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Iceland

Executive Summary

Iceland is an island country located in the north Atlantic Ocean near the Arctic Circle.  Iceland has an advanced economy that centers around three primary sectors:  fisheries, tourism, and aluminum production.  Until recently, U.S. investment in Iceland mostly had been concentrated in the aluminum sector, with Alcoa and Century Aluminum operating plants in Iceland.  However, U.S. portfolio investments in Iceland have been increasing steadily in recent years.  Iceland’s convenient location between the United States and Europe; its high levels of education, connectivity and English proficiency; and a general appreciation for American products make Iceland a promising market for U.S. companies.  U.S. citizens made up close to a quarter of the tourist population that visited in Iceland in 2019 prior to the onset of COVID-19 and the tourist industry’s contraction.

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

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

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

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2020 17 of 175 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2019 26 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2020 21 of 131 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2019 USD 824 https://apps.bea.gov/international/factsheet/
World Bank GNI per capita 2019 USD 72,850 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

The government of Iceland maintains an open investment climate.  The Act on Incentives for Initial Investments, which came into force in 2015, is intended to “promote initial investment in commercial operations, the competitiveness of Iceland and regional development by specifying what incentives are permitted in respect of initial investments in Iceland, and how they should be used.”  The Act does not apply to investments in airports, energy production, financial institutions, insurance operations, or securities.  For more information, see the English translation of the Act: (https://www.stjornarradid.is/leit/$LisasticSearch/Search/?SearchQuery=Act+on+incentives+for+initial+investments+in+Iceland).

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

Tourism has been a growing force behind Iceland’s economy in the past decade, with opportunities for investors in high-end tourism, including luxury resorts and hotels.  The number of tourists in Iceland grew by more than 400 percent between 2010 and 2018, reaching more than 2.3 million in 2018.  However, tourism in Iceland contracted in 2019 with visitors falling just below 2 million, which can be largely attributed to the bankruptcy of Icelandic budget airline WOW Air.  The COVID-19 pandemic has had drastic effects on tourism, as well as on Iceland’s overall economy, which contracted by 6.6 percent in 2020, according to Statistics Iceland.  The sector is facing numerous bankruptcies due to COVID-19 closures and travel bans.  The government has implemented measures to bolster the tourism economy and has committed to building out tourism-related infrastructure.

Isavia, a public company that handles the operation and development of Keflavik International Airport, is embarking on a $1-2 billion capital works project to expand the airport.  Projects include extension of buildings, baggage screening and baggage handling systems, self-check in stations, waiting areas and retail/dining areas, check-in areas, bag-drop off areas, security areas, airbridges/gates for remote stands, re-modelling of existing terminal, de-icing platforms, new runway, new taxiway, and a new ATC tower.  However, due to the COVID-19 pandemic, most tenders have been postponed.

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

Limits on Foreign Control and Right to Private Ownership and Establishment

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

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

Other Investment Policy Reviews

Iceland has been a World Trade Organization (WTO) member since 1995 and a member of GATT since 1968.  The WTO conducted its fifth Trade Policy Review of Iceland in 2017 (https://docs.wto.org/dol2fe/Pages/FE_Search/FE_S_S006.aspx?Query=((%20@Title=%20iceland)%20or%20(@CountryConcerned=%20iceland))%20and%20(%20(%20@Symbol=%20wt/tpr/s/*%20)%20or%20(%20@Symbol=%20wt/tpr/g/*%20))&Language=ENGLISH&Context=FomerScriptedSearch&languageUIChanged=true#).

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

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

Business Facilitation

Businesses are registered with Iceland Revenue and Customs (Skatturinn) (http://www.rsk.is/english/).  Applications for the registration of businesses can be filled in online, however some forms are in Icelandic only and it is therefore necessary for foreign businesses to contract a local representative to complete the paperwork.  The website of the Business Registry in Iceland is (http://www.rsk.is/fyrirtaekjaskra) (Icelandic only).  More information on establishing a business in Iceland can be found here (https://www.government.is/topics/business-and-industry/establishing-a-business-in-iceland/).

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

According to the World Bank, Iceland’s GDP was $24.2 billion in 2019 (https://data.worldbank.org/country/iceland).  Iceland is currently ranked number 64 out of 190 economies on the World Bank’s starting a business list, and number 26 on the ease of doing business list (https://www.doingbusiness.org/en/data/exploretopics/starting-a-business#close).

Outward Investment

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

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

3. Legal Regime

Transparency of the Regulatory System

The regulatory system as a whole is transparent, although bureaucratic delays can occur.  All proposed laws and regulations are published in draft form for the public record and are open for comment.  Icelandic laws regulating business practices are consistent with those of most OECD member states.

The Competition Authority is responsible for enforcing anti-monopoly regulations and promoting effective competition in business activities.  This includes eliminating unreasonable barriers and restrictions on freedom in business operations, preventing monopolies and limitations on competition, and facilitating new competitors’ access to the market.  The Consumer Agency holds primary responsibility for market surveillance of business operators, transparency of the markets with respect to safety and consumers’ legal rights, and enforcement of legislation concerning protection of consumers’ health, legal, and economic rights.  For more information see the Competition Authority’s website: (https://en.samkeppni.is/) and the Consumer Agency website: (https://www.neytendastofa.is/English).

The Icelandic Parliament (Althingi) consists of a single chamber of 63 members; a simple majority is required for ordinary bills to become law.  All bills are introduced in the parliament in draft form.  Draft laws and regulations are open to public comment and are published in full on the parliament’s web page:  (http://www.stjornartidindi.is) and on the websites of the relevant ministries (often in English).  Invest in Iceland also maintains an information portal website that includes information on industry sectors, the business climate, and incentives that foreign investors may find useful (http://www.invest.is).

Ministries or regulatory agencies develop bills, which are available to the general public.  Ministries or regulatory agencies publish the text of the proposed regulations before their enactment on a unified website (https://www.stjornartidindi.is/).  Ministries or regulatory agencies solicit comments on proposed regulation from the general public.  Laws and regulations are published on both the parliament’s website (https://www.althingi.is/) and separate website managed by the Ministry of Justice (https://www.stjornartidindi.is/).

The OECD published a report on Iceland in September 2019.  One of the findings of the report was that regulatory barriers are high in Iceland.  “Regulation should be more commensurate with the needs of a small open economy.  Product market regulation is stringent and the administrative burden for start-ups is high, holding back investment and innovation.  Restrictions to foreign direct investment are among the highest of the OECD, limiting employment and productivity gains through international knowledge transfer.  The government should set up a comprehensive action plan for regulatory reform, prioritizing reforms that foster competition, level the playing field between domestic and foreign firms, and attract international investment.”  (http://www.oecd.org/economy/iceland-economic-snapshot/).  The Government of Iceland has since the report worked to reduce the regulatory burden.  The Minister of Tourism, Industries and Innovation and the Minister of Fisheries and Agriculture announced in October 2019 that they had eliminated more than a thousand regulations relevant to their ministries.

The Iceland Chamber of Commerce operates an independent arbitration institute, the Nordic Arbitration Centre (NAC).  The NAC provides for a dispute resolution mechanism, allowing parties to solve their dispute efficiently and safely.  Both the arbitration process and the Arbitral Tribunals final awards are strictly confidential.  There have been no known cases of discrimination against U.S. investors.  For more information visit the Iceland Chamber of Commerce’s website: (https://www.chamber.is/arbitration).

Iceland scores 4.75 on the World Bank’s Global Indicators of Regulatory Governance index (https://rulemaking.worldbank.org/en/data/explorecountries/iceland#).

International Regulatory Considerations

Icelandic laws regulating business practices are generally consistent with other OECD members.  Iceland’s laws are generally based on EU directives due to Iceland’s membership in the EEA, which legally obligates it to adopt EU directives and law concerning four freedoms of the EU:  free movement, goods, services, persons, and capital.

Iceland has been a member of the World Trade Organization (WTO) since January 1, 1995.  Iceland and the United States signed a Trade and Investment Framework Agreement (TIFA) in January 2009.

Legal System and Judicial Independence

The Icelandic civil law system enforces property rights, contractual rights, and the means to protect these rights.  The Icelandic court system is independent from the parliament and government.  Foreign parties must abide by the same rules as Icelandic parties, and they enjoy the same privileges in court; there is no discrimination against foreign parties in the Icelandic court system.  When trade or investment disputes are settled, the settlement is usually remitted in the local currency.

Iceland has a three-tier judicial system; eight District Courts (Héraðsdómstólar), the Court of Appeal (Landsréttur), and the Supreme Court (Hæstiréttur Íslands).  All court actions commence at the District Courts, and conclusions can then be appealed to the Court of Appeal.  In special cases the conclusions of the Court of Appeal can be referred to the Supreme Court.  A new public agency, the Judicial Administration (Dómstólasýsla), along with the Court of Appeal (Landsréttur) began operating on January 1, 2018.

The Landsdómur is a special high court or impeachment court to handle cases where members of the Cabinet of Iceland are suspected of criminal behavior.  The Landsdómur has 15 members — five supreme court justices, a district court president, a constitutional law professor, and eight people chosen by parliament every six years.  The court assembled for the first time in 2011 to prosecute a former Prime Minister for alleged gross misconduct in the events leading up to the 2008 financial crisis; he was found guilty of failing to hold regular cabinet meetings during the crisis but was not convicted of gross misconduct.

Laws and Regulations on Foreign Direct Investment

Icelandic laws regulating and protecting foreign investments are consistent with OECD and EU standards.  As Iceland is a member of the EEA, most EU commercial legislation and directives are in effect in Iceland.  The major law governing foreign investment is the 1996 Act on Investment by Non-residents in Business Enterprises, which grants national treatment to non-residents of the EEA.  The law dictates that foreign ownership of businesses is generally unrestricted, except for limits in the fishing, energy, and aviation sectors.  However, there are precedents of such restrictions being circumvented by non-EEA companies that establish holding companies within the EEA.  Icelandic law also restricts the ability of non-EEA-citizens to own land, but the Ministry of Interior may waive this.  The managers and the majority of the board of directors in an Icelandic enterprise must be domiciled in Iceland or another EEA member state, although exemptions from this provision can be granted by the Ministry of Interior.

Iceland has no automatic screening process for investments that trigger national security concerns (similar to the Committee on Foreign Investment in the United States), although bidders in privatization sales may be required to go through a pre-qualification process to verify they possess the financial strength to participate.  Investors that intend to hold more than 10 percent of shares (“active” shareholders) in financial institutions are subject to approval from the Central Bank of Iceland (http://en.fme.is/).

For information on incentives and doing business in Iceland see Invest in Iceland’s website: (https://www.invest.is/doing-business/incentives-and-support).

Competition and Antitrust Laws

Competition Law no. 44/2005 is currently in place to promote competition and to prevent unreasonable barriers on economic operations.  Depending on the turnover of the companies in question, the Icelandic Competition Authority is notified of mergers and acquisitions.  The Authority may annul mergers or set conditions to prevent monopolies and limitations on competition.  For more information see the Competition Authority’s website: (https://en.samkeppni.is/).

Expropriation and Compensation

The Constitution of Iceland stipulates that no one may be obliged to surrender their property unless required by the government to serve a public interest, and that such a measure shall be provided for by law and full compensation be paid.  A special committee is appointed every five years to review and proclaim the legality of expropriation cases.  If the committee proclaims a case to be legal, it will negotiate an amount of compensation with the appropriate parties.  If an amount cannot be agreed upon, the committee determines a fair value after hearing the case of all parties.

As far as the U.S. Embassy is aware, the Icelandic government has never expropriated a foreign investment.  However, some private investors described actions by the Icelandic government before and during the October 2008 financial crisis (related to the takeover of three major banks and offshore krona assets) as a type of indirect expropriation (https://www.cb.is/financial-stability/foreign-exchange/offshore-krona-assets/).

Dispute Settlement

ICSID Convention and New York Convention

Iceland is a member state to the International Center for the Settlement of Investment Disputes (Washington Convention), as well as a signatory to the convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention).

Investor-State Dispute Settlement

Iceland has ratified the major international conventions governing arbitration and the settlement of investment disputes.

There was a public dispute in 2016 and 2017 between hedge funds based in the U.S. and UK, and the Icelandic Government concerning offshore krona owned by these hedge funds and capital controls in effect following the economic collapse in 2008.  These hedge funds filed a case against the Government of Iceland at the EFTA courts, but later dropped the case.

An Icelandic company that operates airports in Iceland grounded an airplane owned by an American leasing company in April 2019, due to outstanding debt towards the airport operator that an airline had accumulated.  The airline had just declared bankruptcy and owed the airport operator around 2 billion ISK (approx. $15.8 million) in landing fees.  The airport operator decided to ground the American plane that had been leased by the airline and insisted that the American company settled the airline’s debt.  The American company took the airport operator to court and won the case and the plane was released.

International Commercial Arbitration and Foreign Courts

The Iceland Chamber of Commerce operates an independent arbitration institute, called the Nordic Arbitration Centre.  The awards of the Arbitral Tribunals are final and binding for the parties.  Furthermore, due to Iceland’s ratification of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards the Tribunals awards are enforceable in over 144 countries.  For more information see the Iceland Chamber of Commerce’s website: (http://chamber.is/services/NAC).

Bankruptcy Regulations

The Bankruptcy Act of 1991, No. 21, applies to a debtor who has a social security number and is domiciled in Iceland.  The debtor can be a person, a company, or an institution.  The debtor has to apply for a license of financial reorganization or for composition with creditors.  In the case of a registered company, its registered domicile must be in Iceland.  If the company is unregistered, then its venue must also be in Iceland according to its articles of establishment.  The same applies to institutions.

Bankruptcy is not criminalized in Iceland.  Iceland ranks number 12 out of 190 economies on the World Bank´s Doing Business List for resolving insolvency.

6. Financial Sector

Capital Markets and Portfolio Investment

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

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

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

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

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

Money and Banking System

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

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

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

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

Foreign Exchange and Remittances

Foreign Exchange

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

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

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

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

Remittance Policies

Most restrictions on foreign exchange transactions and cross-border movement of domestic and foreign currency were lifted on March 14, 2017, when capital controls were lifted.  New foreign currency inflows fall under the Rules on Special Reserve Requirements for new Currency Inflows, no. 223/2019 which took effect on March 6, 2019, and replaced the older rules no. 490/2016 on the same subject.  The rules contain provisions on the implementation of special reserve requirements for new foreign currency inflows, including the special reserve base, holding period, special reserve ratio, settlement currency, and interest rates on deposit institutions’ capital flow accounts with the Central Bank of Iceland and Central Bank certificates of deposit.  The rules set the interest rate on capital flow accounts with the Central Bank of Iceland and Central Bank certificates of deposits at 0 percent and specify the Icelandic krona as the settlement currency.  The Foreign Exchange Act no. 87/1992 and the Act no. 42/2016 Amending the Foreign Exchange Act state that the holding period may range up to five years and that the special reserve ratio may range up to 75 percent; however, the aforementioned rules set the holding period at one year and the special reserve ratio at 0 percent.  For more information see the Central Bank of Iceland’s website (https://www.cb.is/foreign-exch/capital-flow-measures/).

Sovereign Wealth Funds

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

7. State-Owned Enterprises

The Icelandic Government owns wholly or has majority shares in 37 companies, including systemically important companies such as energy companies, the Icelandic National Broadcasting Service (RUV) and Iceland Post. Other notable SOEs are Islandsbanki and Landsbankinn (two out of three commercial banks in Iceland), Isavia (public company that operates Keflavik International Airport), and ATVR (the only company allowed to sell alcohol to the general public).  Here is a list of SOEs: https://www.stjornarradid.is/verkefni/rekstur-og-eignir-rikisins/felog-i-eigu-rikisins/.  Total assets of SOEs in 2019 amounted to 5,293 billion ISK (approx. $41.7 billion) and SOEs employed around 6,000 people that same year.  In terms of assets and equity, Landsbankinn (one of three commercial banks in Iceland) is the largest SOE in Iceland, and Isavia employs the most people.

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

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

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

In the midst of the banking crisis, the state, through the Financial Supervisory Authority (FME), took over Iceland’s three largest commercial banks, which collapsed in October 2008, and subsequently took over several savings banks to allow for uninterrupted banking services in the country.  The government has stated its intention to privatize Landsbanki and Islandsbanki.  The Bank Shares Management Company, established by the state in 2009, manages state-owned shares in financial companies.

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

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

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

Privatization Program

There are no privatization programs in Iceland at the moment.  However, the government of Iceland owns two commercial banks (Landsbankinn and Islandsbanki) and has stated that it intends to privatize both.  The government took ownership of the banks when the Icelandic banking system collapsed in 2008.  The Ministry of Finance and Economic Affairs reiterated on January 29, 2021 its intent to sell government of Iceland shares in Islandsbanki.

10. Political and Security Environment

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

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

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source* USG or international statistical source USG or International Source of Data:  BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount  
Host Country Gross Domestic Product (GDP) ($M USD) 2020 $23,164* 2019 $24,188 www.worldbank.org/en/country
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data:  BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2019 $59.7* 2019 $824 BEA data available at
https://apps.bea.gov/
international/factsheet/
Host country’s FDI in the United States ($M USD, stock positions) 2019 $268.3* 2019 $0 BEA data available at
https://www.bea.gov/international/
direct-investment-and-multinational-
enterprises-comprehensive-data
Total inbound stock of FDI as % host GDP 2019 32.5%* 2019 -1% UNCTAD data available at

https://stats.unctad.org/
handbook/EconomicTrends/Fdi.html
     

*Source for host country data: Statistics Iceland, GDP 2,940,638 million ISK, or $23,163.75 million using exchange rate on April 5, 2021 https://px.hagstofa.is/pxen/pxweb/en/Efnahagur/Efnahagur__thjodhagsreikningar__landsframl__1_landsframleidsla/THJ01102.px/table/tableViewLayout1/?rxid=c91a854e-8e6d-4ba1-aa3e-ba17655827ff

*Source for host country data: Central Bank of Iceland, foreign direct stocks in Iceland 7,581 million ISK, or $59.7 million using exchange rate on April 5, 2021 https://www.cb.is/statistics/statistics/2021/03/19/Direct-Investment/?stdID=5

*Source for host country data: Central Bank of Iceland, foreign direct investment position abroad, 34,065 million ISK, or $268.3 million using exchange rate on April 5, 2021.

*Source for host country data: Central Bank of Iceland, foreign direct investment stocks in Iceland, 1,011,131 million ISK, or $7,965 million using exchange rate on April 5, 2021.

Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward 8,760 100% Total Outward 5,883 100%
Luxembourg 2,481 28.3% The Netherlands 2,946 50.1%
The Netherlands 1,975 22.5% United Kingdom 764 13%
Switzerland 1,551 17.7% United States 310 5.3%
Denmark 490 5.6% British Virgin Islands 219 3.7%
Norway 330 3.8% Faroe Islands 214 3.6%
“0” reflects amounts rounded to +/- USD 500,000.
Table 4: Sources of Portfolio Investment
Portfolio Investment Assets
Top Five Partners (Millions, current US Dollars)
Total Equity Securities Total Debt Securities
All Countries 14,261 100% All Countries 12,905 100% All Countries 1,356 100%
Luxembourg 4,919 34.5% Luxembourg 4,919 38.1% United States 678 50%
Ireland 4,355 30.5% Ireland 4,355 33.7% France 179 13.2%
United States 2,927 20.5% United States 2,249 17.4% Belgium 98 7.2%
France 532 3.7% France 353 2.7% Norway 77 5.7%
Norway 398 2.8% Norway 320 2.5% UK 11 0.8%

India

Executive Summary

The Government of India continued to actively court foreign investment. In the wake of COVID-19, India enacted ambitious structural economic reforms, including new labor codes and landmark agricultural sector reforms, that should help attract private and foreign direct investment. In February 2021, the Finance Minister announced plans to raise $2.4 billion though an ambitious privatization program that would dramatically reduce the government’s role in the economy. In March 2021, parliament further liberalized India’s insurance sector, increasing the foreign direct investment (FDI) limits to 74 percent from 49 percent, though still requiring a majority of the Board of Directors and management personnel to be Indian nationals.

In response to the economic challenges created by COVID-19 and the resulting national lockdown, the Government of India enacted extensive social welfare and economic stimulus programs and increased spending on infrastructure and public health. The government also adopted production linked incentives to promote manufacturing in pharmaceuticals, automobiles, textiles, electronics, and other sectors. These measures helped India recover from an approximately eight percent fall in GDP between April 2020 and March 2021, with positive growth returning by January 2021.

India, however, remains a challenging place to do business. New protectionist measures, including increased tariffs, procurement rules that limit competitive choices, sanitary and phytosanitary measures not based on science, and Indian-specific standards not aligned with international standards, effectively closed off producers from global supply chains and restricted the expansion in bilateral trade.

The U.S. government continued to urge the Government of India to foster an attractive and reliable investment climate by reducing barriers to investment and minimizing bureaucratic hurdles for businesses.

 
Measure Year Index/ Rank Website Address
TI Corruption Perception Index 2020 86 of 180 https://www.transparency.org/en/countries/india
World Bank’s Doing Business Report: “Ease of Doing Business” 2019 63 of 190   https://www.doingbusiness.org/en/rankings?region=south-asia
Innovation Index 2020 48 of 131 https://www.wipo.int/global_innovation_index/en/2020
U.S. FDI in partner country (Million. USD stock positions) 2019 45,883 https://apps.bea.gov/international/factsheet/factsheet.cfm?Area=612&UUID=67171087-ee34-4983-ac05-984cc597f1f4
World Bank GNI per capita (USD) 2019 2120 https://data.worldbank.org/indicator/ny.gnp.pcap.cd

1. Openness To, and Restrictions Upon, Foreign Investment

Policies toward Foreign Direct Investment

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

DPIIT, under the Ministry of Commerce and Industry, is India’s chief investment regulator and policy maker. It compiles all policies related to India’s FDI regime into a single document to make it easier for investors to understand, and this consolidated policy is updated every year. The updated policy can be accessed at: http://dipp.nic.in/foreign-directinvestment/foreigndirectinvestment-policy.  DPIIT, through the Foreign Investment Implementation Authority (FIIA), plays an active role in resolving foreign investors’ project implementation problems and disseminates information about the Indian investment climate to promote investments. The Department establishes bilateral economic cooperation agreements in the region and encourages and facilitates foreign technology collaborations with Indian companies and DPIIT oftentimes consults with lead ministries and stakeholders. There however have been multiple incidents where relevant stakeholders reported being left out of consultations.

Limits on Foreign Control and Right to Private Ownership and Establishment

In most sectors, foreign and domestic private entities can establish and own businesses and engage in remunerative activities. Several sectors of the economy continue to retain equity limits for foreign capital as well as management and control restrictions, which deter investment. For example, the 2015 Insurance Act raised FDI caps from 26 percent to 49 percent, but also mandated that insurance companies retain “Indian management and control.” In the parliament’s 2021 budget session, the Indian government approved increasing the FDI caps in the insurance sector to 74 percent from 49 percent. However, the legislation retained the “Indian management and control” rider. In the August 2020 session of parliament, the government approved reforms that opened the agriculture sector to FDI, as well as allowed direct sales of products and contract farming, though implementation of these changes was temporarily suspended in the wake of widespread protests. In 2016, India allowed up to 100 percent FDI in domestic airlines; however, the issue of substantial ownership and effective control (SOEC) rules that mandate majority control by Indian nationals have not yet been clarified. A list of investment caps is accessible at: http://dipp.nic.in/foreign-directinvestment/foreign-directinvestment-policy .

Screening of FDI

All FDI must be reviewed under either an “Automatic Route” or “Government Route” process. The Automatic Route simply requires a foreign investor to notify the Reserve Bank of India of the investment and applies in most sectors. In contrast, investments requiring review under the Government Route must obtain the approval of the ministry with jurisdiction over the appropriate sector along with the concurrence of DPIIT. The government route includes sectors deemed as strategic including defense, telecommunications, media, pharmaceuticals, and insurance. In August 2019, the government announced a new package of liberalization measures and brought a number of sectors including coal mining and contract manufacturing under the automatic route.

FDI inflows were mostly directed towards the largest metropolitan areas – Delhi, Mumbai, Bangalore, Hyderabad, Chennai – and the state of Gujarat. The services sector garnered the largest percentage of FDI. Further FDI statistics are available at: http://dipp.nic.in/publications/fdistatistics. 

Other Investment Policy Reviews

OECD’s Indian Economic Snapshot: http://www.oecd.org/economy/india-economic-snapshot/ 

WTO Trade Policy Review: https://www.wto.org/english/tratop_e/tpr_e/tp503_e.htm 

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

Business Facilitation

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

Invest India  is the official investment promotion and facilitation agency of the Government of India, which is managed in partnership with DPIIT, state governments, and business chambers. Invest India specialists work with investors through their investment lifecycle to provide support with market entry strategies, industry analysis, partner search, and policy advocacy as required. Businesses can register online through the Ministry of Corporate Affairs website: http://www.mca.gov.in/ . After the registration, all new investments require industrial approvals and clearances from relevant authorities, including regulatory bodies and local governments. To fast-track the approval process, especially in the case of major projects, Prime Minister Modi started the Pro-Active Governance and Timely Implementation (PRAGATI initiative) – a digital, multi-modal platform to speed the government’s approval process. As of January 2020, a total of 275 project proposals worth around $173 billion across ten states were cleared through PRAGATI. Prime Minister Modi personally monitors the process to ensure compliance in meeting PRAGATI project deadlines. The government also launched an Inter-Ministerial Committee in late 2014, led by the DPIIT, to help track investment proposals that require inter-ministerial approvals. Business and government sources report this committee meets informally and on an ad hoc basis as they receive reports of stalled projects from business chambers and affected companies.

Outward Investment

The Ministry of Commerce’s India Brand Equity Foundation (IBEF) claimed in March 2020 that outbound investment from India had undergone a considerable change in recent years in terms of magnitude, geographical spread, and sectorial composition. Indian firms invest in foreign markets primarily through mergers and acquisition (M&A). According to a Care Ratings study, corporate India invested around $12.25 billion in overseas markets between April and December 2020. The investment was mostly into wholly owned subsidiaries of companies. In terms of country distribution, the dominant destinations were the Unites States ($2.36 billion), Singapore ($2.07 billion), Netherlands ($1.50 billion), British Virgin Islands ($1.37 billion), and Mauritius ($1.30 million).

3. Legal Regime

Transparency of the Regulatory System

Some government policies are written in a way that can be discriminatory to foreign investors or favor domestic industry. For example, approval in 2021 for higher FDI thresholds in the insurance sector came with a requirement of “Indian management and control.” On most occasions the rules are framed after thorough discussions by government authorities and require the approval of the cabinet and, in some cases, the Parliament as well. Policies pertaining to foreign investments are framed by DPIIT, and implementation is undertaken by lead federal ministries and sub-national counterparts. However, in some instances the rules have been framed without following any consultative process.

In 2017, India began assessing a six percent “equalization levy,” or withholding tax, on foreign online advertising platforms with the ostensible goal of “equalizing the playing field” between resident service suppliers and non-resident service suppliers. However, its provisions did not provide credit for taxes paid in other countries for services supplied in India. In February 2020, the FY 2020-21 budget included an expansion of the “equalization levy,” adding a two percent tax to the equalization levy on foreign e-commerce and digital services provider companies. Neither the original 2017 levy, nor the additional 2020 two percent tax applied to Indian firms. In February 2021, the FY 2021-22 budget included three amendments “clarifying” the 2020 equalization levy expansion that will significantly extend the scope and potential liability for U.S. digital and e-commerce firms. The changes to the levy announced in 2021 will be implemented retroactively from April 2020. The 2020 and 2021 changes were enacted without prior notification or an opportunity for public comment.

The Indian Accounting Standards were issued under the supervision and control of the Accounting Standards Board, a committee under the Institute of Chartered Accountants of India (ICAI), and has government, academic, and professional representatives. The Indian Accounting Standards are named and numbered in the same way as the corresponding International Financial Reporting Standards. The National Advisory Committee on Accounting Standards recommends these standards to the Ministry of Corporate Affairs, which all listed companies must then adopt. These can be accessed at: http://www.mca.gov.in/MinistryV2/Stand.html 

International Regulatory Considerations

India is a member of the South Asia Association for Regional Cooperation (SAARC), an eight- member regional block in South Asia. India’s regulatory systems are aligned with SAARC’s economic agreements, visa regimes, and investment rules. Dispute resolution in India has been through tribunals, which are quasi-judicial bodies. India has been a member of the WTO since 1995, and generally notifies all draft technical regulations to the WTO Committee on Technical Barriers to Trade; however, at times there are delays in publishing the notifications. The Governments of India and the United States cooperate in areas such as standards, trade facilitation, competition, and antidumping practices.

Legal System and Judicial Independence

India adopted its legal system from English law and the basic principles of the Common Law as applied in the UK are largely prevalent in India. However, foreign companies need to make adaptations for Indian Law and the Indian business culture when negotiating and drafting contracts in India to ensure adequate protection in case of breach of contract. The Indian judiciary provides for an integrated system of courts to administer both central and state laws. The judicial system includes the Supreme Court as the highest national court, as well as a High Court in each state or a group of states which covers a hierarchy of subordinate courts. Article 141 of the Constitution of India provides that a decision declared by the Supreme Court shall be binding on all courts within the territory of India. Apart from courts, tribunals are also vested with judicial or quasi-judicial powers by special statutes to decide controversies or disputes relating to specified areas.

Courts have maintained that the independence of the judiciary is a basic feature of the Constitution, which provides the judiciary institutional independence from the executive and legislative branches.

Indonesia

Executive Summary

Indonesia’s population of 270 million, Gross Domestic Product (GDP) over USD 1 trillion, growing middle class, abundant natural resources, and stable economy all serve as very attractive features to U.S. investors; however, a range of stakeholders note that investing in Indonesia remains challenging.  Since 2014, the Indonesian government under President Joko (“Jokowi”) Widodo, now in his second and final five-year term, has prioritized boosting infrastructure investment and human capital development to support Indonesia’s economic growth goals.  The COVID-19 pandemic has accelerated the Indonesian government’s efforts to pursue major economic reforms through the issuance of the 2020 Omnibus Law on Job Creation (Omnibus Law).  The law and its implementing regulations aim to improve Indonesia’s economic competitiveness and accelerate economic recovery by lowering corporate taxes, reforming rigid labor laws, simplifying business licenses, and reducing bureaucratic and regulatory barriers to investment.  The regulations also provide a basis to liberalize hundreds of sectors, including healthcare services, insurance, power generation, and oil and gas.  Sectoral or technical regulations may still present obstacles.  Regardless of the outcome of these positive reforms and their implementation, factors such as a decentralized decision-making process, legal and regulatory uncertainty, economic nationalism, trade protectionism, and powerful domestic vested interests in both the private and public sectors can contribute to a complex investment climate.  Other factors relevant to investors include:  government requirements, both formal and informal, to partner with Indonesian companies, and to manufacture or purchase goods and services locally; restrictions on some imports and exports; and pressure to make substantial, long-term investment commitments.  Despite recent limits placed on its authority, the Indonesian Corruption Eradication Commission (KPK) continues to investigate and prosecute corruption cases.  However, investors still cite corruption as an obstacle to pursuing opportunities in Indonesia.

Other barriers to foreign investment that have been reported include difficulties in government coordination, the slow rate of land acquisition for infrastructure projects, weak enforcement of contracts, bureaucratic inefficiency, and delays in receiving refunds for advance corporate tax overpayments from tax authorities.  Businesses also face difficulty from changes to rules at government discretion with little or no notice and opportunity for comment, and lack of stakeholder consultation in the development of laws and regulations at various levels.  Investors have noted that many new regulations are difficult to understand and often not properly communicated, including internally.  The Indonesian government is seeking to streamline the business license and import permit process, which has been plagued by complex inter-ministerial coordination in the past, through the establishment of a “one stop shop” for risk-based licenses and permits via an online single submission (OSS) system at the Indonesia Investment Coordinating Board (BKPM).

In February 2021, Indonesia introduced a priority list consisting of sectors that are open for foreign investment and eligible for investment incentives to replace the 2016 Negative Investment List.  All sectors are at least partially open to foreign investment, with the exception of seven closed sectors and sectors that are reserved for the central government.  Companies have reported that energy and mining still face significant foreign investment barriers.

Indonesia established the Indonesian Investment Authority (INA), also known as the sovereign wealth fund, upon the enactment of the Omnibus Law, aiming to attract foreign equity and long-term investment to finance infrastructure projects in sectors such as transportation, oil and gas, health, tourism, and digital technologies.

Indonesia began to abrogate its more than 60 existing Bilateral Investment Treaties (BITs) in 2014, allowing some of the agreements to expire in order to be renegotiated, including through ongoing negotiations of bilateral trade agreements.  In March 2021, Indonesia and Singapore ratified a new BIT, the first since 2014.  The United States does not have a BIT with Indonesia.

Despite the challenges that industry has reported, Indonesia continues to attract significant foreign investment.  Singapore, the Netherlands, the United States, Japan, and Malaysia were among the top sources of foreign investment in the country in 2019 (latest available full-year data).  Private consumption is the backbone of Indonesia’s economy, the largest in ASEAN, making it a promising destination for a wide range of companies, ranging from consumer products and financial services, to digital start-ups and franchisors.  Indonesia has ambitious plans to continue to improve its infrastructure with a focus on expanding access to energy, strengthening its maritime transport corridors, which includes building roads, ports, railways and airports, as well as improving agricultural production, telecommunications, and broadband networks throughout the country.  Indonesia continues to attract U.S. franchises and consumer product manufacturers.  UN agencies and the World Bank have recommended that Indonesia do more to grow financial and investor support for women-owned businesses, noting obstacles that women-owned business sometimes face in early-stage financing.

Table 1
Measure Year Index or Rank Website Address
TI Corruption Perceptions index 2020 102 of 180 https://www.transparency.org/en/cpi/2020/index/idn
World Bank’s Doing Business Report “Ease of Doing Business” 2020 73 of 190 http://www.doingbusiness.org/rankings
Global Innovation Index 2020 85 of 131 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, stock positions) 2019 $12,151 https://apps.bea.gov/iTable/iTable.cfm?ReqID=2&step=1
World Bank GNI per capita 2019 $4,050 https://data.worldbank.org/indicator/NY.GNP.PCAP.CD?locations=ID

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Indonesia is an attractive destination for foreign direct investment (FDI) due to its young population, strong domestic demand, stable political situation, abundant natural resources, and well-regarded macroeconomic policy.  Indonesian government officials often state that they welcome increased FDI, aiming to create jobs, spur economic growth, and court foreign investors, notably focusing on infrastructure development and export-oriented manufacturing.  During the first term of President Jokowi’s administration, the government launched sixteen economic policy packages providing tax incentives in certain sectors, cutting red tape, reducing logistics costs, and creating a single submission system for business licensing applications.  Foreign investors, however, have complained about vague and conflicting regulations, bureaucratic inefficiencies, ambiguous legislation in regards to tax enforcement, poor existing infrastructure, rigid labor laws, sanctity of contract issues, and corruption.  To further improve the investment climate, the government drafted and parliament approved the Omnibus Law on Job Creation (Law No. 1/2020) in October 2020 to amend dozens of prevailing laws deemed to hamper investment.  It introduced a risk-based approach for business licensing, simplified environmental requirements and building certificates, tax reforms to ease doing business, more flexible labor regulations, and the establishment of the priority investment list.  It also streamlined the business licensing process at the regional level

The Indonesia Investment Coordinating Board, or BKPM, serves as an investment promotion agency, a regulatory body, and the agency in charge of approving planned investments in Indonesia.  As such, it is the first point of contact for foreign investors, particularly in manufacturing, industrial, and non-financial services sectors.  BKPM’s OSS system streamlines almost all business licensing and permitting processes, based on the issuance of Government Regulation No. 24/2018 on Electronic Integrated Business Licensing Services.  While the OSS system is operational, overlapping authority for permit issuance across ministries and government institutions, both at the national and subnational level, remains challenging.  The Omnibus Law on Job Creation requires local governments to integrate their license systems into the OSS.  The law allows the central government to take over local governments’ authority if local governments are not performing.  The government has provided investment incentives particularly for “pioneer” sectors (please see the section on Industrial Policies).

Limits on Foreign Control and Right to Private Ownership and Establishment

As part of the implementation of the Omnibus Law on Job Creation, the Indonesian government enacted Presidential Regulation No. 10/2021 to introduce a significant liberalization of foreign investment in Indonesia, repealing the 2016 Negative List of Investment (DNI).  In contrast to the previous regulation, the new investment list sets a default principle that all business sectors are open for investment unless stipulated otherwise.  It details the seven sectors that are closed to investment, explains that public services and defense are reserved for the central government, and outlines four categories of sectors that are open to investment: priority investment sectors that are eligible for incentives; sectors that are reserved for micro, small, and medium enterprises (MSMEs) and cooperatives or open to foreign investors who cooperate with them; sectors that are open with certain requirements (i.e., with caps on foreign ownership or special permit requirements); and sectors that are fully open for foreign investment.  Although hundreds of sectors that were previously closed or subject to foreign ownership caps are in theory open to 100 percent foreign investment, in practice technical and sectoral regulations may stipulate different or conflicting requirements that still need to be resolved.

In total, 245 business fields listed in the new Investment Priorities List, or DPI, are eligible for fiscal and non-fiscal incentives, notably pioneer industries, export-oriented manufacturing, capital intensive industries, national infrastructure projects, digital economy, labor-intensive industries, as well as research and development activities.  Restrictions on foreign ownership in telecommunications and information technology (e.g., internet providers, fixed telecommunication providers, mobile network providers), construction services, oil and gas support services, electricity, distribution, plantations, and transportation were removed.  Healthcare services including hospitals/clinics, wholesale of pharmaceutical raw materials, and finished drug manufacturing are fully open for foreign investment, which was previously capped in certain percentages.  The regulation also reduced the number of business fields that are subject to certain requirements to only 46 sectors.  Domestic sea transportation and postal services are open up to 49 percent of foreign ownership, while press, including magazines and newspapers, and broadcasting sectors are open up to 49 percent and 20 percent, respectively, but only for business expansion or capital increases.  Small plantations, industry related to special cultural heritage, and low technology industries or industries with capital less than IDR10 billion (USD 700,000) are reserved for MSMEs and cooperatives.  Foreign investors in partnership with MSMEs and cooperatives can invest in certain designated areas.  The new investment list shortened the number of restricted sectors from 20 to 7 categories including cannabis, gambling, fishing of endangered species, coral extraction, alcohol, industries using ozone-depleting materials, and chemical weapons.  In addition, while education investment is still subject to the Education Law, Government Regulation No. 40/2021 permits education and health investment as business activities in special economic zones.

In 2016, Bank Indonesia (BI) issued Regulation No. 18/2016 on the implementation of payment transaction processing.  The regulation governs all companies providing the following services: principal, issuer, acquirer, clearing, final settlement operator, and operator of funds transfer.  The BI regulation capped foreign ownership of payments companies at 20 percent, though it contained a grandfathering provision.  BI’s Regulation No. 19/2017 on the National Payment Gateway (NPG) subsequently imposed a 20 percent foreign equity cap on all companies engaging in domestic debit switching transactions.  Firms wishing to continue executing domestic debit transactions are obligated to sign partnership agreements with one of Indonesia’s four NPG switching companies.  In December 2020, BI issued umbrella Regulation No. 22/23/2020 on the Payment System, which implements BI’s 2025 Payment System Blueprint and introduces a risk-based categorization and licensing system.  The regulation will enter into force on July 1, 2021.  It allows 85 percent foreign ownership of non-bank payment services providers, although at least 51 percent of shares with voting rights must be owned by Indonesians.  The 20 percent foreign equity cap remains in place for payment system infrastructure operators who handle clearing and settlement services, and a grandfathering provision remains in effect for existing licensed payment companies.

Foreigners may purchase equity in state-owned firms through initial public offerings and the secondary market.  Capital investments in publicly listed companies through the stock exchange are generally not subject to the limitation of foreign ownership as stipulated in Presidential Regulation No. 10/2021.

Indonesia’s vast natural resources have attracted significant foreign investment and continue to offer significant prospects.  However, some companies report that a variety of government regulations have made doing business in the resources sector increasingly difficult, and Indonesia now ranks 64th of 76 jurisdictions in the Fraser Institute’s 2019 Mining Policy Perception Index.  In 2012, Indonesia banned the export of raw minerals, dramatically increased the divestment requirements for foreign mining companies, and required major mining companies to renegotiate their contracts of work with the government.  The full export ban did not come into effect until January 2017, when the government also issued new regulations allowing exports of copper concentrate and other specified minerals, while imposing onerous requirements.  Of note for foreign investors, provisions of the regulations require that in order to export mineral ores, companies with contracts of work must convert to mining business licenses – and thus be subject to prevailing regulations – and must commit to build smelters within the next five years.  Also, foreign-owned mining companies must gradually divest 51 percent of shares to Indonesian interests over ten years, with the price of divested shares determined based on a “fair market value” determination that does not take into account existing reserves.  In January 2020, the government banned the export of nickel ore for all mining companies, foreign and domestic, in the hopes of encouraging construction of domestic nickel smelters.  In March 2021, the Ministry of Energy and Natural Resources issued a Ministerial Decision to allow mining business licenses holders who have not reached smelter development targets to continue exporting raw mineral ores under certain conditions.  The 2020 Mining Law returned the authority to issue mining licenses to the central government.  Local governments retain only authority to issue small scale mining permits

Other Investment Policy Reviews

The latest World Trade Organization (WTO) Investment Policy Review of Indonesia was conducted in December 2020 and can be found on the WTO website: https://www.wto.org/english/tratop_e/tpr_e/tp501_e.htm

The last OECD Investment Policy Review of Indonesia, conducted in 2020, can be found on the OECD website:

https://www.oecd.org/investment/oecd-investment-policy-reviews-indonesia-2020-b56512da-en.htm

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

Business Facilitation

In order to conduct business in Indonesia, foreign investors must be incorporated as a foreign-owned limited liability company (PMA) through the Ministry of Law and Human Rights.  Once incorporated, a PMA must fulfill business licensing requirements through the OSS system.  In February 2021, the Indonesian government issued Government Regulation No. 5/2021 introducing a risk-based approach and streamlined business licensing process for almost all sectors.  The regulation classifies business activities into categories of low, medium, and high risk which will further determine business licensing requirements for each investment.  Low-risk business activities only require a business identity number (NIB) to start commercial and production activities.  An NIB will also serve as import identification number, customs access identifier, halal guarantee statement (for low risk), and environmental management and monitoring capability statement letter (for low risk).  Medium-risk sectors must obtain an NIB and a standard certification.  Under the regulation, a standard certificate for medium-low risk is a self-declared statement of the fulfillment of certain business standards, while a standard certificate for medium-high risk must be verified by the relevant government agency.  High-risk sectors must apply for a full business license, including an environmental impact assessment (AMDAL).  A business license remains valid as long as the business operates in compliance with Indonesian laws and regulations.  A grandfather clause applies for existing businesses that have obtained a business license.

Foreign investors are generally prohibited from investing in MSMEs in Indonesia, although the Presidential Regulation No. 10/2021 opened some opportunities for partnerships in farming, two- and three-wheeled vehicles, automotive spare parts, medical devices, ship repair, health laboratories, and jewelry/precious metals.

According to Presidential Instruction 7/2019, BKPM is responsible for issuing “investment licenses” (the term used to encompass both NIB and other business licenses) that have been delegated from all relevant ministries and government institutions to foreign entities through the OSS system, an online portal which allows foreign investors to apply for and track the status of licenses and other services online.  BKPM has also been tasked to review policies deemed unfavorable for investors.  While the OSS’s goal is to help streamline investment approvals, investments in the mining, oil and gas, and financial sectors still require licenses from related ministries and authorities.  Certain tax and land permits, among others, typically must be obtained from local government authorities.  Though Indonesian companies are only required to obtain one approval at the local level, businesses report that foreign companies often must seek additional approvals in order to establish a business.  Government Regulation No. 6/2021 requires local governments to integrate their business licenses system into the OSS system and standardizes services through a service-level agreement between the central and local governments.

Outward Investment

Indonesia’s outward investment is limited, as domestic investors tend to focus on the large domestic market.  BKPM has responsibility for promoting and facilitating outward investment, to include providing information about investment opportunities in other countries.  BKPM also uses its investment and trade promotion centers abroad to match Indonesian companies with potential investment opportunities.  The government neither restricts nor provides incentives for outward private sector investment.  The Ministry of State-Owned Enterprises (SOEs) encourages Indonesian SOEs through the SOE Go Global Program to increase their investment abroad, aiming to improve Indonesia’s supply chain and establish demand for Indonesian exports in strategic markets.  Indonesian SOEs reportedly accounted for around USD17.5 billion in outward investment in 2019.

3. Legal Regime

Transparency of the Regulatory System

Indonesia continues to bring its legal, regulatory, and accounting systems into compliance with international norms and agreements, but foreign investors have indicated they still encounter challenges in comparison to domestic investors and have criticized the current regulatory system for its failure to establish clear and transparent rules for all actors.  Certain laws and policies establish sectors that are either fully off-limits to foreign investors or are subject to substantive conditions.  In an effort to improve the investment climate and create jobs, Indonesia overhauled more than 70 laws and thousands of regulations through the enactment of the Omnibus Law on Job Creation.  Presidential Regulation No. 10/2021, one of 51 implementing regulations for the Omnibus Law adopted in February 2021, replaced the 2016 DNI with a new investment scheme that significantly reduced the number of sectors that are closed to foreign investment.

U.S. businesses cite regulatory uncertainty and a lack of transparency as two significant factors hindering operations.  U.S. companies note that regulatory consultation in Indonesia is inconsistent, despite the existence of Law No. 12/2011 on the Development of Laws and Regulations and its implementing Government Regulation No. 87/204, which states that the community is entitled to provide oral or written input into draft laws and regulations.  The law also sets out procedures for revoking regulations and introduces requirements for academic studies as a basis for formulating laws and regulations.  Nevertheless, the absence of a formal consultation mechanism has been reported to lead to different interpretations among policy makers of what is required.  Laws and regulations are often vague and require substantial interpretation by the implementers, leading to business uncertainty and rent-seeking opportunities.

Decentralization has introduced another layer of bureaucracy and red tape for firms to navigate.  In 2016, the Jokowi administration repealed 3,143 regional bylaws that overlapped with other regulations and impeded the ease of doing business.  However, a 2017 Constitutional Court ruling limited the Ministry of Home Affairs’ authority to revoke local regulations and allowed local governments to appeal the central government’s decision.  The Ministry continues to play a consultative function in the regulation drafting stage, providing input to standardize regional bylaws with national laws.  The Omnibus Law on Job Creation provided a legal framework to streamline regulations.  It establishes the norms, standards, procedures, criteria (NSPK) and performance requirements in administering government affairs for both the central and local governments.  Law No. 11/2020 aims to harmonize licensing requirements at the central and regional levels.  Under that law and its implementing regulations, the central government has the authority to take over regional business licensing if local governments do not meet performance requirements.  Local governments must also obtain recommendations from the Ministries of Home Affairs and Finance prior to implementing local tax regulations.

In 2017, Presidential Instruction No. 7/2017 was enacted to improve coordination among ministries in the policy-making process.  The regulation requires lead ministries to coordinate with their respective coordinating ministry before issuing a regulation.  The regulation also requires ministries to conduct a regulatory impact analysis and provide an opportunity for public consultation.  The presidential instruction did not address the frequent lack of coordination between the central and local governments.  The Omnibus Law on Job Creation enhanced the predictability of trade policy by moving the authority to issue trade regulations from the ministry-level (Ministry of Trade regulation) to the cabinet-level (government regulation).

International Regulatory Considerations

As an ASEAN member, Indonesia has successfully implemented regional initiatives, including the real-time movement of electronic import documents through the ASEAN Single Window, which reduces shipping costs, speeds customs clearance, and limits corruption opportunities.  Indonesia has committed to ratifying the ASEAN Comprehensive Investment Agreement (ACIA), ASEAN Framework Agreement on Services (AFAS), and the ASEAN Mutual Recognition Arrangement.  Notwithstanding the progress made in certain areas, the often-lengthy process of aligning national legislation has caused delays in implementation.  The complexity of interagency coordination and/or a shortage of technical capacity are among the challenges being reported.

Indonesia joined the WTO in 1995.  Indonesia’s National Standards Body (BSN) is the primary government agency to notify draft regulations to the WTO concerning technical barriers to trade (TBT) and sanitary and phytosanitary standards (SPS); however, in practice, notification is inconsistent.  In December 2017, Indonesia ratified the WTO Trade Facilitation Agreement (TFA).  Indonesia has met 88.7 percent of its commitments to the TFA provisions to date, including publication of information, consultations, advance rulings, detention and test procedures, , goods clearance, import/export formalities, and goods transit.

Indonesia is a Contracting Party to the Aircraft Protocol to the Convention of International Interests in Mobile Equipment (Cape Town Convention).  However, foreign investors bringing aircraft to Indonesia to serve the general aviation sector have faced difficulty utilizing Cape Town Convention provisions to recover aircraft leased to Indonesian companies.  Foreign owners of leased aircraft that have become the subject of contractual lease disputes with Indonesian lessees have been unable to recover their aircraft in certain circumstances.

Legal System and Judicial Independence

Indonesia’s legal system is based on civil law.  The court system consists of District Courts (primary courts of original jurisdiction), High Courts (courts of appeal), and the Supreme Court (the court of last resort).  Indonesia also has a Constitutional Court.  The Constitutional Court has the same legal standing as the Supreme Court, and its role is to review the constitutionality of legislation.  Both the Supreme and Constitutional Courts have authority to conduct judicial review.

Corruption continues to plague Indonesia’s judiciary, with graft investigations involving senior judges and court staff.  Many businesses note that the judiciary is susceptible to influence from outside parties.  Certain companies have claimed that the court system often does not provide the necessary recourse for resolving property and contractual disputes and that cases that would be adjudicated in civil courts in other jurisdictions sometimes result in criminal charges in Indonesia.

Judges are not bound by precedent and many laws are open to various interpretations.  A lack of clear land titles has plagued Indonesia for decades, although land acquisition law No. 2/2012 includes legal mechanisms designed to resolve some past land ownership issues.  The Omnibus Law on Job Creation also created a land bank to facilitate land acquisition for priority investment projects.  Government Regulation No. 27/2017 provided incentives for upstream energy development and also regulates recoverable costs from production sharing contracts.  Indonesia has also required mining companies to renegotiate their contracts of work to include higher royalties, more divestment to local partners, more local content, and domestic processing of mineral ore.

Indonesia’s commercial code, grounded in colonial Dutch law, has been updated to include provisions on bankruptcy, intellectual property rights, incorporation and dissolution of businesses, banking, and capital markets.  Application of the commercial code, including the bankruptcy provisions, remains uneven, in large part due to corruption and training deficits for judges and lawyers.

Laws and Regulations on Foreign Direct Investment

FDI in Indonesia is regulated by Law No. 25/2007 (the Investment Law).  Under the law, any form of FDI in Indonesia must be in the form of a limited liability company with minimum capital of IDR 10 billion (USD 700,000) excluding land and building and with the foreign investor holding shares in the company.  The Omnibus Law on Job Creation allows foreign investors to invest below IDR 10 billion in technology-based startups in special economic zones.  The Law also introduces a number of provisions to simplify business licensing requirements, reforms rigid labor laws, introduces tax reforms to support ease of doing business, and establishes the Indonesian Investment Authority (INA) to facilitate direct investment.  In addition, the government repealed the 2016 Negative Investment List through the issuance of Presidential Regulation No. 10/2021, introducing major reforms that removed restrictions on foreign ownership in hundreds of sectors that were previously closed or subject to foreign ownership caps.  A number of sectors remain closed to investment or are otherwise restricted.  Presidential Regulation No. 10/2021 contains a grandfather clause that clarifies that existing investments will not be affected unless treatment under the new regulation is more favorable or the investment has special rights under a bilateral agreement.  The Indonesian government also expanded business activities in special economic zones to include education and health. (See section on limits on foreign control regarding the new list of investments.)  The website of the Indonesia Investment Coordinating Board (BKPM) provides information on investment requirements and procedures:  https://nswi.bkpm.go.id/guide.  Indonesia mandates reporting obligations for all foreign investors through the OSS system as stipulated in BKPM Regulation No.6/2020.  (See section two for Indonesia’s procedures for licensing foreign investment.)

Competition and Anti-Trust Laws

The Indonesian Competition Authority (KPPU) implements and enforces the 1999 Indonesia Competition Law.  The KPPU reviews agreements, business practices and mergers that may be deemed anti-competitive, advises the government on policies that may affect competition, and issues guidelines relating to the Competition Law.  Strategic sectors such as food, finance, banking, energy, infrastructure, health, and education are KPPU’s priorities.  The Omnibus Law on Job Creation and its implementing regulation, Government Regulation No. 44/2021, removes criminal sanctions and the cap on administrative fines, which was set at a maximum of IDR 25 billion (USD 1.7 million) under the previous regulation.  Appeals of KPPU decisions must be processed through the commercial court.

Expropriation and Compensation

Indonesia’s political leadership has long championed economic nationalism, particularly concerning mineral and oil and gas reserves.  According to Law No. 25/2007 (the Investment Law), the Indonesian government is barred from nationalizing or expropriating an investor’s property rights, unless provided by law.  If the Indonesian government nationalizes or expropriates an investors’ property rights, it must provide market value compensation.

Presidential Regulation No. 77/2020 on Government Use of Patent and the Ministry of Law and Human Rights (MLHR) Regulation No. 30/2019 on Compulsory Licenses (CL) enables patent right expropriation in cases deemed in the interest of national security or due to a national emergency.  Presidential Regulation No.77/2020 allows a GOI agency or Ministry to request expropriation, while MLHR Regulation No. 30/2019 allows an individual or private party to request a CL.

Dispute Settlement

ICSID Convention and New York Convention

Indonesia is a member of the International Center for Settlement of Investment Disputes (ICSID) and the United Nations Commission on International Trade Law (UNCITRAL) through the ratification of the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention).  Thus, foreign arbitral awards are in theory legally recognized and enforceable in Indonesian courts; however, some investors note that these awards are not always enforced in practice.

Investor-State Dispute Settlement

Since 2004, Indonesia has faced seven known Investor-State Dispute Settlement (ISDS) arbitration cases, including those that have been settled, and discontinued cases.  In 2016, an ICSID tribunal ruled in favor of Indonesia in the arbitration case of British firm Churchill Mining.  In March 2019, the tribunal rejected an annulment request from the claimants.  In 2019, a Dutch arbitration court ruled in favor of the Indonesian government in a USD 469 million arbitration case against Indian firm Indian Metals & Ferro Alloys.  Two cases involving Newmont Nusa Tenggara under the BIT with the Netherlands and Oleovest under the BIT with Singapore were discontinued.

Indonesia recognizes binding international arbitration of investment disputes in its bilateral investment treaties (BITs).  All of Indonesia’s BITs include the arbitration under ICSID or UNCITRAL rules, except the BIT with Denmark.  However, in response to an increase in the number of arbitration cases submitted to ICSID, BKPM formed an expert team to review the current generation of BITs and formulate a new model BIT that would seek to better protect perceived national interests.  The Indonesian model BIT is reportedly reflected in newly signed investment agreements.

In spite of the cancellation of many BITs, the 2007 Investment Law still provides protection to investors through a grandfather clause.  In addition, Indonesia also has committed to ISDS provisions in regional or multilateral agreements signed by Indonesia (i.e. ASEAN Comprehensive Investment Agreement).

International Commercial Arbitration and Foreign Courts

Judicial handling of investment disputes remains mixed.  Indonesia’s legal code recognizes the right of parties to apply agreed-upon rules of arbitration.  Some arbitration, but not all, is handled by Indonesia’s domestic arbitration agency, the Indonesian National Arbitration Body.

Companies have resorted to ad hoc arbitrations in Indonesia using the UNCITRAL model law and ICSID arbitration rules.  Though U.S. firms have reported that doing business in Indonesia remains challenging, there is not a clear pattern or significant record of investment disputes involving U.S. or other foreign investors.  Companies complain that the court system in Indonesia works slowly as international arbitration awards, when enforced, may take years from original judgment to payment.

Bankruptcy Regulations

Indonesian Law No. 37/2004 on Bankruptcy and Suspension of Obligation for Payment of Debts is viewed as pro-creditor, and the law makes no distinction between domestic and foreign creditors.  As a result, foreign creditors have the same rights as all potential creditors in a bankruptcy case, as long as foreign claims are submitted in compliance with underlying regulations and procedures.  Monetary judgments in Indonesia are made in local currency.

6. Financial Sector

Capital Markets and Portfolio Investment

The Indonesia Stock Exchange (IDX) index has 713 listed companies as of December 2020 with a daily trading volume of USD 642.5 million and market capitalization of USD 486 billion.  Over the past six years, there has been a 43 percent increase in the number listed companies, but the IDX is dominated by its top 20 listed companies, which represent 55.5 percent of the market cap.  There were 51 initial public offerings in 2020 – one more than in 2019.  During the fourth quarter of  2020, domestic entities conducted 66 percent of total IDX stock trades.

Government treasury bonds are the most liquid bonds offered by Indonesia.  Corporate bonds are less liquid due to less public knowledge of the product and the shallowness of the market.  The government also issues sukuk (Islamic treasury notes) as part of its effort to diversify Islamic debt instruments and increase their liquidity.  Indonesia’s sovereign debt as of March 2021 was rated as BBB by Standard and Poor’s, BBB by Fitch Ratings and Baa2 by Moody’s.

OJK began overseeing capital markets and non-banking institutions in 2013, replacing the Capital Market and Financial Institution Supervisory Board.  In 2014, OJK also assumed BI’s supervisory role over commercial banks.  Foreigners have access to the Indonesian capital markets and are a major source of portfolio investment.  Indonesia respects International Monetary Fund (IMF) Article VIII by refraining from restrictions on payments and transfers for current international transactions.

Money and Banking System

Although there is some concern regarding the operations of the many small and medium sized family-owned banks, the banking system is generally considered sound, with banks enjoying some of the widest net interest margins in the region.  As of December 2020, commercial banks had IDR 9,178 trillion (USD 640 billion) in total assets, with a capital adequacy ratio of 23.9 percent.  Outstanding loans fell by 2.4 percent in 2020 compared to growth of 6.08 percent in 2019, due to the COVID-19 pandemic induced recession.  Gross non-performing loans (NPL) in December 2020 increased to 3.06 percent from 2.53 percent the previous year.  Rising NPL rates were partly mitigated through a loan restructuring program implemented by OJK as part of the COVID-19 recovery efforts.

OJK Regulation No.56/03/2016 limits bank ownership to no more than 40 percent by any single shareholder, applicable to foreign and domestic shareholders.  This does not apply to foreign bank branches in Indonesia.  Foreign banks may establish branches if the foreign bank is ranked among the top 200 global banks by assets.  A special operating license is required from OJK in order to establish a foreign branch.  The OJK granted an exception in 2015 for foreign banks buying two small banks and merging them.  To establish a representative office, a foreign bank must be ranked in the top 300 global banks by assets.

On March 16, 2020, OJK issued Regulation Number 12/POJK.03/2020 on commercial bank consolidation.  The regulation aims to strengthen the structure, and competitiveness of the national banking industry by increasing bank capital and encouraging consolidation of banks in Indonesia.  This regulation increases minimum core capital requirements for commercial banks and Capital Equivalency Maintained Asset requirements for foreign banks with branch offices by least IDR 3 trillion (USD 209 million), by December 31, 2022.

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

Growing digitalization of banking services, spurred on by innovative payment technologies in the financial technology (fintech) sector, complements the conventional banking sector.  Peer-to-peer (P2P) lending companies and e-payment services have grown rapidly over the past decade.  Indonesian policymakers are hopeful that these fintech services can reach underserved or unbanked populations and micro, small, and medium-sized enterprises (MSMEs).  As of June 2020, fintech lending reached IDR 113.46 trillion (USD 7.6 billion) in loan disbursements, while payment transactions using e-money in 2020 are estimated to have increased by 38.5 percent to IDR 201 trillion (USD 14 billion) year-on-year.

Foreign Exchange and Remittances

Foreign Exchange

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

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

Under the 2007 Investment Law, Indonesia gives assurance to investors relating to the transfer and repatriation of funds, in foreign currency, on:capital, profit, interest, dividends and other income;

funds required for (i) purchasing raw material, intermediate goods or final goods, and (ii) replacing capital goods for continuation of business operations;

additional funds required for investment;

funds for debt payment;

royalties;

income of foreign individuals working on the investment;

earnings from the sale or liquidation of the invested company;

compensation for losses; and

compensation for expropriation.

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

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

Remittance Policies

The government places no restrictions or time limitations on investment remittances.  However, certain reporting requirements exist.  Banks should adopt Know Your Customer (KYC) principles to carefully identify customers’ profile to match transactions.  Indonesia does not engage in currency manipulation.

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

Sovereign Wealth Funds

The Indonesian Investment Authority (INA), also known as the sovereign wealth fund, was legally established by the 2020 Omnibus Law on Job Creation.  INA’s supervisory board and board of directors were selected through competitive processes and announced in January and February 2021.  The government has capitalized INA with USD 2 billion through injections from the state budget and intends to add another USD 3 to 4 billion in state-owned assets.  INA aims to attract foreign equity and invest that capital in long-term Indonesian assets to improve the value of the assets through enhanced management.  According to Indonesian government officials, the fund will consist of a master portfolio with sector-specific sub-funds, such as infrastructure, oil and gas, health, tourism, and digital technologies.

7. State-Owned Enterprises

Indonesia had 114 state-owned enterprises (SOEs) and 28 subsidiaries divided into 12 sectors as of December 2019.  In April 2020, the Ministry of SOEs began consolidating SOEs, with the target of reducing the total number of SOEs to 41.  As of January 2021, 20 were listed on the Indonesian stock exchange.  In addition, 14 are special purpose entities under the SOE Ministry and eight are under the Ministry of Finance.  Since mid-2016, the Indonesian government has been publicizing plans to consolidate SOEs into six holding companies based on sector of operations.  In 2017, Indonesia announced the creation of a mining holding company, PT Inalum, the first of the six planned SOE-holding companies.  The others under discussion include plantations, fertilizer, and oil and gas.  In 2020, two holding companies in pharmaceuticals and insurance were established, and three state-owned sharia banks were merged.  A holding company in tourism is being prepared with a target of completion by the end of 2021.

Since his appointment by President Jokowi in November 2019, Minister of SOEs Erick Thohir has underscored the need to reform SOEs in line with President Jokowi’s second-term economic agenda.  Thohir has noted the need to liquidate underperforming SOEs, ensure that SOEs improve their efficiency by focusing on core business operations, and introduce better corporate governance principles.  Thohir has spoken publicly about his intent to push SOEs to undertake initial public offerings (IPOs) on the Indonesian Stock Exchange.  He also encourages SOEs to increase outbound investment to support Indonesia’s supply chain in strategic markets, including through acquisition of cattle farms, phosphate mines, and salt mines.

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

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

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

Privatization Program

While some state-owned enterprises have offered shares on the stock market, Indonesia does not have an active privatization program.  The government plans to capitalize the Indonesia Investment Authority (INA) with USD 4 billion in state-owned assets to attract equity investments in those assets, which may eventually be sold to investors or listed on the stock market.

10. Political and Security Environment

As in other democracies, politically motivated demonstrations occasionally occur throughout Indonesia, but are not a major or ongoing concern for most foreign investors.  Since the Bali bombings in 2002 that killed over 200 people, Indonesian authorities have aggressively continued to pursue terrorist cells throughout the country, disrupting multiple aspirational plots.  Despite these successes, violent extremist networks and terrorist cells remain intact and have the capacity to  conduct attacks with little or no warning, as do lone wolf-style ISIS sympathizers.

Foreign investors in Papua face certain unique challenges.  Indonesian security forces occasionally conduct operations against the Free Papua Movement, a small armed separatist group that is most active in the central highlands region.  Low-intensity communal, tribal, and political conflict also exists in Papua and has caused deaths and injuries.  Anti-government protests have resulted in deaths and injuries, and violence has been committed against employees and contractors of at least one large corporation there, including the death of a New Zealand citizen in an attack on March 30, 2020, as well as  armed groups seizing aircraft and temporarily holding pilots and passengers hostage.  Additionally, racially-motivated attacks against ethnic Papuans in East Java province led to violence in Papua and West Papua in late 2019, including riots in Wamena, Papua that left dozens dead and thousands more displaced.  Continued attacks and counter attacks between security personnel and local armed groups have exacerbated the region’s issues with internally displaced persons.

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

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source* USG or international statistical source USG or International Source of Data:  BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2020 $1,061 2019 $1,119 https://data.worldbank.org/
country/Indonesia
*Indonesia Statistic Agency, GDP from the host country website is converted into USD with the exchange rate 14,546 for 2020
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data:  BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2020 $749.7 2019 $12,151 https://www.bea.gov/international/di1usdbal
Host country’s FDI in the United States ($M USD, stock positions) N/A N/A 2019 $399 https://www.bea.gov/international/di1fdibal
Total inbound stock of FDI as % host GDP 2020 2.7% 2019 20.8% https://unctad.org/en/Pages/DIAE/
World%20Investment%20Report/
Country-Fact-Sheets.aspx
*Indonesia Investment Coordinating Board (BKPM), January 2021

There is a discrepancy between U.S. FDI recorded by BKPM and BEA due to differing methodologies.  While BEA recorded transactions in balance of payments, BKPM relies on company realization reports.  BKPM also excludes investments in oil and gas, non-bank financial institutions, and insurance.

Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment 2019 Outward Direct Investment 2019
Total Inward 233,984 100% Total Outward 79,632 100%
Singapore 55,386 23.7% Singapore 31,409 39.4%
Netherlands 34,981 15.0% France 19,226 24.1%
United States 29,643 12.7%  China (PR Mainland) 18,807 23.6%
Japan 28,875 12.3% Cayman Islands 3,431 4.3%
Malaysia 13,853 5.9% Netherlands 748 0.9%
“0” reflects amounts rounded to +/- USD 500,000.
Source:  IMF Coordinated Direct Investment Survey, 2019 for inward and outward investment data.
Table 4: Sources of Portfolio Investment
Portfolio Investment Assets 2019
Top Five Partners (Millions, US Dollars)
Total Equity Securities Total Debt Securities
All Countries 21,814 100% All Countries 7,886 100% All Countries 13,928 100%
Netherlands 6,842 31.8% United States 3,032 38.4% Netherlands 6,837 49.1%
United States 4.035 16.6% India 2,028 25.7% Luxembourg 1,903 13.7%
India 2,049 8.9% China (PR Mainland) 1,025 13.0% United States 1,003 7.2%
 Luxembourg 1,904 8.4% China (PR Hong Kong) 708 9.0% Singapore 610 4.4%
China (Mainland) 1,270 4.9% Australia 468 5.9% United Arab Emirates 578 4.2%
Source: IMF Coordinated Portfolio Investment Survey, 2019. Sources of portfolio investment are not tax havens.

The Bank of Indonesia published comparable data.

Iraq

Executive Summary

The COVID-19 pandemic and subsequent drop in global oil prices continue to reverberate in Iraq.  The Iraqi government has been covering a large fiscal deficit by borrowing domestically and drawing on its foreign reserves.  In December 2020, the GOI devalued Iraq’s dinar by 22% to forestall a liquidity crisis.  This has raised domestic prices for food and other commodities in Iraq’s import-dependent economy.

Widespread protests in October 2019 caused the resignation of then PM Adil Abdul-Mahdi and his government.  After a lengthy period of government formation, the current government of PM Mustafa al-Kadhimi came to power in May 2020.  Sporadic violent protests continue, especially in the country’s south, and Kadhimi has called for early elections, currently scheduled for October.

In October 2020, Iraq’s cabinet approved an economic reform agenda known as the “white paper,” which identified over 200 reforms, legislative amendments, subsidy cuts, and e-government measures that are broadly in line with previous World Bank and IMF reform recommendations.  The white paper acknowledges the scope of Iraq’s structural economic problems and aims to place Iraq on a private sector-driven economic growth path.  While it is clear that Kadhimi and key advisors are intent on reform, it is less clear that these efforts will overcome other long-standing, entrenched political opposition whose stakeholders profit from GOI opacity and inefficiency.

An uneven security environment, including the threat of resurgent extremist groups, remains an impediment to investment in many parts of the country.  Other lingering effects of the fight against ISIS include major disruptions of key domestic and international trade routes and the destruction of economic infrastructure.  Many militia groups that participated in the fight against ISIS remain deployed and are only under nominal government control.  Several militias have been implicated in a range of criminal and extralegal activities in commercial sectors, including extortion.  However, the security situation varies throughout the country and is generally less problematic in the Iraqi Kurdistan Region (IKR).

Investors in Iraq continue to face extreme challenges resolving issues with GOI entities, including procurement disputes, receiving timely payments, and winning public tenders.  Difficulties with corruption, registration, customs regulations, irregular and high tax liabilities, unclear visa and residency permit procedures, arbitrary application of regulations, lack of alternative dispute resolution mechanisms, electricity shortages, and lack of access to financing remain common complaints from companies operating in Iraq.  Shifting and unevenly enforced regulations create additional burdens for investors.

Despite these challenges, the Iraqi market offers some potential for U.S. exporters.  Iraq regularly imports agricultural commodities, machinery, consumer goods, and defense articles.  While non-oil bilateral trade with the United States was $771.9 million in 2020, Iraq’s economy had an estimated GDP of $200 billion.  Government contracts and tenders are the source of most commercial opportunities in Iraq in all sectors, including the significant oil and gas sectors, and have been financed almost entirely by oil revenues.  Increasingly, the GOI has asked investors and sellers to provide financing options and allow for deferred payments.

Investors in the IKR face many of the same challenges as investors elsewhere in Iraq, but the IKR has a traditionally more stable security situation.  However, the region’s economy has struggled to recover from the 2014 ISIS offensive, the drop in oil prices, the aftermath of the 2017 Kurdish independence referendum, and ongoing disputes with the central government over revenue sharing.

The U.S. government and the GOI have revived the 2008 U.S.-Iraq Strategic Framework Agreement and the Trade and Investment Framework Agreement (TIFA) and held the second TIFA meeting in June 2019 and Strategic Dialogue in 2020 with good success.  The American Chamber of Commerce in Iraq provides a platform for commercial advocacy for the U.S. business community.  Local businesses also are re-energizing an American Chamber of Commerce presence in the IKR.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2020 160 of 175 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2020 172 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index N/A N/A https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) N/A N/A https://apps.bea.gov/international/factsheet/
World Bank GNI per capita N/A N/A http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment (FDI)

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

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

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

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

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

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

The IKR operates under a 2006 investment law and its supporting regulations.  Under the law, foreign investors are entitled to incentives, including full property ownership, and capital repatriation and tax holidays for 10 years.  The KRG is generally open to public-private partnerships and long-term financing, as demonstrated by the KRG’s oil and gas sector contracts that increase production.  In 2020, the KRG Ministry of Planning (MOP) published a framework for creating public-private partnerships in the region but has not drafted legislation to codify it.  Legislation to amend the investment law to broaden its reach to potential investors remains pending in the Iraqi Kurdistan Parliament (IKP).

The GOI established the National Investment Commission (NIC) in 2007, along with its provincial counterparts Provincial Investment Commissions (PICs), as provided under Investment Law 13 (2006).  This cabinet-level organization provides policy recommendations to the Prime Minister and support to current and potential investors in Iraq.  The NIC’s “One Stop Shop” is intended to guide investors through the investment process, though investors have reported challenges using NIC services.

Limits on Foreign Control and Right to Private Ownership and Establishment

Iraqi law stipulates that 50% of a project’s workers must be Iraqi nationals in order to obtain an investment license (National Investment Regulation No. 2, 2009).  Investors must prioritize Iraqi citizens before hiring non-Iraqi workers.  The GOI pressures foreign companies to hire more local employees and has encouraged foreign companies to partner with local industries and purchase Iraqi-made products.  The KRG permits full foreign ownership under its 2006 investment law.

The GOI generally favors State Owned Enterprises (SOE) and state-controlled banks in competitions for government tenders and investment.  This preference discriminates against both local and foreign investors.

Other Investment Policy Reviews

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

Business Facilitation

Foreign investors interested in establishing an office in Iraq or bidding on a public tender are required to register as a foreign business with the Ministry of Trade’s (MOT) Companies Registration Department.  The procedure costs and time to obtain a business license can be found at https://baghdad.eregulations.org/procedure/108?l=en. Many international companies use a local agent to assist in this process due to its complexity.  The GOI is working with UNCTAD to streamline the business registration process and make it available online, as per procedures of obtain investment licenses from NIC according to the amount of capital can be found at:

https://baghdad.eregulations.org/procedure/60?l=en and https://baghdad.eregulations.org/procedure/51/step/230?l=en&reg=0.

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

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

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

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

Outward Investment

Iraq does not restrict domestic investors from investing abroad.

3. Legal Regime

Transparency of the Regulatory System

Iraq’s overall regulatory environment remains opaque, and the Investment Law does not establish a full legal framework governing investment.  Corruption, unclear regulations, and bureaucratic bottlenecks are major challenges for companies that bid on public procurement contracts or seek to invest in major infrastructure projects.  The KRG procurement reform measures, beginning in 2016, sought to address these problems, but with little result.  Iraq’s commercial and civil laws generally fall short of international norms.

The GOI’s rulemaking process can be opaque and lends itself to arbitrary application.  To illustrate, while ministries must publish regulations imposing duties on citizens or private businesses in the official government gazette, internal ministerial regulations have no corresponding requirement.  This loophole allows officials to create internal requirements or procedures with little or no oversight, which can result in additional burdens for investors and businesses.  Furthermore, the lack of regulatory coordination between GOI ministries and national and provincial authorities can result in conflicting regulations, which makes it difficult to accurately interpret the regulatory environment.  In addition, accounting and legal procedures are opaque, inconsistent, and generally do not meet international standards.

Draft bills, including investment laws, are not available for public comment.  The promulgation of new regulations with little advance notice and requirements related to investment guarantees have also slowed projects.

The GOI encourages private sector associations but these associations are generally not influential, given the dominant role of SOEs in Iraq’s economy.  In the IKR, private sector associations have some influence and many, such as the contractors’ union, are very active in advocacy with the KRG.

Iraq has limited transparency of its public finances or government held debt.  Publicly available budgets did not include expenditures by ministry or revenues by source and type.  The budget provided limited details regarding allocations to, and earnings from, SOEs.  Financial statements for most SOEs were generally not publicly available.  Limited information on debt obligations was available on the Central Bank and MOF websites.

International Regulatory Considerations

Iraq is not a member of the WTO and is not a signatory to the Trade Facilitation Agreement.

Legal System and Judicial Independence

Iraq has a civil law system, although Iraqi commercial jurisprudence is relatively underdeveloped.  Over decades of war and sanctions, Iraqi courts did not keep up with developments in international commercial transactions.  Corruption and bureaucratic bottlenecks remain significant problems.  As trade with foreign parties increases, Iraqi courts have seen a significant rise in complex commercial cases.  Although contracts should be enforceable under Iraqi law, such enforcement remains a challenge due to unclear regulations, lack of decision-making authority, and rampant corruption.

Laws and Regulations on Foreign Direct Investment (FDI)

Iraq is a signatory to the League of Arab States Convention on Commercial Arbitration (1987) and the Riyadh Convention on Judicial Cooperation (1983).  Iraq formally joined the ICSID Convention on December 17, 2015, and on February 18, 2017, Iraq joined the Investor-State Dispute Settlement (ISDS) process agreement between investors and states.

Additional information can be found in “A Legal Guide to Investment in Iraq:” http://cldp.doc.gov/programs/cldp-in-action/details/1551.

Competition and Anti-Trust Laws

The COR passed a Competition Law and a Consumer Protection Law in 2010.  However, the Iraqi government has yet to form the Competition and Consumer Protection Commissions authorized by these laws.  The COR has also amended Iraqi law several times to promote fair competition and “competitive capacities” in the local market (2010, 2015).

The COR has also issued many recommendations regarding the amendments of investment licenses and to improve the investment and businesses environment in Iraq.  The August 2019 Resolution 245 announced investment opportunities through the NIC.

The prominent role of SOEs and corruption undermine the competitive landscape in Iraq.

Expropriation and Compensation

The Iraqi Constitution prohibits expropriation, unless done for the purpose of public benefit and in return for just compensation.  The Constitution stipulates that expropriation may be regulated by law, but the COR has not drafted specific legislation regarding expropriation.  Article 9 of the Investment Law guarantees non-seizure or nationalization of any investment project that the provisions of this law cover, except in cases with a final judicial judgment.  The law prohibits expropriation of an investment project, except in cases of public benefit and with fair compensation.  Iraq’s Commercial Court is charged with resolving expropriation cases.  In recent years, there have not been any government actions or shifts in government policy that would indicate possible expropriations in the foreseeable future.

In the IKR, the KBOI can impose fines and potentially confiscate land if it determines that investors are using land awarded under investment licenses for purposes other than those outlined in the license or if the projected was not started during the specified time limits.  The IKR investment law (Article 17) outlines an investor’s arbitration rights, which fall under the civil court system, as the IKR lacks a commercial court system.  Arbitration clauses should be written into local contracts in order to facilitate enforcement in the event of a dispute.

Dispute Settlement

ICSID Convention and New York Convention

In March 2021 the COR voted to ratify the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention); the GOI still needs to formalize its ratification with the UN for it to go into effect.   Until then, the enforcement of arbitral awards must comply with the special requirements set forth in current Iraqi civil procedure law and other related laws.

Investor-State Dispute Settlement

In November 2010, Iraq’s Higher Judicial Council established the First Commercial Court of Iraq — a court of specialized jurisdiction for disputes involving foreign investors — as part of a national strategy to improve Iraq’s investment climate.

In the IKR, commercial disputes are handled through the civil court system.  Additional

information can be found in “A Legal Guide to Investment in Iraq:”  http://cldp.doc.gov/programs/cldp-in-action/details/1551.

International Commercial Arbitration and Foreign Courts

Iraq is a signatory to the League of Arab States Convention on Commercial Arbitration (1987) and the Riyadh Convention on Judicial Cooperation (1983).  Iraq formally joined the ICSID on December 17, 2015, and on February 18, 2017, Iraq joined the ISDS process agreement between investors and states.

Bankruptcy Regulations

Under Iraqi law, an Iraqi debtor may file for bankruptcy, and an Iraqi creditor may file for liquidation of the debtor.  Bankruptcy is not criminalized.  The Iraqi Companies Law regulates the process for the liquidation of legal entities.  Nevertheless, the mechanism for resolving insolvency remains opaque.  Iraq ranks 168 out of 190 countries in the category of Resolving Insolvency, according to the World Bank’s 2020 Doing Business Report.

6. Financial Sector

Capital Markets and Portfolio Investment

Iraq remains one of the most under-banked countries in the Middle East.  The Iraqi banking system includes around 68 private banks and seven state-owned banks.  As of early 2021, 20 foreign banks have licensed branches in Iraq and several others have strategic investments in Iraqi banks.  The three largest banks in Iraq are Rafidain Bank, Rasheed Bank, and the Trade Bank of Iraq (TBI), which account for roughly 85 percent of Iraq’s banking sector assets.  Iraq’s economy remains primarily cash based, with many banks acting as little more than ATMs.  Rafidain and Rasheed offer standard banking products but primarily provide pension and government salary payments to individual Iraqis.

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

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

The main purpose of TBI is to provide financial and related services to facilitate trade, particularly through letters of credit.  Although CBI granted private banks permission to issue letters of credit below $50 million, TBI continues to process nearly all government letters of credit.

Money and Banking System

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

Foreign Exchange and Remittances

Foreign Exchange

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

The GOI’s monetary policy since 2003 has focused on ensuring price stability primarily by maintaining a de facto peg between the IQD and the U.S. dollar, while seeking exchange rate predictability by supplying U.S. dollars to the Iraqi market.  In December 2020, the GOI announced that it would officially devalue the dinar’s peg to the U.S. dollar by 22 percent.  Banks may engage in spot transactions in any currency; however, they are not allowed to engage in forward transactions in Iraqi dinars for speculative purposes through auction but can do so through wire transfer.  There are no taxes or subsidies on purchases or sales of foreign exchange.

Remittance Policies

There are no recent changes to Iraq’s remittance policies.  Foreign nationals are allowed to remit their earnings, including U.S. dollars, in compliance with Iraqi law.  Iraq does not engage in currency manipulation.

Sovereign Wealth Funds

Iraq does not have a sovereign wealth fund.

7. State-Owned Enterprises

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

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

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

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

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

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

Privatization Program

The GOI has repeatedly announced that it plans to reorganize failing SOEs across multiple sectors.  Additionally, the GOI is eager to modernize Iraq’s financial and banking institutions.  There are, however, no concrete timelines for these initiatives, and entrenched patronage networks tying SOEs to ministries remain a stumbling block.

10. Political and Security Environment

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

As of its latest Travel Advisory on January 25, the Department of State maintains a Level Four Travel Advisory for Iraq and advises travelers not to travel to Iraq due to COVID-19, terrorism, kidnapping, and armed conflict.  U.S. government personnel in Iraq are required to live and work under strict security guidelines.  Travelers should review the embassy’s official COVID-19 page, which is updated weekly, before traveling:  https://iq.usembassy.gov/covid-19-information/.

State Department guidance to U.S. businesses in Iraq advises the use of protective security details.  Detailed security information is available on the U.S. Embassy website: http://iraq.usembassy.gov/.  Some U.S. and third country businesspeople travel throughout much of Iraq; however, in general their movement is restricted and most travel with security advisors and protective security teams.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

The GOI collects and publishes limited statistics with which to compare international and U.S. investment data.  The NIC and PICs granted 1067 licenses between 2008 and 2015 (latest statistics available) with a total potential value of $53.9 billion.

In the IKR, the KBOI granted licenses to 166 projects from the period of January 2019 to March 2021, with a total potential value of $5.11 billion.  This represented a capital increase of $1.98 billion (163 percent) compared to 2018.

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source* USG or international statistical source USG or International Source of Data:  BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2019 $224,228  2019 $234,094 www.worldbank.org/en/country
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data:  BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2016 $5,911 2019 $1,928 BEA data available at https://apps.bea.gov/international/factsheet/
Host country’s FDI in the United States ($M USD, stock positions) N/A N/A N/A N/A BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data
Total inbound stock of FDI as % host GDP 2016 3.5% N/A N/A UNCTAD data available at

https://unctad.org/topic/investment/world-investment-report   

* Source for Host Country Data: http://cosit.gov.iq/en/

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

Table 4: Sources of Portfolio Investment
Data not available.

Ireland

Executive Summary

The COVID-19 crisis has already had a serious impact on Ireland’s economy and will continue to do so in 2021. Since March 2020, the Irish government has implemented varying degrees of lockdown measures in response to the COVID-19 pandemic, including restrictions to close non-essential businesses and services for extended periods of time. Ireland’s official unemployment rate has remained around five percent (currently at 5.8 percent as of January 2021) due to the unprecedented pandemic related assistance programs to businesses and workers furloughed due to COVID-19. Due to the high number of individuals receiving pandemic wage subsidies, the official unemployment rate is still roughly five percent, much lower than what the Irish government expects without these programs. Including workers furloughed by the pandemic, the real unemployment rate has fluctuated in line with the three separate nationwide lockdowns in 2020 and 2021, increasing the unofficial unemployment rate to average at an estimated high of 20 percent. Despite the prolonged difficulties, Ireland’s economic projections remain positive and the strongest among the Eurozone countries with three percent economic growth in 2020. This is due to continued growth in exports by technology, pharmaceutical, and other large multinational companies headquartered in Ireland. The government is hopeful its emergency measures will help businesses and its once-sound economy to quickly return from its COVID-19 enforced hibernation.

The Irish government actively promotes foreign direct investment (FDI) and has had considerable success in attracting U.S. investment, in particular. There are over 900 U.S. subsidiaries in Ireland operating primarily in the following sectors: chemicals, bio-pharmaceuticals and medical devices, computer hardware and software, internet and digital media; electronics, and financial services.

One of Ireland’s many attractive features as an FDI destination is its 12.5 percent corporate tax (in place since 2003). Firms also choose Ireland for the quality and flexibility of the English-speaking workforce; the availability of a multilingual labor force; cooperative labor relations; political stability; and pro-business government policies and regulators. Additional positive features include a transparent judicial system; transportation links; proximity to the United States and Europe; and Ireland’s geographic location making it well placed in time zones to support investment in Asia and the Americas. Ireland benefits from its membership of the European Union (EU) and a barrier-free access to a market of almost 500 million consumers. In addition, the clustering of existing successful industries has created an ecosystem attractive to new firms. The United Kingdom’s (UK) departure from the EU, or Brexit, on January 1, 2021, leaves Ireland as the only remaining English-speaking country in the EU and may make Ireland even more attractive as a destination for FDI.

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

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

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

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

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

While Ireland has no bilateral investment treaties, the United States and Ireland have shared a Friendship, Commerce, and Navigation Treaty since 1950 that provides for national treatment of U.S. investors. The two countries have also shared a Tax Treaty since 1998, supplemented in December 2012 with an agreement to improve international tax compliance and to implement the U.S. Foreign Account Tax Compliance Act (FATCA).

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2020 20 of 180 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2020 24 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2020 15 of 131 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2019 $354,940 https://apps.bea.gov/international/factsheet/
World Bank GNI per capita 2019 $64,000 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

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

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

The stock of American FDI in Ireland stood at USD 355 billion in 2019, more than the U.S. total for China, India, Russia, Brazil, and South Africa (the so-called BRICS countries) combined. There are approximately 900 U.S. subsidiaries currently in Ireland employing roughly 180,000 people and supporting work for another 128,000. This figure represents a significant proportion of the 2.31 million people employed in Ireland. U.S. firms operate primarily in the following sectors: chemicals, bio-pharmaceuticals and medical devices, computer hardware and software, internet and digital media; electronics, and financial services.

U.S. investment has been particularly important to the growth and modernization of Irish industry over the past thirty years, providing new technology, export capabilities, management and manufacturing best practices, and employment opportunities. Ireland has more recently become an important R&D center for U.S. firms in Europe, and a magnet for U.S. internet and digital media investment. Industry leaders like Google, Amazon, eBay, PayPal, Facebook, Twitter, LinkedIn, Electronic Arts and cybersecurity firms like Tenable, Forcepoint, AT&T Cybersecurity, McAfee use Ireland as the hub or important part of their respective European, and sometimes Middle Eastern, African, and/or Indian operations.

Factors that challenge Ireland’s ability to attract investment include relatively high labor and operating costs (such as for energy); sporadic skilled-labor shortages; the fall-out from the COVID-19 pandemic; and sometimes-deficient infrastructure (such as in transportation, energy and broadband quality). Ireland also suffers from housing and high-quality office space shortages; and absolute price levels that are among the highest in Europe. The American Chamber of Commerce in Ireland has called for greater attention to a “skills gap” in the supply of Irish graduates to the high technology sector. It also has asserted that relatively high personal income tax rates can make attracting talent from abroad difficult.

In 2013, Ireland became the first country in the Eurozone to exit a financial bailout program from the EU, European Central Bank, and International Monetary Fund (EU/ECB/IMF, or so-called Troika). Compliance with the terms of the Troika program came at a substantial economic cost with gross domestic product (GDP) stagnation and austerity measures, while dealing with high unemployment (which hit 15 percent). Strong economic progress followed through government-backed initiatives to attract investment and stimulate job creation and employment. This helped economic recovery and Ireland’s economy was the one of the fastest growing economies in the Eurozone area annually to 2019. As a result, unemployment levels fell dramatically and by the end of 2019 reached 4.7 percent. In addition, the Irish government has successfully returned to international sovereign debt markets and successful treasury bonds sales, at low interest rates, exemplify renewed international confidence in Ireland’s economic progress. Despite the prolonged difficulties caused by the COVID-19 pandemic, Ireland’s economic performance continued to be the best in the Eurozone in 2020 with an estimated three percent growth, achieved on the back of strong exports from the food, pharmaceutical and med-tech sectors.

Brexit and its Implications for Ireland

The UK’s exit from the EU (Brexit) on January 1, 2021, leaves Ireland as the only remaining English-speaking country in the bloc. The UK is now a non-EU member that shares a land border with Ireland. . The December 2020 agreement dictates the future trading relationship between the UK and the EU and will likely have an affect on Ireland’s economic performance. The agreement allows for tariff-free Ireland – Great Britain (England, Scotland and Wales) trade but comes with increased customs procedures. Existing Ireland – Northern Ireland trade continues unimpeded. While some disruption has been noticed in the supply chain of retail and agricultural sectors (due to their traditional use of the UK “land-bridge” to move products to and from the EU), Irish companies have generally been able to find alternate routes (i.e., using ferries from Ireland directly to continental Europe, though this has raised costs in some sectors.

With Brexit, Ireland has lost a close EU ally on policy matters, particularly free trade and business friendly open markets. Ireland continues to be heavily dependent on the UK as an export market and source especially for food products, and the full effect of Brexit may yet hit sectors such as food and agri-business with disruptions to supply chains and increased red-tape. Irish trade with its EU colleagues has already seen a dramatic switch to direct shipping rather than using Great Britain as a land-bridge for trucking products. A number of UK-based firms (including U.S. firms) have moved headquarters or opened subsidiary offices in Ireland to facilitate ease of business with other EU countries. The Irish Department of Finance and the Central Bank of Ireland (CBI) have estimated Brexit will cut Ireland’s economic growth modestly in the near term but such models are complicated with the ongoing COVID-19 pandemic.

Industrial Promotion

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

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

Limits on Foreign Control and Right to Private Ownership and Establishment

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

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

Citizens of countries other than Ireland and EU member states can acquire land for private residential or industrial purposes. In the past, all non-EU nationals needed written consent from the Department of Agriculture, Food and the Marine before acquiring an interest in land zoned for agricultural use but these limitations no longer exist. There are many equine stud farms and racing facilities owned by foreign nationals. No restrictions exist on the acquisition of urban land.

Ireland does not yet have formal investment screening legislation in place but is in the process of drafting the legislation which is expected to be enacted in 2021. (The bill was delayed due to the government’s efforts to respond to the COVID-19 pandemic.) As a member of the EU, Ireland is required to implement any common EU investment screening regulations or directives such as the EU Framework.

Other Investment Policy Reviews

The Economist Intelligence Unit and World Bank’s Doing Business 2020 provide current information on Ireland’s investment policies.

Business Facilitation

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

The Ireland pages in the following links gives the most up-to-date information:

https://www.doingbusiness.org/en/data/exploretopics/starting-a-business#close  and https://investmentpolicy.unctad.org/country-navigator/102/ireland 

Outward Investment

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

3. Legal Regime

Transparency of the Regulatory System

Ireland’s judicial system is transparent and upholds the sanctity of contracts, as well as laws affecting foreign investment. These laws include:

  • The Companies Act 2014, which contains the basic requirements for incorporation in Ireland;
  • The 2004 Finance Act, which introduced tax incentives to encourage firms to set up headquarters in Ireland and to conduct R&D;
  • The Mergers, Takeovers and Monopolies Control Act of 1978, which sets out rules governing mergers and takeovers by foreign and domestic companies;
  • The Competition (Amendment) Act of 1996, which amends and extends the Competition Act of 1991 and the Mergers and Takeovers (Control) Acts of 1978 and 1987, and sets out the rules governing competitive behavior; and,
  • The Industrial Development Act (1993), which outlines the functions of IDA Ireland.

The Companies Act (2014), with more than 1,400 sections and 17 Schedules, is the largest-ever Irish statute. The Act consolidated and reformed all Irish company law for the first time in over 50 years.

In addition, numerous laws and regulations pertain to employment, social security, environmental protection and taxation, with many of these keyed to EU regulations and directives.

International Regulatory Considerations

Ireland has been a member of the EU since 1973. As a member, it incorporates all EU legislation into national legislation and applies all EU regulatory standards and rules. Ireland is a member of the World Trade Organization (WTO) and follows all WTO procedures.

Legal System and Judicial Independence

Ireland’s legal system is common law. Courts , are presided over by judges appointed by the President of Ireland (on the advice of the government). The Commercial Court is a designated court of the High Court which deals with commercial disagreements between businesses where the value of the claim is at least €1 ($1.2) million. The Commercial Court also oversees cases on intellectual property rights, including trademarks and trade secrets.

Laws and Regulations on Foreign Direct Investment

Ireland treats all firms incorporated in Ireland on an equal basis. With only a few exceptions, no constraints prevent foreign individuals or entities from ownership or participation in private firms/corporations. The most significant of these exceptions is that, in common with other EU countries, Irish airlines must be at least 50 percent owned by EU residents to have full access to the single European aviation market. Citizens of countries other than Ireland and EU member states can acquire land for private residential or industrial purposes.

One of Ireland’s many attractive features as an FDI destination is its low corporate tax rate. Since 2003, the headline corporate tax rate is 12.5 percent, among the lowest in the EU.

In 2014, the government announced firms would no longer be able to incorporate in Ireland without also being tax resident. Prior to this, firms could incorporate in Ireland and be tax resident elsewhere, making use of a tax avoidance arrangement colloquially known as the “Double Irish” to reduce tax liabilities.

The Irish government has indicated it will adhere to future decisions reached through the OECD’s Base Erosion and Profit Sharing (BEPS) negotiations and ratified the BEPS Multilateral Instrument in January 2019. The government implemented a Knowledge Development Box (KDB), effective 2016, which is consistent with OECD guidelines. The KDB allows for the application of a tax rate of 6.25 percent on profits arising to certain intellectual property assets that are the result of qualifying research and development activities carried out in Ireland.

Competition and Antitrust Laws

The Competition and Consumer Protection Commission (CCPC) is an independent statutory body with a dual mandate to enforce competition and consumer protection law in Ireland. The CPCC was established in 2014, following the amalgamation of the National Consumer Agency and the Competition Authority. The CPCC enforces Irish and EU competition law in Ireland. It has the power to conduct investigations and can take civil or criminal enforcement action if it finds evidence of breaches of competition law.

The Competition Act of 2002, subsequently amended and extended by the Competition Act 2006, mandates the enforcement power of the CCPC. The Act introduced criminal liability for anti-competitive practices, increased corporate liability for violations, and outlined available defenses. Most tax, labor, environment, health and safety, and other laws are compatible with EU regulations, and they do not adversely affect investment. The government publishes proposed drafts of laws and regulations to solicit public comment, including those by foreign firms and their representative trade associations. Bureaucratic procedures are transparent and reasonably efficient, in line with the general pro-business approach of the government.

The Irish Takeover Panel Act of 1997 gives the ‘Irish Takeover Panel’ responsibility for monitoring and supervising takeovers and other relevant corporate transactions. The minority squeeze-out provisions in the legislation, allows a bidder who holds 80 percent of the shares of the target firm (or 90 percent for firms with securities on a regulated market) to compel the remaining minority shareholders to sell their shares. There are no reports that the Irish Takeover Panel Act has prevented foreign takeovers, and, in fact, there have been several high-profile foreign takeovers of Irish companies in the banking and telecommunications sectors in the past. Although not recent, Babcock & Brown (an Australian investment firm) acquired the former national telephone company, Eircom in 2006 which it subsequently sold to Singapore Technologies Telemedia in 2009.

The EU Directive on Takeovers provides a framework of common principles for cross-border takeover bids, creates a level playing field for shareholders, and establishes disclosure obligations throughout the EU. Irish legislation fully implemented the Directive in 2006, though the Irish Takeover Panel Act 1997 had already incorporated many of its principles.

Companies must notify the CCPC of mergers over a certain financial threshold for review as required by the Competition Act 2002, as amended (Competition Act).

Expropriation and Compensation

The government normally expropriates private property only for public purposes in a non-discriminatory manner and in accordance with established principles of international law. The government condemns private property in accordance with recognized principles of due process.

The Irish courts provide a system of judicial review and appeal where there are disputes brought by owners of private property subject to a government action.

Dispute Settlement

There is no specific domestic body for handling investment disputes apart from the judicial system. The Irish Constitution, legislation, and common law form the basis for the Irish legal system. DETE has primary responsibility for drafting and enforcing company law. The judiciary is independent, and litigants are entitled to trial by jury in commercial disputes.

ICSID Convention and New York Convention

Ireland is a member of the International Center for the Settlement of Investment Disputes (ICSID) and a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, meaning local courts must enforce international arbitration awards under appropriate circumstances.

Some U.S. business representatives have occasionally called into question the transparency of Irish government tenders. According to some U.S. firms, lengthy procedural decisions often delay the procurement tender process. Unsuccessful bidders have expressed concerns over difficulties receiving information on the rationale behind the tender outcome. In addition, some successful bidders have experienced delays in finalizing contracts, commencing work on major projects, obtaining accurate project data, and receiving compensation for work completed, including through conciliation and arbitration processes. Some successful bidders have also subsequently found that the original tenders may not have accurately described conditions on the ground.

Bankruptcy Regulations

The Companies Act 2014 is the most important body of law dealing with commercial and bankruptcy law, which Irish courts consistently apply. Irish company bankruptcy legislation gives creditors a strong degree of protection. Ireland is ranked 18 (of 190) for ease of resolving insolvencies in World Bank’s Doing Business Report 2019.

6. Financial Sector

Capital Markets and Portfolio Investment

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

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

Money and Banking System

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

The government, with its increased exposure to bank debts and a rising budget deficit, had difficulty in placing sovereign debt on international bond markets following the economic crash of 2008. Ireland had to seek assistance from the Troika (International Monetary Fund (IMF), EU and European Central Bank (ECB)) in November 2010. A rescue package of EUR 85 ($110) billion with EUR 67.5 ($88) billion of this provided by the Troika was agreed to cover government deficits and costs related to the bank recapitalizations.

The government then took effective control of Allied Irish Bank (AIB), following a further recapitalization by the end of 2010. The government took into state control, and then resolved, two building societies, Irish Nationwide Building Society and Educational Building Society. The government helped re-capitalize Irish Life and Permanent (the banking portion of which was spun off and now operates under the name Permanent TSB) and the Bank of Ireland (BOI).

Irish banks were forced to deleverage their non-core assets in line with Troika bailout program recommendations and were effectively limited to service domestic banking demand. BOI succeeded in remaining non-nationalized by realizing capital from the sale of non-essential portfolios and by imposing some targeted burden sharing with some of its bondholders. The government sold just over 28 percent of its shareholding in AIB Bank in July 2017, but it still retains the remainder of the shareholding.

Soon after it exited the Troika program in 2013, Ireland re-entered sovereign debt markets. International financing rates continued to fall to record lows for Irish debt, and Ireland was able to fully repay all of it’s IMF loans by securing bond sales at less expensive rates. Ireland also paid off some bilateral loans extended to it by Denmark and Sweden ahead of schedule in 2017. Currently, Ireland is placing its debt at very low, and sometimes negative, interest rates.

Ireland’s retail banking sector rebounded from the crisis and is now healthy and well capitalized in line with ECB rules on bank capitalizations. The stock of non-performing loans on bank balance sheets remains high; and banks continue to divest themselves of these loans through bundle sales to investors. Ulster Bank, part of the UK-based NatWest Banking group and Ireland’s third largest retail bank, announced its withdrawal from retail banking in Ireland, in early 2021. Ulster Bank, which has not yet set its date for full departure, is expected to sell its loan books to other financial institutions including to Ireland’s remaining retail banks

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

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

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

Foreign Exchange and Remittances

Foreign Exchange

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

Remittance Policies

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

Sovereign Wealth Funds

The National Treasury Management Agency (NTMA) is the asset management bureau of the government. NTMA is responsible for day-to-day funding for government operations normally through the sale of sovereign debt worldwide. NTMA is also responsible for investing Irish government funds, such as the national pension funds, in financial instruments worldwide.

Ireland suspended issuing sovereign debt upon entering the Troika bailout program in 2010 but has been successfully placing Irish debt since Ireland’s 2013 exit from the Troika program,

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

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

7. State-Owned Enterprises

There are a number of SOEs in Ireland operating in the energy, broadcasting, and transportation sectors.

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

The government privatized both Eircom (the national telecommunication service) and Aer Lingus (the national airline). CIE remains wholly owned by the government. Irish Water (which operates as a subsidiary of Ervia) began operations in 2013 to serve as the state-owned entity delivering water services (previously delivered by local authorities) to homes and businesses. New residential water charges (previously funded from general government revenue) were introduced by Irish Water in 2015 and subsequently suspended in 2016. Irish Water continues to deliver water services with the cost of domestic water supplies paid by the government.

All of Ireland’s SOEs are open to competition for market share and can, as in the case of Electric Ireland and Ervia, compete with one another. The SOEs do not discriminate against, or place unfair burdens on, foreign investors or foreign-owned investments. There has been a statutory transfer of responsibility for the regulatory functions for the energy sector from the government to the Commission for Regulation of Utilities. This statutory body is required to not discriminate unfairly between participants in the sector, while protecting the end-user.

SOEs generally pay their own way, finance their operations and fund further expansion through profits generated from their own operations. Some SOEs pay an annual dividend to the government. A board of directors usually governs a SOE with some of these directors appointed by the government.

Privatization Program

Ireland does not have a formal privatization program but the government agreed in 2010, as part of the Troika program, to privatize some of its state-owned and semi-state owned enterprises. The government nominated but has not yet sold some non-strategic elements of Ervia (formerly Bord Gais Eireann, the gas supply company). The government indicated that it may sell the electricity generating arm of Electric Ireland, an electricity supply company, but has not yet done so.

10. Political and Security Environment

There has been no significant spillover of violence from Northern Ireland since the ceasefires of 1994 and the signing and implementation of the Good Friday Agreement (GFA) in 1998. The cessation of violence in Northern Ireland led to increased business investment and confidence in Northern Ireland which also benefited Ireland. The GFA designated funding to develop cross-border cooperation on R&D collaboration, create energy and transportation infrastructure linkages, and for joint trade missions participation. No violence related to the situation in Northern Ireland has been specifically directed at U.S. citizens or firms located in Ireland.

Other Acts of Political Violence

There have been some incidents of criminal terrorism and gangland violence attributed to cross-border groups believed to be involved in the black market. There is considerable Garda and Police Service Northern Ireland (PSNI) cooperation to stem any illegal activity.

There have been no recent incidents involving politically motivated damage to foreign investment projects and/or installations in Ireland. There were some instances of damage to U.S. military assets transiting Shannon Airport in 2003 and later in 2011 by a small number of Irish citizens opposed to wars in Iraq and Afghanistan. In 2017, two anti-war activists defaced a U.S. aircraft with graffiti. The Garda arrested two peace protesters as they attempted to gain illegal access to Shannon airport runways in 2019. Other than these incidences of anti-military acts, there have been no acts against U.S. firms or private interests in Ireland.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

U.S. and foreign companies with major foreign direct investments in Ireland include: Abbott, AdRoll, Adobe, Alcatel-Lucent/Bell Labs, Aldi, Alexion, Allianz, Analog Devices, AOL, Apple, Aramark, Avolon, AWS, Axa, BAM, Bank of America Merrill Lynch, Biotrin, BNY Mellon, Boots, Boston Scientific, BT, Citi, Coca Cola, Consensys, DellEMC, Dropbox, eBay, Eli Lilly,  Ericsson, Etsy, Facebook, Fidelity, Generali, Gilead, Google, GSK, Heineken, HPE, Huawei, Hubspot, IBM, Indeed, Intel, Johnson & Johnson, JP Morgan, Kellogg’s, Lidl, Liebherr, LinkedIn, Mastercard, Microsoft, Merit Medical, MSD (Merck Sharp & Dohme), Northern Trust, Oracle, PayPal, Pfizer, Qualtrics, Quantcast, Regeneron, Salesforce.com, Sanofi, SAP, ServiceSource, Servier, Siemens, State Street, Stream Global Services, Tesco, Teva, Twitter, UnitedHealth Group, United Technologies Research Centre, Vodafone, Waters, Wuxi Biologics, Yahoo!, Zeus, and Zurich.

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source* USG or international statistical source USG or International Source of Data:
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2019 $406,681 2019 $406,681 Eurostat
https://ec.europa.eu/eurostat 
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data: 
U.S. FDI in partner country ($M USD, stock positions) 2019 $354,940 BEA
Host country’s FDI in the United States ($M USD, stock positions) 2019 $343,538 BEA
Total inbound stock of FDI as % host GDP 2019 20.2% UNCTAD     

Note:  Host country’s FDI inbound and outbound data is not shown as it relates to 2018

*Source for Host Country Data: Central Statistics Office (www.cso.ie)

Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward 1,152.371 100% Total Outward 1,085,924 100%
United States 248,888 21% Luxembourg 472,418 44%
Bermuda 197,855 17% United States 140,077 13%
Netherlands 101,017  9% United Kingdom 108,392 10%
Switzerland 98,356  9% Netherlands 66,429  6%
Luxembourg 77,777  7% Bermuda 52,293  5%
“0” reflects amounts rounded to +/- USD 500,000.
Table 4: Sources of Portfolio Investment
Portfolio Investment Assets
Top Five Partners (Millions, current US Dollars)
Total Equity Securities Total Debt Securities
All Countries 3,820,372 100% All Countries 1,563,928 100% All Countries 2,256,444 100%
United States 1,198,777 31% United States 579,573 37% United States 619,203 27%
UK 780,126 20% UK 178,595 11% UK 601,531 27%
France 221,546 6% Luxembourg 114,016 7% France 171,849 8%
Germany 150,597 4% Japan 79,379 5% Germany 99,121 4%
Japan 129,518 3% Cayman Islands 71,568 5% Netherlands 95,774 4%

Israel

Executive Summary

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

The economic impact of the COVID-19 pandemic on Israel is unprecedented but successful pre-pandemic economic policy buffers – steady/strong growth, low debt, a resilient tech sector among them — mean Israel entered the COVID-19 crisis with relatively low vulnerabilities, according to the International Monetary Fund’s Staff Report for the 2020 Article IV Consultation. The fundamentals of the Israeli economy remain strong, and Israel’s economy enjoyed strong growth prior to the COVID-19 pandemic. With low inflation and fiscal deficits that have usually met targets pre-pandemic, most analysts consider Israeli government economic policies as generally sound and supportive of growth. Israel seeks to provide supportive conditions for companies looking to invest in Israel, through laws that encourage capital and industrial R&D investment. Incentives and benefits include grants, reduced tax rates, tax exemptions, and other tax-related benefits.

The U.S.-Israeli bilateral economic and commercial relationship is strong, anchored by two-way trade in goods that reached USD 25.5 billion in 2020 and USD 33.9 billion in 2019, according to the U.S. Census Bureau, and extensive commercial ties, particularly in high-tech and R&D. The total stock of Israeli foreign direct investment (FDI) in the United States was USD 36.6 billion in 2019, according to the U.S. Department of Commerce. Since the signing of the U.S.-Israel Free Trade Agreement in 1985, the Israeli economy has undergone a dramatic transformation, moving from a protected, low-end manufacturing and agriculture-led economy to one that is diverse, open, and led by a cutting-edge high-tech sector.

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

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2020 35 of 175 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2020 35 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2020 13 of 131 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2019 $28.5 billion https://www.bea.gov/sites/default/files/2020-07/dici0720_0.pdf
World Bank GNI per capita 2019 $43,100 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

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

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

Limits on Foreign Control and Right to Private Ownership and Establishment

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

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

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

Other Investment Policy Reviews

The World Trade Organization (WTO) conducted its fifth and latest trade policy review of Israel in July 2018. In the past three years, the Israeli government has not conducted any investment policy reviews through the Organization for Economic Cooperation and Development (OECD) or the United Nations Conference on Trade and Development (UNCTAD). The OECD concluded an Economic Survey of Israel in 2020.

The 2020 OECD Economic Survey of Israel can be found at https://www.gov.il/BlobFolder/news/press_23092020_b/he/PressReleases_files_press_23092020_b_file.pdf 

Business Facilitation

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

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

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

3. Legal Regime

Transparency of the Regulatory System

Israel promotes open governance and has joined the International Open Government Partnership. The government’s policy is to pursue the goals of transparency and active reporting to the public, public participation, and accountability.

Israel’s regulatory system is transparent. Ministries and regulatory agencies give notice of proposed regulations to the public on a government web site: http://www.knesset.gov.il . The texts of proposed regulations are also published (in Hebrew) on this web site. The government requests comments from the public about proposed regulations.

Israel is a signatory to the WTO Agreement on Government Procurement (GPA), which covers most Israeli government entities and government-owned corporations. Most of the country’s open international public tenders are published in the local press. U.S. companies have won a limited number of government tenders, notably in the energy and communications sectors. However, government-owned corporations make extensive use of selective tendering procedures. In addition, the lack of transparency in the public procurement process discourages U.S. companies from participating in major projects and disadvantages those that choose to compete. Enforcement of the public procurement laws and regulations is not consistent.

Israel is a member of UNCTAD’s international network of transparent investment procedures. ( http://unctad.org/en/pages/home.aspx  ). Foreign and national investors can find detailed information on administrative procedures applicable to investment and income generating operations including the number of steps, name and contact details of the entities and persons in charge of procedures, required documents and conditions, costs, processing time, and legal basis justifying the procedures.

International Regulatory Considerations

Israel is not a member of any major economic bloc but maintains strong economic relations with other economic blocs.

Israeli regulatory bodies in the Ministry of Economy (Standards Institute of Israel), Ministry of Health (Food Control Services), and the Ministry of Agriculture (Veterinary Services and the Plant Protection Service) often adopt standards developed by European standards organizations. Israel’s adoption of European standards rather than international standards results in the market exclusion of certain U.S. products and added costs for U.S. exports to Israel.

Israel became a member of the WTO in 1995. The Ministry of Economy and Industry’s Standardization Administration is responsible for notifying the WTO Committee on Technical Barriers to Trade, and regularly does so.

Legal System and Judicial Independence

Israel has a written and consistently applied commercial law based on the British Companies Act of 1948, as amended. The judiciary is independent, but businesses complain about the length of time required to obtain judgments. The Supreme Court is an appellate court that also functions as the High Court of Justice. Israel does not employ a jury system. Israel established other tribunals to regulate specific issues and disputes in a specific area of law, including labor courts, antitrust issues, and intellectual property related issues.

Laws and Regulations on Foreign Direct Investment

There are few restrictions on foreign investors, except for parts of defense or other industries closed to outside investors on national security grounds. Foreign investors are welcome to participate in Israel’s privatization program.

Israeli courts exercise authority in cases within the jurisdiction of Israel. However, if an agreement between involved parties contains an exclusively foreign jurisdiction, the Israeli courts will generally decline to exercise their authority.

Israel’s Ministry of Economy sponsors the web site “Invest in Israel” at www.investinisrael.gov.il 

The Investment Promotion Center of the Ministry of Economy seeks to encourage investment in Israel. The center stresses Israel’s high marks in innovation, entrepreneurship, and Israel’s creative, skilled, and ambitious workforce. The center also promotes Israel’s strong ties to the United States and Europe.

Competition and Antitrust Laws

Israel adopted its comprehensive competition law in 1988. Israel created the Israel Competition Authority (originally called the Israel Antitrust Authority) in 1994 to enforce the competition law.

Expropriation and Compensation

There have been no known expropriations of U.S.-owned businesses in Israel. Israeli law requires adequate payment, with interest from the day of expropriation until final payment, in cases of expropriation.

Dispute Settlement

ICSID Convention and New York Convention

Israel is a member of the International Center for the Settlement of Investment Disputes (ICSID) of the World Bank and the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards. Israel ratified the New York Convention on Recognition and Enforcement of Foreign Arbitral Awards of 1958 in 1959.

Investor-State Dispute Settlement

The Israeli government accepts binding international arbitration of investment disputes between foreign investors and the state. Israel’s Arbitration Law of 1968 governs both domestic and international arbitration proceedings in the country. The Israeli Knesset amended the law most recently in 2008. There are no known extrajudicial actions against foreign investors.

International Commercial Arbitration and Foreign Courts

Israel formally institutionalized mediation in 1992 with the amendment of the Courts Law of 1984. The amendment granted courts the authority to refer civil disputes to mediation or arbitration with party consent. The Israeli courts tend to uphold and enforce arbitration agreements. Israel’s Arbitration Law predates the United Nations Commission on International Trade Law.

Bankruptcy Regulations

Israeli Bankruptcy Law is based on several layers, some rooted in Common Law, when Palestine was under the British mandate in 1917-1948. Bankruptcy Law in Israel is mostly based on British law enacted in Palestine in 1936 during the British mandate.

Bankruptcy proceedings are based on the bankruptcy ordinance (1980), which replaced the mandatory ordinance enacted in 1936. Therefore, the bankruptcy law in Israel resembles the British law as it was more or less in 1936. Israel ranks 29th in the World Bank’s 2020 Doing Business Report’s “resolving insolvency” category.

6. Financial Sector

Capital Markets and Portfolio Investment

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

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

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

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

Money and Banking System

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

Foreign Exchange and Remittances

Foreign Exchange

Israel completed its foreign exchange liberalization process on January 1, 2003, when it removed the last restrictions on the freedom of institutional investors to invest abroad. The Israeli shekel is a freely convertible currency and there are no foreign currency controls. The BOI maintains the option to intervene in foreign currency trading in the event of movements in the exchange rate not in line with fundamental economic conditions, or if the BOI assesses the foreign exchange market is not functioning appropriately. Israeli citizens can invest without restriction in foreign markets. Foreign investors can open shekel accounts that allow them to invest freely in Israeli companies and securities. These shekel accounts are fully convertible into foreign exchange. Israel’s foreign exchange reserves totaled USD 185 billion at the end of February 2021.

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

Remittance Policies

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

Sovereign Wealth Funds

Israel passed legislation to establish the Israel Citizens’ Fund, a sovereign wealth fund managed by the BOI, in 2014 to offset the effect of natural gas production on the exchange rate. The original date for beginning the fund’s operations was 2018 but has been postponed until late 2021. The law establishing the fund states that it will begin operating a month after the state’s tax revenues from natural gas exceed USD 307 million (1 billion New Israeli Shekels).

7. State-Owned Enterprises

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

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

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

Privatization Program

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

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

10. Political and Security Environment

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

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

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source* USG or international statistical source USG or International Source of Data:  BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2020/Q4 $40,900 per capita 2019 $394.6 billion www.worldbank.org/en/country
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data:  BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2018 $29,800 2019 $28,543 BEA data available at https://www.bea.gov/sites/default/files/
2020-07/dici0720_0.pdf
 
Host country’s FDI in the United States ($M USD, stock positions) 2018 $12,000 2019 $36,641 BEA data available at https://www.bea.gov/international/
direct-investment-and-multinational-enterprises-comprehensive-data
Total inbound stock of FDI as % host GDP N/A N/A 2019 4.7% UNCTAD data available at
https://stats.unctad.org/handbook/
EconomicTrends/Fdi.html  
 

* Source for Host Country Data:

Israel’s Central Bureau of Statistics released final 2018 FDI data on March 23, 2020.

https://www.cbs.gov.il/en/mediarelease/Pages/2020/Foreign-Direct-Investment-in-Israel-and-Direct-Investment-Abroad-by-Industries-and-Countries-2016-2018.aspx

Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward 164,424 100% Total Outward 112,055 100%
United States 31,881 19% The Netherlands 48,903 44%
The Netherlands 12,850 8% United States 12,911 12%
Cayman Islands 12,302 7% Switzerland 3,177 3%
Canada 5,275 3% Japan 3,032 3%
China, P.R. 4,389 3% Canada 2,253 2%
“0” reflects amounts rounded to +/- USD 500,000.
Table 4: Sources of Portfolio Investment
Portfolio Investment Assets
Top Five Destinations (Millions, current US Dollars)
Total Equity Securities Total Debt Securities
All Countries 175,628 100% All Countries 101,968 100% All Countries 73,660 100%
United States 97,245 55% United States 60,950 60% United States 36,295 49%
United Kingdom 12,977 7% United Kingdom 10,390 10% United Kingdom 2,587 4%
Luxembourg 9,205 5% Luxembourg 8,491 8% France 1,984 3%
France 6,159 4% Ireland 4,797 5% Netherlands, The 1,571 2%
Ireland 4,942 3% France 4,175 4% Germany 1,482 2%

Italy

Executive Summary

Italy, the first western country struck by the pandemic, saw its economy shrink by 8.9% in 2020, the sharpest contraction since World War II.  As of May 5, 2021, Italy has reported over 122,000 COVID-19 deaths, the six-highest tally in the world.  The government has spent more than €130 billion on stimulus measures (though it is able to borrow at a low cost thanks to support from the European Central Bank).  Repeated hikes to government spending will probably drive Italy’s budget deficit close to 12% of national output in 2021, up from 9.5% in 2020.  However, Italy also is slated to receive the largest share of the European Union’s pandemic recovery fund (Next Generation EU).  The over €200 billion in NGEU funds for Italy will represent the largest transfer to Italy since the Marshall Plan.  The National Recovery and Resilience Plan (NRRP) is designed to deploy the funds to accelerate the transition to a digital economy by focusing on digitization/innovation, the green energy transition, health, infrastructure, education/research, and equity.  Italy on April 30 submitted its NRRP to Brussels for approval and disbursement of its share of NGEU funds.

The government expects Italy’s economy to grow by approximately 4.5% in 2021 and 4.8% in 2022 but faces an uphill battle to push ahead with long-needed structural reform aimed at boosting Italy’s productivity and growth by fixing the country’s tax regime, its byzantine bureaucracy, and its sluggish courts.  Italy ranks 58th out of 190 countries in the 2020 World Bank’s “Doing Business” survey.  Notably, it ranks 97th on securing building permits, 98th for starting businesses, 122nd at enforcing contracts, and 128th on tax rules.  The government’s efforts to implement new investment promotion policies to market Italy as a desirable investment destination have been hampered by Italy’s slow economic growth, unpredictable tax regime, multi-layered bureaucracy, and time-consuming legal and regulatory procedures.

Yet, Italy remains an attractive destination for foreign investment, with one of the largest markets in the EU, a diversified economy, and a skilled workforce.  Italy’s economy, the eleventh largest in the world, is dominated by small and medium-sized firms (SMEs), which comprise 99.9 percent of Italian businesses.  Italy’s relatively affluent domestic market, access to the European Common Market, proximity to emerging economies in North Africa and the Middle East, and assorted centers of excellence in scientific and information technology research, remain attractive to many investors.  Tourism is an important source of external revenue, generating approximately €70 billion a year, as are exports of pharmaceutical products, furniture, industrial machinery and machine tools, electrical appliances, automobiles and auto parts, food and wine, as well as textiles/fashion.  The sectors that have attracted significant foreign investment include telecommunications, transportation, energy, and pharmaceuticals.

The government remains open to foreign investment in shares of Italian companies and continues to make information available online to prospective investors.  There were two significant investment-related policy developments during 2020:  implementation of a digital services tax (DST) that primarily affects tech firms and media companies, and the Italian government’s expansion of its Golden Power investment screening authority.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2020 52 of 175 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2019 58 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2020 28 of 131 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2019 $34,900 https://apps.bea.gov/international/factsheet/
World Bank GNI per capita 2019 $34,530 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

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

EU and Italian antitrust laws provide Italian authorities with the right to review mergers and acquisitions for market dominance.  In addition, the Italian government may block mergers and acquisitions involving foreign firms under its investment screening authority (known as “Golden Power”) if the proposed transactions raise national security concerns.  Enacted in 2012 and further implemented through decrees or follow-on legislation in 2015, 2017, 2019 and 2020, the Golden Power law allows the Government of Italy (GOI) to block foreign acquisition of companies operating in strategic sectors: defense/national security, energy, transportation, telecommunications, critical infrastructure, sensitive technology, and nuclear and space technology.  In March 2019, the GOI expanded the Golden Power authority to cover the purchase of goods and services related to the planning, realization, maintenance, and management of broadband communications networks using 5G technology.  Under the April 6, 2020 Liquidity Decree the Prime Minister’s Office issued, the government strengthened Italy’s investment screening authority to cover all sectors outlined in the EU’s March 2019 foreign direct investment screening directive.  The decree also extends (at least until June 30, 2021) Golden Power review to certain transactions by EU-based investors and gives the government new authorities to investigate non-notified transactions.

The Italian Trade Agency (ITA) is responsible for foreign investment attraction as well as promoting foreign trade and Italian exports.  According to the latest figures available from the ITA, foreign investors own significant shares of 12,768 Italian companies.  As of 2019, these companies had overall sales of €573.6 billion and employed 1,211,872 workers.  ITA operates under the coordination of the Italian Ministry of Economic Development and the Ministry of Foreign Affairs.  As of April 2021, ITA operates through a network of 79 offices in 65 countries.  ITA promotes foreign investment in Italy through Invest in Italy program: http://www.investinitaly.com/en/.  The Foreign Direct Investment Unit is the dedicated unit of ITA for facilitating the establishment and development of foreign companies in Italy.

While not directly responsible for investment attraction, SACE, Italy’s export credit agency, has additional responsibility for guaranteeing certain domestic investments.  Foreign investors – particularly in energy and infrastructure projects – may see SACE’s project guarantees and insurance as further incentive to invest in Italy.

Additionally, Invitalia is the national agency for inward investment and economic development operating under the Italian Ministry of Economy and Finance.  The agency focuses on strategic sectors for development and employment.  Invitalia finances projects both large and small, targeting entrepreneurs with concrete development plans, especially in innovative and high-value-added sectors.  For more information, see https://www.invitalia.it/eng.  The Ministry of Economic Development (https://www.mise.gov.it/index.php/en/) within its Directorate for Incentives to Businesses also has an office with some responsibilities relating to attraction of foreign investment.

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

Limits on Foreign Control and Right to Private Ownership and Establishment

Under EU treaties and OECD obligations, Italy is generally obliged to provide national treatment to U.S. investors established in Italy or in another EU member state.  EU and Italian antitrust laws provide national authorities with the right to review mergers and acquisitions over a certain financial threshold.  The Italian government may block mergers and acquisitions involving foreign firms to protect the national strategic interest or in retaliation if the government of the country where the foreign firm is from applies discriminatory measures against Italian firms.  Foreign investors in the defense and aircraft manufacturing sectors are more likely to encounter resistance from the many ministries involved in reviewing foreign acquisitions than are foreign investors in other sectors.

Italy maintains a formal national security screening process for inbound foreign investment in the sectors of defense/national security, transportation, energy, telecommunications, critical infrastructure, sensitive technology, and nuclear and space technology through its “Golden Power” legislation.  Italy expanded its Golden Power authority in March 2019 to include the purchase of goods and services related to the planning, realization, maintenance, and management of broadband communications networks using 5G technology.  On April 6, 2020 the GOI passed a Liquidity Decree in which the Prime Minister’s office made three main changes to its Golden Power authority to prevent the hostile takeover of Italian firms as they weather the financial impact of the COVID-19 crisis.  First, under the decree Golden Power authority now encompasses the financial sector (including insurance and credit) and all the sectors listed under the EU’s March 19, 2019 regulations establishing a framework for the screening of foreign direct investment.  The Italian government previously had adopted only some of the sectors in the EU regulations when it passed its National Cybersecurity Perimeter legislation in November 2019.  The EU regulations cover:  (1) critical infrastructure, physical or virtual, including energy, transport, water, health, communications, media, data processing or storage, aerospace, defense, electoral or financial infrastructure, and sensitive facilities, as well as land and real estate; (2) critical technologies and dual use items, including artificial intelligence, robotics, semiconductors, cybersecurity, aerospace, defense, energy storage, quantum and nuclear technologies, and nanotechnologies and biotechnologies; (3) supply of critical inputs, including food security, energy, and raw materials; (4) access to sensitive information; and (5) freedom of the media.

Second, until the end of the COVID-19 pandemic, EU-based investors must notify Italy’s investment screening authority if they seek to acquire, purchase significant shares in, or change the core activities of an Italian company in one of the covered sectors.  Previously EU-based investors had to notify the government only of transactions deemed strategic to national interests, such as in the defense sector.  Third, the government now has the power to investigate non-notified transactions and require that both public and private entities cooperate with the investigation.  In addition to being able to fine companies for non-notified transactions, the government can impose risk mitigation measures for non-notified transactions.  An interagency group led by the Prime Minister’s office reviews acquisition applications and makes recommendations for Council of Ministers’ decisions.

Other Investment Policy Reviews

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

Business Facilitation

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

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

Outward Investment

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

3. Legal Regime

Transparency of the Regulatory System

Regulatory authority exists at the national, regional, and municipal level.  All applicable regulations could be relevant for foreign investors.  The GOI and individual ministries, as well as independent regulatory authorities, develop regulations at the national level.  Regional and municipal authorities issue regulations at the sub-national level.  Draft regulations may be posted for public comment, but there is generally no requirement to do so.  Final national-level regulations generally are published in the Gazzetta Ufficiale (and only become effective upon publication).  Regulatory agencies may publish summaries of received comments.

No major regulatory reform affecting foreign investors was undertaken in 2020.

Aggrieved parties may challenge regulations in court.  Public finances and debt obligations are transparent and are publicly available through banking channels such as the Bank of Italy (BOI).

International Regulatory Considerations

Italy is a Member of the European Union (EU).  EU directives are brought into force in Italy through implementing national legislation.  In some areas, EU procedures require Member States to notify the European Commission (EC) before implementing national-level regulations.  Italy on occasion has failed to notify the EC and/or the World Trade Organization (WTO) of draft regulations in a timely way.  For example, in 2017 Italy adopted Country of Origin Labelling (COOL) measures for milk and milk products, rice, durum wheat, and tomato-based products.  Italy’s Ministers of Agriculture and Economic Development publicly stated these measures would support the “Made in Italy” brand and make Italian products more competitive.  Though the requirements were widely regarded as a Technical Barrier to Trade (TBT), Italy failed to notify the WTO in advance of implementing these regulations.  Moreover, in March 2020, the Italian Ministers of Agriculture and Economic Development extended the validity of such COOL measures until December 31, 2021.  Italy is a signatory to the WTO’s Trade Facilitation Agreement (TFA) and has implemented all developed-country obligations.

Legal System and Judicial Independence

Italian law is based on Roman law and on the French Napoleonic Code law.  The Italian judicial system consists of a series of courts and a body of judges employed as civil servants.  The system is unified; every court is part of the national network.  Though notoriously slow, the Italian civil legal system meets the generally recognized principles of international law, with provisions for enforcing property and contractual rights.  Italy has a written and consistently applied commercial and bankruptcy law.  Foreign investors in Italy can choose among different means of alternate dispute resolution (ADR), including legally binding arbitration, though use of ADR remains rare.  The GOI in recent years has introduced justice reforms to reduce the backlog of civil cases and speed new cases to conclusion.  These reforms also included a digitization of procedures, and a new emphasis on ADR.

Regulations can be appealed in the court system.

Laws and Regulations on Foreign Direct Investment

Italy is bound by EU laws on FDI.

Digital Services Tax

In 2020, Italy began implementing a digital services tax (DST), applicable to companies that meet the following two conditions:

  1. €750 million in annual global revenues from any source, not just digital services; and,
  2. €5.5 million in annual revenues from digital services delivered in Italy.

As currently formulated, many U.S. technology companies will fall under Italy’s DST, and some Italian media firms could also be subject to the tax.  Taxes incurred in 2020 are due in May 2021.   (The government has twice postponed the tax payment deadline.)  The government has declared that payments for future tax years will also be due in the month of May of the following year.  The Italian DST includes a sunset clause should countries reach a multilateral agreement in the G20/OECD Inclusive Framework negotiations to reform the international tax regime.

Competition and Anti-Trust Laws

The Italian Competition Authority (AGCM) is responsible for reviewing transactions for competition-related concerns.  AGCM may examine transactions that restrict competition in Italy as well as in the broader EU market.  As a member of the EU, Italy is also subject to interventions by the European Commission Competition Directorate (DG COMP).  AGCM decisions can be appealed in courts.  In March 2020, at the beginning of the COVID health crisis, AGCM launched an investigation against Amazon and eBay for price spikes on hand sanitizer and other products.  In July 2020 AGCM launched an investigation against Apple and Amazon for banning the sale of Apple and Beats branded products to retailers who do not join the official program.  In September 2020, the Competition Authority initiated an investigation of Google, Apple and Dropbox for alleged unfair commercial practices and contractual clauses.

Expropriation and Compensation

The Italian Constitution permits expropriation of private property for “public purposes,” defined as essential services (including during national health emergencies) or measures indispensable for the national economy, with fair and timely compensation.  Expropriations have been minimal in 2020.

Dispute Settlement

ICSID Convention and New York Convention

Italy is a member state of the World Bank’s International Centre for the Settlement of Investment Disputes (ICSID convention).  Italy has signed and ratified the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention).  Italian civil law (Section 839) provides for and governs the enforcement of foreign arbitration awards in Italy.

Italian law recognizes and enforces foreign court judgments.

Investor-State Dispute Settlement

Italy is a contracting state to the 1965 Washington Convention on the Settlement of Investment Disputes between States and Nationals of Other States (entered into force on April 28, 1971).

Italy has had very few publicly known investment disputes involving a U.S. person in the last 10 years.  Italy does not have a history of extrajudicial action against foreign investors.

International Commercial Arbitration and Foreign Courts

Italy is a party to the following international treaties relating to arbitration:

  • The 1927 Geneva Convention on The Execution of Foreign Arbitral Awards (entered into force on February 12, 1931); and
  • The 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (entered into force on May 1, 1969); and
  • The 1961 European Convention on International Commercial Arbitration (entered into force on November 1, 1970).

Italy’s Code of Civil Procedure (Book IV, Title VIII, Sections 806-840) governs arbitration, including the recognition of foreign arbitration awards.  Italian law is not based on the UNCITRAL Model Law; however, many of the principles of the Model Law are present in Italian law.  Parties are free to choose from a variety of Alternative Dispute Resolution methods, including mediation, arbitration, and lawyer-assisted negotiation.

Bankruptcy Regulations

Italy’s bankruptcy regulations are somewhat analogous to U.S. Chapter 11 restructuring and allow firms and their creditors to reach a solution without declaring bankruptcy.  In recent years, the judiciary’s role in bankruptcy proceedings has been reduced to simplify and expedite proceedings.  In 2015, the Italian parliament passed a package of changes to the bankruptcy law, including measures to ease access to interim credit for bankrupt companies and to restructure debts.  Additional changes were approved in 2017 (juridical liquidation, early warning, simplified process, arrangement with creditors, insolvency of affiliated companies as a group, and reorganization of indebtedness rules).  The measures aim to reduce the number of bankruptcies, limit the impact on the local economy, and facilitate the settlement of corporate disputes outside of the court system.  The reform follows on the 2015 reform of insolvency procedures.  In early 2019, the government issued an “implementation decree” for the 2017 bankruptcy reform legislation.  In the World Bank’s “Doing Business Index 2020,” Italy ranks 21 out of 190 economies in the category of “Ease of Resolving Insolvency.”

6. Financial Sector

Capital Markets and Portfolio Investment

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

Netherlands-based Euronext is acquiring Italy’s stock exchange, the Milan Stock Exchange (Borsa Italiana), from the London Stock Exchange.  The acquisition should be completed by mid-2021.  The exchange is relatively small, 377 listed companies and a market capitalization of 37 percent of GDP at the end of December 2020.  Although the exchange remains primarily a source of capital for larger Italian firms, Borsa Italiana created “AIM Italia” in 2012 as an alternative exchange with streamlined filing and reporting requirements to encourage SMEs to seek equity financing.  Additionally, the GOI recognizes that Italian firms remain overly reliant on bank financing and has initiated some programs to encourage alternative forms of financing, including venture capital and corporate bonds.  Financial experts have held that slow CONSOB (the Italian Companies and Stock Exchange Commission) processes and cultural biases against private equity have limited equity financing in Italy, and the Italian Association of Private Equity, Venture Capital, and Private Debt (AIFI) estimates investment by private equity funds in Italy decreased by 26 percent from 2018 to 2019, totaling €7.2 billion – a low figure given the size of Italy’s economy.

Italy’s financial markets are regulated by the Italian securities regulator CONSOB, Italy’s central bank (the Bank of Italy), and the Institute for the Supervision of Insurance (IVASS).  CONSOB supervises and regulates Italy’s securities markets (e.g., the Milan Stock Exchange).  As of January 2021, the European Central Bank directly supervised 11 of Italy’s largest banks and indirectly supervised less significant Italian banks through the Bank of Italy.  IVASS supervises and regulates insurance companies.  Liquidity in the primary markets is sufficient to enter and exit sizeable positions, though Italian capital markets are small by international standards.  Liquidity may be limited for certain less-frequently traded investments (e.g., bonds traded on the secondary and OTC markets).

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

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

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

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

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

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

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

Money and Banking System

Despite isolated problems at individual Italian banks, the banking system remains sound and capital ratios exceed regulatory thresholds.  However, Italian banks’ profit margins have suffered since 2011.  The BOI said the profitability of Italian banks in 2019 was broadly in line with that of European peers but that the annualized rate of return on equity (ROE) at 5.0% (net of extraordinary components) was below the estimated cost of equity.  In the first nine months of 2020, according to the BOI, the return on equity fell from 7.8 to 2.2 percent, though the downturn slowed in the third quarter.  The capitalization of large banks (the ratio between common tier 1 equity and risk weighted assets) was 15.1 percent as of the third quarter of 2020.

While the financial crisis brought a pronounced worsening of the quality of banks’ assets, the ratio of non-performing loans (NPLs) to total outstanding loans has decreased significantly since its height in 2017.  As of January 2021, net NPLs stand at €19.9 billion, the lowest level since June 2009 and down from €20.9 billion in December 2020 and €26.3 billion in January 2020.  ABI, the Italian banking association, reported the NPL ratio was 1.14% (net of provisions) in January 2021, down from 1.2% of December 2020 and 4.89% in November 2015.  The GOI has also taken steps to facilitate acquisitions of NPLs by outside investors.

In 2016, the GOI created a €20 billion bank rescue fund to assist struggling Italian banks in need of liquidity or capital support.  Italy’s fourth-largest bank, Monte dei Paschi di Siena (MPS), became the first bank to avail itself of this fund in January 2019.  The government currently owns 64% of MPS but hopes to exit the bank by the end of 2021, as agreed with EU authorities.  To attract a private buyer for MPS and otherwise encourage M&A activity in the banking sector, the GOI allocated €2.0 billion in tax benefits in the 2021 budget.  The GOI also facilitated the sale of two struggling “Veneto banks” (Banca Popolare di Vicenza and Veneto Banca) to Intesa San Paolo in 2017.  In 2019, Banca Carige, the smallest Italian bank under ECB supervision, was put under special administration.

The main risks for Italian banks are possible deterioration in credit quality and a further decline in profitability.  The rate of new NPLs (as of January 2021) has remained very low despite the COVID-induced economic crisis, benefiting from government measures to extend credit, including through state guarantees on loans, and flexibility from supervisory authorities regarding loan classification.  Some analysts express concern that NPL levels could rise again once government support begins to decline.  Government loan guarantees (to large companies via SACE, Italy’s export credit agency, and to SMEs via the Central Guarantee Fund, or Fondo Centrale di Garanzia) and repayment moratoriums also helped lead to an 8.5 percent increase in credit to firms in 2020, the fastest rate of growth since 2008.

Despite some banking-sector M&A activity since the financial crisis, the ECB, OECD, and Italian government have had to encourage additional consolidation to improve efficiency.  In 2019, Italy had 55 (down from 58) banking groups and 98 stand-alone banks, 229 fewer than one year earlier and as well as 80 subsidiaries of foreign banks.  The cooperative credit reform and the consolidation of the network of small cooperative and mutual banks significantly altered the structure of the banking system.  The most significant recent consolidation was Intesa San Paolo’s takeover in 2020 of UBI Banca, which created Italy’s largest banking group.  The Italian banking sector remains overly concentrated on physical bank branches for delivering services, further contributing to sector-wide inefficiency and low profitability.  Electronic banking is available in Italy, but adoption remains below euro-zone averages.  Cash remains widely used for transactions.

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

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

The Ministry of Economy and Finance and BOI have indicated interest in blockchain technologies to transform the banking sector.  As of March 2021, the Italian Banking Association (ABI) had implemented a Distributed Ledger Technology-based system across the Italian banking sector.  The process aims to reconcile material (and not digitalized) products that are exchanged between banks, such as commercial paper or promissory notes.

According to the Financial Action Task Force, Italy has a strong legal and institutional framework to fight money laundering and terrorist financing, and authorities have a good understanding of the risks the country faces.  Italy, however, presents a continued risk of money laundering from activities of organized crime and its significant black-market economy.

Foreign Exchange and Remittances

Foreign Exchange

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

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

Remittance Policies

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

Sovereign Wealth Funds

The state-owned national development bank Cassa Depositi e Prestiti (CDP) launched a strategic wealth fund in 2011, now called CDP Equity (formerly Fondo Strategico Italiano – FSI).  CDP Equity has €3.4 billion in invested capital and twelve companies in its portfolio, holding both majority and minority participations.  CDP Equity invests in companies of relevant national interest and on its website (http://en.cdpequity.it/) provides information on its funding, investment policies, criteria, and procedures.  CDP Equity is open to capital investments from outside institutional investors, including foreign investors.  CDP Equity is a member of the International Working Group of Sovereign Wealth Funds and follows the Santiago Principles.

7. State-Owned Enterprises

The Italian government formerly owned and operated several monopoly or dominant companies in certain strategic sectors.  However, beginning in the 1990s and through the early 2000s, the government began to privatize most of these state-owned enterprises (SOEs).  Notwithstanding this privatization effort, the GOI retains 100 percent ownership of the national railroad company (Ferrovie dello Stato) and road network company (ANAS), which merged in January 2018.  The GOI holds a 99.56 percent share of RAI, the national radio and television broadcasting network; and retains a controlling interest, either directly or through CDP in companies such as, but not limited to, shipbuilder Fincantieri (71.6 percent), postal and financial services provider Poste Italiane (65 percent), electricity provider ENEL (23.6 percent), oil and gas major Eni (30 percent), defense conglomerate Leonardo-Finmeccanica (30.2 percent), natural gas transmission company Snam (30.1 percent), as well as electricity transmission provider Terna (29.85 percent).  The role and influence of CDP in the economy is increasing steadily with the number of deals it completed in 2020.

The COVID crisis has stimulated greater GOI intervention in the economy with the GOI shoring up companies such as airline Alitalia.  The GOI also has taken a shareholding position in AMInvestco, an Italian subsidiary of Luxembourg-based steel producer Arcelor Mittal, which is operating a steel plant in Taranto in southern Italy.  Despite the Italian government’s shareholding position, most of these companies are operating in a competitive environment (domestically and internationally) and are increasingly responsive to market-driven decision-making rather than GOI demands.  In addition, many of the state-controlled entities are publicly traded, which provides additional transparency and corporate governance obligations, including equitable treatment for non-governmental minority shareholders.  SOEs are subject to the same tax treatment and budget constraints as fully private firms.  Additionally, industries with SOEs remain open to private competition.

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

Privatization Program

The COVID-19 triggered economic crisis caused the GOI to halt and reverse its privatization program.  Notably, it embarked on rescuing troubled institutions like Alitalia, Autostrade, and the Arcelor Mittal steel plant in Taranto (formerly known as ILVA).  Through its national development bank, CDP, the previous Italian government (led by Giuseppe Conte) also took large stakes in Italian companies it considered essential for economic security and prosperity.  CDP took investment positions in Borsa Italiana, NexiSPA, and WeBuild, and likely will invest in other COVID-hit companies.  On March 11, the new government of Mario Draghi published regulations for a fund to assist certain pandemic-affected companies to strengthen their balance sheets.  The so-called “Patrimonio Destinato,” worth up to €40 billion, will be financed by specially issued sovereign bonds and managed by CDP.  CDP will then use the sovereign bonds as collateral to raise liquidity on the market.  Taking advantage of the EU’s more flexible approach to state aid, the fund will invest – via capital injections, convertible bonds, or subordinated debt – in non-financial Italian companies with revenues above €50 million with the aim of helping “strategic” companies weather severe financial difficulty because of the current economic crisis.  CDP may also use the fund to support healthier companies on ordinary market terms and buy stakes in listed companies deemed of strategic importance, but only on the condition that CDP partners with market investors.  The government approved the “Patrimonio Destinato” fund in the May 2020 Relaunch Degree.  The 170-year-old CDP, of which the Ministry of Economy and Finance (MEF) now owns 83%, has played an active role in ensuring strategic assets remain in national hands and in mitigating the economic damage caused by the pandemic.

The MEF owns 64% of Banca Monte dei Paschi di Siena (MPS) after a 2017 bailout that cost taxpayers €5.4 billion; however, the government must sell its stake by the beginning of 2022.  The MEF reportedly is ready to take two steps to guarantee re-privatization of the distressed institution:  1) increase MPS’ capital by injecting €2.5 billion in capital from the Italian Treasury, and 2) allow conversion of approximately €3.7 billion of MPS’ tax assets into tax credits.  Finally, the MEF is said to be considering a divestment of €10 billion of legal risk from the bank.

10. Political and Security Environment

Politically motivated violence is not a threat to foreign investments in Italy.  On rare occasion, extremist groups have made threats and deployed letter bombs, firebombs, and Molotov cocktails against Italian public buildings, private enterprises and individuals, and foreign diplomatic facilities.  Though many of these groups have hostile views of the United States, they have not targeted U.S. property or citizens in recent years.

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

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source* USG or international statistical source USG or International
Source of Data:  BEA; IMF;
Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2019 $2,041,512 (€1,787,664)** 2019 $2,003,576 www.worldbank.org/en/country
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international
Source of data:  BEA; IMF;
Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2019 $11,450

(€9,613)

2019 $34,900 BEA data available at
https://apps.bea.gov/
international/factsheet/
Host country’s FDI in the United States ($M USD, stock positions) 2019 $46,617(€39,137) 2019 $43,660 BEA data available at
https://www.bea.gov/
international/direct-investment-
and-multinational-enterprises-
comprehensive-data
Total inbound stock of FDI as % host GDP 2019 22.2% 2019 22.3% UNCTAD data available at
https://unctad.org/topic/
investment/world-investment-
report

* Italian GDP data are taken from ISTAT, the official statistics agency.  ISTAT publishes preliminary year end GDP data in early February and issues revised data in early March.  Italian FDI data are from the Bank of Italy and are the latest available; new data are released in May.

**2020 GDP is $1,967,248 (€1,651,595).

Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward $445,197 100% Total Outward $554,969 100%
Luxembourg $88,154 20% The Netherlands $50,086 9%
France $79,536 18% Spain $45,643 8%
The Netherlands $76,012 17% United States $43,824 8%
United Kingdom $61,596 14% Germany $41,705 8%
Germany $40,770 9% Luxembourg $35,879 7%
“0” reflects amounts rounded to +/- USD 500,000.
Table 4: Sources of Portfolio Investment
Portfolio Investment Assets
Top Five Partners (Millions, current US Dollars)
Total Equity Securities Total Debt Securities
All Countries $1,697,139 100% All Countries $1,011,578 100% All Countries $685,561 100%
Luxembourg $696,507 41% Luxembourg $670,079 66% Spain $118,488 17%
Ireland $172,884 10% Ireland $150,724 15% France $107,823 16%
France $168,602 10% France $60,779 6% United States $97,797 14%
United States $145,829 9% United States $48,032 5% Germany $54,604 8%
Spain $122,122 7% Germany $20,484 2% Nether-lands $52,943 8%

The statistics above show Italy’s largest investment partners to be within the European Union and the United States.  This is consistent with Italy being fully integrated with its EU partners and the United States.

Jamaica

Executive Summary

The Government of Jamaica (GOJ) considers foreign direct investment (FDI) a key driver for economic growth and in recent years has undertaken macroeconomic reforms that have improved its investment climate. However, the reform program was stymied by measures implemented to contain the impact of the COVID-19 pandemic. The Jamaican economy is estimated to have contracted by a record 12 percent during fiscal year (FY) 2020/21, underpinned by a near collapse in tourism and travel and weaker disposable incomes. The country also lost around 130,000 jobs, wiping out the almost 100,000 created in the last four years. With revenues declining and the debt to GDP ratio rising, the government contained expenditure and suspended its fiscal rules. The debt to GDP ratio increased by 16 percentage points to 110 percent due largely to the fallout in GDP, as the nominal debt remained relatively flat. Despite the fallout, inflation was within the four to six percent target range and the current account deficit remained close to the three percent of GDP level. The stock of Net International Reserves (NIR) ended 2020 at USD3.1 billion or 38.81 weeks of goods and services imports.

Jamaica has continued to pursue fiscal consolidation to reduce its debt to GDP ratio. Expenditure will remain flat for the FY 2021/22 and the primary surplus will more than double to 6.1 percent to achieve the debt to GDP target of 100.7 percent by March 2022. This is expected to put the country’s debt to GDP on track to reach the 60 percent target by FY 2027/28. The economy is widely projected to rebound in FY 2021/22, growing by a relatively robust 5.2 percent, while inflation will remain within the four to six percent range. A successful vaccine roll-out program will be critical to the achievement of the targets.

On March 18, 2021, Fitch Ratings Agency affirmed Jamaica’s Long-Term Foreign Currency Issuer Default Rating (IDR) at ‘B+’ and assigned a stable outlook. Fitch reported that Jamaica’s ‘B+’ rating was supported by, among other things, a favorable business climate and moderate inflation and commodity dependence. The Ratings Agency explained that the strengths were balanced by the country’s susceptibility to exogenous shocks and high public debt and the exposure of the foreign debt to exchange rate movements. Fitch said Jamaica’s stable outlook was supported “by our expectation that the public debt level will return to a firm downward path post-pandemic, which is underpinned by political consensus to maintain a high primary surplus, the resilience of external finances, and stronger economic policy institutions.”

Jamaica received USD665 million in FDI in 2019 (latest available data), a USD110 million drop over the previous year. Despite the decline, data from the 2020 UNCTAD World Investment Report, showed that Jamaica was the highest FDI destination in the English-Speaking Caribbean and the Small Island Developing States (SIDS). China and Spain were the major drivers of FDI in 2019, contributing about 60 percent of the total. Up to the onset of COVID-19 tourism, mining and energy led investment inflows into the island. Though hard hit by the global pandemic, tourism and mining continued to drive foreign investment. There is a significant host government commitment for mining, tourism and airport development, which could resume when economic conditions improve. Business process outsourcing (BPO), including customer service and back office support, continued to attract local and overseas investment. Investments in improved air, sea, and land transportation have reduced time and costs for transporting goods and have created opportunities in logistics.

Companies have reported that Jamaica’s high crime rate, corruption, and comparatively high taxes inhibit its investment prospects. The country’s corruption perception ranking, by Transparency International, improved marginally from 74 (2019) to 69 (2020) out of 180 countries. Despite laws that prescribe criminal penalties for corrupt acts by officials, there were still reports of government corruption in 2020, with a minister and another public official facing several criminal charges. Measures implemented to address crime continued into 2020, including the continuation of States of Emergency and Zones of Special Operations in several high crime areas of the island. While these efforts resulted in lowering serious crimes, the measures did not significantly impact the murder rate, and Jamaica continues to have one of the highest homicide rates in the world.

With energy prices a major component of the cost of doing business, the government has instituted a number of policies to address the structural impediment. In early 2020, the government published its Integrated Resource Plan (IRP), outlining the country’s electricity roadmap for the next two decades. The document has projected 1,164 MW of new generation capacity at a cost of USD7.3 billion, including fuel cost and the replacement of retired plants. Renewable sources are projected to generate 50 percent of electricity by 2037, with Liquified Natural Gas (LNG), introduced in 2016, providing the lion’s share of the other 50 percent. The increased investment in new generation is expected to increase efficiency and reduce the price of electricity to consumers.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2020 69 of 180 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2019 71 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2020 72 of 131 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, stock positions) 2019 USD 145 https://www.bea.gov/data/economic-accounts/international
World Bank GNI per capita 2019 USD 5,320 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

The Government of Jamaica (GOJ) is open to foreign investment in all sectors of the economy. The GOJ made significant structural changes to its economy, under International Monetary Fund (IMF) guidance during the six year period to 2019, resulting in an improved investment environment. Since 2013, Jamaica’s Parliament passed numerous pieces of legislation to improve the business environment and support economic growth through a simplified tax system and broadened tax base. The establishment of credit bureaus and a Collateral Registry under the Secured Interest in Personal Property (SIPP) legislation are improving access to credit. Jamaica made starting a business easier by consolidating forms and made electricity less expensive by reducing the cost of external connection works. The GOJ implemented an electronic platform for the payment of taxes and has established a 90-day window for development approvals.

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

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

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

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

Limits on Foreign Control and Right to Private Ownership and Establishment

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

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

Other Investment Policy Reviews

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

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

Business Facilitation

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

Outward Investment

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

3. Legal Regime

Transparency of the Regulatory System

Jamaica’s regulatory systems are transparent and consistent with international norms. Proposed legislation is available for public review at japarliament.gov.jm , and submissions are generally invited from members of the public when there is a distinct policy shift or for sensitive changes. There is no law that requires the rulemaking body to solicit comments on proposed regulation and no timeframe for the length of a consultation period when it happens. Furthermore, the law does not require reporting on public consultations but the government presents the consultations directly to interested stakeholders in one unified report. Laws in effect are available at japarliament.gov.jm  or moj.gov.jm . Companies interested in doing business in a particular sector should seek guidance from the relevant regulator(s), including the Office of Utilities Regulation (OUR) for utilities, the Bank of Jamaica (BOJ) for deposit taking institutions (DTIs) and the Financial Services Commission (FSC) for non-DTIs.

Jamaica is compliant with established benchmarks for public disclosure of its budget, the establishment and functioning of an independent and supreme audit body, and the award of contracts for natural resource extraction. Additionally, Jamaica’s Public Debt Management Act (PDMA) of 2012 has codified a gradual reduction in its contingent liability or Government Guaranteed Loans (GGL). The PDMA targets a three percent GGL-to-GDP ratio by 2027.

International Regulatory Considerations

The GOJ tends to adopt Commonwealth standards for its regulatory system, especially from Canada and the United Kingdom. In 2001, CARICOM member states established the Regional Organization for Standards and Quality (CROSQ) under Article 67 of the Revised Treaty of Chaguaramas. CROSQ is intended to harmonize regional standards to facilitate the smooth movement of goods in the common market. Jamaica is also a full member of the WTO and is required to notify all draft technical regulations to the WTO Committee of Technical Barriers to Trade (TBT).

Legal System and Judicial Independence

Jamaica has a common law legal system and court decisions are generally based on past judicial declarations. The Jamaican Constitution provides for an independent judiciary with a three-tier court structure. A party seeking to enforce ownership or contractual rights can file a claim in the Resident Magistrate or Supreme Court. Appeals on decisions made in these courts can be taken before the Court of Appeal and then to the Judicial Committee of the Privy Council in the United Kingdom. The Caribbean Court of Justice (CCJ), in its original jurisdiction, is the court of the 15-member Caribbean Community (CARICOM), but Jamaica has not signed on to its appellate jurisdiction.Jamaica does not have a single written commercial or contractual law and case law is therefore supplemented by the following pieces of legislation: (1) Arbitration (Recognition and Enforcement of Foreign Awards) Act; (2) Companies Act; (3) Consumer Protection Act; (4) Fair Competition Act; (5) Investment Disputes Awards (Enforcement) Act; (6) Judgment (Foreign) (Reciprocal Enforcement) Act; (7) Law Reform (Frustrated Contracts) Act; (8) Loans (Equity Investment Bonds) Act; (9) Partnership (Limited) Act; (10) Registration of Business Names Act; (11) Sale of Goods Act; (12) Standards Act; and, (13) Trade Act. The commercial and civil divisions of the Supreme Court have jurisdiction to hear intellectual property claims.

Jamaica enforces the judgments of foreign courts through: (1) The Judgment and Awards (Reciprocal Enforcement) Act; (2) The Judgment (Foreign) (Reciprocal Enforcement) Act; and, (3) The Maintenance Orders (Facilities for Enforcement) Act. Under these acts, judgments of foreign courts are accepted where there is a reciprocal enforcement of judgment treaty with the relevant foreign state. International arbitration is also accepted as a means for settling investment disputes between private parties.

The Jamaican judicial system has a long tradition of being fair, but court cases can take years or even decades to resolve. A new Chief Justice appointed in 2018 has set aggressive benchmarks to streamline the delivery of judgments, bring greater levels of efficiency to court administration, and target throughput rates in line with international best practice. Efforts are currently underway to provide hearing date certainty and disposition of cases within 24 months, barring exceptional circumstances. The deployment of new courtrooms and the appointment of additional Appeal Court Judges are indicators of Jamaica’s commitment to justice reform.

Challenges with dispute resolution usually reflect broader problems within the court system, including long delays and resource constraints. Subsequent enforcement of court decisions or arbitration awards is usually adequate, and the local court will recognize the enforcement of an international arbitration award.

A specialized Commercial Court was established in 2001 to expedite the resolution of commercial cases. The rules do not make it mandatory for commercial cases to be filed in the Commercial Court and the Court is largely underutilized by litigants.

Jamaica ranked 119 in the 2019 World Bank Doing Business Report on the metric of enforcement of contracts, scoring 64.8 in the length of time taken for enforcement, 43.6 for costs associated with litigation and 52.8 on the quality of judicial processes.

Laws and Regulations on Foreign Direct Investment

There are no specific laws or regulations specifically related to foreign investment. Since foreign companies are treated similar to Jamaican companies when investing, the relevant sections of the applicable laws are applied equally.

Competition and Anti-Trust Laws

The Fair Trading Commission (FTC), an agency of the Ministry of Industry, Investment and Commerce, administers the Fair Competition Act (FCA). The major objective of the FCA is to foster competitive behavior and provide consumer protection. The Act proscribes the following anti-competitive practices: resale price maintenance; tied selling; price fixing; collusion and cartels; and bid rigging. The Act does not specifically prohibit mergers or acquisitions that could lead to the creation of a monopoly. The FTC is empowered to investigate breaches of the Act and businesses or individuals in breach can be taken to court if they fail to implement corrective measures outlined by the FTC.

Expropriation and Compensation

Expropriation is generally not an issue in Jamaica, although land may be expropriated for national development under the Land Acquisition Act, which provides for compensation on the basis of market value. The U.S. government is not aware of any current expropriation-related litigation between the Jamaican government and any private individual or company. However, the U.S. government assisted investors who had property expropriated during the 1970’s socialist regime, with a payment in one such case received in 2010.

Dispute Settlement

ICSID Convention and New York Convention

Jamaica became a signatory to the International Center for Settlement of Disputes (ICSID) in 1965. The country is a signatory to the New York Convention (the Convention on the Recognition and Enforcement of Foreign Arbitral Awards), which governs the recognition and enforcement of foreign arbitration awards. The Jamaican Arbitration (Recognition and Enforcement of Foreign Awards) Act enables foreign arbitral awards under the New York Convention to be enforced in Jamaica.

Investor-State Dispute Settlement

International arbitration is also accepted as a means for settling investment disputes between private parties. Jamaica enforces the judgments of foreign courts through: (1) The Judgment and Awards (Reciprocal Enforcement) Act; (2) The Judgment (Foreign) (Reciprocal Enforcement) Act; and, (3) The Maintenance Orders (Facilities for Enforcement) Act. Under these acts, judgments of foreign courts are accepted where there is a reciprocal enforcement of judgment treaty with the relevant foreign state. Jamaica does not have a history of extrajudicial action against foreign investors.

International Commercial Arbitration and Foreign Courts

Jamaica accepts international arbitration of investment disputes between foreign investors, the Jamaican government, and private parties. Local courts recognize and enforce foreign arbitral awards. The Caribbean Court of Justice (CCJ) serves as the region’s international tribunal for disputes within the Caribbean Community (CARICOM) Single Market and Economy. The Dispute Resolution Foundation and the Caribbean Branch of the Chartered Institute of Arbitrators both facilitate arbitration and rules of the Bilateral Investment Treaty (BIT). Other foreign investors are given national treatment and civil procedures apply. Disputes between enterprises are handled in the local courts but foreign investors can refer cases to ICSID. There were cases of trademark infringements in which U.S. firms took action and were granted restitution in the local courts. While restitution is slow, it tends to be fair and transparent. The U.S. government is not aware of any cases in which State-Owned Enterprises (SOEs) have been involved in investment disputes.

Bankruptcy Regulations

Jamaica enacted new insolvency legislation in 2014 that replaced the Bankruptcy Act of 1880 and seeks to make the insolvency process more efficient. The Act prescribes the circumstances under which bankruptcy is committed; the procedure for filing a bankruptcy petition; and the procedures to be followed in the administration of the estates of bankrupts. The reform addresses bankruptcy; insolvency, receiverships; provisional supervision; and winding up proceedings. The law addresses corporate and individual insolvency and facilitates the rehabilitation of insolvent debtors, while removing the stigma formerly associated with either form of insolvency. Both insolvents and “looming insolvents” (persons who will become insolvent within twelve months of the filing of the proposal if corrective or preventative action is not taken) are addressed in the reforms.

The Act contains a provision for debtors to make a proposal to their creditors for the restructuring of debts, subject to acceptance by the creditor. Creditors can also invoke bankruptcy proceedings against the debtor if the amount owed is not less than the prescribed threshold or if the debtor has committed an act of bankruptcy. The filing of a proposal or notice of intention to file a proposal creates a temporary stay of proceedings. During this period, the creditor is precluded from enforcing claims against the debtor. The stay does not apply to secured creditors who take possession of secured assets before the proposal is filed; gives notice of intention to enforce against a security at least 10 days before the notice of intention or actual proposal is filed; or, rejects the proposal. The 2014 legislation makes it a criminal offence if a bankrupt entity defaults on certain obligations set out in the legislation.Jamaica ranked 34 on Resolving Insolvency in the 2020 World Bank’s Doing Business Report. Bankruptcy proceedings take about a year to resolve, costing 18 percent of the estate value with an average recovery rate of 65 percent.The text of the Bankruptcy and Insolvency Act can be found at: http://www.japarliament.gov.jm/attachments/341_The%20Insolvency%20Act%202014%20No.14%20rotated.pdf

6. Financial Sector

Capital Markets and Portfolio Investment

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

Money and Banking System

At the end of 2019 there were 11 deposit-taking institutions (DTIs) consisting of eight commercial banks, one merchant bank (Licensed under the Financial Institutions Act) and two building societies. The number of credit unions shrank from 47 at the end of 2009 to 25 at the end of 2019. Commercial banks held assets of approximately USD13 billion and liabilities of USD11.3 billion at the end of 2020. Non-performing loans (NPL) of USD185 million at end December 2020, were 2.9 percent of total loans. Five of the country’s eight commercial banks are foreign-owned. After a financial sector crisis in the mid-1990s led to consolidations, the sector has remained largely stable.

In October 2018, the GOJ took legislative steps to modernize and make the central bank operationally independent through the tabling of amendments to the Bank of Jamaica (BOJ) Act. The modernization program includes, inter alia, the institutionalization of the central bank independence, improved governance, and the transitioning of monetary policy towards inflation targeting. The modernization efforts continued in 2020 with the passage of the Bank of Jamaica Amendment Act to allow for, among other things: (1) full-fledged inflation targeting; (2) improved capitalization, governance, transparency, and accountability; (3) monetary policy decisions to be devolved to a monetary policy committee; and (4) the central bank Governor to account to Parliament. The Act will therefore remove the power of the government to give monetary policy direction to the central bank. These changes will move Jamaica’s financial governance framework closer in line with international standards.

Foreign Exchange and Remittances

Foreign Exchange

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

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

Remittance Policies

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

Jamaica was listed among the Major Money Laundering Jurisdictions in the U.S. Department of State’s 2020 International Narcotics Control Strategy Report (INCSR), while noting that the GoJ has enacted legislation to address corruption.

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

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

Sovereign Wealth Funds

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

7. State-Owned Enterprises

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

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

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

Privatization Program

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

While the time taken to divest assets depends on state of readiness and complexity, on average transactions take between 18 and 24 months. The process involves pre-feasibility and due diligence assessments; feasibility studies; pre-qualification of bidders; and a public tender. In 2019 the GOJ divested two of its major assets through initial public offerings (IPOs): a 62-megawatt wind farm, which raised almost USD40 million, and a toll highway, which raised almost USD90 million. In 2018, the GOJ signed a 25-year concession for the management and development of the Norman Manley International Airport in Kingston. Other large privatizations include the 2003 privatization of Sangster International Airport in Montego Bay and the 2015 privatization of the Kingston Container Terminal port facility.

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

10. Political and Security Environment

Crime poses a greater threat to foreign investment in Jamaica than political violence, as the country has not experienced any major political violence since the early 1980s. Violent crime, rooted in poverty, unemployment, and transnational criminal organizations, is a serious problem in Jamaica. Sporadic gang violence and shootings are concentrated in specific inner-city neighborhoods, but can occur elsewhere. There were 1,301 murders in Jamaica in 2020, giving the island a homicide rate of 46.5 per 100,000, marginally lower than 2019’s rate of 47.4. Jamaica had the highest homicide rate in Latin America and the Caribbean in 2020. Jamaica also faces a significant problem with extortion in certain urban commercial areas and on large construction project sites. The security challenges increase the cost of doing business as companies spend on additional security measures.

The U.S. Department of State Travel Advisory (at February 2021) assesses Jamaica at Level 3, indicating travelers should exercise increased caution. U.S. companies with personnel assigned to Jamaica are strongly advised to conduct security and cultural awareness training.

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

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

 

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source* USG or international statistical source USG or International Source of Data:  BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount  
Host Country Gross Domestic Product (GDP) ($M USD) 2019* USD15.23B 2019 USD16.46B www.worldbank.org/en/country
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data:  BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2017 N/A 2017 USD167 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data
Host country’s FDI in the United States ($M USD, stock positions) N/A N/A N/A N/A BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data
Total inbound stock of FDI as % host GDP N/A N/A 2018 25.7% UNCTAD data available at

https://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Country-Fact-Sheets.aspx  

* Source for Host Country Data: Statistical Institute of Jamaica https://statinja.gov.jm/NationalAccounting/Annual/NewAnnualGDP.aspx 

Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward Amount 100% Total Outward Amount 100%
USA 39.5 5.9 N/A
Spain 182.0.0 27.4
China   220.0  33.1
Canada   30.0   4.5
Other 191.4 -29.1

Table 4: Sources of Portfolio Investment
Data not available.

Japan

Executive Summary

Japan is the world’s third largest economy, the United States’ fourth largest trading partner, and, as of 2019, the top provider of foreign direct investment (FDI) in the United States. The Japanese government actively welcomes and solicits inward foreign investment and has set ambitious goals for increasing inbound FDI. Despite Japan’s wealth, high level of development, and general acceptance of foreign investment, however, inbound FDI stocks, as a share of GDP, are the lowest in the OECD.

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

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

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

Future improvement in Japan’s investment climate is largely contingent on the success of structural reforms to raise economic growth, and, in the near term, the implementation of COVID-19 recovery measures.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2020 19 of 180 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2019 29 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2020 16 of 131 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2019 USD 131,793 https://apps.bea.gov/international/factsheet/
World Bank GNI per capita 2019 USD 41,710 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Direct inward investment into Japan by foreign investors has been open and free since amendment of the Foreign Exchange and Foreign Trade Act (FEFTA) in 1998. In general, the only requirement for foreign investors making investments in Japan is to submit an ex post facto report to the relevant ministries. The Act was amended in 2019, updating Japan’s foreign investment review regime.  The legislation became effective in May 2020 and lowered the ownership threshold for pre-approval notification to the government for foreign investors from ten percent to one percent in industries that could pose risks to Japanese national security. There are waivers for certain categories of investors.

The Japanese Government explicitly promotes inward FDI and has established formal programs to attract it. In 2013, the government of Prime Minister Shinzo Abe announced its intention to double Japan’s inward FDI stock to JPY 35 trillion (USD 318 billion) by 2020 and reiterated that commitment in its revised Japan Revitalization Strategy issued in August 2016. At the end of 2019, Japan’s inward FDI stock was JPY 33.9 trillion (USD 310 billion), a 10.4 percent increase over the previous year. The Suga Administration’s interest in attracting FDI is one component of the government’s strategy to reform and revitalize the Japanese economy, which continues to face the long-term challenges of low growth, an aging population, and a shrinking workforce.

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

The Ministry of Economy, Trade and Industry (METI) and the Japan External Trade Organization (JETRO) are the lead agencies responsible for assisting foreign firms wishing to invest in Japan. METI and JETRO have together created a “one-stop shop” for foreign investors, providing a single Tokyo location—with language assistance—where those seeking to establish a company in Japan can process the necessary paperwork (details are available at http://www.jetro.go.jp/en/invest/ibsc/ ). Prefectural and city governments also have active programs to attract foreign investors, but they lack many of the financial tools U.S. states and municipalities use to attract investment.

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

Limits on Foreign Control and Right to Private Ownership and Establishment

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

The Foreign Exchange and Foreign Trade Act, as amended, governs investment in sectors deemed to have national security or economic stability implications. If a foreign investor wants to acquire over one percent of the shares of a listed company in the sectors set out below, it must provide prior notification and obtain approval from the Ministry of Finance and the ministry that regulates the specific industry. Designated sectors include weapons manufacturers, nuclear power, agriculture, aerospace, forestry, petroleum, electric/gas/water utilities, telecommunications, and leather manufacturing. There are waivers for certain categories of investors.

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

Other Investment Policy Reviews

The World Trade Organization (WTO) conducted its most recent review of Japan’s trade policies in November 2020 (available at directdoc.aspx (wto.org) ).

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

Business Facilitation

The Japan External Trade Organization is Japan’s investment promotion and facilitation agency. JETRO operates six Invest Japan Business Support Centers (IBSCs) across Japan that provide consultation services on Japanese incorporation types, business registration, human resources, office establishment, and visa/residency issues. Through its website ( https://www.jetro.go.jp/en/invest/setting_up/ ), the organization provides English-language information on Japanese business registration, visas, taxes, recruiting, labor regulations, and trademark/design systems and procedures in Japan. While registration of corporate names and addresses can be completed online, most business registration procedures must be completed in person. In addition, corporate seals and articles of incorporation of newly established companies must be verified by a notary, although there are indications of change underway. When he took office in September 2020, Prime Minister Suga called for reforms to eliminate use of seals and paper-based process along with establishment of a new Digital Agency as part of his policy agenda of digitizing the provision of government services.

According to the 2020 World Bank “Doing Business” Report, it takes eleven days to establish a local limited liability company in Japan. JETRO reports that establishing a branch office of a foreign company requires one month, while setting up a subsidiary company takes two months. While requirements vary according to the type of incorporation, a typical business must register with the Legal Affairs Bureau (Ministry of Justice), the Labor Standards Inspection Office (Ministry of Health, Labor, and Welfare), the Japan Pension Service, the district Public Employment Security Office, and the district tax bureau. JETRO operates a one-stop business support center in Tokyo so that foreign companies can complete all necessary legal and administrative procedures in one location. In 2017, JETRO launched an online business registration system that allows businesses to register company documents but not immigration documentation.

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

Outward Investment

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

Nippon Export and Investment Insurance (NEXI) supports outward investment by providing exporters and investors insurance that protects them against risks and uncertainty in foreign countries that is not covered by private-sector insurers. Together, JBIC and NEXI act as Japan’s export credit agency.

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

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

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

Japan places no restrictions on outbound investment.

3. Legal Regime

Transparency of the Regulatory System

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

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

International Regulatory Considerations

The Japanese Industrial Standards Committee (JISC), administered by the Ministry of Economy, Trade, and Industry, plays a central role in maintaining Japan Industrial Standards (JIS). JISC aims to align JIS with international standards. According to JISC, as of March 31, 2020, 58 percent of Japan’s standards were harmonized with their international counterparts. Nonetheless, Japan maintains a large number of Japan-specific standards that can complicate efforts to introduce new products to the country. Japan is a member of the WTO and notifies the WTO Committee on Technical Barriers to Trade (TBT) of proposed regulations.

Legal System and Judicial Independence

Japan is primarily a civil law country based on codified law. The Constitution and the five major legal codes (Civil, Civil Procedure, Commercial, Criminal, and Criminal Procedure) form the legal basis of the system. Japan has a fully independent judiciary and a consistently applied body of commercial law. An Intellectual Property High Court was established in 2005 to expedite trial proceedings in IP cases. Foreign judgments are recognized and enforced by Japanese courts under certain conditions.

Laws and Regulations on Foreign Direct Investment

Major laws affecting foreign direct investment into Japan include the Foreign Exchange and Foreign Trade Act, the Companies Act, and the Financial Instruments and Exchange Act. The Japanese government actively encourages FDI into Japan and has sought over the past decades to ease legal and administrative burdens on foreign investors, including with major reforms to the Companies Act in 2005 and the Financial Instruments and Exchange Act in 2008. The Japanese government amended the Foreign Exchange and Foreign Trade Act in 2019.

Competition and Antitrust Laws

The Japan Fair Trade Commission (JFTC) holds sole responsibility for enforcing Japanese competition and anti-trust law, although public prosecutors may file criminal charges related to a JFTC finding. In fiscal year 2019, the JFTC investigated 99 suspected Antimonopoly Act (AMA) violations and completed 81 investigations. During this same time period, the JFTC issued 11 cease and desist orders and issued a total of 69.2 billion yen (USD 659 million) surcharge payment orders to 37 companies. In 2019, an amendment to the AMA passed the Diet that granted the JFTC discretion to incentivize cooperation with investigations and adjust surcharges according to the nature and extent of the violation.

The JFTC also reviews proposed “business combinations” (i.e., mergers, acquisitions, increased shareholdings, etc.) to ensure that transactions do not “substantially … restrain competition in any particular field of trade.” In December 2019, amended merger guidelines and policies were put into force to “deal with business combinations in the digital market.” Data is given consideration as a competitive asset under these new guidelines along with the network effects characteristic of digital businesses. The JFTC has expanded authority to review merger cases, including “Non-Notifiable Cases,” when the transaction value is more than JPY40 billion (USD 370 million) and the merger is expected to affect domestic consumers. Further, the amended policies suggest that parties consult with the JFTC voluntarily when the transaction value exceeds JPY40 billion and when one or more of the following factors is met: (i) When an acquired company has an office in Japan and/or conducts research and development in Japan;

(i) When an acquired company has an office in Japan and/or conducts research and development in Japan; (ii) When an acquired company conducts sales activities targeting domestic consumers, such as developing marketing materials (website, brochures, etc.) in the Japanese language; or

(ii) When an acquired company conducts sales activities targeting domestic consumers, such as developing marketing materials (website, brochures, etc.) in the Japanese language; or (iii) When the total domestic sales of an acquired company exceed JPY100 million (USD 920,000)

(iii) When the total domestic sales of an acquired company exceed JPY100 million (USD 920,000)

Expropriation and Compensation

Since 1945, the Japanese government has not expropriated any enterprise, and the expropriation or nationalization of foreign investments in Japan is highly unlikely.

Dispute Settlement

ICSID Convention and New York Convention

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

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

Investor-State Dispute Settlement

International Commercial Arbitration and Foreign Courts

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

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

Bankruptcy Regulations

The World Bank 2020 “Doing Business” Report ranked Japan third worldwide for resolving insolvency. An insolvent company in Japan can face liquidation under the Bankruptcy Act or take one of four roads to reorganization: the Civil Rehabilitation Law; the Corporate Reorganization Law; corporate reorganization under the Commercial Code; or an out-of-court creditor agreement. The Civil Rehabilitation Law focuses on corporate restructuring in contrast to liquidation, provides stronger protection of debtor assets prior to the start of restructuring procedures, eases requirements for initiating restructuring procedures, simplifies and rationalizes procedures for the examination and determination of liabilities, and improves procedures for approval of rehabilitation plans.

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

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

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

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

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

6. Financial Sector

Capital Markets and Portfolio Investment

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

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

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

Japan does not restrict financial flows and accepts obligations under IMF Article VIII.

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

Money and Banking System

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

The country’s three largest private commercial banks, often collectively referred to as the “megabanks,” are Mitsubishi UFJ Financial, Mizuho Financial, and Sumitomo Mitsui Financial. Collectively, they hold assets approaching close to USD 8 trillion at 2020 year end. Japan’s third largest bank by assets – with more than USD 2 trillion – is Japan Post Bank, a financial subsidiary of the Japan Post Group that is still majority state-owned, 56.9 percent as of September 2020. Japan Post Bank offers services via 23,831 Japan Post office branches, at which Japan Post Bank services can be conducted, as well as Japan Post’s network of about 32,000 ATMs nationwide.

A large number of foreign banks operate in Japan offering both banking and other financial services. Like their domestic counterparts, foreign banks are regulated by the Japan Financial Services Agency (FSA). According to the IMF, there have been no observations of reduced or lost correspondent banking relationships in Japan. There are 518 correspondent financial institutions that have current accounts at the country’s central bank (including 123 main banks; 11 trust banks; 50 foreign banks; and 247 credit unions).

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

Japanese regulators are encouraging “open banking” interactions between financial institutions and third-party developers of financial technology applications through application programming interfaces (“APIs”) when customers “opt-in” to share their information.  As a result of the government having set a target to have 80 banks adopt API standards by 2020, more than 100 subject banks reportedly have done so  Many of the largest banks are participating in various proofs of concept using blockchain technology.  While commercial banks have not yet formally adopted blockchain-powered systems for fund settlement, they are actively exploring options, and the largest banks have announced intentions to produce their own virtual currencies at some point.  The Bank of Japan is researching blockchain and its applications for national accounts and established a “Fintech Center” to lead this effort.  The main banking regulator, the Japan Financial Services Agency also encourages innovation with financial technologies, including sponsoring an annual conference on “fintech” in Japan.  In April 2017, amendments to the Act on Settlements of Funds went into effect, permitting the use of virtual currencies as a form of payment in Japan, but virtual currency is still not considered legal tender (e.g., commercial vendors may opt to accept virtual currencies for transactional payments, though virtual currency cannot be used as payment for taxes owed to the government).  The law also requires the registration of virtual currency exchange businesses.  There are currently 27-registered virtual currency exchanges in Japan. In 2017, Japan accounted for approximately half of the world’s trades of Bitcoin, the most prevalent blockchain currency (digital decentralized cryptographic currency).

Foreign Exchange and Remittances

Foreign Exchange

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

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

Remittance Policies

Investment remittances are freely permitted.

Sovereign Wealth Funds

Japan does not operate a sovereign wealth fund.

7. State-Owned Enterprises

Japan has privatized most former state-owned enterprises (SOEs). Under the Postal Privatization Law, privatization of Japan Post group started in October 2007 by turning the public corporation into stock companies. The stock sale of the Japan Post Holdings Co. and its two financial subsidiaries, Japan Post Insurance (JPI) and Japan Post Bank (JPB), began in November 2015 with an IPO that sold 11 percent of available shares in each of the three entities. The postal service subsidiary, Japan Post Co., remains a wholly owned subsidiary of JPH. The Japanese government conducted an additional public offering of stock in September 2017, reducing the government ownership in the holding company to approximately 57 percent. There were no additional offerings of the stock in the bank, but there was an offering in the insurance subsidiary in April 2019. JPH currently owns 88.99 percent of the banking subsidiary and 64.48 percent of the insurance subsidiary. Follow-on sales of shares in the three companies will take place over time, as the Postal Privatization Law requires the government to sell a majority share (up to two-thirds of all shares) in JPH, and JPH to sell all shares of JPB and JPI, as soon as possible. The government planned to implement the third sale of its JPH share holdings in 2019 but did not do so due to sluggish share performance.

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

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

Privatization Program

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

Deregulation of Japan’s power sector took a step forward in April 2016 with the full liberalization of the retail electricity sector. This change has led to increased competition from new entrants. While the generation and transmission of electricity remain mostly in the hands of the legacy power utilities, new electricity retailers reached a 20- percent market share of the total volume of electricity sold as of January 2021. Japan implemented the third phase of its power sector reforms in April 2020 by requiring vertically integrated regional monopolies to “legally unbundle” the electricity transmission and distribution portions of their businesses from the power generation and retailing portions. The transmission and distribution businesses retain ownership of, and operational control over, the power grid in their regional service territories. In addition, many of the former vertically integrated regional monopolies created electricity retailers to compete in the fully deregulated retail market.

American energy companies have reported increased opportunities in this sector, but also report that the regional power utilities have advantages over new entrants with regard to understanding the regulatory regime, securing sufficient low-cost generation in the wholesale market, and accessing infrastructure. For example, while a wholesale market allows new retailers to buy electricity for sale to customers, legacy utilities, which control most of the generation, sell very little power into that market. This limits the supply and increases the cost of electricity that new retailers can sell to consumers. While the liquidity of the wholesale electricity market has increased in recent years, new entrants — including American companies — report that they have few other options for cost-effectively securing the electricity they need to meet their supply obligations. These market dynamics were exacerbated in January 2021, when high electricity demand and constrained LNG supply during a cold spell led to record-high wholesale electricity prices over the course of several days. In addition, as the large power utilities still control transmission and distribution lines, new entrants in power generation are not able to compete due to limited access to power grids.

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

10. Political and Security Environment

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

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source* USG or international statistical source USG or International Source of Data:  BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount  
Host Country Gross Domestic Product (GDP) ($M USD) 2019 $5,148,609 2019 $5,081,770 www.worldbank.org/en/country
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data:  BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2019 $58,188 2019 $131,793 BEA data available at
https://apps.bea.gov/
international/factsheet/
Host country’s FDI in the United States ($M USD, stock positions) 2019 $518,205  2019 $619,259 BEA data available at
https://www.bea.gov/international/
direct-investment-and-multinational-
enterprises-comprehensive-data
Total inbound stock of FDI as % host GDP 2019 6.03% 2019 4.34% UNCTAD data available at
https://stats.unctad.org/
handbook/EconomicTrends/Fdi.html    

* Source for Host Country Data: *2019 Nominal GDP data from “Annual Report on National Accounts for 2019”, Economic and Social Research Institute, Cabinet Office, Japanese Government.  December, 2020. (Note: uses exchange rate of 109.01 Yen to 1 U.S. Dollar and Calendar Year Data)

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

Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data (IMF CDIS, 2019)
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward 220,785 100% Total Outward 1,769,193 100%
United States 58,220 26% United States 518,490 29%
France 34,805 16% United Kingdom 163,594 9%
Singapore 23,428 11% China 127,517 7%
Netherlands 18,966 9% Netherlands 116,189 7%
Cayman Islands 17,448 8% Singapore 81,874 5%
“0” reflects amounts rounded to +/- USD 500,000.
Table 4: Portfolio Investment
Portfolio Investment Assets (IMF CPIS, 2019 end)
Top Five Partners (Millions, current US Dollars)
Total Equity Securities Total Debt Securities
All Countries 4,610,836 100% All Countries 1,904,423 100% All Countries 2,706,413 100%
United States 1,806,516 39% Cayman Islands 735,339 39% United States 1,186,071 44%
Cayman Islands 948,100 21% United States 620,445 33% France 257,881 10%
France 294,758 6% Luxembourg 100,164 5% Cayman Islands 212,761 8%
United Kingdom 175,336 4% Ireland 50,507 3% United Kingdom 127,514 5%
Australia 153,130 3% United Kingdom 47,822 3% Australia 125,861 5%

Jordan

Executive Summary

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

Jordan is committed to the promotion of investments as a key driver of economic growth and job creation, though in practice these policies face implementation challenges. The Government of Jordan offers a range of incentives to potential investors and has undertaken measures to review and enhance the economic, financial, and legal framework governing the investment process to take better advantage of available opportunities and spur growth through investment. However, despite improvement on the World Bank Ease of Doing Business report, doing business in Jordan is more difficult than elsewhere in the region.

Jordan’s economic growth has been limited for over a decade by exogenous shocks, starting with the Global Financial Crisis in 2008, followed by the Arab Spring in 2011 which resulted in interruptions of energy imports, the 2015 closure of Jordan’s borders with Iraq (reopened in August 2017 but still not flourishing) and Syria (partially re-opened in 2018), and an influx of Syrian refugees. Over this period, the government consistently ran large annual budget deficits but has been able to reduce the financing gap with loans, foreign assistance, and savings from economic reform measures enacted as part of an International Monetary Fund (IMF) Extended Fund Facility programs.  On March 25, 2020, the IMF Board approved a $1.3 billion Extended Fund Facility program for Jordan centered on fiscal consolidation, increased revenue collection, targeted social spending, economic growth, and job creation.

After growing by two percent in 2019, Jordan’s economy contracted by 1.6 percent in 2020 according to Department of Statistics data, largely due to the COVID-19 pandemic. The IMF estimates it will grow at 2.0 percent in 2021, though this number could be revised down as the effects of the pandemic’s second wave continue. Early in the pandemic, the Government of Jordan implemented a set of measures to contain the spread of the virus, which entailed a strict curfew and lockdown of schools, colleges, and 75 percent of all economic activity.  The economy gradually re-opened after the initial lockdowns, although evening and Friday curfews persisted through much of 2020 and into 2021. The IMF has released additional credit from a Rapid Financing Instrument to help Jordan manage its fiscal obligations during the pandemic.

Jordan introduced plans to mitigate the pandemic’s negative impact on the economy in both the short and medium terms.  The Central Bank of Jordan (CBJ) injected JD 1.5 billion ($2.1 billion) to increase liquidity in the banking system.  It also lowered the lending rate by 1.5 percent.  The CBJ launched a JD 500 million ($706 million) loan guarantee program at competitive interest rates to help small and medium enterprises (SMEs) resume their operations and pay their operational costs; this loan guarantee program increased in March 2021 to JD 700 million ($988 million). The CBJ also raised credit ceilings for the tourism sector and encouraged banks to reschedule and defer loans for those affected by the crisis through the end of 2021.

King Abdullah II activated the National Defense Law on March 17, 2020. Since then, the Government of Jordan has enacted 25 defense orders which stipulate measures to offset the socioeconomic impact of COVID-related restrictions and protect the economy. (List of all Defense Orders on Prime Ministry’s website in Arabic) . The government also announced measures to alleviate financial and operational burdens on businesses by postponing General Sales Tax (GST) payment and customs fees, reducing the cost of labor by exempting companies from paying social security retirement insurance for three months starting in March 2020, reducing energy costs for the industrial sector, reducing inspection rate of imported essential products, and halting judicial procedures on defaulting individuals/companies. The government issued Defense Order 6 which aims to protect employees’ rights and bans layoffs. It addressed employment conditions in the private sector, including required salary payments and temporary closure of entities/institutions largely hit by the pandemic.

The Social Security Corporation (SSC), in coordination with the government, initiated a number of programs to support workers in most affected sectors and their employers, including the relief program “Estidama,” launched in December 2020 to subsidize the salaries of workers in the sectors most affected by COVID.

Even while Jordan’s economy struggles, international metrics indicate Jordan’s investment regulatory environment is improving.  Jordan was selected as one of the top three most improved business climates in the World Bank’s “Doing Business Report 2020,” jumping 29 places from 104 to 75.  Jordan advanced 33 points in the simplified tax services index for implementing an electronic filing and payment system for labor taxes.  In ease of getting credit, Jordan ranked on par with the United States and Australia. Despite this progress, many investors complain the business environment continues to be challenging due to excessive red tape, shifting interpretations of laws and regulations, difficulties starting and exiting businesses, and other factors.

The Jordanian Investment Law grants equal treatment to local and foreign investors and incentivizes investments in industry, agriculture, tourism, hospitals, transportation, energy, and water distribution. In December 2020, the government submitted amendments to address loopholes related to tax breaks; the proposal is now awaiting parliamentary approval. The ongoing process to rationalize the tax structure and close tax loopholes may reduce incentives offered to foreign investors.

In January 2020, the Jordan Investment Commission (JIC) implemented an investor grievances bylaw which enables investors to file complaints concerning decisions issued by government agencies. Jordan also endorsed a new Public Private Partnership Law in 2020 to support the government’s commitment to broadening the utilization of the public-private partnerships and encouraging the private sector to play a larger role in overall economic activity.

Despite the pandemic, Foreign Direct Investment dropped only by 1.8 percent to JD 390 million ($551 million, equivalent to 1.7 percent of GDP) in the first three quarters of 2020 compared to the same period in 2019.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2020  60 of 180 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2020 75 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2020 81 of 129 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2019 $179 https://apps.bea.gov/international/factsheet/
World Bank GNI per capita 2019 $4,410 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Jordan is largely open to foreign investment, and the government is committed to supporting foreign investment. Foreign and local investors are treated equally under the law. The Jordan Investment Commission (JIC) is the body responsible for implementing the 2014 Investment Law and promoting new and existing investment in Jordan, through a range of measures to incentivize and facilitate investment procedures.

The Investment Law established an Investment Council, comprised of the Prime Minister, ministers with economic portfolios, and representatives from the private sector, to oversee the management and development of national investment policy and propose legislative and economic reforms to facilitate investment.

The Investment Law also identifies JIC as the focal point for investors, capable of expediting the provision of government services and providing investment incentives such as tax and customs exemptions. The President of the Commission and the administrative team supervise and approve investment-related matters within the guidelines set by the Investment Council and approved by the government.

JIC oversees an investment-dedicated “Investment Window” to provide information and technical assistance to investors, with a mandate to simplify registration and licensing procedures for investment projects that benefit from the Investment Law. In 2018, the Commission launched a “Follow-Up and After Care” section with an aim to remove obstacles facing investors and find appropriate solutions as part of the investment process.

In 2018, the government issued the “Code of Governance Practices of Policies and Legislative Instruments in Government Departments for the Year 2018.” It aims to increase legislative predictability and stability to ensure the confidence of citizens and the business sector. The government developed guidelines for a regulatory impact assessment, to be adopted and implemented across all government entities by 2021.

Limits on Foreign Control and Right to Private Ownership and Establishment

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

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

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

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

The bylaw authorizes the Council of Ministers, upon the recommendation of the Prime Minister, to grant a higher percentage ownership to non-Jordanian investors in any investment based on a certain criteria.

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

For national security purposes, foreign investors must undergo security screening through the Ministry of Interior, which can be finalized through the Commission’s “Investment Window” located at the Investment Commission or online https://www.jic.gov.jo/en/home-new/.

Other Investment Policy Reviews

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

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

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

Business Facilitation

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

JIC’s “Investment Window” at the Jordan Investment Commission ( www.jic.gov.jo ) serves as a comprehensive investment center for investors.  The window provides services to local and foreign investors, particularly those in the agricultural, medical, tourism, industrial, ICT-Business Process Outsourcing (BPO), and energy sectors.

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

Jordan has also adopted a single security approval to replace the 11 approvals previously required for new investors.  The new approval covers registering and licensing the company, obtaining driving licenses for investors, possessing immovable property for the establishment of investment projects in the industrial and developing zones, in addition to granting residence permits to non-Jordanian investors and their family members. The commission has published a number of online guides, including the investor guide ( https://www.jic.gov.jo/en/investor-guide/ ).

In 2018, the Companies Control Department has developed and launched a portal for online registration:  http://www.ccd.gov.jo/ . Foreign investors can access it to register new companies. However, e-signatures have not been implemented, so investors must sign documents using notary services in their countries.

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

In December 2020, the Greater Amman Municipality (GAM) digitized thirteen of its licensing-related services, including vocational licensing and renewal.

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

Jordan launched a National Single Window (NSW) for customs clearance. In 2020, all export and import custom declarations became electronic. This was supported by new regulations enforcing the use of electronic clearances.

The Ministry of Digital Economy and Entrepreneurship statistics said that total electronic transactions in 2020 reached 14 million, including services provided by institutions such as GAM, JIC, Tax Department, Ministry of Industry and Trade, and Jordan Customs. As of March 2021, the total number of available e-services is 404.

The 2020 World Bank Doing Business Report attributed Jordan’s rise to 75th globally to reforms regarding the legal rights of borrowers and lenders, the introduction of a unified legal framework for secured transactions, launching a notice-based collateral registry, improvements to the insolvency law, and implementation of an electronic filing and payment for labor taxes and other mandatory contributions.  The number of payments that businesses need to file every year was also cut from twenty-three to nine. However, Jordan ranked 120 in starting a business, with 7.5 procedures and 12.5 days to complete the process.

Outward Investment

Jordan does not have a mechanism to specifically incentivize outward investment, nor does it restrict it.

3. Legal Regime

Transparency of the Regulatory System

Legal, regulatory and accounting policies, applicable to both domestic and foreign investors, are transparent and promote competition.  The Jordanian Companies Law stipulates that all registered companies should maintain sound accounting records and present annual audited financial statements in accordance with internationally recognized accounting and auditing principles. According to the Jordanian Securities Commission (JSC) Law and Directives of disclosures, auditing, and accounting standards (1/1998), all entities subject to JSC’s supervision are required to apply International Financial Reporting Standards (IFRS).

In 2018, the government issued the “Code of Governance Practices of Policies and Legislative Instruments in Government Departments” to increase legislative predictability and the stability of legislative environment. A pilot project was initiated in 2018 that enforced online consultations for new business regulations across six major entities in preparation for the roll out of the regulatory impact assessment across all government entities by 2021. The Legislative and Opinion Bureau is developing a “Legislation Data Memorandum,” which all government entities submitting new regulations will be required to fill out. The memorandum will provide information on the type and details of consultations conducted with the public and private sector and proof that the parties impacted have been consulted. Currently, laws and regulations are usually published on the website of the Legislative and Opinion Bureau for public comment, in addition to executive branch consultations with the legislative branch and key stakeholders. The new steps are aimed at institutionalizing public-private sector consultations.

The government is gradually implementing policies to improve competition and foster transparency in implementation.  These reforms aim to change an existing system influenced in the past by family affiliations and business ties.  The Jordan Investment Commission (JIC), through its Fast-Track Investment Window, introduced a number of measures to streamline the investment process.

The commission issued and published a services and licensing guides outlining processes and fees, in addition to the incentives guide ( https://www.jic.gov.jo/en/services-guide/ ). Guides are currently available in Arabic.

Jordan is committed to its fiscal transparency policy; therefore the Ministry of Finance (MoF) publishes a monthly “General Government Finance Bulletin” and that includes detailed information on government’s debt obligations. ( www.mof.gov.jo/Portals/0/Mof_content/النشرات والبيانات المالية/نشرة مالية الحكومة/2016/Arabic PDF December 2016.pdf  ).

International Regulatory Considerations

Jordan recognizes and accepts most U.S. standards and specifications.  However, Jordan has occasionally required additional product standards for imports.  Some of these measures have been viewed as barriers to trade, such as a 2014 restriction imposed on packaging sizes for poultry available for retail resale.

As a member country of the WTO, Jordan is obliged to notify all draft technical regulations to the WTO Committee on Technical Barriers to Trade (TBT).

Jordan is a signatory of the WTO Trade Facilitation Agreement.  Jordan had implemented 88.7 percent of its commitments.  Jordan submitted its notifications for Category A before the agreement came into force, and is currently in the final review for categories B and C.

Legal System and Judicial Independence

Jordan has a mixed legal system based on civil law, sharia law (Islamic law), and customary law.  The Constitution establishes the judiciary as one of three separate and independent branches of government.  Jordanian commercial laws do not make a distinction between Jordanian and non-Jordanian investors.  However, plaintiffs complain of judicial backlogs and subsequent delays in legal proceedings. In 2018, Jordan has introduced economic judicial chambers, established under the Amman First Instance Court and Amman Appeal Court under the provisions of the Law of Formation of the amended Courts No. 30 of 2017.  These chambers specialize in the adjudication of certain commercial and investment disputes mentioned in Article 4 of the Courts Formation Law.

Laws and Regulations on Foreign Direct Investment

Jordan’s Investment Law governs local and foreign investment.  The law consolidated three entities – the Jordan Investment Board, the Jordanian Development Zones Commission, and the Free Zones Corporation – into the Jordan Investment Commission.  The law incorporates a statement of investors’ rights and a legal framework for the newly established Investment Window, which is located at the Investment Commission’s headquarters.

The commission issued and published services and licensing guides outlining processes and fees, in addition to other guides (  https://www.jic.gov.jo/en/publications/ ).  The commission also issued a new bylaw that regulates non-Jordanian investments to allow larger foreign investors’ ownership in previously restricted areas.

In September 2017, Parliament passed the Monitoring and Inspection of Economic Activities Law No. 33/2017, and amendments to Jordan’s Companies Law No. 34/2017. This law governs the requirements to establish venture capital companies for the purpose of direct investment, or for creating funds, to contribute or invest in high-growth companies that are not listed in the stock market.

In 2018, Jordan passed the Insolvency Law, Movable Assets and Secured Lending Law and Bylaw, the Venture Capital Bylaw, and the Income Tax Law, along with bylaws to ensure proper implementation.

In October 2019, Jordan published an amended Social Security Law stipulating temporary changes to the social security contributions of newly registered entities that meet specific conditions, with an aim to support new companies and startups.  The government also issued the Investor Grievance Bylaw and established a special unit to follow up on investors cases. As part of the government economic stimulus package announced in 2019, new investors are offered 10-year “incentive stability guarantees.” In January 2020, Jordan passed a new Public Private Partnership (PPP) law and established a PPP Unit to identify and study investment opportunities.  The PPP Law introduced a comprehensive PPP framework and created a special fund to finance PPP Projects.  The PPP unit reports to the Prime Minister and is authorized to provide technical assistance to the government by preparing feasibility studies and Financial Commitments Reports. The International Financing Corporation (IFC) and other donors are providing technical assistance programs to enhance the capacity and effectiveness of the PPP unit and framework.

There is no systematic or legal discrimination against foreign participation with respect to ownership and participation in Jordan’s major economic sectors other than the restrictions outlined in the governing regulations.  In fact, many Jordanian businesses actively seek engagement with foreign partners to increase their competitiveness and access to other international markets.  The government’s efforts have made Jordan’s official investment climate welcoming; however, U.S. investors have reported hidden costs, bureaucratic red tape, vague regulations, and unclear or conflicting jurisdictions.

Most economic regulations are available on the Jordan Investment Commission website ( https://www.jic.gov.jo/ar/investment-regulations-2/ ), or on the Ministry of Industry and Trade and Supply website (https://www.mit.gov.jo/Default/AR). All regulations are published in the Official Gazette ( http://pm.gov.jo/newspaper ) or the Legislative and Opinion Bureau ( http://www.lob.jo/ ).

For further details please contact:

Investment Window
Jordan Investment Commission
Telephone: +962 (6) 5608400/9 Ext: 120
P.O. Box 893
Amman 11821 Jordan
E-mail: info@jic.gov.jo

Competition and Antitrust Laws

Parliament passed amendments to Competition Law No. 33/2004 in 2011 to strengthen the local economic environment and attract foreign investment by providing incentives to improve market competitiveness, protect small and medium enterprises from restrictive anticompetitive practices, and give consumers access to high quality products at competitive prices.  The Competition Directorate at the Ministry of Industry, Trade, and Supply conducts market research, examines complaints, and reports violators to the judicial system.

The investor grievance unit established in 2019 at the Jordan Investment Commission can also look into unfair competition cases filed by investors.

Expropriation and Compensation

Article 11 of the Jordanian Constitution stipulates that expropriations are prohibited unless specifically deemed to be in the public interest.  In cases of expropriation, the law mandates provision of fair compensation to the investor in convertible currency.

Dispute Settlement

ICSID Convention and New York Convention

Since 1972, Jordan has been a contracting state to the International Centre for Settlement of Investment Disputes (ICSID Convention).  Only a small number of cases between foreign investors and the Jordanian government have been brought before ICSID tribunals.  Jordan is also a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York convention).

In January 2018, the Parliament passed amendments to Arbitration Law 2017, which aims to facilitate the use of arbitration as an alternative to dispute settlement procedures.

Investor-State Dispute Settlement

Under domestic law, foreign investors may seek third party arbitration as a means of settling disputes. Jordan abides by WTO dispute settlement mechanisms, and dispute settlement mechanisms under the U.S.-Jordan FTA are consistent with WTO commitments.  Article IX of the United States-Jordan Bilateral Investment Treaty (BIT) establishes procedures for dispute settlements between Jordanians and U.S. persons.

Investment disputes are treated as any other commercial or civil dispute in the Jordanian judicial system.  Investment agreements with the Jordanian government as a party generally contain a dispute resolution clause that would refer cases to arbitration in Jordan.  On average, it takes three to four years for cases that go through the local court system to reach a verdict.  Cases settled through arbitration take between 12 to 18 months.  The main challenge in litigating cases is being able to conduct proper process of service upon all concerned parties. Another challenge is recently established Economic Chamber is still developing its expertise in complex commercial litigation.

Rulings by U.S. courts or other international arbitration committees can be upheld through the filing of an Enforcement of Ruling motion in a Jordanian court.

International Commercial Arbitration and Foreign Courts

In March 2018, King Abdullah II approved Arbitration Law No. 16, amending the 2001 law.  The amendment introduced changes to the procedural framework of arbitrators seated in Jordan, which can be traced in the UNCITRAL model law.  The amended law gives more authority to the Arbitral Tribunal and limits the role of the Court of Appeal.

Rulings by U.S. courts or other international arbitration committees can be upheld through the filing of an Enforcement of Ruling motion in a Jordanian court.

The Jordan Investment Commission (JIC) established an investor grievance mechanism in accordance with the Investor Grievance bylaw No. 163 of 2019, and Grievance Hearing regulation No. 1 of 2020. This mechanism allows investors to file complaints against government decisions outside of court system; complaints can be filed electronically through JIC’s website.

Bankruptcy Regulations

The Commercial Code, Civil Code, and Companies Law collectively govern bankruptcy and insolvency proceedings.  In December 2017, the cabinet endorsed a bankruptcy bylaw which stipulates procedures for optional and compulsory liquidation, along with the mechanism, liquidation plan, and required documentation and reporting.  In 2018, parliament passed the Insolvency Law, which allows individuals and companies to offset their financial position through a debt management plan.  The law was designed to help the insolvent entity continue its economic activity, rather than directly resorting to bankruptcy, and regulates insolvency proceedings for foreign organizations according to international conventions ratified by Jordan.  As of 2021, judges had dismissed almost all petitions for insolvency on technical grounds and no company has yet used the insolvency law successfully.

Defaulting on loans or issuing checks without adequate available balances is a crime in Jordan and may subject the offender to imprisonment under Jordan’s penal system.  While Jordan is reexamining these laws, prison terms for debtors remains a legal practice in Jordan.  Investors should conduct thorough due diligence on potential partners and avail themselves of local legal counsel in order to understand best business practices in Jordan and conform with local laws.  The U.S. Commercial Service office of the Embassy of the United States in Amman can assist American businesses in these endeavors.

6. Financial Sector

Capital Markets and Portfolio Investment

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

Jordan’s stock market is one of the most open among its regional competitors, with no cap on foreign ownership. As of March 2021, non-Jordanian ownership in companies listed on the ASE represented 50.7 percent of the total market value (32 percent Arab investors and 18.7 percent non-Arab investors). Non-Jordanian ownership in the financial sector was 52.8 percent, 19.3 percent in the services sector and 63.1 percent in the industrial sector.

In spite of recent reforms and technological advances, the ASE suffers from intermittent liquidity problems and low trading activity. The financial market peaked in 2007-2008, with average trading volumes topping $118 million per day. Following the global economic downturn, the market declined precipitously, with market capitalization falling from a record high of $41 billion in 2007 to $21 billion as of Dec 31, 2019 and dropped further to $18.2 billion in 2020 due to the pandemic.

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

Credit is allocated on market terms.  The private sector has access to a limited variety of credit instruments relative to countries with more developed capital markets.

Money and Banking System

Jordan has 25 banks, including commercial banks, Islamic banks, and foreign bank branches.  Jordan does not distinguish between investment banks and commercial banks.  Concentration in the banking sector has decreased in over the past decade; the assets of the largest five banks accounted for 54.6 percent of licensed banks’ total assets at the end of 2019.  Licensed banks’ total assets reached JD 51.2 billion ($72 billion) at the end of 2019.  Banking sector assets grew by 5.6 percent in the first eleven months of 2020 to reach JD 56.5 billion ($79 billion). The banking system is capably supervised by the CBJ, which publishes an annual Financial Stability Report.  (  https://www.cbj.gov.jo/EchoBusv3.0/SystemAssets/PDFs/EN/JFSRE2019Final_23-11-2020.pdf )

Banks continue to be profitable and well-capitalized with deposits being the primary funding base.  Liquidity and capital adequacy indicators remain strong largely due to the banks’ conservative and risk averse approach, and due to strict regulations on lending, particularly mortgage lending.  Non-performing loan ratios have increased slightly and are expected to increase further in 2021 as a result of COVID-19.  Jordan’s rate of non-performing loans, as a percentage of all bank loans, was 4.9 percent at the end of 2018, reached 5 percent by the end of 2019, and increased to 5.4 in the first six months of 2020.

Jordan has historically had low banking penetration. The CBJ launched a Financial Inclusion Strategy in 2018 to increase access to the formal banking sector. Following the first iteration of the strategy, 42 percent of people in Jordan above the age of 15 had bank accounts, up from 33 percent previously.

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

Foreigners are allowed to open bank accounts with a valid passport and a Jordanian residence permit.

In January 2017, the CBJ established the Jordan Payments and Clearing Company, with an aim to establish and develop digital retail and micro payments along with the investment in innovative technology and digital financial services.  The CBJ actively supports technology and is running JoMoPay, a mobile payment system and provides regulatory support to a privately-operated electronic bill payment service eFAWATEER.com.

Foreign Exchange and Remittances

Foreign Exchange

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

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

Other notable foreign exchange regulations include:

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

Remittance Policies

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

Sovereign Wealth Funds

Jordan does not have a sovereign wealth fund.

7. State-Owned Enterprises

A number of state-owned enterprises (SOEs) exist in Jordan.  Twenty-two SOEs of different sizes and mandates are fully owned by the government.  Wholly owned SOEs employ around 11,000 individuals, with assets exceeding $8 billion. The Government has more the 50 percent ownership in six companies, employing around 4,000 individuals, with total assets of $1.3 billion.

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

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

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

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

Jordan is not a party to the Government Procurement Agreement.

Privatization Program

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

In 2020, Jordan adopted a new Public Private Partnership Law to support the government’s commitment to broadening the utilization of public-private sector partnerships (PPPs) and encouraging the private sector to play a larger role in the economy.  The law does not limit PPPs to certain sectors, or nationalities.  A PPP unit housed at the Prime Ministry supports the government in identifying and prioritizing projects, provides funding resources to cover pre-feasibility and feasibility studies, and oversees tendering processes. The PPP unit interacts with private sector and potential investors through promotional activities, market sounding exercises, and to discuss proposals. Communication during the bidding phase is strictly governed by the PPPs bylaw in line with international best practices. Once a contract is awarded, line ministries or entities will take over as main POCs for projects and their implementation. The PPP higher council will handle investors’ grievances throughout the project’s lifecycle. The unit has already identified a list of potential PPP projects in several sectors: water, energy, transport, tourism, education, health, environment, and ICT.

10. Political and Security Environment

The threat of terrorism remains high in Jordan. Transnational and indigenous terrorist groups have demonstrated the capability to plan and implement attacks in Jordan. Violent extremist groups in Syria and Iraq, including the Islamic State of Iraq and ash-Sham (ISIS), and al-Qa’ida, directly or indirectly have conducted or supported attacks in Jordan and continue to plot against local security forces, U.S. and Western interests and “soft” targets, such as high-profile public events, hotels, places of worship, restaurants, schools, and malls. Jordan’s prominent role in the Global Coalition to Defeat ISIS and its shared borders with Iraq and Syria increase the potential for future terrorist incidents.

Demonstrations occur frequently. They may take place in response to political or economic issues, on politically significant holidays, and during international events. In general, demonstrations remain peaceful. However, some have turned violent, even when intended to be peaceful, leading security officials to intervene. Visitors should consult current State Department public announcements at  www.travel.state.gov before traveling to Jordan.

Visitors should consult current State Department public announcements at  www.travel.state.gov before traveling to Jordan.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

 

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source* USG or international statistical source USG or International Source of Data:  BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount  
Host Country Gross Domestic Product (GDP) ($M USD) 2019 $44,628 2019 $44,503 www.worldbank.org/en/country
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data:  BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) N/A N/A 2019 $179 BEA data available at https://apps.bea.gov/international/factsheet/
Host country’s FDI in the United States ($M USD, stock positions) N/A N/A N/A N/A BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data
Total inbound stock of FDI as % host GDP N/A N/A 2019 83.5% UNCTAD data available at

https://stats.unctad.org/handbook/EconomicTrends/Fdi.html   

* Source for Host Country Data:  N/A

Table 3: Sources and Destination of FDI
Direct Investment from/in Jordan Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward 728* 100% Total Outward 27* 100%

“0” reflects amounts rounded to +/- USD 500,000.
The Central Bank of Jordan does not collect or provide FDI data disaggregated by source.

*Aggregated number for 2020.

 Table 4: Sources of Portfolio Investment
Portfolio Investment Assets
Top Five Partners (Millions, current US Dollars)
Total Equity Securities Total Debt Securities
All Countries Amount 100% All Countries Amount 100% All Countries Amount 100%
United States 3,404 47% Bahrain 326 28% United States 3,249 54%
West Bank 1,080 15% West Bank 297 26% West Bank 783 13%
Bahrain 955 13% United States 155 13% Bahrain 629 10%
Luxembourg 425 6% UK 100 9% Luxembourg 404 7%
UK 221 3% Lebanon 79 7% Netherlands 137 2%

Kazakhstan

Executive Summary

Since its independence in 1991, Kazakhstan has made significant progress toward creating a market economy and has attracted significant foreign investment given abundant mineral, petroleum, and natural gas resources. As of January 1, 2021, the stock of foreign direct investment in Kazakhstan totaled USD 166.4 billion, including USD 38 billion from the United States, according to official statistics from the Kazakhstani central bank.

While Kazakhstan’s vast hydrocarbon and mineral reserves remain the backbone of the economy, the government continues to make incremental progress toward diversification.  Kazakhstan’s efforts to remove bureaucratic barriers have been moderately successful, and in 2020 Kazakhstan ranked 25 out of 190 in the World Bank’s annual Doing Business Report. The government maintains an active dialogue with foreign investors through the President’s Foreign Investors Council and the Prime Minister’s Council for Improvement of the Investment Climate.  Kazakhstan joined the World Trade Organization (WTO) in 2015.  In September 2020, President Tokayev announced a New Economic Course – a reform agenda that, if implemented, aims to improve the investment climate.

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

In July 2018, the government of Kazakhstan officially opened the Astana International Financial Center (AIFC), an ambitious project modelled on the Dubai International Financial Center, which aims to offer foreign investors an alternative jurisdiction for operations, with tax holidays, flexible labor rules, a Common Law-based legal system, a separate court and arbitration center, and flexibility to carry out transactions in any currency.  Since 2019 the government has pursued a policy of using the AIFC as a regional investment hub to attract foreign investment to Kazakhstan. The government has recommended foreign investors use the law of the AIFC as applicable law for contracts with Kazakhstan. . In January 2021 the AIFC on behalf of Kazakhstan joined the Central Asia Investment Partnership initiated by the U.S. International Development Finance Corporation (DFC).

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2020 94 of 179 http://www.transparency.org/research/cpi/overview 
World Bank’s Doing Business Report 2020 25 of 190 http://www.doingbusiness.org/en/rankings 
Global Innovation Index 2020 77 of 131 https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, historical stock positions) N/A N/A N/A
World Bank GNI per capita 2019 USD 8,820 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD 

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Toward FDI

Kazakhstan has attracted significant foreign investment since independence. As of January 1, 2021, the total stock of foreign direct investment (by the directional principle) in Kazakhstan totaled USD 166.4 billion, primarily in the oil and gas sector. International financial institutions consider Kazakhstan to be a relatively attractive destination for their operations, and international firms have established regional headquarters in Kazakhstan.

In 2017, Kazakhstan adhered to the OECD Declaration on International Investment and Multinational Enterprises, meaning it committed to certain investment standards, including the promotion of responsible business conduct..

In its Strategic Plan of Development to 2025, the government stated that bringing up the living standards of Kazakhstan’s citizens to the level of OECD countries is one of its strategic goals.

In addition to earlier approved program documents, the President adopted a National Development Plan to 2025 in February 2021. The Plan outlines objectives and parameters of a New Economic Course announced by President Tokayev in September 2020. The Course included seven priorities: a fair distribution of benefits and responsibilities, the leading role of private entrepreneurship, fair competition, productivity growth and the development of a more technologically advanced economy, human capital development, development of a green economy, and state accountability to the society. A favorable investment climate is a part of this course. To implement his program, the President established the Supreme Council for Reforms and the Agency for Strategic Planning and Reforms. The President chairs the Supreme Council for Reforms, while Sir Suma Chakrabarti, a former President of the European Bank for Reconstruction and Development will serve as Deputy Chairman.

In January 2021, the Prime Minister announced the government’s commitment to increase the share of annual FDI in GDP from 13.2 percent of GDP in 2018 to 19 percent of GDP in 2022.

The government of Kazakhstan has incrementally improved the business climate for foreign investors. Corruption, lack of rule of law and excessive bureaucracy, however, do remain serious obstacles to foreign investment.

Over the last few years, the government has undertaken a number of structural changes aimed at improving how the government attracts foreign investment. In April 2019, the Prime Minister created the Coordination Council for Attracting Foreign Investment. The Prime Minister acts as the Chair and Investment Ombudsman. In December 2018, the Investment Committee was transferred to the supervision of the Ministry of Foreign Affairs, which took charge of attracting and facilitating the activities of foreign investors. In January 2021, the Minister of Foreign Affairs received an additional title of Deputy Prime Minister due to the expanded portfolio of the Ministry. The Investment Committee at the Ministry of Foreign Affairs takes responsibility for investment climate policy issues and works with potential and current investors, while the Ministry of National Economy and the Ministry of Trade and Integration interact on investment climate matters with international organizations like the OECD, WTO, and the United Nations Conference on Trade and Development (UNCTAD). Each regional municipality designates a representative to work with investors. Specially designated front offices in Kazakhstan’s overseas embassies promote Kazakhstan as a destination for foreign investment. In addition, the Astana International Financial Center (AIFC, ) operates as a regional investment hub regarding tax, legal, and other benefits. In 2019, the government founded Kazakhstan’s Direct Investment Fund which became resident at the AIFC and aims to attract private investments for diversifying Kazakhstan’s economy. The state company KazakhInvest, located in this hub, offers investors a single window for government services.

In 2020-2021, the government attempted to improve the regulatory and institutional environment for investors. However, these changes have sometimes been associated with an over-structured system of preferences and an enhanced government role. For example, in January 2021 the Foreign Minister suggested for consideration establishment of an additional group, the Investment Command Staff (ICS) that would make decisions on granting special conditions and extending preferences for investors signing investment agreements. This Investment Command Staff is expected to consider project proposals after their verification by KazakhInvest and the Astana International Financial Center. The government maintains its dialogue with foreign investors through the Foreign Investors’ Council chaired by the President, as well as through the Council for Improving the Investment Climate chaired by the Prime Minister.

The COVID-19 pandemic and unprecedented low oil prices caused the government to amend the country’s mid-term economic development plans. In March 2020, the government approved a stimulus package of $13.7 billion, mostly oriented at maintaining the income of the population, supporting local businesses, and implementing an import-substitution policy.

Limits on Foreign Control and Right to Private Ownership and Establishment

By law, foreign and domestic private firms may establish and own certain business enterprises. While no sectors of the economy are completely closed to foreign investors, restrictions on foreign ownership exist, including a 20 percent ceiling on foreign ownership of media outlets, a 49 percent limit on domestic and international air transportation services, and a 49 percent limit on telecommunication services. Article 16 in the December 2017 Code on Subsoil and Subsoil Use (the Code) mandates that share of the national company KazAtomProm be no less than 50% in new uranium producing joint ventures.

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

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

Foreign Investment in the Energy & Mining Industries

Despite substantial investment in Kazakhstan’s energy sector, companies remain concerned about the risk of the government legislating or otherwise advocating for preferences for domestic companies and creating mechanisms for government intervention in foreign companies’ operations, particularly in procurement decisions.  In 2020, developments ranged from a major reduction to a full annulment of work permits for some categories of foreign workforce (see Performance and Data Localization Requirements.)   During a March 2021 virtual meeting with international oil companies, Kazakhstan’s President urged the government to ensure legal protection and stability of investments and investment preferences. He also tasked the recently established Front Office for Investors to address investor challenges and bring them to the attention of the Prime Minister’s Council.  Moreover, Kazakhstan supported the request of oil companies to remove a discriminatory approach to fines imposed on them for gas flaring.  Under the current legislation, oil companies pay gas flaring fines several times higher than those paid by other non-oil companies.

In April 2008, Kazakhstan introduced a customs duty on crude oil and gas condensate exports, this revenue goes to the government’s budget and does not reach the National Fund.  The National Fund is financed by direct taxes paid by petroleum industry companies, other fees paid by the oil industry, revenues from privatization of mining and manufacturing assets, and from disposal of agricultural land.  The customs duty on crude oil and gas condensate exports is an indirect tax that goes to the government’s budget.  Companies that pay taxes on mineral and crude oil exports are exempt from that export duty.  The government adopted a 2016 resolution that pegged the export customs duty to global oil prices – if the global oil price drops below $25 per barrel, the duty zeros.

The Code defines “strategic deposits and areas” and restricts the government’s preemptive right to acquire exploration and production contracts to these areas, which helps to reduce significantly the approvals required for non-strategic objects.  The government approves and publishes the list of strategic deposits on its website.  The latest approved list is dated June 28, 2018: https://www.primeminister.kz/ru/decisions/28062018-389.

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

Kazakhstan is committed under the Paris Climate Agreement to reduce GHG emissions 15 percent from the level of base year 1990 down to 328.3 million metric tons (mmt) by 2030.  In the meantime, Kazakhstan increased emissions 27.8 percent to 401.9 mmt in the five years from 2013 to 2018. The energy sector accounted for 82.4 percent of GHG emissions, agriculture for 9 percent, and others for 5.6 percent.  The successor of the Energy Ministry for environmental issues, Ministry of Ecology, Geology, and Natural Resources, started drafting the 2050 National Low Carbon Development Strategy in October 2019. The Concept is scheduled for submission to the government in June 2021.

In November 2020, the government adopted a National Plan for Allocation of Quotas for Greenhouse Gas (GHG) Emissions for 2021. The emissions cap (a total number of emissions allowed) is set for 159.9 million. The power sector received the highest number of allowances, or 91.4 million, for 90 power plants.  The cap for the oil and gas sector is 22.2 million for 61 installations, while 24 mining installations get 7.3 million allowances, and 21 metallurgical facilities have 29.6 million.  The combined caps for the chemical and processing sectors are 9.3 million. In February 2018, the Ministry of Energy announced the creation of an online GHG emissions reporting and monitoring system.  The system is not operational, and it is likely to be launched after the Environmental Code comes into effect in July 2021.  Some companies have expressed concern that Kazakhstan’s trading system will suffer from insufficient liquidity, particularly as power consumption and oil and commodity production levels increase.

Other Investment Policy Reviews

The OECD Investment Committee presented its second Investment Policy Review of Kazakhstan in June 2017, available at: https://www.oecd.org/countries/kazakhstan/oecd-investment-policy-reviews-kazakhstan-2017-9789264269606-en.htm.

The OECD Investment Committee presented its second Investment Policy Review of Kazakhstan in June 2017, available at: https://www.oecd.org/countries/kazakhstan/oecd-investment-policy-reviews-kazakhstan-2017-9789264269606-en.htm.

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

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

Business Facilitation

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

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

According to the ‘Doing Business’ Index, it takes 4 procedures and 5 days to establish a foreign-owned limited liability company (LLC) in Kazakhstan. This is faster than the average for Eastern Europe and Central Asia and OECD high-income countries. A foreign-owned company registered in Kazakhstan is considered a domestic company for Kazakhstan currency regulation purposes. Under the law on Currency Regulation and Currency Control, residents may open bank accounts in foreign currency in Kazakhstani banks without any restrictions.

The COVID-19 pandemic triggered new measures for easing the doing business process. In 2021, the government introduced a special three-percent retail tax for 114 types of small and medium-sized businesses. Companies can switch to the new regime voluntarily. The government also introduced an investment tax credit allowing entrepreneurs to receive tax deferrals for up to three years. As a part of his new economic policy, President Tokayev stated that prosecution or tax audits against entrepreneurs should be possible only after a respective tax court ruling.

In 2020, the government approved new measures aimed to facilitate the business operations of investors and to help Kazakhstan attract up to $30 billion in additional FDI by 2025. For example, the government introduced a new notional an investment agreement (see details in Section 4) and removed a solicitation of local regional authorities for obtaining a visa for a business-immigrant.

In order to facilitate the work of foreign investors, the government has recommended to use the law of the Astana International Financial Center (AIFC) as applicable law for investment contracts with Kazakhstan and has planned some steps, including a harmonization of tax preferences of the AIFC, the International IT park Astana Hub, Astana Expo 2017 company and Nazarbayev University. Plans on the further liberalization of a visa and migration regime, and the development of international air communication with international financial centers were suspended due to the COVID-19 pandemic.

Utilizing the advantages of the Astana International Financial Center may bring positive results in attracting foreign investments. Nonetheless, there is still room for improvement in business facilitation in the rest of Kazakhstan’s territory. For example, foreign investors often complain about problems finalizing contracts, delays, and burdensome practices in licensing. The problems associated with the decriminalization of tax errors still await full resolution, despite an order to this effect issued by the General Prosecutor’s Office in January 2020. The controversial taxation of dividends of non-residents that came into force in January 2021, has additionally raised concerns of foreign investors.

Outward Investment

The government neither incentivizes nor restricts outward investment.

3. Legal Regime

Transparency of the Regulatory System

Kazakhstani law sets out basic principles for fostering competition on a non-discriminatory basis.

Kazakhstan is a unitary state, and national legislation enacted by the Parliament and President are equally effective for all regions of the country. The government, ministries, and local executive administrations in the regions (“Akimats”) issue regulations and executive acts in compliance and pursuance of laws. Kazakhstan is a member of the EAEU, and decrees of the Eurasian Economic Commission have preemptive force over national legislation. Publicly listed companies indicate that they adhere to international financial reporting standards but accounting and valuation practices are not always consistent with international best practices.

The government consults on some draft legislation with experts and the business community; draft bills are available for public comment at www.egov.kz under Open Government section, however, the comment period is only ten days, and the process occurs without broad notifications. Some bills are excluded from public comment, and the legal and regulatory process, including with respect to foreign investment, remains opaque. All laws and decrees of the President and the government are available in Kazakh and Russian on the websites of the Ministry of Justice: http://adilet.zan.kz/rus and http://zan.gov.kz/en/ .

Implementation and interpretation of commercial legislation is reported to sometimes create confusion among foreign and domestic businesses alike. In 2016, the Ministry of Health and Social Development introduced new rules on attracting foreign labor, some of which (including a Kazakh language requirement) created significant barriers for foreign investors. After active intervention by the international investment community through the Prime Minister’s Council for Improving the Investment Climate, the government canceled the most onerous requirements.

The non-transparent application of laws remains a major obstacle to expanded trade and investment. Foreign investors complain of inconsistent standards and corruption. Although the central government has enacted many progressive laws, local authorities may interpret rules in arbitrary ways with impunity.

Many foreign companies say they must defend investments from frequent decrees and legislative changes, most of which do not “grandfather in” existing investments. Penalties are often assessed for periods prior to the change in policy. One of the recent cases involves a U.S. company that has objected to the retroactive application of a new rule on an exemption on dividend taxes in Kazakhstan’s Tax Code.  Other examples from the past include foreign companies reporting that local and national authorities arbitrarily imposed high environmental fines, saying the fines were assessed to generate revenue for local and national authorities rather than for environmental protection. Government officials have acknowledged the system of environmental fines required reform and developed the new Environmental Code (Eco Code), compliant with OECD standards, in 2018.  The new Eco Code signed into law in January 2021 will come into effect on July 1, 2021.  The Eco Code mandates local authorities to have 100 percent of environmental payments spent on environmental remediation.  Oil companies have complained that the emission payment rates for pollutants when emitted from gas flaring are at least twenty times higher than when the same pollutants are emitted from other stationary sources. The Parliament is currently reviewing the amendments to the Administrative Code to make gas flaring fines for oil companies equivalent to those imposed on non-oil companies.

In 2015, President Nazarbayev announced five presidential reforms and the implementation of the “100 Steps” Modernization program. The program calls for the formation of a results-oriented public administration system, a new system of audit and performance evaluation for government agencies, and introduction of an open government system with better public access to information held by state bodies.

President Tokayev, who was elected in June 2019, stated his adherence to reforms, initiated by former President Nazarbayev, and called the government to reset approaches to reforms, including robust implementation. The New Economic Course, announced by President Tokayev in 2020, included the streamlining of the taxation system to stimulate inflow of foreign investment and the decriminalization of tax errors. In addition, Tokayev tasked the government to develop in 2021 a new bill guaranteeing the right of citizens to access information on the government’s activity. Public financial reporting, including debt obligations, and explicit liabilities, are published by the National Bank of Kazakhstan at https://nationalbank.kz/en/news/vneshniy-dolg and by the Ministry of Finance on their site: https://www.gov.kz/memleket/entities/minfin/press/article/details/17399?directionId=261&lang=ru.

However, contingent liabilities, such as exposures to state-owned enterprises, their crossholdings, and exposures to banks, are not fully captured there.

International Regulatory Considerations

Kazakhstan is part of the Eurasian Economic Union, and EAEU regulations and decisions supersede the national regulatory system.  In its economic policy Kazakhstan has declared its adherence to the WTO and OECD standards. Kazakhstan became a member of the WTO in 2015.  It notifies the WTO Committee on Technical Barriers to Trade about drafts of national technical regulations (although lapses have been noted).  Kazakhstan ratified the WTO Trade Facilitation Agreement (TFA) in May 2016, notified its Category A requirements in March 2016, and requested a five-year transition period for its Category B and C requirements.  Early in 2018, the government established an intra-agency Trade Facilitation Committee to implement its TFA commitments.  The status of the TFA implementation by Kazakhstan can be found here: https://tfadatabase.org/members/kazakhstan.

Legal System and Judicial Independence

Kazakhstan’s Civil Code establishes general commercial and contract law principles. Under the constitution, the judicial system is independent of the executive branch, although the government interferes in judiciary matters. According to Freedom House’s Nations in Transit report for 2018, the executive branch effectively dominates the judicial branch. Allegedly, pervasive corruption of the courts and the influence of the ruling elites results in low public expectations and trust in the justice system. Judicial outcomes are perceived as subject to political influence and interference. Regulations or enforcement actions can be appealed and adjudicated in the national court system. Monetary judgments are assessed in the domestic currency.

Parties of commercial contracts, including foreign investors, can seek dispute settlement in Kazakhstan’s courts or international arbitration, and Kazakhstani courts nominally enforce arbitration clauses in contracts. However, in actual fact the Government has refused to honor at least one fully litigated international arbitral decision. Any court of original jurisdiction can consider disputes between private firms as well as bankruptcy cases.

The Astana International Financial Center, which opened in July 2018, includes its own arbitration center and court based on British Common Law and independent of the Kazakhstani judiciary. The court is now led by former Deputy President of the UK Supreme Court, Lord Mance, and several other Commonwealth judges have been appointed. The government advises foreign investors to use the capacities of the AIFC arbitration center and the AIFC court more actively. Provisions on using the AIFC law as applicable law are recommended for model investment contracts between a foreign investor and the government. In February 2020, the AIFC reported that both Chevron in Kazakhstan and Tengizchevroil included the AIFC arbitration center as their preferred institution for resolution of commercial disputes in Kazakhstan.  Local lawyers have observed a growing positive influence of the high standards of AIFC court and the AIFC arbitration over the entire judicial system of Kazakhstan.

President Tokayev’s policy on a new Economic Course anticipates further judiciary reforms aimed to strengthen public trust in courts.

Laws and Regulations on Foreign Direct Investment

The following legislation affects foreign investment in Kazakhstan: the Entrepreneurial Code; the Civil Code; the Tax Code; the Customs Code of the Eurasian Economic Union; the Customs Code of Kazakhstan; the Law on Government Procurement; the Law on Currency Regulation and Currency Control, and the Constitutional Law on the Astana International Financial Center. These laws provide for non-expropriation, currency convertibility, guarantees of legal stability, transparent government procurement, and incentives for priority sectors. However, inconsistent implementation of these laws and regulations at all levels of the government, combined with a tendency for courts to favor the government, have been reported to create significant obstacles to business in Kazakhstan.

The Entrepreneurial Code outlines basic principles of doing business in Kazakhstan and the government’s relations with entrepreneurs. The Code reinstates a single investment regime for domestic and foreign investors, and in principal codifies non-discrimination for foreign investors. The Code contains incentives and preferences for government-determined priority sectors, providing customs duty exemptions and in-kind grants detailed in section 4, Industrial Policies.

The Code also provides for dispute settlement through negotiation, use of Kazakhstan’s judicial process, and international arbitration. U.S. investors have expressed concern about the Code’s narrow definition of investment disputes and its lack of clear provisions for access to international arbitration.

In 2020, Kazakhstan enacted a new provision to the Entrepreneurial Code on investment agreement between strategic investors and the government. According to the law, the investment agreement is expected to provide investors with incentives, preliminarily negotiated with the government. The government guarantees the stability of the legal regime for these investment agreements. The investment agreement is an addition to a system of investment contacts already established in Kazakhstan (see Section 4 for details).

A law on Currency Regulation and Currency Control, which came into force July 1, 2019, expands the statistical monitoring of transactions in foreign currency and facilitates the process of de-dollarization. In particular, the law treats branches of foreign companies in Kazakhstan as residents and enables the National Bank of Kazakhstan (NBK) to enhance control over cross-border transactions. The NBK approved a list of companies that keep their non-resident status; the majority of these companies are from extractive industries (see also section 6, Financial Sector).

The legal and regulatory framework offered by AIFC to businesses registering on that territory differs substantially from that of Kazakhstan. The AIFC activity has gained momentum since its establishment in 2018. More detailed information on the legal and regulatory implications of operating within AIFC can be found here: https://aifc.kz/annual-report/ and in Section 6, Financial Sector. Additionally, the government’s single window for foreign investors, providing information to potential investors, business registration, and links to relevant legislation, can be found here: https://invest.gov.kz/invest-guide/.

Competition and Antitrust Laws

The Entrepreneurial Code regulates competition-related issues such as cartel agreements and unfair competition. In 2020, in order to enhance an anti-monopoly policy, the President ordered the transfer of the functions on protection of competition to a newly created Agency for Protection and Development of Competition that operates under his direct supervision. The Agency is responsible for reviewing transactions in terms of competition-related concerns. Regulation of natural monopolies remained with the Ministry of National Economy. In order to be responsive to public opinion, the Agency for Protection and Development of Competition has established various consultative bodies, including the Open Space, the Council on Identifying and Removal of Barriers for Entering Markets, the Public Council, and the Exchange Committee. Foreign companies may participate in the Council on Identifying and Removal of barriers for Entering Markets.

Expropriation and Compensation

The bilateral investment treaty between the United States and Kazakhstan requires the government to provide compensation in the event of expropriation. The Entrepreneurial Code allows the state to nationalize or requisition property in emergency cases but fails to provide clear criteria for expropriation or to require prompt and adequate compensation at fair market value.

The Mission is aware of cases where owners of flourishing and developed businesses have been forced to sell their businesses to companies affiliated with high-ranking and powerful individuals.

Dispute Settlement

ICSID Convention and New York Convention

Kazakhstan has been a member of the International Center for the Settlement of Investment Disputes (ICSID) since December 2001 and ratified the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards in 1995. By law, any international award rendered by the ICSID, a tribunal applying the rules of the UN Commission on International Trade Law Arbitration, Stockholm Chamber of Commerce, London Court of International Arbitration, or Arbitration Commission at the Kazakhstan Chamber of Commerce and Industry is enforceable in Kazakhstan. However, the government does not always honor such awards.

Investor-State Dispute Settlement

The government is a signatory to bilateral investment agreements with 47 countries, the Energy Charter Treaty, and one multilateral investment agreement with EAEU partners. These agreements recognize international arbitration of investment disputes. The United States and Kazakhstan signed a Bilateral Investment Treaty in 1994.

Kazakhstan is legally obligated to recognize arbitral awards, yet does not always honor this fact.

In January 2021, Kazakhstan’s Ministry of Justice reported that in 2020, Kazakhstan was involved in 25 arbitration proceedings, including 15 in international arbitration courts.  A number of investment disputes involving foreign companies have arisen in the past several years linked to alleged violations of environmental regulations, tax laws, transfer pricing laws, and investment clauses. Some disputes relate to alleged illegal extensions of exploration schedules by subsurface users, as production-sharing agreements with the government usually make costs incurred during this period fully reimbursable. Some disputes involve hundreds of millions of dollars. Problems arise in the enforcement of judgments, and ample opportunity exists for influencing judicial outcomes given the relative lack of judicial independence.

To encourage foreign investment, the government has developed dispute resolution mechanisms aimed at enabling aggrieved investors to seek redress without requiring them to litigate their claims. The government established an Investment Ombudsman in 2013, billed as being able to resolve foreign investors’ grievances by intervening in inter-governmental disagreements that affect investors. However, investors who have entered such settlement discussions in good faith report that the government pursued criminal litigation just as the parties were closing in on a deal (after the investors had devoted significant time and resources toward achieving a settlement).

The Entrepreneurial Code defines an investment dispute as “a dispute ensuing from the contractual obligations between investors and state bodies in connection with investment activities of the investor,” and states such disputes may be settled by negotiation, litigation or international arbitration. Investment disputes between the government and investors fall to the Nur-Sultan City Court; disputes between the government and large investor are in the exclusive competence of a special investment panel at the Supreme Court of Kazakhstan. Amendments to legislation on the court system the Parliament adopted in March 2021 will change this system once implemented. Starting from July 1, 2021, the Special Economic Court and the Special Administrative Court of Nur-Sultan City will be the courts of first instance for investment disputes between the government and investors. The Nur-Sultan City Court and the Judicial Chamber on administrative cases of the Supreme Court will serve as the first court of appeal.

International Commercial Arbitration and Foreign Courts

The Law on Mediation offers alternative (non-litigated) dispute resolutions for two private parties. The Law on Arbitration defines rules and principles of domestic arbitration. As of April 2020, Kazakhstan had 18 local arbitration bodies unified under the Arbitration Chamber of Kazakhstan. Please see: https://palata.org/about/. The government noted that the Law on Arbitration brought the national arbitration legislation into compliance with the United Nations Commission on International Trade Law (UNCITRAL) Model Law, the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, and the European Convention on International Commercial Arbitration. Local courts recognize and enforce court rulings of CIS countries. Judgement of other foreign state courts are recognized and enforceable by local courts when Kazakhstan has a bilateral agreement on mutual judicial assistance with the respective country or applies a principle of reciprocity.

When SOEs are involved in investment disputes, domestic courts usually find in the SOE’s favor. By law, investment disputes with private commercial entities, employees, or SOEs are in the jurisdiction of local courts. According to the European Bank for Reconstruction and Development’s 2014 Judicial Decision Assessment, judges in local courts lacked experience with commercial law and tended to apply general principles of laws and Civil Code provisions with which they are more familiar, rather than relevant provisions of commercial legislation. President Tokayev has recognized that that the judicial system lacks specialists in taxation, subsoil use, intellectual property rights and corporate law.

Even when investment disputes are resolved in accordance with contractual conditions, the resolution process can be slow and require considerable time and resources. Many investors therefore elect to handle investment disputes privately, in an extrajudicial way.

Bankruptcy Regulations

Kazakhstan’s 2014 Bankruptcy and Rehabilitation Law (The Bankruptcy Law) protects the rights of creditors during insolvency proceedings, including access to information about the debtor, the right to vote against reorganization plans, and the right to challenge bankruptcy commissions’ decisions affecting their rights. Bankruptcy is not criminalized, unless the court determines the bankruptcy was premeditated, or rehabilitation measures are wrongful. The Bankruptcy Law improves the insolvency process by permitting accelerated business reorganization proceedings, extending the period for rehabilitation or reorganization, and expanding the powers of (and making more stringent the qualification requirements to become) insolvency administrators. The law also eases bureaucratic requirements for bankruptcy filings, gives creditors a greater say in continuing operations, introduces a time limit for adopting rehabilitation or reorganization plans, and adds court supervision requirements. Amendments to the law accepted in 2019-2020 introduced a number of changes. Among them are a more specified definition of premeditated bankruptcy; a requirement to prove a sustained insolvency when filing a claim on bankruptcy; a possibility for the bank-agent to file a request for bankruptcy on behalf of a syndicate of creditors; a possibility for individual entrepreneurs to apply for a rehabilitation procedure to reinstate its solvency, and an option to be liquidated without filing bankruptcy in the absence of income, property, and business operations.

6. Financial Sector 

Capital Markets and Portfolio Investment

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

KASE, in operation since 1993 and with 189 listed companies, trades a variety of instruments, including equities and funds, corporate bonds, sovereign debt, international development institutions debt, foreign currencies, repurchase agreements (REPO) and derivatives. Most of KASE’s trading is comprised of money market (84 percent) and foreign exchange (10 percent). As of January1, 2021, stock market capitalization was USD 45.3 billion, while the corporate bond market was around USD 35.2 billion. The Single Accumulating Pension Fund, the key source of the country’s local currency liquidity accumulated USD 30.7 billion as of January1, 2021.

In 2018, the government launched the Astana International Financial Center (AIFC), a regional financial hub modeled after the Dubai International Financial Center. The AIFC has its own stock exchange (AIX), regulator, and court (see Part 4). The AIFC has partnered with the Shanghai Stock Exchange, NASDAQ, Goldman Sachs International, the Silk Road Fund, and others. AIX currently has 88 listings in its Official List, including 30 traded on its platform.

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

Money and Banking System

As of January 1, 2021, Kazakhstan had 26 commercial banks. The five largest banks (Halyk Bank, Sberbank-Kazakhstan, Forte Bank, Kaspi Bank and Bank CenterCredit) held assets of approximately USD 47.4 billion, accounting for 64.0 percent of the total banking sector.

Kazakhstan’s banking system remains impaired by legacy non-performing loans, poor risk management, weak corporate governance practices, and significant related-party exposures.  In recent years, the government has undertaken measures to strengthen the sector, including capital injections, enhanced oversight, and expanded regulatory authorities. In 2019, the National Bank of Kazakhstan (NBK) initiated an asset quality review (AQR) of 14 major banks, which combined held 87 percent of banking assets as of April 1, 2019. According to NBK officials, the AQR showed sufficient capitalization on average across the 14 banks and set out individual corrective measure plans for each of the banks to improve risk management. As of January 2021, the ratio of non-performing loans to banking assets was 6.8 percent, down from 31.2 percent in January 2014. The COVID-19 pandemic and the fall in global oil prices may pose additional risks to Kazakhstan’s banking sector.

Kazakhstan has a central bank system led by the NBK. In January 2020, parliament established the Agency for Regulation and Development of the Financial Market (ARDFM), which assumed the NBK’s role as main financial regulator overseeing banks, insurance companies, the stock market, microcredit organizations, debt collection agencies, and credit bureaus. The NBK retains its core central bank functions as well as management of the country’s sovereign wealth fund and pension system assets. The NBK, and ARDFM as its successor, is committed to the incremental introduction of the Basel III regulatory standard. As of January 2021, Basel III methodology applies to capital and liquidity calculation with required regulatory ratios gradually changing to match the standard.  Starting December 16, 2020, as a part of WTO commitments, Kazakhstan allowed foreign banks to operate in the country via branches (previously only local subsidiaries were allowed). To open a branch, foreign banks must have international credit ratings of BBB or higher, a minimum of $20 billion in global assets, and comply with other NBK and ARDFM norms and requirements.  Foreigners may open bank accounts in local banks as long as they have a local tax registration number.

Foreign Exchange and Remittances

Foreign Exchange

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

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

Foreign company branches are treated as residents, except for non-financial organizations treated as non-residents based on previously made special agreements with Kazakhstan.  With some exceptions, foreign currency transactions between residents are forbidden. There are no restrictions on foreign currency operations between residents and non-residents, unless specified otherwise by local foreign currency legislation. Companies registered with AIFC are not subject to currency and settlement restrictions.

Kazakhstan abandoned its currency peg in favor of a free-floating exchange rate and inflation-targeting monetary regime in August 2015, although the NBK has intervened in foreign exchange markets to combat excess volatility. Kazakhstan maintains sufficient international reserves according to the IMF. As of January 1, 2021, international reserves at the NBK, including foreign currency, gold, and National Fund assets, totaled USD 94.4 billion.  

Remittance Policies

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

Sovereign Wealth Funds

The National Fund of the Republic of Kazakhstan was established to support the country’s social and economic development via accumulation of financial and other assets, as well as to reduce the country’s dependence on the oil sector and external shocks. The National Fund’s assets are generated from direct taxes and other payments from oil companies, public property privatization, sale of public farmlands, and investment income. The government, through the Ministry of Finance, controls the National Fund, while the NBK acts as the National Fund’s trustee and asset manager. The NBK selects external asset managers from internationally recognized investment companies or banks to oversee a part of the National Fund’s assets.  Information about external asset managers and assets they manage is confidential. As of January 1, 2021, the National Fund’s assets were USD 58.7 billion or around 34 percent of GDP.

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

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

7. State-Owned Enterprises

According to the National Statistical Bureau, as of January 1, 2021, the government owns 25,386 state-owned enterprises (SOEs), including all forms of SOEs, from small veterinary inspection offices, kindergardens, regional departments for the protection of competition, and regional hospitals, to large national companies controlling energy, transport, agricultural finance, and product development.

A list of SOEs is available at: https://gr5.gosreestr.kz/p/ru/gr-search/search-objects.

SOEs plays a leading role in the country’s economy. According to the 2017 OECD Investment Policy Review, SOE assets amount to USD 48-64 billion, approximately 30-40 percent of GDP; net income was approximately USD 2 billion. In order to stop an expansion of the quasi-sovereign sector, President Tokayev introduced in 2019 a moratorium on establishing new parastatal companies that will be in effect until the end of 2021. A bill on improving the business climate adopted by Parliament in April 2020 disincentivizes the establishment of new parastatal companies.

In pursuance of his New Economic Course, President Tokayev proposed in September 2020 the creation of a unified information portal that would consolidate all information about the activity of quasi-sovereign companies (SOEs), including their financial statements. If this portal is established, it would improve transparency of the quasi-sovereign sector significantly. Portfolio investors are also required to have corporate governance standards and independent boards.

Despite these positive developments, the number of SOEs in the economy remains large. The preferential status of parastatal companies is also unchanged; for example, parastatals enjoy greater access to subsidies and government support.

The National Welfare Fund Samruk-Kazyna (SK) is Kazakhstan’s largest national holding company, and manages key SOEs in the oil and gas, energy, mining, transportation, and communication sectors. At the end of 2018, SK had 317 subsidiaries and employed around 300,000 people. By some estimates, SK controls around half of Kazakhstan’s economy, and is the nation’s largest buyer of goods and services. In 2019, SK reported USD 61 billion in assets and USD 3 billion in consolidated net profit. Created in 2008, SK’s official purpose is to facilitate economic diversification and to increase effective corporate governance.

In 2018, First President Nazarbayev approved a new SK strategy which declared effective management of its companies, restructuration and diversification of assets and investment projects, and compliance with principles of sustainable development as priority goals. SK stated its adherence to international standards of SOE management and its willingness to separate the role of the state as a main owner from its regulator’s role. To follow a new strategy, early in 2020, the SK removed the Prime Minister from the Board and elected four independent directors, one of whom became the Chair of the Board. Thus, the government is now represented by three members on the Board- an Aide to the President, the Minister of National Economy, and the CEO of Samruk-Kazyna. Regardless of these positive moves, in reality political influence continues to dominate SK. First President Nazarbayev is the life-long Chair of the Managing Council of SK, with the right to take strategically important decisions on SK activity. SK has special rights, such as the ability to conclude large transactions among members of its holdings without public notification. SK enjoys a pre-emptive right to buy strategic facilities and assets and is exempt from government procurement procedures. Critically, the government can transfer state-owned property to SK, easing the transfer of state property to private owners. More information is available at http://sk.kz/ .

Regardless of these positive moves, in reality political influence continues to dominate SK. First President Nazarbayev is the life-long Chair of the Managing Council of SK, with the right to take strategically important decisions on SK activity. SK has special rights, such as the ability to conclude large transactions among members of its holdings without public notification. SK enjoys a pre-emptive right to buy strategic facilities and assets and is exempt from government procurement procedures. Critically, the government can transfer state-owned property to SK, easing the transfer of state property to private owners. More information is available at http://sk.kz/ .

In addition to SK, the government created the national managing holding company Baiterek in 2013 to provide financial and investment support to non-extractive industries and to drive economic diversification. Baiterek is comprised of the Development Bank of Kazakhstan, the Investment Fund of Kazakhstan, the Housing and Construction Savings Bank – Otbassy Bank, the National Mortgage Company, KazakhExport, the Entrepreneurship Development Fund Damu and other financial and development institutions. In 2021, following the President’s request, Baiterek joined the other quasi-sovereign holding company – KazAgro. Thus, the financing of the agricultural sector will now be in the portfolio of Baiterek. Unlike SK, the Prime Minister remains Chairof the Baiterek Board, assisted by several cabinet ministers and independent directors. As of the end of September 2020, Baiterek had USD 14.3 billion in assets and earned USD 133.5 million in net profit. Please see https://www.baiterek.gov.kz/en .

Another significant SOE is the national holding company Zerde, which is charged with creating modern information and communication infrastructure, using new technologies, and stimulating investments in the communication sector (http://zerde.gov.kz/ ).

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

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

Privatization Program

Kazakhstan has stated the aim to decrease the SOE share in the economy to 15 percent by 2020, in line with OECD averages. The goal has not yet been reached, but the government continues a large-scale privatization campaign. According to a government report, 93 percent of the 2016-2020 plan has been implemented. In 2020, the government enacted a new comprehensive privatization program for 2021-2025. The government’s reports on both campaigns are available at: https://privatization.gosreestr.kz/.

As of March 30, 2021, out of 1,748 organizations planned for privatization, 729 had been sold for USD 1.7 billion. The government sells small, state owned and municipal enterprises through electronic auctions. The public bidding process is established by law. By law and in practice, foreign investors may participate in privatization projects. However, foreign investors may experience challenges in navigating the process.

SK has an important role in the privatization campaign and as of March 2021 had sold full or partial stakes in 88 subsidiaries of large national companies operating in the energy, mining, transportation, and service sectors. 53 subsidiaries have been liquidated or reorganized. In June 2020, SK completed the privatization of 25 percent of KazAtomProm by selling the remaining 6.28 percent of common shares via a dual-listed IPO on the London Exchange and the Astana International Stock Exchange. Although the pandemic affected the preliminary privatization timelines, SK plans to offer institutional investors non-controlling shares in eight national companies via initial public offerings (IPOs), secondary public offerings (SPO) and sale to strategic investors. These companies are: state oil company KazMunaiGas, Air Astana, national telecom operator Kazakhtelecom, railway operator Kazakhstan Temir Zholy, KazPost, and Samruk–Energy, Tau-Ken Samruk and Qazaq Air.

10. Political and Security Environment

There have been no reported incidents of politically motivated violence against foreign investment projects, and although small-scale protests do occur, large-scale civil disturbances are infrequent. No major terrorist attacks took place in Kazakhstan in 2020. In June 2016, individuals described by the government as Salafist militants attacked a gun shop and a military unit, killing 8 and injuring 37 people in the Aktobe region of northwestern Kazakhstan.

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

After close to three decades as President, Nursultan Nazarbayev resigned March 20, 2019, and was succeeded by Kassym-Jomart Tokayev, the former Senate Chairman and next in line of constitutional succession. On June 9, 2019, Kazakhstan held an early presidential election, and Tokayev was elected to a full term with 71 percent of the vote. The Organization for Security and Cooperation in Europe (OSCE) noted in its final report that the election “was tarnished by clear violations of fundamental freedoms as well as pressure on critical voices;…significant irregularities were observed on election day”; “the election took place within a political environment dominated by the ruling Nur Otan party and with confined space for civil society and opposition views.” In the January 10, 2021 election for the Mazhilis (lower house of Parliament), Kazakhstan’s largest party, Nur-Otan, received 71 percent of the vote, while the business-friendly Ak Zhol party received 11 and the People’s party 9 percent. The OSCE similarly criticized the January 10 elections for their lack of adherence to OSCE standards for democratic elections.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source* USG or international statistical source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2019 $181,666 2019 $181,666 https://data.worldbank.org/
country/kazakhstan?view=chart 
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) Jan 1, 2021 $37,939 N/A N/A
Host country’s FDI in the United States ($M USD, stock positions) Jan1, 2021 $193.2 N/A N/A
Total inbound stock of FDI as % host GDP 2019 88.7 % 2019 83.3% UNCTAD data available at https://unctad.org/system/
files/non-official-document/
wir20_fs_kz_en.pdf 

* Source for Host Country Data: *The National Statistical Bureau and The National Bank of Kazakhstan.

Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data (2019)
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward 149,370 100% Total Outward 15,606 100%
The Netherlands 59,897 40.1% The Netherlands 15,081 96.6%
United States 36,510 24.4% Russia 1,597 10.2%
France 13,321 8.9% Cayman Islands 1,095 7%
China, P.R.: Main land 7,649 5.12% Luxembourg 633 4.1%
Japan 5,909 4% Cyprus 567 3.6%
“0” reflects amounts rounded to +/- USD 500,000.
Table 4: Sources of Portfolio Investment
Portfolio Investment Assets (2019)
Top Five Partners (Millions, current US Dollars)
Total Equity Securities Total Debt Securities
All Countries 70,358 100% All Countries Amount14,688 100% All Countries 55,670 100%
United States 36,316 52% United States 8,675 59% United States 27,642 50%
United Kingdom 4,626 7% United Kingdom 1,321 9% International Organizations 3,459 6%
Japan 3,859 5% Japan 1,041 7% United Kingdom 3,305 6%
International Organizations 3,459 5% Switzerland 451 3% Korea, Rep.of 3,095 6%
Korea, Rep.of 3,096 4% France 437 3% Japan 2,817 5%

Kenya

Executive Summary

Kenya has a positive investment climate that has made it attractive to international firms seeking a location for regional or pan-African operations. The novel coronavirus pandemic has negatively affected the short-term economic outlook, but the country remains resilient in addressing the health and economic challenges. In July 2020 the U.S. and Kenya launched negotiations for a Free Trade Agreement, the first in sub-Saharan Africa. The World Bank’s 2020 Ease of Doing Business report ranked Kenya 56 out of the 190 economies it reviewed – five spots higher than in 2019. Since 2014, Kenya has moved up 73 places on this index. Year-on-year, Kenya continues to improve its regulatory framework and its attractiveness as a destination for foreign direct investment (FDI). Despite this progress, U.S. businesses operating in Kenya still face aggressive tax collection attempts, burdensome bureaucratic processes, and significant delays in receiving necessary business licenses. Though corruption remains pervasive, Transparency International ranked Kenya 124 out of 180 countries in its 2020 Global Corruption Perception Index – an improvement of 13 spots compared to 2019.

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

In 2017 and 2018 Kenya instituted broad reforms to improve its business environment, including passing the Tax Laws Amendment (2018) and the Finance Act (2018), which established new procedures and provisions related to taxes, eased the payment of taxes through the iTax platform, simplified registration procedures for small businesses, reduced the cost of construction permits, and established a “one-stop” border post system to expedite the movement of goods across borders. However, the Finance Act (2019) introduced taxes to non-resident ship owners, and the Finance Act 2020 enacted a Digital Service Tax (DST). The DST, which went into effect in January 2021, imposes a 1.5 percent tax on any transaction that occurs in Kenya through a “digital marketplace.” The oscillation between business reforms and conflicting taxation policies has raised uncertainty over the Government of Kenya’s (GOK) long-term plans for improving the investment climate.

Kenya’s macroeconomic fundamentals remain among the strongest in Africa, averaging five to six percent gross domestic product (GDP) growth since 2015 (excepting 2020 due to the negative economic impact of the COVID-19 pandemic), five percent inflation since 2015, improving infrastructure, and strong consumer demand from a growing middle class. There is relative political stability and President Uhuru Kenyatta has remained focused on his “Big Four” development agenda, seeking to provide universal healthcare coverage, establish national food and nutrition security, build 500,000 affordable new homes, and increase employment by growing the manufacturing sector.

The World Bank’s November 2020 Kenya Economic Update report noted that the ongoing locust invasion, COVID-19 pandemic, and drought conditions in certain parts of the country, pose near-term challenges to Kenya’s economic recovery, but also highlighted mitigating measures enacted by the GOK and Central Bank of Kenya (CBK) as positive developments. American companies continue to show strong interest to establish or expand their business presence and engagement in Kenya, especially following President Kenyatta’s August 2018, and February 2020 meetings with former-President Trump in Washington, D.C. Sectors offering the most opportunities for investors include: agro-processing, financial services, energy, extractives, transportation, infrastructure, retail, restaurants, technology, health care, and mobile banking.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2020 124 of 180 http://www.transparency.org/research/cpi/overview 
World Bank’s Doing Business Report* 2020 56 of 190 http://www.doingbusiness.org/en/rankings 
Global Innovation Index 2020 86 of 131 https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, historical stock positions) 2019 $353 http://apps.bea.gov/international/factsheet/ 
World Bank GNI per capita 2019 $1,750 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD 

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

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

Investment Promotion Agency

KenInvest’s ( http://www.invest.go.ke/ ) mandate is to promote and facilitate investment by helping investors understand and navigate local Kenya’s bureaucracy and regulations. KenInvest helps investors obtain necessary licenses and developed eRegulations, an online database, to provide businesses with user-friendly access to Kenya’s investment-related regulations and procedures ( https://eregulations.invest.go.ke/?l=en ).

KenInvest prioritizes investment retention and maintains an ongoing dialogue with investors. All proposed legislation must pass through a period of public consultation, which includes an opportunity for investors to offer feedback. Private sector representatives can serve as board members on Kenya’s state-owned enterprises. Since 2013, the Kenya Private Sector Alliance (KEPSA), the country’s primary alliance of private sector business associations, has had bi-annual round table meetings with President Kenyatta and his cabinet. President Kenyatta also chairs a cabinet-level committee focused on improving the business environment. The American Chamber of Commerce has also increasingly engaged the GOK on issues regarding Kenya’s business environment.

Limits on Foreign Control and Right to Private Ownership and Establishment

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

Kenya’s National Information and Communications Technology (ICT) policy guidelines, published in August 2020, increased the requirement for Kenyan ownership in foreign ICT companies from 20 to 30 percent, and broadened its applicability within the telecommunications, postal, courier, and broadcasting industries. Affected companies have 3 years to comply with the new requirement. The Mining Act (2016) restricts foreign participation in the mining sector. The Mining Act reserves mineral acquisition rights to Kenyan companies and requires 60 percent Kenyan ownership of mineral dealerships and artisanal mining companies. The Private Security Regulations Act (2016) restricts foreign participation in the private security sector by requiring at least 25 percent Kenyan ownership of private security firms. The National Construction Authority Act (2011) and the 2014 National Construction Authority regulations impose local content restrictions on “foreign contractors,” defined as companies incorporated outside Kenya or with more than 50 percent ownership by non-Kenyan citizens. The act requires foreign contractors enter into subcontracts or joint ventures assuring that at least 30 percent of the contract work is done by local firms and locally unavailable skills transferred to a local person. The Kenya Insurance Act (2010) limits foreign capital investment in insurance companies to two-thirds, with no single person holding more than a 25 percent ownership share.

Other Investment Policy Reviews

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

Business Facilitation

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

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

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

The Companies (Amendment) Act (2017) clarified ambiguities in the original act and ensures compliance with global trends and best practices. The act amended provisions on the extent of directors’ liabilities and disclosures and strengthens investor protections. The amendment eliminated the requirements for small enterprises to hire secretaries, have lawyers register their firms, and to hold annual general meetings, reducing regulatory compliance and operational costs.

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

In 2014, the GOK established a Business Environment Delivery Unit to address investors’ concerns. The unit focuses on reducing the bureaucratic steps required to establish and do business. Its website ( http://www.businesslicense.or.ke/ ) offers online business registration and provides detailed information regarding business licenses and permits, including requirements, fees, application forms, and contact details for the respective regulatory agencies. In 2013, the GOK initiated the Access to Government Procurement Opportunities program, requiring all public procurement entities to set aside a minimum of 30 percent of their annual procurement spending facilitate the participation of youth, women, and persons with disabilities ( https://agpo.go.ke/ ).

Kenya’s iGuide, an investment guide to Kenya ( http://www.theiguides.org/public-docs/guides/kenya/about# , developed by UNCTAD and the International Chamber of Commerce, provides investors with up-to-date information on business costs, licensing requirements, opportunities, and conditions in developing countries. Kenya is a member of UNCTAD’s international network of transparent investment procedures.

Outward Investment

The GOK does not promote or incentivize outward investment. Despite this, Kenya is evolving into an outward investor in tourism, manufacturing, retail, finance, education, and media. Kenya’s outward investment has primarily been in the EAC, due to the preferential access afforded to member countries, and in a select few central African countries. The EAC allows free movement of capital among its six member states – Burundi, Kenya, Rwanda, South Sudan, Tanzania, and Uganda.

3. Legal Regime

Transparency of the Regulatory System

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

The 2010 Kenyan Constitution requires government to incorporate public participation before officials and agencies make certain decisions. The draft Public Participation Bill (2019) aims to provide the general framework for such public participation. The Ministry of Devolution has produced a guide for counties on how to carry out public participation; many counties have enacted their own laws on public participation. The Environmental Management and Coordination Act (1999) incorporates the principles of sustainable development, including public participation in environmental management. The Public Finance Management Act mandates public participation in the budget cycle. The Land Act, Water Act, and Fair Administrative Action Act (2015) also include provisions providing for public participation in agency actions.

Kenya also has regulations to promote inclusion and fair competition when applying for tenders. Executive Order No. 2 of 2018 emphasizes publication of all procurement information including tender notices, contracts awarded, name of suppliers and their directors. The Public Procurement Regulatory Authority publishes this information on the Public Procurement Information Portal, enhancing transparency and accountability (https://www.tenders.go.ke/website). However, the directive is yet to be fully implemented as not all state agencies provide their tender details to the portal.

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

International Regulatory Considerations

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

According to the Africa Regional Integration Index Report 2019, Kenya is the second most integrated country in Africa and a leader in regional integration policies within the EAC and COMESA regional blocs, with strong performance on regional infrastructure, productive integration, free movement of people, and financial and macro-economic integration. The GOK maintains a Department of EAC Integration under the Ministry of East Africa and Regional Development. Kenya generally adheres to international regulatory standards. It is a member of the WTO and provides notification of draft technical regulations to the Committee on Technical Barriers to Trade (TBT). Kenya maintains a TBT National Enquiry Point at http://notifyke.kebs.org . Additional information on Kenya’s WTO participation can be found at https://www.wto.org/english/thewto_e/countries_e/kenya_e.htm .

Accounting, legal, and regulatory procedures are transparent and consistent with international norms. Publicly listed companies adhere to International Financial Reporting Standards (IFRS) that have been developed and issued in the public interest by the International Accounting Standards Board. The board is an independent, non-profit organization that is the standard-setting body of the IFRS Foundation. Kenya is a member of UNCTAD’s international network of transparent investment procedures.

Legal System and Judicial Independence

Kenya’s legal system is based on English Common Law, and its constitution establishes an independent judiciary with a Supreme Court, Court of Appeal, Constitutional Court, High Court, and Environment and Land Court. Subordinate courts include: Magistrates, Kadhis (Muslim succession and inheritance), Courts Martial, the Employment and Labor Relations Court, and the Milimani Commercial Courts – the latter two have jurisdiction over economic and commercial matters. In 2016, Kenya’s judiciary instituted the Anti-Corruption and Economic Crimes Courts, focused on corruption and economic crimes. There is no systematic executive or other interference in the court system that affects foreign investors, however, the courts often face allegations of corruption, as well as political manipulation, in the form of unjustified budget cuts, which significantly impact the judiciary’s ability to fulfill its mandate. Delayed confirmation of judges nominated by the Judicial Service Commission result in an understaffed judiciary and prolonged delays in cases coming to trial and receiving judgments. The COVID-19 pandemic has also increased case backlogs, as courts reduced operations and turned to virtual hearings, particularly for non-urgent cases.

Laws and Regulations on Foreign Direct Investment

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

The 2018 amendment to the Anti-Counterfeit Authority (ACA) Act expanded its scope to include protection of intellectual property rights, including those not registered in Kenya. The amended law empowered ACA inspectors to investigate and seize monetary gains from counterfeit goods. The 2019 amendment to the 2001 Copyright Act (established when the country had less than one percent internet penetration), formed the independent Copyright Tribunal, ratified the Marrakesh Treaty, recognized artificial intelligence generated works, established protections for internet service providers related to digital advertising, developed a register of copyrighted works by Kenya Copyright Board (KECOBO), and protected digital rights through procedures for take down notices.

Competition and Antitrust Laws

The Competition Act of 2010 created the Competition Authority of Kenya (CAK). The law was amended in 2019 to clarify the law with regard to abuse of buyer power and empower the CAK to investigate alleged abuses of buyer power. The competition law prohibits restrictive trade practices, abuse of dominant position, and abuse of buyer power, and it grants the CAK the authority to review mergers and acquisitions and investigate and take action against unwarranted concentrations of economic power. All mergers and acquisitions require the CAK’s authorization before they are finalized. The CAK also investigates and enforces consumer-protection related issues. In 2014, the CAK established a KES one million (approximately USD 10,000) filing fee for mergers and acquisitions valued between one and KES 50 billion (up to approximately USD 500 million). The CAK charges KES two million (approximately USD 20,000) for larger transactions. Company acquisitions are possible if the share buy-out is more than 90 percent, although such transactions seldom occur in practice.

Expropriation and Compensation

The constitution guarantees protection from expropriation, except in cases of eminent domain or security concerns, and all cases are subject to the payment of prompt and fair compensation. The Land Acquisition Act (2010) governs due process and compensation related to eminent domain land acquisitions; however, land rights remain contentious and resolving land disputes is often a lengthy process. However, there are cases where government measures could be deemed indirect expropriation that may impact foreign investment. Some companies reported instances whereby foreign investors faced uncertainty regarding lease renewals because county governments were attempting to confiscate some or all of the project property.

Dispute Settlement

ICSID Convention and New York Convention

Kenya is a member of the International Centre for Settlement of Investment Disputes (ICSID) Convention, and the 1958 New York Convention on the Enforcement of Foreign Arbitral Awards. International companies may opt to seek international well-established dispute resolution at the ICSID. Regarding the arbitration of property issues, the Foreign Investments Protection Act (2014) cites Article 75 of Kenya’s constitution, which provides that “[e]very person having an interest or right in or over property which is compulsorily taken possession of or whose interest in or right over any property is compulsorily acquired shall have a right of direct access to the High Court.” In 2020, Kenya prevailed in an ICSID international arbitration case against a U.S./Canadian geothermal company, over a geothermal exploration license revocation dispute.

Investor-State Dispute Settlement

There have been very few investment disputes involving U.S. and international companies in Kenya. Commercial disputes, including those involving government tenders, are more common. The National Land Commission (NLC) settles land related disputes; the Public Procurement Administrative Review Board settles procurement and tender related disputes; and the Tax Appeals Tribunal settles tax disputes. However, private companies have criticized these institutions as having weak institutional capacity, inadequate transparency, and slow to resolve disputes. Due to the resources and time required to settle a dispute through the Kenyan courts, parties often prefer to seek alternative dispute resolution options.

International Commercial Arbitration and Foreign Courts

The government does accept binding international arbitration of investment disputes with foreign investors. The Kenyan Arbitration Act (1995) as amended in 2010 is based on the United Nations Commission on International Trade Law (UNCITRAL) Model Law. Legislation introduced in 2013 established the Nairobi Centre for International Arbitration (NCIA), which serves as an independent, non- profit international organization for commercial arbitration and may offer a quicker alternative than the court system. In 2014, the Kenya Revenue Authority launched an Alternative Dispute Resolution mechanism aimed at providing taxpayers with an alternative, fast-track avenue for resolving tax disputes.

Bankruptcy Regulations

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

Creditors’ rights are comparable to those in other common law countries, and monetary judgments are typically made in KES. The Insolvency Act (2015) increased the rights of borrowers and prioritizes the revival of distressed firms. The law states that a debtor will automatically be discharged from debt after three years. Bankruptcy is not criminalized in Kenya. The World Bank Group’s 2020 Doing Business report ranked Kenya 50 out of 190 countries in the “resolving insolvency” category, an improvement of six spots compared to 2019.

6. Financial Sector

Capital Markets and Portfolio Investment

Though relatively small by Western standards, Kenya’s capital markets are the deepest and most sophisticated in East Africa. The 2020 Morgan Stanley Capital International Emerging and Frontier Markets Index, which assesses equity opportunity in 27 emerging economies, ranked the Nairobi Securities Exchange (NSE) as the best performing exchange in sub-Saharan Africa over the last decade. The NSE operates under the jurisdiction of the Capital Markets Authority of Kenya. It is a full member of the World Federation of Exchanges, a founding member of the African Securities Exchanges Association (ASEA) and the East African Securities Exchanges Association (EASEA). The NSE is a member of the Association of Futures Markets and is a partner exchange in the United Nations-led Sustainable Stock Exchanges initiative. Reflecting international confidence in the NSE, it has always had significant foreign investor participation. In July 2019, the NSE launched a derivatives market that facilitates trading in future contracts on the Kenyan market. The bond market is underdeveloped and dominated by trading in government debt securities. The government’s domestic debt market, however, is deep and liquid. Long-term corporate bond issuances are uncommon, limiting long-term investment capital.

In November 2019, Kenya repealed the interest rate capping law passed in 2016, which had slowed private sector credit growth. There are no restrictions on foreign investors seeking credit in the domestic financial market. Kenya’s legal, regulatory, and accounting systems generally align with international norms. In 2017, the Kenya National Treasury launched the world’s first mobile phone-based retail government bond, locally dubbed M-Akiba. M-Akiba has generated over 500,000 accounts for the Central Depository and Settlement Corporation, and The National Treasury has made initial dividend payments to bond holders.

The African Private Equity and Venture Capital Association (AVCA) 2014-2019 report on venture capital performance in Africa ranked Kenya as having the second most developed venture capitalist ecosystem in sub-Saharan Africa. The report also noted that over 20 percent of the venture capital deals in Kenya, from 2014-2019, were initiated by companies headquartered outside Africa.

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

Kenya has accepted the International Monetary Fund’s Article VIII obligation and does not provide restrictions on payments and transfers for current international transactions.

Money and Banking System

In 2020, the Kenyan banking sector included 41 commercial banks, one mortgage finance company, 14 microfinance banks, nine representative offices of foreign banks, eight non-operating bank holdings, 69 foreign exchange bureaus, 19 money remittance providers, and three credit reference bureaus, which are licensed and regulated by the CBK. Fifteen of Kenya’s commercial banks are foreign owned. Major international banks operating in Kenya include Citibank, Absa Bank (formerly Barclays Bank Africa), Bank of India, Standard Bank, and Standard Chartered. The 12 commercial banks listed banks on the Nairobi Securities Exchange owned 89 percent of the country’s banking assets in 2019.

The COVID-19 pandemic has significantly affected Kenya’s banking sector. According to the CBK, 32 out of 41 commercial banks restructured loans to accommodate affected borrowers. Non-performing loans (NPLs) reached 14.1 percent by the end of 2020 – a two percent increase year-on-year – and are continuing to rise.

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

In November 2019, the GOK repealed the interest rate capping law through an amendment to the Banking Act. This amendment has enabled financial institutions to use market-based pricing for their credit products. While this change has slightly increased the cost of borrowing for some clients, it effectively ensures the private sector uninterrupted access to credit.

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

Foreign Exchange and Remittances

Foreign Exchange Policies

Kenya has no restrictions on converting or transferring funds associated with investment. Kenyan law requires persons entering the country carrying amounts greater than KES 1,000,000 (approximately USD 10,000), or the equivalent in foreign currencies, to declare their cash holdings to the customs authority to deter money laundering and financing of terrorist organizations. Kenya is an open economy with a liberalized capital account and a floating exchange rate. The CBK engages in volatility controls aimed at smoothing temporary market fluctuations. In 2020, the average exchange rate was KES 106.45/USD according to CBK statistics. The foreign exchange rate fluctuated by nine percent from December 2019 to December 2020.

Remittance Policies

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

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

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

Sovereign Wealth Funds

In 2019, the National Treasury published the Kenya Sovereign Wealth Fund policy and the draft Kenya Sovereign Wealth Fund Bill (2019), both of which remain pending. The fund would receive income from any future privatization proceeds, dividends from state corporations, oil and gas, and minerals revenues due to the national government, revenue from other natural resources, and funds from any other source. The Kenya Information and Communications Act (2009) provides for the establishment of a Universal Service Fund (USF). The purpose of the USF is to fund national projects that have significant impact on the availability and accessibility of ICT services in rural, remote, and poor urban areas. In 2020 during the COVID-19 pandemic, the USF committee partnered with the Kenya Institute of Curriculum Development to digitize the education curriculum for online learning.

7. State-Owned Enterprises

In 2013, the Presidential Task Force on Parastatal Reforms (PTFPR) published a list of all state-owned enterprises (SOEs) and recommended proposals to reduce the number of State Corporations from 262 to 187 to eliminate redundant functions between parastatals; close or dispose of non-performing organizations; consolidate functions wherever possible; and reduce the workforce — however, progress is slow ( https://drive.google.com/file/d/0BytnSZLruS3GQmxHc1VtZkhVVW8/edit ). SOEs’ boards are independently appointed and published in Kenya Gazette notices by the Cabinet Secretary of the ministry responsible for the respective SOE. The State Corporations Act (2015) mandated the State Corporations Advisory Committee to advise the GOK on matters related to SOEs. Despite being public entities, only SOEs listed on the Nairobi Securities Exchange publish their financial positions, as required by Capital Markets Authority guidelines. SOEs’ corporate governance is guided by the constitution’s chapter 6 on Leadership and Integrity, the Leadership and Integrity Act (2012) (L&I) and the Public Officer Ethics Act (2003), which establish integrity and ethics requirements governing the conduct of public officials.

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

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

SOE procurement from the private sector is guided by the Public Procurement and Asset Disposal Act (2015) and the published Public Procurement and Asset Disposal Regulations (2020) which introduced exemptions from the Act for procurement on bilateral or multilateral basis, commonly referred to as government-to-government procurement; introduced E-procurement procedures; and preferences and reservations, which gives preferences to the “Buy Kenya Build Kenya” strategy ( http://kenyalaw.org/kl/fileadmin/pdfdownloads/LegalNotices/2020/LN69_2020.pdf ).

Kenya is neither party to the Government Procurement Agreement (GPA) within the framework of the World Trade Organization (WTO) nor an Observer Government.

Privatization Program

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

10. Political and Security Environment

Kenya’s 2017 national election was marred by violence, which claimed the lives of nearly 100 Kenyans, a contentious political atmosphere, which pitted the ruling Jubilee Party against the opposition National Super Alliance (NASA), as well as political interference and attacks on key institutions by both sides. In November 2017, the Kenyan Supreme Court unanimously upheld the October 2017 repeat presidential election results and President Uhuru Kenyatta’s win in an election boycotted by NASA leader Raila Odinga. In March 2018, President Kenyatta and Odinga publicly shook hands and pledged to work together to heal the political, social, and economic divides highlighted by the election. In November 2020, the Building Bridges Initiative, established by President Kenyatta in May 2018 as part of his pledge to work with Odinga, issued its final report recommending reforms to address nine areas: lack of a national ethos; responsibilities and rights of citizenship; ethnic antagonism and competition; divisive elections; inclusivity; shared prosperity; corruption; devolution; and safety and security. The report included a constitutional amendment bill that may be considered in a national referendum in 2021.

The United States’ Travel Advisory for Kenya advises U.S. citizens to exercise increased caution due to the threat of crime and terrorism, and not to travel to counties bordering Somalia and to certain coastal areas due to terrorism. Due to the high risk of crime, it is common for private businesses and residences to have 24-hour guard services and well-fortified property perimeters.

Instability in Somalia has heightened concerns of terrorist attacks, leading businesses and public institutions nationwide to increase their security measures. Tensions flare occasionally within and between ethnic communities. Regional conflict, most notably in Ethiopia, Somalia, and South Sudan, sometimes have spill-over effects in Kenya. There could be an increase in refugees entering Kenya due to drought and instability in neighboring countries, adding to the already large refugee population in the country.

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

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source* USG or international statistical source USG or International Source of Data: BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($B USD) 2019 $90.19bn 2019 $95.5bn https://data.worldbank.org/indicator/
NY.GDP.MKTP.CD?locations=KE 
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data: BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) N/A N/A 2019 $353Mn BEA data available at
http://bea.gov/international/
direct_investment_multinational_
companies_comprehensive_data.htm 
Host country’s FDI in the United States ($M USD, stock positions) N/A N/A 2019 $-16Mn BEA data available at
http://bea.gov/international/
direct_investment_multinational_
companies_comprehensive_data.htm 
Total inbound stock of FDI as % host GDP 2019 1.2 2019 1.4 https://unctad.org/system/files/official-document/wir2020_en.pdf

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

Table 4: Sources of Portfolio Investment
Data not available.

Kosovo

Executive Summary

Already one of Europe’s poorest countries, Kosovo was hit hard by the COVID-19 pandemic. Economic growth forecasts originally projected Kosovo’s economy to shrink by 7.2 percent or more in 2020. However, thanks to the Government of Kosovo’s swift measures – notably the decision to allow Kosovo citizens to withdraw 10 percent of their pension savings – and assistance from international donors, as of February 2021 the latest revised IMF estimate predicts a contraction of only 6 percent in 2020. Many international financial institutions remain cautious in forecasting economic growth for 2021 given the quickly changing circumstances of the pandemic, but most expect Kosovo’s GDP to grow between 3.5 and 4.5 percent in 2021.

The pandemic has not led to permanent changes in Kosovo’s investment policies. The government enacted several relief measures that are all temporary and focused on maintaining employment levels and helping businesses preserve liquidity. As such, Kosovo’s COVID-19 relief measures did not significantly affect its broader investment policy environment.

Kosovo has potential to attract foreign direct investment (FDI), but that potential is constrained by failure to address several serious structural issues, including limited regional and global economic integration; political instability and interference in the economy; corruption; an unreliable energy supply; a large informal sector; difficulty establishing property rights; and tenuous rule of law, including a glaring lack of contract enforcement. The country’s ability to sustain growth relies significantly on international financial support and remittances.

In 2020, the net flow of FDI in Kosovo was estimated at USD 382 million, a significant increase over the 2019 amount of USD 302 million. The stock of portfolio investment in 2019 totaled USD 2.05 billion, with equity securities of USD 1.67 billion, and debt securities of USD 385 million. (NOTE: Data on FDI stock for 2020 was not available at the time of writing. END NOTE.) Real estate and leasing activities are the largest beneficiaries of FDI, followed by financial services and energy. The food, IT, infrastructure, and energy sectors are growing and are likely to attract new FDI.

One key sector of the economy that has sustained strong growth is the wood processing sector. Companies producing kitchens, baths, doors, upholstered furniture, and combined wood, metal and glass have seen increased investment since 2017. The sector is maturing and receiving support in business development services and access to finance. Kosovo is also addressing its energy security by increasing its renewable energy capacity and facilitating more bankable renewable projects.

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

Property rights and interests are enforced, but legal system weaknesses and difficulties associated with establishing title to real estate, in part due to competing claims arising from the history of conflict with Serbia, make enforcement difficult. Kosovo has a good legal framework for protecting intellectual property rights (IPR), but enforcement remains weak, largely due to lack of resources. While IPR theft occurs in Kosovo, there is insufficient data on how widespread the issue is. The issue does not get attention in the media, and Post has not had significant complaints of IPR theft in Kosovo from U.S. companies. Anecdotally, the IPR theft that occurs tends to be mostly in lower-value items that likely do not garner significant attention.

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

Recently, the political environment has been characterized by short electoral cycles and prolonged periods of caretaker governments. However, there have been little substantive changes in legislation and regulations regarding the foreign investment and general business environment. To date, the Embassy is not aware of any damage to commercial projects or installations. In recent years, the political and economic interests of Kosovo’s elites are increasingly converging, which tend to result in corruption. However, the new government, which assumed office March 22, ran on a strong anti-corruption platform and has a strong electoral mandate to enact positive change.

The public consistently ranks Kosovo’s high unemployment rate (officially 24.6 percent in 2020) as among its greatest concerns. Unemployment levels for first-time job seekers and women are considerably higher than the official rate. Many experts cite a skills gap and high reservation wage as significant contributing factors.

Despite the challenges, Kosovo has attracted a number of significant investors including several international firms and U.S. franchises. Some investors are attracted by Kosovo’s relatively young population, low labor costs, relative proximity to the EU market, and natural resources. Global supply disruptions brought on by the COVID-19 pandemic have sparked greater interest recently from some businesses to utilize Kosovo as a base for near-shoring production destined for the EU market. Kosovo does provide preferential access for products to enter the EU market through a Stabilization and Association Agreement (SAA).

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2020 104 of 180 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2020 57 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2019 N/A https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, stock positions) 2019 USD 226 Million  http://data.imf.org/CDIS 
World Bank GNI per capita 2019 USD 4,640 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

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

The mission of the Kosovo Investment Enterprise and Support Agency (KIESA) is to promote and support foreign investments. The agency is tasked with offering a menu of services, including assistance and advice on starting a business in Kosovo, assistance with applying for a site in a special economic zone or as a business incubator, facilitation of meetings with different state institutions, and participation in business-to-business meetings and conferences. In practice, however, many foreign and local companies have complained that KIESA has extremely weak capacity to provide the services under its mandate and must be strengthened.

Foreign chambers of commerce – including the American, German, and European – regularly participate in dialogue platforms with the government.

Limits on Foreign Control and Right to Private Ownership and Establishment

The laws and regulations on establishing and owning business enterprises and engaging in all forms of remunerative activity apply equally to foreign and domestic private entities. Kosovo legislation does not interfere with the establishment, acquisition, expansion, or sale of interests in enterprises by private entities. Under Kosovo law, foreign firms operating in Kosovo are granted the same privileges as local businesses. Kosovo does not have an investment screening mechanism, though the U.S. government is actively working with Kosovo on the best practices for developing and implementing such a mechanism.

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

Other Investment Policy Reviews

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

Business Facilitation

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

The Kosovo Business Registration Agency (KBRA), part of the Ministry of Industry, Entrepreneurship and Trade, registers all new businesses, business closures, and business modifications. The KBRA website is available in English and can be accessed at arbk.rks-gov.net . As of March 2021, some steps in the registration process can be completed online. Successful registrants will receive a business-registration certificate, a fiscal number, and a VAT number. New businesses must register employees for tax and pension programs with the Tax Administration under the Ministry of Finance, Labor and Transfers. Business registration generally takes one day for an individual business and up to three days for joint ventures. A notary is not required when opening a new business unless the business registration also involves a transfer of real property.

Outward Investment

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

3. Legal Regime

Transparency of the Regulatory System

The Law on Public Procurement delegates procurement authority to budgetary units (i.e., ministries, municipalities, and independent agencies) except when the government specifically authorizes the Ministry of Finance, Labor and Transfers’ Central Procurement Agency to procure goods and/or services on its behalf. All tenders are advertised in Albanian and Serbian, and for most important projects, also in English.

The Public Procurement Regulatory Commission (PPRC) oversees and supervises all public procurement and ensures that the Law on Public Procurement is fully implemented. As of 2019, an e-procurement platform is fully operational; all procurements are handled through it, which has greatly enhanced transparency. The PPRC publishes contract award information on its website ( https://e-prokurimi.rks-gov.net/Home/ClanakItemNew.aspx?id=327 ). The National Audit Office conducts annual procurement audits of the various Kosovo ministries, municipal authorities, and agencies that receive funds from the Kosovo consolidated budget. The Procurement Review Body, an independent administrative body, is responsible for handling appeals related to government procurement.

The Kosovo Assembly is responsible for rule-making and regulatory actions, while government ministries and agencies draft and authorize secondary legislation (i.e., implementing regulations). Municipal assemblies and mayors have regulatory authority at the local level. The Government of Kosovo is working to align all legal, regulatory, and accounting systems in Kosovo with EU standards and international best practices. Publicly listed companies are required to comply with international accounting standards.

The Assembly publishes draft laws on its website ( http://www.kuvendikosoves.org/shq/projektligjet-dhe-ligjet/ ). The relevant committees also hold public hearings on proposed laws, including investment laws. The 2016 regulation on the Minimum Standards for Public Consultation Process clarifies the standards, principles, and procedures for consultations during the drafting of legislation. Kosovo has developed an online platform for public comments ( http://konsultimet.rks-gov.net/ ) and publishes rules, regulations, and laws in the official Kosovo Gazette ( https://gzk.rks-gov.net/ ) and on the Kosovo Assembly’s website. The Law on Public Financial Management and Accountability requires a detailed impact assessment of any budgetary implications before new regulations can be implemented. The Ministry of Finance, Labor and Transfers regularly publishes detailed reports on Kosovo’s public finances and debt obligations. Despite the regulatory requirements, some businesses and business associations complain that regulations are still passed with little substantive discussion or stakeholder input.

International Regulatory Considerations

Kosovo is a CEFTA member and is pursuing EU integration. Through its Stabilization and Association Agreement (SAA) with the EU, Kosovo is working to harmonize its laws and regulations with EU standards. Kosovo is not a member of the WTO.

Kosovo is a signatory to the July 2017 Multi-Annual Action Plan for a Regional Economic Area in the Western Balkans Six  and its subsequent Common Regional Market Action Plan . This action plan aims to increase regional integration in the fields of trade, investment policy, labor force mobility, and digitalization.

Legal System and Judicial Independence

In 2016, the Kosovo Assembly amended the constitution to enhance the independence of the judiciary in line with EU requirements. Despite significant reforms and improvements in court efficiency, backlog, and sentencing procedures, the judiciary lacks sufficient subject-matter expertise to effectively handle complex economic issues. While complainants have the right to challenge court decisions, regulations, and enforcement actions in the regular court system, as well as the constitutional court, Kosovo’s courts are viewed as politically influenced by the executive branch, with special treatment or “selective justice” for high-profile, well-connected individuals. While Kosovo court conviction rates generally match regional averages, the rate falls considerably when filtered for high-profile corruption cases.

Significant legislation overhauling the 2004 Criminal Code and the Criminal Procedure Code, amended in 2018, brought Kosovo’s Criminal Law in compliance with the EU Convention on Human Rights, updating definitions and best practices. The Criminal Code contains penalties for tax evasion, bankruptcy, fraud, intellectual property rights offenses, antitrust, securities fraud, money laundering, and corruption. The Special Department of the Special Prosecutor of the Republic of Kosovo handles high-level cases of corruption, organized crime, terrorism, etc.

Kosovo’s civil legal system provides for property and contract enforcement. The Department for Economic Affairs within the Basic Court of Pristina has jurisdiction over economic disputes between both legal and natural persons, including reorganization, bankruptcy, and liquidation of economic persons; disputes regarding impingement of competition; and protection of property rights and intellectual property rights across the entire territory of Kosovo. A similar department within the Court of Appeals holds jurisdiction over “disputes between domestic and foreign economic persons in their commercial affairs” and addresses all appeals coming from the Pristina Basic Court’s Department for Economic Affairs. Commercial cases can take anywhere from six months to several years to resolve.

The Law on Enforcement Procedures permits claimants to utilize bailiffs licensed by the Ministry of Justice to execute court-ordered judgments. In addition, the Laws on Arbitration and Mediation have helped to address impediments to alternative dispute resolution and to enforcing arbitral awards.

Laws and Regulations on Foreign Direct Investment

Foreign firms operating in Kosovo are entitled to the same privileges and treatment as local businesses. Kosovo’s commercial laws are available to the public in English, as well as Kosovo’s official languages (Albanian and Serbian) on the Kosovo Assembly’s website ( http://www.kuvendikosoves.org/shq/projektligjet-dhe-ligjet/ ) and on the Official Gazette website ( http://gzk.rks-gov.net/default.aspx ).

Laws of particular relevance include:

  • The Law on Foreign Investment: provides a set of fundamental rights and guarantees to ensure protection and fair treatment in strict accordance with accepted international standards and practices.
  • The Law on Business Organizations: regulates the registration and closure of a company and the rights and obligations of shareholders, authorized representatives, and others included in the business management structure.
  • The Law on Late Payments in Commercial Transactions: discourages late payments and regulates the calculation of interest on late payments.
  • The Law on Bankruptcy: regulates all matters related to the insolvency of business organizations; the provisions for the protection, liquidation, and distribution of the assets of a bankrupt debtor to its creditors; and the reorganization and discharge of debt for qualified business organizations.
  • The Law on Prevention of Money Laundering and Combating Terrorist Financing: enabled Kosovo to join Egmont Group, an inter-governmental network of 152 Financial Intelligence Units whose members exchange expertise and financial intelligence to combat money laundering and terrorist financing.
  • The Credit Guarantee Fund Law: increased access to finance for all micro- and SMEs in Kosovo in an effort to increase employment, boost local production, and improve the trade balance.
  • The Law on Economic Recovery – COVID-19: makes changes to several laws on a temporary basis to help the economy recover from the negative effects of COVID-19.

Competition and Antitrust Laws

There are two main laws that regulate transactions for competition-related concerns: The Law on Protection of Competition and the Law on Antidumping and Countervailing Measures. The Competition Authority is responsible for implementing the Law on Protection of Competition, but generally lacks the human resources to conduct thorough investigations. The Trade Department of the Ministry of Industry, Entrepreneurship and Trade is responsible for the implementation of the Law on Antidumping and Countervailing Measures. In September 2018, Kosovo’s Assembly approved the Law on Safeguard Measures on Imports, which allows the Trade Minister to impose a provisional safeguard measure up to 200 days.

Expropriation and Compensation

Articles 7 and 8 of the Foreign Investment Law limit expropriation to cases with a clear public interest and protect foreign investments from unreasonable expropriation, guaranteeing due process and timely compensation payment based on fair-market prices. The Law on Expropriation of Immovable Property permits government or municipal expropriation of private property when such action is in the public interest; articles 5 through 13 of the Law define expropriation procedures. An eminent domain clause limits legal recourse in cases arising from the expropriation and sale of property through the privatization of state-owned enterprises. There is no history of expropriation other than uncontroversial, undisputed expropriations for work in the public interest, such as roadway construction.

Dispute Settlement

ICSID Convention and New York Convention

In 2009, Kosovo became a party to the International Centre for Settlement of Investment Disputes (ICSID) Convention and has incorporated the Convention into national law. There is no specific legislation providing for the enforcement of the ICSID Convention, but in accordance with the Law on Foreign Investments, investors may contractually agree to arbitration or other alternative dispute resolution mechanisms. Kosovo is not a signatory to the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Law.

Investor-State Dispute Settlement

Kosovo’s courts recognize international arbitration awards. The Law on Foreign Investments grants foreign investors the right to settle investment dispute either in domestic courts or international arbitration. There is no history of extrajudicial action against foreign investors.

The Commercial Department of Pristina Basic Court has jurisdiction over investment disputes involving State-owned enterprises (SOEs). There are no records available detailing the frequency with which domestic courts have ruled in SOEs’ favor.

Over the past ten years, at least three foreign investors have brought publicly known claims against Kosovo. In 2013, the London Court of International Arbitration (LCIA) determined Post & Telecom Kosovo owed an Israeli company USD 9.8 million for breach of contract. In July 2016, the International Court of Arbitration in Paris awarded an Austrian printing company USD 5.6 million for Kosovo’s illegal termination of a contract to manufacture passports. In June 2015, a German company brought a case before ICSID related to the failed privatization of Kosovo’s telecom company; the arbitral tribunal ruled that it had no jurisdiction over the dispute. As of March 2021, foreign investors have sued Kosovo in at least two new cases.

International Commercial Arbitration and Foreign Courts

The Foreign Investment Law stipulates that investors may utilize the following alternative dispute resolution mechanisms:

  1. The ICSID Convention if both the foreign investor’s country of citizenship and Kosovo are parties to said convention at the time of the request for arbitration;
  2. The ICSID Additional Facility Rules if the jurisdictional requirements for personal immunities per Article 25 of the ICSID Convention are not fulfilled at the time of the request for arbitration;
  3. The United Nations Commission on International Trade Law (UNCITRAL) Rules. In this case, the appointing authority would be the Secretary General of ICSID; or
  4. The International Chamber of Commerce Rules.

Arbitration services are available at arbitral tribunals within the Kosovo Chamber of Commerce and American Chamber of Commerce in Kosovo. Kosovo’s Arbitration Rules are based on model rules derived from the 2010 United Nations Commission on International Trade Law (UNCITRAL) Model Rules for Commercial Arbitration and are consistent with international best practices. The Law on Foreign Investment favors the use of arbitration. To utilize this option, the law requires that the disputed agreement/contract include an arbitration clause.

Foreign arbitral awards and judgments are enforceable in Kosovo. There has been no instance of voluntary compliance by the Government of Kosovo or other public entities with arbitral awards; all known cases have involved some form of judicial process.

Additionally, in accordance with the Law on Mediation, Kosovo courts recognize mediation centers, and one is operated by the American Chamber of Commerce in Kosovo. The Ministry of Justice has adopted the rules leading to the creation of mediation services and has trained and certified a number of mediators. For more information, visit http://www.kosovo-arbitration.com .

Bankruptcy Regulations

The Law on Bankruptcy regulates bankruptcy and insolvency procedures and specifies provisions for the protection, liquidation, and distribution of the assets of a bankrupt debtor to its creditors and the reorganization and discharge of debt for qualified business organizations. Under the law, foreign creditors have the same rights as domestic investors and creditors when launching and participating in bankruptcy proceedings. The World Bank’s 2020 Doing Business Index ranked Kosovo 48 out of 190 economies for ease of resolving insolvency.

In early 2006, Kosovo created a credit registry managed by the Central Bank of Kosovo. It serves as a database for customers’ credit history and aims to help commercial banks and non-banking institutions assess customers’ creditworthiness. Banks and non-banking institutions are required to report to the Credit Registry of Kosovo, but only authorized banking and non-banking institution personnel can access it. In addition to the Credit Registry of Kosovo, the Ministry of Industry, Entrepreneurship and Trade offers a Pledge Registry Sector, a mechanism that records data for collateral pledges.

6. Financial Sector

Capital Markets and Portfolio Investment

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

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

Money and Banking System

Kosovo has 11 commercial banks (of which nine are foreign) and 20 micro-finance institutions (of which 12 are foreign). The official currency of Kosovo is the euro, although the country is not a member of the Eurozone. In the absence of an independent monetary policy, prices are highly responsive to market trends in the larger Eurozone.

The IMF estimates 2020 economic growth at -6 percent due to COVID-19. In spite of this shock, Kosovo’s private banking sector remains well capitalized and profitable. Difficult economic conditions, weak contract enforcement, and a risk-averse posture have traditionally limited banks’ lending activities. However, financial services and bank lending have improved markedly over the past several years, albeit from a low baseline. In March 2021, the rate of non-performing loans was 2.7 percent, only slightly above the pre-pandemic February 2020 rate of 2.5 percent. The three largest banks own 56.2 percent of the total 5.3 billion euros of assets in the entire banking sector; foreign-owned banks have 86.3 percent of the market share. Despite positive trends, relatively little lending is directed toward long-term investment activities. Interest rates have dropped significantly in recent years, from an average of about 12.7 percent in 2012 to an average of 3.1 percent in March 2021. Slower lending is notable in the northern part of Kosovo due to a weak judiciary, informal business activities, and fewer qualified borrowers.

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

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

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

Foreign Exchange and Remittances

Foreign Exchange

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

Remittance Policies

Remittances are a significant source of income for Kosovo’s population, representing approximately 15 percent of GDP (or over USD 1.163 billion) in 2020. Despite COVID-19’s shock to all world economies, remittances to Kosovo have been very resilient and grew by 15.1% in 2020. The majority of remittances come from Kosovo’s European-based diaspora, particularly in Germany and Switzerland. The Central Bank reports that remittances are mainly used for personal consumption, not for investment purposes.

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

Sovereign Wealth Funds

Kosovo does not have any sovereign wealth funds.

7. State-Owned Enterprises

Kosovo has 63 state-owned enterprises (SOEs), 44 of which are municipality managed. These enterprises are typically utilities, such as water treatment and supply, waste management, energy generation and transmission, but also include SOEs involved in telecommunications, mining, and transportation. SOEs are generally governed by government-appointed boards. The Ministry of Economy monitors SOE operations with a light hand.

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

The majority of Kosovo’s SOEs are either regulated or operate at a loss and depend on government subsidies for their survival. COVID-19 has made this situation worse, and the government has provided emergency subsidies to numerous SOEs. SOEs do not receive a larger percentage of government contracts in sectors that are open to foreign competition. However, the government interprets procurement law in a way that considers SOEs to be public authorities and prevents contracting authorities from procuring goods from other sources if SOEs offer such goods and/or services. SOEs purchase goods and services from the private sector, including international firms.

Privatization Program

Kosovo has been progressively privatizing SOE assets since the early 2000s. The Privatization Agency of Kosovo (PAK), an independent agency, is responsible for the disposition of Kosovo’s SOE assets. While PAK plans to finalize all remaining privatizations over the next three to four years, different government administrations have attempted to freeze or completely stop the privatization process. The privatization process is open to foreign investors. PAK provides a live feed of bidding day procedures on its website ( http://www.pak-ks.org/ ). The website also includes bidding information, the results of sales, and other information.

10. Political and Security Environment

Recently, the political environment has been characterized by short electoral cycles and prolonged periods of caretaker governments. Despite the political instability, there have not been substantial legislative and regulative changes, especially regarding investments and business environment. While the environment in the country is growing increasingly politicized, the Embassy is not aware of any damage to commercial projects or installations.

Kosovo held national assembly elections on February 14, 2021, after the Constitutional Court ruled in December 2020 that a convicted Member of Parliament’s (MP) decisive 61st vote to form the government was not valid. For the first time in the last 20 years, the elections produced an overwhelmingly clear victor, the Levizja Vetevendosje (“Self-Determination Movement”) led by Albin Kurti, which was able to form a government in March 2021 with the help of only a few minority MPs. This was unusual as Kosovo’s proportional electoral system typically favors coalitions and partnerships. The new government is likely to be stable and provide a much-needed break from Kosovo’s short electoral cycles.

The previous administration took up its mandate in June 2020, after a motion of no confidence led to its predecessor’s fall 50 days after its election. Faced with the COVID-19 crisis and a razor thin majority at the assembly, the administration focused mainly on day-to-day management and was unable to make substantial legislative and regulative changes. Between July 2019 and March 2021, Kosovo had three different prime ministers and cabinets and held national elections twice, with a lengthy period of coalition negotiations and certification of election results each time. All the government administrations since September 2017 had issues with narrow majorities in the assembly and found it difficult to pass substantive legislation.

Kosovo is not a member of the United Nations and regional neighbors Serbia and Bosnia and Herzegovina are among the countries that do not recognize its statehood. In November 2018, Kosovo imposed a 100 percent tariff on all goods from Serbia and Bosnia and Herzegovina but in April 2020 dropped the 100 percent tariff in favor of “reciprocal measures.” The previous administration dropped these “reciprocal measures” temporarily in June 2020 to give way for negotiations on “economic normalization” with Serbia. Despite a White House-brokered set of commitments signed on September 4, 2020, in Washington, DC, by Kosovo’s then-Prime Minister Avdullah Hoti and Serbian President Aleksandar Vucic, there are numerous issues remaining that might lead to trade and investment barriers between the two countries.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
  Host Country Statistical source* USG or international statistical source USG or International Source of Data:  BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount  
Host Country Gross Domestic Product (GDP) (USD) 2019 $7.69 billion 2019 $ 8.0 billion https://www.worldbank.org/
en/country/kosovo/overview
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data:  BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2019 $213 2019 $226  https://data.imf.org/
regular.aspx?key=61227424
Host country’s FDI in the United States ($M USD, stock positions) 2019 17 2019 17  https://data.imf.org/
regular.aspx?key=61227424
Total inbound stock of FDI as % host GDP 2019 56% 2019 55.7% https://data.imf.org/
regular.aspx?key=61227424

* Source for Host Country Data: Central Bank of Kosovo, 2020.  https://bqk-kos.org/

Table 3: Sources and Destination of FDI*
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward 4,459 100% Total Outward 466 100%
Germany 569 13% Albania 136 29%
Switzerland 542 12% Germany 54 12%
Turkey 490 11% Montenegro 31 7%
Austria 264 6% North Macedonia 29 6%
Slovenia 238 5% Switzerland 26 6%
“0” reflects amounts rounded to +/- USD 500,000.

*Data from the CBK is generally consistent with the IMF data.

Table 4: Portfolio Investment
Portfolio Investment Assets
Top Five Partners (Millions, US Dollars)
Total Equity Securities Total Debt Securities
All Countries 2,055 100% All Countries 1,669 100% All Countries 386 100%
Luxembourg 771 38% Luxembourg 724 43% United States 76 20%
Ireland 515 25% Ireland 484 29% Austria 73 19%
France 418 20% France 404 24% Luxembourg 47 12%
United States 133 6% United States 57 3% Germany 32 8%
Austria 73 4% Germany 0.3 0% Ireland 31 8%

Kuwait

Executive Summary

Kuwait is a country of 1.4 million citizens and 3.3 million expatriates.  It possesses six percent of the world’s proven oil reserves and is a major oil exporter.  The economy is heavily dependent upon oil production and related industries, which are almost wholly owned and operated by the government. The energy sector accounts for more than half of GDP and close to 90 percent of government revenue. The fall in oil prices after OPEC+ failed to agree on production targets in 2019 and the onset of the COVID-19 pandemic led to dramatically reduced global demand for oil and exacerbated Kuwait’s fiscal deficit as oil prices dropped. In response to an evolving global energy market, in 2018 Kuwait launched a national development plan for economic reforms and diversification called New Kuwait Vision 2035. The country’s ability to implement these changes over the coming decade will largely determine Kuwait’s future.

As it develops the private sector to reduce the country’s dependence upon oil, the government faces two central challenges. It must improve the business climate and prepare its citizens to work in the private sector. The government has made progress on the business climate, improving from 97 to 83 among 190 countries in the World Bank’s 2020 Doing Business Report. Nonetheless, Kuwait remains the lowest ranked country in the Gulf Cooperation Council (GCC). A slow and overly complicated bureaucracy, inconsistent legal practices, and restrictive economic policies contribute to a challenging business environment.

More than 85 percent of all Kuwaitis have jobs in the public sector, where they receive generous salaries and benefits. Convincing young Kuwaitis that their future is in the private sector will require changing social attitudes, raising the level of local education so that they may compete internationally and removing perverse incentives. At present, bloated salaries, overly generous benefits, and short working hours make public sector jobs preferable to those in the private sector.

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

Kuwait Vision 2035 focusses on improving the country’s economic infrastructure, such as the construction of new airports, ports, roads, industrial areas, residential developments, hospitals, a railroad, and a metro rail.  The Northern Gateway initiative, which encompasses the Five Islands or Silk City projects, envisions public and private sector investment in the development of an international economic zone. It is not yet clear how increased fiscal pressure resulting from COVID-19 and lower oil prices will affect the plan.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2020 78 of 180 https://www.transparency.org/en/cpi/2020/index/nzl# 
World Bank’s Doing Business Report 2020 83 of 190 http://www.doingbusiness.org/en/rankings 
Global Innovation Index 2020 78 of 131 https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, historical stock positions) 2019 $398 million https://apps.bea.gov/international/factsheet/factsheet.cfm?Area=506 
World Bank GNI per capita 2018 $33,590 https://data.worldbank.org/indicator/NY.GNP.PCAP.CD?locations=KW 

3. Legal Regime

Transparency of the Regulatory System

Kuwait does not have a centralized online location where key regulatory actions are published akin to the Federal Register in the United States.  The regulatory system does not require that regulations be made available for public comment. The government frequently passes draft regulations to interested parties in the private sector, such as the Kuwait Chamber of Commerce and Industry or the Bankers Association, for comment.

The State Audit Bureau reviews government contracts and audits contract performance but does not publicly share the results.

Kuwait does not participate in the Extractive Industries Transparency Initiative (EITI), nor does it incorporate domestic transparency measures requiring the disclosure of payments made to other governments related to the commercial development of oil, natural gas, or mineral deposits.  However, the Kuwait economy is almost wholly dependent upon oil, the extraction of which is deemed a responsibility of the government and is subject to close National Assembly oversight.

International Regulatory Considerations

Kuwait joined the General Agreement on Tariffs and Trade (GATT) in 1963 and became a founding member of the WTO in 1995.  However, Kuwait is not a signatory to every WTO plurilateral agreement, such as the Agreement on Government Procurement. In April 2018, Kuwait deposited its Trade Facilitation Agreement instrument of ratification with the WTO after Kuwait’s National Assembly approved the agreement the previous month.

Kuwait has been part of the GCC since its formation in 1981.  The GCC launched a common market in 2008 and a customs union in 2015.  The GCC continues to forge agreements on regional standards and coordinate trade and investment policies.  American standards and internationally recognized standards are typically accepted. For more information regarding GCC standards and policies, refer to the following GCC website:  http://www.gcc-sg.org/en-us/Pages/default.aspx 

Legal System and Judicial Independence

Kuwait has a developed civil legal system based in part on Egyptian and French law and influenced by Islamic law.  Having evolved in a historically active trading nation, the court system in Kuwait is familiar with international commercial law.  Kuwait’s judiciary includes specialized courts, including a commercial court to adjudicate commercial law. Residents that are not Kuwaiti citizens involved in legal disputes with citizens have frequently alleged the courts show bias in favor of Kuwaiti citizens.  Holders of legal residence have been detained and deported without recourse to the courts.

Persons charged with criminal offenses, placed under investigation, or involved in unresolved financial disputes with local business partners have, in some cases, been subjected to travel bans.  Travel bans are meant to prevent an individual from leaving Kuwait until a legal matter is resolved or a debt settled. Travel bans may remain in place for a substantial period while the case is investigated, resolved, and/or prosecuted.  Failure to repay a debt can result in a prison term ranging from months to years, depending upon the amount owed.

U.S. firms are advised to consult with a Kuwaiti law firm or the local office of a foreign law firm before executing contracts with local parties.  Fees for legal representation can be very high. Contracts between local and foreign parties serve as the basis for resolving any future commercial disputes.  The process of resolving disputes in the Kuwaiti legal system can be subject to lengthy delays, sometimes years, depending on the complexity of the issue and the parties involved.  During these delays, U.S. citizens can be deprived of income streams related to their business venture and be forced to surrender assets and ownership rights before being allowed to depart the country.

Laws and Regulations on Foreign Direct Investment

In an attempt to diversify the economy by attracting foreign investment and raise private sector employment, Kuwait passed a foreign direct investment law in 2013 permitting up to 100 percent foreign ownership of a business – if approved by KDIPA. Without KDIPA approval, all businesses incorporated in Kuwait must be 51 percent-owned by Kuwaiti or GCC citizens and seek licensing through the Ministry of Commerce and Industry. In reviewing applications from foreign investors, KDIPA places emphasis on creating jobs and the provision of training and education opportunities for Kuwaiti citizens, technology transfer, diversification of national income sources, increasing exports, support for local small- and medium-sized enterprises, and the utilization of Kuwaiti products and services.  KDIPA has sponsored 37 foreign firms, including six U.S. companies. In addition to KDIPA assistance in navigating the bureaucracy, available investment incentives include tax benefits, customs duties relief, and permission to recruit required foreign labor. Government control of land limits its availability for development.

In 2019, a set of criteria was introduced to assess applications and grant licenses to foreign investors. Decision No. 329 of 2019 enacted five main criteria for assessing licensing and granting incentives. The criteria covered the following: (i) transfer and settlement of technology, including tangible and intangible technological innovation and the enablement of knowledge creation; (ii) human capital, stressing job creation for nationals and employee development programs; (iii) market development; (iv) economic diversification; and (v) sustainable development in the areas of corporate social responsibility and environmental sustainability. Decisions on licenses and the granting of incentives are based on a “Points Scoring Mechanism” (PMS). Other recent legal measures to facilitate foreign direct investment and economic growth include Law No. 116 of 2014 regarding public-private partnerships (PPP) and a new Companies Law No. 1 of 2016.  The PPP law created the Kuwait Authority for Partnership Projects http://www.kapp.gov.kw/en/Home 

Competition and Anti-Trust Laws

Kuwait’s open economy has generally promoted a competitive market.  In 2007, the government enacted the Protection of Competition Law No. 10 and by-laws in 2012 that facilitated the establishment of a Competition Protection Authority to safeguard free commerce, ban monopolies, investigate complaints, and supervise mergers and acquisitions.  The Competition Protection Authority presented a restructuring plan with the assistance of the World Bank to the Cabinet in 2018, which is still under review. In previous years, U.S. investors have alleged instances of discrimination.

The Commercial Agency Law No. 13 of 2016 removed exclusivity, enabling foreign firms to have multiple agents to market their products.

In 2016, the National Assembly passed a new Public Tenders Law No. 49.  All bids on government-funded infrastructure projects (excluding military and security tenders) over KD 75,000 (USD 250,000) must be submitted to the Central Agency for Public Tenders.  The law requires that foreign contractors bidding on government contracts purchase at least 30 percent of their inputs locally and award at least 30 percent of the work to local contractors, where available.  The law favors local sourcing by mandating a 15 percent price preference for locally- and GCC-produced items, however this provision may be waived on a case-by-case basis.

Expropriation and Compensation

Kuwait has had no recent cases of expropriation or nationalization involving foreign investments.  The 2013 Foreign Direct Investment (FDI) Law guarantees investors against expropriation or nationalization, except for public benefit as prescribed by law.  In such cases, investors should be compensated for the real value of their holdings at the time of expropriation. The last nationalization occurred in 1974.

Dispute Settlement

ICSID Convention and New York Convention

Kuwait is a signatory to the International Center for the Settlement of Investment Disputes (ICSID Convention) and to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

Investor-State Dispute Settlement

The FDI law stipulates that Kuwaiti courts alone are responsible for adjudicating disputes involving a foreign investor, although arbitration is permitted.  Few contracts contain clauses specifying recourse to traditional commercial arbitration. The Kuwaiti judicial system recognizes and enforces foreign judgments only when reciprocal arrangements are in place.

International Commercial Arbitration and Foreign Courts

The recognition and enforcement of foreign arbitral awards occurs more expeditiously than the enforcement of foreign judgments.  Enforcement of the former, however, must meet with the same reciprocity and procedural criteria of enforcing foreign judgments under Articles 199 and 200 of the Civil and Commercial Procedure Code No. 38 of 1980.  Accordingly, an award passed by a foreign arbitral panel or tribunal may be enforced in Kuwait provided that: a) the country where the award has been rendered is a member of the New York Convention; b) the foreign award is rendered by a competent arbitrator in accordance with the laws of the country in which it was awarded; c) the parties have been promptly summoned to appear and duly represented before the arbitral tribunal; d) the award must become a res judicata according to the laws of the country in which it was awarded; and e) the award must not be in conflict with an ordered judgment that has been rendered by a local court in Kuwait and additionally does not contradict mandatory provisions or constitute criminal conduct, or violations to morality or public policy, under Kuwaiti laws.

Alternative Dispute Resolution (ADR) mechanisms include conciliation, negotiation, and mediation.  These mechanisms depend on the parties’ goodwill to settle their disputes with or without the help of a third party.

Law No. 11 of 1995 on Judicial Arbitration for Civil and Commercial Articles, the relevant organizing and explanatory Ministerial Resolutions thereof, and Civil and Commercial Procedure Code No. 38 of 1980 outline the formation, operation, jurisdiction, and procedures of the arbitral panel, and the issuance of arbitral awards through the Kuwait Arbitration Center, located at the Kuwait Chamber of Commerce and Industry.  They also define regulations for international conventions, free trade agreements, and the just application of the reciprocal clause between parties.

Bankruptcy Regulations

Kuwait worked with the World Bank to draft bankruptcy legislation designed to assist businesses to recover from financial difficulties as an alternative to liquidation. The Council of Ministers approved new legislation to support competition and create bankruptcy protections and sent it to the National Assembly. On September 29, 2020, Kuwait’s National Assembly passed the long-awaited law. The new law restructures the legal framework for bankruptcy to focus on rehabilitating troubled companies rather than liquidation. The new law removes penalties for good faith debtors and creates new mechanisms to allow debtors to avoid liquidation, including a preventive settlement procedure and a restructuring procedure.

6. Financial Sector

Capital Markets and Portfolio Investment

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

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

FTSE Russell upgraded the status of the Boursa to Secondary Emerging Market in 2017.  In March 2019, MSCI announced a proposal to reclassify the MSCI Kuwait Index from Frontier to Emerging Markets. MSCI aims to implement the potential reclassification to coincide with the May 2020 Semi-Annual Index Review. On December 1, 2020, Boursa Kuwait completed the Kuwaiti capital market’s inclusion into the MSCI Emerging Markets Indexes with the successful implementation of the first tranche of index inclusion.

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

Money and Banking System

The Central Bank of Kuwait reported that banking sector assets totaled KD 72.44 billion (USD 232.42 billion) in April 2020.

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

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

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

Foreign Exchange and Remittances

Foreign Exchange

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

Remittance Policies

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

Sovereign Wealth Funds

The Kuwait Investment Authority (KIA) manages the Kuwait General Reserve Fund and the Kuwait Fund for Future Generations.  By law, ten percent of oil revenues must be deposited each year into the Fund for Future Generations. In 2020, the National Assembly suspended this requirement due to the large government deficit. KIA management reports to a Board of Directors appointed by the Council of Ministers.  The Minister of Finance chairs the board; other members include the Minister of Oil, the Central Bank Governor, the Undersecretary of the Ministry of Finance, and five representatives from Kuwait’s private sector (three of whom must not hold any other public office).  An internal audit office reports directly to the Board of Directors and an external auditor. This information is provided to the State Audit Bureau, which audits KIA continuously and reports annually to the National Assembly.

The 1982 law establishing the KIA prohibits the public disclosure of the size of sovereign wealth holdings and asset allocations.  KIA conducts closed-door presentations for the Council of Ministers and the National Assembly on the full details of all funds under its management, including its strategic asset allocation, benchmarks, and rates of return.  The Sovereign Wealth Fund Institute estimated that KIA manages one of the world’s largest sovereign funds with more than USD 533.65 billion in assets as of end of May 2020. Economic stress and budget deficits since 2016 due to diminishing oil revenues and, in 2020, the COVID-19 pandemic, has led to the near depletion of the General Reserve Fund. As of April 2021, the Kuwaiti government and the National Assembly are considering options for generating the liquidity necessary to maintain governmental functions. Authorization to issue debt has stalled in the National Assembly, although it still seems a more likely eventual solution than the politically controversial step of drawing funds from the Fund for Future Generations.

7. State-Owned Enterprises

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

Privatization Program

The National Assembly has passed several privatization laws since 2008. The Supreme Council for Privatization was established under a Privatization Law to increase the role of the private sector in Kuwait’s national economy. The council is chaired by the prime minister and consists of five ministers and three experts from different sectors.

The Privatization Law was developed to address all the major issues related to privatization, especially the processes of transforming public projects into joint stock companies, protecting the rights of workers, controlling prices, and the disposition of revenues arising from the privatization process. The Supreme Council and then the Council of Ministers must approve any privatization initiative. Kuwaiti employees have the right to retain their jobs in a privatized company for at least five years with the same salary and benefits.  Privatized shares of any public entity must be offered as follows: 40 percent of shares reserved for Kuwaiti citizens.

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

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

10. Political and Security Environment

The U.S. Embassy occasionally receives threat information indicating possible targeting of official and private U.S. citizens for terrorist attacks.  Soft targets are vulnerable to terrorist attack, although many have made improvements to their perimeters and internal security. There have been no terror incidents in Kuwait since 2016.  There have been no attacks targeting businesses or infrastructure. Since late 2013, Kuwait has seen no large-scale, politically motivated demonstrations, although it experienced some small-scale protests against the governments COVID-19 restrictions over the winter of 2020-2021. Continued political disagreements between the government and political opposition over the last year have increased the potential for public demonstrations, although such protests would be unlikely to target U.S. interests, companies, or investments. U.S. citizens are encouraged to enroll in the U.S. Department of State’s Smart Traveler Enrollment Program (STEP) for up-to-date information from the Embassy.  The Department of State shares credible threat information through its Consular Information Program, including Travel Advisories, Alerts, and Country Information for Kuwait, available at  https://travel.state.gov/content/travel.html or the Embassy’s website:  https://kw.usembassy.gov/.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

According to the 2020 World Investment Report published by the United Nations Conference on Trade and Development, Kuwait attracted a foreign direct investment inflow of USD 104 million in 2019, compared to USD 2.5 billion in foreign direct investment outflows.

According to the U.S. Department of Commerce Bureau of Economic Analysis, 2019 U.S. direct investment in Kuwait was USD 398 million, down from USD 499 million in 2018.  Kuwait’s FDI stock position in the United States totaled USD 1.26 billion in 2019. Kuwaiti direct investment in the United States is largely in real estate.

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source* USG or international statistical source USG or International Source of Data: BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2017 $117,267 2019 $ 134,628.54 https://data.worldbank.org/indicator/
NY.GDP.MKTP.CD?locations=KW 
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data: BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) N/A N/A 2019 $398 million https://apps.bea.gov/international/
factsheet/factsheet.cfm 
Host country’s FDI in the United States ($M USD, stock positions) N/A N/A 2018 $1,256 BEA : Kuwait – International Trade and Investment Country Facts 
Total inbound stock of FDI as % host GDP N/A N/A 2019 10.9% https://unctad.org/en/Pages/DIAE/
World%20Investment%20Report/
Country-Fact-Sheets.aspx 

*Host country source: https://www.cbk.gov.kw/en/statistics-and-publication/publications/quarterly-statistical-bulletin 

Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward 14,904 100% Total Outward 32,997 100%
Qatar 3,684 25% Saudi Arabia 4,455 14%
UAE 879 6% Cayman Islands 4,426 13%
Bahrain 806 5% Bahrain 3,869 12%
Saudi Arabia 695 5% Iraq 3,020 9%
Oman 472 3% Turkey 2,824 9%
“0” reflects amounts rounded to +/- USD 500,000.
Table 4: Sources of Portfolio Investment
Portfolio Investment Assets
Top Five Partners (Millions, current US Dollars)
Total Equity Securities Total Debt Securities
All Countries 18,620 100% All Countries 8,547 100% All Countries 10,073 100%
Saudi Arabia 3,904 21% Bahrain 2,950 35% Saudi Arabia 2,897 29%
Bahrain 3,774 20% United States 1,302 15% UAE 2,278 23%
UAE 2,682 14% Cayman Islands 1,025 12% Qatar 866 9%
United States 1,876 10% Saudi Arabia 1,007 12% Bahrain 824 8%
Cayman Islands 1,225 7% United Kingdom 724 8% Oman 679 7%

Kyrgyzstan

Executive Summary

Against the backdrop of the worst economic downturn since 1991, a looming debt crisis, and a deteriorating COVID-19 situation in the region, the Kyrgyz Republic faces daunting prospects in 2021 to stabilize the economy and recuperate investor confidence. In October 2020, the toppling of the government under former President Soorenbai Jeenbekov in a populist uprising against vote-buying and administrative corruption created the path for the installation of a populist administration under President Sadyr Japarov, who quickly reorganized the government and enacted sweeping constitutional reforms. The Japarov administration, while maintaining its partnerships with key economic partners Russia and China, also seeks financial support and foreign investment from the United States and other Western countries to support economic recovery.  However, under the auspices of a sweeping anti-corruption campaign, detentions and aggressive tactics against private businesses have increased, raising serious concerns among foreign investors about the security of their investments. In May 2021, the government levied a $3 billion fine against the country’s largest foreign investor, Centerra Gold Inc, and installed external management for a three-month period. The government and Centerra Gold Inc. have entered into arbitration proceedings, but the matter will likely have long-lasting repercussions on the country’s already challenging investment climate.

The Kyrgyz economy significantly contracted by 8.6 percent of GDP in 2020, mainly due to decreases in construction, tourism, and non-gold exports. Total inbound foreign direct investment in 2020 shrank by over 50 percent, due to reduced inflows across the board among the country’s main investors: Canada, China, the United Kingdom, and Russia. The International Monetary Fund projected growth is expected to rebound in 2021 and with a full recovery to pre-pandemic levels by 2023, barring a severe resurgence of COVID-19 or political turbulence. The government’s focus on reducing public debt, which is currently 68 percent of GDP, may restrict fiscal space in the short to medium term to move forward on public investments and public private partnerships approved in 2019.

Corruption and government gridlock are major impediments to prospective investment and business development. Since February, the new government has undergone a mass re-structuring of ministries and state agencies, including re-organization of state bodies for economic policy formation such as the State Committee for Information and Communications Technology and the Investment Promotion and Protection Agency, as well as law enforcement oversight by disbanding the Financial Police. Until permanent leadership is assigned for new state bodies, the new government’s short-term priorities and internal capacity continue to be in a state of transition, which may increase some administrative costs for doing business. While the legal and regulatory framework is set up to be in accordance with international norms, poor implementation and weak enforcement, particularly with respect to intellectual property rights protection, and transparency in extractive licensing, are endemic problems. Since October 2020, President Japarov’s anti-corruption campaign resulted in a significant uptick in business investigations and detentions of business executives on criminal charges. Although the government extended the moratorium on business inspections until January 1, 2022, state security services are increasingly involved in economic crime cases, raising concerns about deteriorating transparency and oversight of business regulations.

The Kyrgyz Republic remains a frontier market, oriented towards higher-risk investors seeking to capitalize on the country’s minimal market entry barriers, lack of restrictions on foreign ownership, and export-oriented tax incentives to establish a foothold in Central Asia. Although FDI has historically targeted mining-related sectors, finance, and petroleum product manufacturing, the new government’s stated commitment to develop the country’s digital economy and to enhance regional trade integration presents numerous long-term investment opportunities in agribusiness and food processing, ICT infrastructure, energy, and transit and customs. The Kyrgyz Republic’s participation in the newly launched CASA-1000, a regional electricity transmission project, may increase the country’s export capacity and investment opportunities in the power sector.  This also may catalyze political will to pursue energy tariff reform and leverage new investment with the country’s largely untapped hydro resources. In order to unlock these opportunities, it will be contingent on the new government to prevent backsliding in structural reforms to increase competitiveness and transparency in the investment climate to unlock these opportunities.

*Some information in the report may be subject to change upon date of publication and will be updated in the ICS 2022.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2020 124 of 179 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2020 80 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2020 94 of 131 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2019 $38 https://apps.bea.gov/international/factsheet/
World Bank GNI per capita 2019 $1,240 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

The Kyrgyz Republic is actively seeking foreign direct investment, and the government publicly recognizes that foreign direct investment is an important component to economic development. While the government has implemented laws to attract foreign investment, inconsistent application, onerous bureaucracy as well as inability to protect investors’ assets in the field continue to deter foreign investors. In particular, government activities, including demands for renegotiation of operating contracts, invasive and time-consuming audits, levies of large retroactive fines, and disputes over licenses, pose significant impediments to attracting foreign investment. Pandemic uncertainty coupled with political tumult has had an outsized negative impact in the country and net FDI inflows in 2020 collapsed by over 50 percent relative to 2019.  This includes a notable reduction in FDI inflows from all main investment partners, Canada, China, Russia, and the United Kingdom.

Since 1993, the United States has had a Bilateral Investment Treaty with the Kyrgyz Republic that encourages and offers reciprocal protection of investment. The newly restructured Investment Promotion and Protection Agency (IPPA) of the Kyrgyz Republic (as of February 2021), under the Ministry of Economy and Finance, serves as a vehicle for maintaining an ongoing dialogue with foreign investors and advocates for investing in the Kyrgyz Republic. The agency participates in the development and implementation of measures to attract and stimulate investment activity. Its mandate is to coordinate with state bodies, local municipalities, business entities, and non-state actors to promote investment and support investors in the Kyrgyz Republic, including private investment and public-private partnerships, as well as assist local exporters to promote Kyrgyz goods to external markets, and develop Free Economic Zones (FEZ). The IPPA has investor support programs to help guide investors through the registration process and conducts outreach aimed at helping create an environment conducive to foreign investment. The IPPA often coordinates with international donor organizations on hosting round- tables discussions, exchanges, and capacity building workshops in the field of economic development.

The Institute of the Business Ombudsman was created in January 2019 as an independent non-state body, funded by external donor sources, to protect the rights, freedoms, and legitimate interests of business entities, both local and foreign. In August 2019, the Supervisory Board of the Institute of the Business Ombudsman appointed former UK Ambassador to the Kyrgyz Republic, Robin Ord-Smith, as Business Ombudsman. The Institute of Business Ombudsman has concluded memorandums of cooperation with leading international business associations, including the American Chamber of Commerce in the Kyrgyz Republic (Amcham), International Business Council (IBC), and the Chamber of Commerce of Industry of the Kyrgyz Republic (CCI). In 2020, the Business Ombudsman recommended that business reform, protection and support of local entrepreneurs and protecting private property rights are key conditions for attracting direct investment.

The government has established several committees and councils to coordinate cooperation between the business associations and government bodies. Since 2017, the Business and Entrepreneurship Development Council under the Speaker of the Parliament regularly convenes MPs, business community representatives from various sectors of the economy to discuss measures to improve the investment, promotion of entrepreneurship, and legislation to facilitate doing business in the Kyrgyz Republic. The Committee on Development of Industry and Entrepreneurship under the President of the Kyrgyz Republic serves as a platform for entrepreneurs to turn to in case if their grievances are not addressed by the government. The presidential decree to establish the Committee under the National Council on Sustainable Development of the Kyrgyz Republic was signed on December 24, 2019 with the amendment to designate to the Vice-Prime-Minister for economic development, the Business Ombudsman and heads of business associations. The committee includes platforms to raise investment climate and other business concerns to the offices of the President, Parliament, and Prime Minister. The Kyrgyz government also interacts with the business community via a number of local associations that serve as a voice for entrepreneurs and corporations, including Amcham, IBC, and the National Alliance of Business Associations of the Kyrgyz Republic (http://caa.kg/ru/ru-naba/). The Ministry of Economy and Finance, Parliamentary Business and Entrepreneurship Development Council, and other government bodies often seek the opinion of these associations during the formulation of policy.

Limits on Foreign Control and Right to Private Ownership and Establishment

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

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

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

Other Investment Policy Reviews

In 2016, the International Finance Corporation (IFC), a member of the World Bank Group, released a report on the Kyrgyz investment climate in January 2016. The report is available at: https://documents.worldbank.org/en/publication/documents-reports/documentdetail/259411467997285741/investment-climate-in-kyrgyz-republic-views-of-foreign-investors-results-of-the-survey-of-foreign-investors-operating-and-non-operating here.

The Investment Policy Review (IPR) of The Kyrgyz Republic for 2016 by UNCTAD is available at https://unctad.org/en/pages/PublicationWebflyer.aspx?publicationid=1436.

Business Facilitation

Starting a business in the Kyrgyz Republic has become easier following the elimination of the minimum capital requirement for business registration, abolition of certain registration fees, and decreases in registration times. The Kyrgyz Republic does not have a business registration website. Registration of legal entities, branches, or representative offices in the Kyrgyz Republic is based on “registration by notification” and the “one stop-shop” practice. State registration of a legal entity is completed within three business days from the date of filing the necessary documents for a specified fee. The Kyrgyz Republic ranked in the top quintile of the World Bank’s 2020 Doing Business report (42nd out of 190 countries surveyed) in “Starting a Business.” In 2018-2019, 115 economies implemented 294 business regulatory reforms across the 10 areas measured by Doing Business ( https://www.doingbusiness.org/en/reforms/top-reformers-2020).

Outward Investment

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

3. Legal Regime

Transparency of the Regulatory System

The legal and regulatory system of the Kyrgyz Republic remains underdeveloped, and implementation regulations and court orders relating to commercial transactions remain inconsistent with international practices. Heavy bureaucracy, lack of accessibility among decision-makers responsible for investment promotion, and frequent changes in leadership due to political instability all undermine investor confidence. Moreover, there is a significant capacity gap between the capital (Bishkek) and regional municipalities, particularly in remote, rural areas, in terms of institutional legal expertise andlocal officials and local law enforcement capacity, which hinders the conduct of business especially in the regions of Kyrgyzstan.

There have been no known cases of U.S. investors facing discrimination.

Rule-making authority is vested in the Kyrgyz Parliament – Jogorku Kenesh, which has established robust committees that oversees legislation and regulations affecting several areas of the economy, including: the Committee on Economic and Fiscal Policy; the Committee on Fuel, Energy, and Subsoil Management; the Committee on Transport, Communications, Architecture, and Construction; and the Committee on Budget and Finance. The Office of the Prosecutor General is the supreme legal and regulatory enforcement body in the Kyrgyz Republic. The State Service on Financial Market Regulation and Supervision (Financial Supervision), the State Service on Financial (Financial Intelligence) and the State Service on Combating Economic Crimes (Financial Police), which was dissolved this year, have played important regulatory roles

Accounting procedures tend to adhere to internationally recognized accounting rules, such as the International Financial Reporting Standards (IFRS), and audits are conducted regularly, often in compliance with agreements with international financial institutions (IFIs). Audit results of state organizations tend to be publicly available, unlike those of private organizations.

There have been lapses in the public consultation process, and significant reductions in transparency of Parliamentary committee meetings and failure to circulate draft bills for public review, including the draft new constitution that will be voted on in the April 11 referendum.

Draft bills or regulations are to be posted on Parliament’s web site and open to public comment for 30 days prior to consideration by Parliament and its committees. Parliament is required by regulation to hold public hearings on draft legislation, and has historically been open to the participation of representatives of civil society organizations and the business community in relevant hearings when held.

The IPPA assists investors with regulatory compliance. However, the efficacy of this office in assisting firms with setting up shop is limited since official bureaucratic procedures comprise only some of the hurdles to opening a business. Investment councils, under the auspices of the Office of the President, Parliament and Prime-Minister respectively, exist to further regulatory improvements for the business climate. Contradictory government decrees often create bureaucratic paralysis or opportunities for bribe solicitation in order to complete normal bureaucratic functions. As often in the Kyrgyz Republic, the legal and regulatory framework is largely sound, but implementation and enforcement are weak.

In February 2021, the government structure underwent “optimization,” which resulted in the significant downsizing of ministries and the dissolution and re-organization of several independent state regulatory bodies. The State Committee for Industry, Energy and Subsoil Use is under the supervision of the Ministry of Energy and Industry and, among its core functions, oversees mining licensing. The State Committee of Information and Communications Technology, responsible for implementation of the Digital Transformation Strategy 2019-2023 was dissolved in 2021 but will re-emerge under a new state body that is still undergoing transition. still in transition. The government also eliminated the State Service of Combating Economic Crimes (Financial Police) and will transfer its authority to investigate economic crimes to a new state body within the combined Ministry of Finance and Economy.

International Regulatory Considerations

In August 2015, the Kyrgyz Republic acceded to the Eurasian Economic Union (EAEU), whose current members also include Russia, Kazakhstan, Armenia, and Belarus. The Kyrgyz Republic continues to harmonize its laws to comply with regulations set by the Eurasian Economic Commission, the executive body of the EAEU. However, the Kyrgyz Republic has yet to secure the benefits of increased bilateral trade with EAEU member countries, citing unilaterally imposed trade barriers restricting the flow of Kyrgyz exports. Numerous Kyrgyz entrepreneurs have criticized non-tariff measures that emerged after the country’s accession to the Union, preventing local exporters from fully accessing the wider EAEU market.

The United States and other international partners provided substantial technical assistance to the Kyrgyz Republic in support of its accession to the WTO in 1998, and the country’s regulatory system reflects many international norms and best practices. The Law on the Fundamentals of Technical Regulation in the Kyrgyz Republic, which provides for standardization principles under the WTO Technical Barriers to Trade Agreement, entered into force in 2004. To Post’s knowledge, the Kyrgyz government notifies all draft technical regulations to the WTO Committee on Technical Barriers to Trade (TBT). In 2016, the Kyrgyz Republic ratified the WTO Trade Facilitation Agreement.

Legal System and Judicial Independence

The government’s self-stated principles of the reformed legal system of the Kyrgyz Republic are “ideological and political pluralism, a socially oriented market economy, and the expansion of individual rights and freedoms.” Major barriers to foreign investment stem largely from a lack of adequate implementation rather than gaps in existing laws.

The judicial system is technically independent, but political interference and corruption regularly besmirch its reputation and undermine its effectiveness. Resolution of investment disputes within the Kyrgyz Republic depends on several factors, including who the parties are and the amount of investment.

The weak Kyrgyz judicial system often fails to act as an independent arbiter in the resolution of disputes. Since most disputes are lodged by foreign investors against the Kyrgyz Government, local courts often serve as an executor of the authorities’ political agenda. Regulations and enforcement actions can be appealed and are adjudicated in the national court system. International Court of Arbitration at the Chamber of Commerce and Industry of the Kyrgyz Republic (ICA).and the Central Asian Alternative Dispute Resolution Center provide mediation services for public-private disputes, which remain a protracted and often impartial process in the Kyrgyz Republic.

Laws and Regulations on Foreign Direct Investment

The Kyrgyz Republic’s main legal framework for foreign direct investment remains
the “2003 Law on Investments,” including multiple amendments up until December 2020 (http://cbd.minjust.gov.kg/act/view/ru-ru/1190). The justice system in the Kyrgyz Republic is inefficient and lacks independence, and cases can take years to be resolved. The Kyrgyz Republic does not have a business registration website. The Investment Promotion and Protection Agency of the Kyrgyz Republic (IPPA) maintains the country’s main website for investment queries, https://invest.gov.kg/.

Competition and Antitrust Laws

The State Agency for Anti-Monopoly Regulation of the Kyrgyz Republic conducts unified state antitrust price regulation in the economy. The main tasks of the State Agency are to develop and protect competition, to control compliance with legislation in the field of anti-trust, price regulation, to protect the legal rights of consumers against manifestations of monopoly and unfair competition, to ensure observance of legislation on advertising. To Post’s knowledge, there have been no developments in any significant competition cases over the past year.

Expropriation and Compensation

According to the Law on Investments in the Kyrgyz Republic, investments shall not be subject to expropriation, except as provided by Kyrgyz laws when such expropriation is in the public interests and is carried out on a non-discriminatory basis and pursuant to a proper legal procedure with the payment of timely, appropriate, and feasible reparation of damages (including lost profit).

Foreign investors have the right to compensation in the case of government seizure of assets. However, there is little understanding of the distinction between historical book value, replacement value, and actual market value, which brings into question whether the government would provide fair compensation in the event of expropriation. In the mining sector, there is a long history of investment disputes related to government seizure, revocation, or suspension of mining licenses. In May 2021, the Canadian mining company Centerra Gold Inc., the parent company of the subsidiary Kumtor Gold Company, initiated binding arbitration proceedings against the Kyrgyz government, following the government’s ownership takeover of the Kumtor gold mine and levying of a $3 billion fine against the company for alleged environmental damages. Arbitration proceedings remain ongoing.

In April 2016, the government expropriated four Uzbek-owned resorts on Lake Issyk-Kul on the grounds of the claimant’s failure to make payment to the Kyrgyz Social Fund. Post has no information on whether fair market value compensation was offered following expropriation. (The Kyrgyz Law on Investment specifies that the amount of reparation shall be equivalent to the fair market price of the expropriated investment, and that the reparation must be feasible and shall be payable in a freely convertible currency within the term agreed on by the parties.) In December 2017, the Kyrgyz Government returned the resorts to the claimant and extended the temporary rental of the lands on the basis that the claimant withdrew its claim filed to international arbitration, improved infrastructure at the resorts, and guaranteed that 80 percent of labor force will be Kyrgyz citizens.

Dispute Settlement

ICSID Convention and New York Convention

The Kyrgyz Republic is a member of the International Center for the Settlement of Investment Disputes (ICSID). It signed the ICSID agreement on June 9, 1995, and ratified it on July 5, 1997. The Kyrgyz Republic became a member of the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards on March 18, 1997.

Investor-State Dispute Settlement

The Code of Arbitration Procedure specifies that, if an international treaty of the Kyrgyz Republic establishes the rules of court procedure, other than those, provided by the legislation of the Kyrgyz Republic, rules of the international treaty shall apply. The U.S.-Kyrgyz BIT outlines procedures by which parties may consent to binding arbitration.

Post is unaware of any claims made by U.S. investors under the agreement since it entered into force. Between 2014 and 2018, twenty lawsuits were filed against the Kyrgyz Republic totaling over $2.2 billion in claims. Eleven international arbitration disputes totaling over $1.5 billion in claims have been awarded as of 2020.

The Kyrgyz government has a history of disputing UNCITRAL and other foreign arbitral awards in favor of the claimant. In a pending case in which a D.C. federal court has issued a default ruling enforcing the award, the Kyrgyz Republic has failed to appear for court appearances. The company has yet to receive compensation, and the Kyrgyz government has sought to undo this ruling.

International Commercial Arbitration and Foreign Courts

Code of Arbitration Procedures allows for international and domestic arbitration of disputes. Parties can agree to any judicial institution, including third-party courts within or outside of the Kyrgyz Republic, or domestic or international arbitration. If the parties fail to settle the dispute within three months of the date of the first written request, any investment dispute between an investor and the public authorities of the Kyrgyz Republic will be subject to settlement by the judicial bodies of the Kyrgyz Republic. Any of the parties may initiate a settlement by recourse to: the International Centre for Settlement of Investment Disputes under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States or; arbitration or a provisional international arbitration tribunal (commercial court) established under the arbitration procedures of the UNCITRAL. Recognition and enforcement of international arbitration awards in the Kyrgyz Republic is carried out in accordance with the New York Convention and Kyrgyz laws. However, there are a number of features related to the recognition and enforcement of arbitration awards. In particular, Kyrgyz law expands a list of the grounds for refusal of recognition and enforcement of foreign arbitration awards in comparison with a list of the grounds referred to in the New York Convention.

Bankruptcy Regulations

The Kyrgyz Republic has a written law governing bankruptcy procedures of legal persons and insolvent physical persons (Law of the Kyrgyz Republic “On Bankruptcy” September 22, 1997 with multiple amendments in December 30, 1998, July 1999, September 2000, June 2002, March and August 2005, January and July 2006, June 2007, July 2009, April 2015, June, July and December 2016, May 2017, and December 31, 2019), which covers industrial enterprises and banks, irrespective of the type of ownership, commercial companies, private entrepreneurs, or foreign commercial entities. Bankruptcy proceedings are conducted by the court of arbitration competent for the district in which enterprise is located. The procedure of liquidation can be carried out without the involvement of the judicial bodies if all creditors agree on out-of-court proceedings. Chapter 10 of the law on bankruptcy provides for the possibility of an amicable or peaceful settlement between the enterprise and its creditors, which can be made at any stage of the liquidation process. The World Bank ranked the Kyrgyz Republic 78 out of 190 countries in “Resolving Insolvency” in its 2020 Doing Business report.

6. Financial Sector

Capital Markets and Portfolio Investment

The Kyrgyz government is generally open toward foreign portfolio investment, though experts from international financial institutions (IFIs) have noted that capital markets in the Kyrgyz Republic remain underdeveloped. The economy of the Kyrgyz Republic is primarily cash-based, although non-cash consumer transactions, such as debit cards and transaction machines, have quadrupled.  The number of bank payment cards in use increased by 2.5 times and e-wallets 10 times in the last five years. The Kyrgyz Republic maintained its B2 sovereign credit rating with Moody’s, which downgraded its outlook in November 2020 from stable to negative due to political instability. The government debt market is small and limited to short maturities, though Kyrgyz bonds are available for foreign ownership. Broadly, credit is allocated on market terms, but experts have noted that the presence of the Russian-Kyrgyz Development Fund subsidized sources of credit have introduced market distortions. Bank loans remain the primary source of private sector credit, and local portfolio investors often highlight the need to develop additional financial instruments in the Kyrgyz Republic. There are two stock exchanges in the Kyrgyz Republic (Kyrgyz Stock Exchange and Stock Exchange of the Kyrgyz Republic), but all transactions are conducted through the Kyrgyz Stock Exchange. In 2020, the total value of transactions amounted to 11.83 billion Kyrgyz soms (approximately USD 140 million). The small market lacks sufficient liquidity to enter and exit sizeable positions. Since 1995, the Kyrgyz Republic has accepted IMF Article VIII obligations. Foreign investors are able to acquire loans on the local market if the business is operating on the territory of the Kyrgyz Republic and collateral meets the requirements of local banks. The average interest rate for loans in USD is between 10-15 percent.

Money and Banking System

The National Bank of the Kyrgyz Republic (NBKR) is a nominally independent body whose mandate is to achieve and maintain price stability through monetary policy. The Bank is also tasked with maintaining the safety and reliability of the banking and payment systems. The NBKR licenses, regulates, and supervises credit institutions. The penetration level of the banking sector is 48.4 percent.

According to the IMF, the Kyrgyz banking system at present remains well capitalized with still sizeable, non-performing loans (NPLs). NPLs increased from 8.0 percent to 10.5 percent in 2020, with restructured loans of about 25 percent. Net capital adequacy ratio increased from 24.1 percent to 24.9 percent in 2020. Total assets in the Kyrgyz banking system in 2020 equaled approximately USD 3.4 billion. As of June 2020, the Kyrgyz Republic’s three largest banks by total assets were Optima Bank (approximately USD 430 million), Aiyl Bank (approximately USD 353 million), and Kyrgyz Investment and Credit Bank (KICB; approximately USD 328 million).

There are currently 23 commercial banks in the Kyrgyz Republic, with 312 operating branches throughout the country; the five largest banks comprise more than 50 percent of the total market. No U.S. bank operates in the Kyrgyz Republic and Kyrgyz banks do not maintain correspondent accounts from U.S. financial institutions, following widespread de-risking in 2018. There are ten foreign banks operating in the Kyrgyz Republic: Demir Bank, National Bank of Pakistan, Halyk Bank, Optima Bank, Finca Bank, Bai-Tushum Bank, Amanbank, Kyrgyz-Swiss Bank, Chang An Bank,and Kompanion Bank are entirely foreign held. Other banks are partially foreign held, including KICB and BTA Bank. KICB has multinational organizations as shareholders including the European Bank for Reconstruction and Development (EBRD), Economic Finance Corporation, the Aga Khan Fund for Economic Development and others.

The micro-finance sector in the Kyrgyz Republic is robust, representing nearly 10 percent the market size of the banking sector. Trade accounted for 37.5 percent of the total loan portfolio of the banking sector, followed by agriculture (29 percent) and consumer loans (12.5 percent). The microfinance sector in the Kyrgyz Republic is rapidly growing. In 2020, around 140 microfinance companies, 92 credit unions, 220 pawnshops and 421 currency exchange offices operated in the Kyrgyz Republic. Over the last five years, the three largest microfinance companies (Bai-Tushum, FINCA, and Kompanion) transformed into banks with full banking licenses.

Foreign Exchange and Remittances

Foreign Exchange

Foreign exchange is widely available and rates are competitive. The local currency, the Kyrgyz som, is freely convertible and stable compared to other currencies in the region. While the som is a floating currency, the NBKR periodically intervenes in the market to mitigate the risk of exchange rate shocks. Given significant currency fluctuations among Post-Soviet countries in 2020, the Kyrgyz som was one of the most stable currencies, with the dollar exchange rate rising 18.9 percent over the year. In 2020, the NBKR conducted 29 foreign exchange interventions and in total, sold USD 265.9 million. The NBKR conducts weekly inter-bank currency auctions, in which competitive bids determine market-based transaction prices. Banks usually clear payments within a single business day. Complaints of currency conversion issues are rare. With occasional exceptions in the agricultural and energy sectors, barter transactions have largely been phased out.

Remittance Policies

Remittances typically account for 25-30 percent of GDP. In 2020 net remittances reached $2.37 billion, a 1,25 percent reduction from 2019. In January 2020, the Central Bank of Russia increased the cap on monthly money transfers to the Kyrgyz Republic to 150,000 rubles. (Note: In July 2019, the Central Bank of Russia had lowered the cap on money transfers per month to the Kyrgyz Republic to 100,000 ruble.)

In May 2019, the follow up assessment by the Financial Action Task Force (FATF) concluded that the Kyrgyz Republic demonstrated political commitment in improving its anti-money laundering and countering financing of terrorism, and in addressing technical compliance deficiencies identified in the 2018 Mutual Evaluation Report (MER) assessment. However, the country still lacks a comprehensive national risk assessment and underlying risk-based approach for monitoring and identifying suspicious activities.

Sovereign Wealth Funds

The Kyrgyz Republic’s Sovereign Wealth Fund originated from proceeds of the Kumtor gold mine and is composed of shares in the parent company of the gold mine operator, Centerra Gold. The Kyrgyz Republic owns roughly 77.4 million shares of the company, which are currently valued at USD 836 million.

7. State-Owned Enterprises

There are approximately 106 SOEs in the Kyrgyz Republic that play a significant role in the local economy. However 51 SOEs out of them are not profitable. The State Property Management Fund of the Kyrgyz Republic (www.fgi.gov/kg) is the public executive authority representing the interests of the state. The purpose of the Fund is to ensure the efficiency of the use, management, and privatization of state property. Information on allocations to and earnings from SOEs is included in budget execution reports and is published (in Russian) by the Ministry of Finance and Economy (www.minfin.kg).

Information on SOE assets, earnings, profitability, working capital, and other financial indicators is available on the State Property Management Fund’s website (http://finance.page.kg/index.php?act=svod_profit), though the website is not actively maintained. The State Property Management Fund also reviews the budgets for the largest SOEs, while the Accounting Chamber reviews the accounts of all SOEs and publishes audit reports on their website (www.esep.kg ).

The Kyrgyz Republic does not fully adhere to the OECD Guidelines on Corporate Governance of SOEs. Cronyism and corruption within SOEs are a major obstacle to the Kyrgyz Republic’s economic development. The Heritage Foundation’s 2017 Index of Economic Freedom report noted, elected officials appoint company board members based on political loyalty rather than professional skills and corporate governance knowledge. Positions on boards of directors are frequently used as rewards for political support, and the dynamic has reinforced the patronage system and resulted in poor economic performance and public service delivery. As of February 2021, the presidential decree on “State Personnel Hiring Policy” authorizes the State Personnel Service to direct all state agencies and SOEs to verify the qualifications of all candidates, including education and professional experience, as the basis for personnel appointments.

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

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

Privatization Program

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

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

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

10. Political and Security Environment

The Kyrgyz Republic has a history of political upheaval, most recently in October 2020 when violent election protests ultimately resulted in the annulment of the election results and removal of former President Jeenbekov, who was replaced on an interim basis by current President Sadyr Japarov, who was elected in January 2021. Since independence, the Kyrgyz Republic has had 30 different prime ministers, often necessitating a change in cabinet members with the introduction of each new head of government. In 2005, 2010, and 2020 mass protests against government corruption precipitated the ouster of the country’s elected president. From 2010, the country experienced a period of relative political stability, and in October 2015, the Kyrgyz Republic successfully conducted competitive national parliamentary elections, and a nationwide Constitutional Referendum was held in December 2016. Another Constitutional Referendum is scheduled for April 2021.

In the days following the October 2020 toppling of the government and installation of the interim government led by Sadyr Japarov, political instability spilled over into the commercial sector; following the election protests, local marauders looted and raided the offices and facilities of multiple foreign-joint venture mining enterprises. In the recent past, the extractive resources companies have been the target of localized instability in 2018 and 2019, after relative calm in 2015 and 2016.

The Kyrgyz government has used aggressive tactics for political or economic leverage in negotiations with international companies. In May 2021, the Kyrgyz government assumed full control of the Kumtor Gold Company, a wholly owned subsidiary of the Canadian gold mining company Centerra Gold Inc, following a local court ruling that fined the Canadian company $3 billion for environmental damages. Foreign-affiliated companies have been subjected to local protests, at times resulting in vandalism and violence. In 2019, the majority Chinese company Zhong Ji Mining suspended operations at the Solton-Sary gold mine following violent clashes with hundreds of local residents who blamed the company for environmental degradation. In December 2019, hundreds of protestors demanded local authorities of the Naryn Free Economic Trade Zone to cancel the land lease of a Chinese-Kyrgyz enterprise, resulting in the suspension of a major customs and trade logistics complex. Chinese investment projects continue to be treated with more significant scrutiny and pushback by local residents, relative to Russian, Korean, Japanese, and Western investment initiatives. Since the October incidents, local and foreign businesses show increasing concern about the government’s commitment to ensure the protection of private property and assets.

Supporters of extremist groups such as the Islamic Movement of Uzbekistan (IMU), Al-Qaeda, and the Eastern Turkistan Islamic Movement (ETIM) remain active in Central Asia. These groups have expressed anti-U.S. sentiments and could potentially target U.S.-affiliated organizations and business interests. In August 2016, a suicide bomber, reportedly affiliated with ETIM and trained in Syria, detonated a vehicle-borne improvised explosive device inside the Chinese Embassy compound in Bishkek, located less than 200 yards from the U.S. Embassy. The attack reportedly killed the perpetrator and injured four others, in addition to causing extensive damage. The United States has cooperated with the Kyrgyz Government to improve border and internal security and efforts to return Kyrgyz citizens from conflicts in Iraq and Syria are ongoing. Interethnic tensions persist in the southern part of the country but remain relatively contained from the rest of the country. In the Batken region, demarcation along portions of the Kyrgyz-Uzbek and Kyrgyz-Tajik borders are in dispute. These disputed areas occasionally experience skirmishes between border guards that have resulted in crossfire violence, sometimes involving civilians.

The political and security climate in the Kyrgyz Republic remains fraught with uncertainty as the Japarov administration pursues sweeping constitutional changes to strengthen the powers of the presidency. A resurgence of COVID-19 could not only damage the country’s fragile economy, it may also be the catalyst for further political instability.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

 

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source* USG or international statistical source USG or International Source of Data: BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2020 $7,740 2019 $8,455 www.worldbank.org/en/country
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data: BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2020 4.8 2019 38 BEA data available at https://apps.bea.gov/international/factsheet/
Host country’s FDI in the United States ($M USD, stock positions) 2019 2.8 2019 0 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data
Total inbound stock of FDI as % host GDP N/A N/A 2019 2,5 UNCTAD data available at

https://stats.unctad.org/handbook/EconomicTrends/Fdi.html 

*Source for Host Country Data: National Statistics Committee of the Kyrgyz Republic: http://www.stat.kg; http://www.stat.kg/ru/opendata/category/2315/; http://www.stat.kg/ru/opendata/category/4428/; http://www.stat.kg/ru/statistics/investicii/

Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward 5,886 100% Total Outward 627 100%
China 1,521 27% Canada 611 57%
Canada 1,519 22% China 94.3 16%
Russian Federation 1,073 22% Tajikistan 54 14%
United Kingdom 406 7% Germany 1 11%
Kazakhstan 239 4% United Kingdom 1 1%
“0” reflects amounts rounded to +/- USD 500,000.

Table 4: Sources of Portfolio Investment
Data not available. The Kyrgyz Republic has limited stock and bond markets for portfolio investors. The country is not listed on the IMF’s Coordinated Portfolio Investment Survey (CPIS) site. It is unlikely the country has any large portfolio investors.