egypt include a regulatory system that protects established companies and large companies, a significant informal sector, and the lack of availability of reliable information.

Expropriation and Compensation

The Investment Incentives Law provides guarantees against nationalization or confiscation of investment projects under the law’s domain.  The law also provides guarantees against seizure, requisition, blocking, and placing of assets under custody or sequestration. It offers guarantees against full or partial expropriation of real estate and investment project property.  The U.S.-Egypt Bilateral Investment Treaty also provides protection against expropriation. Private firms are able to take cases of alleged expropriation to court, but the judicial system can take several years to resolve a case.

Dispute Settlement

ICSID Convention and New York Convention

Egypt acceded to the International Convention for the Settlement of Investment Disputes (ICSID) in 1971 and is a member of the International Center for the Settlement of Investment Disputes, which provides a framework for the arbitration of investment disputes between the government and foreign investors from another member state, provided the parties agree to such arbitration.  Without prejudice to Egyptian courts, the Investment Incentives Law recognizes the right of investors to settle disputes within the framework of bilateral agreements, the ICSID or through arbitration before the Regional Center for International Commercial Arbitration in Cairo, which applies the rules of the United Nations (UN) Commissions on International Trade Law.

Egypt adheres to the 1958 New York Convention on the Enforcement of Arbitral Awards; the 1965 Washington Convention on the Settlement of Investment Disputes between States and the Nationals of Other States; and the 1974 Convention on the Settlement of Investment Disputes between the Arab States and Nationals of Other States.  An award issued pursuant to arbitration that took place outside Egypt may be enforced in Egypt if it is either covered by one of the international conventions to which Egypt is party or it satisfies the conditions set out in Egypt’s Dispute Settlement Law 27 of 1994, which provides for the arbitration of domestic and international commercial disputes and limited challenges of arbitration awards in the Egyptian judicial system.  The Dispute Settlement Law was amended in 1997 to include disputes between public enterprises and the private sector.

To enforce judgments of foreign courts in Egypt, the party seeking to enforce the judgment must obtain an exequatur.  To apply for an exequatur, the normal procedures for initiating a lawsuit in Egypt, and several other conditions must be satisfied, including ensuring reciprocity between the Egyptian and foreign country’s courts and verifying the competence of the court rendering the judgment.

Egypt has a system of economic courts specializing in private sector disputes that have jurisdiction over cases related to economic and commercial matters, including intellectual property disputes.  Despite these provisions, business and investors in Egypt’s renewable energy projects have reported significant problems resolving disputes with the Government of Egypt.

Investor-State Dispute Settlement

The U.S.-Egypt Bilateral Investment Treaty allows an investor to take a dispute directly to binding third-party arbitration.  The Egyptian courts generally endorse international arbitration clauses in commercial contracts. For example, the Court of Cassation, on a number of occasions, has confirmed the validity of arbitration clauses included in contracts between Egyptian and foreign parties.

A new mechanism for simplified settlement of investment disputes aimed at avoiding the court system altogether has been established.  In particular, the law established a Ministerial Committee on Investment Contract Disputes, responsible for the settlement of disputes arising from investment contracts to which the state, or an affiliated public or private body, is a party.  This is in addition to establishing a Complaint Committee to consider challenges connected to the implementation of Egypt’s Investment Law.  Finally, the decree established a Committee for Resolution of Investment Disputes, which will review complaints or disputes between investors and the government related to the implementation of the Investment Law.  In practice, Egypt’s dispute resolution mechanisms are time-consuming, but broadly effective.  Businesses have, however, reported difficulty collecting payment from the government when awarded a monetary settlement.

Over the past 10 years, there have been several investment disputes involving both U.S. persons and foreign investors.  Most of the cases have been settled, though no definitive number is available. Local courts in Egypt recognize and enforce foreign arbitral awards issued against the government.  There are no known extrajudicial actions against foreign investors in Egypt during the period of this report.

International Commercial Arbitration and Foreign Courts

Egypt allows mediation as a mechanism for alternative dispute resolution (ADR), a structured negotiation process in which an independent person known as a mediator assists the parties to identify and assess options, and negotiate an agreement to resolve their dispute.  GAFI has an Investment Disputes Settlement Center, which uses mediation as an ADR.

The Economic Court recognizes and enforces arbitral awards.  Judgments of foreign courts may be recognized and enforceable under local courts under limited conditions.

In most cases, domestic courts have found in favor of state-owned enterprises (SOEs) involved in investment disputes.  In such disputes, non-government parties have often complained about the delays and discrimination in court processes.

It is recommended that U.S. companies employ contractual clauses that specify binding international (not local) arbitration of disputes in their commercial agreements.

Bankruptcy Regulations

Egypt passed a new bankruptcy law in January 2018, which should speed up the restructuring and settlement of troubled companies.  It also replaces the threat of imprisonment with fines in cases of bankruptcy.

In practice, the paperwork involved in liquidating a business remains convoluted and extremely protracted; starting a business is much easier than shutting one down.  Bankruptcy is frowned upon in Egyptian culture and many businesspeople believe they may be found criminally liable if they declare bankruptcy.

Investment Incentives

The Investment Law 72//2017 provides incentives to investors, including:

General Incentives:

• All investment projects subject to the provisions of the new law enjoy the general incentives provided by it.
• Investors are exempted from the stamp tax, fees of the notarization, registration of the memorandum of incorporation of the companies, credit facilities, and mortgage contracts associated with their business for five years from the date of registration in the Commercial Registry, in addition to the registration contracts of the lands required for a company’s establishment.
• If the establishment is under the provisions of the new investment law, it will benefit from a 2 percent unified custom tax over all imported machinery, equipment, and devices required for the establishment of such a company.

Special Incentive Programs:

• Investment projects established within three years of the date of the issuance of the Investment Law will enjoy a deduction from their net profit, subject to the income tax:
  • 50 percent of the investment costs for geographical region (A) (the regions the most in need of development as well as designated projects in Suez Canal Special Economic Zone and the “Golden Triangle” along the Red Sea between the cities of Safaga, Qena and El Quseer);
  • 30 percent of the investment costs to geographical region (B) (which represents the rest of the republic).
• Provided that such deduction shall not exceed 80 percent of the paid-up capital of the company, the incentive could be utilized over a maximum of seven years.

Additional Incentive Program:

The Cabinet of Ministers may decide to grant additional incentives for investment projects in accordance with specific rules and regulations as follows:

• The establishment of special customs ports for exports and imports of the investment projects.
• The state may incur part of the costs of the technical training for workers.
• Free allocation of land for a few strategic activities may apply.
• The government may bear in full or in part the costs incurred by the investor to invest in utility connections for the investment project.
• The government may refund half the price of the land allocated to industrial projects in the event of starting production within two years from receiving the land.

Other Incentives related to Free Zones according to Investment Law 72/2017:

• Exemption from all taxes and customs duties.
• Exemption from all import/export regulations.
• The option to sell a certain percentage of production domestically if customs duties are paid.
• Limited exemptions from labor provisions.
• All equipment, machinery, and essential means of transport (excluding sedan cars) necessary for business operations are exempted from all customs, import duties, and sales taxes.
• All licensing procedures are handled by GAFI. To remain eligible for benefits, investors operating inside the free zones must export more than 50 percent of their total production.
• Manufacturing or assembly projects pay an annual charge of 1 percent of the total value of their products.
• Excluding all raw materials, storage facilities are to pay 1 percent of the value of goods entering the free zones while service projects pay 1 percent of total annual revenue.
• Goods in transit to specific destinations are exempt from any charges.

Other Incentives related to the Suez Canal Economic Zone (SCZone):

• 100 percent foreign ownership of companies.
• 100 percent foreign control of import/​export activities.
• Imports are exempted from customs duties and sales tax.
• Customs duties on exports to Egypt imposed on imported components only, not the final product.
• Fast-track visa services.
• A full service one-stop shop for registration and licensing.
• Allowing enterprises access to the domestic market; duties on sales to domestic market will be assessed on the value of imported inputs only.

The Ministry of Industry & Foreign Trade and the Ministry of Finance’s Decree No. 719//2007 provides incentives for industrial projects in the governorates of Upper Egypt (Upper Egypt refers to governorates in southern Egypt).  The decree provides an incentive of EGP 15,000 (approximately USD 850) for each job opportunity created by the project, on the condition that the investment costs of the project exceed EGP 15 million (approximately USD 850,000).  The decree can be implemented on both new and ongoing projects.

Foreign Trade Zones/Free Ports/Trade Facilitation

Public and private free trade zones are authorized under GAFI’s Investment Incentive Law.  Free zones are located within the national territory, but are considered to be outside Egypt’s customs boundaries, granting firms doing business within them more freedom on transactions and exchanges.  Companies producing largely for export (normally 80 percent or more of total production) may be established in free trade zones and operate using foreign currency. Free trade zones are open to investment by foreign or domestic investors.  Companies operating in free trade zones are exempted from sales taxes or taxes, and fees on capital assets and intermediate goods. The Legislative Package for the Stimulation of Investment, issued in 2015, stipulated a 1 percent duty paid on the value of commodities upon entry for storage projects and a 1 percent duty upon exit for manufacturing and assembly projects.

There are currently 11 public free trade zones in operation in the following locations: Alexandria, Damietta, East Port Said Port Zone, Ismailia, Qeft, Media Production City, Nasr City, Port Said, Shebin el Kom, and Suez.  Private free trade zones may also be established with a decree by GAFI, but are usually limited to a single project. Export-oriented industrial projects are given priority. There is no restriction on foreign ownership of capital in private free zones.

The Special Economic Zones (SEZ) Law 83//2002 allows establishment of special zones for industrial, agricultural, or service activities designed specifically with the export market in mind.  The law allows firms operating in these zones to import capital equipment, raw materials, and intermediate goods duty free. Companies established in the SEZs are also exempt from sales and indirect taxes, and can operate under more flexible labor regulations.  The first SEZ was established in the northwest Gulf of Suez.

Law 19//2007 authorized creation of investment zones, which require Prime Ministerial approval for establishment.  The government regulates these zones through a board of directors, but the zones are established, built, and operated by the private sector.  The government does not provide any infrastructure or utilities in these zones. Investment zones enjoy the same benefits as free zones in terms of facilitation of license-issuance, ease of dealing with other agencies, etc., but are not granted the incentives and tax/custom exemptions enjoyed in free zones.  Projects in investment zones pay the same tax/customs duties applied throughout Egypt. The aim of the law is to assist the private sector in diversifying its economic activities.

The Suez Canal Economic Zone, a major industrial and logistics services hub announced in 2014, is expected to include upgrades and renovations to ports located along the Suez Canal corridor, including West and East Port Said, Ismailia, Suez, Adabiya, and Ain Sokhna.  The Egyptian government has invited foreign investors to take part in the projects, which are expected to be built in several stages, the first of which is scheduled to be completed by 2020. Reported areas for investment include maritime services like ship repair services, bunkering, vessel scrapping and recycling; industrial projects, including pharmaceuticals, food processing, automotive production, consumer electronics, textiles, and petrochemicals; IT services such as research and development and software development; renewable energy; and mixed use, residential, logistics, and commercial developments.  Website for the Suez Canal Development Project: http://www.sczone.com.eg/English/Pages/default.aspx  

Performance and Data Localization Requirements

Egypt has rules on national percentages of employment and difficult visa and work permit procdeures.  The application of these provisions that restrict access to foreign worker visas has been inconsistent.  The government plans to phase out visas for unskilled workers, but as yet has not done so. For most other jobs, employers may hire foreign workers on a temporary six-month basis, but must also hire two Egyptians to be trained to do the job during that period.  Only jobs where it is not possible for Egyptians to acquire the requisite skills will remain open to foreign workers. The application of these regulations is inconsistent. The Labor Law allows Ministers to set the maximum percentage of foreign workers that may work in companies in a given sector.  There are no such sector-wide maximums for the oil and gas industry, but individual concession agreements may contain language establishing limits or procedures regarding the proportion of foreign and local employees.

No performance requirements are specified in the Investment Incentives Law, and the ability to fulfill local content requirements is not a prerequisite for approval to set up assembly projects.  In many cases, however, assembly industries still must meet a minimum local content requirement in order to benefit from customs tariff reductions on imported industrial inputs.

Decree 184//2013 allows for the reduction of customs tariffs on intermediate goods if the final product has a certain percentage of input from local manufacturers, beginning at 30 percent local content.  As the percentage of local content rises, so does the tariff reduction, reaching up to 90 percent if the amount of local input is 60 percent or above. In certain cases, a minister can grant tariff reductions of up to 40 percent in advance to certain companies without waiting to reach a corresponding percentage of local content.  In 2010, Egypt revised its export rebate system to provide exporters with additional subsidies if they used a greater portion of local raw materials.

Manufacturers wishing to export under trade agreements between Egypt and other countries must complete certificates of origin and local content requirements contained therein.  Oil and gas exploration concessions, which do not fall under the Investment Incentives Law, do have performance standards, which are specified in each individual agreement and which generally include the drilling of a specific number of wells in each phase of the exploration period stipulated in the agreement.

Egypt does not impose localization barriers on IT firms.  Egypt does not make local production a requirement for market access, does not have local content requirements, and does not impose forced technology or intellectual property transfers as a condition of market access.  But there are exceptions where the government has attempted to impose controls by requesting access to a company’s servers located offshore, or request servers to be located in Egypt and thus under the government’s control.

Real Property

The Egyptian legal system provides protection for real and personal property.  Laws on real estate ownership are complex and titles to real property may be difficult to establish and trace.  According to the World Bank’s 2019 Doing Business Report, Egypt ranks 125 of 190 for ease of registering property.

The National Title Registration Program introduced by the Ministry of State for Administrative Development has been implemented in nine areas within Cairo.  This program is intended to simplify property registration and facilitate easier mortgage financing. Real estate registration fees, long considered a major impediment to development of the real estate sector, are capped at no more than EGP 2000 (USD 110), irrespective of the property value.  In November 2012, the government postponed implementation of an enacted overhaul to the real estate tax and as of April 2017 no action has been taken.

Foreigners are limited to ownership of two residences in Egypt and specific procedures are required for purchasing real estate in certain geographical areas.

The mortgage market is still undeveloped in Egypt, and in practice most purchases are still conducted in cash.  Real Estate Finance Law 148//2001 authorized both banks and non-bank mortgage companies to issue mortgages. The law provides procedures for foreclosure on property of defaulting debtors, and amendments passed in 2004 allow for the issuance of mortgage-backed securities.  According to the regulations, banks can offer financing in foreign currency of up to 80 percent of the value of a property.

Presidential Decree 17//2015 permitted the government to provide land free of charge, in certain regions only, to investors meeting certain technical and financial requirements.  This provision expires on April 1, 2020 and the company must provide cash collateral for five years following commencement of either production (for industrial projects) or operation (for all other projects).

The ownership of land by foreigners is governed by three laws: Law 15//1963, Law 143//1981, and Law 230//1996.  Law 15//1963 stipulates that no foreigners, whether natural or juristic persons, may acquire agricultural land.  Law 143//1981 governs the acquisition and ownership of desert land. Certain limits are placed on the number of feddans (one feddan is equal to approximately one hectare) that may be owned by individuals, families, cooperatives, partnerships and corporations.  Partnerships are permitted to own up to 10,000 feddans. Joint stock companies are permitted to own up to 50,000 feddans.

Partnerships and joint stock companies may own desert land within these limits, even if foreign partners or shareholders are involved, provided that at least 51 percent of the capital is owned by Egyptians.  Upon liquidation of the company, however, the land must revert to Egyptian ownership. Law 143 defines desert land as the land lying two kilometers outside city borders. Furthermore, non-Egyptians owning non-improved real estate in Egypt must build within a period of five years from the date their ownership is registered by a notary public.  Non-Egyptians may only sell their real estate five years after registration of ownership, unless the consent of the Prime Minister for an exemption is obtained.

Intellectual Property Rights

Egypt remains on the Special 301 Watch List in 2019.  Egypt’s IPR legislation generally meets international standards, but is weakly enforced.  Shortcomings in the IPR environment include infringements to copyrights and patents, particularly in the pharmaceuticals sector.

Book, music, and entertainment software piracy is prevalent in Egypt, and a significant portion of the piracy takes place online.  American film studios represented by the Motion Pictures Association of America are concerned about the illegal distribution of American movies on regional satellite channels.

Multinational pharmaceutical companies complain that local generic drug-producing companies infringe on their patents.  Delays and inefficiencies in processing patent applications by the Egyptian Patent Office compound the difficulties pharmaceutical companies face in introducing new drugs to the local market.  The government views patent linkage as “a legal violation” against the concept of separation of authorities between the Ministry of Health and the Egyptian Patent Office. As a result, the Ministry of Health has the authority to issue permits for the sale of drugs, but generally issues these permits without cross-checking patent filings.

Eight GoE ministries have the responsibility to oversee IPR concerns: Supply and Internal Trade for trademarks, Higher Education and Research for patents, Culture for copyrights, Agriculture for plants, Communications and Information Technology for copyright of computer programs, Interior for combatting IPR violations, Customs for border enforcement, and Trade and Industry for standards and technical regulations.  Article 69 of Egypt’s 2014 constitution mandates the establishment of a “specialized agency to uphold [IPR] rights and their legal protection.” A National Committee on IPR was temporary established to address IPR matters until a permanent body is established. All IPR stakeholders are represented in the committee, and members meet every two months to discuss issues. The National Committee on IPR is chaired by the Ministry of Foreign Affairs and reports directly to the Prime Minister. As of April 2019, Parliament was drafting a revision of the 2002 IPR law, and was receptive to U.S. government advice and input.

The Egyptian Customs Authority (ECA) handles IPR enforcement at the national border and the Ministry of Interior’s Department of Investigation handles domestic cases of illegal production. The ECA cannot act unless the trademark owner files a complaint.  Moreover, Egypt’s Economic Courts often take years to reach a decision on IPR infringement cases.

ECA’s customs enforcement also tends to focus on protecting Egyptian goods and trademarks. The ECA is taking steps to adopt the World Customs Organization’s (WCO) Interface Public-Members platform, which allows customs officers to detect counterfeit goods by scanning a product’s barcode and checking the WCO trademark database system.

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

Capital Markets and Portfolio Investment

To date, high returns on GoE debt have crowded out Egyptian investment in productive capacity.  The large foreign inflows Egypt witnessed in 2018 have been mostly portfolio capital, which is highly volatile.  Returns on GoE debt have begun to decrease, which could presage investment by Egyptian capital in the real economy

The Egyptian Stock Exchange (EGX) is Egypt’s registered securities exchange.  There are more than 500,000 investors registered to trade on the exchange. Stock ownership is open to foreign and domestic individuals and entities.  The GoE issues dollar-denominated and Egyptian pound-denominated debt instruments. The GoE has developed a positive outlook toward foreign portfolio investment, recognizing the need to attract foreign capital to help develop the Egyptian economy.

The Capital Market Law 95//1992, along with the Banking Law 88//2003, constitutes the primary regulatory frameworks for the financial sector.  The law grants foreigners full access to capital markets, and authorizes establishment of Egyptian and foreign companies to provide underwriting of subscriptions, brokerage services, securities and mutual funds management, clearance and settlement of security transactions, and venture capital activities.  The law specifies mechanisms for arbitration and legal dispute resolution and prohibits unfair market practices. Law 10//2009 created the Egyptian Financial Supervisory Authority (EFSA) and brought the regulation of all non-banking financial services under its authority. In 2017, EFSA became the Financial Regulatory Authority (FRA).

Settlement of transactions takes one day for treasury bonds and two days for stocks.  Although Egyptian law and regulations allow companies to adopt bylaws limiting or prohibiting foreign ownership of shares, virtually no listed stocks have such restrictions.  While a significant number of the companies listed on the exchange have been family-owned or dominated conglomerates, the exchange has gone through a period of major delisting of many companies that do not have sufficient shares or do not meet the management, fiscal, and transparency standards. Free trading of the remaining shares in many of these ventures is increasing, with a 110 percent increase in trade value and a 53 percent increase in trading volume from 2016 to 2017.  Companies are delisted from the exchange if not traded for six months.

The Higher Investment Council extended the suspension of capital gains tax for three years, until 2020 as part of efforts to draw investors back.   In 2017, the government implemented a stamp duty on all stock transactions with a duty of 0.125 percent on all buyers and sellers. Egypt’s stamp duty on stock exchange transactions includes for the first time a 0.3 percent levy for investors acquiring more than a third of a company’s stocks.

Foreign investors can access Egypt’s banking system by opening accounts with local banks, and buying and selling all marketable securities with brokerages.  The government has repeatedly emphasized its commitment to maintaining the profit repatriation system to encourage foreign investment in Egypt, especially since the pound floatation and implementation of the IMF loan program in November 2016.  The current system for profit repatriation by foreign firms requires sub-custodian banks to open foreign and local currency accounts for foreign investors (global custodians), which are exclusively maintained for stock exchange transactions. The two accounts serve as a channel through which foreign investors process their sales, purchases, dividend collections, and profit repatriation transactions using the bank’s posted daily exchange rates.  The system is designed to allow for settlement of transactions in fewer than two days.

The Egyptian credit market, open to foreigners, is vibrant and active. Repatriation of investment profits has become much easier, as there is enough available hard currency to execute FX trades. Since the floatation of the EGP in November 2016, FX trading is considered straightforward, given the reestablishment of the interbank foreign currency trading system.

Money and Banking System

Benefitting from the nation’s increasing economic stability over the past two years, Egypt’s banks have enjoyed both ratings upgrades and continued profitability.  Thanks to economic reforms, a new floating exchange system, and an Investment Law passed in 2017, the project finance pipeline is increasing after a period of lower activity.  Banking competition is improving to serve a largely untapped retail segment and the nation’s challenging, but potentially rewarding, the SME segment. The Central Bank of Egypt (CBE) has mandated that 20 percent of bank loans go to SMEs within the next two years).  Also, with only about a quarter to a third of Egypt’s adult population owning or sharing an account at a formal financial institution (according to press and comments from contacts), the banking sector has potential for growth and higher inclusion, which the government and banks discuss frequently.  A low median income plays a part in modest banking penetration. But the CBE has taken steps to work with banks and technology companies to expand financial inclusion.

Egypt’s banking sector is generally regarded as healthy and well-capitalized due in part to its deposit-based funding structure and ample liquidity—especially since the floatation and restoration of the interbank market.  The CBE estimates that approximately 4.3 percent of the banking sector’s loans are non-performing in 2018. Still, since 2011, a high level of exposure to government debt, accounting for over 40 percent of banking system assets, at the expense of private sector lending, has reduced the diversity of bank balance sheets and crowded out domestic investment.  Given the floatation of the Egyptian Pound and restart of the interbank trading system, Moody’s and S&P have upgraded the outlook of Egypt’s banking system to positive from stable to reflect improving macroeconomic conditions and ongoing commitment to reform.

38 banks operate in Egypt, including several foreign banks. The CBE has not issued a new commercial banking license since 1979.  The only way for a new commercial bank, whether foreign or domestic, to enter the market (except as a representative office) is to purchase an existing bank.  To this end, in 2013, QNB Group acquired National Société Générale Bank Egypt (NSGB). That same year, Emirates NBD, Dubai’s largest bank, bought the Egypt unit of BNP Paribas.  In 2015, Citibank sold its retail banking division to CIB Bank. In 2016 and 2017, Egypt indicated a desire to partially (less than 35 percent) privatize at least one (potentially two) state-owned banks and a total of 23 firms through either expanded or new listings on the Egypt Stock Exchange, though no action has been taken as of early 2018. In March 2019, Egypt began its program to privatize 23 State-Owned Enterprises with a successful minority stake in the Eastern Tobacco Company.

According to the CBE, banks operating in Egypt held EGP 4.216 trillion in total assets at the end of first quarter of 2018, of which approximately 45 percent were held by the largest five banks (the National Bank of Egypt, Banque Misr, the Commercial International Bank, Qatar National Bank Al-Ahli, and the Banque Du Caire). Egypt’s three state-owned banks (Banque Misr, Banque du Caire, and National Bank of Egypt) control nearly 40 percent of banking sector assets.

The chairman of the EGX recently stated that Egypt is allowing, even encouraging, exploration of the use of blockchain technologies across the banking community.  The FRA will review the development and most likely regulate how the banking system adopts the fast-developing blockchain systems into banks’ back-end and customer-facing processing and transactions. Seminars and discussions are beginning around Cairo, including visitors from Silicon Valley, in which leaders and experts are still forming a path forward.  While not outright banning cryptocurrencies, which is distinguished from blockchain technologies, authorities caution against speculation in unknown asset classes.

Alternative financial services in Egypt are extensive, given the large informal economy, estimated to be from 30 to 50 percent of the GDP. Informal lending is prevalent, but the total capitalization, number of loans, and types of terms in private finance is less well known.

Foreign Exchange and Remittances

Foreign Exchange

There has been significant progress in accessing hard currency since the floatation of the EGP and reestablishment of the interbank currency trading system in November 2016.  While the immediate aftermath saw some lingering difficulty of accessing currency, by 2017 most firms operating in Egypt reported having little difficulty obtaining hard currency for business purposes, such as importing inputs and repatriating profits.  In 2016 the Central Bank lifted dollar deposit limits on households and firms importing priority goods which had been in place since early 2015. With net foreign reserves at an all-time high of over USD 44 billion (March 2019), accessing foreign currency is no longer an issue.

Funds associated with investment can be freely converted into any world currency, depending on the availability of that currency in the local market.  Some firms and individuals report that the process takes time. But the interbank trading system works in general and currency is available as the foreign exchange markets continue to react positively to the government’s commitment to macro and structural reform.

The floating exchange rate operates on the principle of market supply and demand: the exchange rate is dictated by availability of currency and demand by firms and individuals.  While there is some reported informal Central Bank window guidance, the rate generally fluctuates depending on market conditions, without direct market intervention by authorities.  In general, the EGP has stabilized within an acceptable exchange rate range, which has increased the foreign exchange market’s liquidity. Since the early days following the floatation, there has been very low exchange rate volatility.

Remittance Policies

The 1992 U.S.-Egypt Bilateral Investment Treaty provides for free transfer of dividends, royalties, compensation for expropriation, payments arising out of an investment dispute, contract payments, and proceeds from sales.

The Investment Incentives Law stipulates that non-Egyptian employees hired by projects established under the law are entitled to transfer their earnings abroad.  Conversion and transfer of royalty payments are permitted when a patent, trademark, or other licensing agreement has been approved under the Investment Incentives Law.

Banking Law 88//2003 regulates the repatriation of profits and capital.  The current system for profit repatriation by foreign firms requires sub-custodian banks to open foreign and local currency accounts for foreign investors (global custodians), which are exclusively maintained for stock exchange transactions.  The two accounts serve as a channel through which foreign investors process their sales, purchases, dividend collections, and profit repatriation transactions using the bank’s posted daily exchange rates. The system is designed to allow for settlement of transactions in fewer than two days, though in practice some firms have reported short delays in repatriating profits, no longer due to availability but more due to processing steps.

Sovereign Wealth Funds

The Cabinet has approved  the establishment of a sovereign wealth fund, which will be charged with investing state funds locally and abroad across asset classes and will be tapped to manage underutilized assets.  The framework of the EGP200 billion sovereign wealth fund was issued in March of 2018. The government is collaborating with regional and European institutions to take part in forming the fund’s sector-specific units.

State and military-owned companies compete directly with private companies in many sectors of the Egyptian economy.  According to Public Sector Law 203//1991, SOEs should not receive preferential treatment from the government, nor should they be accorded any exemption from legal requirements applicable to private companies.  In addition to the SOEs groups, 40 percent of the banking sector’s assets are controlled by three state-owned banks (Banque Misr, Banque du Caire, and National Bank of Egypt). In March 2014, the government announced that nine public holding companies will be placed under an independent sovereign fund.

In an attempt to encourage growth of the private sector, privatization of SOEs and state-owned banks accelerated under an economic reform program that took place from 1991 to 2008. Following the 2011 revolution, third parties have brought cases in court to reverse privatization deals, and in a number of these cases, Egyptian courts have ruled to reverse the privatization of several former public companies.  Most of these cases are still under appeal.

The state-owned telephone company, Telecom Egypt, lost its legal monopoly on the local, long-distance, and international telecommunication sectors in 2005.  Nevertheless, Telecom Egypt held a de facto monopoly until late 2016 because the National Telecommunications Regulatory Authority (NTRA) had not issued additional licenses to compete in these sectors.  In October 2016, NTRA, however, implemented a unified license regime that allows companies to offer both fixed line and mobile networks. The agreement allows Telecom Egypt to enter the mobile market and the three existing mobile companies to enter the fixed line market.  The introduction of Telecom Egypt as a new mobile operator in the Egyptian market will increase competition among operators, which will benefit users by raising the bar on the quality of services as well as improving prices. Egypt is not a party to the WTO’s Government Procurement Agreement.

SOEs in Egypt are structured as individual companies controlled by boards of directors and grouped under government holding companies that are arranged by industry, including Petroleum Products & Gas, Spinning & Weaving; Metallurgical Industries; Chemical Industries; Pharmaceuticals; Food Industries; Building & Construction; Tourism, Hotels & Cinema; Maritime & Inland Transport; Aviation; and Insurance. The holding companies are headed by boards of directors appointed by the Prime Minister with input from the relevant Minister.

Privatization Program

Egypt has made some progress on its program to privatize 23 State-Owned Enterprises (SOEs). The process formally began in March 2019 with a successful public offering of a minority stake in the Eastern Tobacco Company. The long-awaited program had been delayed repotedly due to market conditions.  The government plans to sell 20-30 percent of Banque du Caire’s shares in an initial public offering on the EGX by the end of 2019, according to the Central Bank. Efforts to privatize before had stalled in an environment where the public often associates privatization with poor quality and higher prices.

Egypt’s privatization program is based on Public Enterprise Law 203//1991, which permits the sale of SOEs to foreign entities.  In 1991, Egypt began a privatization program for the sale of several hundred wholly or partially SOEs and all public shares of at least 660 joint venture companies (joint venture is defined as mixed state and private ownership, whether foreign or domestic).  Bidding criteria for privatizations were generally clear and transparent.

Responsible Business Conduct (RBC) programs have grown in popularity in Egypt over the last 10 years.  Most programs are limited to multinational and larger domestic companies as well as the banking sector and take the form of funding and sponsorship for initiatives supporting entrepreneurship and education and other social activities.  Environmental and technology programs are also garnering greater participation. The Ministry of Trade has engaged constructively with corporations promoting RBC programs, supporting corporate social responsibility (CSR) conferences and providing Cabinet-level representation as a sign of support to businesses promoting RBC programming.

A number of organizations and corporations work to foster the development of RBC in Egypt.  The American Chamber of Commerce has an active CSR committee. Several U.S. pharmaceutical companies are actively engaged in RBC programs related to Egypt’s hepatitis-C epidemic.  The Egyptian Corporate Responsibility Center, which is the UN Global Compact local network focal point in Egypt, aims to empower businesses to develop sustainable business models as well as improve the national capacity to design, apply, and monitor sustainable responsible business conduct policies.  In March 2010, Egypt launched an environmental, social, and governance (ESG) index, the second of its kind in the world after India’s, with training and technical assistance from Standard and Poor’s. Egypt does not participate in the Extractive Industries Transparency Initiative. Public information about Egypt’s extractive industry remains limited to the government’s annual budget.

Egypt has a set of laws to combat corruption by public officials, including an Anti-Bribery Law (which is contained within the Penal Code), an Illicit Gains Law, and a Governmental Accounting Law, among others.  Countering corruption remains a long-term focus. There have been cases involving public figures and entities, including the arrests of Alexandria’s deputy governor and the secretary general of Suez on several corruption charges and the investigation into five members of parliament alleged to have sold Hajj visas.  Nevertheless, according to some businesses, corruption laws have not been consistently enforced. Transparency International’s Corruption Perceptions Index ranked Egypt 105 out of 180 in its 2018 survey, an improvement of 12 places from its rank of 117 in 2017. Transparency International also found that approximately 50 percent of Egyptians reported paying a bribe in order to obtain a public service.

Some private companies use internal controls, ethics, and compliance programs to detect and prevent bribery of government officials. There is no government requirement for private companies to establish internal codes of conduct to prohibit bribery.

Egypt ratified the UN Convention against Corruption in February 2005. It has not acceded to the OECD Convention on Combating Bribery or any other regional anti-corruption conventions.

While NGOs are active in encouraging anti-corruption activities, dialogue between the government and civil society on this issue is almost non-existent, the OECD found in 2009 and a trend that continues today.  While government officials publicly asserted they shared civil society organizations’ goals, they rarely cooperated with NGOs, and applied relevant laws in a highly restrictive manner against NGOs critical of government practices.  Media was also limited in its ability to report on corruption, with Article 188 of the Penal Code mandating heavy fines and penalties for unsubstantiated corruption allegations.

U.S. firms have sometimes identified corruption as an obstacle to FDI in Egypt.  Companies might encounter corruption in the public sector in the form of requests for bribes, using bribes to facilitate required government approvals or licenses, embezzlement, and tampering with official documents.  Corruption and bribery are reported in dealing with public services, customs (import license and import duties), public utilities (water and electrical connection), construction permits, and procurement, as well as in the private sector.  Businesses have described a dual system of payment for services, with one formal payment and a secondary, unofficial payment required for services to be rendered.

Resources to Report Corruption

Several agencies within the GoE share responsibility for addressing corruption.  Egypt’s primary anticorruption body is the Administrative Control Authority (ACA), which has jurisdiction over state administrative bodies, SOEs, public associations and institutions, private companies undertaking public work, and organizations to which the state contributes in any form.  In October 2017, Parliament approved and passed amendments to the ACA law, which grants the organization full technical, financial, and administrative authority to investigate corruption within the public sector (with the exception of military personnel/entities).  The law is viewed as strengthening an institution, which was established in 1964.  The ACA appears well funded and well trained when compared with other Egyptian law enforcement organizations.  Strong funding and the current ACA leadership’s close relationship with President Sisi reflect the importance of this organization and its mission. It is too small for its mission (roughly 300 agents) and is routinely over-tasked with work that would not normally be conducted by a law enforcement agency.

The ACA periodically engages with civil society.  For example, it has met with the American Chamber of Commerce and other organizations to encourage them to seek it out when corruption issues arise.

In addition to the ACA, the Central Auditing Authority (CAA) acts as an anti-corruption body, stationing monitors at state-owned companies to report corrupt practices.  The Ministry of Justice’s Illicit Gains Authority is charged with referring cases in which public officials have used their office for private gain.  The Public Prosecution Office’s Public Funds Prosecution Department and the Ministry of Interior’s Public Funds Investigations Office likewise share responsibility for addressing corruption in public expenditures.

Contact information for the government agency responsible for combating corruption:

Minister of Interior
General Directorate of Investigation of Public Funds
Telephone: 02-2792-1395 / 02-2792 1396
Fax: 02-2792-2389

Stability and economic development remain Egypt’s priorities. The GoE has taken measures to eliminate politically-motivated violence, while also limiting peaceful protests and political expression.  Egypt’s presidential elections proceeded without incident in March 2018. Late 2018 and early 2019 saw a relatively low number of small-scale terrorist attacks primarily against security targets in Cairo and elsewhere in the Nile Valley, with some against civilians. Militant groups committed several large-scale attacks in the Western Desert and Sinai in late 2017, and a car bombing in Alexandria in early 2018.  In the Sinai Peninsula, militants affiliated with ISIS have conducted terrorist attacks against military installations and personnel, as well as a prominent religious site targeting civilians. In response, the government launched a comprehensive counterterrorism offensive beginning in early 2018, which is still ongoing. The United States designated three groups – Harakat Sawaad Misr (HASM), Liwaa el Thawra, and ISIS Egypt – as Specially Designated Global Terrorists in 2018, and designated ISIS-Sinai Province as an alias of Ansar Bayt al-Maqdis, which had been designated a Foreign Terrorist Organization in September 2015.

Official statistics put Egypt’s labor force at approximately 29 million, with an official unemployment rate of 10.7 percent as of December 2018, a 0.6 percent decrease since the previous quarter and a continuation of a gradual downward trend since its peak of over 13 percent in 2014.  Women account for some 75 percent of those unemployed, according to a May 2017 statement by Abu Bakr el-Gendy, head of Egypt’s Central Agency for Public Mobilization and Statistics (CAPMAS). Accurate figures are difficult to determine and verify given Egypt’s large informal economy in which some 62 percent of the non-agricultural workforce is engaged, according to ILO estimates.

The government bureaucracy and public sector enterprises are substantially over-staffed compared to the private sector and other international norms.  According to the World Bank, Egypt has the highest number of government workers per capita in the world.  Businesses highlight a mismatch between labor skills and market demand, despite high numbers of university graduates in a variety of fields.  Foreign companies frequently pay internationally competitive salaries to attract workers with valuable skills.

The Unified Labor Law 12//2003 provides comprehensive guidelines on labor relations, including hiring, working hours, termination of employees, training, health, and safety.  The law grants a qualified right for employees to strike, as well as rules and guidelines governing mediation, arbitration, and collective bargaining between employees and employers.   Non-discrimination clauses are included, and the law complies with labor-related International Labor Organization (ILO) conventions regulating the employment and training of women and eligible children. Egypt ratified ILO Convention 182 on combating the Worst Forms of Child Labor in April 2002. On July 2018, Egypt launched the first National Action Plan on combating the Worst Forms of Child Labor. The law also created a national committee to formulate general labor policies and the National Council of Wages, whose mandate is to discuss wage-related issues and national minimum-wage policy, but it has rarely convened and a minimum wage has rarely been enforced in the private sector. .

Parliament adopted a new Trade Unions Law in late 2017, replacing a 1976 law, which experts said was out of compliance with Egypt’s commitments to ILO conventions.  After a March 2016 Ministry of Manpower and Migration (MOMM) directive not to recognize documentation from any trade union without a stamp from the government-affiliated Egyptian Trade Union Federation (ETUF), the new law established procedures for registering independent trade unions, but some of the unions noted that the directorates of the Ministry of Manpower didn’t implement the law and placed restrictions on freedoms of association and organizing for trade union elections.  Executive regulations for trade union elections stipulate a very tight deadline of three months for trade union organizations to legalize their status, and one month to hold elections, which, critics said, restricted the ability of unions to legalize their status or to campaign. On April 3, 2018, the government registered its first independent trade union in more than two years. Under the new law, a trade union or workers’ committee may be formed if 150 employees in an entity express a desire to organize.  Minimum membership thresholds for forming a general trade union are 20,000 and for a trade union federation, 200,000. The new law explicitly bans compulsory membership or the collection of union dues without written consent of the worker and allows members to quit unions. Each union, general union, or federation is registered as an independent legal entity, thereby enabling any such entity to exit any higher-level entity.

The 2014 Constitution stipulated in Article 76 that “establishing unions and federations is a right that is guaranteed by the law.”  Only courts are allowed to dissolve unions. The 2014 Constitution maintained past practice in stipulating that “one syndicate is allowed per profession.”  The Egyptian constitutional legislation differentiates between white-collar syndicates (e.g. doctors, lawyers, journalists) and blue-collar workers (e.g. transportation, food, mining workers). Workers in Egypt have the right to strike peacefully, but strikers are legally obliged to notify the employer and concerned administrative officials of the reasons and time frame of the strike 10 days in advance.  In addition, strike actions are not permitted to take place outside the property of businesses.  The law prohibits strikes in strategic or vital establishments in which the interruption of work could result in disturbing national security or basic services provided to citizens.  In practice, however, workers strike in all sectors, without following these procedures, but at risk of prosecution by the government.

Collective negotiation is allowed between trade union organizations and private sector employers or their organizations.  Agreements reached through negotiations are recorded in collective agreements regulated by the Unified Labor law and usually registered at MOMM.  Collective bargaining is technically not permitted in the public sector, though it exists in practice.  The government often intervenes to limit or manage collective bargaining negotiations in all sectors.

MOMM sets worker health and safety standards, which also apply in public and private free zones and the Special Economic Zones (see below).  Enforcement and inspection, however, are uneven.  The Unified Labor Law prohibits employers from maintaining hazardous working conditions, and workers have the right to remove themselves from hazardous conditions without risking loss of employment.

Egyptian labor laws allow employers to close or downsize operations for economic reasons.  The government, however, has taken steps to halt downsizing in specific cases.  The Unemployment Insurance Law, also known as the Emergency Subsidy Fund Law 156//2002, sets a fund to compensate employees whose wages are suspended due to partial or complete closure of their firm or due to its downsizing.  The Fund allocates financial resources that will come from a 1 percent deduction from the base salaries of public and private sector employees.  According to foreign investors, certain aspects of Egypt’s labor laws and policies are significant business impediments, particularly the difficulty of dismissing employees.  To overcome these difficulties, companies often hire workers on temporary contracts; some employees remain on a series of one-year contracts for more than 10 years. Employers sometimes also require applicants to sign a “Form 6,” an undated voluntary resignation form which the employer can use at any time, as a condition of their employment. Negotiations on drafting a new Labor Law, which has been under consideration in the Parliament for two years, have included discussion of requiring employers to offer permanent employee status after a certain number of years with the company and declaring Form 6 or any letter of resignation null and void if signed prior to the date of termination.

Egypt has a dispute resolution mechanism for workers.  If a dispute concerning work conditions, terms, or employment provisions arises, both the employer and the worker have the right to ask the competent administrative authorities to initiate informal negotiations to settle the dispute. This right can be exercised only within seven days of the beginning of the dispute. If a solution is not found within 10 days from the time administrative authorities were requested, both the employer and the worker can resort to a judicial committee within 45 days of the dispute.  This committee is comprised of two judges, a representative of MOMM and representatives from the trade union, and one of the employers’ associations. The decision of this committee is provided within 60 days. If the decision of the judicial committee concerns discharging a permanent employee, the sentence is delivered within 15 days. When the committee decides against an employer’s decision to fire, the employer must reintegrate the latter in his/her job and pay all due salaries. If the employer does not respect the sentence, the employee is entitled to receive compensation for unlawful dismissal.

Labor Law 12//2003 sought to make it easier to terminate an employment contract in the event of “difficult economic conditions.”  The Law allows an employer to close his establishment totally or partially or to reduce its size of activity for economic reasons, following approval from a committee designated by the Prime Minister.  In addition, the employer must pay former employees a sum equal to one month of the employee’s total salary for each of his first five years of service and one and a half months of salary for each year of service over and above the first five years.  Workers who have been dismissed have the right to appeal. Workers in the public sector enjoy lifelong job security as contracts cannot be terminated in this fashion; however, government salaries have eroded as inflation has outpaced increases.

Egypt has regulations restricting access for foreigners to Egyptian worker visas, though application of these provisions has been inconsistent.  The government plans to phase out visas for unskilled workers, but as yet has not done so. For most other jobs, employers may hire foreign workers on a temporary six-month basis, but must also hire two Egyptians to be trained to do the job during that period.  Only jobs where it is not possible for Egyptians to acquire the requisite skills will remain open to foreign workers. Application of these regulations is inconsistent.

The Overseas Private Investment Corporation (OPIC) is operating in Egypt to provide the capital and risk mitigation tools that investors need to overcome the barriers faced in this region. In 2012, OPIC launched the USD 250 million Egypt Loan Guaranty Facility (ELGF), in partnership with USAID, to support bank lending and stimulate job creation. The ELGF’s main objective is to help SMEs access finance for growth and development, by providing creditors the needed guarantees to help them mitigate loan risks.  This objective goes hand-in-hand with the Central Bank of Egypt’s initiative to support SMEs. The ELGF expands lending to SMEs by supporting local partner banks as they lend to the target segment and increase access to credit for SMEs. The result is the promotion of jobs and private sector development in Egypt. The ELGF and partner banks sign a Guarantee Facility Agreement (GFA) to outline main terms and conditions of credit guarantee. The two bank partners are Commercial International Bank (CIB) and the National Bank of Kuwait (NBK).  USAID has collaborated with OPIC/ELGF and the CIB to provide training to SME owners and managers on the basics of accounting and finance, banking and loan processes, business registration, and other topics that will help SMEs access financing for business growth.

OPIC is affiliated with several renewable energy, oil and gas, and water supply projects in Egypt, as well. Apache Corporation, the largest U.S. investor in Egypt, has supported its natural gas investment with OPIC risk insurance since 2004. In December 2018, the OPIC Board approved a project to provide USD 430 million in political risk insurance to Noble Energy, Inc. to support the restoration, operation, and maintenance of a natural gas pipeline in Egypt and the supply of natural gas through a pipeline from Israel.

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

Measurements of FDI in Egypt vary according to the source and the definitions employed to calculate the figure.  The Central Bank of Egypt records figures on quarterly and annual investment flows based on financial records for Egypt’s balance of payments statistics.  They are reported in the table below. The Ministry of Petroleum maintains statistics on investment in the oil and gas sector (which accounts for the bulk of FDI in Egypt), while GAFI has statistics on all other investments – including re-invested earnings and investment-in-kind.  Statistics are not always current. GAFI’s figures are calculated in EGP at the historical value and rate of exchange, with no allowance for depreciation, and are cumulative starting from 1971.

U.S. firms are active in a wide range of manufacturing industries, producing goods for the domestic and export markets.  U.S. investors include American Express, AIG, Ideal Standard, Apache Corporation, Bechtel, Bristol-Myers Squibb, Cargill, Citibank, Coca-Cola, Devon Energy, Dow Chemical, ExxonMobil, Eveready, General Motors, Guardian Industries, H.J.  Heinz, Johnson & Johnson, Kellogg’s, Mars, Mondelez, Microsoft, Proctor and Gamble, Pfizer, PepsiCo, Pioneer, and Xerox. Leading investors from other countries include BG, ENI-AGIP, BP, Vodaphone, and Shell (in the oil/gas sector), Unilever, Al-Futtaim, (UAE), the M.A. Kharafi Group (Kuwait), and the Kingdom Development Company (Saudi Arabia).

Table 3: Sources and Destination of FDI

Data not available.

Table 4: Sources of Portfolio Investment

Mohamed El Husseiny, Economic Specialist, U.S. Embassy Cairo
02-2797-2323
Elhusseinyma@state.gov

Policies Towards Foreign Direct Investment

In November 2018, the GOE created a new one page government priority dashboard entitled “Ethiopia: A New Horizon of Hope.”  The dashboard, which predominantly focuses on the economy, pinpoints “Key Facts and Challenges” in areas such as “Financial Sector,” “Macro-Economic Management,” and “Export and Revenue Mobilization.”  The dashboard proposes push-to-grow manufacturing and emphasizes agriculture, information communication and technology, and tourism as pillars of a productive economy. The plan also sets concrete targets to raise credit available to the private sector by 20 percent per year and encourages increased private sector participation in several sectors, including power generation and logistics.  The government is currently undertaking changes in legislation and institutions to implement the economic reforms laid out in the dashboard. In addition, Ethiopia has started implementing a Public Private Partnership (PPP) proclamation, equivalent to a law, which would permit foreign investment and ownership of public infrastructure, with an initial focus on power generation and road construction.

Given the scale of investment required to achieve the goal of becoming a middle income economy by 2025 and the announcement of new economic reforms, the country needs significant inflows of FDI.  Tax incentives for investment in the high-priority sectors, such as manufacturing, agribusiness, textiles, sugar, chemicals, pharmaceuticals, minerals, and metal processing, underscore the government’s focus on FDI.

In June 2018, the GOE announced plans to partially privatize Ethiopian Airlines, EthioTelecom, Ethiopian Electric Power, and Ethiopian Shipping and Logistics Service Enterprise, and fully privatize railways, sugar projects, industrial parks and government-owned hotels.  The GOE has taken concrete measures to open up closed sectors, including drafting a bill to open the aviation sector, drafting legislation to create a new telecommunications regulator and allow foreign investment in that sector, allow minority stakes in joint-ventures by foreign logistics companies, allowing Ethiopian diaspora to hold shares in private Ethiopian banks, and commissioning a study to advise on how best to open up the financial sector.

While laws and regulations may change relatively quickly under the current dynamic reform period, under the existing code, foreign investment is prohibited in wholesale trade (excluding supply of petroleum and its by-products as well as wholesale trade by foreign investors of their locally-produced products), most import trade, export trade of raw coffee, khat, oilseeds, pulses, the export of live sheep, goats, and cattle not raised or fattened by the investor, construction companies (excluding those designated as grade 1), tanning of hides and skins up to crust level, hotels (excluding star-designated hotels), restaurants and bars (excluding international and specialized restaurants), trade auxiliary and ticket selling services, transport services, bakery products and pastries for the domestic market, grinding mills, hair salons, clothing workshops (except garment factories), building and vehicle maintenance, saw milling and timber production, museums, theaters and cinema hall operations, and printing industries.  As part of its ongoing economic reform efforts, the government is in the process of revising the investment code. Foreigners of Ethiopian origin can obtain a resident card from the Ministry of Foreign Affairs that allows them to invest in many sectors closed to other foreigners. While foreign firms cannot engage in joint ventures in closed sectors, they are allowed to supply goods and services to Ethiopian firms in these sectors.

The Ethiopian Investment Commission (EIC) has the mandate to promote and facilitate investments in Ethiopia and its services including: 1) to promote the country’s investment opportunities; 2) to issue investment permits, business licenses, and construction permits; 3) to issue commercial registration certificates and renewals; 4) to negotiate and sign bilateral investment agreements; and, 5) to issue work permits.  In addition, the EIC has the mandate to advise the government on policies to improve the investment climate. At the local level, regional investment agencies facilitate regional investment. Ethiopia’s rank on the 2019 World Bank Ease of Doing Business Index improved from 2018, moving from 161 to 159 out of 190 countries. Progress was primarily in the area of reducing barriers to starting a new business by removing competence certificate for certain businesses; reducing the time it takes to obtain planning consent for construction permits; and, establishing specialized benches to resolve commercial cases addressing contract enforcement.  The World Bank also identified areas where Ethiopia’s Ease of Doing Business worsened from 2018 relative to other ranked countries, including getting electricity, registering property, and resolving insolvency. In order to improve the investment climate, attract more FDI, and tackle unemployment challenges, a committee has been formed by the Prime Minister’s Office to systematically examine each indicator on the Doing Business Index, identify factors that inhibit businesses, and envision placing Ethiopia among the top 100 doing business ranking countries.

The American Chamber of Commerce (AmCham) works on voicing the concerns of the U.S. businesses in Ethiopia.  AmCham has provided a mechanism to compete with investors from India, China, the U.K, and the Netherlands, who meet regularly with government officials through their respective associations to discuss issues that hinder their operation in Ethiopia.  The Addis Ababa Chamber of Commerce also organizes a monthly business forum, which enables the business community to discuss issues related to the investment climate with government officials by sector.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign and domestic private entities have the right to establish, acquire, own, and dispose of most forms of business enterprises.  However, there are sectors (mentioned above) that are closed to foreign investors. There is no private ownership of land. All land is owned by the state, but can be leased for up to 99 years.  Small-scale rural landholders have indefinite use rights, but cannot lease out holdings for extended periods, except in the Amhara Region. The 2011 Urban Land Lease Proclamation allows the government to determine the value of land in transfers of leasehold rights, in an attempt to curb speculation by investors.

A foreign investor intending to buy an existing private enterprise or buy shares in an existing enterprise needs to obtain prior approval from the EIC.  While foreign investors have complained about inconsistent interpretation of the regulations governing investment registration (particularly relating to accounting for in-kind investments), they generally do not face undue screening of FDI, unfavorable tax treatment, denial of licenses, discriminatory import or export policies, or inequitable tariff and non-tariff barriers.

Other Investment Policy Reviews

Over the past four years, the EIC has undertaken an independent review of its investor services in an effort to streamline the investment process.  According to the EIC, the Commission has already implemented at least 28 services pertaining to licensing and registration, and duty-free importation of capital goods for investment in manufacturing.  The EIC has three Deputy Commissioners, with responsibilities for the following divisions: Investment Operations; Industrial Parks Regulation; and, Policy and Investment Climate Improvement.

Business Facilitation

The EIC has established a one-stop shop service to cut the time and cost of acquiring investment and business licenses.  If all requirements are met, it is now possible to obtain a business license in a single day, although this remains the exception rather than the rule.  According to the 2019 World Bank’s Ease of Doing Business Report, on average, it takes 32 days to start a business in Ethiopia. Meanwhile, the EIC has adopted a Customer or Account Manager system to build lasting relationships and provide post-investment assistance to investors.  U.S. investors report that the EIC often fails to meet its own stringent deadlines. The EIC readily admits that many bureaucratic barriers to investment remain, but hopes to eliminate many of these in the future.

Currently, more than 95 percent of Ethiopia’s trade passes through the Port of Djibouti, with residual trade passing through the Somaliland port of Berbera or Port Sudan.  In March 2018, Ethiopia concluded an agreement with the Somaliland Ports Authority and DP World to acquire a 19 percent stake in the joint venture developing the Port of Berbera.  The agreement will help Ethiopia secure an additional logistical gateway for its increasing import and export trade. Following the July 2018 rapprochement with Eritrea, the Ethiopian government has investigated the opportunity of accessing an alternative port at either Massawa or Asseb.

The Government of Ethiopia is working to improve business facilitation services by making the licensing and registration process easier and faster, by registering foreign Chambers and business associations in Ethiopia to advocate for their respective country businesses.  U.S. companies can obtain detailed information for the registration of their business in Ethiopia from an online investment guide to Ethiopia (https://www.theiguides.org/public-docs/guides/ethiopia  ).  Though the government is taking positive steps to socially empower women (half of the new cabinet are women), there is no special treatment provided to those who wish to engage in business.

Online business registration is not yet available, but the Ministry of Trade and Industry claims to have plans to migrate the paper-based registration process to a digital system at some unnamed time in the future.  In 2016, the government revised its commercial registration and business licensing legislation, which eliminated some cumbersome and duplicative requirements, such as the yearly renewal of business registrations and the 15,000 ETB (approximately USD 680) minimum capital requirements to set up limited liability companies.  In 2018 the government removed the need to obtain a certificate of competence for certain types of businesses, made the process of obtaining construction permits faster by reducing the time to obtain planning consent, and made enforcing contracts easier by establishing specialized benches to resolve commercial cases.

The full Doing Business Report is available here: http://www.doingbusiness.org/data/exploreeconomies/ethiopia  
http://www.doingbusiness.org/en/data/exploreeconomies/ethiopia#DB_sb  

Outward Investment

There is no outward investment by domestic investors from Ethiopia as citizens/local investors are not allowed to hold foreign accounts.

Ethiopia is a member of the Multilateral Investment Guarantee Agency (MIGA) and it has bilateral investment and protection agreements with Algeria, Austria, China, Denmark, Egypt, Germany, Finland, France, Iran, Israel, Italy, Kuwait, Libya, Malaysia, the Netherlands, Sudan, Sweden, Switzerland, Tunisia, Turkey and Yemen.  Other bilateral investment agreements have been signed but are not in force with Belgium/Luxemburg, Brazil, Equatorial Guinea, India, Morocco, Nigeria, South Africa, Spain, the United Kingdom, and the United Arab Emirates. Ethiopia signed a protection of investment and property acquisition agreement with Djibouti. A Treaty of Amity and Economic Relations, which entered into force in 1953, governs economic and consular relations with the United States.

Ethiopia is a member of the Common Market for Eastern and Southern Africa (COMESA), a regional economic block, which has 21 member countries.  The body has introduced a 10 percent tariff reduction on goods imported from member states. However, Ethiopia has not yet joined the COMESA free trade area.

In 2019 Ethiopia ratified the African Continental Free Trade Area (AfCFTA) Agreement, which aims to create a single continental market for goods and services, with free movement of business persons and investments, to pave the way for accelerating the establishment of the Continental Customs Union and the African customs union.  Ethiopia is the 21st country to sign the agreement, with just one more country needing to ratify to make AfCFTA operational.

There is no double taxation treaty between the United States and Ethiopia.  Ethiopia has such taxation treaties with fourteen countries, including Italy, Kuwait, Romania, Russia, Tunisia, Yemen, Israel, South Africa, Sudan, and the United Kingdom.

Transparency of the Regulatory System

Ethiopia’s regulatory system is generally considered fair, though there are instances in which burdensome regulatory or licensing requirements have prevented the local sale of U.S. exports, particularly health-related products.  Investment decisions can involve multiple government ministries lengthening the registration and investment process.

The Constitution is the highest law of the country.  The Parliament enacts proclamations, which are followed by regulations that are passed by the Council of Ministers, and implementing directives that are passed by ministries or agencies.  The government engages the public for feedback before passage of draft legislation through public meetings, and regulatory agencies request comments on proposed regulations from stakeholders.  Ministries or regulatory agencies do neither impact assessment for proposed regulations nor ex-post reviews. Parties that are affected by an adopted regulation can request reconsideration or appeal to the relevant administrative agency or court.  But there is no requirement to periodically review regulations to see whether they are still needed or should be revised.

All proclamations and regulations in Ethiopia are published in official gazettes and most of them are available online http://www.hopr.gov.et/web/guest/122   and https://chilot.me/federal-laws/2/  

Legal matters related to the federal government are entertained by Federal Courts while state matters go to state courts.  To ensure consistency of legal interpretation and promote predictability of courts, the Federal Supreme Court Cassation Division is empowered to give binding legal interpretation on all federal and state matters.  Though there are no publicly listed companies in Ethiopia, all banks and insurance companies are obliged to adhere to International Financial Reporting Standards (IFRS).

Regulations related to human health and environmental pollution are often enforced.  In January 2019, the Federal and Oromia State Environment, Forest and Climate Changes Commissions shut down three tanneries in Oromia state for what was said to be repeated environmental pollution offenses.  The government also suspended the business license of MIDROC Gold Mine in May 2018 following weeks of protests by local communities who accused the company of causing health and environmental hazard in the Oromia regional state.  In February 2019, the Ethiopian parliament passed a bill entitled ‘Food and Medicine Administration Proclamation,’ which bans smoking in all indoor workplaces, public spaces, and means of public transport and prohibits alcohol promotion on broadcasting media.

Ethiopia is a member of UNCTAD’s international network of transparent investment procedures  .  Foreign and national investors can find detailed information from the investment commission website http://www.investethiopia.gov.et/investment-process   and https://www.theiguides.org/public-docs/guides/ethiopia   on administrative procedures applicable to investment and income generating operations including the number of steps, name, and contact details of the entities and persons in charge of procedures, required documents and conditions, costs, processing time, and legal bases justifying the procedures.

The government released its five year public finance administration strategic plan (2018-2022) in March 2018, mapping out reforms in government revenue and expenditure forecasting, government accounts management, internal audit, public procurement administration, public debt management, and public financial transparency and accountability.  In support of this initiative, the Ministry of Finance (MOF) issued a directive on Public Financial Transparency and Accountability in October 2018. The directive mandates that all public institutions report their budgetary performance and financial accounts in platforms that are accessible to the wider public in a timely manner. It also makes the MOF responsible for disseminating a regular and detailed physical and financial performance evaluation of large publically-funded projects.  The directive further outlines a clear timeline for the publication of each major piece of budgetary information, such as the pre-budget macroeconomic and fiscal framework, the enacted budget, quarterly execution reports, annual execution reports, and the annual audit report.

International Regulatory Considerations

Ethiopia ratified the AfCFTA on March 21, 2019.  ACFTA aims to create a single, continental market for goods and services, with free movement of business persons and investments.  Ethiopia is also a member of Common Market for Eastern and Southern Africa (COMESA), a regional economic block, which has 21 member countries and has introduced a 10 percent tariff reduction on goods imported from member states.  However, Ethiopia has not yet joined the COMESA free trade area. Ethiopia resumed the WTO accession process in 2018, which began in 2003, with the goal of acceding in 2020.

Ethiopian standards, however, have a national scope and applicability and some of them, particularly those related to human health and environmental protection, are mandatory.  The Ethiopian Standards Agency is the national standards body of Ethiopia.

Legal System and Judicial Independence

Ethiopia has codified criminal and civil laws, including commercial and contractual law.  According to the contractual law, a contract agreement is binding between contracting parties.  Disputes between the parties can be taken to the court. There are, however, no specialized courts for commercial law cases, although there are specialized benches both at the federal and state courts.

While there have been allegations of executive branch interference in judiciary cases with political implications, there is no evidence of interference in purely commercial disputes.  The country has a procedural code for civil and criminal court but the practice is minimal. Enforcement actions are appealable and there are at least three appeal processes from the lower courts to the Supreme Court.  The Criminal Procedure Code follows the inquisitorial system of adjudication.

Companies that operate businesses in Ethiopia assert that courts lack adequate experience and staffing, particularly with respect to commercial disputes.  While property and contractual rights are recognized, judges often lack understanding of commercial matters, including bankruptcy and contractual disputes.  In addition, cases often face extended scheduling delays. Contract enforcement remains weak, though Ethiopian courts will at times reject spurious litigation aimed at contesting legitimate tenders.

Ethiopia is in the process of reforming the Commercial Code to bring it in line with international best practices.  The draft legislation appears to address many concerns raised by the business community, including the creation of a commercial court under the regular court system to improve the expertise of judges as well as increase the speed with which commercial disputes can be resolved.

Laws and Regulations on Foreign Direct Investment

The Investment Proclamation and Regulation of 2012 (later amended in 2014), is Ethiopia’s main legal regime related to foreign direct investment (FDI).  These laws instituted the opening of economic sectors to FDI, the requirements for FDI registration, and the investment incentives that are available to investors.

The following industrial sectors have been designated investment priorities: textiles and garments, leather and leather products, sugar and sugar-related products, cement, metals and engineering, chemicals, pharmaceuticals, renewable energy, and agro-processing.  Investments in those areas receive tax and duty incentives as established in Proclamation 769/2012  .

The 2014 amendment to the Investment Proclamation authorizes the EIC to adjudicate appeals submitted by foreign and domestic investors.  The EIC Investment Board is empowered to authorize the granting of new or additional incentives other than those outlined under the regulations and to authorize foreign investment in areas otherwise exclusively reserved for domestic investors, if the exception is in the national interest.  The EIC’s website  (http://www.investethiopia.gov.et/  ) outlines the government’s policy and priorities, registration processes, and provides regulatory details for investors.  In addition, the Ethiopian Investment Guide website (https://www.theiguides.org/public-docs/guides/ethiopia  ) provides relevant laws, rules, procedures, and reporting requirements for investors.

The revised Commercial Registration and Business Licensing Proclamation eliminated some cumbersome and duplicative requirements, including the yearly renewal of business registrations and the minimum capital requirements to set up limited liability companies, and requires a competency certificate in sectors such as health, security and environment.  The Proclamation allows registration of franchises and holding companies.

Competition and Anti-Trust Laws

Ethiopia’s Trade Practice and Consumers Protection Authority (TPCPA), operating under the Ministry of Trade and Industry, is tasked with promoting a competitive business environment by regulating anti-competitive, unethical, and unfair trade practices to enhance economic efficiency and social welfare.  It has an administrative tribunal with a jurisdiction on matters pertaining to market competition and consumer protection. The authority also annually entertains many cases associated with consumer protection and unfair trade practices.

There are no restrictions for foreign companies or foreign-owned subsidiaries in the areas open to foreign investments.  The EIC reviews investment transactions for compliance with FDI requirements and restrictions as outlined by the Investment Proclamation and its amendments. Nonetheless, companies have complained that SOEs receive favorable treatment in the government tender process.  The public sector’s heavy involvement in economic development means that SOEs often obtain a sizeable portion of open tenders.

Expropriation and Compensation

Per the 2012 Investment Proclamation, no investment by a domestic or foreign investor or enterprise can be expropriated or nationalized, wholly or partially, except when required by public interest in compliance with the law and with payment of adequate compensation.  Such investments may not be seized, impounded, or disposed of except under a court order.

The former Derg military regime nationalized many properties in the 1970s.  The current government’s position is that property seized lawfully by the Derg (by court order or government proclamation published in the official gazette) remain the property of the state.  In most cases, property seized by oral order or other informal means is gradually being returned to the rightful owners or their heirs through a lengthy bureaucratic process. Claimants are required to pay for improvements made by the government during the time it controlled the property.  Public Enterprises, Assets, and Administration stopped accepting requests from owners for return of expropriated properties in July of 2008.

According to local and foreign businesses operating in the Oromia region, there have been a number of isolated incidents threatening investors in the region.  Various pretexts have been used to close down legitimate operations. False charges have been filed with regional courts, property has been confiscated, and bank accounts have been frozen, all in the name of “returning the land” to the “rightful owners” or “creating job opportunities” for the youth.  Regional officials, however, deny any systematic attack on investors and have repeatedly provided assurance that all legitimate investors will be protected. Meanwhile, other investors who have invested heavily in government and community relations and actively engaged local and regional officials have prospered.  The experience of investors is overall uneven and clear trends are not evident.

Dispute Settlement

ICSID Convention and New York Convention

Since 1965, Ethiopia has been a non-signatory member state to the International Centre for Settlement of Disputes (ICSID) Convention, but has not ratified the convention on The Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention).

Investor-State Dispute Settlement

The constitution as well as the investment law guarantees the right of any investor to lodge complaints related to his/her investment with the appropriate investment agency.  If he/she has a grievance against the decision, he/she can appeal to the investment board or to the respective regional agency as appropriate. While disputes can be resolved by international arbitration if both parties agree, enforcement of an arbitration decision is contingent on the Ethiopian court system.  However, if a dispute arises between foreign investors and the state, it will be settled based on the relevant bilateral investment treaty.

Due to an overloaded court system, dispute resolution can last for years.  According to the 2019 World Bank’s Ease of Doing Business report, it takes on average 530 days to enforce contracts through the courts.

International Commercial Arbitration and Foreign Courts

Arbitration has become a widely used means of dispute settlement among the business community as Ethiopian civil code recognizes Alternative Dispute Resolution (ADR) mechanisms as means of dispute resolution.  The Addis Ababa Chamber of Commerce has an Arbitration Center to assist with arbitration. However, there is no guarantee that the award of an international arbitral tribunal will be accepted and implemented by Ethiopian authorities.  Ethiopia is not a party to the Convention on the Recognition and Enforcement of Arbitral Awards, which creates uncertainty for potential investors and serves as disincentive to invest. There are no publicly available statistics that indicate courts’ decision bias towards state-owned enterprises (SOEs) on investment/commercial disputes that involve them.

Bankruptcy Regulations

The Ethiopian Commercial Code (Book V) outlines bankruptcy provisions and proceedings and   establishes a court system that has jurisdiction over bankruptcy proceedings. The primary purpose of the law is to protect creditors, equity shareholders, and other contractors.  Bankruptcy is not criminalized. In practice, there is limited application of bankruptcy procedures due to lack of knowledge on the part of the private sector.

According to the 2019 World Bank Doing Business Report, Ethiopia stands at 148 in the ranking of 190 economies with respect to resolving insolvency.  Ethiopia’s score on the strength of insolvency framework index is 5.0. (Note: The index ranges from zero to 16, with higher values indicating insolvency legislation that is better designed for rehabilitating viable firms and liquidating nonviable ones.)

Investment Incentives

The Investment Regulation 270/2012 and the 2014 amendment outline incentives for investors.  New investors in manufacturing, agro-processing, and selected agricultural products are entitled to income tax exemption ranging from two to five years depending on the location of the investment.  Any investor who produces for export or supplies to an exporter, or who exports at least 60 percent of his products or services, is entitled to an additional two years of income tax exemption.

An investor who establishes a new enterprise in less prosperous areas shall be entitled to an income tax deduction of 30 percent for three consecutive years after the expiry of the regular income tax exemption period.  These areas include Gambella, Benshangul/Gumuz, Afar (except in areas within 15 kilometers from each bank of the Awash River), Somali, Guji, Borena Zones of Oromia, South Omo Zone, Segen, Bench Maji Zone, Sheka Zone, Dawro Zone, Kaffa Zone, Konta, and Basketo Special Woredas of the Southern Nations, Nationalities and Peoples Region.

Ethiopian investment laws provide protection and guarantees to local and foreign investors.

Foreign Trade Zones/Free Ports/Trade Facilitation

The Industrial Park Proclamation 886/2015 mandates Ethiopian Industrial Parks Corporation to develop and administer industrial parks owned by government.  The law designates industrial parks as duty-free zones, and domestic as well as foreign operators in the parks are exempt from income tax for up to 10 years.  Investors operating in parks are also exempt from duties and other taxes on the import of capital goods, construction materials, and raw materials for production of export commodities and vehicles.

An investor who operates in a designated Industrial Development Zone in or near Addis Ababa is entitled to two years of income tax exemptions, and four more years income tax exemption if the investment is made in an industrial park in other areas, provided 80 percent or more of production is for export or constitutes input for an exporter.

Industrial Parks can be developed by either government or private developers.  In practice, the majority have been developed by the Ethiopian government with Chinese financing.  The government has announced plans to construct a total of 17 industrial parks in various locations around the country.  As of April 2019, operational industrial parks include Hawassa Industrial Park, Bole Lemi-I, East Industrial Park, George Shoe Park, Meleke Industrial Park,  Kombolcha Industrial Park, Adama Industrial Park and Debreberhan Industrial Park.

Performance and Data Localization Requirements

Ethiopia does not formally impose performance requirements on foreign investors, though investors in Ethiopia routinely encounter business visa delays and onerous paperwork requirements.  In addition, investors are required to allocate a minimum capital of USD 200,000 per project. For joint investments with a domestic partner, the investment requirement is lowered to USD 150,000.

There are no forced localization or data storage requirements for private investors.  Local content in terms of hiring, products, and services is strongly encouraged but not required.  The Department for Immigration and Nationality Affairs issues residence permits for those with investment permits.  The government also provides multiple entry five year visas for investors in industrial parks. An investor can employ qualified expatriate experts necessary to operations, but is responsible for replacing them by local experts within a limited period.  Top management positions are exempted from this requirement and ex-patriates can fill these positions indefinitely. Although not a legal requirement, in joint ventures with state-owned enterprises investors report informal requirements of up to 30 percent domestic content in goods and/or technology.

EthioTelecom is the sole telecommunications service provider in Ethiopia. In 2018, the government announced plans to liberalize the sector and open the market to foreign service providers.  In February of 2019, the Council of Ministers approved a bill to establish a regulatory agency for communication services that would adequately regulate the telecommunications sector and open it to foreign investment; the bill is awaiting approval by the Parliament.  Proclamation No. 808/2013 mandates the Information Network Security Agency (INSA) to control the import and export of information technology, to build an information technology testing and evaluation laboratory center, and to regulate cryptographic products and their transactions.

Real Property

The constitution recognizes and protects ownership of private property.  However, all land in Ethiopia belongs to “the people” and is administered by the government.  Private ownership does not exist, but land-use rights have been registered in most populated areas.  As land is public property, it cannot be mortgaged. Confusion with respect to the registration of urban land-use rights, particularly in Addis Ababa, is common.  Allegations of corruption in the allocation of urban-land to private investors by government agencies are a major source of popular discontent. The government retains the right to expropriate land for the common good, which it defines as including expropriation for commercial farms, industrial zones, and infrastructure development.  While the government claims to allocate only sparsely settled or empty land to investors, some people have been resettled. In particular, traditional grazing land has often been defined as empty and expropriated, leading to resentment, protests and, in some cases, conflict. In addition, leasehold regulations vary in form and practice by region.  Successful investors in Ethiopia conduct thorough due diligence on land titles at both state and federal levels, and conduct consultations with local communities regarding the proposed use of the land before investing.

We encourage potential investors to ensure their needs are communicated clearly to the host government.  It is important for investors to understand who had land-use rights preceding them, and to research the attitude of local communities to an investor’s use of that land, particularly in region of Oromia, where conflict between international investors and local communities has occurred.

The 2019 World Bank Doing Business Report has ranked Ethiopia 144 out of 190 economies in registering property, as it take on average 52 days to register property.

Intellectual Property Rights

The Ethiopian Intellectual Property Office (EIPO) oversees intellectual property rights (IPR) issues.  Ethiopia is not yet a signatory to a number of major IPR treaties, such as the Paris Convention for the Protection of Industrial Property, the World Intellectual Property Organization (WIPO) Copyright Treaty, the Berne Convention for Literary and Artistic Works, the Madrid System for the International Registration of Marks, or the Patent Cooperation Treaty.  The government expressed its intention to accede to the Berne Convention, the Paris Convention, the Marrakesh Protocol, and the Madrid Protocol. To meet this objective, EIPO is drafting a ratification proclamation. EIPO has been tasked primarily to protect Ethiopian patents and copyrights and to fight pirated software. Generally, EIPO is weak in terms of staff and budget, and it does not have law enforcement authority.  Abuse of U.S. trademarks is rampant, particularly in the hospitality and retail sectors. The government does not publicly track counterfeit goods seizures, and no estimates are available. Ethiopia is not included in the United States Trade Representative (USTR) Special 301 Report or Notorious Markets List.

EIPO contact and office information is available at http://www.eipo.gov.et/  

For additional information about treaty obligations and points of contact at IP offices, please see WIPO’s country profiles   from this page

http://www.wipo.int/directory/en/details.jsp?country_code=ET  

Embassy POC: Economic Officer, Helena Schrader, USEmbassyPolEconExternal@state.gov

Capital Markets and Portfolio Investment

Credit is tight and banks often require 100 percent collateral, making access to credit one of the greatest hindrances on the Ethiopian economy writ large.  A 2011 measure requiring non-government banks to invest the equivalent of 27 percent of their loan disbursement portfolio in National Bank of Ethiopia (NBE) bonds has exacerbated liquidity shortages.

Ethiopia does not have securities markets, and sales/purchases of debt are heavily regulated.  The government is drafting legislation to regulate the over-the-counter market for private share companies.  In March 2019, Moody’s reaffirmed Ethiopia’s credit worthiness at ‘B1 stable,’ while S&P and Fitch maintained their original rating of ‘B.’  According to Moody’s, Ethiopia’s credit profile reflects its very high levels of economic growth; strong investment in infrastructure, energy, and manufacturing; and, low debt-servicing costs set against challenges that include external vulnerability risks and internal stability problems.  Moody’s expects Ethiopia’s economy to grow by approximately 8 percent over the next few years. It puts external vulnerability, geopolitical risk, continued social unrest, and the vulnerability of its relatively small economy to weather cycles and volatility in coffee and gold prices as the key credit challenges going forward.  Conversely, successful export diversification, the smooth and timely completion of infrastructure programs, improved business conditions, a structural reduction of external vulnerabilities leading to a steady accumulation of foreign exchange reserves, and a cessation of domestic and regional geopolitical tensions would all improve Ethiopia’s credit profile.

The Ethiopian government has announced, as part of the overall economic reform effort, its intention to liberalize the financial sector, to include introducing capital markets, opening the banking sector to foreign companies, expanding credit available to the private sector, enabling a system of e-commerce, and expanding the monetary policy tools available to the NBE.  While most outside observers believe that PM Abiy Ahmed and other key economic officials are sincere in their intentions, entrenched interests, low capacity, and financial constraints will likely delay the full implementation of these goals.

The government offers a limited number of 28-day, 3-month, and 6-month Treasury bills, but prohibits the interest rate from exceeding the bank deposit rate.  The government began to offer a one-year Treasury bill in 2011, with yields currently below 3 percent. This market remains unattractive to the private sector and 100 percent of the T-bills are held by public enterprises, primarily the Public Social Security Agency and the Development Bank of Ethiopia.  The NBE plans to introduce a market for government securities, corporate bonds, and a stock market.

In December 2014, Ethiopia issued its first eurobond, raising USD 1 billion at a rate of 6.625 percent.  The 10-year bond was oversubscribed, indicating continued market interest in high-growth sub-Saharan African markets.  According to the Ministry of Finance, the bond proceeds are being used to finance industrial parks, the sugar industry, and power transmission infrastructure.  Due to an increasing external debt load, the Ethiopian government has committed to refrain from non-concessional financing for new projects and to shift ongoing projects to concessional financing when possible.

The Ethiopian Commodity Exchange (ECX), launched in 2008, trades commodities such as coffee, sesame seeds, maize, wheat, mung beans, chickpeas, soybeans, and green beans.  The government launched ECX to increase transparency in commodity pricing, alleviate food shortages, and encourage the commercialization of agriculture. Critics allege that ECX policies and pricing structures are inefficient compared to direct sales at prevailing market rates, triggering an amendment to the ECX law in July 2017, which eliminated a number of criticized regulations, and permitted the trading of financial instruments at a future date.  This amendment paves the way for securities markets in the future using the framework of the commodities exchange.

Money and Banking System

Ethiopia has seventeen commercial banks, two of which are state-owned banks, and fifteen of which are privately owned banks.  The Development Bank of Ethiopia, a state-owned bank, provides loans to investors in priority sectors. In September 2011, the NBE raised the minimum paid-up capital required to establish a new bank from ETB 75 million to 500 million, which effectively stopped the entry of most new banks.  Foreign banks are not permitted to provide financial services in Ethiopia; however, since April 2007, Ethiopia has allowed some foreign banks to open liaison offices in Addis Ababa to facilitate credit to companies from their countries of origins. Chinese, German, Kenyan, Turkish, and South African banks have opened liaison offices in Ethiopia, but the market remains completely closed to foreign retail banks.

Based on recently made available data, the state-owned Commercial Bank of Ethiopia mobilizes more than 60 percent of total bank deposits, bank loans, and foreign exchange.  The NBE controls the bank’s minimum deposit rate, which now stands at 7 percent, while loan interest rates are allowed to float. Real deposit interest rates have been negative in recent years, mainly due to inflation.

Foreign Exchange and Remittances

Foreign Exchange

All foreign currency transactions must be approved by the NBE.  Ethiopia’s national currency (the Ethiopian birr) is not freely convertible.  In September 2018, the GOE removed the limit on holding foreign currency accounts faced by non-resident Ethiopians and non-resident foreign nationals of Ethiopian origin.

Foreign exchange reserves were heavily depleted in 2012 and have remained at critically low levels since then.  By June 2018, gross reserves were USD 2.2 billion, covering approximately 1.6 months of imports. According to the IMF, heavy government infrastructure investment, along with debt servicing and a large trade imbalance, have all fueled the intense demand for foreign exchange.  In addition, the decrease in foreign exchange reserves has been exacerbated by weaker-than-expected earnings from coffee exports and low international commodity prices for other important exports such as gold and oil seeds. Businesses encounter delays of six months to two years in obtaining foreign exchange, and they must deposit the full equivalent in birr in their account to begin the process to obtain foreign exchange.  The foreign exchange crunch has intensified recently, with delays of more than a year reported. Slowdowns in manufacturing due to foreign exchange shortages are common, and high-profile local businesses have closed their doors altogether due to the inability to import required goods in a timely fashion.

Although government policy gives the repatriation of profits “priority,” in reality, due to the foreign exchange shortage, companies have experienced delays of up to two years in the repatriation of larger volumes of profits.  Local sourcing of inputs and partnering with export-oriented partners are strategies employed by the private sector to address the foreign exchange shortage, but access to foreign exchange remains a problem that limits growth, interferes with maintenance and spare parts replacement, and inhibits imports of adequate raw materials.

The foreign exchange shortage distorts the economy in a number of other ways: it fuels the contraband trade through Somaliland because birr is an unofficial currency there and can be used for the purchase of products from around the world.  Exporters, who have priority access to foreign exchange, sell their allocations to importers at inflated rates, creating a black-market for dollars that is roughly 33 percent over the official rate. Other exporters use their foreign exchange earnings to import consumer goods with high margins rather than re-investing profits in their core business.  Meanwhile, the lack of access to foreign exchange impacts the ability of American citizens living in Ethiopia to pay their taxes, or for students to pay school fees abroad.

According to data from NBE, the birr depreciated approximately 98 percent against the U.S. dollar between August 2010 and February 2018, primarily through a series of controlled steps, including a 20 percent devaluation in September 2010 and a 15 percent devaluation in October 2017.  As of March 2019, the official exchange rate was approximately 28.40 birr per dollar. The illegal parallel market exchange rate for the same time was approximately 36 per dollar with spikes up to 38 birr per dollar.

Following the 15 percent devaluation of the Ethiopian birr, the NBE increased the minimum saving interest rate from four percent to seven percent, and limited the outstanding loan growth rate in commercial banks to 16.5 percent, which limits their loan provision for businesses other than export and manufacturing sectors.  Moreover, banks were instructed to transfer 30 percent of their foreign exchange earnings to the account of NBE so the regulator can use the foreign exchange to meet the strategic needs of the country, including payments to procure petroleum and sugar, as well as to cover transportation costs of imported items.

Ethiopia’s Financial Intelligence Unit monitors suspicious currency transfers, including large transactions exceeding ETB 200,000 (roughly equivalent to U.S. reporting requirements for currency transfers exceeding USD 10,000).  Ethiopia citizens are not allowed to hold or open an account in foreign exchange. Ethiopian residents entering the country from abroad should declare their foreign currency in excess of USD 1,000 and non-residents in excess of USD 3,000. Residents are not allowed to hold foreign currency for more than 30 days after acquisition.  A maximum of ETB 1000 in cash can be carried out of the country.

Remittance Policies

Ethiopia’s Investment Proclamation allows all registered foreign investors, whether or not they receive incentives, to remit profits and dividends, principal and interest on foreign loans, and fees related to technology transfer.  Foreign investors may remit proceeds from the sale or liquidation of assets, from the transfer of shares or of partial ownership of an enterprise, and funds required for debt servicing or other international payments. The right of expatriate employees to remit their salaries is granted by NBE foreign exchange regulations.

Sovereign Wealth Funds

Ethiopia has no sovereign wealth funds.

State-owned enterprises (SOEs) dominate major sectors of the economy.  There is a state monopoly or state dominance in telecommunications, power, banking, insurance, air transport, shipping, railway, industrial parks, petroleum importing, and sugar sectors.   State-owned enterprises have considerable advantages over private firms including priority access to credit and customs clearances. While there are no conclusive reports of credit preference for these entities, there are indications that they receive incentives, such as priority foreign exchange allocation, preferences in government tenders, and marketing assistance.  Ethiopia does not publish financial data for most state-owned enterprises, but Ethiopian Airlines and the Commercial Bank of Ethiopia have transparent accounts.

Ethiopia is not a member to the Organisation for Economic Co-operation and Development (OECD) and does not adhere to the guidelines on corporate governance of SOEs.  Corporate governance of SOEs is structured and monitored by a board of directors composed of senior government officials and politically-affiliated individuals, but there is a lack of transparency in the structure of SOEs.

Privatization Program

In July 2018 the government announced the intention to privatize a minority share of Ethiopian Airlines, EthioTelecom, Ethiopian Shipping and Logistics Service Enterprise, and power generation projects, and to fully privatize sugar projects, railways, and industrial parks.  The privatization program will be implemented through public tenders and will be open to local and foreign investors. The background work for the privatization in several sectors is underway, including asset valuation of the enterprises, standardization of the financial reports, and establishment of modernized legal and regulatory frameworks.

The government has sold more than 370 public enterprises since 1995, mainly small companies in the trade and service sectors, which were largely nationalized by the Derg military regime in the 1970s.  Currently, twenty two SOEs are under the Public Enterprise, Assets, and Administration Agency.

Some larger international companies in Ethiopia have introduced corporate social responsibility (CSR) programs; however, most Ethiopian companies do not officially practice CSR, although individual entrepreneurs engage in charity, sometimes on a large scale.  There are efforts to develop CSR programs by the Ministry of Industry in collaboration with the World Bank, U.S. Agency for International Development, and other institutions.

The government encourages CSR programs for both local and foreign direct investors but does not maintain specific guidelines for these programs, which are inconsistently applied and not controlled or monitored.  In early 2015, the Ethiopian Chamber of Commerce & Sectorial Associations published a ‘Model Code of Ethics for Ethiopian Businesses’ that was endorsed by former Ethiopian President Mulatu Teshome as a model for the business community.

Ethiopia was admitted as a candidate-member to the Extractive Industry Transparency Initiative (EITI) in 2014, but has not embraced the need for independent, non-governmental organizations and civil society to be engaged in the process.  As a result, full-membership during the next scheduled review in 2019 remains uncertain. Per the Commercial Code, extractive industries and other businesses are expected to conduct statuary audits of their financial statements at the end of each financial year, though the financial statements are not available to the public, only to financial institutions and share companies.

The Federal Ethics and Anti-Corruption Commission (FEACC) is charged with preventing corruption and is accountable to the Office of the Prime Minister.  The Commission is mandated to provide ethics training and education to prevent corruption.  The investigation and prosecution of corruption crimes are the mandates of the Federal Police Commission and the Federal Attorney General, respectively.

The Federal Police are mandated to investigate corruption crimes committed by public officials as well as “Public Organizations.”  The latter are defined as any organs in the private sector that administer money, property, or any other resources for public purposes.  Examples of such organizations include share companies, real estate agencies, banks, insurance companies, cooperatives, labor unions, professional associations, and others.

Transparency International’s 2018 Corruption Perceptions Index, which measures perceived levels of public sector corruption, rated Ethiopia’s corruption at 34 (the score indicates the perceived level of public sector corruption on a scale of zero to 100, with the former indicating highly corrupt and the latter indicating very clean).  Its comparative rank in 2018 was 114 out of 180 countries, compared to 107 out of 180 countries in 2017.

In December, the American Chamber of Commerce in Ethiopia polled its members and asked what the leading business climate challenges were.  Transparency and governance ranked as the 4th leading business climate challenge, ahead of licensing and registration and public procurement.

Ethiopian and foreign businesses routinely encounter corruption in tax collection, customs clearance, and land administration.  Many past procurement deals for major government contracts, especially in the power generation, telecommunications, and construction sectors were widely viewed as corrupt.

PM Abiy Ahmed has launched a corruption clean-up that has resulted in several hundred arrests.  In connection with the embezzlement schemes involving hundreds of millions of U.S. dollars, particularly with government procurement irregularities, the government arrested and charged in September 2018 over 40 mid- and senior-level Metal Engineering Technology Corporation (METEC) officials.  In addition, the PM transferred the management of large government projects from METEC (which is widely viewed by the public as corrupt) to other government organizations. Similarly, in April 2019, the government arrested 59 officials and business people suspected of corruption. The officials are primarily from the following government institutions: Public Procurement & Property Disposal Service, Food & Drug Administration Agency, Pharmaceuticals Fund & Supply Agency, and the Ethiopian Water Works Construction Enterprise.

Ethiopia is not a party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.  Ethiopia is a signatory to the African Union Convention on Preventing and Combating Corruption. Ethiopia is also member of the East African Association of Anti-Corruption Authorities.  In 2003, Ethiopia signed the UN Anticorruption Convention that was ratified in November 2007.  It is a criminal offense to give or receive bribes, and bribes are not tax deductible.

Resources to Report Corruption

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

Federal Police Commission
Addis Ababa
+251 11 861-9595

Contact at “watchdog” organization:

Transparency Ethiopia
Addis Ababa
+251 11 827-9746
Email: TiratEthiopia@gmail.com

Ethnic conflict —often sparked by historical grievances or resource competition, including land disputes— has resulted in varying levels of violence that have internally displaced as many as two million people nationwide.  Communal conflict between Oromos and Somalis has persisted along their shared border.  Remnants of the Oromo Liberation Front, an opposition movement, have battled ethnic neighbors, regional security forces, and the military.  In the south, conflict between communities in the Guji and Gedeo zones has been particularly violent and intractable.  Disputed territory in the north between the Amhara and Tigray regions is a continuing flash point.  Recent violence between Oromos and Amharas has occurred along a main road from Addis Ababa to the north.

Under PM Abiy’s administration, political space in Ethiopia has opened dramatically.  Constitutional rights, including freedoms of assembly and expression, are broadly respected.  Political prisoners have been released. Opposition parties have been allowed to form or return to the country, and they operate freely. Independent media is re-establishing itself, and laws are being revised to facilitate the rebuilding of civil society.  Nationwide elections are scheduled for May of 2020.  The electoral and pre-electoral period could represent a potential catalyst for unrest.

PM Abiy has also initiated a process of modernization, de-politicization, professionalization, and civilian accountability in his security services.  The past year provides numerous examples where security forces have allowed demonstrators space to operate peacefully.  In some instances, though, security forces have failed to stop ethnic violence in a timely fashion.  Though foreigners are rarely, if ever, specifically targeted, spillover ethnic violence has occasionally resulted in the deaths of foreign employees.

The new administration has also increased regional autonomy.  Successful American investors tell us that understanding the different business climates across the regions—there are different regional taxation regimes, unique ethnic conflicts, varying levels of reception towards profit-making companies, and contrasting approaches to policing and security issues—is key to successfully investing in Ethiopia.

More than 80 percent of Ethiopia’s 100 million people work in agriculture.  The second-most important employer is the government. If the population continues to grow at the current rate of 2.5 percent, Ethiopia will have more than 138 million people by 2030, only 27 percent of whom will live in urban areas.  Ethiopia’s youth, between the ages of 15 and 29, account for 30 percent of the population; 70 million Ethiopians are under the age of 30. The youth unemployment rate in urban settings is over 25 percent (CSA, 2018). The gender gap in employment is high; the unemployment rate among young women in urban areas is over 30 percent, compared with 19 percent for young men.  Young women are three times more likely to be neither in employment, education, or training (NEET). According to International Labor Organization (ILO) statistics, Ethiopia’s youth NEET accounts for 10.5 percent of the youth population (5.7 percent for men, 15.1 percent for women).

Although labor remains readily available and inexpensive in Ethiopia, skilled manpower is scarce.  Approximately 50 percent of Ethiopians over the age of 15 are illiterate according to UNESCO’s definition.  Primary school enrollment rate (age 7 to 14), on the other hand, has now reached 94 percent. To increase the skilled labor force, the GOE has undertaken a rapid expansion of the university system in the last 20 years, increasing the number of higher public education institutions from three to 49.  It has adopted an education policy that requires 70 percent of public university students to study science, engineering, or technology subjects, but many students are not well-prepared by secondary school to study in those fields.

Ethiopia has ratified all eight core International Labor Organization (ILO) conventions.  The Ethiopian Criminal Code outlaws work specified as hazardous by ILO conventions. There is no national minimum wage, and public sector employees – the largest group of wage earners – earned a monthly minimum wage of ETB 420 (approximately USD 19).

Labor unions and confederations are separate entities from the government, and are subject to a great deal of regulation and direct pressure/involvement from the government.  The Confederation of Ethiopian Trade Unions (CETU) comprises well over two hundred thousand members in enterprise-based unions in a variety of sectors, but there is no formal requirement for unions to join the CETU.  Much of the labor force remains in small scale agriculture/industry and thus is not covered by enterprise unions. The Ministry of Labor and Social Affairs’ Directorate of Harmonious Industrial Relations provides labor dispute resolution services, although the caseload and the directorate’s capacity are low.

The Constitution and other laws provide workers, except for civil servants and certain categories of workers primarily in the public sector, with the right to form and join unions, conduct legal strikes, and bargain collectively.  Other laws and regulations that explicitly or potentially infringe upon workers’ rights to associate freely and to organize include: the Civil Society and Organizations (CSO) law; Council of Ministers Regulation No. 168/2009 on Charities and Societies to reinforce the CSO law; and, Proclamation No. 652/2009 on Antiterrorism.  Parliament recently approved a revised CSO law and the antiterrorism law is in the revision process. Such laws and detailed requirements make legal strike actions difficult to carry out. In practice, labor strikes are rare, but there has been an uptick in the last year. Employers offering contracted employment are required to provide severance pay.  The vast majority of employees that work in small scale agriculture and textiles, however, do so without a contract. Large labor surpluses and lax labor law enforcement allow employers to retain employees without contracts that ensure strong worker protections.

The GOE drafted revisions to the Labor Code that will bring Ethiopian labor law into better conformity with international labor standards.  The draft law is currently before the Council of Ministers; once approved, it will proceed to the Parliament for approval. The Ministry of Labor and Social Affairs (MOLSA) claimed that the draft legislation includes language to form a tripartite council to set a national minimum wage and that the ILO has conducted a wage study to help inform the council’s decision.  It is unclear what, if any, language is included to address gaps related to the right to organize, bargain collectively, and associate freely.

Although the government actively engages with the international community to combat child labor and human trafficking, which includes forced/coerced labor, both remain widespread in Ethiopia.  The Ethiopian Parliament ratified ILO Convention 182 on the Worst Forms of Child Labor in May 2003. While not a pressing issue in the formal economy, child labor is common in the informal sector, including construction, agriculture, textiles, manufacturing, mining, and domestic work.  Child labor is present in both urban and rural areas. According to the ILO International Program for the Elimination of Child Labor, more than 50 percent of Ethiopia’s child laborers work in the agriculture sector. Ethiopian traditional woven textiles are included on the U.S. government’s Executive Order 13126 list of goods that have been known to be produced by forced or indentured child labor.  Both NGO and Ethiopian government sources concluded that goods produced (in the agricultural sector and traditional weaving industry in particular) via child labor are largely intended for domestic consumption, and not slated for export. Employers are prohibited from hiring children under the age of 14, and for certain types of hazardous work the minimum age is 18. Ethiopia has a National Action Plan (NAP) for the Elimination of the Worst Forms of Child Labor, which it is currently updating.  The Ministry of Labor and Social Affairs conducts tens of thousands of targeted inspections on occupation safety and standards, although they are not legally empowered to assess fines for infractions and they do not make this data publically available. Due to the shortage of labor inspectors and other enforcement resources, and the fact that inspectors do not inspect informal work sites, most child labor goes unreported.

In 2015, the Ethiopian Parliament ratified an overhaul to its Anti-Human Trafficking and Smuggling criminal code (covered in the 2016 Trafficking in Persons report published by the Department of State).  The government also passed an Overseas Labor Proclamation that legalizes and regulates the employment of Ethiopians in foreign countries. The Government of Ethiopia lifted the ban of overseas employment of domestic workers in the Gulf States in January 2018.  In 2018 preparations were underway to register employment agencies, develop pre-departure materials and centers, identify government and private vocational enters, and provide skills training for domestic workers. A year later, it is still unclear that lifting the ban will decrease the flow of irregular migration due largely to the lengthy and costly process required for regular migration.  Over the past few years, the government has become much more engaged in combatting trafficking in persons, and the number of arrests and prosecutions of traffickers has increased.

The Overseas Private Investment Corporation (OPIC) has offered risk insurance and loans to U.S. investors in Ethiopia in the past, but is not currently present in Ethiopia.

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

*National Bank of Ethiopia and Ethiopian Investment Commission

Table 3: Sources and Destination of FDI

Data regarding inward direct investment are not available for Ethiopia via IMF’s Coordinated Direct Investment Survey (CDIS) site (http://data.imf.org/CDIS  ) so we have used data from Ethiopian investment Commission.

*The yearly average exchange rate is used for each year from 1992-2017 to convert the amount of FDI from domestic currency into USD.
** EU includes Netherlands, France, Ireland, Germany and UK.
*** Total Outward investment data are not available.

Table 4: Sources of Portfolio Investment

Data regarding the equity/debt breakdown of portfolio investment assets are not available for Ethiopia via the IMF’s Coordinated Portfolio Investment Survey (CPIS) and are not available for external publication from the Government of Ethiopia.

U.S. Embassy main number is +251 011 130 6000.

Economic Officer, USEmbassyPolEconExternal@state.gov

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.

The government does not have a policy to steer investment to specific geographic locations, but encourages investments in sectors that create employment, generate foreign exchange, and create forward and backward linkages with rural areas.  The Central Bank has successfully maintained macroeconomic stability with relatively low inflation and stable exchange rates. The National Treasury is increasingly attentive to ensuring 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 for the production of goods for export.

Investment Promotion Agency

KenInvest, the country’s official investment promotion agency, is viewed favorably by international investors (http://www.investmentkenya.com  ).  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 (http://kenya.eregulations.org/?l=en  ).

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.

Telecommunications regulator Communications Authority requires 20 percent Kenyan shareholding within three years of receiving a license.  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

Kenya had no investment policy reviews though multilateral organizations in the last three years.

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.

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 7.1 percent of its commitments under the WTO Trade Facilitation Agreement, which it ratified in 2015. The Kenya Trade Remedies Act provides for the establishment of the Kenya Trade Remedies Agency for the investigation and imposition of anti-dumping, countervailing duty, and trade safeguards measures, and enables the GOK to take necessary measures 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.  Currently, the majority of outward investment remains in the EAC, making the most of Kenyan preferential access between EAC member countries.  The GOK also does not restrict domestic investors from investing abroad. Rather, the EAC advocates for free movement of capital across the six member states – Burundi, Kenya, Rwanda, South Sudan, Tanzania, and Uganda.

BITs or FTAs

In 2018, Kenya did not sign any new BITs or FTAs with other countries.  Kenya’s BIT with Japan was signed in 2016 and came into force in 2017. Kenya’s BIT with the Republic of Korea was signed in 2014 and entered into forced in 2017.

Bilateral Taxation Treaties

The United States does not have a free trade agreement, bilateral investment treaty, or bilateral taxation treaty with Kenya.  Kenya, however, is a beneficiary of the African Growth and Opportunity Act (AGOA), a U.S. trade preference and export promotion policy, which Congress renewed in 2015 for an additional 10 years.  Under AGOA, Kenyan exporters enjoy duty-free access to U.S. markets for products falling under more than 6,400 tariff lines. Kenya’s primary exports to the United States under AGOA are apparel and accessories, coffee, tea, and nuts.  According to the Kenya National Bureau of Statistics’ 2018 Economic Survey, apparel exported under AGOA decreased to USD 327 million in 2017, down 4.6 percent from USD 344 million in 2016. Kenya, however, remains the largest textile exporter under AGOA.  In 2019, the United States and Kenya established a bilateral Trade and Investment Working Group (TIWG) to deepen trade and investment ties between the two countries, including exploratory talks on a future bilateral trade and investment framework.

The GOK has trade facilitation agreements (TFA) through the WTO, EAC Customs Union Protocol, Common Market for Eastern and Southern Africa (COMESA) Protocol on FTA, and the EU-EAC economic partnership agreement.  The nine COMESA FTA member countries are Djibouti, Egypt, Kenya, Madagascar, Malawi, Mauritius, Sudan, Zambia, and Zimbabwe.  The other 10 COMESA countries that are not part of the FTA trade with Kenya on preferential terms, observing tariff reductions between 60 and 80 percent.  The status of EU-EAC economic partnership agreement is unclear at this time because of the failure of Tanzania and Uganda to renew the agreement in 2016 and 2017.  Kenya is continuing to participate in negotiations towards an African Continental Free Trade Area (AfCFTA) which seeks to establish the largest free-trade areas since the formation of the WTO.

According to World Bank and Price Waterhouse Coopers’ 2018 Paying Taxes Report, Kenya improved marginally in the ease of paying taxes, rising to 91 in 2018. The report shows that a medium sized company in Kenya pays a total tax rate of 37.2 percent, 9.8 percent less than the sub Saharan Africa average of 47 percent and below the global average of 40.4 percent.  The iTax system launched by the Kenya Revenue Authority in mid-2015 has reduced tax compiling time from 186 hours in 2016 to 180 in 2017, compared to the global average of 237 hours. Kenya, however, still performs poorly in the post-filing index, which measures value-added tax (VAT) refunds and corrections made to corporate income tax returns, scoring only 59.6 out of 100 in post-filing efficiency.

Transparency of the Regulatory System

Kenya’s regulatory system is relatively transparent and continues to improve.  Proposed laws and regulations pertaining to business and investment are published in draft form for public input and stakeholder deliberation before their passage into law (http://www.kenyalaw.org/   and http://www.parliament.go.ke/the-national-assembly/house-business/bills-tracker  ).  Kenya’s business registration and licensing systems are fully digitized and transparent while computerization of other government processes to increase transparency and close avenues for corrupt behavior is ongoing.

The 2010 Kenyan Constitution requires government to incorporate public participation before officials and agencies make certain decisions.  The draft Public Participation Bill (2018) would provide the general framework for such public participation. The Ministry of Devolution has produced a guide for counties on how to carry out public participation; many counties have enacted their own laws on public participation.  The Environmental Management and Coordination Act (1999) incorporates the principles of sustainable development, including public participation in environmental management. The Public Finance Management Act mandates public participation in the budget cycle. The Land Act, Water Act, and Fair Administrative Action Act (2015) also include provisions providing for public participation in agency actions.

Many GOK laws grant significant discretionary and approval powers to government agency administrators, which can create uncertainty among investors.  While some government agencies have amended laws or published clear guidelines for decision-making criteria, others have lagged in making their transactions transparent.  Work permit processing remains a particular problem, with overlapping and sometimes contradictory regulations. American companies have complained about delays and non-issuance of permits that appear compliant with known regulations.

International Regulatory Considerations

Kenya is a member state of the East African Community (EAC), and generally applies EAC policies to trade and investment.  Kenya operates under the EAC Custom Union Act (2004) and decisions on the tariffs to levy on imports from countries outside the EAC zone are made at the EAC Secretariat level.  The U.S. government engages with Kenya on trade and investment issues bilaterally and through the U.S.-EAC Trade and Investment Partnership. Kenya also is a member of COMESA and the Inter-Governmental Authority on Development (IGAD).

According to the Africa Regional Integration Index Report 2016, Kenya is a leader in regional integration policies within these regional blocs, with strong performance on regional infrastructure, productive integration, free movement of people, and financial and macro-economic integration.  The GOK maintains a Department of East African Community Integration within the Ministry of East Africa and Northern Corridor. Kenya generally adheres to international regulatory standards. The country is a member of the WTO and provides notification of draft technical regulations to the Committee on Technical Barriers to Trade (TBT).  Kenya maintains a TBT National Enquiry Point at http://notifyke.kebs.org  .  Additional information on Kenya’s WTO participation can be found at https://www.wto.org/english/thewto_e/countries_e/kenya_e.htm  .

Accounting, legal, and regulatory procedures are transparent and consistent with international norms.  Publicly listed companies adhere to International Financial Reporting Standards (IFRS) that have been developed and issued in the public interest by the International Accounting Standards Board.  The board is an independent, private sector, not-for-profit organization that is the standard-setting body of the IFRS Foundation. Kenya is a member of UNCTAD’s international network of transparent investment procedures.

Legal System and Judicial Independence

The legal system is based on English Common Law, and the 2010 constitution establishes an independent judiciary with a Supreme Court, Court of Appeal, Constitutional Court, and High Court.  Subordinate courts include: Magistrates, Khadis (Muslim succession and inheritance), Courts Martial, the Employment and Labor Relations Court (formerly the Industrial Court), and the Milimani Commercial Courts – the latter two of which both have jurisdiction over economic and commercial matters.  In 2016, Kenya’s judiciary instituted specialized courts focused on corruption and economic crimes. There is no systematic executive or other interference in the court system that affects foreign investors, however, the courts face allegations of corruption, political manipulation, and long delays in rendering judgments.

Laws and Regulations on Foreign Direct Investment

The Foreign Judgments (Reciprocal Enforcement) Act (2012) provides for the enforcement of judgments given in other countries that accord reciprocal treatment to judgments given in Kenya.  Kenya has entered into reciprocal enforcement agreements with Australia, the United Kingdom, Malawi, Tanzania, Uganda, Zambia, and Seychelles. Outside of such an agreement, a foreign judgment is not enforceable in the Kenyan courts except by filing a suit on the judgment.  Foreign advocates are not entitled to practice in Kenya unless a Kenyan advocate instructs and accompanies them, although a foreign advocate may practice as an advocate for the purposes of a specified suit or matter if appointed to do so by the Attorney General. The regulations or enforcement actions are appealable and are adjudicated in the national court system.

Competition and Anti-Trust Laws

The Competition Act (2010) created the Competition Authority of Kenya (CAK).  All mergers and acquisitions require the CAK’s authorization before they are finalized, and the CAK regulates abuse of dominant position and other competition and consumer-welfare related issues in Kenya.  In 2014, CAK imposed a filing fee for mergers and acquisitions set at one million Kenyan shillings (KSH) (approximately USD 10,000) for mergers involving turnover of between one and KSH 50 billion (up to approximately USD 500 million).  KSH two million (approximately USD 20,000) will be charged for larger mergers. Company takeovers are possible if the share buy-out is more than 90 percent, although such takeovers are rarely seen in practice.

Expropriation and Compensation

The 2010 constitution guarantees protection from expropriation, except in cases of eminent domain or security concerns, and all cases are subject to the payment of prompt and fair compensation.  The Land Acquisition Act (2010) governs due process and compensation in land acquisition, although land rights remain contentious and can cause significant project delays.

Dispute Settlement

ICSID Convention and New York Convention

Kenya is a member of the International Centre for Settlement of Investment Disputes, also known as the ICSID Convention or the Washington Convention, and the 1958 New York Convention on the Enforcement of Foreign Arbitral Awards.  Regarding the arbitration of property issues, the Foreign Investments Protection Act (2014) cites Article 75 of the Kenyan Constitution, which provides that “[e]very person having an interest or right in or over property which is compulsorily taken possession of or whose interest in or right over any property is compulsorily acquired shall have a right of direct access to the High Court.”

Investor-State Dispute Settlement

There have been very few investment disputes involving U.S. and international companies.  Commercial disputes, including those involving government tenders, are more common. The private sector cites weak institutional capacity, inadequate transparency, and inordinate delays in dispute resolution in lower courts.  The resources and time involved in settling a dispute through the Kenyan courts often render them ineffective as a form of dispute resolution.

International Commercial Arbitration and Foreign Courts

The government does accept binding international arbitration of investment disputes with foreign investors.  The Kenyan Arbitration Act (1995) as amended in 2010 is anchored entirely on the United Nations Commission on International Trade Law (UNCITRAL) Model Law.  Legislation introduced in 2013 established the Nairobi Centre for International Arbitration (NCIA), which seeks to serve as an independent, not-for-profit international organization for commercial arbitration, and may offer a quicker alternative to the court system.  In 2014, the Kenya Revenue Authority launched an Alternative Dispute Resolution (ADR) mechanism aiming to provide taxpayers with an alternative, fast-track avenue for resolving tax disputes.

Bankruptcy Regulations

The Insolvency Act (2015) modernized the legal framework for bankruptcies.  Its provisions generally correspond to those of the United Nations’ Model Law on Cross Border Insolvency.  The act promotes fair and efficient administration of cross-border insolvencies to protect the interests of all creditors and other interested persons, including the debtor.  The act repeals the Bankruptcy Act (2012) and updates the legal structure relating to insolvency of natural persons and incorporated and unincorporated bodies. Section 720 of the Insolvency Act (2015) grants the force of law to the UNCITRAL Model Law.

Creditors’ rights are comparable to those in other common law countries, and monetary judgments typically are made in Kenyan shillings.  The Insolvency Act (2015) increased the rights of borrowers and prioritizes the revival of distressed firms. The law states that a debtor will automatically be discharged from debt after three years.  Bankruptcy is not criminalized in Kenya. Kenya moved up 38 ranks in the World Bank Group’s Doing Business 2019 report, moving to 57 of 190 countries in the “resolving insolvency” category.

Investment Incentives

The minimum foreign investment to qualify for GOK investment incentives is USD 100,000, a potential deterrent to foreign small and medium enterprise investment, especially in the services sector.  Investment Certificate benefits, including entry permits for expatriates, are outlined in the Investment Promotion Act (2004).

The government allows all locally-financed materials and equipment for use in construction or refurbishment of tourist hotels to be zero-rated for purposes of VAT calculation – excluding motor vehicles and goods for regular repair and maintenance.  The National Treasury principal secretary, however, must approve such purchases. In a measure to boost the tourism industry, one-week employee vacations paid by employers are a tax-deductible expense. The 2015 amendments to Kenya’s VAT rules clarified some items that are VAT exempt.  In 2018, the Kenya Revenue Authority (KRA) exempted from VAT certain facilities and machinery used in the manufacturing of goods under Section 84 of the East African Community Common External Tariff Handbook. VAT refund claims must be submitted within 12 months of purchase.

The government’s Manufacturing Under Bond (MUB) program encourages manufacturing for export.  The program provides a 100 percent tax deduction on plant machinery and equipment and raw materials imported for production of goods for export.  The program is also open to Kenyan companies producing goods that can be imported duty-free or goods for supply to the armed forces or to an approved aid-funded project.  Investors in metal manufacturing and products and the hospitality services sectors are able to deduct from their taxes a large portion of the cost of buildings and capital machinery.

The Finance Act (2014) amended the Income Tax Act (1974) to reintroduce capital gains tax on transfer of property located in Kenya.  Under this provision, gains derived on the sale or transfer of property by an individual or company are subject to tax at rates of at least five percent.  Sales and transfer of property related to the oil and gas industry are taxed up to 37.5 percent. The Finance Act (2014) also reintroduced the withholding VAT system by government ministries, departments and agencies.  The system excludes the Railway Development Levy (RDL) imports for persons, goods, and projects; the implementation of an official aid-funded project; diplomatic missions and institutions or organizations gazetted under the Privileges and Immunities Act (2014); and the United Nations or its agencies.

Foreign Trade Zones/Free Ports/Trade Facilitation

Kenya’s Export Processing Zones (EPZ) and Special Economic Zones (SEZ) offer special incentives for firms operating within their boundaries.  By the end of 2016, Kenya had 65 designated EPZs, with 91 companies and 52,019 workers contributing KSH 63.1 billion (about USD 622 million) to the Kenyan economy.  Companies operating within an EPZ benefit from the following tax benefits: a 10-year corporate-tax holiday and a 25 percent tax thereafter; a 10-year withholding tax holiday; stamp duty exemption; 100 percent tax deduction on initial investment applied over 20 years; and VAT exemption on industrial inputs.

About 54 percent of EPZ products are exported to the United States under AGOA.  The majority of the exports are textiles – Kenya’s third largest export behind tea and horticulture – and more recently handicrafts.  Eighty percent of Kenya’s textiles and apparel originate from EPZ-based firms. Approximately 50 percent of all firms in the zones are fully-owned by foreigners – mainly from India – while the rest are locally owned or joint ventures with foreigners.

While EPZs are focused on encouraging production for export, SEZs are designed to boost local economies by offering benefits for goods that are consumed both internally and externally.  SEZs will allow for a wider range of commercial ventures, including primary activities such as farming, fishing, and forestry. The 2016 Special Economic Zones Regulations state that the Special Economic Zone Authority (SEZA) must maintain an open investment environment to facilitate and encourage business by the establishment of simple, flexible, and transparent procedures for investor registration.  The rules also empower county governments to set aside public land for establishment of industrial zones.

Companies operating in the SEZs will receive the following benefits:  all SEZ supplies of goods and services to companies and developers will be exempted from VAT; the corporate tax rate for enterprises, developers, and operators will be reduced from 30 percent to 10 percent for the first 10 years and 15 percent for the next 10 years; exemption from taxes and duties payable under the Customs and Excise Act (2014), the Income Tax Act (1974), the EAC Customs Management Act (2004), and stamp duty; and exemption from county-level advertisement and license fees.  There are currently SEZs in Mombasa (2,000 sq. km), Lamu (700 sq. km), and Kisumu (700 sq. km). The Third Medium Term Plan of Kenya’s Vision 2030 economic development agenda calls for a study for an SEZ at Dongo Kundu, and an SEZ was also under consideration at a location near the Olkaria geothermal power plant.

Performance and Data Localization Requirements

The GOK mandates local employment in the category of unskilled labor.  The Kenyan government regularly issues permits for key senior managers and personnel with special skills not available locally.  For other skilled labor, any enterprise whether local or foreign may recruit from outside if the skills are not available in Kenya.  Firms seeking to hire expatriates must demonstrate that the requisite skills are not available locally through an exhaustive search. The Ministry of EAC and Northern Corridor, however, has noted plans to replace this requirement with an official inventory of skills that are not available in Kenya.  A work permit can cost up to KSH 400,000 (approximately USD 4,000).

The Public Procurement and Asset Disposal Act (2015) offers preferences to firms owned by Kenyan citizens and to products manufactured or mined in Kenya.  Tenders funded entirely by the government with a value of less than KSH 50 million (approximately USD 500,000), are reserved for Kenyan firms and goods. If the procuring entity seeks to contract with non-Kenyan firms or procure foreign goods, the act requires a report detailing evidence of an inability to procure locally.  The act also calls for at least 30 percent of government procurement contracts to go to firms owned by women, youth, and persons with disabilities. The act further reserves 20 percent of county procurement tenders to residents of that county.

The Finance Act (2017) amends the Public Procurement and Asset Disposal Act (2015) to introduce Specially Permitted Procurement as an alternative method of acquiring public goods and services.  The new method permits state agencies to bypass existing public procurement laws under certain circumstances. Procuring entities will be allowed to use this method where market conditions or behavior do not allow effective application of the 10 methods outlined in the Public Procurement and Disposal Act.  The act gives the National Treasury Cabinet Secretary the authority to prescribe the procedure for carrying out specially permitted procurement.

The GOK does not currently have any laws requiring data localization, though the draft Data Protection Bill (2018) would impose restrictions on the transfer of data in and out of Kenya, functionally requiring data localization.  The draft bill is similar to the European General Data Protection Regulation requirements on data processing. The GOK’s 2016 draft ICT Policy stated a preference for legislated data localization, but was never implemented.

Real Property

Foreigners cannot own land in Kenya, though they can lease it in 99-year increments.  The cumbersome and opaque process required to acquire land raises concerns about security of title, particularly given past abuses relating to the distribution and redistribution of public land.  The Land (Extension and Renewal of Leases) Rules (2017) has stopped the automatic renewal of leases and now ties renewals to the economic output of the land that must be beneficial to the economy.  If property legally purchased remains unoccupied, the property ownership can revert to other occupiers, including squatters. Privately-owned land comprised six percent of the total land area in 1990; government land was about 20 percent of the total and included national parks, forest land and alienated and un-alienated land.  Trust land is the most extensive type of tenure, comprising 64 percent of the total land area in 1990.

Mortgages and liens exist in Kenya, but the recording system is not reliable – Kenya has only some 40,000 recorded mortgages in a country of 42 million people – and there are often complaints of property rights and interests not being enforced.  The legal infrastructure around land ownership and registration has changed in recent years, and land issues delayed several major infrastructure projects coming into 2019. Kenya’s 2010 Constitution required all land leases to convert from 999 years to 99 years, giving the state the power to review leasehold land at the expiry of the 99 years, deny lease renewal, and confiscate the land if it determines the land has not been used productively.  The constitution also converted foreign-owned freehold interests into 99-year leases at a nominal “peppercorn rate” sufficient to satisfy the requirements for the creation of a legal contract. The GOK has not yet effectively implemented this provision. Work continues on the National Land Information Management System, but fully digitized, border-to-border cadastral data is still many years in the future.

The 2010 Constitution and subsequent land legislation created the National Land Commission, an independent government body mandated to review historical land injustices and provide oversight of government land policy and management.  This had the unintended side effect of introducing coordination and jurisdictional confusion between the commission and the Ministry of Lands. In February 2015, President Kenyatta commissioned the new National Titling Center with a promise to increase the 5.6 million title deeds issued since independence to 9 million.  According to the Ministry of Lands and Physical Planning, 8.6 million title deeds have now been processed. Land grabbing resulting from double registration of titles, however, remains prevalent. Property legally purchased and unoccupied can revert ownership to other parties.

Intellectual Property Rights

The major intellectual property enforcement issues in Kenya related to counterfeit products are corruption, lack of penalty enforcement, failure to impound imports of counterfeit goods at the ports of entry, and reluctance of brand owners to file a complaint with the Anti-Counterfeit Agency (ACA).  The prevalence of “gray market” products – genuine products that enter the country illegally without paying import duties – also presents a challenge, especially in the mobile phone and computer sectors. Copyright piracy and the use of unlicensed software are also emerging challenges.

In an attempt to combat the import of counterfeits, the Ministry of Industrialization and the Kenya Bureau of Standards (KEBS) decreed in 2009 that all locally-manufactured goods must have a KEBS standardization mark.  Several categories of imported goods, specifically food products, electronics, and medicines, must have an import standardization mark (ISM). Under this program, U.S. consumer-ready products may enter the Kenyan market without altering the U.S. label but must also carry an ISM.  Once the product qualifies for a Confirmation of Conformity, KEBS will issue the ISM free of charge.

Kenya is not included on the United States Trade Representative (USTR) Special 301 Report or the Notorious Markets List.

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

Capital Markets and Portfolio Investment

Though relatively small by Western standards, Kenya’s capital markets are the deepest and most sophisticated in East Africa.  The Kenyan capital market has grown rapidly in recent years and has also exhibited strong capital raising capacity. 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.

Foreign investors can obtain credit on the local market; however, the number of available credit instruments is relatively small and the government’s interest rate cap since 2016 continues to constrain the availability of credit.  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. The name of the product is M-Akiba, through which local Kenyans are able to purchase bonds as small as USD 30 on their mobile phones.  The product was enthusiastically received and generated 400,000 new accounts in the first two weeks of its issuance. The GOK expects to issue USD 10 million over this platform in 2019 in an effort to deepen financial inclusion and financial literacy.

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 System (CDS) 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 2018 included 47 commercial banks, one mortgage finance company, 14 microfinance banks, eight representative offices of foreign banks, 74 foreign exchange bureaus, 18 money remittance providers, and three credit reference bureaus.  Kenya also has 12 deposit-taking microfinance institutions. Of Kenya’s 47 banking institutions, 28 are locally owned and 13 are foreign owned. Major international banks operating in Kenya include Citibank, Barclays, Bank of India, Standard Bank (South Africa), and Standard Chartered.

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. JPMorgan Chase has expressed interest in setting up a representative office in Nairobi and Qatari National Bank (QNB) is interested in arranging a Sukuk (sovereign bond) for Kenya. In 2018, Societé Generale (France) also set up a representative office in Nairobi.

In August 2016, President Kenyatta signed into law the Banking Act (2016), which caps the maximum interest rate banks can charge on loans at four percent above the CBK’s benchmark lending rate.  It further provides a floor for the deposit rate held in interest earning accounts to at least 70 percent of the CBK benchmark rate. The cap has hurt the GOK’s ability to raise funds in the local debt market.  The cap also has slowed the consumer and small and medium business credit market. The International Monetary Fund and other observers have warned that the restrictions will result in a continuing contraction in the availability of credit.  In March 2019, the Supreme Court found the interest rate cap to be unconstitutional, but suspended its ruling for 12 months to provide Parliament an opportunity to review the cap.

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 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.  In September 2018, 30 million Kenyans were using mobile phone platforms to transfer money, according to the Communication Authority of Kenya. 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 platform 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 between 3.7-5.7 percent in 2018 and the average rate on 91-day treasury bills had fallen to 7.75 percent in 2018. According to CBK figures, the average exchange rate was KSH 101.3to USD 1.00 in 2018.

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).  As of March 2018, the CBK has licensed 18 money remittance providers following the operationalization of the 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

Kenya is in the process of establishing a sovereign wealth fund under the Kenya National Sovereign Wealth Fund Bill (2014).  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 bill remains under internal review and stakeholder consultations.

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.  The USF has amassed sizeable assets, but to date, the fund and its managing committee have not been able to mobilize it for use on any project.

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 http://www.cofek.co.ke/Report percent20of percent20The percent20Presidential percent20Task percent20force percent20on percent20Parastatal percent20Reforms.pdf .  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.

SOE procurement from the private sector is guided by the Public Procurement (Preference and Reservations) (Amendment) Regulations (2013).  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

Kenya is not currently pursuing privatization.

The Environmental Management and Coordination Act (1999) establishes a legal and institutional framework for the management of the environment while the Factories Act (1951) safeguards labor rights in industries.  The legal system, however, has remained slow to prosecute corporate malfeasance in both areas.

The GOK does not have laws or regulations encouraging Corporate Social Responsibility (CSR) for the risk of discouraging investment.  It is not an adherent to the OECD Guidelines for Multinational Enterprises on Responsible Business Conduct, and it is not yet an Extractive Industry Transparency Initiative (EITI) implementing country or a Voluntary Principles Initiative signatory.  Nonetheless, good examples of CSR abound as major foreign enterprises drive CSR efforts by applying international standards relating to human rights, business ethics, environmental policies, community development, and corporate governance.

Many businesses deem corruption to be pervasive and entrenched in Kenya.  Transparency International’s (TI) 2018 Global Corruption Perception Index ranks Kenya 144 out of 180 countries, one place lower than in 2017 and Kenya’s score of 27 remains below the sub-Saharan Africa average of 32.  Historical lack of political will, little 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 and Kenya’s anticorruption agencies now appear to be coordinating more effectively, including bringing cases against senior officials in an effort to secure high-level convictions.

Kenyan law provides for criminal penalties for official corruption, but no high-level officials were successfully prosecuted and convicted for corruption in 2018.  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).  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/CountryVisit
FinalReports/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: http://www.eacc.go.ke/default.asp?pageid=62 

Contact at “watchdog” organization:

Samuel Kimeu
Executive Director
Transparency International Kenya
Phone:  +254 (0)722-296-589
Email: skimeu@tikenya.org

Report corruption online: https://www.tikenya.org/ 

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 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.

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.

Kenya has one of the highest literacy rates in the region at 90 percent.  Investors have access to a large pool of highly-qualified professionals in diverse sectors from a working population of over 47.5 percent out of a population of 45 million people.  Expatriates are allowed to work in Kenya provided they have a work (entry) permit issued under the Kenya Citizenship and Immigration Act. Any enterprise, whether local or foreign, may recruit expatriates for any category of skilled labor if Kenyans are not available.  Work permits are usually granted to foreign enterprises approved to operate in Kenya as long as the applicants are key personnel. In 2015, the Directorate of Immigration Services made additions to the list of requirements for work permits and special pass applications.  Issuance of a work permit now requires an assured income of at least USD 24,000 annually. Exemptions are available, however, for firms in agriculture, mining, manufacturing, or consulting sectors with a special permit. International companies have complained that the visa and work permit approval process is slow and bribes are sometimes solicited to speed the process.  A tightening of work permit issuances and enforcement begun in 2018 is now one of the largest complaints of multinational companies doing business in Kenya.

A company holding an investment certificate granted by registering with KenInvest and passing health, safety, and environmental inspections becomes automatically eligible for three class D work (entry) permits for management or technical staff and three class G, I, or J work permits for owners, shareholders, or partners.  More information on permit classes can be found at https://kenya.eregulations.org/menu/61?l=en  .

While the Kenya National Bureau of Statistics (KNBS) reports formal unemployment of 7.4 percent, KNBS statistics exclude Kenya’s huge “inactive” worker population, currently estimated at 23 percent (5.6 million) of Kenya’s total working-age population of 25 million; including this group raises total unemployment to about 30 percent.  Employment in Kenya’s formal sector was 2.7 million in 2016, an increase of 3.3 percent from 2015. Average wages for the formal sector are KSH 642,731 (approximately USD 6,240) annually. The government is the largest employer in the formal sector, with an estimated 737,100 government workers in 2016. Agriculture, forestry, and fishing employ 337,000 workers, and manufacturing employs 301,000 workers.  Kenya’s large informal sector, however, makes accurate labor reporting difficult.

In 2017, the GOK launched a website linking job seekers to employment and internship opportunities across the country (http://www.mygov.go.ke/category/jobs/  ). The Kenya Labour Market Information System (KLMIS) portal (https://www.labourmarket.go.ke/) run by the Ministry of Labour and Social Protection in collaboration with the labor stakeholders, is a one-stop shop for labor information in the country.  The site seeks to help address the challenge of inadequate supply of crucial employment statistics in Kenya by providing an interactive platform for prospective employers and job seekers.

There are no known material compliance gaps in either law or practice with international labor standards that would be expected to pose a reputational risk to investors.  The International Labor Organization has not identified any material gaps in Kenya’s labor law or practice with international labor standards. Kenya’s labor laws comply, for the most part, with internationally recognized standards and conventions, and the Ministry of Labor and Social Protection is currently reviewing and ensuring that Kenya’s labor laws are consistent with the 2010 constitution.  The Labor Relations Act (2007) provides that workers, including those in export processing zones, are free to form and join unions of their choice.

Collective bargaining is common in the formal sector but there is no data on the percentage of the economy covered by collective bargaining agreements.  The law permits workers in collective bargaining disputes to strike, but requires the exhaustion of formal conciliation procedures and seven days’ notice to both the government and the employer.  Anti-union discrimination is prohibited, and the government does not have a history of retaliating against striking workers. The law provides for equal pay for equal work. Regulation of wages is part of the Labor Institutions Act (2014), and the government has established basic minimum wages by occupation and location.

The GOK has a growing trade relationship with the United States under the AGOA framework which requires labor standards to be upheld.  In 2018, the government continued to implement a range of programs for the elimination of child labor with dozens of partner agencies, and has actively pursued the elimination of forced labor.  However, low salaries and the lack of vehicles, fuel, and other resources make it very difficult for labor inspectors to do their work. Employers in all sectors routinely bribe labor inspectors to prevent them from reporting infractions, especially in the area of child labor.

In 2016, the U.S. Overseas Private Investment Corporation (OPIC) established a regional office in Nairobi, but the office is not currently staffed.  The agency is engaged in funding programs in Kenya with an active in-country portfolio of approximately USD 700 million, including projects in power generation, internet infrastructure, light manufacturing, and education infrastructure.  OPIC currently has an active pipeline of new projects including transactions in the energy, education, and financial service sectors. On October 2018, President Trump signed the Better Utilization of Investments Leading to Development Act (BUILD), which will consolidate the Overseas Private Investment Corporation (OPIC) and USAID’s Development Credit Authority (DCA) and increase OPIC’s overall portfolio from USD 29 Billion to USD 60 Billion.

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

Table 3: Sources and Destination of FDI

Source:  IMF Coordinated Direct Investment Survey (CDIS). Figures are from 2012 (latest available).  IMF no longer publishes Kenya data as part of its CDIS.

Table 4: Sources of Portfolio Investment

Source:  IMF Coordinated Portfolio Investment Survey (CPIS). Figures are from 2012 (latest available).  IMF no longer publishes Kenya data as part of its CPIS.

U.S. Embassy Economic Section
U.N. Avenue, Nairobi, Kenya
+254 (0)20 363 6050

Policies Towards Foreign Direct Investment

The ROK government’s approach toward FDI is positive, and senior policymakers realize the value of foreign investment.  In a March 28, 2019, meeting with the foreign business community, President Moon Jae-in equated their success “with the Korean economy’s progress.”  Foreign investors in the ROK still face numerous hurdles, however, including insufficient regulatory transparency, inconsistent interpretation of regulations, ongoing regulatory revisions that the market cannot anticipate, underdeveloped corporate governance structures, high labor costs, an inflexible labor system, burdensome Korea-unique consumer protection measures, and market domination by large conglomerates, known as chaebol.

The 1998 Foreign Investment Promotion Act (FIPA) is the basic law pertaining to foreign investment in the ROK.  FIPA and related regulations categorize business activities as open, conditionally or partly restricted, or closed to foreign investment.  FIPA features include:

• Simplified procedures, including those for FDI notification and registration;
• Expanded tax incentives for high-technology investments;
• Reduced rental fees and lengthened lease durations for government land (including local government land);
• Increased central government support for local FDI incentives;
• Establishment of “Invest KOREA,” a one-stop investment promotion center within the Korea Trade-Investment Promotion Agency (KOTRA) to assist foreign investors; and
• Establishment of a Foreign Investment Ombudsman to assist foreign investors.

The ROK National Assembly website provides a list of laws pertaining to foreigners, including FIPA, in English (http://korea.assembly.go.kr/res/low_03_list.jsp?boardid=1000000037  ).

The Korea Trade Investment Promotion Agency (KOTRA) actively facilitates foreign investment through its Invest Korea office (on the web at http://m.investkorea.org/m/index.do ).  For investments exceeding 100 million won (about USD 88,000), KOTRA assists in establishing a domestically-incorporated foreign-invested company. KOTRA and the Ministry of Trade, Industry, and Energy (MOTIE) organize a yearly Foreign Investment Week to attract investment to South Korea.  KOTRA also recruits FDI by participating in overseas events such as the March 2019 “South by Southwest Festival” in Austin, Texas, to attract U.S. startups and investors. The ROK’s key official responsible for FDI promotion and retention is the Foreign Investment Ombudsman. The position is commissioned by the President and heads a grievance resolution body that: collects and analyzes information concerning problems foreign firms experience; requests cooperation from and recommends implementation of reforms to relevant administrative agencies; proposes new policies to improve the foreign investment promotion system; and carries out other necessary tasks to assist investor companies.  More information on the Ombudsman can be found at http://ombudsman.kotra.or.kr/eng/index.do  .

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign and domestic private entities can establish and own business enterprises and engage in almost all forms of remunerative activity.  The number of industrial sectors open to foreign investors is well above the Organization for Economic Cooperation and Development (OECD) average, according to MOTIE.  However, restrictions on foreign ownership remain for 30 industrial sectors, including three that are closed to foreign investment (see below). Under the KORUS FTA, South Korea treats U.S. companies like domestic entities in select sectors, including broadcasting and telecommunications.  Relevant ministries must approve investments in conditionally or partially restricted sectors. Most applications are processed within five days; cases that require consultation with more than one ministry can take 25 days or longer. The ROK’s procurement processes comply with the World Trade Organization (WTO) Government Procurement Agreement, but some implementation problems remain.

The following is a list of restricted sectors for foreign investment.  Figures in parentheses generally denote the Korean Industrial Classification Code, while those for the air transport industries are based on the Civil Aeronautics Laws:

Completely Closed

•  Nuclear power generation (35111)
•  Radio broadcasting (60100)
•  Television broadcasting (60210)

Restricted Sectors (no more than 25 percent foreign equity)

•  News agency activities (63910)

Restricted Sectors (less than 30 percent foreign equity)

• Publishing of daily newspapers (58121)  (Note: Other newspapers with the same industry code 58121 are restricted to less than 50 percent foreign equity)

Restricted Sectors (no more than 30 percent foreign equity)

• Hydroelectric power generation (35112)
• Thermal power generation (35113)
• Solar power generation (35114)
• Other power generation (35119)

Restricted Sectors (no more than 49 percent foreign equity)

• Program distribution (60221)
• Cable networks (60222)
• Satellite and other broadcasting (60229)
• Wired telephone and other telecommunications (61210)
• Mobile telephone and other telecommunications (61220)
• Other telecommunications (61299)

Restricted Sectors (no more than 50 percent foreign equity)

• Farming of beef cattle (01212)
• Transmission/distribution of electricity (35120)
• Wholesale of meat (46313)
• Coastal water passenger transport (50121)
• Coastal water freight transport (50122)
• International air transport (51)
• Domestic air transport (51)
• Small air transport (51)
• Publishing of magazines and periodicals (58122)

Open but Regulated under Relevant Laws

• Growing of cereal crops and other food crops, except rice and barley (01110)
• Other inorganic chemistry production, except fuel for nuclear power generation (20129)
• Other nonferrous metals refining, smelting, and alloying (24219)
• Domestic commercial banking, except special banking area (64121)
• Radioactive waste collection, transportation, and disposal, except radioactive waste management (38240)

Other Investment Policy Reviews

The WTO conducted its seventh Trade Policy Review of the ROK in October 2016.  The Review does not contain any explicit policy recommendations. It can be found at https://docs.wto.org/dol2fe/Pages/FE_Search/FE_S_S009-DP.aspx?language=E&CatalogueIdList=233680,233681,230967,230984,94925,
104614,89233,66927,82162,84639&CurrentCatalogueIdIndex=1&FullText
Hash=&HasEnglishRecord=True&HasFrenchRecord=True&HasSpanishRecord=True  .  The ROK has not undergone investment policy reviews or received policy recommendations from the OECD or United Nations Conference on Trade and Development (UNCTAD) within the past three years.

Business Facilitation

Registering a business remains a complex process that varies according to the type of business being established and requires interaction with KOTRA, court registries, and tax offices.  Foreign corporations can enter the market by establishing a local corporation, local branch, or liaison office. The establishment of local corporations by a foreign individual or corporation is regulated by FIPA and the Commercial Act; the latter recognizes five types of companies, of which stock companies with multiple shareholders are the most common.  Although registration can be filed online, there is no centralized online location to complete the process. For small- and medium-sized enterprises (SMEs) and micro-enterprises, the online business registration process takes approximately three to four days and is completed through Korean language websites. Registrations can be completed via the Smart Biz website, https://www.startbiz.go.kr/.  The UN’s Global Enterprise Registration (GER) rated Smart Biz a low 2.5 on its 10-point evaluation scale and suggested improvements to provide clear and complete instructions for registering a limited liability company.  The GER rated the InvestKorea information portal even lower at 2.0/10. The Korea Commission for Corporate Partnership (http://www.winwingrowth.or.kr/  ) and the Ministry of Gender Equality and Family (http://www.mogef.go.kr/)seek to create a better business environment for minorities and women but do not offer any direct support program for those groups.  Some local governments provide guaranteed bank loans for women or disabled people, but a lack of data on those programs makes it difficult to measure their impact.

Outward Investment

The ROK does not have any restrictions on outward investment.  While Korea’s globally competitive firms complete their investment procedures in-house, the ROK has several offices to assist small business and middle-market firms.

• KOTRA has an Outbound Investment Support Office that provides counseling to ROK firms and holds regular investment information sessions.
• The ASEAN-Korea Centre, which is primarily ROKG-funded, provides counseling and matchmaking support to Korean SMEs interested in investing in the Association of Southeast Asian Nations (ASEAN) region.
• The Defense Acquisition Program Administration in 2019 opened an office to advise Korean SME defense firms on exporting unrestricted defense articles.

The ROK has 16 FTAs encompassing trade with 57 countries, including the United States, and 94 bilateral investment treaties (BITs).  The most recent FTA was signed with five Central American countries (Panama, Costa Rica, Honduras, El Salvador, and Nicaragua) in February 2018 and takes effect in the first half of 2019.  Ongoing FTA negotiations include the Regional Comprehensive Economic Partnership (RCEP) among 16 Asian countries, a ROK-China-Japan trilateral FTA, and bilateral FTAs with Israel and Mercado Comun del Sur (Mercosur).  Negotiations are also in progress to expand the ROK-China FTA services and investment chapter, and to enhance existing FTAs with India, Indonesia, and Chile. The ROK has had free trade negotiations with Mexico, which stopped in 2003 when Mexico announced a moratorium on all FTAs.  Negotiations resumed in 2008 have been suspended since then. The ROK signed a BIT with Mexico in 2002. In September 2017, the ROK and the EAEU (Eurasian Economic Union – five countries including Russia) agreed to set up a joint working group for FTA consultations but formal negotiations have not yet begun.  As of March 2019, the ROK had signed bilateral tax agreements with 93 countries. The ROK National Tax Service has a special unit dedicated to processing Advance Pricing Agreement and Mutual Agreement Procedure requests from North America, Europe, and Australia, as timely processing of these requests has historically been a frequent subject of disputes.  The U.S.-ROK bilateral income tax treaty entered into force in 1979. A complete list of countries and economies with which South Korea has concluded bilateral investment protection agreements, such as BITs and FTAs with investment chapters, is available at http://www.mofa.go.kr/www/wpge/m_3834/contents.do   and http://investmentpolicyhub.unctad.org/IIA  .

In December 2016, a subsidiary of World Fuel Services (WFS) received assessments of approximately USD 10.4 million and a pre-assessment notice for an additional USD 17.6 million from regional tax authorities in Seoul.  The assessments were mainly fines and penalties for allegedly failing to issue value-added tax (VAT) invoices and report certain transactions from 2011-2014. WFS disputes that any VAT was due on the transactions at issue, or that its subsidiary should be required to be a local VAT-registered entity.  WFS’s appeal through the ROK tax administrative appeal process is ongoing.

Transparency of the Regulatory System

ROK regulatory transparency has improved in recent years, due in part to Korea’s membership in the WTO and negotiated FTAs.  However, the foreign business community continues to face a large number of Korea-unique rules and regulations. Approximately 80 percent of regulations are introduced and passed by the National Assembly without a regulatory impact assessment (RIA) due to a loophole that requires only regulations written by ministries to undergo RIAs.  While these regulations may have well-intended social aims, such as consumer protection or the promotion of SMEs, they often have unintended consequences for the economy by creating new trade barriers. Laws and regulations are often framed in general terms and are subject to differing interpretations by government officials, who rotate frequently.  Regulatory authorities often issue oral or internal guidelines or other legally enforceable dictates that prove burdensome and difficult to follow for foreign firms. Intermittent ROKG deregulation plans intended to eliminate the use of oral guidelines or subject them to the same level of regulatory review as written regulations have not led to concrete changes.  Despite KORUS FTA provisions designed to address these issues, they remain persistent and prominent.

The ROK constitution allows both the National Assembly and the executive branch to introduce bills.  The legal norm is for regulations to be introduced in the form of an act. Subordinate statutes (presidential decree, ministerial decree, and administrative rules) largely govern matters delegated by acts and relevant enforcement.  Ministries are in charge of drafting such subordinate regulations. Acts and their subordinate regulations can all be relevant for foreign businesses. Administrative agencies shape policies and draft bills on matters under their respective jurisdictions.  Drafting ministries are required to clearly set policy goals and complete RIAs. When a ministry drafts a regulation, it is required to consult with other relevant ministries before it releases the regulation for public comment. The constitution also allows local governments to exercise self-rule legislative power to draft ordinances and rules within the scope of federal acts and subordinate statutes.  The enactment of acts and their subordinate statutes, ranging from the drafting of bills to their promulgation, must follow formal ROK legislative procedures in accordance with the Regulation on Legislative Process enacted by the Ministry of Legislation. Since 2011, all publicly listed companies have been required to follow International Financial Reporting Standards (IFRS, or K-IFRS in South Korea). The Korea Accounting Standards Board facilitates ROK government endorsement and adoption of IFRS and sets accounting standards for companies not subject to IFRS.  According to the Administrative Procedures Act, proposed laws and regulations (acts, presidential decrees, or ministerial decrees) must seek public comments at least 40 days prior to their promulgation. Regulations are sometimes promulgated with only the minimum required comment period, and with minimal consultation with industry. Regulatory changes originating from legislation proposed by members of the National Assembly are not subject to public comment periods. As a result, 80 percent of all new regulations are written and passed through the National Assembly without rigorous quality control and solicitation of public comments.  The Korean language text of draft acts and regulations accompanied by executive summaries are published online in the Official Gazette and simultaneously posted on the websites of relevant ministries and the National Assembly. This is required under the ROK’s public notification process that includes a 40-day comment period. Foreign firms’ analyses and responses are delayed because of the need to translate complex documentation. The Ministry of Government Legislation reviews whether laws and regulations conform to the constitution and monitors government adherence to the Regulation on Legislative Process. All laws and regulations also undergo review by the Regulatory Reform Committee to minimize government intervention in the economy and to abolish all economic regulations that fall short of international standards or hamper national competitiveness.

In January 2019, Korea introduced a “regulatory sandbox” program intended to reduce the regulatory burden on companies that seek to test innovative ideas, products, and services.  The program is managed by MOTIE; the Ministry of Science and ICT; and the Financial Services Commission, depending on the business sector in which a particular proposal falls. The program is open to Korean companies and to any foreign company with a Korean branch office; however, the first round of companies granted exemptions under the program were exclusively domestic firms.  Websites and applications are only offered in Korean. Despite its limited nature, the initiative is a welcome effort by regulators to spur innovation.

The ROKG enforces regulations through penalties (either fines or criminal charges) in the case of violations of the law.  The government’s enforcement actions can be challenged through an appeal process or administrative litigation. At times the CEOs of local branches can be held legally responsible for all actions of their company and have been arrested and charged for their companies’ crimes.

Business regulation in the ROK often lacks empirical cost-benefit analysis or impact assessment on the basis of scientific and data-driven assessment because regulations are finalized without sufficient stakeholder consultation or passed by the National Assembly without a regulatory impact assessment.  When ministries draft regulations, they must submit their RIA to the Regulatory Reform Committee for its determination on whether the regulation restricts rights or imposes excessive duties. These RIAs are usually not publicly available for comment, and comments received by regulators are not made public.  The ROK’s public finances and debt obligations are generally quite transparent, and the ROKG has proactively improved in this area in recent years. Some concerns regarding debt related to state-owned enterprises and pseudo-government debt remain, however.

International Regulatory Considerations

Though not part of any regional economic bloc, the ROK has revised various local regulations to implement commitments under international treaties and agreements including FTAs.  Treaties duly concluded and promulgated in accordance with the Constitution and the generally recognized rules of international law are accorded the same standing as domestic laws.  ROK officials have repeatedly expressed a desire to harmonize standards with global norms by benchmarking the United States and the EU. The U.S., U.K., and Australian governments exchange regulatory reform best practices with the ROKG to encourage ROK regulators to incorporate more regulatory analytics, increase transparency, and improve compliance with international standards.  Korea-unique rules and regulations continue to pose difficulties for foreign companies operating in the ROK, however. The ROK is a member of the WTO and notifies the Committee on Technical Barriers to Trade of all draft technical regulations. The ROK is also a signatory to the Trade Facilitation Agreement (TFA). The ROK amended the ministerial decree of the Customs Act in 2015, creating a committee charged with implementation of the TFA.  The ROK is a global leader in terms of modernized and streamlined procedures for the transportation and customs clearance of goods.   While the Korea Customs Service’s aggressive interpretation of rules of origin and extensive documentation requirements undermined KORUS benefits for U.S. exporters in the past, industry sources report that KCS has largely addressed this issue over the past year, and is now taking a rational approach to enforcing country of origin issues under KORUS.

Legal System and Judicial Independence

The ROK legal system is based on civil law.  Subdivisions within the district and high courts govern commercial activities and bankruptcies and enforce property and contractual rights with monetary judgments, usually levied in the domestic currency.  The ROK has a written commercial law, and matters regarding contracts are covered by the Civil Act. There are only three specialized courts in the ROK: the patent, family, and administrative courts. In civil cases, courts deal with disputes surrounding the rights of property or legal relations.  The ROK court system is independent and not subject to government interference in cases that may affect foreign investors. Efforts are being made to ensure the judicial process is more fair and reliable. Foreign court judgments are not enforceable in the ROK. Rulings by district courts can be appealed to higher courts and the Supreme Court.

Laws and Regulations on Foreign Direct Investment

Laws and regulations enacted within the past year include:

• The Financial Services Commission (FSC) announced a Revised Regulation for Expansion of Cloud Usage in the Financial Sector in July 2018, allowing financial services companies to make use of cloud storage solutions to process personally identifiable information (PII); this change offered limited benefit for many foreign companies, however, as it was accompanied by restrictive data localization, data protection, and reporting obligations.
• A revision to the Value-Added Tax Act passed in December 2018 and taking effect in July 2019 orders the National Tax Service to apply the standard 10 percent VAT tax on revenue earned in the ROK by foreign ICT firms.
• A revision of the Act on Promotion of Information and Communications Network Utilization and Protection took effect in March 2019 and requires global ICT firms with more than one million daily users or annual sales exceeding USD 900 million to designate a “local agent” who can be held responsible in case of a data breach or other consumer protection violation.
• A December 2018 revision to the FIPA mandated that the MOTIE Minister conduct a survey on job creation by foreign investors every three years.
• The Restriction of Special Taxation Act was revised in December 2018 to remove certain tax breaks for foreign investments registered after December 31, 2018.  Industry analysts viewed this change as a move to get Korea off of the EU List of Non-cooperative Jurisdictions for Tax Purposes (NJTP). The ROK was added to the NJTP list in December 2017, and de-listed in March 2019.

Key pending/proposed laws and regulations as of April 2019 include:

• The FSC plans to further relax restrictions on cloud computing in the financial sector, but has not announced the scope of reform or an implementation schedule.
• Numerous regulations pertaining to the taxation of foreign ICT companies are currently under consideration and are popularly referred to collectively as “Google Tax” laws.  Various ministry officials have publicly recommended waiting for OECD consensus recommendations before implementing a comprehensive digital services tax.

There is no single website for investment-relevant laws and regulations.  However, more information is available at the following websites: https://www.better.go.kr/  , https://www.fsc.go.kr/  , and http://motie.go.kr/  .

Competition and Anti-Trust Laws

The Monopoly Regulation and Fair Trade Act (KFTC Act) authorizes the Korea Fair Trade Commission (KFTC) to review and regulate competition-related and consumer safety matters.  A number of U.S. firms have raised serious concerns that the KFTC has targeted foreign companies with more aggressive enforcement efforts and that KFTC procedures and practices have inhibited their ability to defend themselves during KFTC investigatory proceedings.  The KFTC drafted the first full-scale amendment of the Monopoly Regulation and Fair Trade Act in 38 years and submitted the bill to the National Assembly in December 2018. However the draft amendment act does not address concerns raised by U.S. and other foreign companies regarding procedural fairness and the right to an adequate defense.  Due to this omission, the U.S. Trade Representation called for the first-ever consultations under provisions of the KORUS FTA in 2019.

Expropriation and Compensation

The ROK follows generally accepted principles of international law with respect to expropriation.  ROK law protects foreign-invested enterprise property from expropriation or requisition. Private property can be expropriated for a public purpose – like developing new cities, building new industrial complexes, or constructing roads – and claimants are afforded due process.  Property owners are entitled to prompt compensation at fair market value. There have been many cases of private property expropriation in the ROK for public reasons and these were conducted in a non-discriminatory manner and claimants were compensated at or above fair market value; U.S. Embassy Seoul is not aware of any cases alleging a lack of due process. The ROKG allotted USD 20 billion in its 2019 budget for land expropriation, a 38 percent increase from the previous year.

Dispute Settlement

ICSID Convention and New York Convention

The ROK acceded to the International Centre for Settlement of Investment Disputes (ICSID) in 1967, and the New York Arbitration Convention in 1973.  There are no specific domestic laws providing for enforcement; however, South Korean courts have made rulings based on the ROK’s membership in the conventions.

Investor-State Dispute Settlement

The ROK is a member of the International Commercial Arbitration Association and the World Bank’s Multilateral Investment Guarantee Agency.  ROK courts may ultimately be called upon to enforce an arbitrated settlement. When drafting contracts, it may be useful to provide for arbitration by a neutral body such as the International Commercial Arbitration Association.  U.S. companies should seek local expert legal counsel when drawing up any type of contract with a South Korean entity. The United States has a bilateral Treaty of Friendship, Commerce, and Navigation with the ROK that contains general provisions pertaining to business relations and investment.  The KORUS FTA contains strong, enforceable investment provisions that went into force in March 2012. There have been several serious investment disputes involving foreigners in Korea in recent years. In November 2012, U.S.-based Lone Star Funds, a worldwide private equity firm, brought an investor-state dispute lawsuit against the South Korean government with the ICSID in Washington D.C. under the investment chapter of the KORUS FTA, and this case is still pending.  The private equity firm blamed the ROK government for sharp declines in stock prices, claiming that it delayed the acquisition of the Korea Exchange Bank without cause. The ICSID was expected to make a ruling in 2017, but the ruling has been repeatedly postponed. Foreign court judgments, with the exception of foreign arbitral rulings that meet certain conditions, are not enforceable in the ROK. There is no history of extrajudicial action against foreign investors. An arbitration panel under the United Nations Commission on International Trade Law (UNCITRAL) made a USD 68 million ruling against the ROKG in June 2018 in an investor-state dispute settlement filed by Entekhab, owned by Iranian investor Mohammad Reza Dayyani.  In July 2018, an American individual investor filed an investor-state dispute (ISD) lawsuit against the ROKG, claiming that the government had violated the KORUS FTA in expropriating her land. This case is still pending. Also in July 2018, U.S. activist fund Elliott Associates submitted a notice of arbitration over an ISD pertaining to the KORUS FTA. Elliott Associates claimed they had suffered at least USD 770 million in financial losses due to the merger between Samsung C&T and Cheil Industries, stating the ROKG illicitly intervened by mobilizing the National Pension Service as a large shareholder in the process of approving the merger in 2015. In September 2018, Mason Capital Management, another American investor, filed for arbitration seeking USD 200 million in compensation for losses incurred from the same controversial merger.  Both cases pending before the UNCITRAL. In August 2018, Korea’s Higher Court found former President Park Geun-hye guilty of illegally intervening in the Samsung-Cheil merger.

International Commercial Arbitration and Foreign Courts

Although commercial disputes can be adjudicated in a civil court, foreign businesses find this method impractical.  Proceedings are conducted in Korean, often without adequate interpretation. ROK law prohibits foreign lawyers who have not passed the Korean Bar Examination from representing clients in South Korean courts.  Civil procedures common in the United States, such as pretrial discovery, do not exist in the ROK. During litigation of a dispute, foreigners may be barred from leaving the country until a decision is reached.  Legal proceedings are expensive and time-consuming, and lawsuits often are contemplated only as a last resort, signaling the end of a business relationship. ROK law governs commercial activities and bankruptcies, with the judiciary serving as the means to enforce property and contractual rights, usually through monetary judgments levied in the domestic currency.  The ROK has specialized courts, including family courts and administrative courts, as well as courts specifically dealing with patents and other intellectual property rights issues. Commercial disputes may also be taken to the Korean Commercial Arbitration Board (KCAB). The Korean Arbitration Act and its implementing rules outline the following sequential steps in the arbitration process: 1) parties may request the KCAB to act as an informal intermediary to a settlement; 2) if informal arbitration is unsuccessful, either or both parties may request formal arbitration, in which the KCAB appoints a mediator to conduct conciliatory talks for 30 days; and 3) if formal arbitration is unsuccessful, an arbitration panel consisting of one to three arbitrators would be assigned to decide the case.  If one party is not resident in the ROK, either may request an arbitrator from a neutral country. If foreign arbitral awards or foreign courts’ rulings meet the requirements of Article 217 of the Civil Procedure Act, then those are enforceable by local courts. The U.S. Embassy is not aware of statistics involving state-owned enterprise investment dispute court rulings. Gale International (GI), a U.S. real estate development company, has had an ongoing investment dispute with Korean conglomerate POSCO since 2015.  GI claims it is owed USD 350 million and has filed criminal complaints in a Seoul court against POSCO alleging misappropriation of funds and approving documents with the GI seal without authorization.  The case is still pending, and GI has closed its office in the ROK.

Bankruptcy Regulations

The Debtor Rehabilitation and Bankruptcy Act (DRBA) stipulates that bankruptcy is a court-managed liquidation procedure where both domestic and foreign entities are afforded equal treatment.  The procedure commences after a filing by a debtor, creditor, or a group of creditors and determination by the court that a company is bankrupt. The court designates a Custodial Committee to take an accounting of the debtor’s assets, claims, and contracts.  Creditors may be granted voting rights in the creditors’ group, as identified by the Custodial Committee. Shareholders and contract holders may retain their rights and responsibilities based on shareholdings and contract terms. The World Bank ranked ROK policies and mechanisms to address insolvency 11th among 190 economies in its 2019 Doing Business report.  Debtors may be subject to arrest once a bankruptcy petition has been filed, even if the debtor has not been declared bankrupt.  Individuals found guilty of negligent or false bankruptcy are subject to criminal penalties. Under the revised DRBA enacted on March 28, 2017, Korea established the Seoul Bankruptcy Court (SBC) with nationwide jurisdiction to hear major bankruptcy or rehabilitation cases and to provide more effective, specialized and consistent guidance in bankruptcy proceedings.  Any Korean company with debt equal to or above KRW 50 billion KRW (about USD 44 million) and 300 or more creditors may file for bankruptcy rehabilitation with the SBC. Thirteen local district courts continue to oversee smaller bankruptcy cases in areas outside Seoul.

Investment Incentives

The ROK government provides the following general incentives for foreign investors:

• Cash incentives for qualified foreign investments in free trade zones, foreign investment zones, free economic zones, industrial complexes, and similar facilities;
• Tax and cash incentives for the creation and expansion of workplaces for high-tech business plants and research and development centers;
• Reduced rent for land and site preparation for foreign investors;
• Grants for establishment of convenience facilities for foreigners;
• Reduced rent for state or public property;
• Preferential financial support for investing in major infrastructure projects; and
• Support from the Seoul Metropolitan government, separate from the central government, for SMEs, high-technology businesses, and the biomedical industry.

The ROKG does not issue guarantees or jointly finance foreign direct investment projects.

Foreign Trade Zones/Free Ports/Trade Facilitation

The Ministry of Economy and Finance (MOEF) administers tax and other incentives to stimulate advanced technology transfer and investment in high-technology services.  There are three types of special areas for foreign investment (i.e., Free Economic Zones, Free Investment Zones, and Tariff Free Zones), where favorable tax incentives and other support for investors are available.  The ROK aims to attract more foreign investment by promoting its seven Free Economic Zones: Incheon (near Incheon airport, to be completed in 2022); Busan/Jinhae (in South Gyeongsang Province, to be completed in 2020); Gwangyang Bay (in South Gyeongsang Province, to be completed in 2020); Yellow Sea (in South Chungcheong Province, to be completed in 2020); Daegu/Gyeongbuk (in North Gyeongsang Province, to be completed in 2022); East Sea (in Donghae and Gangneung, to be completed in 2024); and Chungbuk (in North Chungcheong Province, to be completed in 2020).  Additional information is available at http://www.fez.go.kr/global/en/index.do  .  There are also 26 Foreign Investment Zones designated by local governments to accommodate industrial sites for foreign investors.  Special considerations for foreign investors vary among these options. In addition, there are four foreign-exclusive industrial complexes in Gyeonggi Province designed to provide inexpensive land, with the national and local governments providing assistance for leasing or selling in the sites at discounted rates.

Performance and Data Localization Requirements

There are no local employment requirements in the ROK.  Anyone who is planning to work during his or her stay in the ROK is required by law to apply for a visa.  Sponsoring employers often file the work permit and visa applications, and companies should confirm that a candidate of foreign nationality has a valid work permit prior to making a job offer.  Once an expat’s work permit has been approved, the Ministry of Justice will issue a Certificate of Confirmation of Visa Issuance (CCVI). This certificate must then be submitted with the relevant visa application forms to the South Korean embassy or consulate in the applicant’s country of residence.  Work visas are usually valid for one year, and work visa issuance generally takes two to four weeks.  Changing a tourist visa to a work visa is not possible within the ROK and must be applied for at a ROK embassy or consulate. Sectors such as public administration, national defense, and diplomacy are subject to certain restrictions imposed by the ROK government, but there are no government-imposed conditions or restrictions on investing in the ROK in most sectors. The conditions to invest in the ROK are elaborated in the FIPA.  Foreign companies are not required to use domestic content or technology, nor are they required to turn over source code or provide access for surveillance to ROK authorities. The ROK government, however, is implementing policies to foster the domestic software industry, which sometimes creates obstacles for foreign companies pursuing public procurement projects. The ROK ceased imposing performance requirements on new foreign investment in 1989 and eliminated all pre-existing performance requirements in 1992.  There are no performance requirements that force foreign companies to ensure a certain level of local content, local jobs, R&D activity, or domestic shares in the company’s capital. There are no legal requirements for foreign information technology (IT) providers to turn over source code and/or provide access to encryption. However, the security certifications required for some IT products can prove burdensome. These certifications are referred to as “Common Criteria certification” (CC certification), the standards and assessments for which are established and implemented by the IT Security Certification Center.  The source code for IT products might need to be submitted to the IT Security Certification Center during the review process to apply for CC certification. In January 2016, the ROK government announced guidelines stating that the CC certification is a requirement for cloud computing services to be provided to ROK government agencies or public institutions. ROK data privacy law has various requirements for companies that collect, use, transfer, outsource, or process personal information. This law applies uniformly to both domestic and foreign companies that process personal information in the ROK. The law imposes strict restrictions on transferring personal information outside of the country.  If a data controller intends to transfer the personal information of end-users outside of the ROK, it is required to obtain each end-user’s consent. In the case of overseas transfer of personal information for the purpose of IT outsourcing, the data controller may forgo obtaining each individual’s consent if the data controller discloses in its privacy policy: (i) the purpose of overseas transfer; (ii) the transferees of personal information; and (iii) other certain items about overseas transfer. There are similar requirements for a data controller to transfer the personal information of end-users to a third party within the ROK. To transfer the personal information of end-users to a third party, a data controller must obtain each end-user’s consent.  In addition, regulations prohibit financial companies in the ROK from transferring customers’ personal information and related financial transaction data overseas. As such, this financial transaction data cannot be outsourced to overseas IT vendors, and financial companies in the ROK must store customers’ financial transaction data in the ROK. The Financial Services Commission sets Korea’s financial policies, and directs the Financial Supervisory Service in the enforcement of those policies.

Real Property

Property rights and interests are enforced under the Civil Act.  Mortgages and liens exist, and the ROK’s recording system is reliable. The Alien Land Acquisition Act (amended in 1998) grants non-resident foreigners and foreign corporations the same rights as Koreans in purchasing and using land.  The Real Estate Investment Trust (REIT) Act supports indirect investments in real estate and restructuring of corporations. The REIT Act allows investors to invest funds through an asset management company and in real property such as office buildings, business parks, shopping malls, hotels, and serviced apartments.  Property interests are enforced, and there is a reliable system for registering mortgages and liens, managed by the courts.  Legally-purchased property cannot revert to other owners, but squatters may have very limited rights in special situations, such as a right to cultivation of unoccupied land.

Intellectual Property Rights

Four ROK ministries share primary responsibility for protection and enforcement of intellectual property rights (IPR): the Ministry of Culture, Sports, and Tourism (MCST); the Korea Copyright Protection Agency (KCOPA); the Korean Intellectual Property Office (KIPO); and the Korea Customs Service (KCS).  Now a decade removed from exiting the Special 301 Watch List in 2009, the ROK has become a regional leader in terms of legal framework and enforcement for IPR. Enforcement efforts have been primarily focused on online activity in recent years, but some industry sources have reported a loss of momentum in preventing the sale of physical counterfeit goods.  No new IP-related laws or amendments were enacted in 2018, and no relevant reforms are expected in the near future.

Industry sources have expressed satisfaction with the ROK legal framework, saying Korea has become a “model Asian nation” for IPR protections.  KIPO Special Judicial Police seized 542,505 counterfeit items from 361 persons in 2018, down from 691,630 items seized from 362 persons in 2017.  KIPO also suspended 6,181 online transactions in 2018, up from 6,156 cases in 2017; and closed 225 illegal online shopping malls in 2018, up from 191 in 2017.  In addition, KIPO provides training to law enforcement officers, educates the public through television and other media, and rewards those who report counterfeit goods.  KCS seized USD 470 million of IP-infringing goods in 2018, an increase of 249 percent from 2017.  Trademark enforcement accounted for 88 percent of these cases, which were mostly for counterfeit watches, apparel, and other consumer goods.  KCS also promotes IPR protection by posting public service announcements on public transportation (trains and subways) and via social media.

Some industry sources have expressed concern about the prosecution of IPR violations in the ROK, stating that light sentences do not correspond to the lucrative nature of infringing activity and do not serve as an effective deterrent.  Though MCST Judicial Police recommended 670 IPR cases for legal action to the Supreme Prosecutor’s Office (SPO) in 2018, a 24 percent increase on the previous year, the total number of people indicted by the SPO for Copyright Act violations dropped from 24,309 in 2017 to 18,392 in 2018.

Stakeholders have expressed concern, however, that Korea’s pharmaceutical reimbursement is not conducted in a fair, transparent, and nondiscriminatory manner that recognizes the value of innovation.  In March 2018, negotiations to improve and better implement the KORUS FTA concluded with a commitment from Korea to amend its Premium Pricing Policy for Global Innovative New Drugs to ensure non-discriminatory and fair treatment for pharmaceutical products and medical devices, including imported products and devices. Korea’s implementation of this commitment has resulted in amendments that appear to make it so that very few, if any, companies or products will qualify for premium pricing.

The ROK was not listed in the 2019 Special 301 report, nor was it included in the 2018 Notorious Markets List.  For additional information about national laws and points of contact at local intellectual property offices, please see World Intellectual Property Organization’s country profiles at http://www.wipo.int/directory/en/  .

Capital Markets and Portfolio Investment

The Korea Exchange (KRX) is comprised of a stock exchange, futures market, and stock market following a 2005 merger of the Korea Stock Exchange, Korea Futures Exchange, and Korean Securities Dealers Automated Quotations (KOSDAQ) stock market.  It is tracked by the Korea Composite Stock Price Index (KOSPI) and has an effective regulatory system that encourages portfolio investment. There is sufficient liquidity in the market to enter and exit sizeable positions. In 2018, over 2,000 companies were listed with a combined market capitalization of USD 1.9 trillion.  The ROK government uses various incentives, such as tax breaks, to facilitate the free flow of financial resources into the product and factor markets. The ROK respects International Monetary Fund (IMF) Article VIII on the general obligations of member states by refraining from restrictions on payments and transfers for current international transactions.  Credit is allocated on market terms. The private sector has access to a variety of credit instruments, but non-resident foreigners are not able to borrow money in South Korean won, although they can issue bonds in local currency. Foreign portfolio investors enjoy open access to the ROK stock market. Aggregate foreign investment ceilings were abolished in 1998, and foreign investors owned 35.8 percent of benchmark KOSPI stocks and 11.1 percent of the KOSDAQ as of the end of 2018.  Foreign portfolio investment decreased slightly over the past year, reflecting slowing global growth.

Money and Banking System

Financial sector reforms are often cited as one reason for the ROK’s rapid rebound from the 2008 global financial crisis.  These reforms aimed to increase transparency and investor confidence and generally purge the sector of moral hazard. Since 1998, the ROK government has recapitalized its banks and non-bank financial institutions, closed or merged weak financial institutions, resolved many non-performing assets, introduced internationally-accepted risk assessment methods and accounting standards for banks, forced depositors and investors to assume appropriate levels of risk, and taken steps to help end the policy-directed lending of the past.  These reforms addressed the weak supervision and poor lending practices in the South Korean banking system that helped cause and exacerbate the 1997-98 Asian financial crisis. The ROK banking sector is healthy overall, with a low non-performing loan ratio of 0.97 percent at the end of 2018, dropping 0.22 percent from the prior year. Korean commercial banks held more than USD 2.2 trillion in total assets at the end of 2018. The ROK central bank is the Bank of Korea (BOK). Foreign banks or branches are allowed to establish operations in the country, and are subject to prudential measures and other relevant regulations.  The ROK has not lost any correspondent banking relationships in the past three years, nor are any relationships in jeopardy. There are no restrictions on a foreigner’s ability to establish a bank account in Korea.

Foreign Exchange and Remittances

Foreign Exchange

In categories open to investment, foreign exchange banks must be notified in advance of applications for foreign investment.  All ROK banks, including branches of foreign banks, are permitted to deal in foreign exchange. In effect, these notifications are pro forma, and approval can be processed within three hours.  Applications may be denied only on specific grounds, including national security, public order and morals, international security obligations, and health and environmental concerns. Exceptions to the advance notification approval system exist for project categories subject to joint-venture requirements and certain projects in the distribution sector.  According to the Foreign Exchange Transaction Act (FETA), transactions that could harm international peace or public order, such as money laundering and gambling, require additional monitoring or screening. Three specific types of transactions are restricted:

1. Non-residents are not permitted to buy won-denominated hedge funds, including forward currency contracts;
2. The Financial Services Commission will not permit foreign currency borrowing by “non-viable” domestic firms; and
3. The ROK government will monitor and ensure that South Korean firms that have extended credit to foreign borrowers collect their debts.  The ROK government has retained the authority to re-impose restrictions in the case of severe economic or financial emergency.

Funds associated with any form of investment can be freely converted into any world currency.  However, there might be some cost or technical problems in case of conversion into lesser used currencies, due to the relatively small foreign exchange market in the country.  In 2018, 71.9 percent of spot transactions in the market were between the U.S. dollar and Korean won, while daily transaction (spot and future) was equal to USD 55.5 billion, up 9.6 percent from the previous year.  Exchange rates are generally determined by the market. In the past, the U.S. Department of the Treasury has assessed that ROK authorities have intervened on both sides of the currency market, but the sustained rise in their reserves and net forward position indicate that they had intervened on net to resist won appreciation.  In May 2019, however, the U.S. Treasury assessed that on net in 2018 ROKG authorities intervened to support the Won, making small net sales of foreign exchange. In March 2019, the ROK released a report on its net foreign currency intervention for the second half of 2018, the first in a series of regular reports expected to transition from biannual to quarterly in late 2019.  Treasury welcomed the ROK report on its foreign exchange intervention, urged the ROK to continue to limit currency intervention, and observed that Korea now only falls short on one of three monitoring criteria and could be removed from the monitoring list in its next report.  

Remittance Policies

The right to remit profits is granted at the time of original investment approval.  Banks control the now pro forma approval process for FETA-defined open sectors. For conditionally or partially restricted investments (as defined by the FETA), the relevant ministry must provide approval for both investment and remittance.  When foreign investment royalties or other payments are proposed as part of a technology licensing agreement, the agreement and the projected stream of royalties must be approved by either a bank or MOEF. Approval is virtually automatic. An investor wishing to enact a remittance must present an audited financial statement to a bank to substantiate the payment.  The ROK routinely permits the repatriation of funds but reserves the right to limit capital outflows in exceptional circumstances, such as situations when uncontrolled outflows might harm the balance of payments, cause excessive fluctuations in interest or exchange rates, or threaten the stability of domestic financial markets. To withdraw capital, a stock valuation report issued by a recognized securities company or the ROK appraisal board also must be presented. Foreign companies seeking to remit funds from investments in restricted sectors must first seek ministerial and bank approval, after demonstrating the legal source of the funds and proving that relevant taxes have been paid.  There are no time limitations on remittances.

Sovereign Wealth Funds

The Korea Investment Corporation (KIC), a sovereign wealth fund, was established in July 2005 under the KIC Act.  KIC is wholly government-owned, with an independent steering committee that has the authority to undertake core business decisions, composed of six professionals from the private sector, the Chief Executive Officer (CEO) of KIC, and the heads of MOEF and the BOK.  KIC is on the Public Institutions Management Act (PIMA) list. KIC is mandated to manage assets entrusted by the ROK government and the BOK and generally adopts a passive role as a portfolio investor. KIC’s assets under management stood at USD 134.1 billion at the end of 2017.  KIC is required by law to publish an annual report, submit its books to the steering committee for review, and follow all domestic accounting standards and rules. It follows the Santiago Principles and participates in the IMF-hosted International Working Group on Sovereign Wealth Funds.  The KIC has never invested entrusted money in domestic assets, but did once invest USD 23 million of the Corporation’s own money into a domestic real estate fund in January 2015.

Many ROK state-owned enterprises (SOEs) continue to exert significant control over segments of the economy.  There are 35 remaining SOEs active in the energy, real estate, and infrastructure (railroad, highway construction) sectors.  The legal system has traditionally ensured a role for SOEs as sectoral leaders, but in recent years, the ROK has tried to attract more private participation in the real estate and construction sectors in particular.  SOEs are generally subject to the same regulations and tax policies as private sector competitors and do not have preferential access to government contracts, resources, and financing. The ROK is party to the WTO Government Procurement Agreement; a list of SOEs subject to WTO government procurement provisions is available in annex three of the ROK’s agreement.  The state-owned Korea Land and Housing Corporation is given preferential access to developing state-owned real estate projects, notably housing. The court system functions independently from the government and gives equal treatment to SOEs and private enterprises. The ROK government does not provide official market share data for SOEs. It requires each entity to disclose financial statements, the number of employees, and average compensation figures.  The PIMA gives authority to MOEF to administer control of many SOEs, mainly focusing on administrative and human resource management. However, there is no singular government entity that exercises ownership rights over SOEs. SOEs subject to PIMA are required to report to a line minister; the President or line ministers appoint senior government officials or politically-affiliated individuals as CEOs or directors. SOEs are explicitly obligated to consult with government officials on their budget, compensation, and key management decisions (e.g., pricing policy for energy and public utilities).  For other issues, the government officials informally require the SOEs to either consult with them before making decisions or report ex post facto. Market analysts generally regard SOEs as a part of the government or entities fully guaranteed by the government, with some exceptions: SOEs listed on local security markets, such as the Industrial Bank of Korea and Korea Electric Power Corporation, are regarded as semi-private firms. The ROK adheres to the OECD Guidelines for Multinational Enterprises and reports significant changes in the regulatory framework for SOEs to the OECD. A list of South Korean SOEs is available on this Korean-language website: http://www.alio.go.kr/home.html  .  The ROK government officially does not give any non-market based advantages to SOEs competing in the domestic market, but U.S. Embassy Seoul has noted that the state-owned Korea Development Bank enjoys lower financing costs because of the government’s guarantee.  This does not appear to have a major effect on the U.S. retail banks operating in Korea.

Privatization Program

Privatization of government-owned assets historically faced protests by labor unions and professional associations and a lack of interested buyers in some sectors.  No state-owned enterprises were privatized between 2002 and November 2016. In December 2016, the ROK sold part of its stake in Woori Bank, recouping USD 2.07 billion, and plans to sell its remaining 21.4 percent stake at an undetermined future date.  Given the current administration’s pro-labor stance, most analysts do not expect significant movement with regard to privatization in the near future. Foreign investors may participate in privatization programs if they comply with ownership restrictions stipulated for the 30 industrial sectors indicated in Section 1: Openness To, and Restrictions Upon, Foreign Investment.  These programs have a public bidding process that is easy to understand, non-discriminatory, and transparent. The authority in charge or a delegated private lead manager provides the relevant information.

Awareness of the economic and social value of responsible business conduct and corporate social responsibility (CSR) is growing in the ROK but is still in a nascent stage.  The Korea Corporate Governance Service, founded in 2002 by entities including the Korea Exchange and the Korea Listed Companies Association, encourages companies to voluntarily improve their corporate governance practices.  Since 2011, its annual assessments have included reviews of corporate environmental responsibility and CSR, in addition to the issuance of associated guidelines. The United Nations Global Compact (UNGC) Network Korea, established in 2007, actively promotes corporate involvement in the UN Public Private Partnership for Sustainable Development Goals 2016-2030 and guides the values and direction of CSR to be not only about charity, but also about future corporate sustainability.  UNGC is focused on human rights, anti-corruption, labor standards, and the environment, with 249 ROK companies listed as UNGC members as of April 2018. Government-supported subsidies and tax reductions for social enterprises have contributed to an increase in the number of organizations tackling social issues related to unemployment, the environment, and low-income populations. The ROKG promotes the OECD Guidelines for Multinational Enterprises online, via seminars, and by publishing and distributing promotional materials.  To enhance implementation, the ROKG established a National Action Plan overseen by the International Human Rights Division of the Ministry of Justice, established a National Contact Point (NCP), and designated the Korea Commercial Arbitration Board (KCAB) as the NCP Secretariat. The KCAB recently addressed two cases by facilitating discussion of the concerned parties and inviting outside experts on arbitration to settle the issues to the parties’ satisfaction.

The National Human Rights Commission, the Ministry of Employment and Labor (MOEL), the Korea Consumer Agency, and the Ministry of Environment enforce ROK law in the fields of human rights, labor, consumer protection, and environment effectively and fairly.  Shareholders are protected by laws such as the Act on an External Audit of Corporations under the jurisdiction of the Financial Services Commission, the Act on Monopoly Regulation and Fair Trade under the jurisdiction of the KFTC, and the Commercial Act under the jurisdiction of the Ministry of Justice.  The Commercial Act is currently under revision to better represent minority shareholders and enhance the value of shareholders. Other organizations involved in responsible business conduct include the ROK office of Trade Union Advisory Committee to the OECD, the Korea Human Rights Foundation, and the Korean House for International Society.  The Korea Sustainability Investing Forum (KOSIF) was established in 2007 and is dedicated to promoting and expanding socially responsible investment and CSR. Through regular fora, seminars, and publications, KOSIF provides educational opportunities, conducts research to establish a culture of socially responsible investment in the ROK, and supports relevant legislative processes.  It actively engages with National Assembly members and stakeholders to influence decision-making processes.

The ROK does not maintain regulations to prevent conflict minerals from entering supply chains; however, MOTIE supports companies’ voluntary adherence to OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Afflicted and High-Risk Areas.  ROK companies are often obligated to follow the conflict-free regulations of economies to which they export goods. The Korea International Trade Association and private-sector firms provide consulting services to companies seeking to comply with conflict-free regulations.  The ROK is not a member of the Extractive Industries Transparency Initiative, but has a mining industry and has participated in the Kimberly Process since 2012. The ROK government is taking measures to guarantee transparency through the Mining Act, Overseas Resources Development Business Act, other relevant law on taxation, environment, labor, and anti-bribery, and OECD Guidelines for Multinational Enterprises.

In an effort to combat corruption, the ROK has introduced systematic measures to prevent civil servants from inappropriately accumulating wealth and conducting opaque financial transactions. The Public Service Ethics Act, drafted in 1981 and entered into force in 1983, requires high-ranking officials to disclose their assets, including how they were accumulated, and report gifts they receive, thereby making their holdings public.  The Act on Anti-Corruption and the Establishment and Operation of the Anti-Corruption and Civil Rights Commission (previously called the Anti-Corruption Act) concerns reporting of corruption allegations, protection of whistleblowers, institutional improvement, and training and public awareness to prevent corruption, as well as establishing national anti-corruption initiatives through the Anti-Corruption and Civil Rights Commission (ACRC).  The ROK still faces challenges in effectively implementing anti-corruption laws, however. Transparency International’s Corruption Perception Index in 2018 ranked the ROK 45 out of 180 countries and territories, and gave it a score of 57 out of 100 (with 100 being the best score). Public concern about government corruption reached an apex between 2016 and 2017, when local press began exposing the link between then-President Park Geun-hye and her friend and adviser Choi Soon-sil.  Choi was arrested and sentenced to 20 years in jail on charges of fraud, coercion, and abuse of power and President Park was impeached by 234-56 vote in the National Assembly in December 2016. Following her removal from office, a presidential by-election was held on May 9, 2017, bringing President Moon Jae-in into office. Former President Park was found guilty of multiple counts of abuse of power, bribery, and coercion and sentenced to 24 years in prison on April 6, 2018. Separately, on October 5, 2018, Park’s predecessor, former President Lee Myung-bak was sentenced to 11 months of imprisonment for graft, embezzlement, and abuse of power, including accepting bribes from a major consumer electronics conglomerate in return for a presidential pardon for its chairman.  Political corruption at the highest levels of elected office have occurred despite efforts by the ROK legislature to pass and enact anti-corruption laws such as the Act on Prohibition of Illegal Requests and Bribes, also known as the Kim Young-ran Act, in March 2015. The anti-corruption law came into effect on September 28, 2016, and institutes strict limits on the value of gifts that can be given to public officials, lawmakers, reporters, and private school teachers. It also extends to the spouses of officials. The Act on the Protection of Public Interest Whistleblowers is designed to protect whistleblowers in the private sector and equally extends to reports on foreign bribery, with a reporting center operated by the ACRC.

In 2014, to reduce collusion between government regulators and regulated industries that contributed to the tragic sinking of the Sewol ferry, the ROK government attempted to tighten regulations governing the employment of retired government officials, who were seen as having used their insider knowledge and high-level government contacts to help their new employers skirt legal requirements.  The sinking, which resulted in the deaths of 304 passengers (mostly school children on a field trip) and crew in April of that year, resulted in widespread criticism of the ferry operator, the regulators who oversaw its operations, and the ROK government for its poor disaster response and attempts to downplay government culpability. The government expanded the list of sectors restricted from employing former government officials during a mandated period after retirement, extended the mandated post-retirement period from two to three years, and increased scrutiny of retired officials seeking jobs in fields associated with their former official duties.  The Public Service Ethics Commission, between May 2017 and February 2019, approved approximately 85 percent, or 1335, of the requests made by former political appointees and former government officials to accept government affiliated or private sector positions, according to local press. Most companies maintain an internal audit function to prevent and detect corruption. Government agencies responsible for combating government corruption include the Board of Audit and Inspection, which monitors government expenditures, and the Public Service Ethics Committee, which monitors civil servants’ financial disclosures and their financial activities. The ACRC focuses on preventing corruption by assessing the transparency of public institutions, protecting and rewarding whistleblowers, training public officials, raising public awareness, and improving policies and systems.  In reporting cases of corruption to government authorities, nongovernment organizations and civil society groups are protected by the Act on the Prevention of Corruption and the Establishment and Management of the Anti-Corruption and Civil Rights Commission, as well as the Protection of Public Interest Reporters Act. Individuals reporting cases of corruption to the ACRC must provide their full name and other personally identifiable information (PII) to make the submission. However, in April 2018, the law was updated to allow would-be filers to report cases through one’s attorney without disclosing PII to the courts. Violations of these legal protections can result in fines or prison sentences. U.S. firms have not identified corruption as an obstacle to FDI. The ROK ratified the UN Convention against Corruption in 2008. It is also a party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions and a member of the Asia-Pacific Economic Cooperation Anti-Corruption and Transparency Working Group.  The Financial Intelligence Unit has cooperated fully with U.S. and UN efforts to shut down sources of terrorist financing. Transparency International has maintained a national chapter in the ROK since 1999.

Resources to Report Corruption

Government agency responsible for combating corruption:

Anti-Corruption and Civil Rights Commission
Government Complex-Sejong, 20, Doum 5-ro
Sejong-si, 339-012
Telephone: +82-44-200-7151
Fax: +82-44-200-7916
Email: acrc@korea.kr
http://www.acrc.go.kr/en/index.do  

Contact at “watchdog” organization:

Anti-Corruption Network in Korea (aka Transparency International Korea)
#1006 Pierson Building, 42, Saemunan-ro, Jongno-gu, Seoul 110-761
Telephone: +82-2-717-6211
Fax: +82-2-717-6210
Email: ti@ti.or.kr
http://www.transparency-korea.org/  

The Democratic People’s Republic of Korea (DPRK) and the ROK continue to have a tense relationship despite rapprochement efforts in 2018.  The two Koreas still share what is arguably the most heavily-fortified border in the world, with their militaries ready to face off at a moment’s notice.  The United States has had a security alliance with the ROK since 1953, with nearly 28,000 U.S. troops currently stationed in the ROK. The presence of U.S. forces have allowed the Korean Peninsula to maintain general peace and stability since 1953 and enabled the ROK to grow into a modern, prosperous democracy boasting one of the largest and most dynamic economies in the world.  In addition, both the ROK and U.S. governments are engaging with the DPRK in dialogue in an effort to resolve tensions and to realize the complete denuclearization of North Korea. The two Koreas committed in the April 27, 2018, inter-Korean summit to reduce tensions on the border and to work toward a permanent peace regime on the Korean Peninsula. Likewise, the United States and DPRK agreed in the June 12, 2018, Singapore Summit between President Trump and Chairman Kim to work toward denuclearization and to build a lasting and stable peace regime on the Korean Peninsula.  Further progress in inter-Korean relations will, however, depend DPRK’s denuclearization efforts. The ROK does not have a history of political violence directed against foreign investors. There have not been reports of politically motivated threats of damage to foreign-invested projects or foreign-related installations of any sort, nor of any incidents that might be interpreted as having targeted foreign investments. Labor violence unrelated to the issue of foreign ownership, however, has occurred in foreign-owned facilities in the past. There have also been large-scale protests in the past directed at U.S. trade actions (e.g. beef imports in 2008).  The ROK is a modern democracy with active public political participation, and well organized political demonstrations are common. For example, large-scale rallies were a regular occurrence throughout former President Park Geun-hye’s impeachment in 2016 and 2017. The protests were largely peaceful and orderly, with almost no instances of violence. The presidential by-election and transition that followed Park’s impeachment also proceeded smoothly and without incident.

Upon taking office in May 2017, President Moon Jae-in declared himself the “Jobs President,” and his administration has introduced a number of employment-related reforms since.  According to Statistics Korea (http://kostat.go.kr/portal/eng/index.action  ), there were approximately 28 million economically active people in the ROK as of March 2019, with an employment rate (OECD standard) of approximately 60.4 percent.  The overall unemployment rate of 4.3 percent in March 2019 was much lower than the unemployment rate of youth ages 15-29, which, at 9.3 percent, is a serious domestic concern. The country has two major national labor federations.  As of December 2018, the Federation of Korean Trade Unions (FKTU) had 1,036,236 members, and the Korean Confederation of Trade Unions (KCTU) had 995,861 members. KCTU and FKTU are affiliated with the International Trade Union Confederation.  Most of FKTU’s constituent unions maintain affiliations with international union federations.

The minimum wage is reviewed annually.  Labor and business set the minimum wage for 2019 at KRW 8,350 (approximately USD 7.35 per hour), a 10.9 percent increase from 2018.  The Labor Standards Act was revised in 2018 to reduce maximum working hours to 52 per week. According to Statistics Korea, non-regular workers received 54.5 percent of the wages of regular workers in 2018.  Non-regular workers received KRW 1.64 million per month (about USD 1,444) while regular workers received KRW 3.09 million (about USD 2,649).

For regular, full-time employees, the law provides employment insurance, national medical insurance, industrial accident compensation insurance, and participation in the national pension system through employers or employer subsidies.  Non-regular workers, such as temporary and contracted employees, are not guaranteed the same collection of benefits. With regard to severance pay for regular workers, ROK law does not distinguish between the firing of an employee versus the laying off of an employee for economic reasons.  Employers’ reliance on non-regular workers is partially explained by the costs that may be associated with dismissing regular full-time employees and the savings that may be realized through not having to provide insurance and other benefits. There are no government policies requiring the hiring of ROK nationals.  In 2004, the ROK implemented a “guest worker” program known as the Employment Permit System (EPS) to help protect the rights of foreign workers. The EPS allows employers to legally employ a certain number of foreign workers from 16 countries, including the Philippines, Indonesia, and Vietnam, with which the ROK maintains bilateral labor agreements.  In 2015, the ROK increased its annual quota to 55,000 migrant workers. At the end of 2018, approximately 222,374 foreigners were said to be working under the EPS in the manufacturing, construction, agriculture, livestock, service, and fishery industries.

Legally, unions operate with autonomy from the government and employers, although national labor federations, comprised of various industry-specific unions, receive annual government subsidies.  The ratio of organized labor to the entire population of wage earners at the end of 2017 was 10.7 percent; this ratio has remained relatively stable over the last 10 years. ROK trade union participation is lower than the latest-available OECD average of 16.7 percent in 2014.  More information is available at http://stats.oecd.org/  .  Labor organizations are permitted in export processing zones (EPZs), but foreign companies operating in EPZs are exempt from some labor regulations.  Exemptions include provisions that mandate paid leave, require companies with more than 50 people to recruit persons with disabilities for at least two percent of their workforce, encourage companies to reserve three percent of their workforce for workers over 55 years of age, and restrict large companies from participating in certain business categories.  Foreign companies operating in Free Economic Zones have greater flexibility in employing “non-regular” workers in a wider range of sectors for extended contractual periods. ROK law provides workers with the right to associate freely and allows public servants and private workers to organize unions. The Trade Union and Labor Relations Adjustment Act provides for the right to collective bargaining and collective action, and allows workers to exercise these rights in practice.

The National Labor Relations Commission is the primary government body responsible for labor dispute resolution.  It provides arbitration and mediation services in response to dispute resolution requests submitted by employees, employers, or both parties.  Labor inspectors from the Ministry of Employment and Labor also have certain legal authorities to participate in dispute settlement related to violations of labor rights.  The Korea Workers’ Compensation and Welfare Service handles labor disputes resulting from industrial accidents or disasters. In June 2018, the ROK President established the “Economic, Social, and Labor Council” that serves as an advisory group on economic and labor issues.  The Act on the Protection of Fixed-Term and Part-Time Workers prohibits discrimination against non-regular workers and requires that non-regular workers employed longer than two years be converted to permanent status. The two-year rule went into effect on July 1, 2009. Both the labor and business sectors have complained that the two-year conversion law forced many businesses to limit the contract terms of non-regular workers to two years and incur additional costs with the entry of new labor every two years.  More information can be found in the Department of State’s Report on Human Rights Practices for 2018: https://www.state.gov/reports/2018-country-reports-on-human-rights-practices/republic-of-korea/

U.S. investments in the ROK are eligible for insurance programs sponsored by the U.S. Overseas Private Investment Corporation (OPIC).  OPIC has not, however, guaranteed any U.S. investments in the ROK since 1998, when OPIC reinstated coverage it had suspended in 1991 due to concerns about worker rights.  Coverage issued prior to 1991 is still in force. The United States and the ROK signed an investment incentive agreement on July 30, 1998. The ROK has been a member of the World Bank’s Multilateral Investment Guarantee Agency since 1987.  In the second quarter of 2018, Korean firm ARK Impact Asset Management and OPIC embarked on a joint investment in the Mumbai Slum Redevelopment Project.

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

*ROK Sources: GDP – http://ecos.bok.or.kr/   (as of March 2019); inbound FDI – http://www.motie.go.kr  ; (as of January 2018) outbound FDI – http://www.koreaexim.go.kr   (as of March 2018)

Table 3: Sources and Destination of FDI

Table 4: Sources of Portfolio Investment

Economic Section
U.S. Embassy Seoul
188 Sejong-daero, Sejongno, Jongno-gu
Seoul, South Korea, 110-710
Teelphone +82 2-397-4114

Policies Towards Foreign Direct Investment

Over the past decade, the GOR has undertaken a series of policy reforms intended to improve the investment climate, wean Rwanda’s economy off foreign assistance, and increase FDI levels.  Rwanda enjoys strong economic growth, averaging over 7 percent annually over the last decade, high rankings in the World Bank’s Doing Business report (29 out of 190 economies in 2019 (and second best in Africa) compared to 41 in 2018), and a reputation for low corruption.  The Rwandan economy grew more than 8 percent in 2018 as higher global prices for traditional exports, improved agricultural output, growth in transport and tourism, and a rebound in construction activities helped the country to recover from drought and a cyclical downturn in 2016.  The Rwandan economy will continue to be susceptible to the whims of climatic conditions and fluctuation in global commodity prices for coffee, tea, and minerals.  

Potential and current investors cite a number of hurdles and constraints to doing business in Rwanda, including its landlocked geography and resulting high freight transport costs; a small domestic market; limited access to affordable financing; payment delays with government contracts; and frequently inconsistent application of tax, investment, and immigration rules.  In order to support export growth, the GOR subsidizes transportation costs for agricultural products. Given Rwanda’s landlocked geopolitical situation, the country must rely on strong levels of economic diplomacy with countries that offer access to ports. Any serious breakdown in political relationships with Kenya, Tanzania, or Uganda, could impinge investors’ ability to obtain the necessary inputs required for sustained levels of commerce in Rwanda. 

RDB was established in 2006 to fast track investment projects by integrating all government agencies responsible for the entire investor experience under one roof.  This includes key agencies responsible for business registration, investment promotion, environmental compliance clearances, export promotion and other necessary approvals.  New investors can register online at the RDB’s website and receive a certificate in as fast as six hours, and the agency’s “one-stop shop” helps investors secure required approvals, certificates, and work permits.  RDB took steps to enhance investor after-care in 2017, launching a weekly Investor Open House and quarterly investor dialogues, events where RDB senior management officials meet and engage with business leaders. RDB states its investment priorities are innovation and technology, particularly ICT and green innovation; tourism and real estate; agriculture and food security; energy and infrastructure; and mining.  

In 2018, the GOR implemented improvements designed to stimulate investments.  Examples of these reforms include reducing the time required to obtain construction permits and to clear exports through customs by exporters and enabling a more timely provision of electricity.  The GOR also introduced several online certification processes, including for certificate of origin and phytosanitary approvals. RRA started issuing electronic certificates of origin free of charge.  The National Agricultural Export Board issues certificates of origin for tea and coffee free of charge. Rwanda Energy Group (REG) reports that reforms, including a new online application process, have reduced the time for new connections to the electricity grid from an average of 34 days to 20.  REG claims that newly introduced automation systems will enable it to better monitor frequency and duration of outages, improving grid stability and uptime. According to RDB, certain construction projects will no longer require geotechnical studies. RDB also says that construction permit applications will no longer require a commencement date.  

Investors broadly express satisfaction with RDB’s investment facilitation efforts.  However, some foreign investors complain that implementation can be less smooth due to delays in government payments for services or goods delivered.  Other investors complain that they perceived there were GOR efforts to change contracts or memoranda of understanding after such items were negotiated.  Others have faced surprising tax assessments with little notice. Some investors have faced difficulty in obtaining or renewing work visas, perhaps a result of the GOR’s demonstrated preference for hiring local or East African Community (EAC) residents over other expatriates.  Rwanda’s Directorate General of Immigration and Emigration does not always honor the employment and immigration commitments of investment certificates and deals, according to some investors.  

A number of investors have said a top concern affecting their operations in Rwanda is that tax incentives included in deals signed by the RDB are not fully honored by the RRA.  Investors further cite the inconsistent application of tax incentives and import duties as a significant challenge to doing business in Rwanda. For example, a few investors have said that local customs officials have attempted to charge them duties based on their perception of the value of an import, regardless of the actual purchase price.  Under Rwandan law, foreign firms should receive equal treatment with regard to taxes, as well as access to licenses, approvals, and procurement. Foreign firms should receive VAT tax rebates within 15 days of receipt by the RRA, but firms complain that the process for reimbursement can take months, and occasionally years. RRA introduced new software in 2018 that should allow these refunds to be processed and delivered in a more timely manner.  VAT refunds may also be held up pending the results of RRA audits. RRA aggressively enforces tax requirements and imposes punitive fines for errors – deliberate or not – in tax payments, according to some investors.

Based on Article 15 of Law nº 76/2013 of 11/09/2013, the Office of the Ombudsman has the authority to request that the Supreme Court reconsider and review judgments rendered at the last instance by ordinary, commercial, and military courts, if there is any persistence of injustice.  More information on the review process can be found at https://ombudsman.gov.rw/en/?Court-Judgement-Review-Unit-1375  .  

Limits on Foreign Control and Right to Private Ownership and Establishment

Rwanda has neither statutory limits on foreign ownership or control nor any official economic or industrial strategy that discriminates against foreign investors.  Local and foreign investors have the right to own and establish business enterprises in all forms of remunerative activity.  The Rwandan constitution stipulates that every person has the right to private property, whether personal or in association with others.  The government cannot violate the right to private ownership except in the public interest, and only then after following procedures that are determined by law and subject to fair compensation. 

The law also allows private entities to acquire and dispose of interests in business enterprises.  Foreign nationals may hold shares in locally incorporated companies. The GOR has continued to privatize state holdings, although the government, ruling party, and military continue to play a dominant role in Rwanda’s private sector.  Foreign investors can acquire real estate but with a general limit on land ownership.  While local investors can acquire land through leasehold agreements that extend to a maximum of 99 years, foreign investors are usually restricted to leases up to 49 years with the possibility of renewal.  The government published a new Investment Code in 2015 aimed at providing tax breaks and other incentives to boost FDI.  The Investment Code includes equal treatment for foreigners and nationals with regard to certain operations, free transfer of funds, and compensation against expropriation. 

Other Investment Policy Reviews

In February 2019, The World Trade Organization (WTO) published a Trade Policy Review for the EAC covering Burundi, Kenya, Rwanda, Tanzania and Uganda.  The report is available at: https://docs.wto.org/dol2fe/Pages/FE_Search/FE_S_S006.aspx?Query=(@Symbol= percent20wt/tpr/s/*) percent20and percent20(( percent20@Title= percent20rwanda percent20) percent20or percent20(@CountryConcerned= percent20rwanda))&Language=ENGLISH&Context=FomerScriptedSearch&languageUIChanged=true#   

The Rwanda annex to the report is available at:  https://docs.wto.org/dol2fe/Pages/FE_Search/ExportFile.aspx?Id=251521&filename=q/WT/TPR/S384-04.pdf  

Business Facilitation

The RDB offers one of the fastest business registration processes in Africa.  New investors can register online at the RDB’s website (http://org.rdb.rw/busregonline  ) or register in person at the RDB in Kigali.  Once a certificate of registration is generated, company tax identification and employer social security contribution numbers are also generated automatically.  The RDB “One Stop Center” assists firms in acquiring visas and work permits, connections to electricity and water, and support in conducting required environmental impact assessments.  

In 2018, RRA distributed a new electronic billing software and electronic billing machines that should improve efficiency and introduce additional flexibilities for customer-facing businesses.  This should also support all customers by allowing vendors to issue official VAT invoices from any computer with the new software. The system submits VAT refund claims directly through the RRA E-Tax Portal, which should reduce the time required to process VAT refunds. To reduce the number of cases subjected to audit, RRA is implementing an automated audit case selection process using a risk-based approach to select taxpayers subjected to audit based on compliance history.  The official announcement of these changes is available at: https://www.rra.gov.rw/index.php?id=286&tx_news_pi1 percent5Bnews percent5D=166&tx_news_pi1 percent5Bcontroller percent5D=News&tx_news_pi1 percent5Baction percent5D=detail&cHash=dfd263b497338982e0a9ebff74d52fdb  

The RDB is prioritizing additional reforms to improve the investment climate.  By 2020, it hopes to amend the land policy to merge issuance of free hold titles and occupancy permits; introduce online notarization of property transfers; implement small claims procedure to allow self-representation in court and reduce attorney costs; launch electronic auctioning to reduce time to enforce judgments, reducing court fees and allowing payments electronically; and establish a commercial division at the Court of Appeal to fast-track commercial dispute resolution. 

Rwanda promotes women and gender equality and has pioneered a number of projects to promote women entrepreneurs, including the creation of the Chamber of Women Entrepreneurs within the Rwanda Private Sector Federation (PSF).  Both men and women have equal access to investment facilitation and protections.     

Outward Investment

The government does not have a formal program to provide incentives for domestic firms seeking to invest abroad, but there are no restrictions in place limiting such investment.

Bilateral Investment Treaties 

Rwanda is a member of the WTO, the EAC, Economic Community of the Great Lakes, the Economic Community of Central African States, and the Common Market for Eastern and Southern Africa (COMESA).  Rwanda ratified the African Continental Free Trade Area agreement in March 2018, but its implications for the region remain unclear. While the EAC now has a customs union and common market, the slow pace of regulatory reform, lack of harmonization, non-tariff barriers, and bureaucratic inefficiencies still hamper the free movement of goods, capital, and people in the region.  Rwanda takes part in EAC negotiations with other trading partners.  

The United States and Rwanda signed a Trade and Investment Framework Agreement (TIFA) in 2006 and a BIT in 2008.  Rwanda has active bilateral investment treaties with Germany (1969), Belgium-Luxemburg Economic Union (1985), and the Republic of Korea (2013).  Rwanda signed bilateral investment treaties with Mauritius (2001), South Africa (2000), Turkey (2016), Morocco (2016), the United Arab Emirates (2016), and Qatar (2018), but these treaties have yet to enter into force.  Rwanda signed the Economic Partnership Agreement between the EAC and the European Union; this agreement has not yet entered into force. 

Bilateral Taxation Treaties 

Rwanda does not have a bilateral taxation treaty with the United States.  Rwanda has double taxation agreements with Barbados, Mauritius, the Belgium-Luxembourg Economic Union, the Bailiwick of Jersey, Singapore and South Africa.

After Rwanda implemented new higher tariffs on imports of secondhand clothing and footwear in 2016, the U.S. government partially suspended African Growth and Opportunities Act (AGOA) benefits for apparel products from Rwanda, effective May 2018.  Many other Rwandan exports to the United States are still eligible for trade preferences under the Generalized System of Preferences and AGOA.

Transparency of the Regulatory System

The GOR generally employs transparent policies and effective laws largely consistent with international norms.  Rwanda is a member of the U.N. Conference on Trade and Development’s international network of transparent investment procedures.  The Rwanda eRegulations system is an online database designed to bring transparency to investment procedures in Rwanda.  Investors can find further information on administrative procedures at:  https://businessprocedures.rdb.rw/.  Rwandan laws and regulations are published in the Government Gazette and/or online at http://primature.gov.rw/index.php?id=97  .  Government institutions generally have clear rules and procedures, but implementation can sometimes be uneven.  Investors have cited examples of receiving conflicting information from different officials in one or more government departments.  Investors have also cited breach of contracts and incentive promises, and the short time given to comply with changes in government policies, as hurdles to comply with regulations. 

For example, the GOR submitted a 2019 draft law to Parliament banning single use plastic containers.  Investors in the beverage and agro-processing sectors expressed concern that the law would have a serious impact on their operations, that alternative packaging was not available in some cases, and that the GOR did not consult effectively with stakeholders before submitting it.  The law would build on a ban on the manufacture and use of polyethylene bags introduced in 2008.

There is no formal mechanism to publish draft laws for public comment, although civil society sometimes has the opportunity to review them.  There is no informal regulatory process managed by nongovernmental organizations. Regulations are usually developed rapidly in an effort to achieve policy goals and sometimes lack a basis in scientific or data-driven assessments.  Scientific studies, or quantitative analysis (if any) conducted on the impact of regulations, are not generally made publicly available for comment. Regulators do not publicize comments they receive. Public finances and debt obligations are generally made available to the public in reasonable time but only after budget enactment.  Finances for SOEs are not publicly available but may be requested by civil society organizations with a legitimate reason.  

There is no government effort to restrict foreign participation in industry standards-setting consortia or organizations.  Legal, regulatory, and accounting systems are generally transparent and consistent with international norms, but are not always enforced.  The Rwanda Utility Regulation Agency (RURA), the Office of the Auditor General (OAG), the Anticorruption Division of the RRA, the Rwanda Standards Board (RSB), the National Tender Board, and the Rwanda Environment Management Authority also enforce regulations.  In recent years, the OAG’s annual reports to parliament have prompted criminal investigations of alleged misconduct and corruption. Consumer protection associations exist but are largely ineffective. The business community has been able to lobby the government and provide feedback on some draft government policies through the PSF, a business association with strong ties to the government.  In some cases, the PSF has welcomed foreign investors which organized other investors to positively affect government policies. However, some investors have criticized the PSF for advocating to businesses about government policies rather than advocating business concerns to the government.  

International Regulatory Considerations

Rwanda is a member of the EAC Standards Technical Management Committee.  Approved EAC measures are generally incorporated into the Rwandan regulatory system within six months and are published in the National Gazette like other domestic laws and regulations.  Rwanda is also a member of the standards technical committees for the International Standardization Organization, the African Organization for Standardization, and the International Electrotechnical Commission.  Rwanda is a member of the International Organization for Legal Metrology and the International Metrology Confederation.  RSB represents Rwanda at the African Electrotechnical Commission. Rwanda notifies draft technical regulations to the WTO Committee on Technical Barriers to Trade. 

Legal System and Judicial Independence

The Rwandan legal system was originally based on the Belgian civil law system.  However, since the renovation of the legal framework in 2002, the introduction of a new constitution in 2003, and the country’s entrance to the Commonwealth in 2009, there is now a mixture of civil law and common law (hybrid system).  Rwanda’s courts address commercial disputes and facilitate enforcement of property and contract rights.  Rwanda’s judicial system suffers from a lack of resources and capacity, including well-functioning courts, with some cases allegedly backlogged up to five years.  Investors occasionally cite what they perceive as the government’s casual approach to contract sanctity and say the GOR sometimes fails to enforce court judgments in a timely fashion.  In August 2018, the GOR created a Court of Appeal in an attempt to expedite the appeal process without going to the Supreme Court and to reduce backlogs. The new Court of Appeal arbitrates cases handled by the High Court, Commercial High Court, and Military High Court.  The Supreme Court continues to decide on cases of injustice filed from the Ombudsman Office and on constitutional interpretation. 

A Tax Court is yet to be established in Rwanda.  The RDB announced the government’s intent to create a commercial division at the Court of Appeal to fast-track resolution on commercial disputes. 

Laws and Regulations on Foreign Direct Investment

National laws governing commercial establishments, investments, privatization and public investments, land, and environmental protection are the primary directives governing investments in Rwanda.  Since 2011, the government reformed tax payment processes and enacted additional laws on insolvency and arbitration. The 2015 Investment Code establishes policies on FDI, including dispute resolution (Article 9).  The RDB keeps investment-related regulations and procedures at: http://businessprocedures.rdb.rw  .

According to a WTO policy review report dated January 2019, Rwanda is not a party to any countertrade and offsetting arrangements, or agreements limiting exports to Rwanda. 

A new property tax law was passed in August 2018.  The new law removes the provision that taxpayers must have freehold land titles to pay property taxes.  Small and medium enterprises (SMEs) will receive a two-year tax trading license exemption upon establishment.  Under the new law, the income threshold reserved for maintenance and upkeep of rented property has increased from 30 percent to 50 percent, and interest rates on loans are subtracted in the calculation of the taxable value.  For residential houses (in excess of the first family home), owners pay 0.25 percent in the first year, 0.5 percent in the second year, 0.75 percent in third year, and graduate to 1 percent from the fourth year onwards.  Commercial buildings are taxed 0.2 percent of the property market value in the first year, 0.3 percent in the second year, 0.4 percent in the third year, and 0.5 percent from the fourth year onwards.  For industry, the rate is maintained at a flat rate of 0.1 percent of their market value to support the “Made in Rwanda” campaign to promote local manufacturing. 

In April 2018, the GOR passed a new law to streamline income tax administration and to clarify the law.  A number of items were added to the list of activities giving rise to taxable income. For example, the sale, lease, and free transfer of immovable assets allocated to the business now constitute taxable income.  All payments made by a resident of Rwanda on services performed abroad, other than those consumed abroad, constitute taxable income. New articles were added to address transfer pricing rules, preconditions to participate in public tenders, and taxation rules for liberal professionals and consultants.  The new law can be accessed here: http://www.primature.gov.rw/media-publication/publication/latest-offical-gazettes.html?no_cache=1&tx_drblob_pi1 percent5BdownloadUid percent5D=464  . 

Competition and Anti-Trust Laws

Since 2010, a Competition and Consumer Protection Unit was created at the Ministry of Trade and Industry (MINICOM) to address competition and consumer protection issues.  Rwanda has legislation in place to regulate competition. The government is setting up the Rwanda Inspectorate and Competition Authority (RICA), a new independent body with the mandate to promote fair competition among producers.  The body will reportedly aim to ensure consumer protection and enforcement of standards. RICA will serve as a regulatory body to enforce technical regulations and laws related to trade, while the RSB will continue to set quality standards for goods.  To read more on competition laws in Rwanda, please visit: http://www.minicom.gov.rw/index.php?id=136 . 

Market forces determine most prices in Rwanda, but in some cases, the GOR intervenes to fix prices for items considered sensitive in Rwanda.  RURA, in consultation with relevant ministries, sets prices for petroleum products, water, electricity, and public transport. MINICOM and the Ministry of Agriculture have fixed farm gate prices, or the market value of a cultivated product minus the selling costs, for agricultural products like coffee, maize, and Irish potatoes  from time to time. On international tenders, a 10 percent price preference is available for local bidders, including those from regional economic integration bodies in which Rwanda is a member.

Some U.S. companies have expressed frustration that while authorities require them to operate as a formal enterprise that meets all Rwandan regulatory requirements, some local competitors are informal businesses that do not operate in full compliance with all regulatory requirements.  Other investors have claimed unfair treatment compared to ruling party-aligned or politically connected business competitors in securing public incentives and contracts.

More information on specific types of agreements, decisions and practices considered to be anti-competitive, or abuse of dominant position, in Rwanda can be found here: https://rura.rw/fileadmin/Documents/docs/ml08.pdf 

Expropriation and Compensation

The 2015 Investment Code forbids the expropriation of investors’ property in the public interest unless the investor is fairly compensated.  A new expropriation law came into force in 2015, which included more explicit protections for property owners.  Though Rwandan law is clear that private property will be expropriated only in the public interest and after appropriate compensation following market rates, property owners have complained about the definition of “public interest,” valuation procedures, payment levels, and timing of payments.  A number of property owners have protested expropriation of their property by the City of Kigali and claimed that the compensation offered was below market value and not in accordance with the expropriation law. 

A 2017 study by Rwanda Civil Society Platform argues that the government conducts expropriations on short notice and does not provide sufficient time or support to help landowners fairly negotiate compensation.  The report includes a survey that found only 27 percent of respondents received information about planned expropriation well in advance of action.  While mechanisms exist to challenge the government’s offer, the report notes that landowners are required to pay all expenses for the second valuation, a prohibitive cost for rural farmers or the urban poor.  Media have reported that wealthier landowners have the ability to challenge valuations and have received higher amounts. 

Political exiles and other embattled opposition figures have been involved in taxation lawsuits and “abandoned properties” that led to the auctioning of properties, allegedly at below market values. 

Dispute Settlement

ICSID Convention and New York Convention

Rwanda is signatory to the International Center for Settlement of Investment Disputes (ICSID) and the African Trade Insurance Agency (ATI).  ICSID seeks to remove impediments to private investment posed by non-commercial risks, while ATI covers risk against restrictions on import and export activities, inconvertibility, expropriation, war, and civil disturbances. 

Rwanda ratified the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards in 2008. 

Investor-State Dispute Settlement

Rwanda is a member of the East African Court of Justice for the settlement of disputes arising from or pertaining to the EAC.  Rwanda has also acceded to the 1958 New York Arbitration Convention and the Multilateral Investment Guarantee Agency convention.  Under the U.S.-Rwanda BIT, U.S. investors have the right to bring investment disputes before neutral, international arbitration panels.  Disputes between U.S. investors and the GOR in recent years have been resolved through international arbitration, court judgments, or out of court settlements.  Judgments by foreign courts and contract clauses that abide by foreign law are accepted and enforced by local courts, though they lack capacity and experience to adjudicate cases governed by non-Rwandan law.  There have been a number of private investment disputes in Rwanda, though the government has yet to stand as complainant, respondent, or third party in a WTO dispute settlement. Rwanda has been a party to two cases at ICSID since Rwanda became a member in 1963; one of these cases is an ongoing case brought by an American investor against Rwanda.  SOEs are also subject to domestic and international disputes. In 2018, SOEs party to a suit both won and lost several judgments by the Supreme Court, while other cases were settled under arbitration. 

International Commercial Arbitration and Foreign Courts

In 2012, the GOR launched the Kigali International Arbitration Center (KIAC).  According to press reports, the KIAC has reviewed 100 cases worth USD 50 million in claims involving petitions of 18 different nationalities since 2012.  Some businesses report being pressured to use the Rwanda-based KIAC for the seat of arbitration in contracts signed with the GOR. Because KIAC has a short track record and the location of its domicile, these companies would prefer arbitration take place in a third country, and some have reported difficulty in securing international financing due a KIAC provision in their contracts. 

Bankruptcy Regulations

Rwanda ranks 58 out of 190 economies for resolving insolvency in the World Bank’s 2019 Doing Business Report.  It takes an average of two and a half years to conclude bankruptcy proceedings in Rwanda. The recovery rate for creditors on insolvent firms was reported at 19 cents on the dollar, with judgments typically made in local currency. 

The 2009 Insolvency Law clarified standards for beginning insolvency proceedings, preventing the separation of the debtor’s assets during reorganization proceedings, setting clear time limits for the submission of a reorganization plan, implementing an automatic stay of creditors’ enforcement actions, introducing provisions on voidable transactions and the approval of reorganization plans, and establishing additional safeguards for creditors in reorganization proceedings.

In April 2018, the GOR instituted a new Insolvency and Bankruptcy Law.  One major changes is the introduction of an article on “pooling of assets” allowing creditors to pursue parent companies and other members of the group, in case a subsidiary is in liquidation.  Article 121 states that “On application of the liquidator, creditor or shareholder, the court may order that: 

1) any company that is or has been a related company of the company in liquidation must pay to the liquidator the whole or part of any or all of the claims made in the liquidation; 2) where two or more related companies are in liquidation, the liquidations in respect of each company must proceed together, as if they were one company, to the extent the court so orders and subject to such terms and conditions as the court may impose.”  

The new law can be accessed here:  http://org.rdb.rw/wp-content/uploads/2018/06/Insolvency-Law-OGNoSpecialbisdu29April2018.pdf  

Investment Incentives

The 2015 Investment Code offers a package of benefits and incentives to both domestic and foreign investors under certain conditions, including:

For an international company with its headquarters or regional office in Rwanda, a preferential corporate income tax rate of 0 percent; 

• For any investor, a preferential corporate income tax rate of 15 percent;
• Corporate income tax holiday of up to seven years;
• Exemption of customs tax for products used in Export Processing Zones (EPZ);
• Exemption of capital gains tax;
• VAT refund;
• Accelerated depreciation; and
• Immigration incentives.

Further details on benefits under the Investment Code can be accessed here:  http://businessprocedures.rdb.rw/media/Investiment_promotion_law.pdf .  

Poorly coordinated efforts between the RDB, RRA, MINICOM, and the Directorate of Immigration and Emigration can lead to inconsistent application of incentives, according to investors.  Investors reported that tax incentives included in deals signed by the RDB are not honored by the RRA in all cases or sometimes not in a timely manner. Additionally, investors continue to face challenges receiving payment for services rendered for GOR projects, VAT refund delays, and/or expatriation of profits.  In 2016, the GOR instituted a law governing public-private partnership (PPPs) as a step toward courting investments in key development projects.  The law provides a legal framework concerning establishment, implementation, and management of PPPs. Detailed guidelines for the law can be accessed here:  http://rdb.rw/wp-content/uploads/2018/08/PPP-Guidelines.pdf   

Foreign Trade Zones/Free Ports/Trade Facilitation

Rwanda has established the KSEZ, which was set up through the merger of former Kigali Free Trade Zone and the Kigali Industrial Park projects.  SEZs in Rwanda are regulated by the SEZ Authority of Rwanda (SEZAR), based at the RDB.  Land in KSEZ is acquired through Prime Economic Zone Secretariat, a private developer, under the regulations of SEZAR.  The price per square meter is USD 62, and the minimum size that can be acquired is one hectare.  Bonded warehouse facilities are now available both in and outside of Kigali for use by businesses importing duty-free materials.  The GOR has established a number of benefits for investors operating in the SEZs, including tax and land ownership advantages. A company basing itself in the SEZ can also opt to be a part of the Economic Processing Zone.  A number of criteria must be satisfied in order to qualify, such as extensive records on equipment, materials and goods, suitable offices, security provisions, and a number of property constraints. Holding an EPZ license will exempt a company from VAT, import duties, and corporate tax.  The company is then obliged to export a minimum of 80 percent of production. Even after considering savings due to these government incentives, a few investors reported that land in the SEZs was significantly more expensive than land outside the zones. The GOR has stated that there are no fiscal, immigration, or customs incentives beyond those provided in the 2015 Investment Code, though media has occasionally speculated that certain investors received additional incentives.  The negative list of goods prohibited under the EAC Customs Management Act applies in SEZs. In November 2018, the GOR approved the Bugesera Special Economic Zone (BSEZ), located 45 minutes from Kigali. 

Procedural information and cost involved in operating in SEZs can be accessed here: https://businessprocedures.rdb.rw/procedure/238/189?l=en   

The SEZ policy was revised in 2018.  The new policy introduces performance incentives to include indicators such as exports, full time jobs, local supply contracts, and domestic market recapture.  Under the new policy, foreigners and locals may only lease land (formerly, foreign investors were able to purchase land outright in SEZ). To read more on the new policy, please see:  http://www.minicom.gov.rw/fileadmin/minicom_publications/documents/SEZ_Policy_-_January_2018_v2.pdf  

Rwanda created the Export Growth Facility (EGF) in 2015, with an initial capital of RWF 500 million, administered by the Development Bank of Rwanda (BRD).  German KfW Development Bank injected €8.5 million in support of the fund.  The pilot program targets SMEs with export sales below USD 1 million.  Priority sectors include horticulture, agro-processing, and manufacturing.  The facility has three windows: an investment catalyst fund, a matching grant fund for market entry costs, and an export guarantee facility.  Investment catalyst funds support private sector investments in export-orientated production through a 6.5 percent subsidy on market interest rates (normally between 16-20 percent).  The matching grant fund provides grants (50 percent of the need) for expenditure on specific market entry costs (export strategy elaboration, export promotion, compliance with standards, etc.).  The export guarantee fund provides short-term guarantees to commercial banks financing exporters’ pre- and post-shipment operations. The export guarantee component is not yet operational. The facility supports both locally and foreign-owned companies in Rwanda; at least one American company has already received a loan. 

Rwanda created the Business Development Fund (BDF) in 2011 to provide support to SMEs in credit guarantees, matching grants, asset leasing, and advisory services.  BDF works with banks to provide guarantees between 50-75 percent of required collaterals. The maximum guarantee is RWF 500 million for agriculture projects and RWF 300 million for other sectors, for a maturity period of up to 10 years. 

The GOR also manages the Rwanda Green Fund (FONERWA) to spur investment in green innovation.  The UK Aid Department for International Development, KFW, and other donors have invested in the fund.  FONERWA claims projects it supports have created more than 137,000 green jobs to date.

Performance and Data Localization Requirements

There is no legal obligation for nationals to own shares in foreign investments or requirement that shares of foreign equity be reduced over time.  However, the government strongly encourages local participation in foreign investments. 

There is no requirement for private companies to store their data in Rwanda.  Under the National Information and Telecommunication Infrastructure plan, Rwanda is pushing to become a regional ICT hub and has constructed a National Data Center.  The facility acts as the country’s central data storage facility and houses applications used by government institutions. There is no requirement for foreign IT providers to turn over source code and/or provide access to encryption technology.  IT companies dealing with government data cannot store it outside Rwanda or transfer it without GOR approval. 

Some investors have cited the GOR’s reluctance to support visas for expatriate staff as a significant limitation on doing business in Rwanda.  There is no formal requirement that a certain number of senior officials or board members be citizens of Rwanda. Under the 2015 Investment Code, the government allows registered those who invest a minimum of USD 250,000 to hire up to three expatriate employees, without the need to conduct a labor market test in Rwanda.  Investors who wish to hire more than three expatriate employees must conduct a labor market test, unless the available position is listed on Rwanda’s “Occupations in Demand” list. The Directorate General of Immigration and Emigration does not always honor the employment and immigration commitments of investment certificates and deals, according to a number of investors.  Investors should be aware that applicants from other EAC countries are given hiring preference over other expatriates.

While the government does not impose conditions on the transfer of technology, it does encourage foreign investors, without legal obligation, to transfer technology and expertise to local staff to help develop Rwanda’s human capital.  There is no legal requirement that investors must purchase from local sources or export a certain percentage of their output, though the government offers tax incentives for the latter. Unless stipulated in a contract or memorandum of understanding characterizing the purchase of privatized enterprises, performance requirements are not imposed as a condition for establishing, maintaining, or expanding other investments.  Such requirements are imposed chiefly as a condition to tax and investment incentives. The GOR is not involved in assessing the type and source of raw materials for performance, but the RSB determines quality standards for some product categories. 

Rwanda requires that all U.S. citizens possess a visa to enter Rwanda.  A 30-day tourist visa can be purchased for USD 30 upon arrival at Kigali International Airport or at a land border.  Accepted forms of payment include cash (Rwandan francs or U.S. dollars printed in 2006 or later) and credit cards (Visa or MasterCard).  Rwanda requires proof of yellow fever vaccination for travelers coming from a country where yellow fever is endemic or where there is an outbreak of yellow fever.  U.S. citizens planning to remain in Rwanda for more than 30 days must apply for a permit within 15 days of arrival. Departures after the visa ending date are fined on a daily basis.  The government generally processes visa applications for U.S. citizen investors in a timely manner. However, some investors have complained that the application process for work permits and extended stay visas (over 60 days) has become onerous.  Immigration authorities frequently request extra documentation detailing applicants’ qualifications and, at times, have taken several months to adjudicate work permit cases. Applicants for work permits may facilitate the process by ensuring that they travel with a) original police background checks, preferably notarized, b) educational documents on original letterhead, and c) a certified copy of diplomas if the original is not carried.

Real Property

The law protects and facilitates acquisition and disposition of all property rights.  Investors involved in commercial agriculture have leasehold titles and are able to secure property titles, if necessary.  The 2015 Investment Code states that investors shall have the right to own private property, whether individually or in association with others.  Foreign investors can acquire real estate, though there is a general limit on land ownership. While local investors can acquire land through leasehold agreements that extend to 99 years, the lease period for foreigners cannot exceed 49 years, in most cases.  Such leases are theoretically renewable, but the law is new enough that foreigners generally have not yet attempted to renew a lease. Mortgages are a nascent but growing financial product in Rwanda, increasing from 770 properties in 2008 to 13,394 in 2017, according to the RDB. 

Intellectual Property Rights

The 2015 Investment Code guarantees protection of investors’ intellectual property rights (IPR) related to technology transfer.  As a member of the Common Market for Eastern and Southern Africa (COMESA), Rwanda is automatically a member of African Regional Intellectual Property Organization.  Rwanda is also a member of the World Intellectual Property Organization (WIPO) and is working toward harmonizing its legislation with the World Trade Organization (WTO) Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).  Rwanda has yet to ratify the WIPO internet treaties.

The Rwanda Development Board (RDB) and the Rwanda Standards Board (RSB) are the main regulatory bodies for Rwanda’s IPR laws.  The RDB registers IPR and provides a certificate of ownership title. Every registered IPR title is published in the Official Gazette. The fees payable for substance examination and registration of IPR apply equally for domestic and foreign applicants.  Since 2016, any power of attorney granted by a non-resident to a Rwandan-based industrial property agent must be notarized (previously, a signature would have been sufficient). The RSB inspects imported products to ensure compliance with standards. Registration of patents and trademarks is on a first-in-time, first-in-right basis, so companies should consider applying for trademark and patent protection in a timely manner.  It is the responsibility of the copyright holders to register, protect, and enforce their rights where relevant, including retaining their own counsel and advisors.  Through the RSB and the Rwanda Revenue Authority (RRA), Rwanda has worked to increase protection of IPR, but many goods that violate patents, especially pharmaceutical products, still make it to market.  As many products available in Rwanda are re-exports from other EAC countries, it may be difficult to identify counterfeit goods without regional cooperation.

Several investors reported difficulties in registering patents and enforcing their IPR against infringement in a timely manner.  A few companies have expressed concern over inappropriate use of their IP.  While the government has offered rhetorical support, enforcement has been mixed.  In some cases infringement has stopped but, in other cases, companies have been frustrated with the slow pace of receiving judgment or in receiving compensation after successful legal cases.

IPR legislation covering patents, trademarks, and copyrights was approved in 2009.  The Registration Service Agency, which is part of the RDB, was established in 2008 and has improved IPR protection by registering all commercial entities and facilitating business identification and branding.  Rwanda conducts anti-counterfeit goods campaigns on a regular basis, but statistics on IP enforcement are not publicly available.

Rwanda is not included in the United States Trade Representative (USTR) Special 301 Report or the Notorious Markets List.  

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

Capital Markets and Portfolio Investment

Rwanda’s capital markets are relatively immature and lack complexity.   Many U.S. investors express concern that local access to affordable credit is a serious challenge in Rwanda.  Interest rates are high for the region, banks offer predominantly short-term loans, collateral requirements can be higher than 100 percent of the value of the loan, and Rwandan commercial banks rarely issue significant loan values.  The prime interest rate is 16-18 percent. Large international transfers are subject to authorization. Investors who seek to borrow more than USD 1 million must often engage in multi-party loan transactions, usually leveraging support from larger regional banks.  Credit terms generally reflect market rates, and foreign investors are able to negotiate credit facilities from local lending institutions if they have collateral and “bankable” projects. In some cases, preferred financing options may be available through specialized funds including the Export Growth Fund, BRD, or FONERWA.

Only eight companies have publicly listed and traded equities in Rwanda.  Rwanda Capital Market Authority was established in 2017 to regulate the capital market, commodity exchange and related contracts, collective investment schemes, and warehouse receipts.  Most capital market transactions are domestic. While offers can attract some international interests, they are rare. Rwanda is one of a few sub-Saharan African countries to have issued sovereign bonds.  Four new local currency bonds for USD 61.8 million in total were issued in 2018, with an average annual yield of 12.1 percent. BNR has implemented reforms in recent years that are helping to create a secondary market for Rwandan treasury bonds.  In November 2018, the IMF completed its tenth review of Rwanda’s economic performance under the Policy Support Instrument, which can be found here: https://www.imf.org/en/Publications/CR/Issues/2018/11/30/Rwanda-Tenth-Review-Under-the-Policy-Support-Instrument-Press-Release-Staff-Report-and-46407

Money and Banking System

Rwanda’s financial sector remains highly concentrated.  Around 76 percent of all bank assets are held by five of the largest commercial banks (Bank of Kigali, BPR Atlas Mara, I&M Bank, COGEBANQUE, and Equity Bank).  The largest, partially state-owned Bank of Kigali (BoK), holds more than 30 percent of all assets. The banking sector holds around 65 percent of total financial sector assets in Rwanda.  Non-performing loans constitute 6.9 percent of all banking sector assets as of June 2018. Foreign banks are permitted to establish operations in Rwanda, with several Kenyan-based banks in the country.  Atlas Mara Limited acquired a majority equity stake in Banque Populaire du Rwanda (BPR) in 2016. BPR/Atlas Mara has the largest number of branch locations and is Rwanda’s second largest bank after BoK. In total, Rwanda’s banks have assets of USD 3 billion, according to the BNR, the country’s Central Bank.  The IMF gives the BNR high marks for its effective monetary policy. BNR introduced a new monetary policy framework in 2019, which shift its tools toward inflation-targeting monetary framework in place of a quantity-of-money framework.

The private sector has limited access to credit instruments.  Prospective account holders are expected to provide proof of residency.  Most Rwandan banks are conservative and risk-averse, trading in a limited range of commercial products, though additional products are becoming available as the industry matures and competition increases.  Rwanda has not lost any correspondent banking relationships in the past three years, and all banks are expected to conform to Basel prudential principles. Most financial services in Rwanda are VAT-exempt. 

BNR reported that commercial banks made a total net profit of USD 26 million in 2018, but their liquidity ratio was 49 percent (compared to BNR’s required minimum of 20 percent), suggesting reluctance toward making loans.  Local banks often generate significant revenue from holding government debt and from charging a variety of fees to banking customers. Credit cards are becoming more common in major cities, especially at locations frequented by foreigners, but are not used in rural areas.  Rwandans primarily rely on cash or mobile money to conduct transactions.  

In 2018, the capital adequacy ratio grew to 21.4 percent from 20.8 percent over the year, well above the minimum of 15 percent, suggesting the Rwanda banking sector continues to be generally risk averse. The number of debit cards in the country grew 8 percent year over year to 945,000 (only 18 percent of Rwandans have bank accounts), and the number of mobile banking customers grew 22 percent to 1,266,000. 

Foreign Exchange and Remittances

Foreign Exchange

In 1995, the government abandoned a dollar peg and established a floating exchange rate regime, under which all lending and deposit interest rates were liberalized.  BNR publishes an official exchange rate on a daily basis, which is typically within a 2 percent range of rates seen in the local market. Some investors report occasional difficulty in obtaining foreign exchange.  Rwanda generally runs a large trade deficit, estimated at 10 percent of GDP in 2018. The Rwandan franc depreciated against the U.S. dollar by 8.9 percent in the fiscal year ending June 2017, and 3.5 percent in the fiscal year ending June 2018, according to BNR.

Transacting locally in foreign currency is prohibited in Rwanda.  Regulations set a ceiling on the foreign currency that can leave the country per day.  In addition, regulations specify limits for sending money outside the country; BNR must approve any transaction that exceed these limits.  

Most local loans are in local currency.  In December 2018, BNR issued a new directive on lending in foreign currency which requires the borrow to have a turnover of at least RWF 50 million or equivalent in foreign currency, have a known income stream in foreign currency not below 150 percent of the total installment repayments, and the repayments must be in foreign currency.  The collateral pledged by non-resident borrowers must be valued at 150 percent of the value of the loan. In addition, BNR requires banks to report regularly on loans granted in foreign currency.  

Full guidance can be accessed here: https://www.bnr.rw/fileadmin/AllDepartment/FinancialStability/lawsandregulations/DIRECTIVE_No_09-2018.pdf  

Remittance Policies

Investors can remit payments from Rwanda only through authorized commercial banks.  There is no limit on the inflow of funds, although local banks are required to notify BNR of all transfers over USD 10,000 to mitigate the risk of potential money laundering.  A withholding tax of 15 percent to repatriate profits is considered high by a number of investors given that a 30 percent tax is already charged on profits, making the whole tax burden 45 percent.  Additionally, there are some restrictions on the outflow of export earnings. Companies generally must repatriate export earnings within three months after the goods cross the border. Tea exporters must deposit sales proceeds shortly after auction in Mombasa, Kenya.  Repatriated export earnings deposited in commercial banks must match the exact declaration the exporter used crossing the border. Rwandans working overseas can make remittances to their home country without impediment. It usually takes up to three days to transfer money using SWIFT financial services.  The concentrated nature of the Rwandan banking sector limits choice, and some U.S. investors have expressed frustration with the high fees charged for exchanging francs to dollars.

Sovereign Wealth Funds

In 2012, the Rwandan government launched the Agaciro Development Fund (ADF), a sovereign wealth fund that includes investments from Rwandan citizens and the international diaspora.  In November 2018, the fund was worth USD 58.8 million.  The ADF operates under the custodianship of BNR and reports quarterly and annually to the Ministry of Finance and Economic Planning, its supervisory authority.  ADF is a member of the International Forum of Sovereign Wealth Funds and is committed to the Santiago Principles.  ADF only operates in Rwanda.  In addition to returns on investments, citizens and private sector voluntary contributions, and other donations, ADF receives RWF 5 billion every year from tax revenues and 5 percent of proceeds from every public asset that is privatized.  The fund also gets 5 percent of royalties from minerals and other natural resources each year.  The government has transferred a number of its shares in private enterprises to the management of ADF including those in the BoK, Broadband Systems Corporation (BSC), Gasabo 3D Ltd, Africa Olleh Services (AoS), Korea Telecom Rwanda Networks (KTRN), and the Dubai World Nyungwe Lodge.  ADF invests mainly in Rwanda. While the fund can invest in foreign non-fixed income investments, such as publicly listed equity, private equity, and joint ventures, the AGDF Corporate Trust Ltd (the fund’s investment arm) held no financial assets and liabilities in foreign currency, according to the 2017 annual report.

Rwandan law allows private enterprises to compete with public enterprises under the same terms and conditions with respect to access to markets, credit, and other business operations.  Since 2006, the GOR has made efforts to privatize SOEs; reduce the government’s non-controlling shares in private enterprises; and attract FDI, especially in the ICT, tourism, banking, and agriculture sectors, but progress has been slow.  Current SOEs include water and electricity utilities, as well as companies in construction, ICT, aviation, mining, insurance, agriculture, finance, and other investments. The government continues to own significant and sometimes controlling interests of companies in mining, construction, banking, hotels, food production, and other sectors.  Some investors complain about competition from state-owned and ruling party-aligned businesses. SOEs and utilities appear in the national budget, but the financial performance of most SOEs is only detailed in an annex that is not publicly available. The most recent budget report of the OAG also covers SOEs and has sections criticizing the management of some of the organizations.  That public report can be found here: (http://oag.gov.rw/documents/reports-to-parliament/performance-audit-reports/  ).  SOEs are governed by boards with most members having other government positions.  Each public company is under a government line ministry. 

The GOR supports some public enterprises directly from the national budget through net lending estimated at about 2 percent of the GDP in 2018.  About 1 percent of GDP is a subsidy to RwandAir for its operational and capital expansion, and the rest of lending includes support to export promotion activities and debt-servicing costs for other public enterprises.

State-owned non-financial corporations include Ngali Holdings, Horizon Group Ltd, Rwanda Civil Aviation Authority, REG, Water and Sanitation Corporation, RwandAir, National Post Office, Rwanda Printery Company Ltd, King Faisal Hospital, Muhabura Multichoice Ltd, Prime Holdings, Rwanda Grain and Cereals Corporation, Kinazi Cassava Plant, and the Rwanda Inter-Link Transport Company.  State-owned financial corporations include the NBR, Development Bank of Rwanda, Special Guarantee Fund, Rwanda National Investment Trust Ltd, ADF, BDF and the Rwanda Social Security Board.

The GOR has interests in the BoK, Rwanda Convention Bureau, BSC, CIMERWA, Gasabo 3D Ltd, AoS, KTRN, Dubai World Nyungwe Lodge, and Akagera Management Company, among others.  

Ruling Party (Rwandan Patriotic Front) investment arm Crystal Ventures has subsidiaries such as Inyange Industries, NPD Ltd., Bourbon Coffee, ISCO Security, Ruliba Clays, Real Contractors, East African Granite Industries, Nexus, and Stone Craft. 

Privatization Program

Rwanda continues to carry out a privatization program that has attracted foreign investors in strategic areas ranging from telecommunications and banking to tea production and tourism.  Since the program started in 1995, 56 companies have been fully privatized, seven were liquidated, and 20 more were in the process of privatization by 2017 (latest data available).  The RDB’s Strategic Investment Department is responsible for implementing and monitoring the privatization program. 

Some observers have questioned the transparency of certain transactions, as a number of transactions were undertaken through mutual agreements directly between the government and the private investor, some of whom have personal relationships with senior government officials, rather than public offerings.  In February-March 2017, the government sold its 19.8 percent stake in I&M Bank to help finance its equity stake in the Bugesera Airport, currently under construction.  

In 2016, the OAG produced a report criticizing RDB’s management of the privatization program. The report can be accessed here: http://www.oag.gov.rw/fileadmin/user_upload/Performance_Reports/
STRATEGIC_MANAGEMENT_OF_PRIVATIZATION_ACTIVITIES.pdf 

There is a growing awareness of corporate social responsibility (CSR) within Rwanda, and several foreign-owned companies operating locally implement CSR programs.  Rwanda implements the OECD’s Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas.  Rwanda also implements the International Tin Supply Chain Initiative tracing scheme.  In 2016, the Better Sourcing Program began an alternative mineral tracing scheme in Rwanda. Rwanda also has guidelines on corporate governance by publically listed companies. 

In recognition of the firm’s strong commitment to CSR, the U.S. Department of State awarded Sorwathe, a U.S.-owned tea producer in Kinihira, Rwanda, the Secretary of State’s 2012 Award for Corporate Excellence for Small and Medium Enterprises.  In 2015, U.S. firm Gigawatt Global was also a finalist for the Secretary of State’s Award for Corporate Excellence in the environmental sustainability category.

Rwanda is ranked among the least corrupt countries in Africa, with Transparency International’s 2018 Corruption Perception Index putting the country among Africa’s four least corrupt nations and 48th in the world.  The government maintains a high-profile anti-corruption effort, and senior leaders articulate a consistent message emphasizing that combating corruption is a key national goal. The government investigates corruption allegations and generally punishes those found guilty.  High-ranking officials accused of corruption often resign during the investigation period, and many have been prosecuted. Rwanda has ratified the UN Anticorruption Convention. It is a signatory to the OECD Convention on Combating Bribery. It is also a signatory to the African Union Anticorruption Convention.  Giving and accepting a bribe is a criminal act, and penalties depend on circumstances surrounding the specific case. U.S. firms have identified the perceived lack of government corruption in Rwanda as a key incentive for investing in the country. 

Some firms have reported occurrences of petty corruption in the customs clearing process, but there are few or no reports of corruption in transfers, dispute settlement, regulatory system, taxation, or investment performance requirements.  A local company cannot deduct a bribe to a foreign official from taxes. A bribe by a local company to a foreign official is a crime in Rwanda. The OAG has pursued many corruption cases in recent years, most of which involved misuse of public funds.  The Rwanda Governance Board monitored governance more broadly and promoted mechanisms to control corruption. The RRA’s Anticorruption Unit has a code of conduct and an active mechanism for internal discipline. The Office of the Ombudsman, the National Tender Board, RURA, and the NSB also enforced regulations regarding corruption. 

A new corruption law was passed in September 2018, extending definitions of corruption and embezzlement and removing the statute of limitations on such crimes.  It also removes criminal liability for a person who gives or receives an illegal benefit and informs the justice organs before the commencement of criminal investigation by providing information and evidence.

The new law can be accessed here: http://www.rlrc.gov.rw/fileadmin/user_upload/Laws2/ percent5BHOME percent5DMOST percent20RECENT percent20LAWS/New percent20law percent20fighting percent20against percent20Corruption percent20 percent282018 percent29.pdf  

There are no local industry or non-profit groups offering services for vetting potential local investment partners, but the Ministry of Justice keeps judgments online, making it a source of information on companies and individuals in Rwanda at www.judiciary.gov.rw/home/  .  The Rwanda National Public Prosecution Authority issues criminal records on demand to applicants at www.nppa.gov.rw  . 

Resources to Report Corruption

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

Mr. Anastase Murekezi
Chief Ombudsman
Ombudsman (Umuvunyi)
P.O Box 6269, Kigali, Rwanda
Telephone: +250 252587308
omb1@ombudsman.gov.rw / sec.permanent@ombudsman.gov.rw

Mr. Felicien Mwumvaneza
Commissioner for Quality Assurance Department (Anti-Corruption Unit)
Rwanda Revenue Authority
Avenue du Lac Muhazi, P.O. Box 3987, Kigali, Rwanda
Telephone: +250 252595504 or +250 788309563
felicien.mwumvaneza@rra.gov.rw / commissioner.quality@rra.gov.rw 

Mr. Obadiah Biraro
Auditor General
Office of the Auditor General
Avenue du Lac Muhazi, P.O. Box 1020, Kigali, Rwanda
Telephone: +250 78818980
oag@oag.gov.rw

Contact at “watchdog” organization

Mr. Apollinaire Mupiganyi
Executive Director
Transparency International Rwanda
P.O: Box 6252 Kigali, Rwanda
Telephone: +250 788309563
amupiganyi@transparencyrwanda.org / mupiganyi@yahoo.fr

Rwanda is a stable country with relatively little violence.  According to a 2017 report by the World Economic Forum, Rwanda is the ninth safest country in the world.  Investors have cited the conducive political and security environment as an important driver of investments.  A strong police and military provide a security umbrella that minimizes potential criminal activity. 

The U.S. Department of State recommends that U.S. citizens exercise caution when traveling near the Rwanda-Democratic Republic of the Congo (DRC) border, given the possibility of fighting and cross-border attacks involving the Democratic Forces for the Liberation of Rwanda (FDLR) and other armed groups in the region. The FDLR includes former soldiers and supporters of the regime that orchestrated the 1994 Genocide against the Tutsi.  Relations between Burundi and Rwanda are tense. There is a risk of cross-border incursions and armed clashes, and accusations in both directions contend that the countries harbor their neighbor’s rebel forces.  In 2018, there were a few incidents of sporadic fighting in Nyaruguru district and Nyungwe National Park. 

Grenade attacks aimed at the local populace occurred on a recurring basis between 2008 and 2014 in Rwanda.  There have been several cross-border attacks in Western Rwanda on Rwandan police and military posts reportedly since 2016.  Despite occasional violence along the Rwanda-DRC border and the ongoing political crisis in neighboring Burundi, there have been no incidents involving politically motivated damage to investment projects or installations since the late 1990s.  Relations with Uganda are also increasingly tense, but leaders continue to emphasize they are seeking a political solution.

Please see the following link for State Department Country Specific Information: https://travel.state.gov/content/travel/en/international-travel/International-Travel-Country-Information-Pages/Rwanda.html 

General labor is available, but Rwanda suffers from a shortage of skilled labor, including accountants, lawyers, engineers, tradespeople, and technicians.  Higher institutes of technology, private universities, and vocational institutes are improving and producing more and better-trained graduates each year. In 2017 and 2018, the Ministry of Education (MINEDUC) closed several colleges due to sub-standard practice allegations.  The Rwanda Workforce Development Authority sponsors programs to support both short and long-term professional trainings targeting key industries in Rwanda. Carnegie Mellon University opened a campus in Kigali in 2012–its first in sub-Saharan Africa–and currently offers a Master of Science in Electrical and Computer Engineering  and Master of Science in Information Technology.  In 2013, the nonprofit university program, Kepler, was established for students to work toward a U.S.-accredited degree through online learning and in-person seminars.  Oklahoma Christian University offers an online Master of Business Administration program with on-site support in Kigali. In 2012, the government extended basic compulsory education from nine to 12 years.  In 2009, the government designated English, rather than French, as the language of instruction for students from grade four onwards. 

Investors are strongly encouraged to hire Rwandan nationals whenever possible.  According to the Investment Code, a registered investor who invests an equivalent of at least USD 250,000 may recruit three foreign employees.  However, a number of foreign investors reported difficulties importing qualified staff in accordance with the Investment Code due to Rwandan immigration rules and practices.  In some cases, these problems occurred even though investors had signed agreements with the government regarding the number of foreign employees.  

Companies find skill deficits in many sectors when hiring.  The Rwandan education system continues to struggle with a shortage of resources and capacity, including due to a shortage of teachers qualified to teach in English after the 2009 transition away from French.  A study of dropout and repetition rates conducted in collaboration with MINEDUC and UNICEF published in 2016 found that only 38 percent of those enrolled complete primary education and even a smaller percentage successfully complete secondary education (16 percent complete lower secondary and 10 percent higher secondary level).  The official 2018 literacy rate for individuals aged 15 and above is 69.5 percent for women and 77.6 percent for men, according to the GOR. Functional literacy rates are lower according to independent evaluations, particularly in rural areas.  

Rwanda has ratified all of the International Labor Organization’s eight core conventions.  Policies to protect workers in special labor conditions exist, but enforcement remains inconsistent.  The government encourages, but does not require, on-the-job training and technology transfer to local employees.  The law restricts voluntary collective bargaining by requiring prior authorization or approval by authorities and requiring binding arbitration in cases of non-conciliation.  The law provides some workers the right to conduct strikes, subject to numerous restrictions, but strikes are very rare.  There is no unemployment insurance or other social safety net programs for workers laid off for economic reasons.  The legal framework for employment rights for disabled persons is not as strong as in the United States, but the government and some employers are making efforts to offer reasonable accommodations. 

In 2000, the government revised the national labor code to eliminate gender discrimination, restrictions on the mobility of labor, and wage controls.  NISR’s 2016/2017 Fifth Integrated Household Living Conditions Survey, released in December 2018, found that approximately 10.4 percent of children in Rwanda ages 6-17 are engaged in economic activities, particularly in agriculture and in domestic service.  Tea has been included on the U.S. government’s List of Goods Produced by Child Labor or Forced Labor since 2010, with an estimated 13,000 children involved in the sector, primarily on small, family-owned farms that sell harvests to larger cooperatives. The U.S. Department of State have no evidence that children are employed by either tea producers or tea cooperatives in Rwanda.  The U.S. Department of Labor-financed “REACH-T” project successfully removed approximately 5,000 children engaged in, or at risk of, child labor in the country’s 12 tea-producing districts between 2013 and 2017. Private firms are responsible for their local employees’ income tax payments and Rwanda Social Security Board pension contributions. For full-time workers, these payments amount to more than 30 percent of take-home pay, which can be a disadvantage if competing firms are in the informal economy and not compliant with these requirements. 

Labor laws are not waived in order to attract or retain investment.  There are no labor law provisions in SEZs or industrial parks, which differ from national labor laws.  Collective bargaining is not common in Rwanda. Few professional associations fix minimum salaries for their members and some investors have expressed concern that labor law enforcement is uneven or opaque.

In 2018, a new labor law was passed.  The law states the Ministry of Labor may establish a minimum wage by ministerial order but does not specify an amount.  Among changes in the new law, an employer can now suspend an employee in writing for a period not exceeding 30 days without pay, but the salary will be repaid if the employee proves innocence after the administrative investigation.  The minimum working age remains 16, with an exception for 13-15 year olds to perform light work only in the context of an apprenticeship. Damages paid for an employee victim of unfair dismissal cannot go below three months of salary nor exceed six months of salary.  For employees with more than ten years of experience with the same employer, damages cannot exceed nine months of net salary. The new law imposes a requirement that both parties consent to any amendment to an employment contract, if the amendment results in changes in salary or other benefits.  The probation period has been reduced from six months to three. An employee dismissed for economic or technical reasons and whose dismissal does not last more than six months is entitled to be reinstated without competition when he or she meets the profile required for the position to which the employer seeks to fill. 

More information on major changes can be at the Rwanda Law Reform Commission website here: http://www.rlrc.gov.rw/index.php?id=82&tx_news_pi1 percent5Bnews percent5D=61&tx_news_pi1 percent5Bcontroller percent5D=News&tx_news_pi1 percent5Baction percent5D=detail&cHash=b69f6019dcb0ff868f7ef72b5b034de1  

Full the new labor law, see: https://www.mifotra.gov.rw/fileadmin/news_import/New_Labour_Law_2018.pdf  

The Overseas Private Investment Corporation (OPIC) has provided financing and political risk insurance to more than a dozen U.S. projects in Rwanda since 1975.  OPIC officials have expressed interest in expanding the corporation’s portfolio in Rwanda and are currently evaluating potential projects. The Export-Import Bank continues its program to insure short-term export credit transactions involving various payment terms, including open accounts that cover the exports of consumer goods, services, commodities, and certain capital goods.  The 1965 U.S.-Rwanda Investment Incentive Agreement remains in force; Rwanda and the United States are discussing potential updates to this agreement. 

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

Table 3: Sources and Destination of FDI

Inward Direct Investment according to IMF’s Coordinated Direct Investment Survey (http://data.imf.org/CDIS  ).  Data on Rwandan outward FDI is not available.

Table 4: Sources of Portfolio Investment

Data not available; data on Rwanda equity security holdings by nationality is not available.  According to a 2017 BNR report, portfolio investment remains the lowest component of foreign investment in Rwanda mainly due to the low level of financial market development.  Portfolio investment stock increased to USD 100.5 million in 2016, a 3 percent increase from 2015 levels. In 2016, Rwanda recorded foreign portfolio inflows of USD 3 million compared to USD 2.5 million in 2015.  There is no more recent data available for portfolio investment.

Matthew Steed
Economic and Commercial Officer
United States Embassy
2657 Avenue de la Gendarmerie, P.O. Box 28 Kigali, Rwanda
+250-252-596-538
KigaliEcon@state.gov 

Policies Toward Foreign Direct Investment

The Government of Senegal welcomes foreign investment.  Foreign firms are generally able to invest in Senegal free from systematic discrimination in favor of local firms.  Nevertheless, some U.S. and other foreign firms have noted that, in practice, Senegal’s investment environment seems to favor incumbents and insiders – often other foreign firms – at the expense of new market entrants. Common complaints include excessive and inconsistently applied bureaucratic processes, nontransparent judicial processes, and an opaque decision-making process for public tenders and contracts.

Senegal’s Investment Promotion Agency (APIX), www.investinsenegal.com  , provides a range of administrative services to foreign investors. APIX is working to reduce the administrative burden of starting a business in Senegal, although red tape and slow processes continue to hamper investment.  APIX has launched a one-stop shop, the APIX Administrative Procedures Facilitation Center, with the goal of helping businesses perform all business registration procedures with government, local authorities and public institutions within two days. In practice, however, the World Bank Doing Business 2019 estimates that it takes six days to register a firm. In addition to other bureaucratic and documentary requirements, registering a business requires certification of certain documents by a public notary registered in Senegal. Senegalese law provides special preferences to facilitate investment and business operations by medium and small enterprises, including reduced interest rates for Senegalese-owned companies.

The government conducts ongoing dialogue with the private sector through the Conseil Presidentiel de l’Investissement (Presidential Council on Investment, or “CPI”). Among other activities, the CPI sponsors an annual forum at which investors comment on the government’s policies and actions. Another important venue for dialogue is the annual Assises de l’Entreprises sponsored by the Conseil National du Patronat, the national employers’ association. More information can be found at www.cnp.sn.  Senegal does not have a business ombudsman or other official charged with coordinating complaints about the business climate. In practice, investors must often engage directly at the minister level to resolve business climate concerns.

Limits on Foreign Control and Right to Private Ownership and Establishment

There are no barriers to ownership of businesses by foreign investors in most sectors. There are some exceptions for strategic sectors such as water, electricity distribution, and port services where the government and state-owned companies maintain responsibility for most physical infrastructure but allow private companies to provide services. Senegal allows foreign investors equal access to ownership of property and does not impose any general limits on foreign control of investments.  Senegal’s Investment Code includes guarantees for equal treatment of foreign investors including the right to acquire and dispose of property.

The Government of Senegal does some screening of proposed investments, primarily to verify compatibility with the country’s overall development goals and compliance with environmental regulations. If the government is involved in project financing, the Ministry of Finance and Budget will also review financing arrangements to ensure compatibility with budget and debt policies. APIX can facilitate government review of investment proposals and the project approval process.

Other Investment Policy Reviews

On January 15, 2019, the Executive Board of the International Monetary Fund (IMF) completed the seventh review of Senegal’s economic performance under the program supported by a Policy Support Instrument (PSI) approved on June 24, 2015. For more information, see: https://www.imf.org/en/News/Articles/2019/01/18/pr1905-imf-exec-board-completes-7th-review-psi-senegal-concludes-2018-article-iv  .

Business Facilitation

The point of entry for business registration is the website of Senegal’s Investment Promotion Agency (APIX) at www.investinsenegal.com  . In 2018, the World Bank’s Doing Business Index ranked Senegal 64 out of 190 for “Starting a Business,” acknowledging significant improvement on this indicator over the past several years. APIX has launched a one-stop shop, the APIX Administrative Procedures Facilitation Center, with the goal of helping businesses perform all business registration procedures with government, local authorities and public institutions. The World Bank Doing Business 2019 estimates that it takes an average of six days to register a firm, with four separate administrative procedures, some of which require certification by a registered lawyer or notary.

Senegal’s Agency for the Development and Supervision of Small and Medium-sized Enterprises (ADEPME) has launched initiatives to support small and medium-sized enterprises (defined in Senegal as companies with fewer than 50 employees and annual revenues of less than 5 billion CFA (about USD 9 million)). These include tax incentives, grants for capacity building and for feasibility studies, and technical assistance to help firms operating in the informal sector formalize and register. ADEPME has also launched a program to certify the creditworthiness of SMEs, making them eligible for loans at preferential rates.

Outward Investment

The government neither promotes nor restricts outward investment.

According to the WTO (https://www.wto.org/english/tratop_e/tpr_e/s362-07_e.pdf ), Senegal has signed 28 bilateral investment treaties (BITs), of which 16 are currently in force. Senegal signed a BIT with the United States in December 6, 1983, which entered into force in October 25, 1990.  Other notable BIT partners include: Canada (2016); Kuwait (2009); Portugal (2011); Turkey (2012) Argentina (2010); France (2010); India (2009); Mauritius (2009) and Spain (2011). Senegal ratified the WTO Trade Facilitation Treaty in February 2017.

Senegal is a member of the Economic Community of West African States (ECOWAS), which seeks to create a regional free trade zone with approximately 300 million inhabitants. The ECOWAS Trade Liberalization System (ETLS), approved in 1979, has yet to be fully implemented, however. Senegal has adopted and implemented the ECOWAS Common External Tariff (CET) System and generally imposes tariffs in a transparent and rules-based way. In March 2018, Senegal signed the African Continental Free Trade Area agreement, a step toward a continent-wide liberalized market for goods and services.

Senegal does not have a bilateral taxation treaty with the United States.  Senegal has concluded agreements for the avoidance of double taxation with some 15 partners, including Belgium, Canada, Egypt, France, Kuwait, Lebanon, Malaysia, Mauritania, Mauritius, Morocco, Norway, Qatar, Chinese Taipei, Tunisia Malaysia, and Portugal.

Negotiations continue toward an Economic Partnership Agreement between the European Union and several West African countries, including Senegal.  More information may be found here: http://ec.europa.eu/trade/policy/countries-and-regions/negotiations-and-agreements/#_pending  

Some foreign firms, including U.S. companies, report concerns over Senegal’s system for assessing and collecting taxes from corporate entities. According to some reports, the processes used by tax authorities to calculate tax assessments are cumbersome, complex, and inconsistent, making necessary lengthy and uncertain negotiations over tax bills.  Some observers, including tax professionals, have reported that Senegalese tax authorities seem to target large, prominent companies for discriminatory taxation, ignoring smaller, unregistered firms that operate informally and pay little or no taxes. The government is implementing a program to incentivize small and medium-sized enterprises (SMEs) to formalize their operations, but progress has been slow. By some estimates, the informal sector represents up to 90 percent of the economic activity in the country.

Senegal has made no recent changes to its tax code, which can be accessed here: http://www.investinsenegal.com/IMG/pdf/cgi2013-2.pdf /    http://www.impotsetdomaines.gouv.sn/fr/documentation/code-general-des-impots-cgi  .

Transparency of the Regulatory System

Senegal has made some progress towards developing independent regulatory institutions, including regulators for the energy, telecommunications, and financial sectors. While Senegal lacks established procedures for a public comment process for proposed laws and regulations, the government frequently holds public hearings and workshops to discuss proposed initiatives. Proposed regulations are not always made available to the public in a timely way, however. Although Senegalese law requires proposed legislation to be published in advance in the government’s official gazette, the government does not consistently update the gazette’s website.

Authority to make rules and regulate rests with the relevant government ministry unless there is a separate regulatory authority for a particular industry. However, in some instances, a ministry or the president will exert authority over regulatory matters—e.g., determining electricity tariffs. Local government bodies do not have a decisive role in regulatory decisions.

In 1988, the government established the Commission de Regulation du Secteur de l’Electricite (CRSE) to regulate the electricity sector and set electricity tariffs. Although the CRSE is, by law, an independent agency, observers note that the government frequently exercises influence over its decisions. The government is preparing to expand the CRSE’s role to include regulation of hydrocarbon fuels. The CRSE holds public consultations every three years as part of its technical process for reviewing electricity tariffs. The Autorite de Regulation des Telecommunications et des Postes is responsible for licensing and regulation of telecommunications and postal services in Senegal. The regulator of financial institutions is the Banque Centrale des Etats de l’Afrique de l’Ouest (BCEAO), the regional central bank for the eight-member West African Economic and Monetary Union (WAEMU), based in Dakar.

Senegal is a member of the United Nations Conference on Trade and Development (UNCTAD)’s international network of transparent investment procedures. At https://senegal.eregulations.org/   there is detailed information on administrative procedures applicable to investment and income generating operations. This includes the number of steps required, name and contact details of the entities and persons in charge of procedures, required documents, and conditions, costs, processing time and legal bases for procedures. There is no legal requirement to conduct impact assessments of proposed regulations, and regulatory agencies rarely do so. There is no specialized government body tasked with reviewing and monitoring regulatory impacts.

Legal, regulatory and accounting systems closely follow French models, and West African Economic and Monetary Union (WAEMU) countries present their financial statements in accordance with the SYSCOA system, based on Generally Accepted Accounting Principles in France.

Senegal’s budget and information on debt obligations were widely and easily accessible to the public, including online. The budget was substantially complete and considered generally reliable.  Senegal’s supreme audit institution reviewed the government’s accounts, and has published its audit reports for Senegal’s budgets through 2016 online. The process for allocating licenses and contracts for natural resource extraction was outlined in law and appeared to be followed in practice. Basic information on natural resource extraction awards was publicly available, and the government participated actively in the Extractive Industries Transparency Initiative (EITI). Senegal is the first Francophone country in sub-Saharan Africa to submit to a fiscal transparency evaluation (FTE) by the IMF.  In its January 30, 2019 FTE, the IMF rated Senegal “average” overall for countries of similar income and institutional capacity. Senegal was rated “advanced” or “good” on fiscal forecasting, budgeting, and fiscal reporting. It was rated “basic” on monitoring risks triggered by subnational governments. Senegal’s fiscal transparency would be improved by the supreme audit authority making its reports on the budget available in a timely manner.

International Regulatory Considerations

As a member of the Economic Community of West African States (ECOWAS), Senegal adheres to regional requirements concerning the movement of people and goods. Similarly, financial and fiscal-policy directives of WAEMU are also enforced in Senegal, as are regulations issued by the BCEAO. Senegal is a member of the WTO and generally notifies draft regulations to the WTO Committee on Technical Barriers to Trade.  However, since 2005 Senegal has banned imports of uncooked poultry and poultry products from the world without notifying the WTO.

Legal System and Judicial Independence

While Senegal has well-developed commercial and investment laws and a legal framework for resolving business disputes and enforcing property rights, settlement of disputes is often cumbersome and slow. Senegal’s legal system is based on French traditions and practice. While Senegal’s legal system is one of the most effective in francophone Africa, it presents a challenging environment for resolution of commercial disputes. Court cases tend to proceed slowly, with ample opportunity for the parties involved to prolong the proceedings. Even when courts issue judgments, companies may encounter challenges in implementing court decisions and enforcing their contractual rights. Some foreign investors report experiencing discriminatory treatment by local courts. Investors may consider including provisions for binding arbitration in their contracts in order to avoid prolonged and unpredictable entanglements in Senegalese courts. To alleviate the growing backlog and delays in resolution of commercial disputes, the government of Senegal recently launched a Commercial Court as part of its investment climate reforms, although the court’s operations have yet to be fully implemented.

Senegal’s constitution provides that the judiciary is independent of the legislature and executive. In practice, however, the executive’s influence over the courts is occasionally evident though generally not overt. Executive interference in judicial matters is, however, rare in strictly commercial matters. While often cumbersome and time-consuming, judicial processes in Senegal are, as a rule, procedurally competent. Companies may seek judicial redress against regulatory decisions. Such cases are heard in administrative tribunals that specialize in adjudicating claims against the state.

Laws and Regulations on Foreign Direct Investment

Senegal’s 2004 Investment Code provides basic guarantees for equal treatment of foreign investors and repatriation of profit and capital. It also specifies tax and customs exemptions according to the investment volume, company size and location, with investments outside of Dakar eligible for longer tax exemptions. A law to enhance transparency in public procurement and public tenders entered into force in 2008, establishing a public procurement regulatory body, the Autorité de Régulation des Marchés Publics (ARMP), which publishes annual reviews of public procurement. Procedures for challenging tender awards are available. The government enacted a law on public-private partnerships in 2014 to facilitate expedited approval of projects that include a minimum share of domestic investment.

More information on Senegal’s legal and regulatory environment, including texts of the Investment Code, the Mining Code, a new Petroleum Code finalized in February 2019, can be found at the following:

• Investment Code: http://investinsenegal.com/IMG/pdf/resume_ci_et_dispositifs_incitatifs_du_cgi-3.pdf 
• Mining Code: http://itie.sn/reglementation/  
• Petroleum Code: http://www.droit-afrique.com/uploads/Senegal-Code-2019-petrolier.pdf 

Competition and Anti-Trust Laws

Senegal’s national competition commission, the Commission Nationale de la Concurrence, is responsible for reviewing transactions for competition-related concerns.

Expropriation and Compensation

Senegal’s Investment Code includes protection against expropriation or nationalization of private property with exceptions for “reasons of public utility” that would involve “just compensation” in advance. In general, Senegal has no history of expropriation or creeping expropriation against private companies.  The government may sometimes use eminent domain justifications to procure land for public infrastructure projects with compensation provided to land owners. Senegal’s Bilateral Investment Treaty with the U.S. also specifies that international legal standards are applicable to any cases of expropriation of investment and the payment of compensation.

Dispute Settlement

ICSID Convention and New York Convention

Senegal is a member of the International Convention for the Settlement of Investment Disputes (ICSID) and a signatory of the Convention on the Recognition and Enforcement of Arbitral Awards (the New York Convention). Senegalese law recognizes the Cour d’Appel (Appeals Court) as the competent authority for the recognition and enforcement of awards rendered pursuant to ICSID.  Senegal is also a signatory to the Organization for the Harmonization of Corporate Law in Africa Treaty (OHADA). This agreement supports enforcement of awards under the New York Convention. The Autorité de Régulation des Marchés Publics (ARMP) manages a dispute resolution mechanism for public tenders.

Investor-State Dispute Settlement

Senegal has growing experience in using international arbitration for resolution of investment disputes with foreign companies, including some cases involving tax disputes with U.S. firms. The government has also prevailed in some arbitration cases, including a 2013 arbitration decision in a high-profile case with a multinational company over an integrated mining/railway/port project, fostering greater confidence within the government to the arbitration process. Senegal’s Bilateral Investment Treaty with the United States includes provisions to facilitate the referral of investment disputes to binding arbitration.

International firms have pursued a variety of investment disputes during the last decade, including at least two U.S. firms involved in tax and customs disputes. One U.S. energy firm was involved in a tax dispute and ultimately prevailed in arbitration. Another company has an ongoing case over whether imported industrial inputs would be subject to customs duties. Other foreign companies in the mining and telecommunications sectors have pursued commercial disputes over licensing. These disputes have often been resolved through arbitration or an amicable settlement.

Senegal has no history of extrajudicial action against foreign investors.

International Commercial Arbitration and Foreign Courts

The government has initiated several programs to establish commercial courts and use alternative dispute resolution mechanisms to reduce the time required for resolving business disputes. Under the OHADA treaty, Senegal recognizes the corporate law and arbitration procedures common to the 16 member states in western and central Africa. Senegalese courts routinely recognize arbitration clauses in contracts and agreements. It is not unusual for courts to rule against state-owned enterprises in disputes involving private enterprises.

Bankruptcy Regulations

Senegal has commercial and bankruptcy laws that address liquidation of business liabilities. Foreign creditors receive equal treatment under Senegalese bankruptcy law in making claims against liquidated assets.  Monetary judgments are normally in local currency. As a member of OHADA, Senegal permits three different types of bankruptcy liquidation through a negotiated settlement, company restructuring, or complete liquidation of assets.  Senegal ranked 94th out of 190 countries on the “Resolving Insolvency” indicator in the 2019 World Bank Doing Business Index. According to the index, it takes an average of 36 months to complete liquidation proceedings in Senegal.  Secured creditors recover an average of 30.1 cents per every dollar owed in such proceedings, compared to an average of 20.3 for sub-Saharan Africa and 70.5 for OECD high income countries.

Investment Incentives

Senegal’s Investment Code provides for investment incentives, including temporary exemption from customs duties and income taxes, for investment projects.  Eligibility for investment incentives depends upon a firm’s size and the type of activity, amount of the potential investment, and location of the project. To qualify for significant investment incentives, firms must invest above CFA 100 million (approximately USD 165,000) or in activities that lead to an increase of 25 percent or more in productive capacity.  Investors may also deduct up to 40 percent of retained investment over five years. For companies engaged strictly in “trading activities,” however, investment incentives may not be available.

Eligible sectors for investment incentives include agriculture and agro-processing, fishing, livestock and related industries, manufacturing, tourism, mineral exploration and mining, banking, and others.  All qualifying investments benefit from the “Common Regime,” which includes two years of exoneration from duties on imports of goods not produced locally for small and medium-sized firms, and three years for all others.  Also included is exoneration from direct and indirect taxes for the same period.

Exoneration from the Minimum Personal Income Tax and from the Business License Tax can be granted to investors who use local resources for at least 65 percent of their total inputs within a fiscal year.  Enterprises that locate in less industrialized areas of Senegal may benefit from exemption of the lump-sum payroll tax of three percent, with the exoneration running from five to 12 years, depending on the location of the investment.  The investment code provides for exemption from income tax, duties and other taxes, phased out progressively over the last three years of the exoneration period. Most incentives are automatically granted to investment projects meeting the above criteria.  The new tax code was published December 31, 2012 (law # 2012-31 of December 2012 published in journal # 6706 of 31/12/2012).

An existing firm requesting an extension of such incentives must be at least 20 percent self-financed.  Large firms – those with at least 200 million CFA (USD 330,000) in equity capital – are required to create at least 50 full-time positions for Senegalese nationals, to contribute the hard currency equivalent of at least 100 million CFA (USD 165,000 USD), and keep regular accounts that conform to Senegalese (European accounting system) standards.  In addition, firms must provide APIX with details on company products, production, employment and consumption of raw materials.

Foreign Trade Zones/Free Ports/Trade Facilitation

In 2017, Senegal passed legislation to create special economic zones (SEZ) regime. Enterprises approved under the SEZ regime may be granted tax and customs concessions for up to 25 years.  Benefits may include: exemptions from duties and taxes on imports of goods, raw materials and equipment (except for community levies); application of a reduced 15 percent corporate tax rate; and exemption from certain taxes and charges such as the business tax and property taxes. To qualify for these benefits, companies must represent a minimum investment of CFA 100 million (USD 165,000), create at least 150 direct jobs during their first year of operation, and generate at least 60 percent of their revenue from exports.  In November 2018, President Sall inaugurated the country’s first SEZ, the Integrated Industrial Platform of Diamniadio, a suburb of Dakar; it is expected to create approximately 20,000 jobs by 2023. The government plans to launch two additional SEZs – the Sandiara Industrial Area (in Mbour) the Special Economic Zone of Ndiass. With a growing interest in economic zones, there is a need for more clarity and coherence in the incentives offered by the government.

Performance and Data Localization Requirements

Except in the petroleum sector (discussed below), the government does not currently impose, by statute, specific requirements for including local content, input or employment in investment activities.  The government has announced, however, that it favors local content, and the current administration is pursing legislation that would require some level of local content in new investment projects. The government also negotiates with potential investors on a case-by-case basis to support local employment or ensure incentives for investors to meet their contractual commitments.  The U.S. Bilateral Investment Treaty with Senegal includes provisions for companies to engage freely professional, technical, and managerial assistance necessary for planning and operation of investments. Nevertheless, foreign firms often find that voluntarily including local content in their projects makes their proposals more competitive.

Senegal approved a new Petroleum Code in February 2019.  The new law updated Senegal’s oil and gas legal framework, which was initially adopted two decades ago when the country sought to attract initial investments for largely untested resources.  Senegal’s recent string of major offshore petroleum discoveries, however, has attracted major international players and led the government to adjust the legislation to preserve a greater share of the profits for Senegal.  The gist of the law reflects the spirit of the new constitution, which stipulates that the country’s natural resources belong to its people. As a result, the law guarantees more favorable terms to the national oil company Petrosen, including a minimum of 10 percent interest in projects in the exploration phase and up to 30 percent interest when projects reach the development and exploitation stages.  Although oil and gas blocks will still be awarded through open international tenders, the new law will require foreign oil companies to source a portion of labor and materials locally and contribute to a training fund for local workers.

Acquiring work permits for expatriate staff is typically straightforward.  Citizens from WAEMU member countries may work freely in Senegal.

Real Property

The Senegalese Civil Code provides a framework, based on French law, for enforcing private property rights.  The code provides for equality of treatment and non-discrimination against foreign-owned businesses. Senegal maintains a property title and a land registration system, but application is uneven outside of urban areas.  Establishing ownership rights to real estate can be difficult.  Once established, however, ownership is protected by law.

The government has undertaken several reforms to make it easier for investors to acquire and register property.  It has streamlined procedures and reduced associated costs for property registration. The government has developed new land tenure models intended to facilitate land acquisition by resolving conflicts between traditional and government land ownership.  If the new models are widely adopted, the government and donors expect they will facilitate land acquisition and investment in the agricultural sector while providing benefits to traditional landowners in local communities.

The government generally pays compensation when it takes private property through eminent domain actions.  Senegal’s housing finance market is underdeveloped and few long-term mortgage-financing vehicles exist. There is no secondary market for mortgages or other bundled revenue streams.  The judiciary is inconsistent when adjudicating property disputes. Senegal ranked 118 out of 190 countries in the 2019 Doing Business Index for Registering Property. According to the World Bank methodology, it requires an average of 41 days to register property (a slight improvement from 2018) against an average of 53.9 days in sub-Saharan Africa and 20.1 days in Organisation for Economic Co-operation and Development (OECD) high-income countries.  Five separate procedures are required for property registration.

Intellectual Property Rights

Senegal maintains an adequate legal framework for the protection of intellectual property rights (IPR), but it has limited institutional capacity to implement this framework and enforce IPR protections.  Senegal has been a member of the World Intellectual Property Organization (WIPO) since its inception. Senegal is also a member of the African Organization of Intellectual Property (OAPI), a grouping of 15 francophone African countries with a common system for obtaining and maintaining protection for patents, trademarks and industrial designs.  Local statutes recognize reciprocal protection for authors or artists who are nationals of countries adhering to the 1991 Paris Convention on Intellectual Property Rights.

Patents are registered with the Agence sénégalaise pour la Propriété industrielle et l’Innovation technologique (ASPIT) and are protected for 20 years.  An annual charge is levied during this period.  Registered trademarks are protected for a period of 20 years.  Trademarks may be renewed indefinitely by subsequent registrations.

Senegal is a signatory to the Bern Copyright Convention.  The Senegalese Copyright Office, part of the Ministry of Culture, protects copyrights.  Bootlegging of music CDs is common and of concern to the local music industry. The Copyright Office has taken actions to combat media piracy, including seizure of counterfeit cassettes and CD/DVDs.  In 2008, the government established a special police unit to better enforce the country’s anti-piracy and counterfeit laws.

In general, however, the government has limited capacity to combat IPR violations or to seize counterfeit goods.  Customs screening for counterfeit goods production is weak and confiscated goods occasionally re-appear in the market.  Nevertheless, the government has made efforts to raise awareness of the impact of counterfeit products on the Senegalese marketplace, and officers have participated in trainings offered by manufacturers to identify counterfeit products.

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

Capital Markets and Portfolio Investment

Senegalese authorities take a generally positive view of portfolio investment.  Assisted by the debt management office of the Central Bank of West African States (BCEAO) and thanks to a well-functioning regional debt market, Senegal has historically issued regular debt instruments in local currency to manage its finances.  Beginning in 2011, the government began accessing international debt markets, issuing U.S. dollar-denominated eurobonds in 2011, 2014, 2017, and 2018. Some observers, including the IMF, have expressed mild concern over the recent rise in Senegal’s external debt, which reached 52 percent of GDP in 2018.

A handful of Senegalese companies are listed on the West African Regional Stock Exchange (BRVM), headquartered in Abidjan, Cote d’Ivoire.  The BVRM also has local offices in each of the WAEMU member countries, offering additional opportunities to attract foreign capital and access diversified sources of financing.

In 2018, the BCEAO launched the region’s first certification program for dealers in securities and other financial instruments.  Modeled on accreditation programs offered by the Chartered Institute for Securities and Investment (CISI), the new program was supported by the U.S. Treasury’s Office of Technical Assistance.

The government does not restrict payments for current international transactions.

Money and Banking System

While Senegal’s banking system is generally sound, the financial sector is under-developed. Senegal’s approximately twenty commercial banks, primarily based in France, Nigeria, Morocco, and Togo, follow generally conservative lending guidelines, with collateral requirements that most potential borrowers cannot meet.  Few firms are eligible for long-term loans, and small- and medium-sized enterprises have little access to credit. According to a 2014 government survey, less than 5 percent of enterprises receive financing from commercial banks. Senegal’s banking sector is regulated by the BCEAO, the regional central bank, and the WAEMU regional banking commission.  Increasingly available mobile money services offer Senegalese consumers alternatives to traditional banking and credit services.

Foreign Exchange and Remittances

Foreign Exchange

As one of the eight WAEMU countries, Senegal uses the CFA franc – issued by the BCEAO – as its currency.  The CFA franc is pegged to the euro. Senegal’s Investment Code includes guarantees of access to foreign exchange and repatriation of capital and earnings, although repatriation transactions are subject to procedural requirements of financial regulators, including limitations imposed by the BCEAO on the use of offshore accounts.  Local financial institutions routinely carry out commercial transfers in a timely fashion. The government limits the amount of foreign exchange that individual travelers may take outside Senegal. Departing travelers may take a maximum of 6 million CFA francs (approximately USD 10,000) in foreign currency and travelers checks upon presentation of a valid airline ticket.  Senegal’s Bilateral Investment Treaty with the United States includes commitments to ensuring free transfer of funds associated with investments.

Remittance Policies

Remittances from Senegal’s large diaspora represent around 9 percent of GDP and are one of the main resources for the country.  According to the last IMF review of Senegal’s economy, remittances remains a significant component of the current account but are expected to decline as a percent of GDP over the medium term.

Sovereign Wealth Funds

In 2012, Senegal established a sovereign wealth fund (Fonds Souverain d’Investissements Strategiques, or FONSIS) with a mandate to leverage public assets to support equity investments in commercial projects supporting economic development objectives, FONSIS invests primarily in strategic sectors defined in the Plan Senegal Emergent (PSE), including agriculture, fishing, infrastructure, energy, mining, tourism, and services.

Senegal maintains several taxes and funds allocated for specific purposes such as expanding access to transportation, energy, and telecommunications, including the autonomous road maintenance fund and the energy support fund.  For these funds, some information is included in budget annexes; these funds are subject to the same auditing and oversight mechanisms as ordinary budgetary spending. FONSIS reports that it abides by the Santiago Principles for sovereign wealth funds.

Senegal has generally reduced government involvement in state-owned enterprises (SOEs) during the last three decades.  However, the government still owns full or majority interests in approximately 20 such companies, including the national electricity company (Senelec), Dakar’s public bus service, the Port of Dakar, the national postal company (National Post), the national rail company, and the national water utility.  The state-owned electricity company, Senelec, retains control over power transmission and distribution, but it relies increasingly on independent power producers to generate power. The government has also retained control of the national oil company, Petrosen, which is involved in hydrocarbon exploration in partnership with foreign oil companies and operates a small refinery dependent on government subsidies.  The government has modest and declining ownership of agricultural enterprises, including a state-owned company involved in rice production.

In 2018, the government relaunched a wholly state-owned airline, Air Senegal. The government owns a minority share in Sonatel-Orange Senegal, the country’s largest internet and mobile communications provider.

The Direction du Secteur Parapublic, an agency within the Ministry of Finance, manages the government’s ownership rights in enterprises.  The government’s budget includes financial allocations to these enterprises, including subsidies to Senelec.  SOE revenues are not projected in budget documents, but actual revenues are included in quarterly reports published by the Ministry of Finance.  Senegal’s supreme audit institution (the Cour des Comptes) conducts audits of the public sector and SOEs.  Its reports are made publicly available at www.coursdescomptes.sn and www.ige.sn, but not always in a timely fashion.

In 2018, the IMF, pursuant to an ongoing Policy Support Instrument, recommended that the government reduce its subsidies to the National Post to reduce public sector borrowing requirements.

Privatization Program

The government has no program for privatizing the remaining SOEs.

Following the lead of foreign companies, some Senegalese firms have begun adopting corporate social responsibility programs and responsible business conduct standards. This movement, however, is not yet widespread.

The criteria and procedures by which the government awards natural resource extraction contracts or licenses are specified in Senegal’s 2016 Mining Code.  The new code requires mining companies to participate in transparency reporting, following the guidelines of the Extractive Industries Transparency Initiative (EITI).  The government appeared to follow the Mining Code and its implementing regulations in practice, although unregulated artisanal mining is common in some areas. Basic information on awards was publicly available online through the government’s official journal, and included details regarding geographic areas, resources under development, companies involved, and the duration of contracts.  In January 2019, the government adopted a new Petroleum Code, in response to major offshore hydrocarbon discoveries since 2014. The new code clarifies mechanisms for reserving revenues from oil and gas projects to the government. Senegal has been an active member of the EITI since 2013. In May 2018, the EITI Board declared Senegal the first country in Africa to have made “satisfactory progress” in implementing EITI standards.  In October, Senegal hosted the 41st quarterly meeting of the EITI Board, along with a conference on EITI implementation in Africa. The government’s EITI committee reports directly to the president.

Senegalese law provides criminal penalties for corruption, but the government often did not enforce the law effectively.  Officials frequently engaged in corrupt practices with impunity.

A 2014 law requires the president, cabinet ministers, speaker and chief financial officer of the National Assembly, and managers of public funds in excess of one billion CFA francs (approximately USD 1.8 million) to disclose their assets to OFNAC.  Failure to comply may result in a penalty amounting to one-quarter of an individual’s monthly salary until forms are filed. The president may dismiss appointees who do not comply. With the exception of disclosures made by the president, disclosures made under the law are confidential and unauthorized release of asset disclosures is a criminal offense.

The government has made some limited progress in improving its anti-corruption efforts, but corruption remains a problem.  The current administration mounted corruption investigations against several public officials (primarily the president’s political rivals) and has secured several convictions.  The government reactivated the Court of Repossession of Illegally Acquired Assets to investigate corruption by former government officials. President Sall also created new institutions such as the National Anti-Corruption Commission (OFNAC) and procedures to require asset declarations from public officials.  OFNAC is composed of twelve members appointed by decree with a mission to fight corruption, embezzlement of public funds and fraud. The government of Senegal has also taken steps to increase budget transparency in line with regional standards. Senegal ranked 67 out of 180 countries, in Transparency International’s 2018 Corruption Perception Index (CPI), representing a substantial increase over Senegal’s ranking of 99 in 2011.

Notwithstanding Senegal’s positive reputation for corruption relative to regional peers, investors continue to report corruption as an issue at lower levels of the bureaucracy where officials with modest salaries may demand “tips” for advancing permits and other official paperwork.  Some high level officials in Sall’s administration are rumored to be involved in corrupt dealings. It is important for U.S. companies to assess corruption risks and develop an effective compliance program or measures to prevent and detect corruption, including foreign bribery. U.S. firms operating in Senegal can underscore to interlocutors in Senegal that they are subject to the Foreign Corrupt Practices Act (FCPA) in the United States and may consider seeking legal counsel to ensure compliance with anti-corruption laws in the United States and Senegal.

OFNAC did not publish an annual report during the year.  OFNAC’s first annual report in 2016 concluded that bribery, misappropriation, abuse of authority, and fraud remained widespread within government institutions, particularly in the health and education ministries, the postal services, and the Transport Administration.  The OFNAC president was dismissed two months later, and the organization has not published any reports since.

Senegal’s financial intelligence unit, Cellule Nationale de Traitement des Informations Financières (CENTIF) is responsible for investigating money laundering and terrorist financing. CENTIF has broad authority to investigate suspicious financial transactions, including those of government officials.

The U.S. Government seeks to level the global playing field for U.S. businesses by encouraging other countries to take steps to criminalize all acts of corruption, including bribery of foreign public officials, and requiring them to uphold their obligations under relevant international conventions.  A U.S. firm that believes a competitor is seeking to use bribery of a foreign public official to secure a contract may bring this to the attention of appropriate U.S. agencies.

Senegal is a signatory of the United Nations Convention against Corruption but it is not a signatory of the OECD Convention on Combatting Bribery.

Resources to Report Corruption

Mrs. Seynabou Ndiaye Diakhaté
Presidente
Office National de Lutte Contre La Fraude et la Corruption (OFNAC)
Lot 72-73, Cité Keur Gorgui à Mermoz-Pyrotechnie
Telephone: 800 000 900 / +221 33 889 98 38
www.ofnac.sn

Birahim Seck
President
Forum Civil
40 Avenue Malick Sy (1er étage) – B.P. 28 554 – Dakar
Telephone: +221 33 842 40 44
forumcivil@orange.sn / http://www.forumcivil.sn/  

Senegal has long been regarded as an anchor of stability in the West Africa region that is vulnerable to political unrest.  It is the only mainland West African country that has never had a coup d’état since gaining independence in 1960. Senegal experienced sporadic incidents of political violence during the lead up to national elections in March 2012 due to strong opposition to former President Wade’s decision to seek re-election for a third term. The 2012 presidential election, however, reinforced Senegal’s reputation as the strongest democracy in West Africa. International observers assessed the February 2019 presidential election, in which President Sall easily won a second term, as free and fair, despite some isolated systemic issues and a few instances of campaign violence.  Public protests occasionally spawn isolated incidents of violence when unions, opposition parties, merchants, or students demand better salaries, working conditions or other benefits. Sporadic incidents of violence as result of petty banditry continue in the Casamance region, which has suffered from a three-decade-old conflict ignited by a local rebel movement seeking independence for the region, but the level of violence has declined in recent years as the government and rebel groups have engaged in negotiations to resolve the conflict.

Security is a top priority for the government, which has increased its defense and security budget by 92 percent between 2012 and 2017.

Senegal has an abundant supply of unskilled and semi-skilled labor, with a more limited supply of skilled workers in engineering and technical fields.  While Senegal has one of the best higher educational systems in West Africa and produces a substantial pool of educated workers, limited job opportunities in Senegal lead many to look outside of the country for employment.

Relations between employees and employers are governed by the Labor Code, industry-wide collective bargaining agreements, company regulations, and individual employment contracts.  There are two powerful industry associations that represent management’s interests: the National Council of Employers (CNP) and the National Employers’ Association (CNES). The principal labor unions are the National Confederation of Senegalese Workers (CNTS), and the National Association of Senegalese Union Workers (UNSAS), a federation of independent labor unions.  Senegalese law permits all workers to form unions with limited exceptions for security force members, including police and gendarmes, customs officers, and judges. The labor code requires prior authorization from the Ministry of Interior by giving the ministry discretionary power to issue a document recognizing a trade union before it can exist legally. The law allows unions to conduct their activities without interference and provides for the right to bargain collectively.  Collective bargaining agreements, however, apply only to an estimated 44 percent of union workers. Trade unions organize on an industry-wide basis, very similar to the French system of union organization, though most workers are involved in informal sector occupations where they are often self-employed and not subject to the labor code.

Although Senegal has institutions and policies in place to combat the worst forms of child labor, most of its efforts are directed towards the overall labor market.  The recently adopted draft legislation on article L145 of the labor code relative to the minimum age for admission to employment is a good start. The law is yet to be applied, however.  In some cases, religious and political considerations keep the government from taking strong action to protect children, who are subject to exploitation in areas such as forced begging, artisanal mining, agriculture, and sex work.  Moreover, child labor done in the home, on the family farm, or in a family informal business is as socially acceptable and not targeted by the government. Outside of the artisanal gold sector and forced child begging, the government does not consider child labor to be a problem warranting spending limited national resources.  A way forward could be to leverage other sectors that impact children, such as education and health, and use their resources and programs in such a way as to have an impact on child labor.

The Overseas Private Investment Corporation (OPIC) offers financing and investment insurance to support U.S. investment projects in Senegal and is actively seeking to strengthen its portfolio in the country.  OPIC is currently supporting several investment projects in Senegal including two energy projects, one microfinance project and an agribusiness project. Additional projects in the energy and tourism sectors are under consideration.  Senegal is a member of the Multilateral Investment Guarantee Agency (MIGA), an arm of the World Bank

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

Table 3: Sources and Destination of FDI

Cheikh Oumar Dia
Economic Specialist
U.S. Embassy, Route des Almadies, B.P. 49, Dakar, Senegal
+221 33 879 4867
diaco@state.gov

Policies Towards Foreign Direct Investment

The government of South Africa is generally open to foreign investment as a means to drive economic growth, improve international competitiveness, and access foreign markets.  Merger and acquisition activity is more sensitive and requires advance work to answer potential stakeholder concerns. The 2018 Competition Amendment Bill, which was signed into law on February 13, 2019, introduced a mechanism for South Africa to review foreign direct investments and mergers and acquisitions by a foreign acquiring firm on the basis of protecting national security interests (see section on Laws and Regulations on Foreign Direct Investment below).  Virtually all business sectors are open to foreign investment. Certain sectors require government approval for foreign participation, including energy, mining, banking, insurance, and defense.

The Department of Trade and Industry’s (the dti) Trade and Investment South Africa (TISA) division provides assistance to foreign investors.  In the past year, they opened provincial One-Stop Shops that provide investment support for foreign direct investment (FDI), with offices in Johannesburg, Cape Town, and Durban, and a national One Stop Shop located at the dti in Pretoria and online at http://www.gov.za/Invest percent20SA percent3AOnestopshop  .  An additional one-stop shop has opened at Dube Trade Port, which is a special economic zone aerotropolis linked to the King Shaka International Airport in Durban.  The dti actively courts manufacturing industries in which research indicates the foreign country has a comparative advantage. It also favors manufacturing that it hopes will be labor intensive and where suppliers can be developed from local industries.  The dti has traditionally focused on manufacturing industries over services industries, despite a strong service-oriented economy in South Africa. TISA offers information on sectors and industries, consultation on the regulatory environment, facilitation for investment missions, links to joint venture partners, information on incentive packages, assistance with work permits, and logistical support for relocation.  The dti publishes the “Investor’s Handbook” on its website: www.dti.gov.za  

While the government of South Africa supports investment in principle and takes active steps to attract FDI, investors and market analysts are concerned that its commitment to assist foreign investors is insufficient in practice.  Some felt that the national-level government lacked a sense of urgency to support investment deals. Several investors reported trouble accessing senior decision makers. South Africa scrutinizes merger- and acquisition-related foreign direct investment for its impact on jobs, local industry, and retaining South African ownership of key sectors.  Private sector representatives and other interested parties were concerned about the politicization of South Africa’s posture towards this type of investment. Despite South Africa’s general openness to investment, actions by some South African Government ministries, populist statements by some politicians, and rhetoric in certain political circles show a lack of appreciation for the importance of FDI to South Africa’s growth and prosperity and a lack of concern about the negative impact domestic policies may have on the investment climate.  Ministries often do not consult adequately with stakeholders before implementing laws and regulations or fail to incorporate stakeholder concerns if consultations occur. On the positive side, the President, assisted by his appointment of four investment envoys, and his new cabinet are working to restore a positive investment climate and appear to be making progress as they engage in senior level overseas roadshows to attract investment.

Limits on Foreign Control and Right to Private Ownership and Establishment

Currently there is no limitation on foreign private ownership. South Africa’s transformation efforts – the re-integration of historically disadvantaged South Africans into the economy – has led to policies that could disadvantage foreign and some locally owned companies.  In 2017, the Broad-Based Black Socio-Economic Empowerment Charter proposed for the South African mining and minerals industry required an increase to 30 percent ownership by black South Africans, but was mired in the courts as industry challenged it. The Charter was retracted for revision and a new version was proposed in 2018. The Broad-Based Black Economic Empowerment Act of 2013 (B-BBEE), and associated codes of good practice, requires levels of company ownership and participation by Black South Africans to get bidding preferences on government tenders and contracts. The dti created an alternative equity equivalence (EE) program for multinational or foreign owned companies to allow them to score on the ownership requirements under the law, but many view the terms as onerous and restrictive.  Currently eight multinationals, most in the technology sector, participate in this program, most in the technology sector.

Other Investment Policy Reviews

The World Trade Organization carried out in 2015 a Trade Policy Review for the Southern African Customs Union, in which South Africa accounts for over 90 percent of overall GDP.  Neither the OECD nor the UN Conference on Trade and Development (UNCTAD) has conducted investment policy reviews for South Africa.

Business Facilitation

According to the World Bank’s Doing Business report, South Africa’s rank in ease of doing business in 2019 was unchanged from 2018 at 82nd of 190.  It ranks 134th for starting a business, taking an average of forty days to complete the process. South Africa ranks 143rd of 190 countries on trading across borders.

In 2017, the dti launched a national InvestSA One Stop Shop (OSS) to simplify administrative procedures and guidelines for foreign companies wishing to invest in South Africa.  The dti, in conjunction with provincial governments, opened physical OSS locations in Cape Town, Durban, and Johannesburg. These physical locations bring together key government entities dealing with issues including policy and regulation, permits and licensing, infrastructure, finance, and incentives, with a view to reducing lengthy bureaucratic procedures, reducing bottlenecks, and providing post-investment services.  The virtual OSS web site is: http://www.gov.za/Invest percent20SA percent3AOnestopshop  .

The Companies and Intellectual Property Commission (CIPC), a body of the dti, is responsible for business registrations and publishes a step-by-step process for registering a company.  This process can be done on its website (http://www.cipc.co.za/index.php/register-your-business/companies/  ), through a self-service terminal, or through a collaborating private bank.  New business registrants also need to register through the South African Revenue Service (SARS) to get an income tax reference number for turnover tax (small companies), corporate tax, employer contributions for PAYE (income tax), and skills development levy (applicable to most companies).  The smallest informal companies may not be required to register with CIPC, but must register with the tax authorities. Companies also need to register with the Department of Labour (DoL) – www.labour.gov.za   – to contribute to the Unemployment Insurance Fund (UIF) and a compensation fund for occupational injuries.  The DoL registration takes the longest (up to 30 days), but can be done concurrently with other registrations.

Outward Investment

South Africa does not incentivize outward investments.  South Africa’s stock foreign direct investments in the United States in 2017 totaled USD 4.1 billion (latest figures available), an almost 40 percent increase from 2016.  The largest outward direct investment of a South African company is a gas liquefaction plant in the State of Louisiana by Johannesburg Stock Exchange (JSE) and NASDAQ dual-listed petrochemical company SASOL.  There are some restrictions on outward investment, such as a R1 billion (USD 83 million) limit per year on outward flows per company. Larger investments must be approved by the South African Reserve Bank and at least 10 percent of the foreign target entities voting rights must be obtained through the investment. https://www.resbank.co.za/RegulationAndSupervision/
FinancialSurveillanceAndExchangeControl/FAQs/Pages/Corporates.aspx  

Of South Africa’s 49 signed bilateral investment treaties (BITs), 35 never entered into force or were terminated.  According to UNCTAD, fourteen agreements are still in force including with Russia, China, Cuba, and Iran. The 2015 “Protection of Investment Act” replaces lapsed BITs and stipulates that “Existing investments that were made under such treaties will continue to be protected for the period and terms stipulated in the treaties.  Any investments made after the termination of a treaty, but before promulgation of this Act, will be governed by the general South African law.” It also provides that “the government may consent to international arbitration in respect of investments covered by the Act, subject to the exhaustion of domestic remedies.” Such “arbitration will be conducted between the Republic and the home state of the applicable investor.”  South Africa is not engaged in new BIT negotiations.

South Africa is a member of the Southern Africa Customs Union (SACU) which has a common external tariff and tariff-free trade between its five members (South Africa, Botswana, Lesotho, Namibia, and Eswatini, formerly known as Swaziland).  South Africa is generally restricted from negotiating trade agreements by itself because SACU is the competent authority. Nevertheless, South Africa has free trade agreements with the Southern African Development Community (SADC) including its 12 members; the Trade, Development and Cooperation Agreement (TDCA) between South Africa and the European Union (EU); EFTA-SACU Free Trade Agreement between SACU and the European Free Trade Association (EFTA) – Iceland, Liechtenstein, Norway, and Switzerland; and the Economic Partnership Agreement (EPA) between the SADC EPA States (South Africa, Botswana, Namibia, Eswatini, Lesotho, and Mozambique) and the EU and its Member States.  These agreements mainly cover trade in goods and provide preferential market access, though article 52 of the 1999 EU-TDCA covers investment promotion and protection.  South Africa, through SACU, is currently negotiating a “rollover” EPA with the United Kingdom (UK) similar to its EPA with the EU in an effort to curb any trade disruptions when the UK exits the EU.  Progress in reaching an agreement is mired in negotiations over rules of origin, cumulation, and sanitary and phytosanitary matters. 

South Africa is a signatory to the SADC-EAC-COMESA Tripartite FTA which includes 26 countries with a combined GDP of USD 860 billion and a combined population of approximately 590 million people.  This agreement primarily covers trade in goods. South Africa ratified the African Continental Free Trade Agreement in 2018. It joins 21 other African countries, reaching the threshold needed to bring the agreement into force, once these countries submit their ratification instruments to the African Union.  Implementation of the agreement still requires signatories to present offers on tariff lines and services, and agree to rules of origin among other outstanding issues.

The United States and South Africa signed a Trade and Investment Framework Agreement (TIFA) in 1999.  The last TIFA discussions were held in 2015. The United States and SACU negotiated a Trade, Investment and Development Cooperation Agreement (TIDCA) in 2008.

The first U.S.-South Africa bilateral tax treaty eliminated double taxation and entered into force in 1998.  In 2014, a new bilateral tax treaty was signed to implement the U.S. Foreign Asset Tax Compliance Act (FATCA).

As part of a broad set of tax increases, in 2018 the government raised, for the first time since 1993, the value added tax (VAT) by one percentage point to 15 percent.  Other fiscal measures intended to raise government revenues, such as no upward adjustments to personal income tax brackets to account for inflation, higher alcohol and tobacco excise duties, and an extra 29 cents per liter for gasoline and 30 cents per liter for diesel in fuel levies – are meant to generate an additional R15-billion (USD 1.1 billion) for the national coffers.  The tax increases come alongside government expenditure cuts primarily in government payroll compensation. Taken together, these interventions aim to stabilize public finances by 2023. According to Finance Minister Tito Mboweni, “It will not be easy. There are no quick fixes. But our nation is ready for renewal. We are ready to plant the seeds of our future.”

The South African Revenue Service (SARS) began collecting the health promotion levy – previously known as the sugar-sweetened beverages tax – in April 2018, almost one year after it was initially due to come into effect.  In February 2019, the Minister of Finance announced a five percent increase to this tax from 2.1 rand cents to 2.21 rand cents (USUSD 0.0015 to USD 0.0016) per gram of sugar content that exceeds 4 grams per 100 ml.  The tax, which applies to both domestic and international products, is meant to encourage the reduction in the consumption of sugar-sweetened beverages to deal with obesity and the epidemic of non-communicable diseases such as diabetes, which is cited as the second leading cause of death, after tuberculosis, among South Africans.  The Treasury argued that taxes on foods high in sugar can be an important element in a strategy to address diet-related diseases.

The South African Revenue Service will impose a carbon emissions tax from June 2019, based on an initial levy of R120 per ton of carbon dioxide equivalent (CO2e) of greenhouse gas emissions above certain tax-free allowances.

Transparency of the Regulatory System

South African laws and regulations are generally published in draft form for stakeholders to comment, and legal, regulatory, and accounting systems are generally transparent and consistent with international norms.

The dti is responsible for business-related regulations. It develops and reviews regulatory systems in the areas of competition, standards, consumer protection, company and intellectual property registration and protections, as well as other subjects in the public interest.  It also oversees the work of national and provincial regulatory agencies mandated to assist the dti in creating and managing competitive and socially responsible business and consumer regulations. The dti publishes a list of Bills and Acts that govern the dti’s work at http://www.dti.gov.za/business_regulation/legislation.jsp  .

The 2015 Medicines and Related Substances Amendment Act authorized the creation of the South African Healthcare Products Regulatory Authority (SAHPRA), meant in part to address the backlog of more than 7000 drugs waiting for approval to be used in South Africa.  Established in 2018, and unlike its predecessor, the Medicines Control Council (MCC), SAHPRA is a stand-alone public entity governed by a board that is appointed by and accountable to the South African Ministry of Health. SAHPRA is responsible for the monitoring, evaluation, regulation, investigation, inspection, registration, and control of medicines, scheduled substances, clinical trials and medical devices, in vitro diagnostic devices (IVDs), complementary medicines, and blood and blood-based products.  SAHPRA intends to do this through 207 full-time in-house technical evaluators, though this structure has not been fully staffed. Unlike with the MCC, SAHPRA’s funding is provided by the retention of registration fees. Despite its launch in 2018, the full staffing and implementation of SAPHRA is anticipated to take up to five years, and clearing the backlog of drug registration dossiers will also take significant time.

South Africa’s Consumer Protection Act (2008) went into effect in 2011. The legislation reinforces various consumer rights, including right of product choice, right to fair contract terms, and right of product quality. Impact of the legislation varies by industry, and businesses have adjusted their operations accordingly. A brochure summarizing the Consumer Protection Act can be found at:  http://www.dti.gov.za/business_regulation/acts/CP_Brochure.pdf . Similarly, the National Credit Act of 2005 aims to promote a fair and non-discriminatory marketplace for access to consumer credit and for that purpose to provide the general regulation of consumer credit and improves standards of consumer information. A brochure summarizing the National Credit Act can be found at: http://www.dti.gov.za/business_regulation/acts/NCA_Brochure.pdf 

International Regulatory Considerations

South Africa is a member of the Southern African Customs Union (SACU), the oldest existing customs union in the world.  SACU functions mainly on the basis of the 2002 SACU Agreement which aims to: (a) facilitate the cross-border trade in goods among SACU members; (b) create effective, transparent and democratic institutions; (c) promote fair competition in the common customs area; (d) increase investment opportunities in the common customs area; (e) enhance the economic development, diversification, industrialization and competitiveness of member States; (f) promote the integration of its members into the global economy through enhanced trade and investment; (g) facilitate the equitable sharing of revenue arising from customs and duties levied by members; and (h) facilitate the development of common policies and strategies.

The 2002 SACU Agreement requires member States to develop common policies and strategies with respect to industrial development; cooperate in the development of agricultural policies; cooperate in the enforcement of competition laws and regulations; develop policies and instruments to address unfair trade practices between members; and calls for harmonization of product standards and technical regulations.

SACU member States are working to develop the regional industrial development policy to harmonize competition policy and unfair trade practices.  Progress is limited in general to customs related areas, mainly tariff and trade remedies. SACU has not harmonized non-tariff measures. Also, the 2002 SACU Agreement is limited to the liberalization of trade in goods and does not cover trade in services.  In 2008, the SACU Council of Ministers agreed that new generation issues such as services, investment, and Intellectual Property Rights should be incorporated into the SACU Agenda. Work is ongoing. South Africa is generally restricted from negotiating trade agreements by itself, since SACU is the competent authority.

In general, South Africa models its standards according to European standards or UK standards where those differ.

South Africa is a member of the WTO and attempts to notify all draft technical regulations to the Committee on Technical Barriers to Trade (TBT), though often after the regulations have been implemented.

In November 2017, South Africa ratified the WTO’s Trade Facilitation Agreement. According to the government, it has implemented over 90 percent of the commitments as of February 2018. The outstanding measures were notified under Category B, to be implemented by the indicative date of 2022 without capacity building support and include Article 3 and Article 10 commitments on Advance Rulings and Single Window.

The South African Government is not party to the WTO’s Government Procurement Agreement (GPO).

Legal System and Judicial Independence

South Africa has a mixed legal system composed of civil law inherited from the Dutch, common law inherited from the British, and African customary law, of which there are many variations.  As a general rule, South Africa follows English law in criminal and civil procedure, company law, constitutional law, and the law of evidence, but follows Roman-Dutch common law in contract law, law of delict (torts), law of persons, and family law.  South African company law regulates corporations, including external companies, non-profit, and for-profit companies (including state-owned enterprises). Funded by the national Department of Justice and Constitutional Development, South Africa has district and magistrates courts across 350 districts and high courts for each of the provinces (except Limpopo and Mpumalanga, which are heard in Gauteng).  Often described as “the court of last resort,” the Supreme Court of Appeals hears appeals, and its jurisprudence may only be overruled by the apex court, the Constitutional Court. Moreover, South Africa has multiple specialized courts, including the Competition Appeal Court, Electoral Court, Land Claims Court, the Labour and Labour Appeal Courts, and Tax Courts to handle disputes between taxpayers and the South African Revenue Service.  These courts exist parallel to the court hierarchy, and their decisions are subject to the same process of appeal and review as the normal courts. Analysts routinely praise the competence and reliability of judicial processes, and the courts’ independence has been repeatedly proven with high-profile rulings against controversial legislation, as well as against former presidents and corrupt individuals in the executive and legislative branches.

Laws and Regulations on Foreign Direct Investment

The February 2019 ratification of the Competition Amendment Bill introduced, among other revisions, section 18A that mandates the President create a committee – comprised of 28 Ministers and officials chosen by the President – to evaluate and intervene in a merger or acquisition by a foreign acquiring firm on the basis of protecting national security interests.  According to the bill, any decisions taken by this committee are required to be published in the Gazette and must be presented, in appropriate detail, to the National Assembly. The new section states that the President must identify and publish in the Gazette – the South African equivalent of the U.S. Federal Register – a list of national security interests including the markets, industries, goods or services, sectors or regions in which a merger involving a foreign acquiring firm must be notified to the South African government.  The law also outlines what factors the President should take into consideration when determining what constitutes a threat to national security interest, including the merger’s impact on the use or transfer of sensitive technology or know-how; the security of critical infrastructure, including systems, facilities, and networks; the supply of critical goods or services to citizens and/or to the government; and the potential to enable foreign surveillance or espionage or hinder intelligence or law enforcement operations. It also suggests the President consider transactions that enable or facilitate terrorism, terrorist organizations, or organized crime; and to consider a merger’s impact on the economic and social stability of South Africa.  The law further recommends the committee take into consideration whether the foreign acquiring firm is a firm controlled by a foreign government.

Competition and Anti-Trust Laws

The Competition Commission is empowered to investigate, control and evaluate restrictive business practices, abuse of dominant positions, and mergers in order to achieve equity and efficiency.  Their public website is www.compcom.co.za  

The Competition Tribunal has jurisdiction throughout South Africa and adjudicates competition matters in accordance with the Competition Act.  While the Commission is the investigation and enforcement agency, the Tribunal is the adjudicative body, very much like a court.

In addition to the points made in the previous section, the amendments, presented by the Ministry for Economic Development that revise the Competition Act of 1998 and entered effect in February 2019 extend the mandate of the competition authorities and the executive to tackle high levels of economic concentration, address the limited transformation in the economy, and curb the abuse of market power by dominant firms.  The changes introduced through the Competition Amendment Act are meant to curb anti-competitive practices and break down monopolies that hinder “transformation” – the increased participation of black and HDSA in the South African economy. The amendments aim to deter the abuse of market dominance by large firms that use practices such as margin squeeze, exclusionary practices, price discrimination, and predatory pricing.  By increasing the penalties for these prohibited business practices – for repeat offences the penalties could amount to between 10 percent to 25 percent of a firm’s annual turnover – and allowing the parent or holding company to be held liable for the actions of its subsidiaries that contravene competition law, the Competition Commission hopes to break down these anticompetitive practices and open up new opportunities for SMEs.

Expropriation and Compensation

Racially discriminatory property laws and land allocations during the colonial and apartheid periods resulted in highly distorted patterns of land ownership and property distribution in South Africa.  Given the slow and mixed success of land reform to date, the National Assembly (Parliament) passed a motion in February 2018 to investigate a proposal to amend the constitution (specifically Section 25, the “property clause”) to allow for land expropriation without compensation (EWC). The constitutional Bill of Rights, where Section 25 resides, has never been amended.  Some politicians, think-tanks, and academics argue that Section 25, as written, allows for EWC in certain cases, while others insist that in order to implement EWC more broadly, amending the constitution is required. Academics foresee a few test cases for EWC over the next year, primarily targeted at abandoned buildings in urban areas, informal settlements in peri-urban areas, and involving labor tenants in rural areas.

Parliament tasked an ad hoc Constitutional Review Committee – made up of parliamentarians from various political parties – to report back on whether to amend the constitution to allow EWC, and if so, how it should be done.  In December 2018, the National Assembly adopted the committee’s report recommending a constitutional amendment, but Parliament ran out of time to draft the amendment before its final session before the May 8, 2019 elections.  The next Parliament will need to compose a new ad hoc committee to draft the constitutional amendment bill.

South African law requires that Parliament engage in a rigorous public participation process.  Parliament must publish a proposed bill to amend the Constitution in the Government Gazette at least 30 days prior to its introduction to allow for public comment.  Any change to the constitution would need a two-thirds parliamentary majority (267 votes) to pass, as well as the support of six out of the nine provinces in the National Council of Provinces.  Currently, no single political party has such a majority.

In September 2018, President Ramaphosa appointed an advisory panel on land reform, which supports the Inter-Ministerial Committee on Land Reform chaired by Deputy President David Mabuza.  Comprised of ten members from academia, social entrepreneurship, and activist organizations, the panel will submit a formal report in 2019 on issues related to land restitution, redistribution, tenure security, and agricultural support.  Analysts have praised the panel for representing the executive branch’s interest and dedication to engaging with diverse sectors to handle the sensitive, multi-faceted issues related to land reform.

Existing expropriation law, including The Expropriation Act of 1975 (Act) and the Expropriation Act Amendment of 1992, entitles the government to expropriate private property for reasons of public necessity or utility.  The decision is an administrative one. Compensation should be the fair market value of the property as agreed between the buyer and seller, or determined by the court, as per Section 25 of the Constitution. In several restitution cases in which the government initiated proceedings to expropriate white-owned farms after courts ruled the land had been seized from blacks during apartheid, the owners rejected the court-approved purchase prices.  In most of these cases, the government and owners reached agreement on compensation prior to any final expropriation actions. The government has twice exercised its expropriation power, taking possession of farms in Northern Cape and Limpopo provinces in 2007 after negotiations with owners collapsed. The government paid the owners the fair market value for the land in both cases. A new draft expropriation law, intended to replace the Expropriation Act of 1975, was passed and is awaiting Presidential signature.  Some analysts have raised concerns about aspects of the new legislation, including new clauses that would allow the government to expropriate property without first obtaining a court order.

In 2018, the government operationalized the 2014 Property Valuation Act that creates the office of Valuer-General charged with the valuation of property that has been identified for land reform or acquisition or disposal by a department.  Among other things, the Act gives the government the option to expropriate property based on a formulation in the Constitution termed “just and equitable compensation.” This considers the market value of the property and applies discounts based on the current use of the property, the history of the acquisition, and the extent of direct state investment and subsidy in the acquisition and capital improvements to the property.  Critics fear that this could lead to the government expropriating property at a price lower than fair market value. The Act also allows the government to expropriate property under a broad range of policy goals, including economic transformation and correcting historical grievances.

The Mineral and Petroleum Resources Development Act 28 of 2002 (MPRDA), enacted in 2004, gave the state ownership of all of South Africa’s mineral and petroleum resources.  It replaced private ownership with a system of licenses controlled by the government of South Africa, and issued by the Department of Mineral Resources.  Under the MPRDA, investors who held pre-existing rights were granted the opportunity to apply for licenses, provided they met the licensing criteria, including the achievement of certain B-BBEE objectives.  Amendments to the MPRDA passed by Parliament in 2014, but were not signed by the President.  In August 2018, the Minister for the Department of Mineral Resources, Gwede Mantashe, called for the recall of the amendments so that oil and gas could be separated out into a new bill.  The Minister also announced the B-BBEE provisions in the new Mining Charter would not apply during exploration, but would start once commodities were found and mining commenced.  The Amendments are now with the Department of Mineral Resources to draft a new bill to be submitted to Parliament.

Dispute Settlement

ICSID Convention and New York Convention

South Africa is a member of the New York Convention of 1958 on the recognition and enforcement of foreign arbitration awards, but is not a member of the World Bank’s International Center for the Settlement of Investment Disputes.

Investor-State Dispute Settlement

The 2015 Promotion of Investment Act removes the option for investor state dispute settlement through international courts typically afforded through bilateral investment treaties (BITs).  Instead, investors disputing an action taken by the South African government must request the Department of Trade and Industry to facilitate the resolution by appointing a mediator. A foreign investor may also approach any competent court, independent tribunal, or statutory body within South Africa for the resolution of the dispute.

Dispute resolution can be a time-intensive process in South Africa.  If the matter is urgent, and the presiding judge agrees, an interim decision can be taken within days while the appeal process can take months or years.  If the matter is a dispute of law and is not urgent, it may proceed by application or motion to be solved within months. Where there is a dispute of fact, the matter is referred to trial, which can take several years.  The Alternative Dispute Resolution involves negotiation, mediation or arbitration, and may resolve the matter within a couple of months.

International Commercial Arbitration and Foreign Courts

Arbitration in South Africa follows the Arbitration Act of 1965, which does not distinguish between domestic and international arbitration and is not based on UNCITRAL model law.  South African courts retain discretion to hear a dispute over a contract entered into under U.S. law and under U.S. jurisdiction; however, the South African court will interpret the contract with the law of the country or jurisdiction provided for in the contract.

South Africa recognizes the International Chamber of Commerce, which supervises the resolution of transnational commercial disputes.  South Africa applies its commercial and bankruptcy laws with consistency and has an independent, objective court system for enforcing property and contractual rights.

Alternative Dispute Resolution is increasingly popular in South Africa for many reasons, including the confidentiality which can be imposed on the evidence, case documents, and the judgment.  South Africa’s new Companies Act also provides a mechanism for Alternative Dispute Resolution.

Bankruptcy Regulations

South Africa has a strong bankruptcy law, which grants many rights to debtors, including rejection of overly burdensome contracts, avoiding preferential transactions, and the ability to obtain credit during insolvency proceedings.  South Africa ranks 66 out of 190 countries for resolving insolvency according to the 2019 World Bank Doing Business report, an increase from its 2018 rank of 55 despite receiving the same overall score, indicating that the increase is only due to other countries falling below South Africa in 2019.

Investment Incentives

South Africa offers various investment incentives targeted at specific sectors or types of business activities. The dti has a number of incentive programs ranging from tax allowances to support in the automotive sector and helping innovation and technology companies to film and television production.

12I Tax Allowance: is designed to support new industrial projects that utilize only new and unused manufacturing assets and expansions or upgrades of existing industrial projects. The incentive offers support for both capital investment and training. https://www.thedti.gov.za/financial_assistance/financial_incentive.jsp?id=45&subthemeid=26  

Agro-Processing Support Scheme (APSS): aims to stimulate investment by South African agro-processing/beneficiation (agri-business) enterprises. https://www.thedti.gov.za/financial_assistance/financial_incentive.jsp?id=69&subthemeid=25  

Aquaculture Development and Enhancement Programme (ADEP): is available to South African registered entities engaged in primary, secondary, and ancillary aquaculture activities in both marine and freshwater classified under SIC 132 (fish hatcheries and fish farms) and SIC 301 and 3012 (production, processing and preserving of aquaculture fish). https://www.thedti.gov.za/financial_assistance/financial_incentive.jsp?id=56&subthemeid=26  

Automotive Investment Scheme (AIS): designed to grow and develop the automotive sector through investment in new and/ or replacement models and components that will increase plant production volumes, sustain employment and/ or strengthen the automotive value chain. https://www.thedti.gov.za/financial_assistance/financial_incentive.jsp?id=37&subthemeid=26  

Medium and Heavy Commercial Vehicles Automotive Investment Scheme (MHCV-AIS): is designed to grow and develop the automotive sector through investment in new and/or replacement models and components that will increase plant production volumes, sustain employment and/or strengthen the automotive value chain. https://www.thedti.gov.za/financial_assistance/financial_incentive.jsp?id=60&subthemeid=26  

People-carrier Automotive Investment Scheme (P-AIS): provides a non-taxable cash grant of between 20 percent and 35 percent of the value of qualifying investment in productive assets approved by the dti. https://www.thedti.gov.za/financial_assistance/financial_incentive.jsp?id=55&subthemeid=26  

Business Process Services (BPS): aims to attract investment and create employment opportunities in South Africa through offshoring activities. https://www.thedti.gov.za/financial_assistance/financial_incentive.jsp?id=6&subthemeid=25  

Capital Projects Feasibility Programme (CPFP): is a cost-sharing grant that contributes to the cost of feasibility studies likely to lead to projects that will increase local exports and stimulate the market for South African capital goods and services. https://www.thedti.gov.za/financial_assistance/financial_incentive.jsp?id=4&subthemeid=26  

Cluster Development Programme (CDP): aims to promote industrialization, sustainable economic growth and job creation needs of South Africa through cluster development and industrial parks. https://www.thedti.gov.za/financial_assistance/financial_incentive.jsp?id=66&subthemeid=28  

Critical Infrastructure Programme (CIP): aims to leverage investment by supporting infrastructure that is deemed to be critical, thus lowering the cost of doing business.  https://www.thedti.gov.za/financial_assistance/financial_incentive.jsp?id=3&subthemeid=26  

Clothing and Textile Competitiveness Improvement Programme (CTCIP): aims to build capacity among manufacturers and in other areas of the apparel value chain in South Africa, to enable them to effectively supply their customers and compete on a global scale. https://www.thedti.gov.za/financial_assistance/financial_incentive.jsp?id=35&subthemeid=25  

Export Marketing and Investment Assistance (EMIA): develops export markets for South African products and services and recruits new foreign direct investment into the country. The purpose of the scheme is to partially compensate exporters for costs incurred with respect to activities aimed at developing an export market for South African product and services and to recruit new foreign direct investment into South Africa. https://www.thedti.gov.za/trade_investment/emia.jsp  

Foreign Film and Television Production and Post-Production Incentive: to attract foreign-based film productions to shoot on location in South Africa and conduct post-production activities. https://www.thedti.gov.za/financial_assistance/financial_incentive.jsp?id=63&subthemeid=26  

Innovation and Technology Funding instruments: click on the link to see a graphic of the various funding instruments the government has made available. https://www.thedti.gov.za/financial_assistance/Innovation_value_Chain.jsp  

Manufacturing Competitiveness Enhancement Programme (MCEP): aims to encourage manufacturers to upgrade their production facilities in a manner that sustains employment and maximizes value-addition in the short to medium term.  Participants can also apply for incentives for energy efficiency and green economy incentives. https://www.thedti.gov.za/financial_assistance/financial_incentive.jsp?id=53&subthemeid=25  

Production Incentive (PI): forms part of the Clothing and Textile Competitiveness Program, and forms part of the customized sector program for the clothing, textiles, footwear, leather and leather goods industries. https://www.thedti.gov.za/financial_assistance/financial_incentive.jsp?id=36&subthemeid=25  

Sector-Specific Assistance Scheme (SSAS): is a reimbursable cost-sharing incentive scheme which grants financial support to organizations that support the development of industry sectors and those that contribute to the growth of South African exports. https://www.thedti.gov.za/financial_assistance/financial_incentive.jsp?id=8&subthemeid=26  

Shared Economic Infrastructure Facility (SEIF) – contact the Department of Small Business Development on +27 861 843 384 (select option 2) or E-Mail: sbdinfo@dsbd.gov.za for more information. https://www.thedti.gov.za/financial_assistance/financial_incentive.jsp?id=61&subthemeid=1  

Support Programme for Industrial Innovation (SPII): is designed to promote technology development in South Africa’s industry, through the provision of financial assistance for the development of innovative products and/or processes. SPII is focused on the development phase, which begins when basic research concludes and ends at the point when a pre-production prototype has been produced. https://www.thedti.gov.za/financial_assistance/financial_incentive.jsp?id=48&subthemeid=8  

Strategic Partnership Programme (SPP) – The SPP aims to develop and enhance the capacity of small and medium-sized enterprises to provide manufacturing and service support to large private sector enterprises. https://www.thedti.gov.za/financial_assistance/financial_incentive.jsp?id=67&subthemeid=1  

Workplace Challenge Programme (WPC): managed by Productivity South Africa, WPC aims to encourage and support negotiated workplace change towards enhancing productivity and world-class competitiveness, best operating practices, continuous improvement, lean manufacturing, while resulting in job creation. https://www.thedti.gov.za/financial_assistance/financial_incentive.jsp?id=68&subthemeid=25  

Foreign Trade Zones/Free Ports/Trade Facilitation

South Africa designated its first Industrial Development Zone (IDZ) in 2001. IDZs offer duty-free import of production-related materials and zero VAT on materials sourced from South Africa, along with the right to sell in South Africa upon payment of normal import duties on finished goods.  Expedited services and other logistical arrangements may be provided for small to medium-sized enterprises or for new foreign direct investment. Co-funding for infrastructure development is available from the dti. There are no exemptions from other laws or regulations, such as environmental and labor laws.  The Manufacturing Development Board licenses IDZ enterprises in collaboration with the South African Revenue Service (SARS), which handles IDZ customs matters. IDZ operators may be public, private, or a combination of both. There are currently five IDZs in South Africa: Coega IDZ, Richards Bay IDZ, Dube Trade Port, East London IDZ, and Saldanha Bay IDZ.  For more detailed information on IDZs in South Africa please see: http://www.thedti.gov.za/industrial_development/sez.jsp  

In February 2014, the dti introduced a new Special Economic Zones (SEZs) Bill focused on industrial development. The SEZs encompass the IDZs but also provide scope for economic activity beyond export-driven industry to include innovation centers and regional development.  There are five SEZ in South Africa: Atlantis SEZ, Nkomazi SEZ, Maliti-A-Phofung SEZ, Musina/Makhado SEZ, and OR Tambo SEZ. The broader SEZ incentives strategy allows for 15 percent Corporate Tax as opposed to the current 28 percent, Building Tax Allowance, Employment Tax Incentive, Customs Controlled Area (VAT exemption and duty free), and Accelerated 12i Tax Allowance.

Performance and Data Localization Requirements

Employment and Investor Requirements

Foreign investors who establish a business or who invest in existing businesses in South Africa must show within twelve months of establishing the business that at least 60 percent of the total permanent staff are South African citizens or permanent residents.

The Broad-Based Black Economic Empowerment (B-BBEE) program measures employment equity, management control, and ownership by historically disadvantaged South Africans for companies which do business with the government or bid on government tenders.  Companies may consider the B-BBEE scores of their sub-contractors and suppliers, as their scores can sometimes contribute to or detract from the contracting company’s B-BBEE score.

A business visa is required for foreign investors who will establish a business or who will invest in an existing business in South Africa.  They are required to invest a prescribed financial capital contribution equivalent to R2.5million (USD 178 thousand) and have at least R5 million (USD 356 thousand) in cash and capital available.  These capital requirements may be reduced or waived if the investment qualifies under one of the following types of industries/businesses: information and communication technology; clothing and textile manufacturing; chemicals and bio-technology; agro-processing; metals and minerals refinement; automotive manufacturing; tourism; and crafts.

The documentation required for obtaining a business visa is onerous and includes, among other requirements, a letter of recommendation from the Department of Trade and Industry regarding the feasibility of the business and its contribution to the national interest, and various certificates issued by a chartered or professional South African accountant.

U.S. citizens have complained that the processes to apply for and renew visas and work permits are lengthy, confusing, and difficult.  Requirements frequently change mid-process, and there is little to no feedback about why an application might be considered incomplete or denied.  Many U.S. citizens use facilitation services to help navigate these processes.

Goods, Technology, and Data Treatment

The government does not require the use of domestic content in goods or technology.  The transfer of personal information about a subject to a third party who is in a foreign country is prohibited unless certain conditions are met.  These conditions are outlined in the Protection of Personal Information (PoPI) Act, which the government enacted in 2013 to regulate how personal information may be processed.  The conditions relate to: accountability, processing limitations, purpose specification, information quality, openness, security safeguards, and data subject participation. PoPI also created an Information Regulator (IR) to draft regulations and enforce them; the five member body that comprises the IR was established in 2018.  The IR released regulations on personal information processing in December 2018, but government was not clear if the one year grace period to begin implementation started from the date the regulations were published or from the date the IR is fully operational.

Investment Performance Requirements

There are no performance requirements on investments.

Real Property

The South African legal system protects and facilitates the acquisition and disposition of all property rights (e.g., land, buildings, and mortgages).  Deeds must be registered at the Deeds Office. Banks usually register mortgages as security when providing finance for the purchase of property.

South Africa ranks 106th of 190 countries in registering property according to the 2019 World Bank Doing Business report.

Intellectual Property Rights

South Africa has a strong legal structure and enforcement of intellectual property rights through civil and criminal procedures.  Criminal procedures are generally lengthy, so the customary route is through civil enforcement.  There are concerns about counterfeit consumer goods, illegal commercial photocopying, and software piracy.

Owners of patents and trademarks may license them locally, but when a patent license entails the payment of royalties to a non-resident licensor, the Department of Trade and Industry (the dti) must approve the royalty agreement.  Patents are granted for twenty years – usually with no option to renew. Trademarks are valid for an initial period of ten years, renewable for ten-year periods. The holder of a patent or trademark must pay an annual fee to preserve ownership rights.  All agreements relating to payment for the right to use know-how, patents, trademarks, copyrights, or other similar property are subject to approval by exchange control authorities in the SARB. A royalty of up to four percent is the standard approval for consumer goods, and up to six percent for intermediate and finished capital goods.

Literary, musical, and artistic works, as well as cinematographic films and sound recordings are eligible for copyright under the Copyright Act of 1978.  New designs may be registered under the Designs Act of 1967, which grants copyrights for five years. The Counterfeit Goods Act of 1997 provides additional protection to owners of trademarks, copyrights, and certain marks under the Merchandise Marks Act of 1941.  The Intellectual Property Laws Amendment Act of 1997 amended the Merchandise Marks Act of 1941, the Performers’ Protection Act of 1967, the Patents Act of 1978, the Copyright Act of 1978, the Trademarks Act of 1993, and the Designs Act of 1993 to bring South African intellectual property legislation fully into line with the WTO’s Trade-Related Aspects of Intellectual Property Rights Agreement (TRIPS).  Further Amendments to the Patents Act of 1978 also brought South Africa into line with TRIPS, to which South Africa became a party in 1999, and implemented the Patent Cooperation Treaty. The private sector and law enforcement cooperate extensively to stop the flow of counterfeit goods into the marketplace, and the private sector believes that South Africa has made significant progress in this regard since 2001.   Statistics on seizures are not available.

In an effort to modernize outdated copyright law to incorporate “digital age” advances, the dti introduced the latest draft of the Copyright Amendment Bill in May 2017.  The South African Parliament and the National Council of Provinces approved the Copyright Amendment Bill in March 2019 and sent the bill to the president for signature. As of mid-May 2019, the bill had not been signed.  Among the issues of concern to some private sector stakeholders is the introduction of the U.S. model of “fair use” for copyright exemptions without prescribing industry-specific circumstances where fair use will apply, creating uncertainty about copyrights enforcement.  Other concerns that stakeholders have include a clause which allows the Minister of Trade and Industry to set royalty rates for visual artistic works and impose compulsory contractual terms. The bill also limits the assignment of copyright to 25 years before it reverts back to the author.

The Performers’ Protection Amendment Bill seeks to address issues relating to the payment of royalties to performers; safeguarding the rights of contracting parties; and promotes performers’ moral and economic rights for performances in fixations (recordings).  Similar to the Copyright Amendment Bill, this bill gives the Minister of Trade and Industry authority to determine equitable remuneration for a performer and copyright owner for the direct or indirect use of a work. It also suggests that any agreement between the copyright owner and performer will only last for a period of 25 years and does not determine what happens after 25 years.  The bill also does not stipulate how it will address works with multiple performers, particularly how to resolve potential problems of hold-outs when contracts are renegotiated that could hinder the further exploitation of a work.

The dti released the final Intellectual Property Policy of the Republic of South Africa Phase 1  in June, 2018, that informs the government’s approach to intellectual property and existing laws.  Phase I focuses on the health space, particularly pharmaceuticals. The South African Government, led by the dti, held multiple rounds of public consultations since its introduction and the 2016 release of the IP Consultative Framework.

Among other things, the IP policy framework calls for South Africa to carry out substantive search and examination (SSE) on patent applications and to introduce a pre- and post-grant opposition system.  The dti repeatedly stressed its goal of creating the domestic capacity to understand and review patents, without having to rely on other countries’ examinations. U.S. companies working in South Africa have been generally supportive of the government’s goal; they are concerned, however, that the relatively low number of examiners currently on staff (20) to handle the proposed SSE process and the introduction of a pre-grant opposition system in South Africa could lead to significant delays of products to market.  The South African Government is working with international partners (including USPTO and the European Union) to provide accelerated training of their patent reviewers while also recruiting new staff.

The new IP policy framework also raises concerns around the threat of separate patentability criteria for medicines and a more liberalized compulsory licensing regime.  Stakeholders are calling for more concrete assurances that the use of compulsory licensing provisions will be as a last resort and applied in a manner consistent with WTO rules.  Industry sources report they are not aware of a single case of South Africa issuing a compulsory license.

South Africa is currently in the process of implementing the Madrid Protocol.  CIPC has completed drafting legislative amendments after consultations with stakeholders and the World Intellectual Property Organization (WIPO) on the implementation process in South Africa.  WIPO has conducted a number of missions to South Africa on this matter, the latest of which was in February 2018. South Africa has also engaged with national IP offices with similar trade mark legislation, such as New Zealand.

Resources for Rights Holders

Economic Officer covering IP issues:

Juan Manuel Cammarano
Trade and Investment Officer
+27(0)12 431-4343
CammaranoJM@State.gov

For additional information about South Africa’s treaty obligations and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/  .  A list of attorneys for various South African districts can be found on the U.S. Mission Citizen Services page: https://za.usembassy.gov/u-s-citizen-services/local-resources/attorneys/

Capital Markets and Portfolio Investment

South Africa recognizes the importance of foreign capital in financing persistent current account and budget deficits and openly courts foreign portfolio investment.  Authorities regularly meet with investors and encourage open discussion between investors and a wide range of private and public-sector stakeholders. The government enhanced efforts to attract and retain foreign investors.  President Cyril Ramaphosa hosted an investment conference in October 2018 and attended the World Economic Forum in Davos in January 2019 to promote South Africa as an investment destination. South Africa suffered a two-quarter technical recession in 2018 with economic growth registering only 0.8 percent for the entire year.

South Africa’s financial market is regarded as one of the most sophisticated among emerging markets.  A sound legal and regulatory framework governs financial institutions and transactions.

The fully independent South African Reserve Bank (SARB) regulates a wide range of commercial, retail and investment banking services according to international best practices, such as Basel III, and participates in international forums such as the Financial Stability Board and G-20 Finance Ministers and Central Bank Governors.  There are calls to “nationalize” the privately-held SARB, which would not change its constitutional mandate to maintain price stability. The Johannesburg Stock Exchange (JSE) serves as the front-line regulator for listed firms, but is supervised in these regulatory duties by the Financial Services Board (FSB). The FSB also oversees other non-banking financial services, including other collective investment schemes, retirement funds and a diversified insurance industry.  The South African government has committed to tabling a Twin Peaks regulatory architecture to provide a clear demarcation of supervisory responsibilities and consumer accountability and to consolidate banking and non-banking regulation in 2017.

South Africa has access to deep pools of capital from local and foreign investors which provide sufficient scope for entry and exit of large positions.  Financial sector assets amount to almost three times GDP, and the JSE is the largest on the continent with capitalization of approximately USD 900 billion and approximately 400 companies listed on the main, alternative and other smaller boards.  Non-bank financial institutions (NBFI) hold about two thirds of financial assets.  The liquidity and depth provided by NBFIs make these markets attractive to foreign investors, who hold more than a third of equities and government bonds, including sizeable positions in local-currency bonds. A well-developed derivative market and a currency that is widely traded as a proxy for emerging market risk allows investors considerable scope to hedge positions with interest rate and foreign exchange derivatives.

The SARB’s exchange control policies permit authorized currency dealers, normally one of the large commercial banks, to buy and borrow foreign currency freely on behalf of domestic and foreign clients.  The size of transactions is not limited, but dealers must report all transactions to SARB, regardless of size.  Non-residents may purchase securities without restriction and freely transfer capital in and out of South Africa.  Local individual and institutional investors are limited to holding 25 percent of their capital outside of South Africa. Given the recent exchange rate fluctuations, this requirement has entailed portfolio rebalancing and repatriation to meet the prescribed prudential limits.

Banks, NBFIs, and other financial intermediaries are skilled at assessing risk and allocating credit based on market conditions.  Foreign investors may borrow freely on the local market.  A large range of debt, equity and other credit instruments are available to foreign investors, and a host of well-known foreign and domestic service providers offer accounting, legal and consulting advice.  In recent years, the South African auditing profession has suffered significant reputational damage with the leadership of two large foreign firms being implicated in allegations of aiding and abetting irregular client management practices that were linked to the previous administration, or of delinquent oversight of listed client companies.  South Africa’s WEF competitiveness rating for auditing and reporting fell from number one in the world in 2016, to number 55 in 2018.

Money and Banking System

South African banks are well capitalized and comply with international banking standards. There are 19 registered banks in South Africa and 15 branches of foreign banks. Twenty-nine foreign banks have approved local representative offices. Five banks – Standard, ABSA, First Rand (FNB), Capitec, and Nedbank – dominate the sector, accounting for over 85 percent of the country’s banking assets, which total over USD 390 billion.  The SARB regulates the sector according to the Bank Act of 1990. There are three alternatives for foreign banks to establish local operations, all of which require SARB approval: separate company, branch, or representative office. The criteria for the registration of a foreign bank are the same as for domestic banks. Foreign banks must include additional information, such as holding company approval, a letter of “comfort and understanding” from the holding company, and a letter of no objection from the foreign bank’s home regulatory authority. More information on the banking industry may be obtained from the South African Banking Association at the following website: www.banking.org.za  .

The Financial Services Board (FSB) governs South Africa’s non-bank financial services industry (see website: www.fsb.co.za/  ).  The FSB regulates insurance companies, pension funds, unit trusts (i.e., mutual funds), participation bond schemes, portfolio management, and the financial markets.  The JSE Securities Exchange SA (JSE) is the nineteenth largest exchange in the world measured by market capitalization and enjoys the global reputation of being one of the best regulated.  Market capitalization stood at USD 900 billion as of November 2018, with 388 firms listed. The Bond Exchange of South Africa (BESA) is licensed under the Financial Markets Control Act. Membership includes banks, insurers, investors, stockbrokers, and independent intermediaries.  The exchange consists principally of bonds issued by government, state-owned enterprises, and private corporations. The JSE acquired BESA in 2009. More information on financial markets may be obtained from the JSE (website: www.jse.co.za  ).  Non-residents are allowed to finance 100 percent of their investment through local borrowing.  A finance ratio of 1:1 also applies to emigrants, the acquisition of residential properties by non-residents, and financial transactions such as portfolio investments, securities lending and hedging by non-residents.

Foreign Exchange and Remittances

Foreign Exchange

The South African Reserve Bank (SARB) Exchange Control Department administers foreign exchange policy.  An authorized foreign exchange dealer, normally one of the large commercial banks, must handle international commercial transactions and report every purchase of foreign exchange, irrespective of the amount.  Generally, there are only limited delays in the conversion and transfer of funds. Due to South Africa’s relatively closed exchange system, no private player, however large, can hedge large quantities of Rand for more than five years.

While non-residents may freely transfer capital in and out of South Africa, transactions must be reported to authorities.  Non-residents may purchase local securities without restriction. To facilitate repatriation of capital and profits, foreign investors should ensure an authorized dealer endorses their share certificates as “non-resident.”  Foreign investors should also be sure to maintain an accurate record of investment.

Remittance Policies

Subsidiaries and branches of foreign companies in South Africa are considered South African entities and are treated legally as South African companies.  As such, they are subject to exchange control by the SARB. South African companies may, as a general rule, freely remit the following to non-residents: repayment of capital investments; dividends and branch profits (provided such transfers are made out of trading profits and are financed without resorting to excessive local borrowing); interest payments (provided the rate is reasonable); and payment of royalties or similar fees for the use of know-how, patents, designs, trademarks or similar property (subject to prior approval of SARB authorities).

While South African companies may invest in other countries, SARB approval/notification is required for investments over R500 million (USD 43.5 million).  South African individuals may freely invest in foreign firms listed on South African stock exchanges. Individual South African taxpayers in good standing may make investments up to a total of R4 million (USD 340,000) in other countries.  As of 2010, South African banks are permitted to commit up to 25 percent of their capital in direct and indirect foreign liabilities. In addition, mutual and other investment funds can invest up to 25 percent of their retail assets in other countries.  Pension plans and insurance funds may invest 25 percent of their retail assets in other countries.

Before accepting or repaying a foreign loan, South African residents must obtain SARB approval.  The SARB must also approve the payment of royalties and license fees to non-residents when no local manufacturing is involved.  When local manufacturing is involved, the dti must approve the payment of royalties related to patents on manufacturing processes and products.  Upon proof of invoice, South African companies may pay fees for foreign management and other services provided such fees are not calculated as a percentage of sales, profits, purchases, or income.

Sovereign Wealth Funds

South Africa does not have a Sovereign Wealth Fund.

State-owned enterprises (SOEs) play a significant role in the South African economy.  In key sectors such as electricity, transport (air, rail, freight and pipelines), and telecommunications, SOEs play a lead role, often defined by law, although limited competition is allowed in some sectors (e.g., telecommunications and air).  The government’s interest in these sectors often competes with and discourages foreign investment.  South Africa’s overall fixed investment was 19 percent of GDP.  The SOEs share of the investment was 21 percent while private enterprise contributed 63 percent (government spending made up the remainder of 16 percent).  The IMF estimates that the debt of the SOEs would add 13.5 percent to the overall national debt.

The Department of Public Enterprises (DPE) has oversight responsibility in full or in part for seven of the approximately 700 SOEs that exist at the national, provincial and local levels:  Alexkor (diamonds); Denel (military equipment); Eskom (electricity generation, transmission and distribution); South African Express and Mango (budget airlines); South African Airways (national carrier); South African Forestry Company (SAFCOL – (forestry); and Transnet (transportation).   These seven SOEs employ approximately 105,000 people.  For other national-level SOEs, the appropriate cabinet minister acts as shareholder on behalf of the state. The Department of Transport, for example, has oversight of the state-owned South African National Roads Agency (SANRAL), Passenger Rail Agency of South Africa (PRASA), and Airports Company South Africa (ACSA), which operates nine of South Africa’s airports. The Department of Communications has oversight of the South African Broadcasting Corporation (SABC). The National Treasury assumed control of South African Airways (SAA) in 2014 through 2018, but SAA has since returned to the DPE. .

Combined, South Africa’s SOEs that fall under DPE’s authority posted a loss of R15.5 billion (USD 1.3 billion) in the 2017/2018 financial year.  In recent years many have been plagued by mismanagement and corruption, and repeated government bailouts have exposed the public sector’s balance sheet to sizable contingent liabilities.  The election of President Cyril Ramaphosa and appointment of Minister of Public Enterprises Pravin Gordhan signaled a renewed emphasis on improving SOE governance and performance.

The state-owned electricity giant Eskom generates approximately 95 percent of the electricity used in South Africa.  Coal-fired power stations generate approximately 93 percent of Eskom’s electricity.  Eskom’s core business activities are generation, transmission, trading and distribution.  South Africa’s electricity system operates under strain because of low availability factors for base load generation capacity due to maintenance problems.  The electricity grid’s capacity reserve margins frequently fall under two percent, well below international norms.  Beginning in November 2013, Eskom periodically declared “electricity emergencies,” and asked major industrial users to reduce consumption by ten percent for specified periods (usually one to two days).   To meet rising electricity demand, Eskom is building new power stations (including two of the world’s largest coal-fired power stations, but both are years overdue and over budget).  Eskom and independent industry analysts anticipate South Africa’s electricity grid will remain constrained for at least the next several years.  The South African government has implemented a renewable energy independent power producer procurement program (REIPPP) that in the past three years has added 1500Mw of a planned 3900Mw of renewable energy production to the grid and recently signed 27 Independent Power Producer agreements to provide an additional 2,300 MW to the grid.  In February 2018, S&P announced that it “lowered its long-term foreign and local currency issuer credit ratings on South Africa-owned utility ESKOM Holdings SOC Ltd. to ‘CCC+’ from ‘B-‘.

Transnet National Ports Authority (TNPA), the monopoly responsible for South Africa’s ports, charges some of the highest shipping fees in the world.  In March 2014, Transnet announced an average overall tariff increase of 8.5 percent at its ports to finance a USD 240 million modernization effort.  High tariffs on containers subsidize bulk shipments of coal and iron ore, thereby favoring the export of raw materials over finished ones.  According to the South African Ports Regulator, raw materials exporters paid as much as one quarter less than exporters of finished products.  TNPA is a division of Transnet, a state-owned company that manages the country’s port, rail and pipeline networks.  In April 2012, Transnet launched its Market Driven Strategy (MDS), a R336 billion (USD 28 billion) investment program to modernize its port and rail infrastructure.  Transnet’s March 2014 selection of four OEMs to manufacture 1064 locomotives is part of the MDS.  This CAPEX is being 2/3 funded by operating profits with the remainder from the international capital markets.  In 2016, Transnet reported it had invested R124 billion (USD 10.3 billion) in the previous four years in rail, ports, and pipeline infrastructure.  In recent years ratings agencies have downgraded Transnet’s rating to below the investment-grade threshold.  In November 2017 S&P downgraded Transnet’s local currency rating from BBB- to BB+.

Direct aviation links between the United States and South Africa are limited to flights between Atlanta, New York (JFK), and Washington (Dulles) to Johannesburg.  The growth of low-cost carriers in South Africa has reduced domestic airfares, but private carriers are likely to struggle against national carriers without further air liberalization in the region and in Africa.  The launch of the Single African Air Transport Market, which is composed of 23 African Union member states including South Africa, in January 2018 demonstrates the potential for further cooperation on the continent.  In South Africa, the state-owned carrier, South African Airways (SAA), relies on the government for financial assistance to stay afloat and received back-to-back bailouts of R5 billion (USD 357 million) in 2018 alone to repay creditors.  New management at SAA, including a new board and CEO offer some hope that SAA will implement its turnaround plan, but the airline has a long journey to recover from mismanagement and six consecutive years of losses. The new management has requested a R21.7 billion (USD 1.55 billion) bailout from government over three years to turn the company around. During fiscal year 2017/2018, SAA lost R5.7 billion (USD 407 million) bringing the company’s cumulative losses since 2011 to a total of R23 billion (USD 1.65 billion).

The telecommunications sector in South Africa, while advanced for the continent, is hampered by regulatory uncertainty and poor implementation of the digital migration, both of which contribute to the high cost of data.  In 2006, South Africa agreed to meet an International Telecommunication Union deadline to achieve analogue-to-digital migration by June 1, 2015.  As of April 2019, South Africa has initiated but not completed the migration.  Until this process is finalized, South Africa will not be able to allocate the spectrum freed up by the conversion.  Many of the issues stemmed from the confusion and infighting caused by the 2014 split of the Department of Communications into two departments—the Department of Communications (DOC) and the Department of Telecommunications and Postal Services (DTPS). In November 2018, the Ramaphosa administration announced their re-incorporation into a single Department of Communications to take effect after the May 2019 elections.

In October 2016, DTPS released a policy paper addressing the planned course of action to realize the potential of the ICT sector.  The paper advocates for open access requirements that could overhaul how telecommunications firms gain access to and use infrastructure.  It also proposes assigning all high-demand spectrum to a Wireless Open Access Network.  Some stakeholders, including state-owned telecommunications firm Telkom, agree with the general approach.  Others, including the major private sector mobile carriers, feel the interventions would curb investment while doing little to facilitate digital access and inclusion.  In November 2017, DTPS published a draft Electronic Communications Amendment Bill that would implement the ICT White Paper, but the Minister of Communications withdrew the bill in February 2019.  Private industry and civil society had criticized the reach of the bill. The Minister stated that the DoC would consult with relevant stakeholders to re-draft the bill before submitting it to Parliament.

Privatization Program

Although in 2015 and 2016 senior government leaders discussed allowing private-sector investment into some of the more than 700 SOEs and a recently released report of a presidential review commission on SOE that called for rationalization of SOEs, the government has not taken any concrete action to enable this.  The CEO of SAA has stated that a fund-raising plan to sell a stake in SAA to an equity partner will be shelved until the airline can shore up its balance sheet. He announced the restructuring of the national carrier into three segments: international, regional, and domestic, but he has not articulated how that would occur in practice.

Other candidates for unbundling of SOEs / privatization are ESKOM and defense contractor Denel.

Responsible Business Conduct (RBC), is well-developed in South Africa, and is driven in part by the recognition that the private sector has an important role to play.  The socio-economic development element of B-BBEE has formalized and increased RBC in South Africa, as firms have largely aligned their RBC activities to the element’s performance requirements.  The 2013 amendment’s compliance target is one percent of net profit after tax spent on RBC, and at least 75 percent of the RBC activity must benefit historically disadvantaged South Africans referred to the B-BBEE act as black people, which includes South Africans of black, colored, Chinese and Indian descent.  Most RBC is directed towards non-profit organizations involved in education, social and community development, and health.

The South African mining sector follows the rule of law and encourages adherence to the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Afflicted and High-Risk Areas.  For example South Africa is a founding member of the Kimberley Process Certification Scheme (KPCS), the process established in 2000 to prevent conflict diamonds from entering the mainstream rough diamond market. The Kimberley Process is designed to ensure that diamond purchases do not finance violence by rebel movements and their allies seeking to undermine legitimate governments.

South Africa does not participate in the Extractive Industries Transparency Initiative (EITI). South African mining, labor and security legislation seek to speak to the values as embodied by Voluntary Principles on Security and Human Rights.

South African mining laws and regulations allow for the accounting of all revenues from the extractive sector in the form of mining taxes, royalties, fees, dividends and duties.  The reporting and accounting of all revenues from the extractive sector is done through Parliament by such institutions as the Auditor General and the National Treasury budgetary processes and the results are publicly available. There is a sizeable illicit mining sector in South Africa, mostly in decommissioned gold mines.

South Africa has a robust anti-corruption framework, but laws are inadequately enforced and accountability in public sectors tends to be low. The law provides for criminal penalties for conviction of official corruption, and the government continued efforts to curb corruption, but officials sometimes engaged in corrupt practices with impunity.

High-level political interference has undermined the ability of the country’s National Prosecuting Authority (NPA) – constitutionally responsible for all prosecutions – to pursue criminal proceedings and enforce accountability.  After an unprecedented consultative process, President Ramaphosa appointed Shamila Batohi as the National Director of Public Prosecutions (NDPP) in December 2018, and he created an Investigative Directorate within her office in March 2019 to focus on the significant number of cases emanating from ongoing corruption investigations.  The Constitutional Court ruled in August 2018 that Zuma’s appointment of Shaun Abrahams as the former NDPP was invalid and ordered President Ramaphosa to replace Abrahams within 90 days. Widely praised by civil society, the court also ordered former NDPP Mxolisi Nxasana to repay a “golden handshake” (an illegal departure bonus) of 10.2 million rand (USD 788,000) he received when Zuma replaced him with Abrahams in 2015.

The Department of Public Service and Administration formally coordinates government initiatives against corruption, and the “Hawks” – South Africa’s Directorate for Priority Crime Investigations – focuses on organized crime, economic crimes, and corruption.  In 2018, the Office of the Public Protector, a constitutionally mandated body designed to investigate government abuse and mismanagement, investigated thousands of cases, some of which involved high-level officials. The public and NGOs considered the Office of the Public Protector independent and effective, despite limited funding.  According to the NPA’s 2017-2018 Annual Report, it recovered 410,000 rand (USD 31,700) from government officials involved in corruption, a 92-percent decrease from the previous year.  Courts convicted 213 government officials of corruption.

The Prevention and Combating of Corrupt Activities Act (PCCA) officially criminalizes corruption in public and private sectors and codifies specific offenses (such as extortion and money laundering), making it easier for courts to enforce the legislation.  Applying to both domestic and foreign organizations doing business in the country, the PCCA covers receiving or offering bribes, influencing witnesses and tampering with evidence in ongoing investigations, obstruction of justice, contracts, procuring and withdrawal of tenders, and conflict of interests, among other areas.  Inconsistently implemented, the PCCA does not include any protectionary measures for whistleblowers.  Complementary acts – such as the Promotion of Access to Information Act and the Public Finance Management Act – calls for increased access to public information and review of government expenditures.

“State capture” – the popular term used to describe systemic corruption of the state’s decision-making processes by private interests – has become synonymous with the administration of former president Jacob Zuma.  In response to widespread calls for accountability, President Cyril Ramaphosa has denounced corruption since assuming office in February 2018. He has vowed to tackle the scourge at all levels of government, including through proposed lifestyle audits of officials to expose bribery, corruption, and public tender irregularities.  He has also launched four separate judicial commissions of inquiry to investigate corruption, fraud, and maladministration, including in the Public Investment Corporation, South African Revenue Service, National Prosecuting Authority, and writ large across the government. These commissions have revealed pervasive networks of criminality across all levels of the municipal, provincial, and national government.  Numerous former senior officials had already testified before the commission; a number of them directly implicated former president Jacob Zuma in corruption cases.

Corruption charges were reinstated against Zuma in 2018 related to a USD 2.5-billion arms deal in the late 1990s.  The Zuma-linked Gupta family, which owns interests in multiple industries from computer services to mining, has also been placed under investigation and its assets frozen while the state investigates allegations of state capture, bribery, and the siphoning off of public funds meant for small-holder farmers.  These and other ongoing efforts are meant to rebuild the public’s trust in government and to foment transparency and predictability in the business environment in order to woo investors.

UN Anticorruption Convention, OECD Convention on Combatting Bribery

South Africa signed the Anticorruption Convention on 9 Dec 2003 and ratified it on 22 Nov 2004.  South Africa also signed the OECD Convention on Combatting Bribery in 2007, with implementing legislation dating from 2004.

South Africa is also a party to the SADC Protocol Against Corruption, which promotes the development of mechanisms needed to prevent, detect, punish and eradicate corruption in the public and private sector.  The protocol also seeks to facilitate and regulate cooperation in matters of corruption amongst Member States and foster development and harmonization of policies and domestic legislation related to corruption.  The Protocol defines ‘acts of corruption,’ preventative measures, jurisdiction of Member States, as well as extradition. http://www.sadc.int/files/7913/5292/8361/Protocol_Against_Corruption2001.pdf 

Resources to Report Corruption

To report corruption to the government:

Advocate Busisiwe Mkhwebane
Public Protector
Office of the Public Protector, South Africa
175 Lunnon Street, Hillcrest Office Park, Pretoria 0083

Anti-Corruption Hotline: +27 80 011 2040 or +27 12 366 7000
http://www.pprotect.org   or customerservice@pprotect.org

Or for a non-government agency:

David Lewis
Executive Director
Corruption Watch
87 De Korte Street, Braamfontein/Johannesburg 2001
+27 80 002 3456 or +27 11 242 3900
http://www.corruptionwatch.org.za/content/make-your-complaint  
info@corruptionwatch.org.za

South Africa has a history of politically-motivated violence and civil disturbance.  Violent protests, often by residents in poor communities against the lack of effective government service delivery, are common.  Killings of, and by, mostly low-level political and organized crime rivals take place on a regular basis.  Still, South Africa enjoys strong, democratic political institutions and the overall political environment is stable and secure.

In May 2018, President Cyril Ramaphosa set up an inter-ministerial committee in the security cluster to serve as a national task force on political killings.  The task force includes the Police Minister‚ State Security Minister‚ Justice Minister‚ National Prosecuting Authority, and the National Police Commissioner.  The task force ordered multiple arrests, including of high profile officials, in what appears to be a crackdown on political killings.

There is suspicion that criminal threats have been used to resolve business disputes. There was one known incident in 2018 when two expat employees of a U.S. company managing an ongoing construction project received threats to leave the country.  The threats escalated to mention the expats’ families as targets, and the company evacuated them from South Africa. Subcontractors accused of using substandard construction materials were suspected. There were no reports of physical damage at the project.

Labor unrest in one part of South Africa has caused damage to property and halted operations to a U.S. company operating in an industrial zone.  In this case, the U.S. company was targeted as a single employer by strikes and labor unrest on what was a national bargaining council issue.

Since 1994, the South African government has replaced apartheid-era labor legislation with policies that emphasize employment security, fair wages, and decent working conditions.  Under the aegis of the National Economic Development and Labor Council (NEDLAC), government, business, and organized labor are to negotiate all labor laws, with the exception of laws pertaining to occupational health and safety.  The South African Constitution and South African laws allows workers to form or join trade unions without previous authorization or excessive requirements. Labor unions that meet a locally negotiated minimum threshold of representation (often, 50 percent plus one union member) are entitled to represent the entire workplace in negotiations with management.  As the majority union or representative union, they may also extract agency fees from non-union members present in the workplace. In some workplaces and job sectors, this financial incentive has encouraged inter-union rivalries, including intimidation and violence, as unions compete for the maximum share of employees in seeking the status of representative union.

In February 2019, South Africa reported a year-on-year unemployment rate increase of 0.4 percentage point to 27.1 percent.  However, labor force participation increased by 0.6 percentage points to 59.4 percent from 58.8 percent in 2018. The youth unemployment (ages 15-24) rate has hovered at or just over 50 percent since 2015.  Approximately 3.2 million (31.1 percent) of the 10.3 million of these South Africans were not in employment, education, or training. On a quarterly basis, employment in the formal sector increased in all industries with the exception of professional employment and skilled agriculture.

There are 205 trade unions registered with the Department of Labor as of February 2019, up from 190 the prior year, but down from the 2002 high of 504.  According to the 2018 Fourth Quarter Labor Force Survey (QLFS) report from Statistics South Africa (StatsSA), 4.04 million workers belonged to a union, an increase of 511,000 from the fourth quarter of 2017.  Department of Labor statistics indicate union density declined from 45.2 percent in 1997 to 24.7 percent in 2014, the most recent data available. Using StatsSA data, however, union density can be calculated: The February 2019 QLFS reported 4.041 million union members and 13.992 million employees, for a union density of 28.9 percent.

The right to strike is protected under South Africa’s constitution and laws.  The law allows workers to strike due to matters of mutual interest, such as wages, benefits, organizational rights disputes, socioeconomic interests of workers, and similar measures. Workers may not strike because of disputes where other legal recourse exists, such as through arbitration. Although the number of workdays lost to strikes jumped from 480,000 in 2017 to 1.95 million in 2018, the figure remains low in comparison to the 2005-2014 period in which every year but one (2008) saw lost workdays total at least 2.3 million.  Long-running strikes in the plastics and mining sector accounted for the 2018 increase. Strikes in 2018 were triggered almost exclusively (96 percent of strikes) by wages and grievances. The health and education sectors saw the most strikes in 2018, followed by miners and municipal sector workers. Due to long-running strikes in the plastics and mining sectors, these industries saw the most work days lost to strikes in 2018.

Layoffs and retrenchments are permitted for economic reasons, but they are subject to a statutory process requiring consultations between employers and labor unions in an effort to reach consensus.

Employers and employees are each required to pay one percent of workers’ wages to the national unemployment fund.  The fund pays benefits based on reverse sliding scale of the prior salary, up to 58 percent of the prior wage, for up to 34 weeks.

There are robust labor dispute resolution institutions in South Africa, including the Commission for Conciliation, Mediation and Arbitration (CCMA), the bargaining councils, and specialized labor courts of both first instance and appellate jurisdiction.

Improved labor stability is essential for South Africa’s economic stability and development and vital to the country’s ability to continue to attract and retain foreign investment.  The government of South Africa does not waive labor laws to attract or retain investment.

Collective bargaining is a cornerstone of the current labor relations framework.  As of February 2019, the South Africa Department of Labor listed 39 private sector bargaining councils through which parties negotiate wages and conditions of employment.  Per the Labor Relations Act, the Minister of Labor must extend agreements reached in bargaining councils to non-parties of the agreement operating in the same sector. Employer federations, particularly those representing small and medium enterprises (SMEs) argue the extension of these agreements – often reached between unions and big business – negatively impacts SMEs that cannot afford to pay higher wages.  In 2018, the average wage settlement resulted in a 7.2 percent wage increase, on average 2.6 percent above the increase in South Africa’s consumer price index and down slightly from the average increase of 7.6 percent in 2017.

Major labor legislation includes:

As of January 1, 2019, South Africa has a national minimum wage of R20/hour, with lower rates for domestic (R16/hour) and agricultural (R 18/hour) workers.  This rate is subject to annual increases as suggested by the 13-member National Minimum Wage Commission and as approved by parliament and signed by the president.

In November 2018, President Ramaphosa signed an amendment to the Basic Conditions of Employment Act which provides benefits to new parents.  Fathers may now claim ten days of paternity leave, whereas adoptive parents and commissioning parents in a surrogate motherhood agreement may now claim ten weeks of leave.  South Africa’s Unemployment Fund funds this leave at the same rate for unemployment claims (see above) and not at the claiming employee’s wage rate.

The Labor Relations Act (LRA), in effect since 1995 with amendments made in 2014, provides fair dismissal guidelines, dispute resolution mechanisms, and retrenchment guidelines stating employers must consider alternatives to retrenchment and must consult all relevant parties when considering possible layoffs.  The Act enshrines the right of workers to strike and of management to lock out striking workers. The Act created the Commission on Conciliation, Mediation, and Arbitration (CCMA), which can conciliate, mediate, and arbitrate in cases of labor disputes, and is required to certify an impasse in bargaining council negotiations before a strike can be called legally.  The CCMA’s caseload currently exceeds what was anticipated; the South African Government provided the CCMA an additional USD 60 million to handle its caseload and any possible increase caused by the 2014 amendments to the LRA. Amendments to the LRA modify the regulation of temporary employment service firms, extend organizational rights to workplaces with a majority of temporary or fixed term contract workers, reduces the maximum period of temporary or fixed term contract employment to three months, establishes joint liability by temporary employment services and their clients for contraventions of employment law, and strengthens other protections for temporary or contract workers.

The Basic Conditions of Employment Act (BCEA), implemented in 1997 and amended in 2014, establishes a 45-hour workweek, standardizes time-and-a-half pay for overtime, and authorizes four months of maternity leave for women. No employer may require or permit an employee to work overtime except by agreement, and overtime may not be more than 10 hours a week. The law stipulates rest periods of 12 consecutive hours daily and 36 hours weekly and must include Sunday. The law allows adjustments to rest periods by mutual agreement. A ministerial determination exempted businesses employing fewer than 10 persons from certain provisions of the law concerning overtime and leave.  Farmers and other employers can apply for variances from the law by showing good cause. The law applies to all workers, including workers in informal sectors, foreign nationals, and migrant workers, but the government did not prioritize labor protections for workers in the informal economy. The law prohibits employment of children under age 15 and prohibits anyone from requiring or permitting a child under age 15 to work. The law allows children under age 15 to work in the performing arts, but only if their employers receive permission from the Department of Labor and agree to follow specific guidelines. Amendments made in 2014 clarify the definitions of employment, employers, and employees to reflect international labor conventions, closing a loophole that previously existed in South African law between the LRA and the BCEA.  The Act gives the Minister of Labor the power to set sectoral minimum wages and annual minimum wage increases for employees not covered by sectoral minimum wage agreements.

The Employment Equity Act of 1998 (EEA), amended in 2014, protects all workers against unfair discrimination on the grounds of race, age, gender, religion, marital status, pregnancy, family responsibility, ethnic or social origin, color, sexual orientation, disability, conscience, belief, political, opinion, culture, language, HIV status, birth, or any other arbitrary ground. The EEA further requires large- and medium-sized companies to prepare employment equity plans to ensure that historically disadvantaged South Africans, such as Blacks, South Asians, and Coloreds, as well as women and disabled persons, are adequately represented in the workforce.  The EEA amendments increase fines for non-compliance with employment equity measures and have a new provision of equal pay for work of equal value. The Act prohibits the use of foreign nationals to meet employers’ affirmative action targets and relaxes the standards for parties in labor disputes to access the CCMA instead of going directly to the Labor Court.

More information regarding South African labor legislation can be found at:  www.labour.gov.za/legislation  

The Overseas Private Investment Corporation (OPIC) has an approximately USD 1.2 billion portfolio in South Africa.  Since a 1993 agreement to facilitate OPIC programs, OPIC has invested in a number of funds supporting sub-Saharan Africa development, including the Africa Catalyst Fund (USD 300 million focused on small- and medium-sized enterprise development), Africa Healthcare Fund (USD 100 million focused on private healthcare delivery businesses), and ECP Africa Fund II, (USD 523 million, focused on telecommunications, oil and gas, power, transportation, agribusiness, media, financial services and manufacturing).  Tailored products to support clean and renewable energy are a particular focus. OPIC opened an office in Johannesburg in 2013 to support investment to key African countries through its financing and risk mitigation instruments. Additional information on OPIC programs that involve South Africa may be found on OPIC’s website: http://www.opic.gov  

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

* Statistics South Africa (STATS SA) www.statssa.gov.za

Table 3: Sources and Destination of FDI

Table 4: Sources of Portfolio Investment

Juan Manuel Cammarano
Trade and Investment Officer
877 Pretorius Street
Arcadia, Pretoria 0083
+27 (0)12-431-4343
cammaranojm@state.gov

Policies Towards Foreign Direct Investment

As of April 2019, the government was actively seeking foreign direct investment, but had not undertaken meaningful steps to facilitate it.  Reported unfair practices have included effective expropriation of assets, inconsistent taxation policies, harassment by security services, extortion attempts, and a general perception that foreigners are not afforded fair results in court proceedings or labor disputes.

The country makes few investment facilitation efforts. The South Sudan Investment Authority (SSIA) has been established as has, in theory, a One Stop Shop Investment Center.  However, both organizations are poorly resourced and neither maintains an active web site. There is no business registration website. The ministries that handle company registration include the Ministry of Trade and Industry, Ministry of Finance, and Ministry of Justice. There is no single window registration process, and an investor must visit all the above mentioned agencies to complete the registration of a company.  It is estimated that the registration process could take several months.

In January 2018, South Sudan joined the African Trade and Insurance Agency (ATI), which provides export insurance and other assistance to foreign investors and traders.  Several local lawyers are willing to advise investors and guide them through the registration process, for a fee. The government has held investment conferences and organized an investment roadshow.  There is a private-sector Chamber of Commerce. There is no ombudsman.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign and domestic private entities have the right to establish and own business enterprises and engage in all forms of remunerative activity, as well as freely establish, acquire and dispose of interests in business enterprises.  Under the investment law, the government of South Sudan leases land to foreign investors for limited periods of time, generally not to exceed 30-60 years, with the possibility of renewal. In the case of leases for mining or quarrying, the lease shall not exceed the life of the mine or quarry.  Under the 2009 Land Act, non-citizens are not allowed to own land in South Sudan.

For investors who wish to start a business in South Sudan, there is a local shareholder requirement but the foreign investor can usually retain majority control.  For foreign-based companies who wish to establish a subsidiary in South Sudan, the local shareholder requirement does not apply. South Sudanese businesses are given priority in several areas, including micro-enterprises, postal services, car hire and taxi operations, public relations, retail, security services, and the cooperative services.  Exact details, and the extent of enforcement of these requirements, are sometimes unclear.

Subject to the Private Security Companies Rules and Regulations of 2013, registering and setting up a protection services security company in South Sudan requires a South Sudanese citizen to hold at least 51 percent of the company.  Companies in the extractives sector must also have a South Sudanese national as part owner, but the exact percentage of ownership required is not always clear.

According to the Investment Act, foreign investors must apply for an investment certificate from the South Sudan Investment Authority to ensure that the investment will be beneficial to the economy or general benefit of South Sudan.

Other Investment Policy Reviews

In the past three years, the government has not undergone any third-party investment policy reviews.

Business Facilitation

The Government’s fiscal and economic strategy sees government facilitating investment in economic priority sectors, particularly in agriculture, transport infrastructure, petroleum, mining, and energy, to unlock South Sudan’s economic potential and boost diversified growth.  Investment incentives exist but the exact procedures are somewhat opaque.

There is no business registration website.  The process to register a business is lengthy and complex, and involves visiting multiple offices at the national, state, and local levels.  The Chamber of Commerce recommends hiring a local lawyer to register a business.

Outward Investment

The Government of South Sudan does not have a policy for promoting or incentivizing outward investment.  The government does not have a policy restricting domestic investors from investing abroad.

South Sudan signed a Bilateral Investment Treaty (BIT) with Morocco in 2017 but it is not in force.

In November 2018 a South African government fund signed an agreement with South Sudan pledging USD 1 billion for oil exploration and construction of a refinery.  The agreement was made between two state-owned companies but is not a general BIT.

South Sudan does not have a bilateral taxation treaty with the United States and does not have a tax agreement with any other countries.  Contacts have reported that in practice, business owners can be subject to a range of unexpected taxes from a variety of levels of authority.

Transparency of the Regulatory System

Bureaucratic procedures for opening a business are long and cumbersome, particularly for foreigners trying to navigate the system without the assistance of a well-connected national.

The private sector is governed by a mix of laws from Sudan, the pre-independence semi-autonomous Government of Southern Sudan, and since 2011, the Government of South Sudan. The Transitional National Legislative Assembly (TNLA) passed laws to improve the transparency of the regulatory system, including the 2012 Companies Act and the 2012 Banking Act, however enforcement regulations are still lacking and there is little transparency. The government does not consult with the public about proposed regulations and information about regulations is not widely published.  Several key pieces of legislation governing customs, imports and exports, leasing and mortgaging, procurement, and labor have not been approved by the government and are needed to improve the business environment in South Sudan.

The oil sector is the major industry that attracts FDI, but transparency in the oil sector is absent, despite it being mandated by South Sudanese law.  The Ministry of Petroleum does not share data at an institutional level with the Bank of South Sudan, and does not release it to the public. The Ministry of Petroleum does not publish oil production data on their website. The contracts process for oil companies that are planning to bid and invest in South Sudan is controlled by the Ministry of Petroleum. This information is not publicly available on the Ministry’s website.

There are no known informal regulatory processes managed by nongovernmental organizations or private sector associations that would affect U.S. investors.  National and state bodies are the main source of regulation, but county and sub-county level officials also impose regulations. In 2018 and 2019, international non-governmental organizations regularly reported that local officials demanded taxes and fees that differed with those set out in national policy.  An opaque Presidential Decree issued in late 2018, for example, resulted in weeks of customs clearance disruptions at the country’s main land border in Nimule. NGOs report regular discrepancies between tax and labor rules issued by the national government and those enforced by local authorities. At some state levels, private contractors moving goods earmarked for humanitarian relief have been prevented entry at state borders.

There are no publicly listed companies.  Government accounting is non-transparent.  In 2018 the legislative assembly held public budget hearings, but in general, most bills and regulations are passed without public comment, and are poorly disseminated.  There is no centralized online location where key regulatory actions are published. There is no ombudsman. Parliament has not been able to provide effective oversight of government ministers. There were no significant corruption cases prosecuted in 2018.

No enforcement reforms have been announced or implemented.  The establishment of the National Revenue Authority may provide a stronger foundation for development and implementation of accounting and regulatory standards.  South Sudan is working to develop sources of non-oil revenue, including more centralized and effective enforcement of personal income tax. If transparently collected and managed, these funds could assist in development of the country’s infrastructure.

South Sudan’s parliament is responsible for developing laws, but bodies such as the National Revenue Authority have also been influential in developing tax procedures, for example.  There is no indication that regulations are informed by quantitative analysis and public comments received by regulators are not made public.

Laws and regulations are randomly enforced and are not well-publicized, creating uncertainty among domestic and foreign investors.  The Ministry of Labor, for example, rarely if ever conducts inspections, but NGOs and foreign investors have reported that employees have colluded with labor inspectors to extort fines from business managers.

South Sudan’s public finances are extremely opaque.  The government released some debt obligation information during budget hearings in 2018 regarding certain infrastructure loans, but to date has not disclosed the amount of forward-sold oil (the country’s main source of revenue).  The Ministry of Petroleum particularly lacks transparency, as does the Ministry of Finance. Allegations of corruption plague both ministries. The state-owned oil company Nilepet has consistently refused public auditing.

International Regulatory Considerations

South Sudan is a member of the African Union and the East African Community (since April 2016) and is making progress in adapting its national regulatory system to regional standards.

With the establishment of the National Revenue Authority, South Sudan has begun to implement EAC customs regulations and procedures.  South Sudan is not a member of the WTO.

Legal System and Judicial Independence

South’s Sudan’s legal system is a combination of statutory and customary laws.  There are no dedicated commercial courts and no effective arbitration act for handling business disputes. The only official means of settling disputes between private parties in South Sudan is civil court, but enforcement of court decisions is weak or nonexistent.  The lack of official channels for businesses to resolve land or other contractual disagreements has led businesses to seek informal mediation, including through private lawyers, tribal elders, law enforcement officials, and business organizations.

The executive regularly interferes in judiciary matters.  Parties to business disputes have been arrested by state security forces and held at length without charges.  High-level government and military officials are often immune from prosecution in practice, and frequently interfere with court decisions. Parties in contract disputes are sometimes arrested by authorities and imprisoned until the party agrees to pay a sum of money, often without going to court and sometimes without formal charges.

The lack of a unified, formal system encourages ‘forum shopping’ by businesses that are motivated to find the venue in which they can achieve an outcome most favorable to their interests. Many disputes are resolved informally.  U.S. companies seeking to invest in South Sudan face a complex commercial environment with extraordinarily weak enforcement of the law. While major U.S. and multinational companies may have enough leverage to extricate themselves from business disputes, medium-sized enterprises that are more natural counterparts to South Sudan’s fledgling business community will find themselves held to local rules.

Laws and Regulations on Foreign Direct Investment

Despite some improvements to the taxation system, the opacity and lack of capacity in the country’s legal system poses high risk to foreign investors.  South Sudan’s National Revenue Authority has centralized and standardized collection of Personal Income Tax and customs duties.  A One-Stop Shop Investment Centre (OSSIC) was established in 2012 but there is no website or advertised physical office. In practice, someone who wishes to register a business must rely on a local lawyer to register the business with the registrar at the Ministry of Justice and with other relevant authorities such as tax authorities.

Competition and Anti-Trust Laws

South Sudan does not review transactions for competition-related concerns.  There were no significant developments in 2018.

Expropriation and Compensation

The Investment Promotion Act of 2009 prohibits nationalization of private enterprises unless the expropriation is in the national interest for a public purpose.  However, the current law does not define the terms “national interest” or “public purpose.” According to the law expropriation must be in accordance with due process and provide for fair and adequate compensation, which is ultimately determined by the local domestic courts.

Government officials have pressured development partners to hand over assets at the end of programs. While some donor agreements call for the government to receive goods at the close-out of a project, assets have been seized by local government officials even in instances where they were not included in a formal agreement.

Although officially denied, credible reports from humanitarian aid agencies indicate that money is routinely extorted at checkpoints manned by both government and opposition forces to allow the delivery of humanitarian aid throughout the country.

In practice, the government has not offered compensation for expropriated property.  For example, in October 2018 the Government expropriated the assets of Kerbino Wol Agok, a high profile prisoner of the National Security Service, with no apparent judicial process.  His companies and their bank accounts were seized and all employees fired.

Due to the insufficiencies in the legal system, investors should not expect to receive due process.  Investors face a complex commercial environment with relatively weak enforcement of the law.

Dispute Settlement

ICSID Convention and New York Convention

South Sudan signed and ratified the ISCID Convention on April 18, 2012 and it entered into force on May 18, 2012.  Currently South Sudan is not a signatory to the convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention).

There is no specific domestic legislation that enforces awards under the ICSID convention.

Investor-State Dispute Settlement

South Sudan does not have a Bilateral Investment Treaty (BIT) or Free Trade Agreement (FTA) with the United States.

In recent years South Sudan has reportedly failed to pay for some services provided to it by private companies. For example, in November 2017 South Sudan stopped issuing and renewing passports and other travel documents after its production system was shut down for two weeks by the country’s German supplier, due to the government’s failure to pay an annual software license fee of around USD 500,000.  In addition, numerous private companies, including at least one U.S. company, claim the government has reneged on or delayed payment for work under contract.

In March 2018, the government suddenly suspended Lebanese-owned cell phone service provider Vivacell, which had previously been South Sudan’s largest telecommunications company with a 51 percent market share and equipment installed throughout the country, due to an alleged failure to pay taxes.

There is a history of extrajudicial action against foreign investors.  Parties in contract disputes are sometimes arrested and imprisoned until the party agrees to pay a sum of money, often without going to court and sometimes without formal charges.

International Commercial Arbitration and Foreign Courts

There are no official arbitration bodies in South Sudan.  South Sudan lacks any dedicated legal framework for rendering enforceable court judgments from foreign courts.

Bankruptcy Regulations

The 2011 Insolvency Act provides for both personal and corporate bankruptcies.  Given the lack of commercial courts, there is little information available about the rights of creditors in practice.  South Sudan is tied for last place in the World Bank’s 2019 Doing Business Report ranking for “resolving insolvency.”

Investment Incentives

The Investment Promotion Act provides for various tax incentives, including capital allowances ranging from 20 to 100 percent of eligible expenditures, deductible annual allowances ranging from 20 to 40 percent, and depreciation allowances ranging from 8 to 10 percent.  A foreign tax credit is granted to any resident company paying foreign taxes on income from business activities outside South Sudan. In practice, the exact incentive structure is somewhat unclear.

Applications for fiscal incentives are made to the Ministry of Finance, Commerce, Investment and Economic Planning through the One Stop Shop Investment Centre (OSSIC).  Tax exemptions and concessions on machinery, equipment, capital and net profits are approved for stated periods by the Ministry of Finance, at its discretion. Fiscal incentives also include capital allowances, deductible annual allowances and annual depreciation allowances.

The government has been known to guarantee foreign direct investment projects with oil deliveries.  However, due to a lack of transparency at the Ministry of Petroleum, it is unclear to what extent the country’s oil production has been leveraged and thus it is impossible to ascertain the likelihood of the country being able to honor such commitments.

Foreign Trade Zones/Free Ports/Trade Facilitation

South Sudan has not established any free trade zones. On June 22, 2013 the government of South Sudan announced the construction of Juba Specialized Economic Zone (SEZ) near the capital.  It was intended to be an industrial area for business and investment activities but development of the area has not progressed.

Performance and Data Localization Requirements

South Sudan’s 2017 Labor Act dictates that 80 percent of staff at all levels of management must be South Sudanese nationals.  Additionally, authorities in some areas of the country have demanded that NGOs employ people local to a specific area, or from a specific ethnic group, although there is no basis for this practice in South Sudanese law.  The law makes no specific mention of senior management and boards of directors. The government requires work permit fees for foreign nationals. These are typically several thousand dollars per employee, but the exact amounts change regularly.  Foreigners are also subject to a variety of registration requirements, which also change regularly and unpredictably.

In consideration of entitlement to an investment certificate, the Investment Act encourages, but does not require, technology transfer, increase in foreign exchange through exports or import substitution, production and use of local raw materials and supplies, and contributions to the local community.  For entitlement to an investment certificate, the Investment Authority is required by law to assess if the investment will create employment for South Sudanese, acquire new skills of technology for South Sudanese, and contribute to tax revenues. The use of domestic content in goods or technology is encouraged, but not required.

The Investment Authority may revoke an investment certificate due to breach of performance requirements, with 30 days notice.  There are no provisions regarding maintenance, increase, or decrease of performance requirements.  The Investment Act applies these requirements equally to domestic and foreign investors.

There are no known requirements for foreign IT providers to turn over source code or provide access to encryption.  No measures are known to exist to prevent companies from transferring customer or other business data outside the country.  There are no known rules on maintaining data storage within the country.

Real Property

There was no progress in 2018 towards comprehensive land reform. Laws on mortgages, valuation, and the registration of titles have not been drafted.  While the 2009 Land Act and the 2009 Investment Promotion Act both state that non-citizens can access land for investment purposes, by leasing the land but not owning it, clear regulations governing how a business acquires land were not available in 2018.

Currently, some businesses lease land from the government, while others lease land directly from local communities and/or individuals. Under the Land Act, investment in land acquired from local communities must contribute economically and socially to the development of the local community.  Businesses will often sign a memorandum of understanding with the local communities in which they agree to employ locals or invest in social services in exchange for use of the land. Land negotiations with communities often require several months or longer to complete. South Sudan ranked 179 out of 185 countries for ease of registering property in the World Bank’s 2019 Doing Business Report.

Ownership of land is often unclear, with communities and government both claiming the same property. In some cases, multiple individuals hold registration certificates demonstrating sole ownership of the same piece of land.

As of April 2019, over 4 million South Sudanese were still displaced from their homes due to conflict.  During the five-year civil war, many of their houses were illegally occupied and likely remain so. Property owners or public authorities may file for an order to evict unauthorized occupants under the Land Act.  While the rightful owners may hold clear land titles, it is unclear if the legal system is equipped to handle their claims and it is likely that land ownership will be regularly disputed throughout large parts of the country in the foreseeable future.

Intellectual Property Rights

The legal structure for intellectual property rights (IPR) is weak and enforcement is lax.  Recorded instances of intellectual property theft are rare. While the Investment Act of 2009 includes an article on the protection of IPR, implementing legislation on trademarks, copyrights, and patents has not yet been passed.  To date, the only intellectual property law which has been put forward to the legislature is the Trade Marks Bill of 2013. No new IP-related laws or regulations were enacted in 2018.

South Sudan does not track or seize counterfeit goods.  There has been no known prosecution of IPR violations and there are no estimates available for traffic of counterfeit goods. There was one report of an unauthorized public screening of a U.S. film in 2018.

South Sudan is not included in the United States Trade Representative (USTR) Special 301 Report or the Notorious Markets List.

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

Capital Markets and Portfolio Investment

The Investment Act mentions portfolio investment, but South Sudan does not have a functioning market for financial assets.  South Sudan does not have a stock market or related regulatory system. There are no known policies for promotion of investment into product and factor markets.

South Sudan’s formal financial system offers few financial products. It is difficult for foreign investors to get credit on the local market due to the shortage of hard currency, the lack of accurate means of obtaining reliable figures or audited accounts, the absence of a credit reference bureau, and South Sudan’s failure to document land ownership properly.  According to the World Bank, 50 percent of all South Sudanese firms cite access to finance as a constraint.

Banks are often unwilling to lend due to the lack of adequate laws to protect lenders and difficulties related to personal identification.  After the Bank of South Sudan confiscated commercial banks’ reserves on deposit at the central bank in 2015, diverting them to the use of the government, companies and individuals had difficulty accessing their funds.  This made depositors reluctant to trust their funds to the banking system.

The Bank of South Sudan launched treasury bills on August 18, 2016 for purchase by members of the public, companies and commercial banks.  This lasted until April 2017, when people stopped investing in the bills due to high inflation and a lack of a secondary market for them. The bank had previously issued treasury bills in 2012 without success.

Money and Banking System

Activity in the banking system grew after independence for a period until it deteriorated in 2014 due to civil conflict and the reduction of oil exports. The economy of South Sudan is cash-based, with limited use of demand deposits. The IMF has categorized South Sudan’s financial sector as small and undeveloped.  South Sudan has recently introduced mobile money. Informal unauthorized transfer services already exist, but mobile money services should allow for greater access to domestic banking services.

There is limited information to assess the health of this sector and figures are unreliable.  The Bank of South Sudan, the country’s central bank, has limited assets. There are a total of nine foreign-owned banks.  There are no known additional regulations for foreign banks. There are no known restrictions on a foreigner’s ability to establish a bank account.

Foreign Exchange and Remittances

Foreign Exchange

Foreign investors cannot remit funds through the parallel market. They are required by law to remit through banks or foreign exchange bureaus at an exchange rate that is far below the market rate.

The 2009 Investment Promotion Act guarantees unconditional transferability in and out of South Sudan “in freely convertible currency of capital for investment; payments in respect of loan servicing where foreign loans have been obtained; and the remittance of proceeds, net of all taxes and other statutory obligations, in the event of sale or liquidation of the enterprise.” In reality, the ability to exchange local currency for foreign currency is severely restricted.

South Sudan maintained a fixed exchange rate for the South Sudanese Pound until December 2015 when it moved to a managed floating exchange rate regime.  Since then, the local currency has depreciated significantly due to deficit spending by the government, printing of money, and a lack of hard currency. The current official exchange rate can be found from the Bank of South Sudan or from commercial banks in Juba.  There is a large spread between this rate and the unofficial parallel market rate.

Remittance Policies

There have been no recent changes to investment remittance policies, and no known waiting periods on remittances.

Sovereign Wealth Funds

The Petroleum Revenue Management Act of 2013 created a sovereign wealth fund (SWF) to set aside surplus profits from oil sales.  The law established the Oil Revenue Stabilization Account to act as a buffer against volatility in oil prices and the Future Generations Fund to set aside some funds for future generations.  The SWF is supposed to distribute 10 percent of oil profits into the Oil Revenue Stabilization Account and 15 percent to the Future Generations Fund. To date, however, neither has received any financing.  The Comprehensive Peace Agreement (CPA) that ended the civil war with Sudan set a 2 percent share of oil revenue that is supposed to be given to the oil producing states along with 3 percent revenue allocation to the local communities.  However, in August 2017, the government announced that it would stop giving the 3 percent and 2 percent share to states. The September 2018 peace agreement calls for the accounts to be funded. The SWF does not follow any good practices and being unfunded, does not invest domestically (although it is intended to).

The national oil company – Nile Petroleum Corporation, or Nilepet – remains the primary fully State-owned enterprise (SOE) in South Sudan.  The government owns stakes in construction and trade companies and in several banks. Limited data is available on number, total income, and employment figures of SOEs.  There is no published list of SOEs.

Nilepet is the technical and operational branch of the Ministry of Petroleum. Nilepet took over Sudan’s national oil company’s shares in six exploration and petroleum sharing agreements in South Sudan at the time of the country’s independence in 2011.  Nilepet also distributes petroleum products in South Sudan. The government, through Nilepet, holds minority stakes in other oil companies operating in South Sudan

The Petroleum Revenue Management Bill, which governs how Nilepet’s profits are invested, was enacted into law in 2013; however, the company has yet to release any information on its activities, even though the law states that comprehensive, audited reports on the company’s finances must be made publicly available.

The government is not transparent about how it exercises ownership or control of Nilepet.  Its director reports to the Minister of Petroleum and Mining. Nilepet’s revenues and expenditures are not disclosed in the central government budget.  No audited accounts of Nilepet are publicly available. After the January 2012 oil production shutdown, oil production recovered to more than 235,000 barrels per day at end of 2013, only to fall to about 160,000 barrels per day in early 2014 as a result of the conflict that started in December 2013. The ongoing conflict has reduced daily oil production currently to about 140,000 barrels per day (bpd) as of April 2019, and the collapse of international oil prices plus the drop in oil production has cut state revenues.

In March 2018, the Bureau of Industry and Security (BIS) of the U.S. Department of Commerce amended the Export Administration Regulations (EAR) to add Nilepet and several related companies to the Entity List, along with the Ministry of Petroleum and the Ministry of Mining, due to their role in worsening the conflict in South Sudan.

The Entity List identifies entities, including corporations, private or government organizations, and natural persons, and other persons reasonably believed to be involved, or to pose a significant risk of being or becoming involved, in activities contrary to the national security or foreign policy interests of the United States.

The U.S. Government assesses the 15 entities BIS has added to the Entity List as contributing to the ongoing crisis in South Sudan because they are a source of substantial revenue that, through public corruption, is used to fund the purchase of weapons and other material that undermine the peace, security, and stability of South Sudan rather than support the welfare of the South Sudanese people. Adding these entities to the Entity List is intended to ensure that items subject to the EAR are not used to generate revenue to finance the continuing violence in South Sudan.

The following 15 entities are the first South Sudanese entities added to the Entity List: Ascom Sudd Operating Company; Dar Petroleum Operating Company; DietsmannNile; Greater Pioneer Operating Co. Ltd; Juba Petrotech Technical Services Ltd; Nile Delta Petroleum Company; Nile Drilling and Services Company; Nile Petroleum Corporation; Nyakek and Sons; Oranto Petroleum; Safinat Group; SIPET Engineering and Consultancy Services; South Sudan Ministry of Mining; South Sudan Ministry of Petroleum; and Sudd Petroleum Operating Co.

These 15 entities are subject to a license requirement for all exports and reexports destined for any of the entities and transfers (in-country) to them of all items subject to the EAR with a licensing review policy of a presumption of denial. This license requirement also applies to any transaction involving any of these entities in which such entities act as a purchaser, intermediate consignee, ultimate consignee or end-user.  Additionally, no license exceptions are available to these entities.

If any person participates in a transaction described above involving any of these 15 entities without first obtaining the required license from BIS, that person would be in violation of the EAR and could be subject to civil or criminal enforcement proceedings. Civil enforcement could result in the imposition of monetary penalties or the denial of the person’s export privileges. Additionally, a person’s supplying or procuring items subject to the EAR or engaging in other activity involving an entity on the Entity List could result in a determination to add that person to the Entity List consistent with the procedures set forth in the EAR.

The regulation can be viewed on the Federal Register at https://www.gpo.gov/fdsys/pkg/FR-2018-03-22/pdf/2018-05789.pdf .

The country does not adhere to the OECD Guidelines on Corporate Governance for SOEs.

Privatization Program

South Sudan does not have a privatization program. So far, the government has no plans for privatization, and there are few government-owned entities that provide services to individuals.

The idea of responsible business conduct is new in South Sudan, and there is little awareness of standards in this area.  The few large international firms operating in South Sudan sometimes offer some basic benefits to local communities, but on an irregular basis. The 2009 Land Act requires investment activities carried out on land acquired from local communities to “reflect an important interest for the community or people living in the locality,” and to contribute economically and socially. There are complaints in the media about the number of foreign-owned companies and the lack of hiring of South Sudanese employees.  International observers have argued that many of the oil producing companies do not practice responsible behavior in regard to environmental damage in the oil fields.

The government has taken no steps towards RBC.  The recently signed peace agreement and some national laws (such as the Petroleum Act) contain RBC provisions but they are unenforced.  The environmental and human rights impact of oil pollution has been severe but the government has not responded to widespread damage to the environment and displacement of people.  The government has demonstrated little capacity or will to enforce laws on human rights, labor rights, consumer protection, environmental protections, and other laws/regulations intended to protect individuals from adverse business impact.  The government has not put in place corporate governance, accounting, and executive compensation standards to protect shareholders.

NGOs have promoted RBC, particularly in the environmental domain, but activists and reporters in this field have reported that they are subject to government harassment.

The government does not encourage adherence to the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Afflicted and High-Risk Areas, and there are no functioning domestic measures related to such due diligence.  South Sudan is a source of minerals originating from conflict-affected areas and there is little oversight to the extractive industries such as gold.

The government does not participate in the Extractive Industries Transparency Initiative (EITI) and while the law requires the disclosure of payments made to the government in regard to oil sales, in reality disclosure is weak or nonexistent.

South Sudan has laws, regulations, and penalties to combat corruption, but there is a near total lack of enforcement and considerable gaps exist in legislation.  As a result, corruption is pervasive.

Companies are reportedly asked to pay extralegal taxes and fees.  Security officials have been reported to impose business conditions including payment of fees, salaries, and logistical support to their operations.  In practice, politically connected people are immune to prosecution. There are no laws that prevent conflict of interest in government procurement.

The government does not encourage or require private companies to establish internal codes of conduct that, among other things, prohibit bribery of public officials.  There is no indication that private companies use internal controls, ethics, and compliance programs to detect and prevent bribery of government officials.

The South Sudan Anti-Corruption Committee (SSACC) was established in accordance with the 2005 Constitution and the 2009 SSACC Act. The five commission members and chairperson are appointed by the President with approval by a simple majority in the parliament. The commission is tasked with protecting public property, investigating corruption, and submitting evidence to the Ministry of Justice for necessary action.  In addition, the commission is tasked with combatting administrative malpractice in public institutions, such as nepotism, favoritism, tribalism, sectionalism, gender discrimination, bribery, embezzlement, and sexual harassment.

In reality, the SSACC lacks the resources or political capital to investigate corruption.  It has no capacity to address state corruption as it can only relay its findings to the Ministry of Justice for prosecution.  There were no significant anti-corruption cases investigated or prosecuted in 2018.

South Sudan acceded to the United Nations Convention against Corruption on January 23, 2015 but has not yet ratified it.  The country is not a party to the OECD Anti-Bribery Convention and is not reported to be a participant in regional anti-corruption initiatives.

The country provides no protection to NGOs involved in investigating corruption.  NGOs of all types are routinely subject to government harassment.

All major sectors including the extractive sector, hotels, airlines, banking, and security sectors are subject to interference from the security sector including recruitment interference, and payment of fees and salaries.

Corruption appears to be pervasive at all levels of government and society. The regulatory system is poor or non-existent, and dispute settlement is weak and subject to influence.

Resources to Report Corruption

National Audit Chamber
P.O. Box 210
Juba, South Sudan
Tel: +211 (0) 955 481 021
info@auditchamber-ss.org

Honorable Ngor Kulong Ngor
Chairperson
South Sudan Anti-Corruption Commission
P.O Box 312
Juba, South Sudan
anticorruptioncommission@yahoo.co.uk

Honorable Awad Masha Zigizo
Commissioner
South Sudan Anti-Corruption Commission
P.O Box 312
Juba, South Sudan
anticorruptioncommission@yahoo.co.uk

Contact at “watchdog” organizations:

UN Panel of Experts on South Sudan
Mr. David Biggs (Senior Committee Secretary)
Tel: (212) 963-5598
sc-2206-committee@un.org

Transparency International
Alt-Moabit 96
10559 Berlin
Germany
Telephone: +49 30 3438 200
Fax: +49 30 3470 3912
ti@transparency.org

The Sentry
c/o The Enough Project
1420 K Street, NW, Suite 200
Washington, DC 20005
info@thesentry.org

There is a long history of politically motivated violence in South Sudan.  The warring parties concluded a peace agreement in September 2018 to stop the civil war that has wrought the country since 2013.  Limited fighting continues in some parts of the country as of April 2019, but in general, the ceasefire has held. The effects of the war on the economy and investment will be evident for some time.

Previous violence during conflict with Sudan resulted in damage to installations in one of the major oil producing areas in the country, shutting down production in that region.  Repairs to these facilities began in 2018, allowing for an increase in oil production.

The environment remains insecure but hopes of peace have been rekindled with signing of a new peace agreement in September 2018.  The parties, however, remain behind in implementation as of April 2019.

There were 1.9 million Internally Displaced Persons (IDPs) in South Sudan, and an additional 2.3 million South Sudanese refugees in neighboring countries as of April 2019.  The government has not yet developed the conditions that would allow the IDPs and refugees to safely return home. Political opposition leaders faced illegal detention and travel restrictions in 2018.  The government has temporarily shut down several newspapers and detained journalists it accused of printing articles opposing policies or actions undertaken by the government.

The conflict severely disrupted trade, markets, and agricultural activities, claimed thousands of lives and spurred one of the world’s most serious humanitarian crises. The conflict was marked by grave human rights abuses, especially pervasive gender-based violence.  Out of a population of approximately 12 million, some 6.5 million people are in need of food assistance in South Sudan. During 2018, the bulk of U.S. and the international community’s support efforts were directed at the immediate needs of the ongoing humanitarian crisis brought on by the civil conflict.  Other development assistance has been significantly reduced.

NGOs complain of harassment, and aid convoys have come under attack in 2018.  South Sudan was named the most dangerous country in the world for aid workers in 2018.  Armed cattle raids claimed hundreds of lives in 2018, and several ambushes and kidnappings have taken place on the country’s main highway, the Juba-Nimule road.  The Department of State currently warns against travel to South Sudan due to the critically high risk of crime, kidnapping, and armed conflict.

South Sudan has a shortage of both skilled and unskilled workers across most areas in the formal sector.  According to the 2008 census, 84 percent of those employed are in non-wage work. Unskilled labor in the service and construction sectors is often performed by immigrants from neighboring countries.  This is in large part due to a lack of basic skills training. South Sudan has one of the worst adult literacy rates in the world: about 27 percent.

The five-year civil war has resulted in large swaths of people displaced from their homes (over 4 million are displaced or refugees as of April 2019) and has devastated the economy.

Government enforcement of existing labor laws has been absent. Most small South Sudanese businesses operate in the informal economy, where labor laws and regulations are widely ignored.

The Labor Act of 2017 requires that 80 percent of staff hired by foreign employers at all levels of management be nationals of South Sudan.  Government security offices have been reported to interfere with hiring in some cases. The Ministry of Labor thoroughly reviews all work permit applications in an attempt to determine whether a position could be filled by a South Sudanese national.  Some foreign-owned companies reported long delays in receiving work permits for expatriate staff, and many expatriates are issued work permits for just one to three months, rather than the standard one year. State and local authorities have also been reported to charge additional fees and attempt to restrict employment to people from a certain place or of a certain ethnic group.

The Labor Act establishes an “employment exchange” scheme for unemployed people that reserves vending, hawking, driving, office support staffing and other manual labor for nationals only.  No social safety net programs exist in practice. The Labor Act allows for Termination for Redundancy “due to changes in the operational requirements of the employer” with certain conditions, and requires severance pay.  The law differentiates between this and several other forms of termination.

There are no special labor provisions in order to attract or retain investment.  No formal functioning collective bargaining systems exist. Disputes are handled by the Ministry of Labor, by courts, and informally/extrajudicially.  Foreign employers have reported being at a significant disadvantage in such disputes.

In July 2018, a mob of hundreds described as local youths attacked NGO facilities causing millions of dollars in damages in Maban.  The government was slow to respond or investigate, and ultimately released the attack’s ringleaders shortly after arresting them. In 2018, some international organizations reported labor strikes from day wage-earners.  Some international organizations reported strikes or blockages where locals protested against the employment of South Sudanese from different ethnic groups perceived to be receiving favored treatment.

Child labor is rampant and the government does not enforce child labor laws through inspections or fines.

The most recent change to labor law was the Labor Act signed by the South Sudanese President in December 2017.

There is a potential for successful OPIC operations in South Sudan if the security environment continues to improve.  The Overseas Private Investment Corporation (OPIC) has been open to business in South Sudan since 2012. South Sudan ratified its Investment Incentive Agreement (IIA) with OPIC in 2013.  South Sudan is a member country of the Multilateral Investment Guarantee Agency.

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

Table 3: Sources and Destination of FDI

Data not available.

Table 4: Sources of Portfolio Investment

Data not available.

Economic/Commercial Officer
U.S. Embassy, Kololo Road, Juba, South Sudan
(U.S.) +1 (202) 216-6279, ext 215
jubacommercial@state.gov

Policies Towards Foreign Direct Investment

The United Republic of Tanzania, according to Government officials, welcomes foreign direct investment (FDI) as it pursues its industrialization and development agenda.  However, in practice, government policies and actions do not effectively keep and attract investment. The 2018 World Investment Report indicates that FDI flows to Tanzania shrank by 14 percent in 2017 to USD 1.18 billion, a 24 percent decline from 2015.  Some concerns noted by stakeholders included difficulty in hiring foreign workers, reduced profits caused by unfriendly and opaque tax policies, increased local content requirements, regulatory/policy instability, lack of trust between the GoT and the private sector, and mandatory initial public offerings (IPOs) in mining and communication industries.

The United Republic of Tanzania does have framework agreements on investment, and offers various incentives and the services of investment promotion agencies.  Investment is mainly a non-Union matter, thus there are different laws, policies, and practices for the mainland and Zanzibar. However, international agreements on investment are covered as Union matters and therefore apply to both regions. 

The Tanzania Investment Center (TIC) is intended to be a one-stop center for investors, providing services to investors such as permits, licenses, visas, and land.  The Zanzibar Investment Promotion Authority (ZIPA) provides the same function in Zanzibar. In January 2019, the President moved the TIC from the Ministry of Industry, Trade, and Investment (MITI) to the Prime Minister’s Office (PMO) and appointed a Minister of State for Investment in the Prime Minister’s Office.  The move, part of Tanzania’s “2019: The Year of Investment” campaign, aims to improve the business climate by enabling better coordination and reduced bureaucracy. (See Chapter 4 for more information on TIC).

The Government of Tanzania has an ongoing dialogue with the private sector via the Tanzania National Business Council (TNBC), created in 2001.  TNBC meetings are chaired by the President of the United Republic of Tanzania and co-chaired by the head of the Tanzania Private Sector Foundation (TPSF).  Unfortunately, the TNBC has only met twice in the past four years. There is also a Zanzibar Business Council (ZBC) launched in 2005, and Regional Business Councils (RBCs) and District Business Councils (DBCs).  In April 2019, the new Minister of State for Investment announced she was launching a new series of forums with foreign investors, including U.S. investors. 

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign investors generally receive treatment equivalent to domestic investors but limits still persist in a number of sectors.  Tanzania conforms to best practice in several cases. There are no geographical restrictions on location for private establishments with foreign participation or ownership, no limitations on number of foreign entities that can operate in a given sector, and no sectors in which foreign investment approval is required for greenfield FDI and not for domestic companies. 

However, Tanzania discourages foreign investment by imposing limitations on foreign equity ownership or activity in several sectors, including aerospace, agribusiness (fishing), construction, and heavy equipment, travel and tourism, energy and environmental industries, information and communication, and publishing, media, and entertainment.  For example,

• Foreign companies may not provide tourism services like mountain guides, tour guides, car rental, or travel agency services, per the Tourism Act, 2008.
• Per the Merchant Shipping Act of 2003, only citizen-owned ships are authorized to engage in local trade (waiver by ministerial discretion), and the Shipping Agency Act states that only Tanzanians may be licensed as shipping agents.  Port services licenses are solely for citizen-owned Tanzania companies.
• The Fisheries (Amendment) Regulations, 2009 implies onerous conditions for foreigners to fish and export fishery products, and fishing licenses cost three times more for foreigners than locals, and foreigners can only deal with certain fish and fish products.
• Foreign construction contractors can only obtain temporary licenses, per the Contractors Registration Act of 1997, and contractors must commit in writing to leave Tanzania upon completion of the set project.  The Contractors Registration (Amendment) By- Laws, 2004 limit foreign contractors to specified, more complex classes of work.
• Foreign capital participation in the telecommunications sector is limited to a maximum of 75 percent. 
• All insurers require one-third controlling interest by Tanzania citizens, per the Insurance Act.
• The Electronic and Postal Communications (Licensing) Regulations 2011 limits foreign ownership of Tanzanian TV stations to 49 percent, and prohibits foreign capital participation in national newspapers. 
• Mining projects must be at least partially owned by the GoT and “indigenous” companies and hire, or at least favor, local suppliers, service providers, and employees.  (See Chapter 4: Laws and Regulations on FDI for details.). Gemstone mining is limited to Tanzanian citizens with a possible waiver by ministerial discretion. In February 2019, responding to low growth and investment in the sector, the government revised the 2018 Mining (Local Content) Regulations 2018 by reducing the local shareholder requirement from 51 percent to 20 percent.  

Currently, foreigners can invest in stock traded on the Dar es Salaam Stock Exchange (DSE), but only East African residents can invest in government bonds.  East Africans, excluding Tanzanian residents, however, are not allowed to sell government bonds bought in the primary market for at least one year following purchase.

Other Investment Policy Reviews

There have not been any third-party investment policy reviews (IPRs) on Tanzania in the past three years, the most recent OECD report is for 2013.  The World Trade Organization (WTO) published a Trade Policy Review in 2019 on all the East African Community states, including Tanzania. 

WTO – Trade Policy Review: East African Community (2019)
https://www.wto.org/english/tratop_e/tpr_e/tp484_e.htm

OECD – Tanzania Investment Policy Review (2013)
http://www.oecd.org/daf/inv/investment-policy/tanzania-investment-policy-review.htm  

WTO – Secretariat Report of Tanzania
https://www.wto.org/english/tratop_e/tpr_e/s384-04_e.pdf

UNCTAD – Trade and Gender Implications (2018)
https://unctad.org/en/PublicationsLibrary/ditc2017d2_en.pdf

Business Facilitation

The World Bank’s Doing Business 2019 Indicators rank Tanzania 144 out of 190 overall for ease of doing business, and 163rd for ease of starting a business.  There are 10 procedures to open a business, higher than the sub-Saharan average of 7.4. The Business Registration and Licensing Agency (BRELA) issues certificates of compliance for foreign companies, certificates of incorporation for private and public companies, and business name registration for sole proprietor and corporate bodies.  After registering with BRELA, the company must: obtain the taxpayer identification number (TIN) certificate, apply for a business license, apply for the VAT certificate, register for workmen’s compensation insurance, register with the Occupational Safety and Health Authority (OSHA), receive inspection from the Occupational Safety and Health Authority (OSHA), and obtain a Social Security registration number. 

The TIC provides simultaneous registration with BRELA, TRA, and social security (http://tiw.tic.co.tz/  ) for enterprises whose minimum capital investment is not less than USD 500,000 if foreign owned or USD 100,000 if locally owned. 

In May 2018, the government adopted the Blueprint for Regulatory Reforms to improve the business environment and attract more investors.  The reforms, which were developed as a collaborative effort between the Ministry of Industry, Trade and Investment and the private sector, seek to improve the country’s ease of doing business through regulatory reforms and to increase efficiency in dealing with the government and its regulatory authorities.  The Blueprint is largely pending implementation. 

Outward Investment

Tanzania does not promote or incentivize outward investment, and in fact, generally discourages capital flight.  There are restrictions on Tanzanian residents’ participation in foreign capital markets and ability to purchase foreign securities.  Under the Foreign Exchange (Amendment) Regulations 2014 (FEAR), however, there are circumstances where Tanzanian residents may trade securities within the East African Community (EAC).  In addition, FEAR provides some opportunities for residents to engage in foreign direct investment and acquire real assets outside of the EAC.

Tanzania has bilateral investment treaties with 18 countries, and seven investment agreements with regional economic blocs.  On April 1 2019, Tanzania terminated its BIT agreement with Netherlands. The country is also a signatory to global investment instruments such as the International Centre for Settlement of Investment Disputes (ICSID) Convention, the New York Convention, and the UN Guiding Principles on Business and Human Rights.

The U.S. and Tanzania do not have bilateral investment or taxation agreements.  Tanzania is a member of the EAC, which signed a 2008 Trade and Investment Framework Agreement (TIFA) and a 2012 Trade and Investment Partnership (TIP) with the United States.  Under the U.S.-EAC TIP, the U.S. and EAC are seeking to expand trade, investment and dialogue with the private sector.

Transparency of the Regulatory System

Tanzania has formal processes for drafting and implementing rules and regulations.  Generally, after an Act is passed by Parliament, the creation of regulations is delegated to a designated ministry.  In theory, stakeholders are legally entitled to comment on regulations before they are implemented. However, ministries and regulatory agencies do publish a list of anticipated regulatory changes or proposals intended to be adopted/implemented.  There is not a period of time set by law for the text of the proposed regulations to be publicly available. Thus, stakeholders often report that they are either not consulted or given too little time to provide useful comment. Ministries or regulatory agencies do not have the legal obligation to publish the text of proposed regulations before their enactment.  Moreover, the government has increasingly used presidential decree powers to bypass regulatory and legal structures.

In 2016, the President signed the Access to Information Act into law.  In theory, the Act gives citizens more rights to information; however, some claim that the Act gives too much discretion to the GoT to withhold disclosure.  Although information, including rules and regulations, is available on the GoT’s “Government Portal” (https://www.tanzania.go.tz/documents  ), the website is generally not current and incomplete.  Alternatively, rules and regulations can be obtained on the relevant ministry’s website, but many offer insufficient information.

Nominally independent regulators are mandated with impartially following the regulations.  The process, however, has sometimes been criticized as being subject to political influence, depriving the regulator of the independence it is granted under the law. 

Tanzania does not meet the minimum standards for transparency of public finances and debt obligations. 

International Regulatory Considerations

Tanzania is a member of the World Trade Organization (WTO) and its National Enquiry Point (NEP) is the Tanzania Bureau of Standards (TBS).  As the WTO NEP, TBS handles information on adopted or proposed technical regulations, as well as on standards and conformity assessment procedures.  Tanzania is also part of both the EAC and the Southern African Development Community (SADC) and subject to their respective regulations. However, according to the 2016 East African Market Scorecard (most recent), Tanzania is not compliant with several EAC regulations.

Legal System and Judicial Independence

Tanzania’s legal system is based on the English Common Law system. The first source of law is the 1977 Constitution, followed by statutes or acts of Parliament; and case law, which are reported or unreported cases from the High Courts and Courts of Appeal and are used as precedents to guide lower courts.  The Court of Appeal, which handles appeals from mainland Tanzania and Zanzibar, is the highest ranking court, followed by the High Court, which handles civil, criminal and commercial cases. There are four specialized divisions within the High Courts: Labor, Land, Commercial, and Corruption and Economic Crimes.  The Labor, Land, and Corruption and Economic Crimes divisions have exclusive jurisdiction over their respective matters, while the Commercial division does not claim exclusive jurisdiction. The High Court and the District and Resident Magistrate Courts also have original jurisdiction in commercial cases subject to specified financial limitations. 

Apart from the formal court system, there are quasi-judicial bodies, including the Tax Revenue Appeals Tribunal and the Fair Competition Tribunal, as well as alternate dispute resolution procedures in the form of arbitration proceedings.  Judgments originating from countries whose courts are recognized under the Reciprocal Enforcement of Foreign Judgments Act (REFJA) are enforceable in Tanzania. To enforce such judgments, the judgment holder must make an application to the High Court of Tanzania to have the judgment registered. Countries currently listed in the REFJA include Botswana, Lesotho, Mauritius, Zambia, Seychelles, Somalia, Zimbabwe, Swaziland, the United Kingdom, and Sri Lanka.  

The Tanzanian constitution guarantees judicial independence.  Judges are appropriately trained, appointed by the president in consultation with an independent Judicial Service Commission, have secure tenure until retirement at age 60, and are promoted and dismissed in a fair and unbiased manner.  This gives the higher-level courts considerable independence. In 2018, the head of Tanzania’s judiciary, Chief Justice Ibrahim Hamis Juma, publicly warned politicians to stay off his “territory” warning of grave consequences for those who do not. 

Corruption within the judiciary remains a concern, despite President Magufuli’s very public campaign against corruption.  According to the 2017 Afrobarometer Survey, the percentage of Tanzanians who believed that at least some/most/all of the Judiciary were corrupt was 48 percent/17 percent/3 percent, respectively.  The selection and appointment of judges in Tanzania is criticized for its non-transparent nature. The Judiciary Service Commission proposes judges to the President for appointment. However, the criteria and process for candidates is unknown. 

Regulations and enforcement actions are appealable and they are adjudicated in the national court system. 

Laws and Regulations on Foreign Direct Investment

In 2017, new laws/regulations were enacted that may impact the risk-return profile on foreign investments, especially those in the mining industry.  The laws/regulations include the Natural Wealth and Resources (Permanent Sovereignty) Act 2017, Natural Wealth and Resources Contracts (Review and Renegotiation of Unconscionable Terms) Act 2017, Written Laws (Miscellaneous Act) 2017, and Mining (Local Content) Regulations 2018.   The three new acts were introduced by the executive branch under a certificate of urgency, meaning that standard advance publication requirements were waived to expedite passage. As a result, there was minimal stakeholder engagement.

Investors, especially those in natural resources and mining, have expressed concern about the effects of these new laws.  Two of the new laws apply to “natural wealth and resources,” which are broadly defined and not only include oil and gas, but in theory could include wind, sun, and air space.  Investors are encouraged to seek legal counsel to determine the effect these laws may have on existing or potential investments. For natural resource contracts, the laws remove rights to international arbitration and subject contracts, past and present, to Parliamentary review.  More specifically, the law states “Where [Parliament] considers that certain terms …or the entire arrangement… are prejudicial to the interests of the People and the United Republic by reason of unconscionable terms it may, by resolution, direct the Government to initiate renegotiation with a view to rectifying the terms.”  Further, if the GoT’s proposed renegotiation is not accepted, the offending terms are automatically expunged. “Unconscionable” is defined broadly, including catch-all definitions for clauses that are, for example, “inequitable or onerous to the state.” Under the law, the judicial branch does not play a role in determining whether a clause is “unconscionable.”

The Mining (Local Content) Regulations 2018 require that indigenous Tanzanian companies are given first preference for mining licenses.  An ‘indigenous Tanzanian company’ is one incorporated under the Companies Act with at least 51 percent of its equity owned by and 100 percent of its non-managerial positions held by Tanzanians.  Furthermore, foreign mining companies must have at least 5 percent equity participation from an indigenous Tanzanian company and must grant the GoT a 16 percent carried interest. Lastly, foreign companies that supply goods or services to the mining industry must incorporate a joint venture company in which an indigenous Tanzanian company must hold equity participation of at least 20 percent.

The Mining (Local Content) Regulations 2018 also set the timeframe for local content percentages to be raised over the next 10 years which vary by type of good or service provided.  There are immediate requirements to use 100 percent local content for financial, insurance, legal, catering, cleaning, laundry, and security services. All contractors must submit a local content plan to the GoT, which includes provisions to favor local content and meets required local content percentages.  The plan must include five sub plans on employment and training; research and development; technology transfer; legal services; and financial services. The regulations also require contractors to implement bidding procedures to acquire goods and services and to award contracts to indigenous Tanzanian companies if they do not exceed the lowest bidder by more than 10 percent.  There are also regular contractor reporting requirements. Violating these regulations can lead to a fine of up to TZS 500 million or five years imprisonment.      

Competition and Anti-Trust Laws

The Fair Competition Commission (FCC) is an independent government body mandated to intervene, as necessary, to prevent significant market dominance, price fixing, extortion of monopoly rent to the detriment of the consumer, and market instability. The FCC has the authority to restrict mergers and acquisitions if the outcome is likely to create market dominance or lead to uncompetitive behavior.

Expropriation and Compensation

The constitution and investment acts require government to refrain from nationalization.  However, the GoT may expropriate property after due process for the purpose of national interest.  The Tanzanian Investment Act guarantees payment of fair, adequate, and prompt compensation; access to the court or arbitration for the determination of adequate compensation; and prompt repatriation in convertible currency where applicable.  For protection under Tanzania Investment Act, foreign investors require USD 500,000 minimum capital (a local one needs USD 100,000).

GoT authorities do not discriminate against U.S. investments, companies, or representatives in expropriation.  There have been cases of government revocation of hunting concessions that grant land rights to foreign investors, including a U.S.-based company with strategic investor status in 2016.  In late-2018, the GoT expropriated several dormant cashew-processing factories. In the same vein, in early-2019, the GoT reportedly repossessed 16 previously-privatized factories that were not in operation.  At the same time, the government issued a notice to more than 30 businesses, including hotels and other factories, warning them that if they did not present a plan for revitalizing their businesses, the GoT would repossess them too.  The ownership structure of these businesses unconfirmed; however, there are reports that some have foreign ownership. At least one factory with substantial U.S. investment reports that the GoT has blocked the sale of its assets. 

There are numerous examples of indirect expropriation, such as confiscatory tax regimes or regulatory actions that deprive investors of substantial economic benefits from their investments.

Dispute Settlement

ICSID Convention and New York Convention

Tanzania is a member of both the International Centre for Settlement of Investment Disputes (ICSID) and the Multilateral Investment Guarantee Agency (MIGA).  ICSID was established under the auspices of the World Bank by the Convention on the Settlement of Investment Disputes between States and Nationals of Other States.  MIGA is World Bank-affiliated and issues guarantees against non-commercial risk to enterprises that invest in member countries. 

Tanzania is a signatory to the New York Convention on the Recognition and Enforcement of Arbitration Awards.

The highly anticipated Public Private Partnership (PPP) (Amendment) Act, No. 9 of 2018 (the PPP Amendment Act) entered into force in September 2018.  PPP agreements are now subject to local arbitration under the arbitration laws of Tanzania. This provision augments the existing governing law provision which provides that the PPP agreement will be governed by Tanzanian law.  Therefore, in the event of a dispute, the parties must select a local arbitral forum i.e. the National Construction Council or the Tanzania Institute of Arbitrators. Additionally, Section 25A makes provision for PPP projects relating to natural wealth and resources to recognize the provisions under the Natural Wealth and Resources (Permanent Sovereignty) Act, 2017 and the Natural Wealth and Resources (Review and Re-Negotiation of Unconscionable Terms) Act, 2017 (collectively the Natural Wealth Laws).  These provisions include only local arbitration under Tanzanian law will be recognized as well as the right for Parliament to review any agreements in relation to, but not limited to, natural wealth and resources.

Investor-State Dispute Settlement

Investment-related disputes in Tanzania can be protracted.  The Commercial Court of Tanzania operates two sub-registries located in the cities of Arusha and Mwanza.  The sub-registries, however, do not have resident judges. A judge from Dar es Salaam conducts a monthly one-week session at each of the sub-registries.  The government said it intends to establish more branches in other regions including Mbeya, Tanga, and Dodoma, though progress has stagnated. Court-annexed mediation is also a common feature of the country’s commercial dispute resolution system.

Despite legal mechanisms in place, foreign investors have claimed that the GoT sometimes does not honor its agreements.  Additionally, investors continue to face challenges receiving payment for services rendered for GoT projects. One high profile example of such a dispute is that of U.S.-based Symbion Power, which in 2017 filed an application for ICSID arbitration seeking USD 561 million for alleged breach of contract of a purchase power agreement, and the dispute is ongoing.

International Commercial Arbitration and Foreign Courts

On 12 September 2018, the Tanzanian Parliament enacted the Public Private Partnership (Amendment) Bill 2018.  The amendment includes a provision requiring foreign investors to resolve disputes exclusively through Tanzania’s domestic courts, without recourse to international arbitration.  This has been a cause of alarm among international investors. The bill comes just a year after two natural resources legislation handed the Tanzanian government and parliament greater control over mining, oil and gas operations in the country, including the right to renegotiate or remove certain terms from existing contracts.

The Attorney General, Adelarus Kilangi, told Members of Parliament during the passage of the bill that the Tanzanian judicial system was best placed to hear disputes from international investors.  He further commented that the amendments were necessary to counteract the “bias” of international arbitration institutions, such as the International Centre for Settlement of Investment Disputes (ICSID) and the panels of international arbitrators who hear such disputes.

In August 2018, Tanzania Electric Supply Co (Tanesco), wholly owned by the Tanzanian government, lost an appeal against an ICSID award in a long-running case against Standard Chartered Bank and was ordered to pay USD 148 million.  Tanesco is also facing a claim from U.S.-based Symbion Power for USD 561 million. There are at least 22 pending filings of international arbitration against Tanzania. 

Bankruptcy Regulations

According to the 2019 World Bank’s Ease of Doing Business report, it takes an average of three years to conclude bankruptcy proceedings in Tanzania. The recovery rate for creditors on insolvent firms was reported at 20.3 U.S. cents on the dollar, with judgments typically made in local currency.

Investment Incentives

The TIC offers a package of investment benefits and incentives to both domestic and foreign investors without performance requirements.  A minimum capital investment of USD 500,000 if foreign owned or USD 100,000 if locally owned is required. These incentives include:

• Discounts on customs duties, corporate taxes, and VAT paid on capital goods for investments in mining, infrastructure, road construction, bridges, railways, airports, electricity generation, agribusiness, telecommunications, and water services.
• 100 percent capital allowance deduction in the years of income for the above mentioned types of investments – though there is ambiguity as to how this is accomplished.
• No remittance restrictions. The GoT does not restrict the right of foreign investors to repatriate returns from an investment.
• Guarantees against nationalization and expropriation. Any dispute arising between the GoT and investors may be settled through negotiations or submitted for arbitration.
• Allowing interest deduction on capital loans and removal of the five-year limit for carrying forward losses of investors.

Investors may apply for “Strategic Status” or “Special Strategic Status” to receive further incentives.  The criteria used to determine whether an investor may receive these designations are available on TIC’s website (www.tic.co.tz/strategicInvestor  ). 

The government habitually introduces waivers through the Public Finance Act with the aim of attracting investment in certain targeted sectors. In Financial Year 2018/19, the government introduced a VAT exemption for the following items in order to encourage investment: Packaging materials produced for use by local manufacturers of pharmaceutical products; imported animal and poultry feeds additives; and sanitary pads. The government also introduced 100 percent tax amnesty on interest and penalties from July 1 to December 31, 2018 in order to encourage tax compliance among the business community.  

The Export Processing Zones Authority (EPZA) oversees Tanzania’s Export Processing Zones (EPZs) and Special Economic Zones (SEZs).  EPZA’s core objective is to build and promote export-led economic development by offering investment incentives and facilitation services. Minimum capital requirements for EPZ and SEZ investors are USD 500,000 for foreign investors and USD 100,000 for local investors.  Investment incentives offered for EPZs include:

• An exemption from corporate taxes for 10 years.
• An exemption from duties and taxes on capital goods and raw materials.
• An exemption on VAT for utility services and on construction materials.
• An exemption from withholding taxes on rent, dividends, and interests.
• Exemption from pre-shipment or destination inspection requirements.
• SEZs offer similar incentives, excluding the 10 year exemption from corporate taxes.

The Zanzibar Investment Promotion Agency (ZIPA) and the Zanzibar Free Economic Zones Authority (ZAFREZA) offer roughly equivalent incentives as those offered by TIC and EPZA policies.

Foreign Trade Zones/Free Ports/Trade Facilitation

Tanzania’s export processing zones (EPZs) and special economic zones (SEZs) are assigned geographical areas or industries designated to undertake specific economic activities with special regulations and infrastructure requirements.  EPZ status can also be extended to stand-alone factories at any geographical location. EPZ status requires the export of 80 percent or more of the goods produced while SEZ status has no export requirement, allowing manufacturers to sell their goods locally.  As of March 2018, there were 14 designated EPZ/SEZ industrial parks, 10 of which are in development, and 75 stand-alone EPZ factories.

Performance and Data Localization Requirements

The Non-Citizens (Employment Regulation) Act (see Section 12 Labor Policies and Practices below) requires employers to attempt to fill positions with Tanzanian citizens before seeking work permits for foreign employees, and to develop plans to transition to local employees.

In recognition of the fact that the local content (LC) initiative cuts across all economic sectors, the government decided that LC development should take a multi-sector approach, rather than being confined to a single ministry or sector.  In 2015, the government directed the National Economic Empowerment Council (NEEC) to oversee implementation of local empowerment initiatives. The objective of the local content policy is to put local products and services – delivered by businesses owned and operated by Tanzanians – in an advantageous position to exploit opportunities emanating from inbound foreign direct investments.  In 2015, the GoT enacted The Petroleum Act 2015 and, subsequently, issued The Petroleum (Local Content) Regulations 2017. Similarly, in 2017, the GoT amended mining laws, issuing The Mining (Local Content) Regulations 2018. (See Chapter 4: Laws and Regulations on Foreign Direct Investment for more on recent local content laws.)

The GoT requires banks to physically house their computer servers in Tanzania.  In 2016, the GoT launched a USD 94 million national data center (NDC), which is operated by the GoT’s Telecommunications Corporation (TTC).  Under the Tanzania Telecommunications Corporation (TTC) Act 2017, the TTC plans, builds, operates and maintains the “strategic telecommunications infrastructure,” which is defined as transport core infrastructure, data center and other infrastructure that the GoT proclaims “strategic” via official public notice.  It is not yet clear how the law will be implemented and whether telecommunications operators will be required to use the TTC’s data center or provide the TTC greater data access. 

Real Property

All land is owned by the government and procedures for obtaining a lease or certificate of occupancy may be complex and lengthy.  Less than 15 percent of land has been surveyed, and registration of title deeds is handled manually, mainly at the local level. Foreign investors may occupy land for investment purposes through a government-granted right of occupancy (“derivative rights” facilitated by TIC), or through sub-leases from a granted right of occupancy.  Foreign investors may also partner with Tanzanian leaseholders to gain land access.

Land may be leased for up to 99 years, but the law does not allow individual Tanzanians to sell land to foreigners. There are opportunities for foreigners to lease land, including through TIC, which has designated specific plots of land (a land bank) to be made available to foreign investors.  Foreign investors may also enter into joint ventures with Tanzanians, in which case the Tanzanian provides the use of the land (but retains ownership, i.e., the leasehold).

Secured interests in property are recognized and enforced.  Though TIC maintains a land bank, restrictions on foreign ownership may significantly delay investments.  Land not in the land bank must go through a lengthy approval process by local-level authorities, the Ministry of Lands, Housing, Human Settlements Development (MoLHHSD), and the President’s Office to be designated as “general land,” which may be titled for investment and sale.

The MoLHHSD handles registration of mortgages and rights of occupancies and the Office of the Registrar of Titles issues titles and registers mortgage deeds.  Title deeds are recognized as collateral for securing loans from banks. In January 2018, the GoT amended the land law, requiring that loan proceeds secured by mortgaging underdeveloped land be used solely to develop the specific piece of land used as collateral.   The changes apply to general land managed by the MoLHSSD’s Commissioner for Lands, who must receive a report from the lender showing how loan proceeds will be used to develop the land. The law does not apply to village land allocated by village councils, which cannot be mortgaged to a financial institution.

Tanzania’s Registering Property rank in the World Bank’s 2019 Ease of Doing Business report deteriorated from 142 in 2018 to 146 in 2019.  According to the report, it takes eight procedures and 67 days to register property compared the Sub-Saharan Africa average of 53.9 days

Intellectual Property Rights

The GoT’s Copyright Society of Tanzania (COSOTA) is responsible for registration and enforcement of copyrighted materials (e.g., music, film, software), while the registration of trademarks and patents is administered by the Business Registrations and Licensing Agency (BRELA) within the Ministry of Industry and Trade.  It is the responsibility of the rights’ holders to enforce their rights where relevant, retaining their own counsel and advisors. The Fair Competition Commission (FCC) promotes competition, protects consumers against unfair market conduct, and has quasi-judicial powers to determine trademark and patent infringement cases.  The FCC is also tasked with combating the sale of counterfeit merchandise. However, counterfeit human medicines, cosmetics and packaged food materials are handled by the Tanzania Food and Drugs Authority.

Counterfeiting is a growing challenge.  The Confederation of Tanzanian Industries (CTI) reported that between 2010 and 2016, the FCC carried out 138 raids, seized 1,151 containers containing counterfeit products, and identified 1,711 alleged offenders.  Based on this data, the FCC estimated 10 percent of Tanzanian goods are counterfeit. A previous CTI study, however, estimated that upwards of 50 percent of goods in Tanzania may be counterfeit. The ‘hot spots’ for counterfeit goods are Dar es Salaam, Arusha, Mwanza and Mbeya.  Despite its efforts, limited resources make it difficult for the GoT to adequately combat counterfeiting. For additional information about national laws and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/  .

Capital Markets and Portfolio Investment

Tanzania’s Dar es Salaam Stock Exchange (DSE) is a self-listed publicly-owned company.  In 2013, the DSE launched a second tier market, the Enterprise Growth Market (EGM) with lower listing requirements designed to attract small and medium sized companies with high growth potential.  As of December 2017, DSE’s total market capitalization reached USD 10.5 billion, a 20.6 percent increase over the previous year’s figure. The Capital Markets and Securities Authority (CMSA) Act facilitates the free flow of capital and financial resources to support the capital market and securities industry.  Tanzania, however, restricts the free flow of investment in and out of the country, and Tanzanians cannot sell or issue securities abroad unless approved by the CMSA.

Under the Capital Markets and Securities (Foreign Investors) Regulation 2014, there is no aggregate value limitation on foreign ownership of listed non-government securities.  Despite progress, the country’s capital account is not fully liberalized and only foreign individuals or companies from other EAC nations are permitted to participate in the government securities market.  Even with this recent development allowing EAC participation, ownership of government securities is still limited to 40 percent of each security issued.

Tanzania’s Electronic and Postal Communications Act 2010 amended in 2016 by the Finance Act 2016 requires telecom companies to list 25 percent of their shares via an initial public offering (IPO) on the DSE.  Of the seven telecom companies that filed IPO applications with the CMSA, only Vodacom’s application received approval. In 2017, Vodacom planned to offer its shares from March 9 to April 19, but lack of demand required it to extend the offering period to July 28.  Moreover, to spur demand, the GoT opened the IPO to foreign investors who purchased 40 percent of the total shares offered.

As part of the Mining (Minimum Shareholding and Public Offering) Regulations 2016, large scale mining operators were required to float a 30 percent stake on the DSE by October 7, 2018.  On February 24, 2017, however, the GoT surprised the industry by amending the regulations so that the 30 percent stake had to be floated by August 23, 2017, rather than October 7, 2018. However, some mining companies have not listed on the DSE.

Money and Banking System

Finscope’s 2017 Financial Inclusion Report revealed that Tanzania’s financial inclusion rate increased to 65 percent in 2017 from 58 percent in 2013, primarily because of increased mobile phone usage.  However, participation in the formal banking sector still remains low. In 2017, low private sector credit growth and high non-performing loan (NPL) rates were persistent problems. In March 2017, the Bank of Tanzania (BoT) cut its discount rate to 12 percent from 16 percent to boost lending and economic growth, the first time it had cut interest rates since 2013.  In April 2017, the BoT reduced commercial banks’ statutory minimum reserves (SMR) requirement from 10 to 8 percent. These measures did not adequately spur lending, so in August 2017, the BoT reduced its discount rate for the second time from 12 to 9 percent. Despite these measures, private sector credit growth was lower than expected and NPL rates in December 2017 remained more than double the BoT’s targeted 5 percent rate.

In 2018, the BoT continued to address problems in the banking sector.  In January 2018, the BoT closed five community banks for under capitalization and gave an additional three until June 2018 to raise capital.  In its February 14, 2018 Tanzania Country Partnership Framework FY18-FY22, the World Bank reported that Tanzania’s “financial sector is stable despite high nonperforming loans…, which must be addressed.”  In a February 19, 2018 Circular titled “Measures to Increase Credit to Private Sector and Contain Non-Performing Loans,” the BoT issued guidelines to boost lending and reduce NPLs.

As of March 31, 2018, the banking sector was composed of 41 commercial banks, 6 community banks, 5 microfinance banks, 3 development financial institutions, 3 financial leasing companies and 2 credit bureaus. The two largest banks are CRDB Bank and National Microfinance Bank (NMB), which represent almost 30 percent of the market.  Private sector companies have access to commercial credit instruments including documentary credits (letters of credit), overdrafts, term loans, and guarantees. Foreign investors may open accounts and earn tax-free interest in Tanzanian commercial banks.

The Banking and Financial Institution Act 2006 established a framework for credit reference bureaus, permits the release of information to licensed reference bureaus, and allows credit reference bureaus to provide to any person, upon a legitimate business request, a credit report.  Currently, there are two private credit bureaus operating in Tanzania – Credit Info Tanzania Limited and Dun & Bradstreet Credit Bureau Tanzania Limited.

Foreign Exchange and Remittances

Foreign Exchange Policies

Tanzanian regulations permit unconditional transfers through any authorized bank in freely convertible currency of net profits, repayment of foreign loans, royalties, fees charged for foreign technology, and remittance of proceeds. The only official limit on transfers of foreign currency is on cash carried by individuals traveling abroad, which cannot exceed USD 10,000 over a period of 40 days. Investors rarely use convertible instruments.

In 2018 and 2019, the Bank of Tanzania inspected all forex shops in the country and ultimately found that most of them did not meet the requirements of new laws governing the businesses.  As a result, more than ninety percent of the Forex bureaus in country were closed. The government then licensed the commercial banks and Tanzania Post Corporation to open forex shops.

Remittance Policies

There are no recent changes or plans to change investment remittance policies that either tighten or relax access to foreign exchange for investment remittances.

Sovereign Wealth Funds

Tanzania has not established a sovereign wealth fund.

Public enterprises do not compete under the same terms and conditions as private enterprises because they have access to government subsidies and other benefits.  SOEs are active in the power, communications, rail, telecommunications, insurance, aviation, and port sectors. SOEs generally report to ministries and are led by a board.  Typically, a presidential appointee chairs the board, which usually includes private sector representatives. SOEs are not subjected to hard budget constraints. SOEs do not discriminate against or unfairly burden foreigners, though they do have access to sovereign credit guarantees.

As of June 2015, the GoT’s Treasury Registrar reported shares and interests in 215 public parastatals, companies and statutory corporations.  (See http://www.tro.go.tz/index.php/en/2014-12-17-09-13-44/commercial  )

Relevant ministry officials usually appoint SOEs’ board of directors to serve preset terms under what is intended to be a competitive process.  As in a private company, senior management report to the board of directors. Summary financial results for fiscal year 2017 of SOEs are included in the GoT’s consolidated financial statements (CFS) which are available online.  This year, however, the National Audit Office issued an adverse audit opinion, calling CFS accuracy into question.

Privatization Program

The government retains a strong presence in energy, mining, telecommunication services, and transportation.  The government is increasingly empowering the state-owned Tanzania Telecommunications Corporation Limited (TTCL) with the objective of safeguarding the national security, promoting socio-economic development, and managing strategic communications infrastructure.  The government also acquired 51 percent of Airtel Telecommunication Company Limited and became the majority shareholder.  In the past, the GoT has sought foreign investors to manage formerly state-run companies in public-private partnerships, but successful privatizations have been rare.  Though there have been attempts to privatize certain companies, the process is not always clear and transparent. In some instances, the GoT took back control as was the case in 2009-10 when the government nationalized formerly-privatized Tanzania Railways Limited, General Tyre, and Kilimanjaro International Airport based on mismanagement.

In 2010, the GoT enacted the Public Private Partnership (PPP) Act.  According to the act, any ministry, government department or agency, or statutory corporation may act as a PPP procuring authority.  The 2014 amendment of the PPP Act created a new PPP Center to be incorporated in the Office of the Prime Minister through merging the Coordination Unit and the Finance Unit.  It also set up a PPP Technical Committee to recommend PPP projects for approval by the National Investment Steering Committee. In spite of these developments, Tanzania’s Five Year Development Plan (2016-2021) (FYDP II) recognized weaknesses in the PPP legal framework and inadequate understanding and operationalization of PPP concepts as impediments to private sector financing.  As a result, FYDP II calls for an expanded role of the private sector through PPPs. Despite this goal, little progress has been made in this area.

In August 2017, President Magufuli instructed the Minister of Industry, Trade and Investments to revisit the terms of privatization and the ensuing performance of previously privatized companies/assets – most of which took place during the 1990s.  According to the Minister, of 156 privatized companies, 62 were operating normally, 28 were under-performing and 56 were no longer in operation. The GoT, in turn, has implemented a plan to repossess and subsequently retender idle companies/assets.  As a result, according to the Treasury Registrar Office, three companies were repossessed and an additional 12 companies are being considered for similar action by the Attorney General.

Responsible business conduct (RBC) includes respecting human rights, environmental protection, labor relations and financial accountability, and it is practiced by a number of large foreign firms.  Tanzania has laws covering labor and environmental issues. The Employment and Labor Relations Act (ELRA) establishes labor standards, rights and duties, while the Labor Institutions Act (LIA) specifies the government entities charged with administering labor laws.

The GoT’s National Environment Management Council (NEMC) undertakes enforcement, compliance, review and monitoring of environmental impact assessments; performs research; facilitates public participation in environmental decision-making; raises environmental awareness; and collects and disseminates environmental information.  Stakeholders, however, have expressed concerns over whether the NEMC has sufficient funding and capacity to handle its broad mandate.

There are no legal requirements for public disclosure of RBC, and the GoT has not yet addressed executive compensation standards.  Dar es Salaam Stock Exchange (DSE) listed companies, however, must release legally required information to shareholders and the general public.  In addition, the DSE signed a voluntary commitment with the United Nations Sustainable Stock Exchanges Initiative in June 2016, to promote long-term sustainable investments and improve environmental, social and corporate governance.  Tanzania has accounting standards compatible with international accounting bodies.

The Tanzanian government does not usually factor in RBC into procurement decisions.  The GoT is responsible for enforcing local laws, however, the media regularly reports on corruption cases where offenders allegedly avoid sanctions.  There have also been reports of corporate entities collaborating with local governments to carry out controversial undertakings that may not be in the best interest of the local population.

Conflicts between mining companies and neighboring communities have been reported mostly in gold mining areas, leading to intrusion into mining sites and clashes with mining company guards and police.  For example, in June 2017, media reported that villagers invaded Acacia’s North Mara Mine demanding compensation, and leading to the arrest of 66 people and several injuries. Communities often protest the government’s decision to grant mining rights and/or seek compensation over allegations of death, injuries, or environmental damage.

Forty-one Tanzanian entities participate in the United Nations Global Compact Network which focuses on RBC.  Some foreign companies have engaged NGOs that monitor and promote RBC to avoid adversarial confrontations. In addition, some of the multinational mining companies who are signatories to the Voluntary Principles on Security and Human Rights (VPs) have taken the lead and appointed NGOs to conduct programs to mitigate conflicts between the mining companies, surrounding communities, local government officials and the police.

Tanzania is a member of Extractive Industries Transparency Initiative (EITI) since 2009 and in 2015 Tanzania enacted the Extractive Industries Transparency and Accountability Act, which demands that all new concessions, contracts and licenses are made available to the public.  The government produces EITI Reports that disclose revenues from the extraction of its natural resources.

Tanzania has laws and institutions designed to combat corruption and illicit practices.  It is a party to the UN Convention against Corruption, but it is not a signatory to the OECD Convention on Combating Bribery.  Although corruption is still viewed as a major problem, President Magufuli’s focus on anti-corruption has translated into an increased judiciary budget, new corruption cases, and a decline in perceived corruption.  This improvement is partly attributed to instituting electronic services which reduce the opportunity for corruption through human interactions at agencies such as the Tanzania Revenue Authority (TRA), the Business Registration and Licensing Authority (BRELA), and the Port Authority.

Tanzania has three institutions specifically focused on anti-corruption.  The PCCB prevents corruption, educates the public, and enforces the law against corruption.  The Ethics Secretariat and its associated Ethics Tribunal under the President’s office enforces compliance with ethical standards defined in the Public Leadership Codes of Ethics Act 1995.  Lastly, the Economic, Corruption and Organized Crime Court, created in 2016, prosecutes corruption cases. As of April 2017, the Court had registered a total of 25 cases – some of which are high-profile grand corruption cases.

Companies and individuals seeking government tenders are required to submit a written commitment to uphold anti-bribery policies and abide by a compliance program.  These steps are designed to ensure that company management complies with anti-bribery polices.

The GoT is currently implementing its National Anti-Corruption Strategy and Action Plan Phase III (2017-2022) (NACSAP III) which is a decentralized approach focused on broad government participation.  NACSAP III has been prepared to involve a broader domain of key stakeholders including GoT local official, development partners, civil society organization (CSOs), and the private sector. The strategy puts more emphasis on areas that historically have been more prone to corruption in Tanzania such as revenue collection of oil, gas, and natural resources.  Despite the outlined role of the GoT, CSOs, NGOs and media find it increasingly more difficult to investigate corruption in the current political environment. (See Chapter 11)

President Magufuli’s current anti-corruption campaign has affected public discourse about the prevailing climate of impunity, and some officials are reluctant to engage openly in corruption.  Transparency International (TI), which ranks perception of corruption in public sector, gave Tanzania a score of 36 points out of 100 for both 2017 and 2018. The TI ranking, however, improved from 116 out of 180 countries in 2017 to 99 in 2018.

Some critics, however, question how effective the initiative will be in tackling deeper structural issues that have allowed corruption to thrive.  Despite President Magufuli’s focus on anti-corruption, there has been little effort to institutionalize what often appear to be ad hoc measures, a lack of corruption convictions, and persistent underfunding of the country’s main anti-corruption bodies.

Resources to Report Corruption

Contact at government agency responsible for combating corruption:

The Director General
Prevention and Combating of Corruption Bureau
P.O. Box 4865, Dar es Salaam, Tanzania
Tel: +255 22 2150043   Email: dgeneral@pccb.go.tz

Contact at “watchdog” organization:

Executive Director
Legal and Human Rights Centre
P.O. Box 75254, Dar es Salaam, Tanzania
Tel: +255 22 2773038/48   Email: lhrc@humanrights.or.tz

Since gaining independence, Tanzania has enjoyed a relatively high degree of peace and stability compared to its neighbors in the region.  Tanzania has held five national multi-party elections since 1995, the most recent in 2015. Mainland Tanzania government elections have been generally free of political violence.  Elections on the semi-autonomous archipelago of Zanzibar, however, have been marred by political violence several times since 1995.

October 2015 general elections were conducted in a largely open and transparent atmosphere; however, simultaneous elections in Zanzibar were controversially annulled after an opposition candidate declared victory.  A heavily criticized re-run election was held on March 20, 2016 despite an opposition boycott. Since the 2015 election, the GoT has placed several restrictions on political activity, including severely limiting the ability of opposition political parties and civil society organizations to debate issues publicly, or peacefully assemble.  An attempted assassination of opposition politician Tundu Lissu in October 2017 resulted in international calls for investigation; as of May 2018 police had not identified a suspect. Subsequent by-elections in 2017 and 2018 were marred by allegations of irregularities, and instances of political violence, including the unintended police killing of a young woman on apublic bus near a political demonstration.

Over a period of several months in 2017, a string of 43 killings took place; victims included local government officials and police in the southern half of Tanzania’s Pwani region near Dar es Salaam.  Authorities, who referred to the incident as presenting “unprecedented security threats and challenges” established a special police zone in the area and ultimately succeeded in halting the killings after a violent confrontation with the alleged perpetrators.

In addition to monitoring the political climate, foreign investors remain concerned about land tenure issues. Although the government owns all land in Tanzania and oversees the issuance of land leases of up to 99 years, many Tanzanian citizens judge that foreign investors exploit Tanzanian resources, sometimes resulting in conflict between investors and nearby residents. In Arusha, some of these conflicts have led to violence, prompting the GoT to emphasize its commitment to supporting foreign investment while also ensuring the intended benefit of the investments to Tanzanian citizens.

The GoT’s Five Year Development Plan 2016-2021 (FYDP II), which is in its third year of implementation, acknowledges Tanzania’s shortage of skilled labor and the importance of professional training to support industrialization.  The Integrated Labor Force Survey Analytical Report of 2014 found that only 3.6 percent of Tanzania’s 20 million person labor force is highly skilled.  On the regional front, Tanzania, Uganda, Rwanda and Kenya have committed to the EAC’s 2012 Mutual Recognition Agreement of engineers, making for a more regionally competitive engineering market.

In Tanzania, labor and immigration regulations permit foreign investors to recruit up to five expatriates with the possibility of additional work permits granted under specific conditions.

The Non-Citizens (Employment Regulation) Act 2015 introduced stricter rules for hiring foreign workers.  Under the Act, the Labor Commissioner must determine if “all possible efforts have been explored to obtain a local expert” before approving a non-citizen work permit.  In addition, employers must submit “succession plans” for foreign employees, detailing how knowledge and skills will be transferred to local employees.

Non-citizens may be granted two-year work permits, renewable up to five years, while foreign investors may be granted 10 year work permits which may be extended if the investor is deemed to be contributing to the economy and well-being of Tanzanians.  Some stakeholders fear that this provision creates an opening for corruption and arbitrarily prejudicial decisions against foreign investors. Since the passage of the Act, GoT officials have been conducting aggressive “special permit inspections” to verify the validity of work permits.  The process for obtaining work permits remains immensely bureaucratic, opaque at times, and slow.

Mainland Tanzania’s minimum wage, which has not changed since July 2013, is set by categories covering 12 employment sectors. The minimum wage ranges from TZS 100,000 (USD 45) per month for agricultural laborers to TZS 400,000 (USD 180) per month for laborers employed in the mining sector.  Zanzibar’s minimum wage is TZS 300,000 (USD 135), after being increased from TZS 150,000 (USD 68) in April 2017.

Mainland Tanzania and Zanzibar governments maintain separate labor laws. Workers on the mainland have the right to join trade unions.  Any company with a recognized trade union possessing bargaining rights can negotiate in a Collective Bargaining Agreement. As of 2012, unionized workers comprised 13 percent of the formal sector work force.  In the agricultural sector, the country’s largest employment sector, 5-8 percent of the work force is unionized. In the public sector, the government sets wages administratively, including for employees of state-owned enterprises.

Mainland workers have the legal right to strike and employers have the right to a lockout.  The law restricts the right to strike when doing so may endanger the health of the population. Workers in certain sectors are restricted from striking or subject to limitations.  In 2017, the GoT issued regulations that strengthened child labor laws, created minimum one-year terms for certain contracts, expanded the scope of what is considered discrimination, and changed contract requirements for outsourcing agreements.

The labor law in Zanzibar applies to both public and private sector workers.  Zanzibar government workers have the right to strike as long as they follow procedures outlined in the Employment Act of 2005, but they are not allowed to join mainland-based labor unions.  Zanzibar requires a union with 50 or more members to be registered and sets literacy standards for trade union officers. An estimated 40 percent of Zanzibar’s workforce is unionized. (See Chapter 4: Laws and Regulations on Foreign Direct Investment for more on recent local content laws.)

In 1996, the U.S. Overseas Private Investment Corporation (OPIC) signed an incentive agreement with the GoT.  . The current portfolio includes projects in agriculture, energy, microfinance and logistics. OPIC provides financing or insurance to these projects.  In addition, USAID’s Development Credit Authority (DCA) provides guarantees for commercial loans and has active portfolio guarantees with four banks to encourage lending to small and medium sized enterprises.  Tanzania is also a member of the World Bank’s Multilateral Investment Guarantee Agency (MIGA), which offers political risk insurance and technical assistance to attract FDI.

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

* Source for Host Country Data: National Bureau of Statistics (NBS); 2017 GDP: TZS 116,101,908,000,000 (Ex/rate TZS/USD: TZS 2300/USD)

Table 3: Sources and Destination of FDI

Data not available.

Table 4: Sources of Portfolio Investment

Data not available.

Economic Officer
U.S. Embassy Dar es Salaam
686 Old Bagamoyo Road
Msasani, Dar es Salaam
Tel: 255-22-229-4000
drseconomic@state.gov