Policies Towards Foreign Direct Investment

The government of Albania (GoA) understands that private sector development and increased levels of foreign investment are critical to increase opportunity and lower unemployment. Albania maintains a liberal foreign investment regime designed to help attract FDI. The Law on Foreign Investment outlines specific protections for foreign investors and allows 100 percent foreign ownership of companies in all but a few sectors. Albanian legislation does not distinguish between domestic and foreign investments.

The 2010 amendments to the Law on Foreign Investment introduced criteria specifying when the state would grant special protection to foreign investors involved in property disputes, providing additional guarantees for investors for investments of more than 10 million euros through December 2014. The 2017 amendments extended state protection for strategic investments, as defined under the 2015 Law on Strategic Investments, through December 2018.

The U.S.-Albania bilateral investment treaty entered into force in 1998 and obligates the GOA to provide U.S. investors with most-favored-nation treatment.

The Albanian Investment Development Agency (AIDA) is in charge of promoting foreign investments in Albania. Investors intending to invest in Albania should contact AIDA to learn more about the services AIDA offers for foreign investors http://aida.gov.al/ 

The Law on Strategic Investments stipulates that AIDA, as the Secretariat of the Strategic Investment Council, serves as a one-stop window for foreign investors, from filing of the application form to granting the status of strategic investment/investor.

The deadline for application to receive the status of strategic investment/investor is December 2018. The legal framework regulating the strategic investments can be found at the Albanian Investment Development Agency page at http://aida.gov.al/pages/strategic-investments. 

Despite hospitable legislation, U.S. investors are challenged by rampant corruption and the perpetuation of informal business practices. Several major U.S. investors have left the country in recent years after contentious commercial disputes, including several that were brought before international arbitration.

Limits on Foreign Control and Right to Private Ownership and Establishment

There are no restrictions on foreign ownership or control of domestic corporations. According to Albanian legislation, 100 percent foreign ownership of companies is allowed in nearly all sectors with a few exceptions, including:

• International air passenger transport (foreign interest in airline companies is limited to 49 percent ownership for investors outside the Common European Aviation Zone);
• Electric power transmission (must be 100 percent state owned);
• Television broadcasting (no entity may own more than 40 percent of a television company).

Albanian law permits private ownership and establishment of enterprises and property. Foreign investors do not require additional permission or authorization beyond that required of domestic investors. The government applies restrictions only on the purchase of real estate: agricultural land cannot be purchased by foreign individuals or foreign companies, but may be rented for up to 99 years. Commercial property may be purchased, but only if the proposed investment is worth three times the price of the land. There are no restrictions on the purchase of private residential property. Foreigners can acquire concession rights on natural resources and on resources of the common interest, as defined by the Law on Concessions and Public Private Partnerships.

Foreign and domestic investors have numerous options available for organizing business operations in Albania. The 2008 ‘Law on Entrepreneurs and Commercial Companies,’ and ‘Law Establishing the National Registration Center’ (NRC) allow for the following legal types of business entities to be established through the NRC: Sole Entrepreneur; Unlimited Partnership; Limited Partnership; Limited Liability Company; Joint Stock Company; Branches and Representative Offices; and Joint Ventures.

Other Investment Policy Reviews

World Trade Organization (WTO) conducted a Trade Policy Review of Albania in March 2016: https://www.wto.org/english/tratop_e/tpr_e/s337_e.pdf .

Business Facilitation

According to the 2017 World Bank Doing Business Report, it takes an average of five procedures over five days to start a company in Albania. The National Registration Center (NRC) serves as a one-stop shop for business registration. All required procedures and documents are published on-line at http://www.qkb.gov.al/information-on-procedure/business-registration/  The registration may be done in person, or online via the e-Albania portal at https://www.e-albania.al/sherbimi.aspx?kodi=3428 . Many companies choose to complete the registration process in person, as the online portal requires an authentication process and electronic signature and is only available in Albanian. Business licenses can be acquired through the Business Licensing Center at http://www.qkl.gov.al 

Outward Investment

Albania neither promotes nor incentivizes outward investment or restricts domestic investors from investing abroad.

The United States and Albania signed a bilateral investment treaty in 1995, which entered into force in January 1998. The treaty ensures that U.S. investors receive national or most-favored-nation treatment and provides for dispute settlement. There is no free trade agreement or bilateral taxation treaty between the two countries.

As of May 2017, Albania had concluded bilateral investment treaties with 44 countries. See a full list at the following page: http://investmentpolicyhub.unctad.org/IIA/CountryBits/2. Out of 44 agreements, eight are not yet in force. The BIT with the United States has been in force since 1998.

As of February 2017, Albania had signed treaties for the avoidance of double taxation with 41 countries. See a full list at the following page: https://www.tatime.gov.al/c/6/125/marreveshje-nderkombetare 

Albania has also signed free trade agreements with the EU, CEFTA countries (Macedonia, Montenegro, Serbia, Bosnia and Herzegovina, Kosovo, and Moldova), EFTA countries (Switzerland, Liechtenstein, Norway, and Iceland), and Turkey. In addition, in 1992, Albania ratified the Agreement on Promotion, Protection and Guarantee of Investments among member states of the Organization of the Islamic Conference.

Transparency of the Regulatory System

Albania’s regulatory system has improved in recent years, but faces challenges. Uneven enforcement of legislation, cumbersome bureaucracy, and a lack of transparency are all hindrances to the business community.

Albanian legislation includes rules on disclosure requirements, formation, maintenance, and alteration of capital, mergers and divisions, takeover bids, shareholders’ rights, as well as corporate governance principles. The Law on Accounting and Financial Statements includes reporting provisions related to international financial reporting standards for large companies, and national financial reporting standards for small and medium enterprises.

Other independent agencies and bodies, including the Energy Regulator (ERE), Telecom Regulator (AKEP), Natural Resources Bureau (AKBN), and other major institutions operate to ensure transparency in specific sectors.

State-owned oil company AlbPetrol retains some regulatory authority over legacy oilfields and is a consistent source of reports of corruption, predatory interpretation of regulations, and inefficiency in the hydrocarbons sector. Major foreign investors in this sector report difficulties in complying with often overlapping regulatory requirements and inconsistent and often conflicting interpretation of Albanian legislation and regulations governing oil exploration and extraction.

International Regulatory Considerations

Albania acceded to the WTO in 2000, and the country notifies the WTO Committee on Technical Barriers to Trade of all draft technical regulations.

The Albania legal system is based on the continental judicial system. The Albanian Constitution provides for the separation of legislative, executive, and judicial branches, thereby supporting the independence of the judiciary. The Civil Procedure Code enacted in 1996 governs civil procedure in Albania. The civil court system consists of district courts, appellate courts, and the Supreme Court. The district courts are organized in specialized sections according to the subject of the claim, including civil disputes, family disputes, and commercial disputes.

The administrative courts of first instance, the Administrative Court of Appeal, and the Administrative College of the High Court, now adjudicate administrative disputes. Administrative courts aim to adjudicate administrative cases quickly. The Constitutional Court reviews whether laws or subsidiary legislation comply with the Constitution, and in limited cases protects and enforces the constitutional rights of citizens and legal entities.

Parties may appeal the judgment of the first instance courts within 15 days; while appellate court judgments must be appealed to the Supreme Court within 30 days. A lawsuit against an administrative action is submitted to the administrative court within 45 days from notification and the law stipulates short procedural timeframes enabling faster adjudication of administrative disputes.

Albania does not have a specific commercial code, but defines commercial legislation through a series of relevant commercial laws including, the Foreign Investment Law, Commercial Companies Law, Bankruptcy Law, Environmental Law, Law on Corporate and Municipal Bonds, Transport Law, Maritime Code, Secured Transactions Law, Employment Law, Taxation Procedures Law, Banking Law, Insurance and Reinsurance Law, Concessions Law, Mining Law, Energy Law, Water Resources Law, Waste Management Law, Excise Law, Oil and Gas Law, Gambling Law, Telecommunications Law, Value Added Law, and Sports Law.

Corruption is endemic in the Albanian judicial system and U.S. investors are advised to include binding international arbitration clauses in agreements with Albanian counterparts. While the government has historically respected decisions by international arbitration courts, as noted above, the GoA recently ignored an injunction from such a court in a high-profile investment dispute (a decision that was later reversed). Albania is a signatory to the New York Convention and foreign arbitration awards may be enforced in local courts.

Laws and Regulations on Foreign Direct Investment

The Law on Foreign Investments seeks to create a hospitable legal climate for foreign investors and stipulates the following:

1. No prior government authorization is needed for an initial investment;
2. Foreign investment may not be expropriated or nationalized directly or indirectly, except for designated special cases, in the interest of public use and as defined by law;
3. Foreign investors enjoy the right to expatriate all funds and contributions in kind from their investments;
4. Foreign investors receive most favored nation treatment according to international agreements and Albanian law.

There are limited exceptions to this liberal investment regime, most of which apply to the purchase of real estate. Agricultural land cannot be purchased by foreigners and foreign entities, but may be rented for up to 99 years. Investors can buy agricultural land if registered as a commercial entity in Albania. Commercial property may be purchased, but only if the proposed investment is worth three times the price of the land. There are no restrictions on the purchase of private residential property.

In an effort to boost investments in strategic sectors, the government approved a new law on strategic investments in May 2015. Under the new law, a “strategic investment” as deemed by the government benefits from either “assisted procedure” or “special procedure” assistance by the government to help navigate the permitting and regulatory process. To date, no major investors have taken advantage of the law.

Major Laws Governing Foreign Investments:

• Law 55/2015, “On Strategic Investments”: Defines procedures and rules to be observed by government authorities when reviewing, approving and supporting strategic domestic and foreign investments in Albania;
• Law 9901/2008 “On Entrepreneurs and Commercial Companies”: Outlines general rules and regulations on the merger of commercial companies;
• Law 110/2012 “On Cross-Border Mergers”: Determines rules on mergers when one of the companies involved in the process is a foreign company;
• Law 9121/2003 “On Protection of Competition”: Stipulates provisions for the protection of competition, and the concentration of commercial companies;
• Law 10198/2009 “On Collective Investment Undertakings”: Regulates conditions and criteria for the establishment, constitution, and operation of collective investment undertakings and of management companies;
• Law 7764/1993 “On the Foreign Investments” amended by the Law 10316/2010.

Authorities responsible for mergers, change of control, and transfer of shares include, the Albanian Competition Authority (ACA) http://www.caa.gov.al/laws/list/category/1/page/1 which monitors the implementation of the competition law and approves mergers and acquisitions when required by the law; and, the Albanian Financial Supervisory Authority (FSA) http://www.amf.gov.al/ligje.asp  which regulates and supervises the securities market and approves the transfer of shares and change of control of companies operating in this sector.

Investors in Albania are entitled to judicial protection of legal rights related to their investments. Foreign investors have the right to submit disputes to an Albanian court. In addition, parties to a dispute may agree to arbitration. Albania is a signatory to the New York Arbitration Convention and foreign arbitration awards are typically recognized by Albania, although the government refused to recognize an injunction from a foreign arbitration court in one high profile case, in 2016, calling into question the government’s commitment to arbitration (this refusal was later reversed). The Albanian Civil Procedure Code outlines provisions regarding domestic and international commercial arbitration. Many foreign investors complain that endemic judicial corruption and inefficient court procedures undermine judicial protection in Albania and seek international arbitration to resolve disputes.

Albania’s tax system does not distinguish between foreign and domestic investors. Informality in the economy (as high as 50 percent) presents challenges for tax administration.

Visa requirements to obtain residence or work permits are straightforward and do not pose an undue burden on potential investors. The only potential complication to obtaining a work permit is the requirement that a foreign employer maintain a certain number of local employees. The Law on Foreigners states that a foreign employer will be granted a work permit when the number of foreign employees does not exceed 10 percent of the total number of employees on the payroll over the 12 proceeding months.

The Law on Entrepreneurs and Commercial Companies sets guidelines on the activities of companies and the legal structure under which they may operate. The government adopted the law in 2008 to conform Albanian legislation to the European Union’s Acquis Communitaire. The most common type of organization for foreign investors is a limited liability company.

The Law on Concessions establishes the framework for promoting and facilitating the implementation of privately financed concessionary projects. Concessions may be identified by central or local governments or through third party unsolicited proposals. In the case of unsolicited proposals, the proposing company is entitled to receive a bonus of up to 10 percent of total points based on the technical and financial proposal.

Competition and Anti-Trust Laws

The Law on Protection of Competition governs incoming foreign investment whether through mergers, acquisitions, takeovers, or green field investments, irrespective of industry or sector. In the case of particular share transfers in insurance and banking industries, additional regulatory approvals may also be necessary. Transactions between parties outside Albania–foreign-to-foreign transactions–are covered by the competition law, which explicitly states that the transactions apply to all activities, domestic or foreign, that directly or indirectly affect the Albanian market.

Expropriation and Compensation

The Albanian Constitution guarantees the right of private property. According to Article 41, expropriation or limitation in the exercise of a property right can occur only if it serves the public interest and with fair compensation. During the post-communist period, expropriation has been limited to land for public interest, mainly infrastructure projects such as roads, energy infrastructure, water works, airports, and other facilities. Compensation has generally been below market value and owners have complained that the compensation process is slow and unfair. Civil courts are responsible for resolving such complaints.

Change of government can also be of concern to foreign investors. Following the 2013 elections and peaceful transition of power, the new government revoked or attempted to renegotiate numerous concession agreements, licenses, and contracts signed by the previous government with both domestic and international investors. This practice has occurred in years past, as well.

There are many ongoing disputes regarding properties confiscated during the communist regime. Identifying ownership is a longstanding problem in Albania that makes restitution for expropriated properties difficult. The restitution and compensation process started in 1993, but has been slow and marred by corruption. Many U.S. citizens of Albanian origin have suffered from long-running restitution disputes. Court cases drag on for years without a final decision, forcing many to refer their case to the European Court of Human Rights in Strasbourg, France. To date, the Court has issued approximately 29 decisions in favor of Albanian citizens in civil cases involving protection of property with an assessed financial cost of approximately $50 million. Reportedly, there are approximately 400 applications pending for consideration. Even after settlement in Strasbourg, enforcement of the decision is often slow or nonexistent.

The GOA has recently approved new property compensation legislation that aims to provide a solution to the pending claims for restitution and compensation. The legislation presents three methods of compensation for confiscation claims: restitution; compensation of property with similarly valued land in a different location; and cash settlement/financial compensation. The legislation sets a 10-year timeframe for the completion of the entire process.

The Albanian government has generally not engaged in expropriation actions against U.S. investments, companies, or representatives. There have been limited cases in which the government has revoked licenses, especially in the mining and energy sectors, based on contract violation claims.

Dispute Settlement

ICSID Convention and New York Convention

Under the Albanian Constitution, ratified international agreements prevail over domestic legislation. Albania is a member state to the International Centre for the Settlement of Investment Disputes (ICSID Convention). It also is a signatory to the convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention). Albania has ratified the 1927 Convention and the European Convention on Arbitration (Geneva Convention).

For an arbitration award to be locally recognized, the claimant must enforce the award before the Court of Appeals. The procedure to recognize a foreign arbitral award typically lasts around one month and either party may appeal the Court’s decision to the Supreme Court. The appeal must be filed within 30 days from the date of decision or notification of the other party (if absent).

The possibility of bringing an action before the local court to avoid arbitration proceedings is remote. According to explicit provisions in the Albanian Code of Civil Procedure, if a party brings actions before local courts despite the parties’ agreement to arbitrate, the court would, upon motion of the other party, dismiss the case without entertaining the merits of the case. The decision of the court to dismiss the case can be appealed to the Supreme Court, which has 30 days to consider the appeal.

An alternative to dispute settlement via the courts is private arbitration or mediation. Parties can engage in arbitration when they have agreed to such a provision in the original agreement, when there is a separate arbitration agreement, or by mutual agreement at any time when a dispute arises. Legislation distinguishes arbitration of international disputes from arbitration of domestic disputes in that the parties involved in an international dispute may agree to settle through either a domestic or foreign arbitration tribunal. Mediation is also applicable in resolving all civil, commercial, and family disputes and is regulated by the law “On Dispute Resolution through Mediation.” Arbitral awards are final and enforceable and can be appealed only in cases foreseen in the Code of Civil Procedure. Mediation is final and enforceable in the same way.

There are no consolidated institutions for dispute resolution through arbitration and arbiters are appointed ad hoc in compliance with the provisions of the Code of Civil Procedure. The law provides for the National Chamber of Mediators and Chambers of Mediators as institutions to perform mediation. Mediators are licensed and registered at the Mediators Register at the Ministry of Justice, which maintains a list of mediators from which the parties can choose.

The provisions for arbitration procedures and the recognition and enforcement of foreign awards are stipulated in the Albanian Code of Civil Procedure. Albania does not have a separate law on arbitration. Although the arbitration chapter of the Code of Civil procedure stipulates only the rules for domestic arbitration, the country is signatory to the 1958 New York Convention, and as such, recognizes the validity of written arbitration agreements and arbitral awards in a contracting state.

The Albanian Code of Civil Procedure requires the courts to reach a judgment within a reasonable amount of time, but does not provide for a specific deadline to decide on commercial disputes. Reaching a final judgment in a commercial litigation may take several years to exhaust all stages of the process.

The procedure for the recognition of a foreign arbitral award should take on average approximately one month; however, in certain cases this decision may be appealable. An appeal against a court decision that recognizes a foreign arbitral award does not automatically suspend the effects of the enforcement.

International Commercial Arbitration and Foreign Courts

Over the past ten years, there have been six investment disputes between the Albanian government and U.S. companies, four of which resulted in international arbitration. Despite a stated desire to attract and support foreign investors, U.S. investors in disputes with the Albanian government report a lack of productive dialogue with government officials, who frequently display a reluctance to settle the disputes before they are escalated to the level of international arbitration, or before the international community exerts pressure on the government to resolve the issue. U.S. investors in Albania are encouraged to include strong binding arbitration clauses in any agreements with Albanian counterparts.

Bankruptcy Regulations

Albania maintains adequate bankruptcy legislation, though actual bankruptcies are rare in practice. Corrupt and inefficient bankruptcy courts make it difficult for companies to reorganize or discharge debts through bankruptcy.

The Bankruptcy Law governs the reorganization or liquidation of insolvent businesses. It sets out non-discriminatory and mandatory rules for the repayment of the obligations by a debtor in a bankruptcy procedure. The law establishes statutory time limits for insolvency procedures, professional qualifications for insolvency administrators, and an Agency of Insolvency Supervision to regulate the profession of insolvency administrators.

A bankruptcy procedure can be initiated by debtors, creditors, or tax authorities. Debtors and creditors can file for either liquidation or reorganization. Tax authorities can request a bankruptcy procedure when the subject reports losses three years consecutively. Bankruptcy proceedings may also be invoked when the debtor is unable to pay the obligations at maturity date or will be unable to pay in the near future.

According to the provisions of the Bankruptcy Law, the initiation of bankruptcy proceedings would suspend the enforcement of claims by all creditors against the debtor subject to bankruptcy. Creditors of all categories should submit their claims to the bankruptcy administrator in order to be treated under the bankruptcy proceeding. The Bankruptcy Law provides specific treatment for different categories, including, secured creditors, unsecured creditors, and unsecured creditors of lower ranking (i.e. those whose claims would be paid after all the secured and unsecured creditors were satisfied). The claims of the secured creditors will be satisfied by the assets of the debtor, which secure such claims under security agreements. The claims of the unsecured creditors will be paid out of bankruptcy estate excluding the assets used for payment of the secured creditors, following the priority ranking described under the Albanian Civil Code.

Pursuant to the provisions of the Bankruptcy Law, the creditors have the right to establish a creditors committee and the creditors’ assembly. The creditors’ committee is appointed by the Commercial Section Courts, before the first meeting of the creditors’ assembly. The creditors’ committee represents the secured creditors, the unsecured creditors with larger claims, and creditors with small claims. The committee has the right: (a) to support and supervise the activities of the insolvency administrator; (b) to request and receive information about the insolvency proceedings; c) to inspect the books and records; and, d) to order an examination of the revenues and cash balances.

In the event that the creditors and administrator agree that reorganization is the company’s best option, the bankruptcy administrator prepares a reorganization plan and submits it to the court for authorizing implementation.

According to the insolvency procedures, only creditors whose rights are affected by the proposed reorganization plan enjoy the right of vote and the dissenting creditors in reorganization receive at least as much as what they would obtain in a liquidation. Creditors are divided into classes for the purposes of voting on the reorganization plan and each class votes separately and creditors of the same class are treated equally.

The insolvency framework allows for the continuation of contracts supplying essential goods and services to the debtor, the rejection by the debtor of overly burdensome contracts, the avoidance of preferential or undervalued transactions, and the possibility of the debtor obtaining credit after commencement of insolvency proceedings. No priority is assigned to post-commencement creditors.

The creditor has the right to object to decisions accepting or rejecting creditors’ claims, and should approve the sale of substantial assets of the debtor. The creditor does not have the right to request information from the insolvency representative and the law does not require approval by the creditor for the selection of appointment of insolvency representative.

According to the law on bankruptcy, foreign creditors have the same rights as domestic creditors with respect to the commencement of, and participation in, a bankruptcy proceeding. The claim is valued as of the date the insolvency proceeding is opened. Claims expressed in foreign currency are converted into Albanian currency according to the official exchange rate applicable to the place of payment at the time of the opening of the proceeding.

The Albanian Criminal Code provides for several criminal offences in bankruptcy such as: (i) the bankruptcy was provoked intentionally; (ii) concealment of bankruptcy status; (iii) concealment of assets after bankruptcy; and, (iv) failure to comply with the obligations arising under bankruptcy proceeding.

According to the World Bank’s 2017 Doing Business Report, Albania ranked 43 out of 190 countries in the insolvency index. A reference analysis of ‘resolving insolvency’ can be found at: http://www.doingbusiness.org/data/exploreeconomies/albania#resolving-insolvency .

The number of bankruptcy requests in Albania is growing; as of November 2016, 132 companies had navigated through bankruptcy based on the register of the Taxation Department.

Investment Incentives

The Albanian Investment Development Agency (www.aida.gov.al) is the best source to find incentives offered across a variety of sectors. Distinct from the incentives listed below, individual parties may negotiate additional incentives directly through AIDA or with the Ministry of Economy, Trade, Tourism and Entrepreneurship.

In an effort to boost investments in strategic sectors, the GoA approved a new law on strategic investments in May 2015 that outlines the criteria, rules, and procedures that state authorities use when approving a strategic investment. A strategic investment is an investment of public interest, based on several criteria, including, size of the investment, implementation time, productivity and value added, creation of new jobs, sectoral economic priorities, and regional and local economic development. The law does not discriminate between foreign and domestic investors.

The following sectors are defined as strategic sectors: Mining and Energy, Transport, Electronic Communication Infrastructure, Urban Waste Industry, Tourism, Agriculture (large farms) and Fishing, Economic Zones, and Development Priority Areas. The law foresees that investments in strategic sectors may benefit the status of Assisted Procedure and Special Procedure, based on the level of investment, which varies from one to 100 million euros, depending on the sector and other criteria stipulated in the law.

In the Assisted Procedure, the public administration coordinates, assists, and supervises the entire administrative process for the investment approval and makes available to the investor state-owned property needed for the investment. In the Special Procedure, the investor also enjoys state support for the expropriation of private property and the ratification of the contract by Parliament.

The law and bylaws that entered into force on January 1, 2016, foresee the establishment of the Strategic Investments Committee (SIC), a collegial body headed by the prime minister, whose members include ministers covering the respective strategic sectors, state advocate, and on a case-by-case basis ministers whose portfolios are impacted by the strategic investment. The Albanian Investment Development Agency (AIDA) serves as the Secretariat of SIC and is in charge of providing administrative support to investors. The SIC grants the status of Assisted Procedure and Special Procedure, for strategic investments/investors based on the size of investments and other criteria defined in the law.

Energy and Mining, Transport, Electronic Communication Infrastructure, and Urban Waste Industry: Investments greater than 30 million euros enjoy the status of assisted procedure, while 50 million euros or more enjoys special procedure status.

Tourism and Economic Areas: Investments equal or higher than 5 million euros enjoy the status of assisted procedure; and greater than 50 million euros enjoy the status of special procedure.

Agriculture (large agricultural farms) and Fishing: Investments greater than 3 million euros and which create at least 50 new jobs enjoy the status of assisted procedure; and greater than 50 million euros enjoy the status of special procedure.

Development Priority Areas: Investments greater than one million euros that creates at least 150 new jobs enjoy the status of assisted procedure. Investments greater than 10 million euros that create at least 600 new jobs enjoy the status of special procedure.

Energy sector: Some machinery and equipment imported for the construction of hydropower plants is VAT exempt.

Foreign tax credit: Albania applies foreign tax credit rights even in cases where no double taxation treaty exists with the country in which the tax is paid. If a double taxation treaty is in force, double taxation is avoided either through an exemption or by granting tax credits up to the amount of the applicable Albanian corporate income tax rate (currently 15 percent).

Corporate income tax exemption: Film studios and cinematographic productions, licensed and funded by the National Cinematographic Center, are exempt from paying corporate income tax.

Loss carry forward for corporate income tax purposes: Fiscal losses can be carried forward for three consecutive years (the first losses are used first). However, the losses may not be carried forward if more than 50 percent of direct or indirect ownership of the share capital or voting rights of the taxpayer is transferred (changed) during the tax year.

Incentives for manufacturing sector

Lease of public property: The government of Albania can lease public property of more than 500 m2, or grant a concession for the symbolic price of one euro if the properties will be used for manufacturing activities with an investment exceeding 10 million euros, or for inward processing activities. The GOA can also lease public property or grant a concession for the symbolic price of one euro for investments of more than two million euros on activities that address social and economic issues in a certain area, as well as activities related to sports, culture, tourism and cultural heritage. Criteria and terms are decided on an individual bases by the Council of Ministers.

Manufacturing activities are exempt from VAT on machinery and equipment.

The employer is exempt from the social security tax payment for one year for all new employees.

The state pays the salaries for four months for the new employees and offers various financing incentives for job training.

VAT credit for fuel: Taxpayers whose main business activity is production of bricks and tiles and the transport of goods with technological means are allowed to credit VAT on the purchase of fuel used wholly and exclusively for their business activities, up to the limit of a certain percentage of the taxpayer’s total annual turnover.

Manufacturing sector obtains VAT refunds immediately in the case of zero risk exporters, within 30 days if the taxpayer is an exporter, and within 60 days in the case of other taxpayers.

Apparel and footwear producers are exempt from 20 percent VAT on raw materials so long as the finished product is exported. In 2011, the GOA also removed customs tariffs for imported apparel and raw materials in the textile and shoe industries (e.g. leather used for clothes, cotton, viscose, velvet, sewing accessories, and similar items).

Technological and Development Areas (TEDA): The law on the economic development areas provides both fiscal and administrative incentives for companies investing in these areas. A full list of incentives can be found at the following page: http://www.teda.gov.al/?page_id=687 .

Research and Development

The Agency for Research, Technology and Innovation (ARTI), is a public, legal institution whose mission is to evaluate, finance, monitor and manage programs and projects in the fields of science, technology and innovation in Albania. ARTI (http://www.akti.gov.al/ ) aims to fund projects in the field of small and medium enterprises, as well as transfer, modernization and renewal of their technologies. The Agency is funded by the state budget, donations by both domestic and foreign individuals and private sector, EU programs and projects, from specific countries and partner organizations. There are no restrictions to apply for research and development projects for foreign firms operating in Albania.

Foreign Trade Zones/Free Ports/Trade Facilitation

Albania has no functional duty free import zones, although legislation exists for the creation of such. The May 2015 amendments to the Law on the Establishment and Operation of Technical and Economic Development Areas (TEDA) established the legal framework for the establishment of TEDAs (a.k.a. free trade zones), defining the incentives for developers investing in the development of these zones as well as companies operating within the zones. The Ministry of Economic Development has announced three investment opportunities seeking private sector developers to obtain, develop, and operate three fully serviced areas, located in Koplik (61 ha) and Spitalla (100 ha). Interested investors and developers may find more information for the development of Technical and Economic Development Areas (TEDA) at the following site: http://aida.gov.al/faqe/zonat-me-zhvillim-teknik-dhe-ekonomik 

Performance and Data Localization Requirements

Although visa, residence, and work permit requirements are straightforward and do not pose an undue burden on potential investors, the Law on Foreigners requires foreign investors to prove that foreign employees are less than 10 percent of the total workforce before granting a work permit.

According to current legislation in force, companies that have sensitive data (mostly in telecommunications, banking, energy, and other sector) are not authorized to transfer data abroad. In order to do so, they must receive approval and fulfill certain security criteria. As such, many companies operating in Albania are returning their data to Albania. The two largest private datacenters in Albania belong to telecom operator Albtelekom and Albanian Telecommunication Union (ATU).

Real Property

Real Estate is registered at the Immovable Property Registration Office (IPRO). The procedures are cumbersome and registrants have complained of corruption in the process. Recent changes to legislation allow a notary public to have access to real estate registers and confirm the legal ownership of property. The process of registering property remains cumbersome and difficult to navigate. For large transactions, it is advisable to hire an attorney to check documents and procedures for property registration.

Property legislation has developed in a piecemeal and uncoordinated way. The reform in the sector has not achieved the consolidation of property rights and the elimination of legal uncertainties. Immovable property rights enforcement is not efficient and is a common source of corruption allegations and lengthy legal procedures. Through international donor assistance, the registration system has improved. The initial property registration process has seen progress, but the finalization of the process has stalled in recent years. Approximately 15 percent of properties nationwide are not yet registered, mostly in urban and high value coastal areas.

Illegal construction is a major impediment to securing property titles. The legalization process to address large-scale illegal construction started in 2006, and is still ongoing. There are an estimated 440,000 illegal buildings in Albania, many have applied or are cases in process for legalization. In an attempt to legalize property and punish illegal construction, the government’s National Urban Construction Inspectorate (INUK) began a campaign of building demolition in late 2013. There were credible reports that the government demolished some homes without due legal process as part of a wider campaign to demolish illegally constructed buildings. Citizens also submitted complaints that INUK ignored citizens’ requests to demolish some illegal buildings while choosing to demolish other buildings about which citizens had not complained.

The civil court system manages property rights disputes. Decisions from civil courts often take many years and authorities often do not enforce court decisions. In 2010, there were amendments to the law on foreign investments, which granted special protection to foreign investors on property disputes. However, the new law on strategic investments aims to fill the gap and provide foreign investors with assistance on a variety of issues including property title. Foreigners and/or foreign entities can purchase commercial land only if the investment is more than three times the value of the land. In the case of farm land, it can only be leased, for 99 years.

According to the 2017 World Bank’s Doing Business Report, Albania performed poorly in the registering property category, ranking 106 out of 190 economies. It takes 19 days and six procedures to register property and the associated costs can reach 10 percent of the total property value.

Intellectual Property Rights

Albania is not and has never been listed on the USTR Special 301 Watch List or Priority Watch List, or Notorious Markets report. However, IPR infringement and theft are common due to weak legal structures and poor enforcement. Counterfeit goods, while decreasing, are present in some local markets ranging from software to garments and machines. Albanian law protects copyrights, patents, trademarks, stamps, marks of origin, and industrial designs, but significant gaps remain between the law’s intent and its enforcement. Regulators are ineffective at collecting fines and prosecutors rarely press charges for IP theft. U.S. companies should consult an attorney experienced in IPR issues and avoid potential risk by establishing solid commercial relationships and drafting strong contracts.

A new IPR law approved by the Parliament on March 31, 2016 entered into effect in November 2016. The law seeks to harmonize domestic legislation with EU law to strengthen IPR enforcement and address shortcomings in existing legislation. The main institutions responsible for IPR enforcement include the Albanian Copyright Office (ACO), Audiovisual Media Authority (AMA), the General Directorate of Patents and Trademarks (GDPT), the General Directorate for Customs, the Tax Inspectorate, the Prosecutor’s Office, police, and courts. The new law also stipulated the establishment of three new IPR bodies: the National Council of Copyrights, which is responsible to monitor the implementation of the law; the Agency for the Collective Administration, in charge of IPR administration; and the Copyrights Department within the Ministry of Culture.

While official figures are not available, Customs does report the quantity of counterfeit goods destroyed annually. In the case of seizure, the rights holder has the burden of proof and must first inspect the goods before any further action takes place. The rights holder is also responsible for the storage and destruction of the counterfeit goods.

Law enforcement on copyrights remains virtually nonexistent and copyright violations are rampant. Most IP-related fines are never collected and the few cases referred to prosecutors by regulatory agencies are rarely enforced. The number of copyright violation cases brought to court remains low. ACO sanctions are not effective and the low fines it levies are rarely collected and do not serve as an adequate deterrent.

Patents and Trademarks

The General Directorate for Patents and Trademarks (GDPT) is responsible to register and administer patents, commercial trademarks and service marks, industrial designs, and geographical indications. The 2008 law on Industrial Property was amended initially in 2014 to reflect EU legislation on this matter. Further amendments were introduced in February 2017 that aim to transform GDPT from a public institution into an autonomous agency to strengthen its human and financial capacities and improve performance. Despite adequate legislation, the GDPT requires further capacity building and additional human resources to be effective. Specifically, examination procedures are lengthy due to a limited number of patent and trademark examiners.

Albania became a contracting party to the WIPO Patent Law Treaty and a full member of the European Patent Organization in 2010. The government became party to the London Agreement on the implementation of Article 65 of the European Convention for Patents in 2013.

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/ .

Resources for Rights Holders

Contact at mission on IP issues:

Jeffrey D. Bowan
Economic and Commercial Officer
Phone: + 355 (0) 4229 3115
E-mail: BowanJD@state.gov

Country resources:

American Chamber of Commerce: www.amcham.com.al 
Address: Rr. Deshmoret e 4 shkurtit, Sky Tower, kati 11 Ap 3 Tirana, Albania
Email: info@amcham.com.al
Phone: +355 (0) 4225 9779
Fax: +355 (0) 4223 5350

List of local lawyers: http://tirana.usembassy.gov/list_of_attorneys.html

Capital Markets and Portfolio Investment

In the absence of a stock market, the country’s banking sector remains the main channel for business financing. The sector is sound, profitable, and well capitalized, although the high rate of non-performing loans remains a concern. The Bank of Albania’s legal measures to address the problem have generated positive results. At the end of 2016, non-performing loans dropped to 18.2 percent of all private loans, marking a significant reduction from 2014, when the non-performing loans reached 25 percent. Capital adequacy, at 15.7 percent, remains far above Basel requirements and indicates sufficient assets, which totaled $11.4 billion in 2016. The banking sector is fully private and consists of 16 banks, most of which are subsidiaries of foreign banks. As of September 2016, the Turkish National Commercial Bank remains the largest bank, with 27.3 percent of the market, followed by Austrian Raiffeisen Bank with 18.8 percent market share. The market share of Greek banks has fallen significantly in recent years and stands at around 14 percent.

The government has adopted policies promoting the free flow of financial resources to promote foreign investment in Albania. The government and Central Bank refrain from restrictions on payments and transfers for international transactions. Despite Albania’s shallow FX market, banks enjoy sufficient liquidity to support sizeable positions. Furthermore, portfolio investments remain limited mostly to company shares, government bonds, and real estate.

The high rate of non-performing loans and the economic slowdown has forced commercial banks to tighten lending standards. After falling in 2015, the stock of loans increased by 2.5 percent year-on-year in 2016. The credit market is competitive, but interest rates in domestic currency can be high, currently between 5.6 and 12 percent. Most mortgage and commercial loans are denominated in euros as rate differentials between local and foreign currency average 2-6 percent. Commercial banks have improved the quality and quantity of services they offer and the private sector has benefited from the expansion of these instruments.

The major state owned enterprises are Electric Distribution Operator (OSHEE), Transmission System Operator (OST), Electricity Generation Company (KESH), Oil and Gas Operator, Albpetrol, Albanian Post Office, and the Albanian Railway System. There is no published list of SOEs and no clear data on their assets, net income, or total number of employees.

Money and Banking System

Albania’s banking sector weathered the financial crisis better than many of its neighbors, due largely to a lack of exposure to international capital markets and lack of a domestic housing bubble. There is sufficient liquidity in the market to enter and exit sizeable positions. The sector remained profitable even during the peak of the 2008 financial crisis, when it suffered a reduction of deposits of about 15 percent. Market concentration remains high, as the five largest banks dominate the market with about 73 percent of total assets. The Bank of Albania has the flexibility to intervene in the currency market to protect exchange rates and official reserves, but not for more than 12 months. In an attempt to stimulate business activity, the Bank of Albania further loosened monetary policy in 2016, with official central bank interest rates reaching a historic low of 1.25 percent.

Foreigners are not required to prove residency status to establish a bank account aside from the normal know-your-client procedures. However, U.S. citizens are required to fill out a form allowing for the disclosure of their banking data to the IRS under the framework of the U.S. Foreign Account Tax Compliance Act.

Foreign Exchange and Remittances

Foreign Exchange

The Central Bank of Albania (BOA) formulates, adopts, and implements foreign exchange policies and maintains a supervisory role in foreign exchange activities in accordance with the Law on the Bank of Albania No. 8269 and the Banking Law No. 9662. Foreign exchange is regulated by the 2009 Regulation on Foreign Exchange Activities no. 70 (FX Regulation).

The BOA maintains a free float exchange rate regime for its domestic currency, the Lek (ALL). Foreign exchange is readily available at banks and exchange bureaus. However, when exchanging several million dollars or more, preliminary notification may be necessary as the exchange market in Albania remains small. The domestic currency has remained stable over the last year, depreciating by around 1.5 percent against the U.S. dollar. Albanian authorities do not engage in currency arbitrage and do not view such as an efficient instrument to achieve competitive advantage.

Remittance Policies

The Banking Law does not impose restrictions on the purchase, sale, holding, or transfer of monetary foreign exchange. However, the Law on the Bank of Albania authorizes the Bank to temporarily restrict the purchase, sale, holding, or transfer of foreign exchange to preserve the foreign exchange rate or official reserves. In practice, the Bank of Albania rarely employs such measures. The last episode was in 2009, when the Bank temporarily tightened supervision rules over liquidity transfers by domestic correspondent banks to foreign banks due to insufficient liquidity in international financial markets. It also asked banks to halt distribution of dividends and use dividends to increase shareholders’ capital, instead. The Bank lifted these restrictions in 2010.

The Law on Foreign Investment guarantees the right to transfer and repatriate funds associated with an investment in Albania into a freely usable currency at a market-clearing rate. Only licensed entities (banks) may conduct foreign exchange transfers and waiting periods depend on office procedures adopted by the banks. Both Albanian and foreign citizens entering or leaving the country must declare assets in excess of ALL 1,000,000 (USD 8,000) in hard currency and/or precious items. Failure to declare such assets is considered a criminal act, which is punishable by confiscation of the assets and imprisonment. Legal parallel markets are not in place in Albania, as the financial sector does not make use of convertible or negotiable instruments.

Although the Foreign Exchange Regulation provides that residents and non-residents may transfer capital within and into Albania without restriction, capital transfers out of Albania are subject to certain documentation requirements. Persons must submit a request indicating the reasons for the capital transfer, the amount of capital transferred outside the territory of Albania, and the address to which the capital will be transferred. Such persons must also submit a declaration on the source of the funds to be transferred. In January 2015, The FX Regulation was amended and the requirement to present the documentation showing the preliminary payment of taxes related to the transaction was removed.

Albania is not a major trading partner with the United States, but, in general, does not engage in policy currency manipulation tactics. Albania is a member of the Council of Europe Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL), a Financial Action Task Force-style regional body. The INCRS 2016 report categorizes Albania as a country of jurisdiction of concern with regard to money laundering.

Sovereign Wealth Funds

Albania does not have a sovereign wealth fund.

SOEs are defined as legal entities, which are entirely state-owned or state-controlled and operate as commercial companies in compliance with the Law on Entrepreneurs and Commercial Companies. No discrimination exists between public and private companies operating in the same sector. The government requires SOEs to submit annual reports and undergo independent audits. SOEs are subject to the same tax levels and procedures, and same domestic accounting and international financial reporting standards, as all other commercial companies. The High State Audit is the institution that audits SOE activities. SOEs are also subject to public procurement law.

Albania is yet to become party to the Government Procurement Agreement (GPA) of the World Trade Organization (WTO), but has obtained observer status and is negotiating full accession. However, private companies can compete openly and under the same terms and conditions with respect to market share, products and services, and incentives.

The SOE operation in Albania is regulated by the Law on Entrepreneurs and Commercial Companies, Law on State Owned Enterprises, and the Law on the Transformation of State Owned Enterprises into Commercial Companies. The Ministry of Economic Development, Tourism, Trade and Entrepreneurship represents the state as the owner of the SOEs. There are no legal binding requirements for the SOEs to adhere to OECD guidelines. However, basic principles of corporate governance are stipulated in the above-mentioned laws and generally accord with OECD guidelines. The corporate governance structure of SOEs includes the supervisory board and the general director (administrator) in the case of joint stock companies. The supervisory board is comprised of 3-9 members, who are not employed by the SOE, two-thirds of whom are appointed by the representative of the Ministry of Economic Development, and one-third are appointed by the line ministry, local government unit, or institution to which the company reports. The supervisory B=board is the highest decision making authority, and appoints and dismisses the administrator for the SOE through a two-thirds vote. In the case of SOEs operating in the electricity sector, the representative of the owner and the appointment of supervisory board members is regulated by the Law on the Electrical Energy Sector, and in the natural gas sector by the Law on the Sector of Natural Gas.

Privatization Program

The privatization process in Albania is nearing a conclusion, with only a few major privatizations remaining. These few opportunities include the electricity distribution company, 16 percent of the fixed line telephone company, Albtelekom, and state-owned oil company Albpetrol. SOEs operate in energy generation, electricity transmission and distribution, water supply, ports, railway, insurance, postal services, and hydrocarbons sectors.

Public awareness of corporate social responsibility (CSR) in Albania is low and CSR remains a relatively new concept for much of the business community. The small level of CSR engagement in Albania comes primarily from the energy, telecommunications, heavy industry, and banking sectors and tends to focus on philanthropy and environmental issues. International organizations have recently improved efforts to promote CSR awareness. Thanks to efforts by the international community and large international companies, the first Albanian CSR Network was founded in March 2013 as a business-led, non-profit organization. The American Chamber of Commerce also formed a CSR subcommittee in 2015 to promote CSR among its members. The government maintains relatively robust CSR, labor and employment rights, consumer protection, and environmental protection legislation, but enforcement and implementation is inconsistent.

Albania has been a member of the Extractive Industries Transparency Initiative (EITI) since 2013.

The Law on Commercial Companies and Entrepreneurs outlines generic corporate governance and accounting standards. According to the above-mentioned law and the law on the national business registration center, companies are required to disclose publicly when they change administrators and shareholders and to disclose financial statements.

The Corporate Governance Code for unlisted joint stock companies incorporates the OECD definitions and principles on corporate governance, but is not legally binding. The code provides guidance for Albanian companies, and aims to provide a best-practice framework above the minimum legal requirements, while assisting Albanian companies to develop a governance framework.

Corruption is a continuing problem in Albania, undermining the rule of law and jeopardizing economic development. Albania ranked 83 out of 176 countries in Transparency International’s 2016 Corruption Perception Index (CPI). Albania’s score improved from 2013 and 2014, when it ranked 116 and 110. Nevertheless, Albania remains one of the most corrupt countries in Europe, according to the CPI. The passage by Parliament of constitutional amendments in July 2016 to reform the judicial system was a major step forward, and reform, once implemented, should make the country more attractive to international investors.

Judicial reform has been described as the most significant development in Albania since the end of communism, and nearly one-third of the constitution was rewritten, as a result. The reform also entails the passage of laws to ensure implementation of the constitutional amendments. Judicial reform’s new vetting process will ensure that prosecutors and judges with unexplained wealth, insufficient training, or who have issued questionable past decisions are removed from the system. The reform will also establish an independent prosecutor and specialized investigation unit to investigate and prosecute corruption and organized crime. If fully implemented, judicial reform will discourage corruption, promote foreign and domestic investment, and allow Albania to compete more successfully in the global economy.

UN Anticorruption Convention, OECD Convention on Combatting Bribery

The government has ratified several corruption-related international treaties and conventions and is a member of major international organizations and programs dealing with corruption and/or organized crime. Albania has ratified the Civil Law Convention on Corruption (Council of Europe), the Criminal Law Convention on Corruption (Council of Europe), the Additional Protocol to Criminal Law Convention on Corruption (Council of Europe), and the United Nations Convention against Corruption (UNCAC). Albania has also ratified a number of key conventions in the broader field of economic crime, including the Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime (2001); and the Convention on Cybercrime (2002). Albania has been a member of the Group of States against Corruption (GRECO) since the ratification of the Criminal Law Convention on Corruption, in 2001, and is a member of the Stability Pact Anti-Corruption Network (SPAI). Albania is not a member of the OECD Convention on Combating Bribery of Foreign Public Officials in international Business Transactions.

Resources to Report Corruption

Government online portal to report corruption: http://www.stopkorrupsionit.al 

Political violence is rare. Albania’s June 2013 elections and transition to a new government were peaceful. However, security forces shot and killed four protesters on January 21, 2011, during a violent political demonstration. Albania is a source of stability in the region and maintains generally friendly relations with neighboring countries.

Albania’s labor force numbers about 1.1 million people, according to official data. The official estimated unemployment rate in October 2016 was 15 percent; though unemployment for people aged 15-29 was estimated at 27 percent. Approximately 46 percent of the population is self-employed in the agriculture sector. Informality is widespread in the Albanian labor market. A 2013 International Labor Organization survey on Labor force suggests that 43 percent of non-farm jobs correspond to informal employment. The situation is even more serious in the farm sector, where 88 percent of employment is informal or undocumented.

While some in the labor force are highly skilled, many work in low-skill industries or have outdated skills. The education level of the workforce is relatively low, limiting economic prospects and access to quality jobs. According to the Institute of Statistics, in 2015 about 43 percent of working age persons in Albania had a primary education or less, while only 19 percent had a tertiary education. The government provides fiscal incentives for labor force training for the inward processing industry, which in Albania includes the shoe and textile sectors. A majority of young Albanians speak English, Italian, or Greek as a second language. Other foreign language skills are common, as well.

Albania has a tradition of a strong secondary educational system, while vocational schools are less prevalent. In 2014, just 8 percent of high school pupils were enrolled in vocational schools. However, the current government has shifted attention to the promotion of vocational education.

In October 2016, the average salary in public administration was approximately 54,000 ALL ($436) per month. Minimum wage is 22,000 ALL/month (approximately $176), which is among the lowest in the region.

Pursuant to the Labor Code and the recently amended “Law on the Status of the Civil Employee,” both individual and collective employment contracts regulate labor relations between employees and management. Albania has been a member of the International Labor Organization (ILO) since 1991 and has ratified 54 ILO conventions, the entire set of fundamental and governance conventions as well as two protocols: http://www.ilo.org/dyn/normlex/en/f?p=1000:11200:0::NO:11200:P11200_COUNTRY_ID:102532.

The Albanian government has established the National Council of Labor, composed of government officials, trade unions, management, and employers’ associations, to improve social dialogue between stakeholders. The institutions governing the labor market include the Ministry of Welfare and Youth, Ministry of Innovation and Public Administration, the National Employment Service, the State Labor Inspectorate, and private actors such as employment agencies and vocational training centers. Albania has adopted a large variety of regulations to monitor labor abuses, but their enforcement remains weak due to persistent informality in the work force.

Law 108/2013 dated March 28, 2013 “On Foreigners” and various decisions of the Council of Ministers regulate the employment regime in Albania. The law limits to 10 percent the number of foreigners hired by employers in Albania. In 2015, the labor code was amended to include the temporary employment of foreigners in Albania. However, for specific projects or to attract foreign investment, employment can be regulated thorough special laws, and wages and training costs may be tax deductible.

Both employees and managers have the right to form trade unions. Trade unions are organized at both the national level (according to industrial sector) and company level. The Labor Code guarantees the right to strike as part of the right to negotiate wages and working conditions. However, strikes from economic grievances are rare in Albania. Employment contracts apply to both union and non-union workers. The two main national-level trade unions, both affiliated with the International Trade Union Confederation (ITUC), are the Confederation of Trade Unions (KSSH) and the Union of the Independent Trade Unions of Albania (BSPSH). Employment contracts can be limited or unlimited in duration, but typically cover an unlimited period if not specified in the contract. Employees can collect up to 12 months of salary in the event of an unexpected interruption of the working contract.

The state labor inspectorate is the main authority responsible for the monitoring of labor conditions and the enforcement of labor code and occupational health and safety standards. Its performance is considered inadequate due to a lack of human resources and limited financial capabilities. Furthermore, the inspectorate has no investigative and prosecution responsibilities as it submits all allegations of infringements to other law enforcement agencies.

The State Labor Inspectorate is responsible for enforcing occupational health and safety standards and regulations. Workplace conditions in the manufacturing, construction, and mining sectors are often poor and, in some cases, dangerous due to a lack of inspections and enforcement by the Labor Inspectorate.

U.S. Department of State Human Rights Report: http://www.state.gov/j/drl/rls/hrrpt

Department of Labor Child Labor Report: http://www.dol.gov/ilab/reports/child-labor 

The Overseas Private Investment Corporation (OPIC) signed an agreement with Albania in 1991. Albania has also ratified the World Bank’s Multilateral Investment Guarantees Agency (MIGA) Convention. Both instruments provide investment guarantees against certain non-commercial risks (i.e., political risk insurance) to eligible foreign investors for qualified investments in developing member countries. MIGA’s coverage covers the following risks: currency transfer restriction, expropriation, breach of contract, war, terrorism, civil disturbance, and failure to honor sovereign financial obligations. MIGA and OPIC often cooperate on projects.

For more information on OPIC please see www.opic.gov .

For more information on MIGA, please see www.miga.org .

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

*Domestic Sources: Bank of Albania http://www.bankofalbania.org/
Albanian Institute of Statistics http://www.instat.gov.al/ 
Albanian Ministry of Finances: http://www.financa.gov.al/ 

Table 3: Sources and Destination of FDI

Source: IMF Coordinated Direct Investment Survey (CDIS)

Table 4: Sources of Portfolio Investment

Source: IMF’s Coordinated Portfolio Investment Survey (CPIS) (cpis.imf.org )

Jeffrey D Bowan
Economic and Commercial Officer
U.S. Embassy Tirana, Albania
Rruga Elbasanit, Nr. 103
Tirana, Albania
+355 4 224 7285
BowanJD@state.gov

Policies Toward Foreign Direct Investment

The Government of the Republic of Cameroon (GRC) continues to rely on foreign direct investment (FDI) to sustain economic growth and build vital infrastructure projects in the country. In 2016, the GRC undertook many initiatives to attract FDI. On March 2016, Cameroon organized the first edition of “Invest in Cameroon,” an investment forum, held in Yaounde, Cameroon to attract foreign direct investment in Cameroon. On September 2016, President Biya took part in the second 2016 U.S.-Africa Business Forum organized by Bloomberg Philanthropies and the U.S. Department of Commerce. The Forum focused on trade and investment opportunities on the continent for African heads of government and American business leaders. During the event in New York, President Biya made a case for Cameroon as a good destination for FDI. Throughout 2016, the government also hosted business delegations from many countries, notably Tunisia, France, Belgium and Great Britain.

On October 20, 2016, Cameroon officially became the host of the Africa office of the European Investment Bank (EIB), following a cooperation agreement with Cameroon. The EIB has a portfolio of investment in Cameroon which spans many sectors. In February 2017, Cameroon hosted “Promote 2017—International Exhibition for Enterprises and Partnerships,” the largest trade fair in Central Africa, to which 22 U.S. companies took part alongside many hundreds of domestic and international companies. Finally, President Biya visited Italy from March 18-24, 2017 with a large delegation of economic and sector ministries. During an economic meeting with Italian business leaders, President Biya told the audience that Cameroon has a wide range of investment opportunities that leverage its strategic geographical location in the sub-region. According to the Cameroon Ministry of Economy, FDI was about 18 percent of the GDP in 2015/2016.

Cameroon does not have laws that prohibit, limit or condition foreign investment in a sector of the economy. However, the investment code has a number of general minimum requirements, which can also qualify the investor for some benefits. Local content, specifically in terms of local jobs going to Cameroonians, is increasingly becoming a requirement although it is not yet enshrined in a law. In general terms, the four criteria, though not obligatory, required to benefit from the code are (i) the number of local staff employed, (ii) the percentage of exports, (iii) the use of local natural resources and (iv) the value-added contribution to the economy.

The Cameroon Investment Promotion Agency (CIPA) in collaboration with other authorities is in charge of implementing these measures. The CIPA’s objective is to contribute to the development and implementation of government policy in the field of investments promotion. CIPA promotes the image of Cameroon abroad, contributes to the creation of an enabling business environment in Cameroon, and proposes measures to attract investors as well as improve the implementation of sector codes. The GRC prioritizes and maintains ongoing dialogue with investors through private-public formal and informal institutions. An example of these institutions is the Cameroon Business Forum, which works to improve the business climate. Another example is the Groupement Inter-Patronal du Cameroun (GICAM), Cameroon’s largest business group, which also works with government to address specific sector issues. The GRC also consults businesses on a broad range of issues such taxation, industrial and labor regulations.

Limits on Foreign Control and Right to Private Ownership and Establishment

In Cameroon, foreign businesses can set up and totally own their businesses. There is no strict or compulsory requirement to have a local partner. Subject to specific sector regulations, companies can engage in all forms of remunerative activities. There are no limits to foreign ownership or control. The State of Cameroon is the main economic actor in sectors such as upstream oil, telecom infrastructure and electricity production. These sectors have specific regulations detailing the conditions under which the private sector may invest. These regulations are not outright prohibition, but the State may grant a license (telecom) or operate through a production sharing contract (oil and gas sector). The government may screen some investment proposals in the context of standard due diligence in order to verify the credentials and professional competence of investors or investing companies. The GRC does not impose restrictions on outward or on inward investment.

If an investor cannot own the assets that it has built in Cameroon, the public private partnership (PPP) framework offers opportunities for a “Build, Operate and Transfer” (BOT) model, which enables investors to recoup their investment over time. The PPP framework is the main model recommended for foreign direct investment in large infrastructure projects. The government PPP Commission claims to have approved PPP projects worth USD 500 million since its creation.

Other Investment Policy Reviews

In recent months the Government of Cameroon and donors have conducted several economic policy reviews in the aftermath of the collapse of the oil prices. As a result of the collapse, national debt has increased to 30 percent of the Gross Domestic Product (2016), which prompted the International Monetary Fund (IMF) to downgrade Cameroon risk profile from “moderate” to “high” in the IMF debt rating. However, Cameroonian authorities argue that most global sovereign rating agencies maintained Cameroon’s rating in 2015/2016 and that the GRC debt management mechanisms enshrined in the National Debt Committee and debt monitoring institution “Caisse Autonome D’Amortissement du Cameroun” (CAA) are robust.

Standard & Poor’s credit rating for Cameroon stands at “B”, Moody’s at “B2”, while Fitch’s credit rating for Cameroon stood at “B.” All three agencies forecast a “stable outlook” for Cameroon. Authorities have endeavored to reassure investors and donors by indicating that the country is “borrowing cautiously and spending wisely.” Cameroon is currently undergoing another quasi investment policy review in the context of an imminent structural adjustment program from the IMF. Cameroon and other member countries of the Central African Economic and Monetary Community (CEMAC) agreed in December 2016 to engage with the IMF to find ways to overcome macroeconomic instability caused in part by collapse of commodity prices.

The IMF indicates that, while the Cameroonian economy has weathered these recent external shocks thus far, with economic growth remaining relatively robust, public debt has spiked rapidly causing the widening of fiscal deficit. Under the three-year plan being considered, the government will focus its attention on stabilizing public finances and boosting infrastructure projects. These infrastructure projects are expected to generate and sustain growth. During this process, Cameroon must also manage domestic security issues in the Far North Region (FNR) and also a defiant Anglophone population, which is protesting against what English-speaking Cameroonians perceive as their socio-economic and political marginalization. Although the Anglophone crisis appears non-threatening for the ruling party in terms of holding on to power, it could serve as a catalyst for more general protests against bad governance and corruption, to thereby become a driver of a larger civil society movement of discontent. The Anglophone regions are suffering some economic distress due to restrictive measures imposed by the GRC and blocking of the Internet, but there is some recent movement by Ministry of Justice and the Presidency to resolve social and political issues.

According to the IMF, the government has continued to spend heavily in order to support economic growth and address insecurity in the Far North Region. Military spending is leading to an increase in public debt (which reached an estimated 30 percent of GDP in 2016, from less than 20 percent of GDP in 2013). Assuming that a deal is finalized with the IMF, this will be the first time that Cameroon has resorted to IMF financial support since its previous three-year extended credit facility arrangement expired in January 2009. In February, the Ministry of the Economy (French acronym “MINEPAT”) presented the IMF with a 2017‑19 crisis management plan, which contains proposals for additional macroeconomic measures.

Cameroon’s economic performance is supported by some relatively strong internal factors. The government of Cameroon describes Cameroon as the “land of attractiveness for investors.” The government justifies this by the strategic location of the country. Indeed, in addition to the 1,700 km border it shares with Nigeria, Africa’s large economy, which gives direct access to 180 million potential consumers, Cameroon is also at the intersection of two economic zones, namely the Economic Community of Central African States (CEMAC) and the Economic Community of West African States (ECOWAS). Together, the two economic zones have a consumer market of over 300 million people. Cameroon also harbors substantial natural resources (17 million of exploitable forest, a large variety of extractive resources including cobalt, iron and gold, and vast arable land with excellent rainfall). Politically, Cameroon has a reputation of being politically and socially stable in a turbulent region and has recorded a sustained economic growth of over 5 percent since 2013. The sectors that are driving this growth are agriculture, services, transportation and Information & Communication Technology (ICT). This economic growth is underpinned by an emerging consumer culture. More than 50 percent of the population is under the age of 25. Unlike their parents, young people want the latest technological gadgets. They are brand conscious, want to live in urban areas, and are increasingly shopping on the Internet.

Cameroon important economic sectors and their contribution to the GDP (2013)

Business Facilitation

In order to facilitate the creation of businesses Cameroon has business creation centers around the country. These are known in French as the Centres de Formalites de Creation d’Entreprises (CFCE), which can finalize the creation of a new enterprise within 72 hours. The CFCE also provides start-up tool kits for new entrepreneurs, and is referred to as a “one stop shop” for small to medium enterprises. Cameroon is also a member of the Organization for the Harmonization of Business Law and Accounting in Africa (known by its French Acronym OHADA). The objective of OHADA is to create a better investment climate by regional standardization of laws so as to attract investment and to foster more economic growth in the markets of the seventeen (17) OHADA member countries.

Cameroon’s ministry of small and medium size enterprises is developing an online business registration process. The government is assisted in this project by the United Nations Conference on Trade and Development (UNCTAD). More information can be found on https://businessfacilitation.org/countries/ .

https://www.cfce.cm/  Centres de Formalites de Creation d’Entreprises (CFCE) provide a business toolkit to entrepreneurs.

http://www.statistics-cameroon.org/  The Institute of National Statistics provides quantitative indicators on the economy and sectors.

www.apme.cm/  This agency for the promotion of small and medium size enterprises is specifically dedicated to the promotion and support for small and medium size enterprises.

Outward Investment

Although the priority for the government of Cameroon in to attract inward investment, the country does not restrict domestic investors from investing abroad. There are a few Cameroonian companies that have expanded across Sub-Saharan Africa, Europe and Asia. Afriland First Bank is a full-service bank in Cameroon, with subsidiaries in 14 African countries with the holding company based in Switzerland. Another Cameroonian company in the instant money transfer business, Express Union is present in 10 African countrie. Tradex, a subsidiary of the State-owned national oil company Societe National des Hydrocarbures (SNH) has invested in neighboring Central African Republic and Chad. Further examples can be seen with the Societe des Brasseries du Cameroon (SABC), the largest beer brewery in the country. SABC is now owned by the French group CASTEL after the State sold shares to the French family owners. SABC is listed in Paris and on the New York Stock Exchange.

• Belgium-Luxembourg: Convention between the Union Belgo-Luxembourg Union for the reciprocal promotion and protection of investments 1980
• Canada: Investment Promotion and Protection Agreement (FIPA) in Toronto on March 3, 2014
• China: Bilateral Investment Treaty Agreement signed on May 10, 1997
• Egypt: Memorandum of Understanding with the General Authority for Investment
• Germany: Treaty between the Federal Republic of Germany and the Federal Republic of
• Cameroun concerning the encouragement of investments, 1962
• Guinea: Mutual discussions and framework agreement
• Italy: Economic, technical and financial development cooperation Agreement between the Government of the Republic of Italy and the Government of the Republic of Cameroon, 1989)
  Agreement between the Government of the Republic of Italy and the Government of the Republic of Cape Verde on the reciprocal promotion and protection of investments 12/6/1997
• Mali: Cultural Agreement and Commercial agreement signed March 17, 1964 in Bamako
• Mauritania: Framework agreement for general bilateral cooperation following recognition after independence
• Mauritius: Framework agreement for general bilateral cooperation following recognition after independence
• Morocco: Economic and technical cooperation agreement signed in Rabat on June 25, 1974
• Netherlands: Agreement signed in 1967
• Romania: Agreement between the Government of the Socialist Republic of Romania and the Government of the Republic of Cameroon on the mutual promotion and protection of investments 30.8.1980)
• Switzerland: Cameroon-Switzerland Bilateral Investment Treaty signed in 1964
• Turkey: Turkey and Cameroon signed a number of agreements, including Cultural and Scientific Cooperation Agreement on (March 06, 2002), Trade, Economic and Technical Cooperation Agreement on (March 04, 2002), Joint Economic Commission Protocol on (July 08, 2003)
• United Kingdom: Agreement between Great Britain and the Government of the United Republic of Cameroon for the Promotion and Protection of Investments March 04, 1982
• United States of America: The U.S. and Cameroon signed a Bilateral Investment Treaty (BIT) in 1986 that came into force in 1989
• Cameroon is not on the list of countries which have signed an FTA with the U.S., nor the list of countries which have Bilateral Taxation Treaties with the U.S.

Transparency of the Regulatory System

The World Bank Doing Business 2017, found persistent challenges in enforcing contracts in Cameroon. Globally, Cameroon stands at 160 in the ranking of 190 economies on the ease of enforcing contracts. However, the report also indicates that Cameroon made enforcing contracts easier by creating specialized commercial divisions within its courts of first instance. Cameroon has transparent policies and effective laws to foster competition on a non-discriminatory basis. Officials argue that these are indicators of “clear rules of the game.” But operationally and in practice, the courts have severe logistical challenges. For example, courts data are manually recorded because the legal system is not computerized. In many courts around Cameroon, court records are filed in paper and stored in folders, which make them subject to fire and deterioration.

In terms of standards, Cameroon’s commercial legal system follows the OHADA rules which are supposed to be aligned with International Financial Reporting Standards (IFRS). But enforcement is weak partly because of lack of capacity. Cameroon does not train enough specialized judges in the commercial and economic fields. Consequently, poor enforcement of laws and accounting standards tends to create confusion for foreign investors. Despite efforts to align OHADA standards to international norms, GRC accounting regulations remain obsolete in the context of rapid developments in international finance and capital markets. To circumvent the problem, U.S. enterprises and investors often maintain two sets of accounting records, one in accordance with U.S. Generally Accepted Accounting Principles (GAAP, the U.S. accounting standards) and suitable international standards, and another set to address the OHADA standards and GRC reporting requirements.

In view these dysfunctions and weaknesses in the courts, arbitration is increasingly becoming the solution of choice to solve business disputes. It is possible in Cameroon to solve some complex legal disputes through arbitration. In fact, arbitration exists in the OHADA corporate law. Since OHADA is a supra national law, Cameroon is bound by its decisions which follow international norms.

The Parliament of Cameroon is the source of all regulatory powers. The ministries initiate draft laws for different areas of the national life. A few laws are reviewed on a yearly basis. This is the case for the public finance law, which was just revised and published in both English and French in 2017. Institutions and groups can also initiate legislation. In rare cases, draft bills or regulations are made available for public comment and there is some level of consultation process. The National Institute of Statistics provides quantitative analysis that may be used during the review. However, public involvement in Cameroon is limited and oversight or enforcement mechanisms are weak, and therefore do not ensure that governments follow administrative processes. Appeal and pressure mechanisms are limited if the government does not consider the observations of civil society groups in the final draft. Consequently, the executive branch is responsible for 98 percent of laws, including the most relevant texts for businesses.

Typically, the legal texts submitted to parliament by the executive are voted unchallenged because of the powerful majority of the ruling party in the legislative body. After voting, the texts are recorded in the Official Journal, which is the official register of the Cameroonian government. The Official Journal is a paper-based record system. The State does not have an electronic or online version. The legislation process is completed when the President of the Republic issues an implementation decree (Executive power), which generally details the ways in which the law will be implemented. The power to issue decrees grants a high level of influence to the Executive branch, on the final version of the laws because the decree may either strengthen or weaken the implementation of law. This is because individual ministries and bodies in the civil administration, which are parts of the executive arm, are responsible for the effective implementation of individual laws and regulations. In some cases, as the execution of the laws evolves from the center (the executive and the legislative) to the lowest level of administration, or from urban cities to the rural areas, their strength, effectiveness and understanding tend to weaken.

Over the past few years, with the support of donors for capacity building, Cameroon has undertaken reform to improve the efficiency of the legal system and of public finance procedures. Some of the reforms are supported and funded by multilateral and bilateral donors. The reform of the budget process, which helped Cameroon to introduce “Program Budget,” for example, is now in full swing. If fully implemented, many areas of the public finance reforms could have a positive impact on foreign investors, create a better investment climate and lead to more broad-based inclusive growth.

International Regulatory Considerations

Cameroon is a member of the CEMAC. The treaties of this regional body supersede the laws of the member states. Cameroon is also a member of the United Nations system and a party to many international conventions. Cameroon has been a member of World Trade Organization (WTO) since 13 December 1995 and a member of GATT since 3 May 1963.

Legal System and Judicial Independence

The Cameroon legal system is a blend of Roman or common law and Cameroonian judges are fluent, well-trained and competent in the two systems. Courts are structured in a pyramidal way with the Supreme Court functioning as the highest court in the land. Regulations and enforcement actions are appealable and can be adjudicated in the national court system. Contracts are enforced through the courts or through arbitration. The country’s commercial law is the OHADA law.

The head of the executive power, namely the President of the Republic is also the Supreme Head of the Judiciary. This constitutional status gives the executive branch immense powers to influence the functioning of the judiciary matters. This influence can be exerted through his power of appointment. The President of the Republic can appoint and demote judges, and he can decide on the internal and territorial deployment of legal institutions such as courts. In the absence of proper checks and balances the current judicial process in unpredictable. The outcome of legal processes are uncertain because judges are not immune from pressure or from simple logistical challenges such as the lack of computers to electronically and digitally process court documents.

Laws and Regulations on Foreign Direct Investment

The Law No. 2013/004 of 18 April 2013 defining incentives for private investment in Cameroon proposes common and special incentives while indicating the State’s commitments with regard to private investors in Cameroon. This important law remains valid for domestic and foreign investors. Additional laws and regulations are available on the website of the Cameroon ministry of finance (http://www.minfi.gov.cm/index.php/en/documents ). In addition to these sources, the Investment Promotion Agency offers a “one-stop-shop” website for investment, with relevant laws, rules, procedures, and reporting requirements for investors http://www.investincameroon.net/home2/ ).

Competition and Anti-Trust Laws

The National Competition Commission (of the Ministry of Commerce) is the official body in charge of competition regulations.

Expropriation and Compensation

Decree N°.87-1872 of 16 December 1987 and the subsequent implementation decree N°.85-9 of 4 July 1985 lay down the procedure governing expropriation for public purposes and conditions for compensation. Some of the provisions of these legal texts were repealed by Instruction n°005/I/Y.25/MINDAF/D220 of 29 December 2005. Essentially, for the general public interest, the State may expropriate any person or entity from privately owned land. The laws also lay down the formalities to be observed within the context of the procedure, both at the central and local levels. In recent years, the government of Cameroon generally expropriated in the context of the construction of large infrastructure projects such as roads and hydroelectric dams. The government has a compensation process in place to meet the losses of those affected by such decisions. In practice, over the past 10 years many cases of compensation procedures have been marred in serious corruption schemes masterminded by civil servants in charge of the process. These incidents have significantly diluted the trust in the whole process throughout the country.

Dispute Settlement

ICSID Convention and New York ConventionInternational

Cameroon ratified the “International Centre for Settlement of Investment Disputes” (ICSID) Convention on 3 January, 1967 and the New York Convention on 19 February, 1988. But there is no specific domestic legislation providing for enforcement under the 1958 New York Convention and for the enforcement of awards under the ICSID Convention.

Investor-State Dispute Settlement

The OHADA-signatory nations adopted a uniform act on arbitration (the Uniform Act) on March 11, 1999. The Uniform Act sets out the basic rules applicable to any arbitration, where the seat of arbitration is located in an OHADA member state. The Uniform Act is based on the United Nations Commission on International Trade Law (UNCITRAL) model law. It supersedes the national laws on arbitration of the OHADA states. Cameroon’s arbitration law is contained in its code of civil and commercial procedure in the third volume, Articles 576 to 601.

International Commercial Arbitration and Foreign Courts

There have been cases of disputes between Cameroonian partners and U.S. companies, but they tend to be solved through arbitration. General misunderstandings between partners about contractual commitments tend to cause conflicts. But such cases have been infrequent over the past 10 years. Issues related to Bilateral Investment Treaty (BIT) or Free Trade Agreement (FTA) with an investment chapter with the United States, have thus far not emerged in claims by U.S. investors. Local courts may recognize foreign arbitral awards issued against the GRC, but they are not well equipped to enforce such decisions. In general, foreign investors complain more about administrative harassment or bottlenecks, and less about extrajudicial actions.

The Embassy has been successful in engaging and reaching out to key government officials when U.S. companies face disputes or harassment. In practice, the duration of dispute resolution will depend on the complexity of the case, and no standard timeline exists or can be estimated. This alternative approach can be further complicated by the inherent dysfunctions within the public administration, such as bureaucratic red tape, corruption, and lack of technical expertise on modern commercial contracts.

Additional alternative dispute resolution may involve mediation and negotiations, also possibly through third-party binding arbitration. The OHADA system serves both as domestic and primary reference legislation. However, the Groupement Interpatronal du Cameroon (GICAM), the country’s most powerful business lobbying group, has an arbitration center (Centre d’arbitrage du Groupement interpatronal du Cameroun), which is based in Douala. Douala is Cameroon’s largest city and trade hub, and the arbitration center is modern and well-equipped.

As a treaty, the OHADA prevails over domestic laws. An international arbitration award can prevail especially if operating through the OHADA framework. The Common Court of Justice and Arbitration (CCJA) enforced under OHADA are both an arbitration institution and a judicial court, with a remit covering all the OHADA states. Judicial processes are bureaucratic, expensive, time-intensive and lengthy to pursue. This is true even for domestic and state-owned companies which, like their foreign competitors, also suffer from the weaknesses of the legal system and are not guaranteed any better treatment in case of dispute.

Bankruptcy Regulations

Cameroon has bankruptcy laws, which recognize the right of creditors, the equity of shareholders and other types of liabilities. Bankruptcy is not criminalized, if it is not a deliberate collusion to avoid tax or mislead investors. Globally, Cameroon stands at 122 in the ranking of 190 economies on the ease of resolving insolvency. According to data collected by Doing Business 2017, resolving insolvency takes 2.8 years on average and costs 33.5 percent of the debtor’s estate, with the most likely outcome being that the company will be sold as piecemeal sale. The average recovery rate is 15.8 cents on the dollar.

Investment Incentives

Cameroon’s 2013 investment law lists several types of investment incentives for investors and also specifies the conditions that they have to meet, in order to benefit from those incentives. This law lays down incentives applicable to Cameroonian or foreign legal entities, whether or not established in Cameroon, conducting business therein, or holding shares in Cameroonian companies, with a view to encouraging private investment and boosting national production. For example, during the establishment phase (which cannot exceed five years), the new code provides for exemptions from VAT and duties on key services/assets (including an exemption from stamp duty on the lease of immovable property). During the operation phase (which cannot exceed 10 years), further exemptions from or reductions of other taxes (including corporate tax), duties (such as stamp duty on loans) and other fees are granted. Overall, this law seeks to facilitate, promote and attract productive investment in order to develop activities geared towards strong, sustainable and shared economic growth as well as job creation. In a context where businesses have to navigate between national and regional incentives, U.S. companies and investors must seek local and regional expertise if they plan to operate in the economic zone of Central Africa (The Economic and Monetary Community of Central Africa).

http://investincameroon.net/fr/download/law-n-2013004-of-18-april-2013-to-lay-down-private-investment-incentives-in-the-republic-of-cameroon .

Common incentives:

Common incentives are granted to investors during the establishment and operation phases. The investor may, during the operation phase, which may not exceed 10 (ten) years, according to the scale of investment and expected economic returns, as applicable, enjoy exemptions from or reductions of payment of several taxes, duties and other fees including corporate tax, tax on profit and stamp duty on loans. In addition, any investor may benefit from a tax credit provided he or she meets one of the following criteria: (1) employs at least 5 (five) graduates each year, (2) combats pollution, and (3) develops public interest activities in rural areas.

Tax and customs incentives:

The investor shall enjoy the following benefits during establishment phase, which may not exceed 5 (five) years, with effect from the date of issuance of the approval:

• Exemption from stamp duty on establishment or capital increase;
• Exemption from stamp duty if immovable property used exclusively for professional purposes and that is part of an integral part of the investment program;
• Exemption from transfer taxes on the acquisition of immovable property, land and buildings essential for the implementation of the investment program;
• Exemption from stamp duty on contracts for the supply of equipment and construction of buildings and installations, that is essential for the implementation of their investment program;
• Full deduction of technical assistance fees in proportion to the amount of the investment made, calculated on the basis of the total amount of the investment;
• Exemption from VAT on the provision of services related to the execution of the project and obtained from abroad,
• Exemption from stamp duty on concession contracts;
• Exemption from business license tax;
• Exemption from taxes and duties on all equipment and materials related to the investment program;
• Exemption from VAT on the importation of equipment and materials; and
• Immediate removal of equipment and material related investment program during clearance operations.

Administrative incentives:

Subject to the fulfillment of the obligations incumbent on them, notably with respect to the exchange rate regime and the tax legislation, investors may enjoy the following benefits:

• The right to open in Cameroon and abroad local and foreign currency accounts and to carry out transactions on such accounts;
• the right to freely use and or keep abroad funds acquired or borrowed abroad, and to freely use such;
• the right to freely keep abroad dividends and proceeds of any kind from capital invested, as well as proceeds from the liquidation or sale of their assets;
• the right to directly pay abroad non-resident suppliers of goods and services essential for conduct of business; and
• free transfer of dividends and proceeds from the sale of shares in case of disinvestment.

Also, with respect to foreign staff employed by the investor and resident in the Republic of Cameroon, they shall enjoy free conversion and free transfer to their country of origin of all or

part of amounts due them, subject to prior payment of various taxes and social security contributions to which they are liable in compliance with the regulations in force. Finally, the Government shall institute facilities necessary for the establishment of a specific visa and a reception counter at all airports throughout the national territory for investors, subject to their presentation of a formal invitation from the body in charge of investment promotion of Small and Medium sized Enterprise (SMEs).

There are additional incentives in priority economic sectors. In addition to the above-mentioned incentives, specific incentives may be provided to enterprises which carry out investments that contribute to the attainment of the following priority objectives:

• Development of agriculture, fisheries, livestock, and plant, animal or fishery product packaging activities;
• Development of tourism and leisure facilities, social economy and handicraft;
• Development of housing, including social housing;
• Promotion of agro-industry, manufacturing industries, industry, construction materials, iron and steel industry, construction, maritime and navigation activities;
• Development of energy and water supply; encouragement of regional development and decentralization;
• The fight against pollution and environmental protection;
• Promotion and transfer of innovative technologies and research and development;
• Promotion of exports;
• Promotion of employment and vocational training.

Foreign Trade Zones/Free Ports/Trade Facilitation

In Cameroon, Foreign Trade Zones (FTZ) are demarcated and fenced geographic areas, with controlled access, where some standard trade barriers, tariffs, quotas, or other bureaucratic requirements are lifted or lowered to attract investments. Cameroon passed a special law instituting FTZ in 1990. Applications for an authorization to establish an industrial free zone are submitted to the National Office for Industrial Free Zones. The authorization to establish an Industrial Free Zone is granted by the Minister in Charge of Industrial Development. Some of the benefits of the FTZ are built into commercial, fiscal, custom and labor codes.

Performance and Data Localization Requirements

The government of Cameroon does not mandate local employment except as an incentive to entice foreign investment. The government of Cameroon encourages investors to create jobs and employ local labor. These are not compulsory and there are no legal restrictions on senior management and boards of directors either, although local content (goods, raw material, technology and manpower) tend to facilitate the understanding of the domestic business environment. Prospective investors and their employees can travel to Cameroon on standard intentional visas. The fees may vary per country of application. Once they settle in Cameroon they can apply for long term residence permits.

The government of Cameroon applies the visa reciprocity rules to a limited extent, but companies have in the past complained about the difficulty of obtaining work permits or the fact that work visas expire after six months and frequently are single entry. Longer term work permits are now said to be available, but they have not been issued to our interlocutors unless included as residency work permits, a different category with more complicated application procedures. The government does not impose rules on the recruitment of senior management nor excessively onerous visa, residence, work permit, or similar requirements inhibiting mobility of foreign investors and their employees.

Enforcement procedures for performance requirements are not yet standardized, but the government generally develops terms of reference on a case by case basis for contract performance. Cases of “forced localization” have not been reported and the government has not stated intentions to maintain, increase or decrease performance requirements.

Foreign information technology (IT) providers are not required to turn over source code and/or provide access to encryption. But they can be required to provide such data in cases of cybercrime under the national cybercrime law. The same legal principle applies to the transfer of business-related data. On the other hand, the government is trying to build data storage centers in order to manage IT data. In the meantime, all cellphone users have a legal requirement to register their phone number with the government.

Real Property

Interests in property are recognized in the law. For mortgage transactions between two private parties, a proper contract is required for the agreement to be binding and enforceable in the courts. Liens have to be recorded in the contract. A registry of land title exists in Cameroon. The land rights of indigenous peoples, tribes or farmers are recognized in the Constitution.

Records from the Ministry of State Property and Land Tenure (French acronym “MINDAF”) indicate that land registration rates have not significantly increased since colonial times.

Between 1884 and 2005 only 125,000 title deeds had been issued. On average, this represents approximately 1,000 titles per year, covering less than 2 percent of the land in Cameroon. In 2009, a study by the African Development Bank (AfDB) identified other distinctive patterns in land ownership. For example, formal land registration is more common in urban (60 percent) than in rural areas. Existing legislation does not discriminate against foreign land owners but land disputes are common between Cameroonian citizens. The disputes are generally caused by non-respect of commercial sales contracts or by informal sales of land. Illegal occupations of lands are also common. Globally, Cameroon stands at 177 in the ranking of 190 economies on the ease of registering property.

Intellectual Property Rights

The legal structure for Intellectual Property Rights (IPR) and corresponding enforcement mechanisms are weak. Infringement on IPR is especially common in the media, pharmaceutical, software, and print industries. No new laws have been enacted in the last year, and IPR protection remains uniformly weak. The country occasionally seizes and publicly burns counterfeit goods, but these actions are not systematically documented, and no cumulative data exists on the seizures. Imported counterfeit goods, such as fake luxury watches, clothes, copied movies in DVDs and music-CDs are prevalent in the local market. Customs officers have authority to seize, store and then eventually destroy these counterfeit goods. National institutions are overwhelmed by the problem and have no influence on the countries of origin for problems, notably China, India, Nigeria, and Pakistan. Cameroon is not listed in the 2014 Special 301 Report or the Notorious Markets Report.

https://ustr.gov/sites/default/files/ USTR%202014%20Special%20301%20Report%20to%20Congress%20FINAL.pdf 

Customs officers have seizure authority, but destruction is deferred until detailed review of the property is made by officials, transparent to the property owner and/or rights holder. The following are common items that are seized:

• Counterfeit medication
• Pirated music, films and software
• Fake copies of luxury consumer goods (clothes, shoes, glasses, watches, perfumes)
• Fake car tires simulating major brand names
• Fake spare car parts

Report from the World Intellectual Property Organization (WIPO) shows the following data for Cameroon:

Cameroon is a member of the African Intellectual Property Organization (OAPI –Organisation Africaine de la Propriete Intellectuelle), the main organization that ensures the protection of intellectual property rights in most African Francophone countries. OAPI is located in Yaounde. Individuals and companies can register their IP and brands directly at the OAPI.

Once registered there is legal protection and recourse for the inventor or IP rights holder, although protection is realistically more limited once commercial products reach the market.

IP protections are deteriorating in Cameroon because of the influence of supply countries such as China and India, both of which illegally export volumes of counterfeit goods. 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/ . Cameron does not appear to be listed in the notorious market report in 2016.

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

Cameroon is open to foreign investment and has been able to attract well known global brands that have invested in the country. U.S. companies such as General Electric, Boeing, Microsoft, and Oracle all have large projects in Cameroon. There are no governmental restrictions at this time and no policy obstructions are interfering in the investment markets. In October 2016, JP Morgan led senior executives from five investment management companies to Cameroon. These investment firms which comprised Franklin Templeton Investments, Fidelity, Lazard Asset Management, Grantham Mayo van Otterloo & Co. (GMO) and Alliance Bernstein (A/B Global) comprise collectively around USD5.3-Trillion in assets under management, with about USD 145-million USD already invested in Cameroon. Another group of prospective investors led by Citi Bank visited Cameroon in late October 2016. Collectively, this group represents a portfolio of USD 3.5 Trillion in assets under management. At least three major U.S. investment funds invested USD 145 in Cameroon’s first Eurobond which was issued in 2015.

The Douala Stock Exchange (DSX) is one of the youngest stock exchanges in Sub Saharan Africa. It was created in 2001 and currently has only three companies listed and five sovereign bonds. The regulatory system of the DSX permits portfolio investment, but the market is still in its infancy, suffering from low liquidity and bureaucratic inertia.

International capital market actors, more precisely private equity firms, operate in Cameroon. These new actors are enabling the connection of Cameroon to larger international investors. There are also major bank credit instruments available on the open market and venture capital operations are gaining traction in the Cameroon business sectors. Foreign investors can get credit on the local market and the private sector has access to a variety of credit instruments. Cameroon is connected to the international banking payment systems and there are no government restrictions on payments or transfers. The banking system is regulated by the regional six member country Central Bank (French acronym “BEAC”) called the Bank of Central African States. The bank follows IMF standards. Foreign investors – including from the U.S. as well as international banks – that provide business credit, personal finance, and even mortgage instruments on real estate, are beginning to show great interest in Cameroon.

Money and Banking System

The banking sector is regulated, but financial institutions tend to suffer from under-performance on local debt and un-serviced loans from both commercial and individual debtors. Less than 10 percent of Cameroonians have access to banking services. According to the World Bank, non-performing loans were 10.31 percent of total bank loans in 2016.

1. Afriland First Bank Group (USD 2.3 billion, 2011) is a large financial services provider in Cameroon with customer deposits in excess of USD 951 million (CFA: 460 billion), as of December 2012
2. Banque Internationale pour l’Epargne et le Credit (USD 2.1 billion 2011)
3. Societe Generale de Banque au Cameroun (USD 972 million 2011) with global assets of €1.308 trillion (2014)
4. Standard Chartered Bank Cameroon (USD 706 million 2011)
5. Ecobank (USD 508 million 2011) with total assets of USD 22.5 billion (2013)

The Bank of Central African States (Banque des Etats de l’Afrique Centrale, BEAC https://www.beac.int/ ) is the central bank that serves six central African countries that form the Economic and Monetary Community of Central Africa (CEMAC) including Cameroon, Central African Republic, Chad, Equatorial Guinea, Gabon, and the Republic of Congo. BEAC has been in operation since 1972, although rocked by a few embezzlement scandals in 2009 and 2010. The current governor of BEAC is Lucas Abaga Nchama (from Equatorial Guinea).

There are no restrictions on foreigners establishing bank accounts, credit instruments, business financing or other such transactions. Rules on all forms of mergers and acquisitions, including hostile, are governed by OHADA and are detailed in a lengthy body of commercial, legal and accounting codes. The OHADA sections on mergers and acquisitions are the Napoleonic version of our SEC regulations.

Foreign Exchange and Remittances

Foreign Exchange

There are no restrictions or limitations placed on foreign investors in converting, transferring, or repatriating funds associated with an investment. Funds may be converted to any world currency. The national (regional) currency, the Central African CFA Franc, (or the “CFA”) is pegged to the Euro and fixed at a specific rate. The Central Bank controls monetary policy, follows IMF standards, and is independent from member states.

Cameroon has not passed any laws which change or tighten access to foreign exchange for investment remittances. There are no time limitations on transactions beyond the classic banking transactions timeline. Remittances policies and banking transactions are regulated by the regional Central Bank. Foreign investors can remit through convertible and negotiable instruments through legal channels recognized by the regional central bank. Any incidence of currency manipulation tactics is handled by the regional central bank.

The 2015 Finance Bill increased taxes on each external outbound transfer by 33.33 percent, causing the suspension of all outbound transfers of top international operators namely Western Union, MoneyGram, Ria, Sigue, and Money Express, and also for the their agents & sub-agents. The measure also had another unintended consequence, to the extent that it has stimulated informal transfers or quasi “black market” activities especially, on the Cameroon- Dubai and Cameroon-China corridors.

Remittance Policies

Domestically, the remittance market is expanding. Cameroon currently counts more than 6 million registered mobile money subscribers. In addition, 1.5 million people are using 4 digital solutions currently offered by banks and mobile phone companies, namely ATM, mobile wallet, mobile debit card and website. These systems are supporting various forms of remittances and financial services.

Soverign Wealth Funds

Cameroon does not have a sovereign wealth fund.

The Government of Cameroon has over 130 state owned enterprises (SOEs) in which it has majority ownership, and which operate in more than 8 key sectors of the economy including strategic ones such as agribusiness, energy and mining. SOEs are also present in real estate, transportation, services, information & communication, finance and travel (tourism).

In Cameroon, a State-Owned Enterprise (SOE) is an enterprise partly or totally owned by the GRC. Some SOE are profit oriented (70 percent), while others are set up to provide public services. In other cases, SOEs themselves are so dominant, because of their quasi-monopoly, that they often act as de facto regulators, for example in telecom and in the media. Data on SOEs’ R&D and share of public contracts are not publicly available. Inside the GRC’s portfolio of companies, there are intricate cross-holdings, whereby various state institutions mutually hold equities in SOEs. Shareholders in SOEs include the National Hydrocarbons Company (SNH), the Hydrocarbon Price Stabilization Fund and the National Social Security Fund, which together have stakes in more than 30 state-owned entities. The largest holdings are controlled by National Investment Company (NIC) with shares in more than 32 enterprises. In 2010, the NIC valued the GRC’s stakes to be worth USD 516 million or one fifth of the national budget.

Operationally, the private sector enjoys technological competitive advantages and flexibility to respond to market conditions that bureaucratic and over-staffed SOEs cannot replicate. Delivery of products and services to the markets still depends on price-competitiveness and quality of goods offered, so inferior SOE products and services (e.g. Internet, cable television and cellular telephone offerings) face legitimate private-sector competition. The government does not publish data on percentage of expenditures SOEs allocate to research and development. SOEs can source equipment, purchase goods, and acquire services from the private sector, including overseas providers in the United States.

Financially, some SOEs have a legal ability to contract debt and, in so doing, generate contingent liabilities for the state. They also have a history of accumulating unpaid tax arrears while at the same time benefitting from preferential access to land and to public funds through State subventions. Private companies do not automatically have such advantages. The Audit Chambers of the Supreme Court of Cameroon indicates in its yearly reports that SOEs are not financially transparent. Only about 22 percent of these structures publish financial accounts. Other reports have highlighted corruption cases involving managers of SOEs and unveiled inefficiencies, severe dysfunctions and opacity of the management of SOEs. These problems are exacerbated by the fact that over the past years, the government has not imposed any performance targets, productivity requirements and quality of service standards nor any significant budget constraints on SOEs. The governing boards and senior executive teams are political appointees and connected individuals, they have means to avoid tax burdens levied on private enterprises, receive specialized consideration for subsidies and enhanced operating budgets, and obtain generally preferential treatment from the government (including courts).

Cameroon is an observer under the World Trade Organization’s Agreement on Government Procurement (GPA), but SOEs may receive a larger percentage of government contracts/business than their private sector competitors, as it is not clear if SOEs are covered under the agreement.

In Cameroon law, ownership in SOEs is regulated by laws. The government claims that its regulations and codes comply with international standards, but over the past two decades the regulations and code governing SOEs have become obsolete since they were introduced when the GRC was the dominant economic actor in most sectors. Since then, new actors, notably domestic and international private companies, have emerged and are finding it difficult to compete in a landscape where the GRC maintains specific privileges in the name of the public good on behalf of non-transparent SOEs.

Although individual SOEs are generally placed under the tutorship of a sector ministry, the entire portfolio is heavily centralized. The management reports to line ministries but the board of directors are directly appointed by the President of the Republic who also determines the corporate governance structures. The Technical Committee for Rehabilitation within the Ministry of Finance is responsible for the financial surveillance. Most board members are former ministers or leading members of the central committee of the ruling party appointed by the President. In most cases they do not have the expertise, experience and sound understanding of the enterprise or sector they are required to serve in. This misalignment of competence affects the performance of SOEs. In a 2016 report, the International Monetary Fund (IMF) observed that the profitability and financial autonomy of SOEs have deteriorated in recent years, draining scarce budget resources, partly because of weak corporate governance.

Privatization Program

Cameroon enacted major privatization policies in the 1990s and early 2000 under the purview of international donors such as the International Monetary Fund and the World Bank. The process has been stalled for over a decade, but market pressures continue to mount for additional privatization efforts. Data shows that GRC had stakes in 171 entities in 2004. Since then, 30 companies had been privatized. An additional list of 10 companies have been scheduled for privatization since 2005 (examples CAMAIRCO, CAMTEL, SCDP, SODECOTON) for more than ten years.

In general privatization appears to on hold. The government favors Public Private Partnership (PPP) or some variations of outsourcing of/contractual management, with the State retaining some ownership of assets or of the business, rather than outright privatization. In some cases, the State also prefers to take participation in ventures, such as mining companies, rather than creating a state-owned company. The framework for PPP can be found at http://www.ppp-cameroun.cm/uploads/Telechargements/cadre-juridique-des-PPP-recueil-des-textes-en.pdf .

This is evident in the oil and gas sector, where the government has a dominant presence in extraction, refinement, distribution, and storage of oil and gas. Similar dominant positions exist in other sectors of the economy – particularly transport. The GRC controls the vast majority of transport infrastructure (airports, seaports, and road networks) through companies such as Cameroonian Airline Company (Camair-Co), Cameroonian Shipping Lines (CAMSHIP), Cameroon Shipyard and Industrial Engineering Ltd. (CNIC), and Cameroon Rail Network (CAMRAIL).

Moreover, in addition to the 119 SOEs featured in a recent survey by the IMF(2015), the government of Cameroon has in recent years expanded its foothold in the most important economic sectors. In financial services, the GRC is creating two new banks to fund agriculture and provide finance for small and medium size enterprises. These new State-funded banks will compete with 13 already existing domestic and international private banks. In the energy sector, the government created the Cameroon Electricity Transport Company (SONATREL), a wholly State-owned company to manage electricity infrastructure. Similar plans are underway to allow the Electricity Development Corporation of Cameroon (EDC) to become a water marketer for hydroelectric dam operators. In manufacturing, the GRC is setting up a fertilizer plant with a German firm, an agricultural tractor assembly plant with India, and cement factories with Nigerian and Moroccan firms. In some sectors, this dominant position of the State could distort the competitive landscape.

Foreign investors can participate in the privatization programs. According to some analysts, of the 30 State-owned companies privatized by 2004, the majority (22) were won by foreign bidders. The public bidding on tender offers is transparent. They are advertised in the media, but the actual process of awarding contracts may still be tainted by corruption, particularly on very large scale projects. The listing of public tenders in the Cameroon Tribune newspaper and publication of which firms received the contract will not, in and of themselves, result in a fully transparent process of awards. Many other practical problems may continue years after the contract has been granted. This is the case in some large government projects where the government has accumulated arrears payments to major road construction companies causing delays and in some cases severe financial stress to the contractors.

Responsible business conduct is not regulated by law in Cameroon. However, the GRC has enacted laws that cover issues related to what is locally considered “corporate social responsibility” or CSR. There are additional initiatives in the private sector to foster a corporate social responsibility culture. All major infrastructure projects in Cameroon are compelled to conduct an Environmental and Social Impact Assessment (ESIA) to establish the impact of the projects on people and nature. Cameroon’s ESIA law strives to follow World Bank standards. A Ministry of Environment and Forestry was created in April 1992 with a mandate to elaborate, implement and follow up the national policy of environment; a master law August 1996 related to environmental management prescribes environmental impact assessment for all projects that can cause environmental degradation. The ESIA is fast becoming an important and unavoidable compliance step for foreign and domestic companies. Cameroon is also compliant with the Extractive Industries Transparency Initiative (EITI).

Cameroon works with non-governmental organizations and multilateral partners in the private sector to improve, monitor, and promote the effectiveness of legislation and the enforcement of laws on human rights. The country has a human rights commission, which strives to educate people, institutions and the private sector on these issues. However, the country faces challenges when it comes to implementing these principles in general, because of the dysfunctions in the legal systems, or when human right issues intercept with domestic political issues. In addition, the OHADA laws have provisions for corporate governance, transparent accounting, and fair executive compensation standards to protect shareholders.

In Cameroon, corruption is punishable under sections 134 and 134 (a) of the Pena1 code of Cameroon. From November 2012 to December 2015, 112 serious cases of corruption are in courts. Since then 14 more officials have been arrested and are on trial for corruption and embezzlement of public funds. Prior to these cases, the courts had judged and jailed senior government officials for acts of corruption. Since inception, the Special Criminal Tribunal has handled over 123 cases and recovered USD 5.5 million USD worth of state funds. Most legal observers estimate that this amount is minute compared to the huge sums allegedly stolen. The cases have revealed complex levels of collusion inside and outside the civil service. Embezzlements are fueled by several dysfunctions within the civil service, and an ambient environment of conflicts-of-interests, notably in government procurement and overall due to weak supervision.

U.S. firms indicate that corruption is most pervasive in government procurement, award of licenses or concessions, transfers, performance requirements, dispute settlement, regulatory system, customs and taxation. The private sector is also infected although public institutions have historically been more vulnerable to corruption. The government has introduced anti-corruption mechanisms and measures for all economic actors, but provides little support to “whistle blower” cases and especially non-governmental organizations. However, in recent years, private companies have initiated their own peer anti-corruption sensitization measures. Cameroon is signatory to the United Nations and the African Union anti-corruption initiatives, but these international initiatives have practical limited effects on the enforcement of laws in the country. The newly formed Business Coalition Against Corruption (BCAC) is rapidly growing in private-sector membership and influence.

In the civil service, cronyism, nepotism, tolerance for serious conflicts of interest and also collisions to defraud the State abound. The government declares that it is committed to fighting corruption but appears overwhelmed by the daunting task, or complicit in the system of clientelism that harbors corrupt actors. In some extreme instances, civil servants blatantly violate laws and then offer bribes to State inspectors so that they are not investigated and prosecuted. It is a vicious cycle that replicates, metamorphoses, and perpetuates itself in an environment of apparent impunity. Officially, bribes are prohibited and the State has many institutions that are supposed to fight against systemic corruption. Cameroon has signed up to many international anti-corruption agreements. But this scourge continues to plague the civil service at almost every level (government procurement, award of licenses or concessions, transfers, performance requirements, dispute settlement, regulatory system, customs or taxation) with private companies paying a heavy price despite several anti-corruption initiatives by business groups.

Resources to Report Corruption

Rev. Dieudonne MASSI GAMS
Chairman
National Anti-Corruption Commission
B.P. 33200 Yaounde Cameroon
(+237) 22 20 37 32
www.conac-cameroun.net 
infos@conac-cameroun.net

Me Charles NGUINI
Country Representative
Transparency International Cameroon
Nouvelle route Bastos, rue 1.839, BP: 4562 Yaounde
(+237) 33 15 63 78
transparency@ti-cameroon.org

Cameroon is a peaceful country in a turbulent region. However, the country is facing domestic security challenges from the terrorist group Boko Haram, in the Far North of Cameroon. Also, since December 2016, the two English speaking regions of Cameroon have been rocked by social unrest. Anglophones claim that they are marginalized by the central government. Since then lawyers and teachers have been on strike and schools have been closed. Since January 2017, physicians and teachers of the French speaking regions have also periodically been on strike, generally over pay and working conditions. But some Anglophones want a return to a two state federation while other more extremists fringes of secessionists want total separation to form a new state. Although the likelihood of a split between the two communities is remote, the economy of the English speaking Northwest and Southwest regions has nearly collapsed. Outside of Cameroon, the crisis is seen as a domestic matter and the central government appears to have the crisis under control, although systematic clamp downs with massive arrests have prompted complaints of human right abuses. In the short term, the impact of this domestic crisis on foreign direct investments has been weak.

In the Far North and the English speaking regions, there are some disruptions to economic activities despite the measures taken by the government to limit the impact of the crises. There may be more turbulence ahead. Cameroon is heading into an electoral year with presidential elections scheduled for 2018. President Paul Biya, who has been in power for 34 year, is likely to bid for another 7 years in office. If elected, he will be 91 years old when his mandate ends. In 2008, opposition to his candidacy triggered unrest in the country for many months.

In Cameroon, over 50 percent of the population is under 25. The official unemployment is around 4 percent, although youth unemployment may be as much as 75 percent. The majority of youth who are qualified are under-employed in the informal sector. Unskilled labor is prevalent in the agricultural and service sector, and under-employment is prevalent in manufacturing, commerce, technician or technical trades, and mid-management jobs. A 2010 Survey of Employment and the Informal Sector (EESI) by the National Institute of Statistics revealed an unemployment rate of 3.8 percent based on International Labor Organization (ILO) standards. The study identified under-employment as a real challenge for employment policy makers in Cameroon, with rates of 12.3 percent and 63.7 percent, respectively for visible and invisible under-employment.

There are shortages of technical trade skills, for example, for maintenance and repair of industrial machinery, in every sector of the economy. Truck and automotive maintenance is widely practiced in the informal sector. Rudimentary or artisanal agriculture, fishing, and textile manufacture economic sectors are still in need of significant development, and a lack of skilled workers tends to be the norm across the country. The government of Cameroon does not require companies to hire nationals. However, foreign nationals are required to obtain work permits prior to formal employment. While foreign nationals are automatically issued work permits for companies of the industrial free zones regime, their number may not exceed 20 percent of the total work force of a company after the fifth year of operation in Cameroon if benefiting from the Industrial Free Zone (IFZ) regime.

Although union and contract agreements vary widely from sector to sector, in general Cameroon functions as an “employment at will” economy, and labor laws differentiate between layoffs and firing. Layoffs are not caused by the fault of the employees. Layoffs are often considered as alternative solutions to dismissing workers based on performance fault or economic grounds. There is no special treatment of labor in special economic zones, foreign trade zones, or free ports. While the Labor Code applies to Enterprises of the Industrial Free Zone (IFZ) regime, some matters are governed by special provisions under the 1990 law establishing IFZ. These include the employer’s right to determine salaries according to productivity, free negotiation of work contracts, and automatic issuance of work permits for foreign workers. The Ministry of Labor monitors labor abuses, health and safety standards and other related issues, but enforcement is poor. Labor laws are waived through the regime of Industrial Free Zones to attract or retain investment. As indicated earlier, the waivers include the employer’s right to determine salaries according to productivity, free negotiation of work contracts, and automatic issuance of work permits for foreign nationals.

There are labor unions that are independent, and others that are affiliated with the government under existing laws and regulations. Over 100 trade unions and 12 union confederations operate in the country. However, the labor union movement is highly fractured and somewhat ineffective in promoting workers’ rights. Some union leaders accuse the government and company managers of promoting division within trade unions to weaken them, as well as protecting non-representative trade union leaders with whom they can negotiate more easily.

Cameroon’s labor dispute resolution mechanisms are outlined in the labor code. The procedure differs depending on whether the dispute is individual or collective. Individual disputes fall under the jurisdiction of the civil court dealing with labor matters in the place of employment or residence of the worker. The legal procedure is initiated after the labor inspector fails to settle the dispute amicably out of the court system. Settlement of collective labor disputes is subject to conciliation and arbitration, and any strike or lock-out started after the procedures have been exhausted and have failed is deemed legitimate. While the conciliation procedure is conducted by the labor inspector, arbitration of any collective dispute that has not been settled by conciliation is handled by an arbitration board, chaired by the competent judicial officer of the competent court of appeal. Workers who ignore procedures to conduct a legal strike can be dismissed or fined. For more information (see: https://www.ilo.org/dyn/natlex/docs/WEBTEXT/31629/64867/E92CMR01.htm )

The law provides for the rights to collective bargaining as a means to regulate labor relations between employers and workers. Workers are allowed to bargain collectively and re-negotiate past collective agreements from time to time. In case of an inability to conclude a collective agreement, the National Labor Advisory Board can issue a decree to establish a minimum wage for a particular occupation. In the context of rampant poverty, labor disputes tend to have socio-political ramifications beyond the boundaries of simple legal employment contracts. In February 2008, a strike by transportation workers who were opposing high fuel prices and poor working conditions triggered a series of violent demonstrations in Cameroon. In response to the protests, the government reduced the cost of fuel, reduced the duties paid on cement, suspended duties on essential goods such as cooking oil, fish and rice, as well as raised salaries of civil servants and military personnel.

The labor code differentiates between layoffs and firing (w/ severance). In all cases of dismissal, it shall be up to the employer to show that the grounds for dismissal alleged by him are well-founded. Whenever a contract of employment of unspecified duration is terminated without notice or without the full period of notice being observed, the responsible party shall pay to the other party compensation corresponding to the remuneration including any bonuses and allowances which the worker would have received for the period of notice not observed. Except in the case of serious misconduct, where a contract of employment of unspecified duration is terminated by the employer, the worker with no less than two successive years of seniority in the enterprise shall be entitled to severance pay distinct from pay in-lieu-of notice which shall be determined giving regard to the worker’s seniority. However, in most cases implementation of these decisions may take many years of negotiations often involving the Ministry of Labor, courts and social services.

The Cameroon labor market continues to be dominated by a large informal sector. According to the World Bank, a large section of the work force earns their living in the informal sector. Agriculture provides a large portion of informal jobs with over 70 percent of jobs performed informally. Other economic sectors which continue to feed this labor informality are telecommunications, manufacturing, construction, banking, and the hotel industry. The formal private sector and the public sector employ 4 percent and 6 percent of the workforce, respectively. Informality is often decried but it has instilled a culture of flexibility in the Cameroonian job market. Cameroon labor code lays down principles of labor laws regarding employment, dismissal, remedies for wrongful dismissal, compensation for industrial injuries, and trade unions. But most jobs do not have binding contracts and employers generally seem to have the upper hand in labor dispute. There is informality even in the formal sector which is against the law. Despite this landscape, it is important for U.S. companies to ensure compliance with the local labor laws and to abide by international best practice which refer to the treatment of workers.

There is a gap in the supply and demand for labor in Cameroon. Often skills do not match the needs of companies, while the qualification of many job seekers may not be the ones needed by employers. This stems from the inadequacy or obsoleteness of the content of the educational systems. While the Cameroonian educational system has schools that can produce good engineers and doctors, there are few schools which provide training for technicians such as welders, plumbers, computer technicians and maintenance workers. Cameroon does not impose the hiring of nationals although some level of local content and transfer of skills tend to be positively perceived as elements of corporate social responsibility. There is no direct linkage between the labor code and incentives for FDI which are stipulated in a different law. The government expects foreign companies to also abide by all Cameroonian laws. In theory, the Labor Code provides a legal framework for the emergence of a flexible and efficient labor market, but such a market has not fully emerged. Cameroon is a party to the ILO Conventions 87 and 98 permitting the freedom to form unions and the right to collective bargaining.

In general, any individual dispute arising from a contract of employment between workers and their employers or from a contract of apprenticeship shall fall within the jurisdiction of the court dealing with the labor disputes in accordance with the legislation on judicial organization. In Cameroon, trade unions are not strong. For this reason, collective bargaining agreements are relatively rare. The OHADA corporate laws have additional provisions for dispute resolution. However, dysfunctions in the legal systems can create gaps in compliance or practice with international labor standards. The ILO works with the Cameroonian government on issues such as the prevention of child labor and trafficking in person, which contributes to the alignment of Cameroon laws with international labor standards.

Cameroon and OPIC signed an Investment Guarantee in 1967. In recent years and with this agreement, OPIC has been able to provide insurance and contributed to an increased access to finance for Cameroonian farmers and small and medium sized enterprises. The current official currency exchange rate for the U.S. dollar is CFA 590/USD 1.00, although there have been significant fluctuations recently, from CFA 583/USD 1.00 to CFA 612/USD 1.00.

Cameroon has ambitious development plans and hopes to become an emerging economy by 2035. The government has published a list of 80 large infrastructure projects covering many sectors that would help achieve that goal. Cameroon officials have officially invited U.S. companies to bid and support them in the execution of these projects. The government has been slow to move on many of these projects. Nonetheless, these projects offer good business opportunities for OPIC’s continued involvement in Cameroon.

Cameroon signed an Investment Incentive Agreement with OPIC on March 07, 1967.

Table 3: Sources and Destination of FDI

The IMF relies on country authorities to submit data for this survey and the Mission is initiating talks with Cameroonian authorities to encourage the government to assist the IMF in the data collection and uploading process. At this time, fields in Table 3 are Not Applicable.

Table 4: Sources of Portfolio Investment

Not Applicable.

Dr. Derrin Smith
Deputy Chief of the Political and Economic Section
US Embassy Yaounde, Rosa Parks Ave, Yaounde, Cameroon
+237-2-2220-1500
yaoundepolecon@state.gov

Policies Toward Foreign Direct Investment

China has long relied on foreign investment to develop key sectors of its economy. Although many industries and economic sectors remain restricted or prohibited to foreign investment, government officials recognize the important role that Foreign Direct Investment (FDI) has historically played in China’s economic development. They have therefore continued to promise economic reforms to further open up China’s economy to provide greater market access for foreign investment. According to the Ministry of Commerce (MOFCOM), 2016 saw China’s total inward FDI flows rise 4.1 percent from the year prior, to 813.22 billion renminbi (RMB) (U.S. $126 billion). China’s sustained high economic growth rate, growing middle class, and the expansion of diverse product demand all contribute to China’s attractiveness as an FDI destination.

Foreign investors, however, often temper their optimism regarding potential investment returns with uncertainty about China’s willingness to offer a level playing field vis-à-vis Chinese competitors. Foreign investors report a range of challenges related to China’s current investment climate, including: broad use of industrial policies to protect and promote state-owned and other domestic firms through employing subsidies, preferential financing, and selective enforcement of laws and regulations; restrictions on controlling ownership of foreign entities through equity caps, limited voting rights, limits to foreign participation on companies’ board of directors, etc.; weak protection and enforcement of IPR; corruption; discriminatory and non-transparent anti-monopoly enforcement; excessive national or cyber security requirements; and an unreliable legal system lacking transparency and rule of law. The 2015 Anti-Terrorism Law, the Foreign Non-Governmental Organization (NGO) Law, the Cyber Security Law, and other measures impede local Chinese firms (especially banks) from purchasing foreign technology, raising concerns that China has back-tracked on reforms to further open up to foreign investment.

China promotes inward investment through MOFCOM’s “Invest in China” website, found at www.fdi.gov.cn . MOFCOM publishes laws and regulations related to foreign investment, economic statistics, lists of investment projects, relevant news articles, and other relevant information about investing in China. In addition, each region has a provincial-level investment promotion agency through local MOFCOM departments.

American Chamber of Commerce China 2016 American Business in China White Paper: http://www.amchamchina.org/whitepaper 

American Chamber of Commerce China 2017 Business Climate Survey:
http://www.amchamchina.org/policy-advocacy/business-climate-survey 

U.S.-China Business Council’s China October 2016 Economic Reform Scorecard:
https://www.uschina.org/reports/uscbc-china-economic-reform-scorecard-october-2016 

MOFCOM’s Investment Promotion Website:
http://www.fdi.gov.cn/1800000121_10000161_8.html 

Limits on Foreign Control and Right to Private Ownership and Establishment

The Catalogue for the Guidance of Foreign Investment in Industries, or Foreign Investment Catalogue (FIC), governs the “pre-establishment,” or market access, phase of investment and establishes whether foreign investment in a particular economic sector or industry is “encouraged,” “restricted,” or “prohibited.” In both the encouraged and restricted categories, the FIC clearly outlines industry sectors that are completely liberalized and those that are open to foreign investment but subject to equity caps, joint ventures requirements, and Chinese national leadership requirements. Encouraged sectors are industries China believes would benefit from foreign investment and technology transfer, often in line with industrial policy goals. Restricted and prohibited sectors are those seen as sensitive, possibly touching on national security concerns, or at odds with the industrial goals of China’s economic development plans.

In December 2016, MOFCOM and the National Development and Reform Commission (NDRC) jointly issued for public comment an updated draft of the FIC that proposed reforms to further liberalize 20 sectors of the economy. Of note, the proposed draft FIC changed the header of the restricted and prohibited section to the “nationwide negative list.” Foreign investors interested in industries not on the negative list will no longer require pre-approval from MOFCOM, but rather, need only register their investment with MOFCOM.

The proposed revisions in the draft FIC may improve market access in some sectors, but are relatively minor, and revisions affecting investments in industries that have traditionally faced heavy restrictions, such as banking, telecommunications, and cultural industries, fall short of the reform expectations of the U.S. business community. In addition, it is unclear how the updated FIC will be prioritized vis-à-vis other, contradictory industry-based regulations or whether other industrial policies will supersede the version of the FIC that is ultimately published. This uncertainty undermines confidence in the stability and predictability of China’s investment climate and impedes foreign investors’ future business planning.

The Chinese language version of the 2015 FIC: http://www.mofcom.gov.cn/article/b/f/201503/20150300911747.shtml 

The Chinese language version of the 2016 draft FIC: http://www.ndrc.gov.cn/yjzx/yjzx_add.jsp?SiteId=122 

Ownership Restrictions

In both the “encouraged” and “restricted” categories of the FIC, certain industries require joint ventures and/or requirements that a company be controlled by Chinese nationals.

For example:

• In the oil and natural gas exploration and development industry, foreign investment is required to take the form of equity joint ventures and cooperative joint ventures.
• In the accounting and auditing sectors, the Chief Partner of a firm must be a Chinese national.
• In higher education and pre-school, foreign investment is only permitted in the form of cooperative joint ventures led by a Chinese partner.
• In some sectors, the Chinese partners individually or as a group must maintain control of the enterprise. Examples include: construction and operation of civilian airports, construction and operation of nuclear power plants, establishment and operation of cinemas, and the design and manufacture of civil-use satellites.

In some sectors, the foreign shareholder’s proportion of the investment may not exceed a certain percentage. For example, foreign equity ownership is limited to:

• 50 percent in value-added telecom services (excepting e-commerce);
• 49 percent in basic telecom enterprises;
• 50 percent in life insurance firms; and
• 49 percent in security investment fund management companies.

Mandatory joint venture structures and equity caps give Chinese partner firms significant control, often allowing them to benefit from technology transfer. In addition, the relative opacity of the approval process and the broad discretion granted to authorities foster an environment where the Chinese government can impose deal-specific conditions beyond written legal requirements, often with the intent to force technology transfer as a condition of market access or to support industrial policies and the interests of local competitors.

Other Investment Policy Reviews

Organization for Economic Cooperation and Development (OECD)

China is not a member of the OECD. The OECD Council decided to establish a country program of dialogue and co-operation with China in October 1995. The most recent OECD Investment Policy Review for China was completed in 2008. The OECD Investment Policy Review noted that policy changes in China between 2006 and 2008 tightened restrictions on inward direct investment, including cross-border mergers and acquisitions.

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

In 2013, OECD published a working paper entitled “China Investment Policy: An Update,” which provided an update on China’s investment policy since the publication of the 2008 Investment Policy Review. The paper noted that while China’s economic strength buoys foreign investor confidence, fears of investment protectionism are growing.

OECD 2013 Update:  http://www.oecd.org/china/WP-2013_1.pdf 

World Trade Organization (WTO)

China became a member of the World Trade Organization (WTO) in 2001. WTO membership boosted China’s economic growth and advanced its legal and governmental reforms. The most recent WTO Investment Trade Review for China was completed in 2016. The report highlighted key changes between the 2011 and 2015 FIC. In addition, it noted that the foreign investment pilot negative list expanded from the Shanghai FTZ to the FTZs of Tianjin, Fujian, and Guangdong. The trade review also said that China encourages inward FDI, as well as joint ventures between Chinese and foreign companies, particularly in research and development. The report also mentioned that technology transfer, while not a requirement for investment approval, is a practice widely encouraged by Chinese authorities.

WTO Investment Trade Review for China: https://www.wto.org/english/tratop_e/tpr_e/tp400_e.htm 
International Monetary Fund (IMF) information on China: http://www.imf.org/external/country/Chn/ 
FDI Statistics from MOFCOM: http://www.fdi.gov.cn/1800000121_10000177_8.html 

Business Facilitation

Basic business registration procedures in China are difficult. The World Bank ranked China 78th out of 190 economies in terms of ease of doing business and 127th for starting a business. In Shanghai and Beijing, at least 11 procedures are reportedly required to establish a business, with an average timeline of more than 30 days to complete the registration process. Steps to register a business include pre-approval for a company name, a business license approved by the State Administration for Industry and Commerce (SAIC), an organization code certificate with the Quality and Technology Supervision Bureau, registration with the provincial and local tax bureaus, a company seal issued by the police department, registration with the local statistics bureau, a local bank account, the authorization to print or purchase invoices and receipts, and registration with the Ministry of Human Resources and Social Security, as well as with the Social Welfare Insurance Center.

The Government Enterprise Registration (GER), an initiative of the United Nations Conference on Trade and Development (UNCTAD), gave China a score of 1.5 out of 10 on its website for registering and obtaining a business license. SAIC is the main government body that approves business licenses, and according to GER, SAIC’s website lacks even basic information, such as what to do and how to do it.

SAIC’s online business registration information can be found at http://www.saic.gov.cn/. 

Recently, the State Council – China’s cabinet – has tried to reduce red tape by eliminating hundreds of administrative licenses and delegating administrative approval power across a range of sectors. The number of investment projects subject to central government approval has reportedly dropped more than 75 percent. The State Council also has set up a website in English, which is more user-friendly than SAIC’s website, to help foreign investors looking to do business in China: (http://english.gov.cn/services/doingbusiness ).

MOFCOM’s Department of Foreign Investment Administration is responsible for foreign investment promotion in China.

Despite efforts to streamline business registration procedures, foreign companies still continue to complain about the many challenges of setting up a business, including the process of registration and obtaining administrative licenses. Numerous companies offer consulting, legal, and accounting services for establishing wholly foreign-owned enterprises, partnership enterprises, joint ventures, and representative offices. The differences among these corporate entities are significant, and investors should review their options carefully with an experienced advisor before choosing a particular corporate entity or investment vehicle.

Outward Investment

In 2001, China initiated a “going-out” investment strategy for SOEs to go abroad to acquire foreign assets and gain greater access to foreign markets. Over time, this policy has evolved to include both state and private Chinese companies in a diversified number of economic sectors. Today, China is one of the largest outbound direct investors in the world and invested over U.S. $200 billion globally in 2016 alone, according to the Rhodium Group, a leading private sector analyst of U.S.-China bilateral investment. China’s preferred investment location is the United States, where China invested over U.S. $45 billion in 2016, almost triple 2015 investment, according to Rhodium reports.

Chinese officials support foreign investment opportunities that help China move up the manufacturing value chain by acquiring advanced manufacturing and high-technology capabilities that can be transferred back to China. This emphasis is stressed in both the 13th Five Year Plan and the Made in China 2025 policy that aims to transform China’s economy to better compete against advanced economies in 10 key high-tech sectors, including: new energy vehicles, next-generation IT, biotechnology, new materials, aerospace, oceans engineering and ships, railway, robotics, power equipment, and agriculture machinery. Chinese government officials provide preferred financing, subsidies, and access to an opaque network of investors to promote and provide incentives for outbound investment in key sectors.

While China continues to push for value-added outbound acquisitions, in November 2016, Chinese officials at the State Administration for Foreign Exchange (SAFE) issued guidelines that regulate foreign currency outflow for investments considered financial in nature or investments deemed “illogical” because the investment falls outside the core business of the acquiring company. In other words, investments made strictly for the purpose of financial returns, like commercial real estate, or investments where a company enters a completely different economic sector than it currently operates, will receive greater scrutiny from Chinese regulators. These guidelines were intended to slow the momentum of China’s shrinking foreign currency reserves, in part brought about by a surge in outbound investment that, starting in Q3 2015, has exceeded capital inflows from foreign direct investment. Experts attribute China’s shrinking foreign currency reserves to two factors. First, as China’s GDP has slowed down, the quality of investment opportunities in China that yield a high return have diminished, making foreign investors less likely to invest in China and causing Chinese investors to look overseas to other markets with better return potential. Second, Chinese investors expect the RMB will continue to depreciate over time, which makes holding RMB-denominated investments less attractive than investments made in U.S. dollars and other foreign currencies. In an attempt to diversify assets into different currencies, Chinese household and company investments have fled to quality destinations like the United States and Europe.

China has bilateral investment agreements with over 100 countries and economies, including: Austria, the Belgium-Luxembourg Economic Union, Canada, France, Germany, Italy, Japan, South Korea, Spain, Thailand, and the United Kingdom. China’s bilateral investment agreements cover expropriation, arbitration, most-favored-nation treatment, and repatriation of investment proceeds. They are generally regarded as weaker than the investment treaties the United States seeks to negotiate.

A list of China’s signed BITs: http://tfs.mofcom.gov.cn/article/Nocategory/201111/20111107819474.shtml 

The United States and China were actively engaged in BIT negotiations from October 2012 until January 2017.

In addition to bilateral investment agreements, China also has 14 Free Trade Agreements (FTAs) with its trade and investment partners. It is negotiating an additional nine FTAs and researching six more potential FTAs. China’s FTA partners are ASEAN, Singapore, Pakistan, New Zealand, Chile, Peru, Costa Rica, Iceland, Switzerland, Hong Kong, Macao, and Taiwan. China has also recently signed FTAs with Korea and Australia, both of which include a chapter on investment.

China’s signed FTAs: http://fta.mofcom.gov.cn/index.shtml 

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

Transparency of the Regulatory System

In China’s complex legal and regulatory system, regulators and other government authorities inconsistently enforce regulations, rules, and other regulatory guidelines. Foreign investors rank inconsistent and arbitrary regulatory enforcement, along with the lack of transparency, among the major problems they face doing business in China. Government-controlled trade organizations and regulatory bodies set standards that often ignore Chinese transgressors while strictly enforcing regulations against targeted foreign companies. In China’s regulatory system, different agencies at both the central and local levels issue rules and regulations that impact foreign businesses in certain geographical areas and in certain industries. Some of these rules are only guidelines that are not necessarily considered part of the legal code. Because all of these regulations and guidelines could potential impact foreign investors, foreign companies often feel overburdened by a complex regulatory system rife with contradictions and inconsistencies. Knowing how to apply central versus local rules, for example, is a common complaint of U.S. businesses that are both confused and lack confidence in the regulatory system.

In accordance with China’s WTO accession commitments, the State Council’s Legislative Affairs Office (SCLAO) issued instructions to Chinese agencies to publish all foreign trade and investment-related laws, regulations, rules, and policy measures in the MOFCOM Gazette. Chinese agencies rarely meet these commitments. In addition, the State Council has issued Interim Measures on Public Comment Solicitation of Laws and Regulations and a Circular on Public Comment Solicitation of Department Rules, which require government agencies to post proposed trade and economic-related administrative regulations and departmental rules on the official SCLAO website for 30-day public comment period. Officials have publicly confirmed that these documents are legally binding. However, despite these efforts, ministries under the State Council continue to post only some of the draft administrative regulations and departmental rules on the SCLAO website. When drafts are published, they often are available for comment for less than the required 30 days.

While not provided for in China’s Law on Legislation, the State Council and ministries under the State Council also issue “normative documents” (opinions, circulars, notices, etc.), which are a form of quasi-regulation to implement applicable law, regulations, and rules when further specificity is necessary, or when there is no governing law. The U.S. business community reports that Chinese ministries often impose new requirements on companies through the issuance of a normative document, which, unlike the formal rulemaking process, does not necessitate a public comment period.

Proposed regulations are often drafted without using scientific studies or quantitative analysis to assess the regulation’s impact. When an assessment is made, the results and methodology of the study are not made available to the public. Third parties are asked to comment on draft regulations, but it is unclear what impact the comments have on the final regulation. This lack of transparency adds to foreign investor perceptions that industrial policy goals and other anticompetitive factors are driving forces behind China’s regulatory regime.

Chinese state actions are strongly motivated by the perceived need to protect social stability and/or achieve other political goals, many times at the detriment of foreign investors. The opaque relationship between the Chinese government, Chinese companies, and the Communist Party often makes it impossible to know where decisions originate. An example of these blurred lines is the existence of Self-Regulatory Organizations (SROs) that are responsible for certain licensing decisions. In the financial sector, Chinese financial institutions that are members of these same SROs can decide on the license applications of foreign firms. If a license decision might threaten a Chinese firm’s competitive position in the domestic market, there may be incentives to disapprove the license. For this reason, foreign firms are concerned that decisions may be made based on non-transparent and discriminatory licensing procedures.

Access to foreign online resources — including news, cloud-based business services, and virtual private networks (VPNs) – are increasingly restricted without official acknowledgement or explanation. Foreign-invested companies have also reported threats of retaliation by government regulators for actions taken by the United States and other foreign governments at the WTO or other legal forums.

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

International Regulatory Considerations

China has been a member of the WTO since 2001. As part of its ascension agreement, China agreed to notify the WTO Committee on Technical Trade of all draft technical regulations. Compliance with this WTO commitment is something Chinese officials continue to promise in different dialogues with U.S. government officials.

Legal System and Judicial Independence

The Chinese court system is based on a civil law model that borrowed from the legal systems of Germany and France. Modified to account for local characteristics in China, the rules governing commercial activities are present in various laws, regulations, and judicial interpretations, including China’s civil law, contractual law, partnership enterprises law, security law, insurance law, enterprises bankruptcy law, labor law, and Supreme People’s Court (SPC) Interpretation on Several Issues Regarding the Application of the Contract Law. China does not have specialized commercial courts, but in 2014, began a three-year pilot program to establish three IPR courts in Beijing, Guangzhou, and Shanghai; in addition, courts throughout China often have specialized IPR “tribunals” to hear disputes.

China’s Constitution provides a legal basis for courts to independently exercise adjudicative power, and several laws have provisions stating courts are not subject to interference by administrative organs, public organizations, and/or individuals. However, the Constitution also emphasizes the “leadership of the Communist Party.” In practice, China’s court system is not independent of government agencies or the Chinese Communist Party (CCP), which often intervene in disputes. Interference takes place for many reasons, including:

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

The U.S. business community consistently reports that Chinese courts, particularly at lower levels, are susceptible to outside political influence (particularly from local governments), lack the sophistication to understand complex commercial disputes, and operate without transparency. U.S. companies often avoid challenging administrative decisions or bringing commercial disputes before a local court for fear of future retaliation.

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

Laws and Regulations on Foreign Direct Investment

China’s legal and regulatory framework provides discretion to promote investment in specific industries and geographic regions and to restrict foreign investment not considered in China’s national interests. Laws and regulations with undefined key terms and standards allow for inconsistent application by different agencies and localities. As a result, China has in place investment restrictions that are broader than developed countries, including the United States.

Despite repeated calls by Chinese leadership to strengthen the rule of law in China, foreign investors often point out that weaknesses in the legal system allow regulators to inconsistently apply and interpret laws and regulations. This diminishes the predictability of China’s business environment and has created a feeling among U.S. investors that the Chinese legal system discriminates against them.

China’s current foreign investment regime is based on three central laws: the China-Foreign Equity Joint Venture Enterprise Law, the China-Foreign Cooperative Joint Venture Enterprise Law, and the Foreign-Invested Enterprise (FIE) Law. Multiple administrative regulations and regulatory documents issued by the State Council are derived from these three laws, including:

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

There are also over 1,000 rules and regulatory documents related to foreign investment in China and issued by government ministries, including:

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

Local legislatures and governments also enact their own regulations, rules, and guidelines that directly impact foreign investment in their geographical area. Examples of local regulations include the Wuhan Administration Regulation on Foreign-Invested Enterprises and Shanghai’s Municipal Administration Measures on Land Usage of Foreign-Invested Enterprises.

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

FDI Laws on Investment Approvals

China approves foreign investments on a case-by-case basis. China claims to provide foreign investors with “national treatment,” or treatment no less favorable than the treatment it gives to domestic investors, after an investment has been established. The process varies based on industry and investment type, with overall low transparency.

Foreign investors are required to obtain approvals for establishing an enterprise and undertaking an investment project. MOFCOM pre-approval is not required for an investment not listed in the “restricted” or “prohibited” sections of the FIC, but foreign investors still need to register the investment with MOFCOM. That being said, the mere fact that an investment category is not on the FIC negative list does not guarantee approval, as other steps and approvals may be required. In some industries, such as telecommunications, foreign investors are also required to get approval from industry regulators like the Ministry of Industry and Information Technology.

In July 2004, the State Council issued the Decision on Investment Regime Reform and the Catalogue of Investment Projects subject to Government Ratification (Ratification Catalogue). According to the Ratification Catalogue, all proposed foreign investment projects in China must be submitted for “review and ratification” by the NDRC, or provincial or local Development and Reform Commissions, depending on the sector and value of the investment. In 2013, however, the government issued a new catalogue to narrow the scope of foreign investment projects subject to NDRC ratification. An “encouraged” investment under the FIC that does not require a Chinese controlling interest, and is in a sector not listed on the Ratification Catalogue, only needs to be “filed for record” with the local NDRC office. This policy shift marked a positive step toward easing bureaucratic barriers to foreign investment.

In November 2014, China released an updated edition of the Ratification Catalogue, which eliminated NDRC ratification requirements for 15 new sectors and delegated ratification authority to local governments in 23 additional sectors. In several new sectors, the new Ratification Catalogue also raised the threshold of foreign ownership that would trigger the requirement for NDRC approval. When announcing the reforms, NDRC stated the goal of the latest revision to the Ratification Catalogue was to limit ratification to projects relating to “national and ecological security, geographic and resource development,” and the “public interest.” NDRC estimates that revisions made to the Ratification Catalogue over the past several years would reduce the number of projects requiring ratification from central government authorities by 76 percent.

Ratification Catalogue: http://www.gov.cn/zhengce/content/2014-11/18/content_9219.htm 

The NDRC approval process for foreign investment projects also includes assessing the project’s compliance with China’s laws and regulations; its compliance with the FIC and industrial policy; its national security, environmental safety, and public interest implications; its use of resources and energy; and its economic development ramifications. In some cases, NDRC also solicits the opinions of relevant Chinese industrial regulators and “consulting agencies,” which may include industry associations that represent Chinese domestic firms. This presents potential conflicts of interest that can disadvantage foreign investors seeking to receive project approval. The State Council may also weigh in on high-value projects in “restricted” sectors.

After receiving NDRC approval for the investment project and either notifying or applying for approval for an investment from MOFCOM, investors next apply for a business license with the SAIC. Once a license is obtained, the investor registers with China’s tax and foreign exchange agencies. Greenfield investment projects must also seek approval from China’s Environmental Protection Ministry and its Ministry of Land Resources. The specific approvals process may vary from case to case, depending on the details of a particular investment proposal and local rules and practices.

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

Antitrust Review

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

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

Foreign investors obtain actual control, via merger or acquisition, of a domestic enterprise in a key industry;

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

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

National Security Review

In February 2011, China released the State Council Notice Regarding the Establishment of a Security Review Mechanism for Foreign Investors Acquiring Domestic Enterprises. The notice established an interagency Joint Conference, led by NDRC and MOFCOM, with the authority to block foreign mergers and acquisitions of domestic firms that it believes may impact national security. The Joint Conference is instructed to consider not just national security, but also “national economic security” and “social order” when reviewing transactions. China has not disclosed any instances in which it invoked this formal review mechanism.

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

Foreign Investment Law

In January 2015, MOFCOM proposed for public comment a new Foreign Investment Law. This law, if enacted, would unify and supersede the three governing foreign investment laws established by the State Council. It also would abolish the case-by-case approval system for foreign investment and replace it with a system that treats foreign investment the same as domestic investments, except in the limited number of industries enumerated on the “negative list.” The draft law calls for streamlining the approval process for foreign investment in some sectors, but contains a number of troubling provisions – e.g., broadening the definition of foreign investor, expanding the role of the national security review mechanism, increasing reporting requirements, and threatening the structure of variable interest entities (VIEs) – that could facilitate discriminatory treatment against foreign investment. To date, there have been no new announcements about a future release of the Foreign Investment Law or a timeline for its implementation.

In addition to transforming the current foreign investment regime, the aforementioned MOFCOM draft Foreign Investment Law would also establish a broad and potentially intrusive national security review mechanism. As it is currently envisaged, the national security review could be used to hinder market access and increase the financial burden of foreign investment in China.

Free Trade Zones – Negative List Approach

In April 2015, the State Council issued a General Plan for the FTZs in Tianjin, Guangdong, and Fujian that offers national treatment for the “pre-establishment,” or market access, phase of investment, except as otherwise provided under a negative list. The State Council-issued negative list for these FTZs contains 85 measures restricting foreign investment and 37 measures forbidding foreign investment. Together, this negative list has 17 fewer measures than the negative list adopted in the Shanghai FTZ in 2014 and 68 fewer measures than Shanghai FTZ’s 2013 negative list. Nevertheless, while the number of discriminatory measures declined, the most recent negative list includes no commercially significant openings for foreign investment.

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

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

Competition and Anti-Trust Laws

China uses a complex system of laws, regulations, and agency specific guidelines at both the central and provincial level that impacts an economic sector’s makeup, sometimes as a monopoly, near-monopoly, or authorized oligopoly. These measures are particularly common in resource-intensive sectors such as electricity and transportation, as well as in industries seeking unified national coverage like fixed-line telephony and postal services. The measures also target sectors the government deems vital to national security and economic stability, including defense, energy, and banking. Examples of such laws and regulations include the Law on Electricity (1996), Civil Aviation Law (1995), Regulations on Telecommunication (2000), Postal Law (1986), Railroad Law (1991), and Commercial Bank Law (amended in 2003), among others.

Anti-Monopoly Law

China’s Anti-Monopoly Law (AML) went into effect on August 1, 2008. The AML delegates antitrust enforcement to three agencies: MOFCOM to review concentrations (mergers and acquisitions); the NDRC to review cartel agreements, abuse of dominant position, and abuse of administrative powers centered on product pricing; and the SAIC to review the same types of activities as NDRC when those activities are not directly price-related. In addition, the AML established the Anti-Monopoly Commission to provide oversight, expertise, and coordination among different stakeholders and enforcement agencies. After the AML was enacted, the need to clarify parts of the law became apparent, leading MOFCOM, NDRC, SAIC, and other Chinese government ministries and agencies to formulate implementing guidelines, departmental rules, and other measures. Generally, the AML enforcement agencies have sought public comment on proposed measures and guidelines, although comment periods can be less than 30 days.

In 2015, the CCP Central Committee and State Council declared that all future economic policies would reflect China’s competition policy. In 2016, the three AML enforcement agencies drafted guidelines on six enforcement areas: anti-monopoly guidelines for the automobile industry, guidelines on determining illegal incomes and fines, guidelines on the “leniency” system in horizontal monopoly agreements, guidelines on AML settlement cases, guidelines for intellectual property abuse, and guidelines on monopolistic agreement exemptions. In addition, the State Council in June 2016 introduced guidelines on the Fair Competition Review Mechanism that targets administrative monopolies at the local level and requires agencies to first conduct a fair competition review to certify that new measures do not inhibit competition, prior to issuing new policies, laws, and guidelines. While it is too early to tell the extent to which the Fair Competition Review Mechanism will break down China’s pervasive administrative monopolies, Chinese academics in particular are optimistic that this development signals a more prominent role for competition in future economic decisions.

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

Since the AML went into effect, the number of merger and acquisition transactions MOFCOM has reviewed each year has continued to grow. According to MOFCOM statistics, in 2016 alone, MOFCOM completed an AML review for 395 cases (a 19 percent year-on-year increase), with the majority of cases coming from manufacturing industries like semi-conductors, telecommunications, and other high-end manufacturing. Of these reviewed cases, 82 percent were finished in the initial 30-day review period. Since AML’s inception, the vast majority (over 80 percent) of cases “conditionally” approved have involved offshore transactions between foreign parties. The other “conditional” cases involved foreign companies merging with Chinese enterprises. Observers have expressed concerns about the speed and inconsistent application of the review process, along with suspicions that Chinese regulators rarely approve “on condition” transactions involving two Chinese companies, thus signaling an inherent AML bias against foreign enterprises. MOFCOM has stated it will enforce the requirement that Chinese firms, in addition to foreign firms, notify regulators of proposed mergers and acquisitions for review.

In 2016, foreign companies expressed fewer complaints than in previous years about NDRC’s AML investigations. Some experts said leadership changes at NDRC improved enforcement practices, including introduction of a more balanced approach to investigations, which looks into Chinese companies more often than foreign enterprises. NDRC has also made progress in AML enforcement transparency by releasing aggregate data on investigations and publicizing case decisions. That said, many foreign companies still worry about future “dawn raids” and express concerns that NDRC regulators, along with SAIC and MOFCOM, can at any time use competition law to promote China’s industrial policy goals by targeting foreign firms to limit competition.

In bilateral dialogues, China continues to express its commitment to protect and enforce IPR across a range of industry sectors. Chinese officials are also in the process of clarifying AML guidelines that address areas where IPR and AML intersect, such as forcing foreign companies to license IPR technology to local companies at a “fair” price that does not violate a company’s “dominant market position.” Chinese officials also reiterated the need for AML agencies to be free from intervention from other government agencies. Lastly, Chinese officials committed to protecting commercial secrets obtained during AML proceedings. Despite the dialogues, U.S. companies remain concerned about IPR protections, along with the lack of independence of AML agencies from outside influences.

How the AML applies to SOEs and government monopolies in certain industries also is unclear. While language in the AML protects the lawful operations of SOEs and government monopolies in industries deemed nationally important, all three AML enforcement agencies have publicly stated the law does apply to SOEs. All three additionally claim to have pursued some enforcement action, albeit small, against SOEs. Given the prominent role of SOEs in China’s economic structure, along with the CCP’s proactive orchestration of mergers in key industries like rail, marine shipping, metals, and other strategic sectors, concerns persist that enforcement against SOEs will remain limited. These mergers in key industries have been criticized for further insulating SOEs from both domestic and foreign competition, leading to higher prices for Chinese consumers and more concentrated market power post-merger.

Expropriation and Compensation

Chinese law prohibits nationalization of FIEs, except under “special” circumstances. Chinese officials have said these circumstances include national security and when an investment presents an obstacle to achieving a large civil engineering project, but the law does not define these special circumstances. Chinese law requires compensation of expropriated foreign investments, but does not explain what method to use or the formula to calculate the value of the foreign investment. The Department of State is not aware of any cases since 1979 in which China has expropriated a U.S. investment, although the Department has notified Congress through the annual 527 Investment Dispute Report of several cases of concern.

Dispute Settlement

ICSID Convention and New York Convention

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

Investment and Commercial Disputes in the Chinese Legal System

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

CIETAC is based in Beijing and has four sub-commissions in Shanghai, Shenzhen, Tianjin, and Chongqing. In 2012, CCPIT, under the authority of the State Council, issued new arbitration rules that granted CIETAC headquarters significantly more authority to hear cases than the sub-commissions. Expecting a loss in revenue, CIETAC Shanghai and CIETAC Shenzhen declared their independence, issued their own rules, and changed their names. As a result, CIETAC disqualified its former Shanghai and Shenzhen affiliates from administering arbitration disputes.

This jurisdictional dispute between CIETAC in Beijing and the former sub-commissions raised serious concerns among the U.S. business and legal communities, particularly regarding the validity of arbitration agreements specifying particular arbitration procedures and the enforceability of arbitral awards issued by the sub-commissions. In 2013, the SPC issued a notice clarifying that any lower court that hears a case arising out of the CIETAC split must report the case to the SPC before making a decision. However, the SPC notice is brief and lacks detail on certain issues, including the timeframe for the lower court’s decision to reach the SPC and for the SPC to issue its opinion.

Other arbitration commissions exist and are usually affiliated with the government at the provincial or municipal level. The Beijing Arbitration Commission and the Shanghai Arbitration Commission have emerged as serious domestic competitors to CIETAC. For contracts involving at least one foreign party, offshore arbitration may be adopted. Foreign companies often encounter challenges in enforcing arbitration decisions issued by Chinese and foreign arbitration bodies. Investors may appeal to higher courts in such cases.

The Chinese government and judicial bodies do not maintain a public record of investment disputes. The SPC maintains a count of the annual number of cases involving foreigners tried throughout China, but does not specify the types of cases, identify civil or commercial disputes, or note foreign investment disputes. Rulings in some cases are open to the public.

Although it has not concluded a BIT with the United States, China has bilateral investment agreements with over 100 countries and economies. The majority of these agreements set mediation, domestic remedies, and international arbitration as the means to settle disputes. However, investor-state disputes leading to arbitration are rare in China.

International Commercial Arbitration and Foreign Courts

There are few precedents where Chinese courts have recognized and enforced foreign court judgments. Articles 281 and 282 of China’s Civil Procedure Law cover the recognition and enforcement of the effective judgments of foreign courts by the court system in China. According to these laws, if the Chinese courts determine validity of a claim, after reviewing the foreign courts’ judgments, China’s treaty obligations, reciprocity principles, basic principles of Chinese laws, China’s sovereignty, security, and social public interests, the Chinese courts shall issue verdicts to recognize the effectiveness of foreign court judgments and issue enforcement orders if enforcement is needed. China has concluded 27 bilateral agreements on the recognition and enforcement of foreign court judgments, but none with the United States. China’s recognition of judgments by U.S. courts can be inconsistent, according to anecdotal reports.

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

Bankruptcy Regulations

China’s primary bankruptcy legislation is the Enterprise Bankruptcy Law, which was promulgated on August 27, 2006 and took effect on June 1, 2007. The 2007 law applies to all companies incorporated under Chinese laws and regulations, including private companies, public companies, SOEs, FIEs, and financial institutions. It is commensurate with developed countries’ bankruptcies laws and provides for potential reorganization or restructuring rather than liquidation. Due to uncertainty about authorities and procedures, lack of implementation guidelines, and the limited number of cases providing precedent, the law has never been fully enforced, and most corporate debt disputes are settled through negotiations led by local governments. The potential for local government interference, along with corporate fears of losing control, disincentivize companies from pursuing bankruptcy proceedings. Chinese courts lack capacity to handle bankruptcy cases, and bankruptcy administrators, clerks, and judges all lack experience.

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

Although still relatively small, the number of bankruptcy cases began to pick up starting in 2015, with the government announcing in 2016 several high-profile SOE bankruptcies. The SPC reported that in 2016, 5,665 bankruptcy cases were accepted by the Chinese courts and 3,602 cases were closed, representing a 53.8 percent year-on-year increase from 2015, when only 3568 cases were accepted. Most bankruptcy cases are still resolved through liquidation due to long delays, but 1,041 cases were resolved through reorganization, an 85 percent increase from 2015. Since the fall of 2016, 73 new specialized bankruptcy tribunals were founded, along with the SPC issuing several implementing measures to improve bankruptcy procedures.

Investment Incentives

Different localities court foreign investors by providing preferential packages like reduced income taxes, resources and land use benefits, reduced import/export duties, special treatment in obtaining basic infrastructure services, streamlined government approvals, and funding for initial startup. These packages may stipulate export, local content, technology transfer, and other requirements as part of the preferred investment package. These localities offer preferential treatment in special economic zones (like Shanghai, Tianjin, Fujian, and Guangdong), development zones, and science parks. China in 2016 announced seven additional FTZs (Chongqing, Zhejiang, Hubei, Henan, Sichuan, Shaanxi, and Liaoning), to begin operating in 2017. These new economic zones are a shift from prior FTZs because they target inland areas in need of economic development and areas that are consistent with Chinese officials’ call for greater foreign investment in Central and Western China. China also uses the Catalogue of Priority Industries for Foreign Investment in Central and Western China to provide greater market access to foreign investors in inland areas of mainland China, so as to spur investment.

There are no expressed prohibitions against foreign firms participating in research and development programs financed by the Chinese government. In fact, for certain sectors where China lacks the capacity and expertise to conduct advanced research or supply advanced technology in a given field, foreign participation is generally encouraged and solicited. This is part of China’s stated goal of moving up the manufacturing value chain and transforming China’s economy to a model driven by innovative growth. However, there are a large number of sectors that China deems sensitive due to broadly defined national security concerns, including “economic security,” which can effectively close off foreign investment to those sectors.

Foreign Trade Zones/Free Ports/Trade Facilitation

China’s principal customs-bonded areas include Shanghai, Tianjin, Shantou, three districts within Shenzhen (Futian, Yantian, and Shatoujiao), Guangzhou, Dalian, Xiamen, Ningbo, Zhuhai, and Fuzhou. Besides these official duty-free zones identified by China’s State Council, numerous economic development zones and open cities offer similar privileges and benefits to foreign investors.

In September 2013, the Shanghai Municipal government and the State Council announced the establishment of the Shanghai Pilot FTZ, which condensed four previously existing bonded areas into a single FTZ. In April 2015, the State Council expanded the number of FTZs to include Tianjin, Guangdong, and Fujian, although the Shanghai FTZ remains the largest of the four. The goal of the FTZs is to provide a trial ground for trade and investment liberalization measures and to introduce service sector reforms, especially in financial services, that China expects to eventually introduce in other parts of the domestic economy.

In particular, Chinese officials tout the use of a “negative list” – that is, a list expressly identifying sectors where national treatment does not apply – as a key reform introduced in the FTZs. On April 20, 2015, the State Council published a revised negative list to supersede the 2014 list. The 2015 list  regulates trade and investment in all four FTZs, reducing the number of excluded items to 122 (down from a high of 190 items when the list was first rolled out in 2013). Major sectors in which restrictions have been lifted include manufacturing, construction, wholesale and retail, information technology services, financial services, real estate, and business services.

In 2016, the State Council announced the establishment of seven additional FTZs in Chongqing, Zhejiang, Hubei, Henan, Sichuan, Shaanxi, and Liaoning. The foreign investment negative list used in the existing four FTZs will also apply to the seven new FTZs. The stated purpose of the new FTZs is to integrate more closely with the “One Belt, One Road” plan – the Chinese government’s initiative to enhance global economic interconnectivity through joint infrastructure and investment projects that connect China’s inland and border regions to countries in Southeast Asia, Central Asia, Africa, and Europe. These new FTZs will be operational beginning in 2017.

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

Performance and Data Localization Requirements

Shortly after China’s WTO ascension, China revised its FDI laws regarding export performance requirements, requirements to include local content, requirements to balance foreign exchange through trade, technology transfer requirements, and requirements to create research and development centers. As part of these revisions, China committed to only enforce technology transfer requirements that do not violate WTO standards on intellectual property and trade-related investment measures. In practice, however, some local officials and regulators prefer investments with “voluntary” performance requirements that develop favored industries and support the local job market. Provincial and municipal governments will sometimes restrict access to local markets, government procurement, and public works projects even for firms that have already invested in the province or municipality. In addition, Chinese regulators have reportedly pressured foreign firms in some sectors to disclose intellectual property content or provide intellectual property licenses to Chinese firms, often at below market rates.

Regulatory restrictions, including in the Cyber Security Law, limits the ability of domestic and foreign operators of “critical information infrastructure” to transfer business and personal data outside of China, while requiring those same operators to store such data in China. Restrictions on cross-border data flows and unclear requirements on the use of domestic encryption algorithms have prompted many firms to review how their China systems interact with their global corporate networks. In order to comply with emerging requirements that technology used by business be “secure and controllable,” foreign firms are facing pressure to disclose source code and other intellectual property disclosures during testing and certification related to government procurement; adhere to prescriptive technology adoption requirements, often in the form of domestic standards that diverge from global standards, which give preference to domestic firms; and to comply with operational restrictions such as privacy measures, data center location, and cross-border data flow restrictions.

Real Property

The Chinese legal system mediates acquisition and disposition of property. Foreign companies have complained that Chinese courts have inconsistently protected the legal real property rights of foreigners.

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

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

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

Intellectual Property Rights

Following WTO accession, China updated many of its laws and regulations to comply with the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) and other international agreements. However, there are still aspects of China’s IPR legal and regulatory regime that the U.S. government believes fall short of international best practices and, if improved, would provide greater protection to IPR. Furthermore, effective enforcement of China’s IPR laws and regulations remains a significant challenge.

Generally speaking, criminal penalties imposed by Chinese courts for IPR infringement are not applied on a frequent and consistent enough basis to significantly deter ongoing infringement. Furthermore, when administrative sanctions are issued, the basis for the sanctions is inconsistent and non-transparent, and penalties applied are insignificant, further weakening any deterrent effect. In addition, the award for IPR damage is very low, making civil litigation against IPR infringements an option with limited effect. For detailed information on China’s environment for IPR protection and enforcement, please see the following reports:

Office of the U.S. Trade Representative’s (USTR) 2017 Special 301 Report (see section on China): https://ustr.gov/issue-areas/intellectual-property/Special-301 

USTR’s 2016 National Trade Estimate Report on Foreign Trade Barriers in China (see section on China): https://ustr.gov/sites/default/files/2016-NTE-Report-FINAL.pdf 

USTR’s 2016 Report to Congress on China’s WTO Compliance: http://www.wipo.int/directory/en. 

Capital Markets and Portfolio Investment

China’s leadership has stated that it seeks to build a modern, highly developed, and multi-tiered capital market. Bank loans continue to provide the majority of credit options (reportedly around 70 percent) for Chinese companies, although other sources of capital, such as corporate bonds, trust loans, equity financing, and private equity are quickly expanding their scope, reach, and sophistication. Chinese regulators regularly use administrative methods to control credit growth, although market-based tools such as interest rate policy play an increasingly important role.

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

In recent years, China’s “shadow banking” sector, which includes vehicles such as wealth management and trust products, has grown rapidly. Chinese authorities have taken steps to increase the transparency requirements and strengthen supervision of these banking activities, while also permitting these vehicles to continue to develop. These vehicles often provide private firms additional channels to obtain capital, though at higher than benchmark rates. In 2016, worried about increasingly interconnected leverage across China’s corporate sector, the government introduced a new macro prudential assessment tool to take a more comprehensive approach to managing financial risks. Regulators also issued informal “window guidance” to domestic and foreign banks to reduce lending and currency operations.

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

Money and Banking System

After several years of rapid credit growth, China’s banking sector faces asset quality concerns. For 2016, the China Banking Regulatory Commission reported a rise in the non-performing loans (NPL) ratio to 1.74 percent, up from 1.67 percent at the end of 2015. The outstanding balance of commercial bank NPLs in 2016 reached 1.5 trillion RMB (approximately U.S. $230 billion). China’s total banking assets surpassed 228 trillion RMB (approximately U.S. $35 trillion) in December 2016, a 14.4 percent year-on-year increase. Experts estimate Chinese banking assets account for over 20 percent of global banking assets. China’s credit and broad money supply continue to post low double-digit growth, outpacing GDP growth nearly two-to-one.

Foreign Exchange and Remittances

Foreign Exchange

In 2016, several foreign companies complained about administrative delays in remitting large sums of money from China, even after completing all of the documentation requirements. Such incidents come amid announcements that SAFE had issued guidance to tighten scrutiny of foreign currency outflows due to China’s rapidly decreasing foreign currency exchange.

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

Chinese foreign exchange rules cap the maximum amount of RMB individuals are allowed to convert into other currencies at approximately U.S. $50,000 each year and restrict them from directly transferring RMB abroad without prior approval from SAFE. While SAFE has not reduced this quota, banks are reportedly being instructed by SAFE to increase scrutiny over individuals’ request for foreign currency and to require additional paperwork clarifying the intended use of the funds.

In 2016, facing significant capital outflow pressure, the government tightened capital controls, including through informal guidance to banks and the introduction of reserve requirements for institutions conducting foreign currency transactions. While the central bank’s official position is that companies with proper documentation should be able to freely conduct business, in practice, companies have reported facing challenges and delays in getting foreign currency transactions approved by sub-national regulatory branches.

China’s exchange rate regime is managed within a band that allows the currency to rise or fall by 2 percent per day from the “reference rate” set each morning. In August 2015, China announced that the reference rate would more closely reflect the previous day’s closing spot rate. Since that change, daily volatility of the RMB has at times been higher than in recent years, but for the most part, remains below what is typical for other currencies.

Remittance Policies

The following operations do not require SAFE approval: purchase and remittance of foreign exchange as a result of capital reduction, liquidation, or early repatriation of an investment in a foreign-owned enterprise, or as a result of the transfer of equity in an FIE to a Chinese domestic entity or individual where lawful income derived in China is reinvested.

The remittance of profits and dividends by FIEs is not subject to time limitations, but FIEs need to submit a series of documents to designated banks for review and approval. The review period is not fixed, and is frequently completed within one or two working days of the submission of complete documents.

Remittance policies have not changed substantially since SAFE simplified some regulations in January 2014, devolving many review and approval procedures to banks. Firms that remit profits at or below USD $50,000 dollars can do so without submitting documents to the banks for review. For remittances above USD $50,000, the firm must submit tax documents, as well as the formal decision by its management to distribute profits. However, in 2016, some companies reported increased delays in receiving approval.

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

The remittance of financial lease payments falls under foreign debt management rules. There are no specific rules on the remittance of royalties and management fees. However, beginning in 2016, SAFE began requiring banks to hold 20 percent reserves against foreign currency transactions, significantly increasing the cost of foreign exchange operations.

The Financial Action Task Force has identified China as a country of primary concern. Global Financial Integrity (GFI) estimates that over U.S. $1 trillion of illicit money left China between 2003 and 2012, making China the world leader in illicit capital flows. In 2013, GFI estimates that another U.S. $260 billion left the country.

Sovereign Wealth Funds

China officially has only one sovereign wealth fund (SWF), the China Investment Corporation (CIC). Established in 2007, CIC manages an estimated U.S. $813.8 billion in assets (as of November 2016) and invests on a 10-year time horizon. China’s sovereign wealth is also invested by a subsidiary of SAFE, the government agency that manages China’s foreign currency reserves, and reports directly to the PBOC. The SAFE Administrator also serves concurrently as a PBOC Deputy Governor.

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

China also operates other funds that function in part like sovereign wealth funds, including: China’s National Social Security Fund, with an estimate U.S. $295 billion in assets; the China-Africa Development Fund (solely funded by the China Development Bank), with an estimated U.S. $5 billion; the SAFE Investment Company, with an estimated U.S. $474 billion; and China’s state-owned Silk Road Fund, established in December 2014 with $40 billion to foster investment in countries along the “One Belt, One Road.” Chinese SWFs do not report the percentage of their assets that are invested domestically.

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

China has approximately 150,000 SOEs, of which around 50,000 (33 percent) are owned by the central government, and the remainder by local governments. The central government directly controls and manages 102 strategic SOEs through the State Assets Supervision and Administration Commission (SASAC), of which 66 are listed on stock exchanges domestically and/or internationally. SOEs, both central and local, account for 30 to 40 percent of total GDP and about 20 percent of China’s total employment. The percentage of SOE revenue spent on research and development is unknown. SOEs can be found in all sectors of the economy, from tourism to heavy industries.

SASAC regulated SOEs: http://www.sasac.gov.cn/ 

China’s leading SOEs benefit from preferential government policies aimed at developing bigger and stronger “national champions.” SOEs enjoy favored access to essential economic inputs (land, hydrocarbons, finance, telecoms, and electricity) and exercise considerable power in markets like steel and minerals. SOEs have long enjoyed preferential access to credit and the ability to issue publicly traded equity and debt. SOEs also are not subject to the same tax burdens as their private sector competitors. According to some Chinese academics, provincial governments have used their power to manipulate industrial policies and deny operating licenses to domestic and foreign investors in order to persuade reluctant owners to sell out to bigger, state-owned suitors.

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

OECD Guidelines on Corporate Governance

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

Chinese law lacks unified guidelines or a governance code for SOEs, especially among provincial or locally-controlled SOEs. Among larger SOEs that are primarily managed by SASAC, senior management positions are filled by senior CCP members who report directly to the CCP. SASAC Chairman Xiao Yaqing reemphasized this point during a March 9, 2017 press conference at the National People’s Congress, where he stated newly implemented rules required the chairman of any SOE under his ministry’s control to also be the secretary of the SOE’s CCP committee, as a way of strengthening the Party’s control.

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

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

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

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

The Third Plenum Decision emphasizes that SOEs need to focus resources in areas that “serve state strategic objectives.” However, experts point out that despite these new SOE distinctions, SOEs continue to hold dominant shares in their respective industries, regardless of whether they are strategic, which may further restrain private investment in the economy. Moreover, the application of China’s Anti-Monopoly Law, together with other industrial policies and practices that are selectively enforced by the authorities, protect SOEs from private sector competition.

China is not a party to the Government Procurement Agreement (GPA) within the framework of the WTO, although Hong Kong is listed.

Investment Restrictions in “Vital Industries and Key Fields”

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

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

A key SOE-dominant industry that is insulated from competition is agricultural products. Current agriculture trade rules, regulations, and limitations placed on foreign investment severely restrict the contributions of U.S. agricultural companies, depriving China’s consumers of the many potential benefits additional foreign investment could provide. These investment restrictions in the agricultural sectors are at odds with China’s 12th Five Year Plan objective of shifting more resources to agriculture and food production in order to improve Chinese lives, food security, and food safety.

Privatization Program

At the November 2013 Third Plenum, the Chinese government announced reforms to SOEs that included selling shares of SOEs to outside investors. This gradual approach to privatization is an effort to improve SOE management structures, emphasize the use of financial benchmarks, and gradually take steps that will bring private capital into some sectors traditionally monopolized by SOEs like energy, telecommunications, and finance. In practice, these reforms have been gradual as the Chinese government has struggled to implement its SOE reform vision and often opted to utilize a preferred SOE consolidation approach. In the past few years, the Chinese government has listed several large SOEs and their assets on the Hong Kong stock exchange, subjecting SOEs to greater transparency requirements and heightened regulatory scrutiny. This approach is a possible mechanism to improve SOE corporate governance and transparency. The government also committed at the Third Plenum to raise the portion of earnings that SOEs pay out as dividends to the public budget, although here, too, the pace and method of implementation remain uncertain.

For Chinese companies, Responsible Business Conduct (RBC) is a relatively new concept. The degree of understanding and general awareness of RBC standards (including environmental, social, and governance issues) by Chinese firms is extremely low, especially with Chinese companies operating exclusively in the domestic market. Chinese laws regulating business conduct are limited in scope, often voluntary, and frequently ignored when other economic imperatives compete with RBC priorities. In general, China suffers from the lack of independent NGOs, investment funds, worker organizations/unions, or other business associations that actively promote or monitor RBC issues.

The recently implemented Foreign NGO Law restricts certain NGO activities and remains a concern to U.S. organizations, especially with respect to its limiting influence on the promotion, development, and implementation of RBC and corporate social responsibility (CSR) practices. It is especially challenging for U.S. investors looking to partner with Chinese companies, or to expand operations with Chinese suppliers, when few Chinese firms meet internationally recognized standards in areas like labor and environmental protection and manufacturing best practices.

Despite these restrictions, Chinese officials increasingly place emphasis on protecting the environment. This priority was highlighted in the 13th Five Year Plan, which highlighted sustainability as a key priority and area for Chinese companies to enact CSR initiatives.

In 2014, China also signed a memorandum of understanding (MOU) with the OECD to cooperate on RBC initiatives. However, the MOU does not require or necessarily mean that Chinese companies will adhere to the OECD Guidelines for Multinational Enterprises. Industry leaders have pushed to establish a national contact point or RBC center, a key initiative of the OECD guidelines, and China’s Ministry of Commerce in 2016 launched the RBC Platform to raise awareness of RBC issues.

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

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

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

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

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

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

The Supreme People’s Procuratorate (SPP) and the Ministry of Public Security investigate criminal violations of laws related to anti-corruption, while the Ministry of Supervision (MOS) and the Discipline Inspection Commission (CCDI) enforce ethics guidelines and party discipline. China’s National Audit Office also inspects the accounts of SOEs and government entities. The National Bureau of Corruption Prevention (NBCP) is under the direct administration of the State Council and is responsible for improving government transparency and coordinating anti-corruption efforts among different government organizations. In January 2017, China announced plans for a National Supervision Commission, which will absorb the current functions carried out by MOS, anti-corruption units of the SPP, and those of the NBCP, and also pass a corresponding National Supervision Law by as early as March 2018.

President Xi Jinping’s Anti-Corruption Efforts

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

According to Wang Qishan, head of the CCDI and also a member of China’s ruling seven-member Politburo Standing Committee, the CCP disciplined around 415,000 officials in 2016, almost a 25 percent increase compared to the previous year. However, over 75 percent of those disciplined received only “light discipline.” Of the officials disciplined, about 11,000 officials were expelled from the CCP and handed over to Chinese courts for prosecution. One group heavily disciplined has been the discipline inspectors, with the CCP punishing more than 7,900 inspectors since late 2012. This led to new regulations being implemented in 2016 by CCDI that increased overall supervision of investigators. Authorities also noted an increase in SOE officials being investigated, including 43 total investigations conducted in 2015, in comparison to 10 in 2014 and just two in 2013. Around 40 percent of SOE corruption investigations were of SOEs in the energy sector.

China’s overseas fugitive-hunting campaign, called “Operation Skynet,” has led to the capture of around 2,500 fugitives suspected of corruption. In 2016 alone, CCDI reported that 1,032 fugitives suspected of official crimes were reprehended. The Chinese government reports that in the first 11 months of 2016, China recovered 2.3 billion RMB (U.S. $334.47 million) in losses from graft, from over 70 countries and regions, through this campaign.

Anecdotal information suggests that China’s anti-corruption crackdown oftentimes is inconsistently and discretionarily applied, raising concerns among foreign companies in China. For example, to fight rampant commercial corruption in the medical/pharmaceutical sector, China’s health authority issued “black lists” of firms and agents involved in commercial bribery. Several of these blacklisted firms were foreign companies. Additionally, anecdotal information suggests many Chinese government officials responsible for approving foreign investment projects are slowing approvals to not arouse corruption suspicions.

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

United Nations Anticorruption Convention, OECD Convention on Combatting Bribery

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

Resources to Report Corruption

The following government organization receives public reports of corruption:

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

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

In recent years, the growing number of protests over corporate mergers and acquisitions has increased, often with workers and mid-level managers of an acquired firm protesting because they were not included or consulted in the process. There have also been a small number of cases of foreign businesspeople being trapped in China during a business contract dispute.

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

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

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

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

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

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

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