Policies Towards Foreign Direct Investment

China continues to be one of the largest recipients of global FDI due to a relatively high economic growth rate and an expanding consumer base that demands diverse, high-quality products.  FDI has historically played an essential role in China’s economic development.  However, due to recent stagnant FDI growth and gaps in China’s domestic technology and labor capabilities, Chinese government officials have prioritized promoting relatively friendly FDI policies promising market access expansion and non-discriminatory, “national treatment” for foreign enterprises through general improvements to the business environment.  They also have made efforts to strengthen China’s regulatory framework to enhance broader market-based competition.

In 2019, China issued an updated nationwide “negative list” that made some modest openings to foreign investment, most notably in the financial sector, and promised future improvements to the investment climate through the implementation of China’s new FIL.  MOFCOM reported that FDI flows to China grew by 5.8 percent year-on-year in 2019, reaching USD137 billion.  In 2019, U.S. businesses expressed concern over China’s weak protection and enforcement of intellectual property rights (IPR); corruption; discriminatory and non-transparent anti-monopoly enforcement that forces foreign companies to license technology at below-market prices; excessive cyber security and personal data-related requirements; increased emphasis on the role of CCP cells in foreign enterprises, and an unreliable legal system lacking in both transparency and the rule of law.

• American Chamber of Commerce China 2019 American Business in China White Paper 
• American Chamber of Commerce China 2019 Business Climate Survey 
• S.-China Business Council’s 2019 China Business Environment Member Survey 

China seeks to support inbound FDI through the “Invest in China” website, where MOFCOM publishes laws, statistics, and other relevant information about investing in China.  Further, each province has a provincial-level investment promotion agency that operates under the guidance of local-level commerce departments.  See:  MOFCOM’s Investment Promotion Website 

Limits on Foreign Control and Right to Private Ownership and Establishment

Entry into the Chinese market is regulated by the country’s “negative lists,” which identify the sectors in which foreign investment is restricted or prohibited, and a catalogue for encouraged foreign investment, which identifies the sectors the government encourages foreign investment to be allocated to.

• The Special Administrative Measures for Foreign Investment Access (̈the “Nationwide Negative List”);
• The Special Administrative Measures for Foreign Investment Access to Pilot Free Trade Zones (the “FTZ Negative List”) used in China’s 18 FTZs
• The Industry Catalogue for Encouraged Foreign Investment (also known as the “FIC”).   The central government has used the FIC to encourage FDI inflows to key sectors – in particular semiconductors and other high-tech industries that would help China achieve MIC 2025 objectives.  The FIC is subdivided into a cross-sector nationwide catalogue and a separate catalogue for western and central regions, China’s least developed regions.

In addition to the above lists, MOFCOM and NDRC also release the annual Market Access Negative List  to guide investments.  This negative list – unlike the nationwide negative list that applies only to foreign investors – defines prohibitions and restrictions for all investors, foreign and domestic.  Launched in 2016, this negative list attempted to unify guidance on allowable investments previously found in piecemeal laws and regulations.  This list also highlights what economic sectors are only open to state-owned investors.

In restricted industries, foreign investors face equity caps or joint venture requirements to ensure control is maintained by a Chinese national and enterprise.  These requirements are often used to compel foreign investors to transfer technology in order to participate in China’s market.  Foreign companies have reported these dictates and decisions are often made behind closed doors and are thus difficult to attribute as official Chinese government policy.  Foreign investors report fearing government retaliation if they publicly raise instances of technology coercion.

Below are a few examples of industries where these sorts of investment restrictions apply:

• Preschool, general high school, and higher education institutes require a Chinese partner.
• Establishment of medical institutions also require a Chinese JV partner.

Examples of foreign investment sectors requiring Chinese control include:

• Selective breeding and seed production for new varieties of wheat and corn.
• Basic telecommunication services.
• Radio and television listenership and viewership market research.

Examples of foreign investment equity caps include:

• 50 percent in automobile manufacturing (except special and new energy vehicles);
• 50 percent in value-added telecom services (except e-commerce domestic multiparty communications, storage and forwarding, call center services);
• 50 percent in manufacturing of commercial and passenger vehicles.

The 2019 editions of the nationwide and FTZ negative lists and the FIC for foreign investment came into effect July 30, 2019.  The central government updated the Market Access Negative List in October 2019.  The 2019 foreign investment negative lists made minor modifications to some industries, reducing the number of restrictions and prohibitions from 48 to 40 in the nationwide negative list, and from 45 to 37 in China’s pilot FTZs.  Notable changes included openings in the oil and gas sector, telecommunications, and shipping of marine products.  On July 2, 2019, Premier Li Keqiang announced new openings in the financial sector, including lifting foreign equity caps for futures by January 2020, fund management by April, and securities by December.  While U.S. businesses welcomed market openings, many foreign investors remained underwhelmed and disappointed by Chinese government’s lack of ambition and refusal to provide more significant liberalization.  Foreign investors noted these announced measures occurred mainly in industries that domestic Chinese companies already dominate.

Other Investment Policy Reviews

China is not a member of the Organization for Economic Co-Operation and Development (OECD), but the OECD Council established a country program of dialogue and co-operation with China in October 1995.  The OECD completed its most recent investment policy review for China in 2008 and published an update in 2013.

• OECD 2008 Report 
• OECD 2013 Update 

China’s 2001 accession to the World Trade Organization (WTO) boosted China’s economic growth and advanced its legal and governmental reforms.  The WTO completed its most recent investment trade review for China in 2018, highlighting that China remains a major destination for FDI inflows, especially in real estate, leasing and business services, and wholesale and retail trade.

• WTO Investment Trade Review for China 
• International Monetary Fund (IMF) information on China 
• FDI Statistics from MOFCOM 

Business Facilitation

In 2019, China climbed more than 40 spots in the World Bank’s Ease of Doing Business Survey to 31st place out of 190 economies.  This was partly due to regulatory reforms that helped streamline some business processes, including improvements to addressing delays in construction permits and resolving insolvency.  This ranking does not account for major challenges U.S. businesses face in China like IPR violations and forced technology transfer.  Moreover, China’s ranking is based on data limited only to the business environments in Beijing and Shanghai.

• World Bank Ease of Doing Business 

Created in 2018, the State Administration for Market Regulation (SAMR) is now responsible for business registration processes.  The State Council established a new website in English, which is more user-friendly than SAMR’s website, to assist foreign investors looking to do business in China.  In December 2019, China also launched a Chinese-language nationwide government service platform on the State Council’s official website.  The platform connected 40 central government agencies with 31 provincial governments, providing information on licensing and project approvals by specific agencies.  The central government published the website under its “improving the business climate” reform agenda, claiming that the website consolidates information and offers cross-regional government online services.

• The State Council Information on Doing Business in China 
• Nationwide Government Service Platform 

Foreign companies still complain about continued challenges when setting up a business relative to their Chinese competitors.  Numerous companies offer consulting, legal, and accounting services for establishing wholly foreign-owned enterprises, partnership enterprises, joint ventures, and representative offices in China.  Investors should review their options carefully with an experienced advisor before choosing a corporate entity or investment vehicle.

Outward Investment

Since 2001, China has pursued a “going-out” investment policy.  At first, the Chinese government mainly encouraged SOEs to secure natural resources and facilitate market access for Chinese exports.  In recent years, China’s overseas investments have diversified with both state and private enterprises investing in nearly all industries and economic sectors.  While China remains a major global investor, total outbound direct investment (ODI) flows fell 8.2 percent year-on-year in 2019 to USD110.6 billion, according to MOFCOM data.

In order to suppress significant capital outflow pressure, the Chinese government created “encouraged,” “restricted,” and “prohibited” outbound investment categories in 2016 to guide Chinese investors, especially in Europe and the United States.  While the guidelines restricted Chinese outbound investment in sectors like property, hotels, cinemas, entertainment, and sports teams, they encouraged outbound investment in sectors that supported Chinese industrial policy by acquiring advanced manufacturing and high-tech assets.  Chinese firms involved in MIC 2025 targeted sectors often receive preferential government financing, subsidies, and access to an opaque network of investors to promote and provide incentives for outbound investment.  The guidance also encourages investments that promote China’s One Belt One Road (OBOR) initiative, which seeks to create connectivity and cooperation agreements between China and dozens of countries via infrastructure investment, construction projects, real estate, etc.

Transparency of the Regulatory System

One of China’s WTO accession commitments was to establish an official journal dedicated to the publication of laws, regulations, and other measures pertaining to or affecting trade in goods, services, trade related aspects of intellectual property rights (TRIPS), and the control of foreign exchange.  Despite mandatory 30-day public comment periods, Chinese ministries continue to post only some draft administrative regulations and departmental rules online, often with a public comment period of less than 30 days.  U.S. businesses operating in China consistently cite arbitrary legal enforcement and the lack of regulatory transparency among the top challenges of doing business in China.  Government agencies often do not make available for public comment and proceed to publish “normative documents” (opinions, circulars, notices, etc.) or other quasi-legal measures to address situations where there is no explicit law or administrative regulation in place.  When Chinese officials claim an assessment or study was made for a law, the methodology of the study and the results are not made available to the public.  As a result, foreign investors face a regulatory system rife with inconsistencies.

In China’s state-dominated economic system, the relationships are often blurred between the CCP, the Chinese government, Chinese business (state- and private-owned), and other Chinese stakeholders.  Foreign-invested enterprises (FIEs) perceive that China prioritizes political goals, industrial policies, and a desire to protect social stability at the expense of foreign investors, fairness, and the rule of law.  The World Bank Global Indicators of Regulatory Governance gave China a composite score of 1.75 out 5 points, attributing China’s relatively low score to the futility of foreign companies appealing administrative authorities’ decisions to the domestic court system; not having easily accessible and updated laws and regulations; the lack of impact assessments conducted prior to issuing new laws; and other concerns about transparency.

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

International Regulatory Considerations

As part of its WTO accession agreement, China agreed to notify the WTO Committee on Technical Barriers to Trade (TBT) of all draft technical regulations.  However, China continues to issue draft technical regulations without proper notification to the TBT Committee.

Legal System and Judicial Independence

The Chinese legal system borrows heavily from continental European legal systems, but with “Chinese characteristics.”  The rules governing commercial activities are found in various laws, regulations, and judicial interpretations, including China’s civil law, contract law, partnership enterprises law, security law, insurance law, enterprises bankruptcy law, labor law, and several interpretations and regulations issued by the Supreme People’s Court (SPC).  While China does not have specialized commercial courts, it has created specialized courts and tribunals for the hearing of intellectual property disputes, including in Beijing, Guangzhou, and Shanghai.  In October 2018, the National People’s Congress approved the establishment of a national SPC appellate tribunal to hear civil and administrative appeals of technically complex intellectual property (IP) cases.

China’s constitution and various laws provide contradictory statements about court independence and the right of judges to exercise adjudicative power free from interference by administrative organs, public organizations, or powerful individuals.  In practice, regulators heavily influence courts, and the Chinese constitution establishes the supremacy of the “leadership of the communist party.”  U.S. companies often avoid challenging administrative decisions or bringing commercial disputes before local courts due to perceptions of futility or government retaliation.

Laws and Regulations on Foreign Direct Investment

China’s new investment law, the FIL, was passed on March 2019 and came into force on January 1, 2020, replacing China’s previous foreign investment framework.  The FIL provides a five-year transition period for foreign enterprises established under previous foreign investment laws, after which all foreign enterprises will be subject to the same domestic laws as Chinese companies, such as the Company Law and, where applicable, the Partnership Enterprise Law.  The FIL intends to abolish the case-by-case review and approval system on market access for foreign investment and standardize the regulatory regimes for foreign investment by including the negative list management system, a foreign investment information reporting system, and a foreign investment security review system all under one document.  The FIL also seeks to address common complaints from foreign business and government by explicitly banning forced technology transfers, promising better IPR protection, and establishing a complaint mechanism for investors to report administrative abuses.  However, foreign investors complain that the FIL and its implementing regulations lack substantive guidance, providing Chinese ministries and local officials significant regulatory discretion, including the ability to retaliate against foreign companies.

In addition to the FIL, in 2019, the State Council issued other substantive guidelines and administrative regulations, including:

• Implementing Regulations of the Foreign Investment Law of the People’s Republic of China (Implementing Regulations);
• Measures for Foreign Investment Information Reporting (Measures No. 2 );
• Notice of the General Office of the State Council on Launching the Security Review  

System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (Notice 6);

• Regulation on Optimizing the Business Environment (Order No. 722); and
• Opinions on Further Improving the Utilization of Foreign Investment (Opinions 2019).

Other relevant legislation issued by government entities in 2019, include:

• Supreme Court Judicial Interpretation of the FIL 

Draft legislation issued by other government entities in 2020:

• Draft Amendments to the Anti-Monopoly Law;

In addition to central government laws and implementation guidelines, ministries and local regulators have issued over 1,000 rules and regulatory documents that directly affect foreign investments within their geographical areas.  While not comprehensive, a list of published and official Chinese laws and regulations is available at:  http://www.gov.cn/zhengce/ .

FDI Laws on Investment Approvals

Foreign investments in industries and economic sectors that are not explicitly restricted or prohibited on the foreign investment negative or market access lists do not require MOFCOM pre-approval.  However, investors have complained that in practice, investing in an industry not on the negative list does not guarantee a foreign investor “national treatment,” or treatment no less favorable than treatment accorded to a similarly-situated domestic investor.  Foreign investors must still comply with other steps and approvals like receiving land rights, business licenses, and other necessary permits.  When a foreign investment needs ratification from the NDRC or a local development and reform commission, that administrative body is in charge of assessing the project’s compliance with a panoply of Chinese laws and regulations.  In some cases, NDRC also solicits the opinions of relevant Chinese industrial regulators and consulting agencies acting on behalf of Chinese domestic firms, creating potential conflicts of interest disadvantageous to foreign firms.

Competition and Anti-Trust Laws

The Anti-Monopoly Bureau of the SAMR enforces China’s Anti-Monopoly Law (AML) and oversees competition issues at the central and provincial levels.  The agency reviews mergers and acquisitions, and investigates cartel and other anticompetitive agreements, abuse of a dominant market position, and abuse of administrative powers by government agencies.  SAMR issues new implementation guidelines and antitrust provisions to fill in gaps in the AML, address new trends in China’s market, and help foster transparency in AML enforcement.  Generally, SAMR has sought public comment on proposed measures and guidelines, although comment periods can be less than 30 days.  In 2019, the agency put into effect provisions on abuse of market dominance, prohibition of monopoly agreements, and restraint against abuse of administrative powers to restrict competition.  In January 2020, SAMR published draft amendments to the AML for comment, which included, among other changes, stepped-up fines for AML violations and expanded factors to consider abuse of market dominance by Internet companies.  (This is the first step in a lengthy process to amend the AML.)  SAMR also oversees the Fair Competition Review System (FCRS), which requires government agencies to conduct a review prior to issuing new and revising existing laws, regulations, and guidelines to ensure such measures do not inhibit competition.

While these are seen as positive measures, foreign businesses have complained that enforcement of competition policy is uneven in practice and tends to focus on foreign companies.   Foreign companies have expressed concern that the government uses AML enforcement as an extension of China’s industrial policies, particularly for companies operating in strategic sectors.  The AML explicitly protects the lawful operations of government monopolies in industries that affect the national economy or national security.   U.S. companies have expressed concerns that SAMR consults with other Chinese agencies when reviewing M&A transactions, allowing other agencies to raise concerns, including those not related to antitrust enforcement, in order to block, delay, or force transacting parties to comply with preconditions in order to receive approval.  Foreign companies have also complained that China’s enforcement of AML facilitated forced technology transfer or licensing to local competitors.

Expropriation and Compensation

Chinese law prohibits nationalization of FIEs, except under vaguely specified “special circumstances” where there is a national security or public interest need. Chinese law requires fair compensation for an expropriated foreign investment, but does not detail the method used to calculate the value of the foreign investment.  The Department of State is not aware of any cases since 1979 in which China has expropriated a U.S. investment, although the Department has notified Congress through the annual 527 Investment Dispute Report of several cases of concern.

Dispute Settlement

ICSID Convention and New York Convention

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

Investor-State Dispute Settlement  (ISDS)

Initially, China was disinclined to accept ISDS as a method to resolve investment disputes based on its suspicions of international law and international arbitration, as well as its emphasis on state sovereignty.  China’s early BITs, such as the 1982 China–Sweden BIT, only included state–state dispute settlement.  As China has become a capital exporter under its initiative of “Going Global” and infrastructure investments under the OBOR initiative, its views on ISDS have shifted to allow foreign investors with unobstructed access to international arbitration to resolve any investment dispute that cannot be amicably settled within six months.  Chinese investors did not use ISDS mechanisms until 2007, and the first known ISDS case against China was initiated in 2011 by Malaysian investors.  On July 19, 2019, China submitted its proposal on ISDS reform to the United Nations Commission on International Trade Law (UNCITRAL) Working Group III.  Under the proposal, China reaffirmed its commitment to ISDS as an important mechanism for resolving investor-state disputes under public international law.  However, it suggested various pathways for ISDS reform, including supporting the study of a permanent appellate body. including supporting the study of a permanent appellate body.

International Commercial Arbitration and Foreign Courts

Chinese officials typically urge private parties to resolve commercial disputes through informal conciliation.  If formal mediation is necessary, Chinese parties and the authorities typically prefer arbitration to litigation.  Many contract disputes require arbitration by the Beijing-based China International Economic and Trade Arbitration Commission (CIETAC).  Established by the State Council in 1956 under the auspices of the China Council for the Promotion of International Trade (CCPIT), CIETAC is China’s most widely utilized arbitral body for foreign-related disputes.  Some foreign parties have obtained favorable rulings from CIETAC, while others have questioned CIETAC’s fairness and effectiveness.  Besides CIETAC, there are also provincial and municipal arbitration commissions.  A foreign party may also seek arbitration in some instances from an offshore commission.  Foreign companies often encounter challenges in enforcing arbitration decisions issued by Chinese and foreign arbitration bodies.  In these instances, foreign investors may appeal to higher courts.  The Chinese government and judicial bodies do not maintain a public record of investment disputes.  The SPC maintains an annual count of the number of cases involving foreigners but does not provide details about the cases.  Rulings in some cases are open to the public.
In 2018, the SPC established the China International Commercial Court (CICC) to adjudicate international commercial cases, especially cases related to the OBOR initiative.  The first CICC was established in Shenzhen, followed by a second court in Xi’an.  The court held its first public hearing on May 2019, involving a Chinese company suing an Italian company, and issued its first ruling on March 2020, siding with the Chinese company.  Parties to a dispute before the CICC can only be represented by Chinese law-qualified lawyers, as foreign lawyers do not have a right of audience in Chinese courts.  Unlike other international courts, foreign judges are not permitted to be part of the proceedings.  Judgments of the CICC, given it is a part of the SPC, cannot be appealed from, but are subject to possible “retrial” under the Civil Procedure Law.  Local contacts and academics note that to-date, the CICC has not reviewed any OBOR or infrastructure related cases and question the CICC’s ability to provide “equal protection” to foreign investors.

China has bilateral agreements with 27 countries on the recognition and enforcement of foreign court judgments, but not with the United States.  However, under Chinese law, local courts must prioritize China’s laws and other regulatory measures above foreign court judgments.

Bankruptcy Regulations

China introduced formal bankruptcy laws in 2007, under the Enterprise Bankruptcy Law, which applied to all companies incorporated under Chinese laws and subject to Chinese regulations.  However, courts routinely rejected applications from struggling businesses and their creditors due to the lack of implementation guidelines and concerns over social unrest.  Local government-led negotiations resolved most corporate debt disputes, using asset liquidation as the main insolvency procedure.  Many insolvent Chinese companies survived on state subsidies and loans from state-owned banks, while others defaulted on their debts with minimal payments to creditors.  After a decade of heavy borrowing, China’s growth has slowed and forced the government to make needed bankruptcy reforms.  China now has more than 90 U.S.-style specialized bankruptcy courts.  In 2019, the government added new courts in Beijing, Shanghai and Shenzhen.  Court-appointed administrators—law firms and accounting firms that help verify claims, organize creditors’ meetings, and list and sell assets online as authorities look to handle more cases and process them faster.  China’s SPC recorded over 19,000 liquidation and bankruptcy cases in 2019, double the number of cases in 2017.  While Chinese authorities are taking steps to address mounting corporate debt and are gradually allowing some companies to fail, companies generally avoid pursing bankruptcy because of the potential for local government interference and fear of losing control over the bankruptcy outcome.  According to experts, Chinese courts not only lack the resources and capacity to handle bankruptcy cases, but bankruptcy administrators, clerks, and judges lack relevant experience.

Investment Incentives

To attract foreign investment, different provinces and municipalities offer preferential packages like a temporary reduction in taxes, resources and land use benefits, reduction in import or export duties, special treatment in obtaining basic infrastructure services, streamlined government approvals, research and development subsidies, and funding for initial startups.  Often, these packages stipulate that foreign investors must meet certain benchmarks for exports, local content, technology transfer, and other requirements.  The Chinese government incentivizes foreign investors to participate in initiatives like MIC 2025 that seek to transform China into an innovation-based economy.  Announced in 2015, China’s MIC 2025 roadmap has prioritized the following industries:  new-generation information technology, advanced numerical-control machine tools and robotics, aerospace equipment, maritime engineering equipment and vessels, advanced rail, new-energy vehicles, energy equipment, agricultural equipment, new materials, and biopharmaceuticals and medical equipment.  While mentions of MIC 2025 have all but disappeared from public discourse, a raft of policy announcements at the national and sub-national levels indicate China’s continued commitment to developing these sectors.  Foreign investment plays an important role in helping China move up the manufacturing value chain.  However, foreign investment remains closed off to many economic sectors that China deems sensitive due to broadly defined national or economic security concerns.

Foreign Trade Zones/Free Ports/Trade Facilitation

In 2013, the State Council announced the Shanghai pilot FTZ to provide open and high-standard trade and investment services to foreign companies.  China gradually scaled up its FTZ pilot program to 12 FTZs, launching an additional six FTZs in 2019.  China’s FTZs are in: Tianjin, Guangdong, Fujian, Chongqing, Hainan, Henan, Hubei, Liaoning, Shaanxi, Sichuan, Zhejiang, Jiangsu, Shandong, Hebei, Heilongjiang, Guanxi, and Yunnan provinces.  The goal of all of China’s FTZs is to provide a trial ground for trade and investment liberalization measures and to introduce service sector reforms, especially in financial services, that China expects to eventually introduce in other parts of the domestic economy.  The FTZs promise foreign investors “national treatment” for the market access phase of an investment in industries and sectors not listed on the FTZ negative list, or on the list of industries and economic sectors from which foreign investment is restricted or prohibited.  However, the 2019 FTZ negative list lacked substantive changes, and many foreign firms have reported that in practice, the degree of liberalization in the FTZs is comparable to opportunities in other parts of China.  The stated purpose of FTZs is also to integrate these areas more closely with the OBOR initiative.

Performance and Data Localization Requirements

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

Furthermore, China’s evolving cybersecurity and personal data protection regime includes onerous restrictions on firms that generate or process data in China, such as requirements for certain firms to store data in China.  Restrictions exist on the transfer of personal information of Chinese citizens outside of China.  These restrictions have prompted many firms to review how their networks manage data.  Foreign firms also fear that PRC laws call for the use of “secure and controllable,” “secure and trustworthy,” etc. technologies will curtail sales opportunities for foreign firms or pressure foreign companies to disclose source code and other proprietary intellectual property.  In October 2019, China adopted a Cryptography Law that includes restrictive requirements for commercial encryption products that “involve national security, the national economy and people’s lives, and public interest.”  This broad definition of commercial encryption products that must undergo a security assessment raises concerns that implementation will lead to unnecessary restrictions on foreign information and communications technology (ICT) products and services.  Further, prescriptive technology adoption requirements, often in the form of domestic standards that diverge from global norms, in effect give preference to domestic firms.  These requirements potentially jeopardize IP protection and overall competitiveness of foreign firms operating in China.

Real Property

The Chinese state owns all urban land, and only the state can issue long-term land leases to individuals and companies, including foreigners, subject to many restrictions.  Chinese property law stipulates that residential property rights renew automatically, while commercial and industrial grants renew if the renewal does not conflict with other public interest claims.  Several foreign investors have reported revocation of land use rights so that Chinese developers could pursue government-designated building projects.  Investors often complain about insufficient compensation in these cases.  In rural China, collectively owned land use rights are more complicated.  The registration system suffers from unclear ownership lines and disputed border claims, often at the expense of local farmers whom village leaders exclude in favor of “handshake deals” with commercial interests.  China’s Securities Law defines debtor and guarantor rights, including rights to mortgage certain types of property and other tangible assets, including long-term leases.  Chinese law does not prohibit foreigners from buying non-performing debt, but such debt must be acquired through state-owned asset management firms, and PRC officials often use bureaucratic hurdles to limit foreigners’ ability to liquidate assets.

Intellectual Property Rights

In 2019, China’s legislature promulgated multiple reforms to China’s IP protection and enforcement systems.  In January, the Guidelines on Interim and Preliminary Injunctions for Intellectual Property Disputes came into force. These SPC guidelines provide added clarity to the IP injunction process and offer additional procedural safeguards for trade secret cases.  In April, the Standing Committee of the National People’s Congress passed amendments to the Trademark Law, the Anti-Unfair Competition Law (AUCL), and the Administrative Licensing Law, among other legislation that increases the potential punitive penalty for willful infringement to up to five times the value of calculated damages.  China also amended the Administrative Licensing Law to provide administrative penalties for government officials who illegally disclose trade secrets or require the transfer of technology for the granting of administrative licenses.  Similarly, in March, China’s State Council revised several regulations that U.S. and EU enterprises and governments had criticized for discriminating against foreign technology and IP holders.  Finally, in November, the Amended Guidelines for Patent Examination came into effect.  This measure provides further procedural guidance and defines patentability requirements for stem cells and graphical user interfaces.

Despite the changes to China’s legal and regulatory IP regime, some aspects of China’s IP protection regime fall short of international best practices.  Ineffective enforcement of Chinese laws and regulations remains a significant obstacle for foreign investors trying to protect their IP, and counterfeit and pirated goods manufactured in China continue to pose a challenge.  U.S. rights holders continued to experience widespread infringement of patents, trademarks, copyrights, and trade secrets, as well as problems with competitors gaming China’s IP protection and enforcement systems.  In some sectors, Chinese law imposes requirements that U.S. firms develop their IP in China or transfer their IP to Chinese entities as a condition to accessing the Chinese market, or to obtain tax and other preferential benefits available to domestic companies.  Chinese policies can effectively require U.S. firms to localize research and development activities, making their IP much more susceptible to theft or illicit transfer.  These practices are documented in the 2019 Section 301 Report released by the Office of the U.S. Trade Representative (USTR).  The PRC also remained on the Priority Watch List in the 2020 USTR Special 301 Report, and several Chinese physical and online markets were listed in the 2019 USTR Review of Notorious Markets for Counterfeiting and Piracy.  Under the recently signed U.S.-China Phase One trade agreement, China is required to make a number of structural reforms to its IP regime, which will be captured in an IP action plan.

For detailed information on China’s environment for IPR protection and enforcement, please see the following reports:

• Economic And Trade Agreement Between The Government Of The United States Of America And The Government Of The People’s Republic Of China Text 
• USTR Section 301 Report on China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation 
• USTR 2020 Special 301 Report (see section on China)  
• USTR’s 2019 National Trade Estimate Report on Foreign Trade Barriers in China (see section on China) 
• USTR’s 2019 Report to Congress on China’s WTO Compliance 
• USTR’s 2019 Review of Notorious Markets for Counterfeiting and Piracy (see China)   

Capital Markets and Portfolio Investment

China’s leadership has stated that it seeks to build a modern, highly-developed, and multi-tiered capital market.  Since their founding over three decades ago, the Shanghai and Shenzhen Exchanges, combined, are ranked the second largest stock market in the world with over USD5 trillion in assets.  China’s bond market has similarly expanded significantly to become the third largest worldwide, totaling approximately USD13 trillion.  Direct investment by private equity and venture capital firms has increased significantly, but has faced setbacks due to China’s capital controls, which complicate the repatriation of returns.  In December 2019, the State Council and China’s banking and securities regulatory authorities issued a set of measures that would remove in 2020 foreign ownership caps in select segments of China’s financial sector.  Specifically, foreign investors can wholly own insurance and futures firms as of January 1, asset management companies as of April 1, and securities firms as of December 1, 2020.

China has been an IMF Article VIII member since 1996 and generally refrains from restrictions on payments and transfers for current international transactions.  However, the government has used administrative and preferential policies to encourage credit allocation towards national priorities, such as infrastructure investments.  As of 2019, over 40 sovereign entities and private sector firms, including Daimler and Standard Chartered HK, have since issued roughly USD48 billion in “Panda Bonds,” Chinese renminbi (RMB)-denominated debt issued by foreign entities in China.  China’s private sector can also access credit via bank loans, bond issuance, and wealth management and trust products.  However, the vast majority of bank credit is disbursed to state-owned firms, largely due to distortions in China’s banking sector that have incentivized lending to state-affiliated entities over their private sector counterparts.

The Monetary and Banking System

China’s monetary policy is run by the People’s Bank of China (PBOC), China’s central bank.  The PBOC has traditionally deployed various policy tools, such as open market operations, reserve requirement ratios, benchmark rates and medium-term lending facilities, to control credit growth.  The PBOC had previously also set quotas on how much banks could lend, but abandoned the practice in 1998.  As part of its efforts to shift towards a more market-based system, the PBOC announced in 2019 that it will reform its one-year loan prime rate (LPR), which will serve as an anchor reference for Chinese lenders.  The LPR is based on the interest rate for one-year loans that 18 banks offer their best customers.  Despite these measures to move towards more market-based lending, China’s financial regulators still influence the volume and destination of Chinese bank loans through “window guidance” – unofficial directives delivered verbally – as well as through mandated lending targets for key economic groups, such as small and medium sized enterprises.

The China Banking and Insurance Regulatory Commission (CBIRC) oversees China’s roughly 4,000 lending institutions.  At the end of the first quarter of 2019, Chinese banks’ total assets reached RMB 276 trillion (USD40 trillion).  China’s “Big Five” – Agricultural Bank of China, Bank of China, Bank of Communications, China Construction Bank, and Industrial and Commercial Bank of China – dominate the sector and are largely stable, but over the past year, China has experienced regional pockets of banking stress, especially among smaller lenders.  Reflecting the level of weakness among these banks, in November 2019, the PBOC announced that about one in 10 of China’s banks received a “fail” rating following an industry-wide review.  The assessment deemed 420 firms, all rural financial institutions, “extremely risky.”  The official rate of non-performing loans among China’s banks is relatively low: below two percent as of the end of 2019.  However, analysts believe the actual figure may be significantly higher.  Bank loans continue to provide the majority of credit options (reportedly around 66 percent in 2019) for Chinese companies, although other sources of capital, such as corporate bonds, equity financing, and private equity are quickly expanding their scope, reach, and sophistication in China.  In December 2019, the Coronavirus (COVID-19) pandemic emerged in Wuhan, China.  In response, the PBOC established a variety of programs to stimulate the economy, including a re-lending scheme of USD4.28 billion and a special credit line of USD50 billion for policy banks.  In addition, the Ministry of Industry and Information Technologies established a list of companies vital to COVID-19 efforts, which would be eligible to receive additional loans and subsidies from the Ministry of Finance.

As part of a broad campaign to reduce debt and financial risk, Chinese regulators over the last several years have implemented measures to rein in the rapid growth of China’s “shadow banking” sector, which includes wealth management and trust products.  These measures have achieved positive results: the share of trust loans, entrusted loans, and undiscounted bankers’ acceptances dropped a total of seven percent in 2019 as a share of total social financing (TSF) – a broad measure of available credit in China.  TSF’s share of corporate bonds jumped from a negative 2.31 percent in 2017 to 12.7 percent in 2019.  In October 2019, the CBIRC announced that foreign owned banks will be allowed to establish wholly-owned banks and branches in China.  However, analysts noted there are often licenses and other procedures that can drag out the process in this sector, which is already dominated by local players.  Nearly all of China’s major banks have correspondent banking relationships with foreign banks, including the Bank of China, which has correspondent banking relationships with more than 1,600 institutions in 179 countries and regions.  Foreigners are eligible to open a bank account in China, but are required to present a passport and/or Chinese government issued identification.

Foreign Exchange and Remittances

Foreign Exchange

While the central bank’s official position is that companies with proper documentation should be able to freely conduct business, in practice, companies have reported challenges and delays in obtaining approvals for foreign currency transactions by sub-national regulatory branches.  Chinese authorities instituted strict capital control measures in 2016, when China recorded a surge in capital flight that reduced its foreign currency reserves by about USD1 trillion, stabilizing to around USD3 trillion today.  China has since announced that it will gradually reduce those controls, but market analysts expect they would be re-imposed if capital outflows accelerate again.  Chinese foreign exchange rules cap the maximum amount of RMB individuals are allowed to convert into other currencies at approximately USD50,000 each year and restrict them from directly transferring RMB abroad without prior approval from the State Administration of Foreign Exchange (SAFE).  In 2017, authorities further restricted overseas currency withdrawals by banning sales of life insurance products and capping credit card withdrawals at USD5,000 per transaction.  SAFE has not reduced the USD50,000 quota, but during periods of higher than normal capital outflows, banks are reportedly instructed by SAFE to increase scrutiny over individuals’ requests for foreign currency and to require additional paperwork clarifying the intended use of the funds, with the express intent of slowing capital outflows.

China’s exchange rate regime is managed within a band that allows the currency to rise or fall by 2 percent per day from the “reference rate” set each morning.  In August 2019, the U.S. Treasury Department designated China a “currency manipulator,” given China’s large-scale interventions in the foreign exchange market.  Treasury removed this designation in January 2020.

Remittance Policies

According to China’s FIL, as of January 1, 2020, funds associated with any forms of investment, including investment, profits, capital gains, returns from asset disposal, IPR loyalties, compensation, and liquidation proceeds, may be freely converted into any world currency for remittance.  Under Chinese law, FIEs do not need pre-approval to open foreign exchange accounts and are allowed to retain income as foreign exchange or to convert it into RMB without quota requirements.  The remittance of profits and dividends by FIEs is not subject to time limitations, but FIEs need to submit a series of documents to designated banks for review and approval.  The review period is not fixed and is frequently completed within one or two working days of the submission of complete documents.  For remittance of interest and principal on private foreign debt, firms must submit an application form, a foreign debt agreement, and the notice on repayment of the principal and interest.  Banks will then check if the repayment volume is within the repayable principal.  There are no specific rules on the remittance of royalties and management fees.  In August 2018, SAFE raised the reserve requirement for foreign currency transactions from zero to 20 percent, significantly increasing the cost of foreign currency transactions.

Sovereign Wealth Funds

China officially has only one sovereign wealth fund (SWF), the China Investment Corporation (CIC), which was launched to help diversify China’s foreign exchange reserves.  Established in 2007 with USD200 billion in initial registered capital, CIC currently manages over USD940 billion in assets as of the close of 2018 and invests on a 10-year time horizon.  CIC has since evolved into three subsidiaries:

• CIC International was established in September 2011 with a mandate to invest in and manage overseas assets.  It conducts public market equity and bond investments, hedge fund, multi-asset and real estate investments, private equity (including private credit) fund investments, co-investments, and minority investments as a financial investor.
• CIC Capital was incorporated in January 2015 with a mandate to specialize in making direct investments to enhance CIC’s investment in long-term assets.
• Central Huijin makes equity investments in Chinese state-owned financial institutions.

CIC publishes an annual report containing information on its structure, investments, and returns.  CIC invests in diverse sectors, including financial services, consumer products, information technology, high-end manufacturing, healthcare, energy, telecommunications, and utilities.  China also operates other funds that function in part like sovereign wealth funds, including:  China’s National Social Security Fund, with an estimated USD325 billion in assets; the China-Africa Development Fund (solely funded by the China Development Bank), with an estimated USD10 billion in assets; the SAFE Investment Company, with an estimated USD417.8 billion in assets; and China’s state-owned Silk Road Fund, established in December 2014 with USD40 billion in assets to foster investment in OBOR partner countries.  Chinese state-run funds do not report the percentage of their assets that are invested domestically.  However, Chinese state-run funds follow the voluntary code of good practices known as the Santiago Principles and participate in the IMF-hosted International Working Group on SWFs.  The Chinese government does not have any formal policies specifying that CIC invest funds consistent with industrial policies or in government-designated projects, although CIC is expected to pursue government objectives.  CIC generally adopts a “passive” role as a portfolio investor.

China has approximately 150,000 wholly-owned SOEs, of which 50,000 are owned by the central government, and the remainder by local or provincial governments.  SOEs, both central and local, account for 30 to 40 percent of total gross domestic product (GDP) and about 20 percent of China’s total employment.  Non-financial SOE assets totaled roughly USD30 trillion.  SOEs can be found in all sectors of the economy, from tourism to heavy industries.  In addition to wholly-owned enterprises, state funds are spread throughout the economy, such that the state may also be the majority or largest shareholder in a nominally private enterprise.  China’s leading SOEs benefit from preferential government policies aimed at developing bigger and stronger “national champions.”  SOEs enjoy favored access to essential economic inputs (land, hydrocarbons, finance, telecoms, and electricity) and exercise considerable power in markets like steel and minerals.  SOEs have long enjoyed preferential access to credit and the ability to issue publicly traded equity and debt.  A comprehensive, published list of all Chinese SOEs does not exist.

PRC officials have indicated China intends to utilize OECD guidelines to improve the professionalism and independence of SOEs, including relying on Boards of Directors that are independent from political influence.  Other recent reforms have included salary caps, limits on employee benefits, and attempts to create stock incentive programs for managers who have produced mixed results.  However, analysts believe minor reforms will be ineffective if SOE administration and government policy remain intertwined, and Chinese officials have made minimal progress in fundamentally changing the regulation and business conduct of SOEs.  SOEs continue to hold dominant shares in their respective industries, regardless of whether they are strategic, which may further restrain private investment in the economy.  Among central SOEs managed by the State-owned Assets Supervision and Administration Commission (SASAC), senior management positions are mainly filled by senior CCP members who report directly to the CCP, and double as the company’s party secretary.  SOE executives outrank regulators in the CCP rank structure, which minimizes the effectiveness of regulators in implementing reforms.  The lack of management independence and the controlling ownership interest of the state make SOEs de facto arms of the government, subject to government direction and interference.  SOEs are rarely the defendant in legal disputes, and when they are, they almost always prevail.  U.S. companies often complain about the lack of transparency and objectivity in commercial disputes with SOEs.

Privatization Program

Since 2013, the PRC government has periodically announced reforms to SOEs that included selling SOE shares to outside investors or a mixed ownership model, in which private companies invest in SOEs and outside managers are hired.  The government has tried these approaches to improve SOE management structures, emphasize the use of financial benchmarks, and gradually infuse private capital into some sectors traditionally monopolized by SOEs like energy, telecommunications, and finance.  In practice, however, reforms have been gradual, as the PRC government has struggled to implement its SOE reform vision and often preferred to utilize a SOE consolidation approach.  Recently, Xi and other senior leaders have increasingly focused reform efforts on strengthening the role of the state as an investor or owner of capital, instead of the old SOE model in which the state was more directly involved in managing operations.

General awareness of RBC standards (including environmental, social, and governance issues) is a relatively new concept to most Chinese companies, especially companies that exclusively operate in China’s domestic market.  Chinese laws that regulate business conduct use voluntary compliance, are often limited in scope, and are frequently cast aside when other economic priorities supersede RBC priorities.  In addition, China lacks mature and independent non-governmental organizations (NGOs), investment funds, worker unions, and other business associations that promote RBC, further contributing to the general lack of awareness in Chinese business practices.  The Foreign NGO Law remains a concern for U.S. organizations due to the restrictions on many NGO activities, including promotion of RBC and corporate social responsibility (CSR) best practices.  For U.S. investors looking to partner with a Chinese company or expand operations, finding partners that meet internationally recognized standards in areas like labor, environmental protection, worker safety, and manufacturing best practices can be a significant challenge.  However, the Chinese government has placed greater emphasis on protecting the environment and elevating sustainability as a key priority, resulting in more Chinese companies adding environmental concerns to their CSR initiatives.  As part of these efforts, Chinese ministries have signed several memoranda of understanding with international organizations such as the OECD to cooperate on RBC initiatives.  As a result, MOFCOM in 2016 launched the RBC Platform, which serves as the national contact point on RBC issues and supplies information to companies about RBC best practices in China.

Since Xi’s rise to power in 2012, China has undergone an intensive and large-scale anti-corruption campaign, with investigations reaching into all sectors of the government, military, and economy.  Xi labeled endemic corruption an “existential threat” to the very survival of the CCP.  Since then, each CCP annual plenum has touched on judicial, administrative, and CCP discipline reforms needed to root out corruption.  In 2018, the CCP amended the constitution to enable the CCP’s Central Commission for Discipline Inspection (CCDI) to become a state organ, calling the new body the National Supervisory Commission-Central Commission for Discipline Inspection (NSC-CCDI). The NSC-CCDI wields the power to investigate any public official and those involved in corrupt officials’ dealings.  From 2012 to 2019, the NSC-CCDI claimed it investigated 2.78 million cases – more than the total of the preceding 10 years.  In 2019 alone, the NSC-CCDI investigated 619,000 cases and disciplined approximately 587,000 individuals, of whom 45 were officials at or above the provincial or ministerial level.  The PRC’s overseas fugitive-hunting campaign, called “Operation Skynet,” has led to the capture of more than 7,500 fugitives suspected of corruption who were living in other countries.  The PRC did not notify host countries of these operations.  In 2019 alone, NSC-CCDI reported apprehending 2,041 alleged fugitives suspected of official crimes, including 860 corrupt officials, as well as recovering about USD797.5 million in stolen money.

Anecdotal information suggests the PRC’s anti-corruption crackdown is inconsistently and discretionarily applied, raising concerns among foreign companies in China.  For example, to fight rampant commercial corruption in the medical/pharmaceutical sector, the PRC’s health authority issued “black lists” of firms and agents involved in commercial bribery, including several foreign companies.  Anecdotal information suggests many PRC officials responsible for approving foreign investment projects, as well as some routine business transactions, delayed approvals so as not to arouse corruption suspicions, making it increasingly difficult to conduct normal commercial activity.  While central government leadership has welcomed increased public participation in reporting suspected corruption at lower levels, direct criticism of central government leadership or policies remains off-limits and is seen as an existential threat to China’s political and social stability.

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

Resources to Report Corruption

The following government organization receives public reports of corruption:  Anti-Corruption Reporting Center of the CCP Central Commission for Discipline Inspection and the Ministry of Supervision, Telephone Number:  +86 10 12388.

Foreign companies operating in China face a low risk of political violence.  However, protests in Hong Kong in 2019 exposed foreign investors to political risk due to Hong Kong’s role as an international hub for investment into and out of China.  The CCP also punished companies that expressed support for Hong Kong protesters — most notably, a Chinese boycott of the U.S. National Basketball Association after one team’s general manager expressed his personal view supporting the Hong Kong protesters.  In the past, the PRC government has also encouraged protests or boycotts of products from countries like the United States, South Korea, Japan, Norway, Canada, and the Philippines, in retaliation for unrelated policy decisions.  Examples of politically motivated economic retaliation against foreign firms include boycott campaigns against Korean retailer Lotte in 2016 and 2017 in retaliation for the South Korean government’s decision to deploy the Terminal High Altitude Area Defense (THAAD) to the Korean Peninsula; and the PRC’s retaliation against Canadian companies and citizens for Canada’s arrest of Huawei Chief Financial Officer Meng Wanzhou.

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

For U.S. companies operating in China, finding, developing, and retaining domestic talent at the management and skilled technical staff levels remain challenging for foreign firms.  In addition, labor costs, including salaries along with other production inputs, continue to rise.  Foreign firms continue to cite air pollution concerns as a major hurdle in attracting and retaining qualified foreign talent.  Chinese labor law does not provide for freedom of association or protect the right to strike.  The PRC has not ratified the International Labor Organization conventions on freedom of association, collective bargaining, or forced labor, but it has ratified conventions prohibiting child labor and employment discrimination.  Foreign companies complain of difficulty navigating China’s labor and social insurance laws, including local implementation guidelines. Compounding the complexity, due to ineffective enforcement of labor contract laws, Chinese domestic employers often hire local employees without contracts, putting foreign firms at a disadvantage.  Without written contracts, workers struggle to prove employment, thus losing basic protections such as severance if terminated.  Moreover, in 2018 and 2019, there were multiple U.S. government, media, and NGO reports that persons detained in internment camps in Xinjiang were subjected to forced labor in violation of international labor law and standards.  In October 2019, CBP issued a Withhold Release Order barring importation into the United States of garments produced by Hetian Taida Apparel Co., Ltd. in Xinjiang, which were determined to be produced with prison or forced labor in violation of U.S. import laws.  The Commerce Department added 28 Chinese commercial and government entities to its Entity List for their complicity in human rights abuses.

The All China Federation of Trade Unions (ACFTU) is the only union recognized under the law.  Establishing independent trade unions is illegal.  The law allows for “collective bargaining,” but in practice, focuses solely on collective wage negotiations.  The Trade Union Law gives the ACFTU, a CCP organ chaired by a member of the Politburo, control over all union organizations and activities, including enterprise-level unions.  ACFTU enterprise unions require employers to pay mandatory fees, often through the local tax bureau, equaling a negotiated minimum of 0.5 percent to a standard two percent of total payroll.  While labor laws do not protect the right to strike, “spontaneous” worker protests and work stoppages regularly occur.  Official forums for mediation, arbitration, and other similar mechanisms of alternative dispute resolution often are ineffective in resolving labor disputes.  Even when an arbitration award or legal judgment is obtained, getting local authorities to enforce judgments is problematic.

*China’s National Bureau of Statistics (converted at 6.8 RMB/USD estimate)
**China’s 2019 Yearbook (Annual Economic Data from China’s Economic Ministries:  MOFCOM, NBS, and Ministry of Finance)

Source:  IMF Coordinated Direct Investment Survey (CDIS)

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

Policies Towards Foreign Direct Investment

Egypt’s completion of the most recent three-year, $13 billion IMF Extended Fund Facility and its associated reform package helped stabilize Egypt’s macroeconomy, introduced important subsidy and social spending reforms, and helped restore investor confidence in the Egyptian economy.  The flotation of the Egyptian Pound (EGP) in November 2016 and the restart of Egypt’s interbank foreign exchange (FX) market as part of this program was the first major step in restoring investor confidence that immediately led to increased portfolio investment and should lead to increased FDI over the long term.  Other important reforms have included a new investment law and an industrial licensing law in 2017, a new bankruptcy law in 2018, and other reforms aimed at reducing regulatory overhang and improving the ease of doing business. Egypt’s government has announced plans to further improve its business climate through investment promotion, facilitation, more efficient business services, and the implementation of investor-friendly policies.

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

The Tenders Law (Law 89 of 1998) requires the government to consider both price and best value in awarding contracts and to issue an explanation for refusal of a bid. However, the law contains preferences for Egyptian domestic contractors, who are accorded priority if their bids do not exceed the lowest foreign bid by more than 15 percent.

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

The General Authority for Investment and Free Zones (GAFI, http://gafi.gov.eg) is the principal government body that regulates and facilitates foreign investment in Egypt, and reports directly to the Prime Minister.  Prior to December 2019, GAFI had been a component of the Ministry of Investment and International Cooperation.

”The Investor Service Center (ISC)” is an administrative unit established within GAFI that provides ”one-stop-shop” services, easing the way for global investors looking for opportunities presented by Egypt’s domestic economy and the nation’s competitive advantages as an export hub for Europe, the Arab world and Africa. This is in addition to promoting Egypt’s investment opportunities in various sectors.

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

Advice and support to help in the evaluation of Egypt as a potential investment location;

Identification of suitable locations and site selection options within Egypt;

Assistance in identifying suitable Egyptian partners;

Aftercare and dispute settlement services.​

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

Limits on Foreign Control and Right to Private Ownership and Establishment

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

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

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

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

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

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

Other Investment Policy Reviews

The Organization for Economic Cooperation and Development (OECD) signed a declaration with Egypt on International Investment and Multinational Enterprises on July 11, 2007, at which time Egypt became the first Arab and African country to sign the OECD Declaration, marking a new stage in Egypt’s drive to attract more foreign direct investment (FDI).  On July 8, 2020, the OECD released an Investment Policy Review for Egypt which highlighted the government’s progress implementing a proactive reform agenda to improve the business climate, attract more foreign and domestic investment, and reap the benefits of openness to FDI and participation in global value chains.

https://www.oecd.org/countries/egypt/egypt-continues-to-strengthen-its-institutional-and-legal-framework-for-investment.htm 

In January 2018 the World Trade Organization (WTO) published a comprehensive review of the Egyptian Government’s trade policies, including details of the 2017 Investment Law’s main provisions.

https://www.wto.org/english/tratop_e/tpr_e/s367_e.pdf 

The United Nations Conference on Trade Development (UNCTAD) published an Information and Communications Technology (ICT) Policy Review for Egypt in 2017, in which it highlighted the potential for investments in the ICT sector to help drive economic growth and recommended specific reforms aimed at strengthening Egypt’s performance in key ICT policy areas.  https://unctad.org/en/PublicationsLibrary/dtlstict2017d3_en.pdf   UNCTAD published its last comprehensive Investment Policy Review for Egypt in 1999, and an implementation report in 2006.

Business Facilitation

GAFI’s new ISC (https://gafi.gov.eg/English/Howcanwehelp/OneStopShop/Pages/default.aspx ) was launched in February 2018 and provides a full start-to-end service to the investor as described above.  The new Investment Law also introduces ”Ratification Offices” to facilitate obtaining necessary approvals, permits, and licenses within 10 days of issuing a Ratification Certificate.

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

Outward Investment

Egypt promotes and incentivizes outward investment. According to the Egyptian government’s FDI Markets database for the period from January 2003 to May 2020, outward investment featured the following:

• Egyptian companies implemented 270 Egyptian FDI projects. Estimated total value of the projects, which employed about 50,000 workers, was $25.6 billion.
• The following countries respectively received the largest amount of Egyptian outward investment in terms of total project value: UAE, Saudi Arabia, Algeria, Kenya, Jordan, Ethiopia, Germany, Libya, Morocco and Sudan. The UAE, Saudi Arabia and Algeria accounted for about 28 percent of the total amount.

Elsewedy Electric was the largest Egyptian company investing abroad, implementing 20 projects with a total investment estimated to be $2.1 billion.

Egypt does not restrict domestic investors from investing abroad.

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

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

In addition to BITs, Egypt is also a signatory to a wide variety of other agreements covering trade issues. Egypt joined the Common Market for Eastern and Southern Africa (COMESA) in June 1998, and in 2019 deposited its instrument of ratification for the 2018 African Continental Free Trade Agreement (AfCFTA).  In July 1999, Egypt and the United States signed a Trade and Investment Framework Agreement (TIFA). In June 2001, Egypt signed an Association Agreement with the European Union (EU), which entered into force on June 1, 2004. The agreement provided immediate duty free access of Egyptian products into EU markets, while duty free access for EU products into the Egyptian market was phased in over a 12-year period ending in 2016.  In 2010, Egypt and the EU completed an agricultural annex to their agreement, liberalizing trade in over 90 percent of agricultural goods.

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

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

The industrial areas currently included in the QIZ program are Alexandria, areas in Greater Cairo such as Sixth of October, Tenth of Ramadan, Fifteenth of May, South of Giza, Shobra El-Khema, Nasr City, and Obour, areas in the Delta governorates such as Dakahleya, Damietta, Monofeya and Gharbeya, and areas in the Suez Canal such as Suez, Ismailia, Port Said, and other specified areas in Upper Egypt. Egyptian exports to the United States through the QIZ program have mostly been ready-made garments and processed foods. The value of the Egyptian QIZ exports to the United States was approximately $752 million in 2017.

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

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

Transparency of the Regulatory System

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

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

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

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

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

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

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

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

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

The government made its budget documents widely and easily accessible to the general public, including online.  Budget documents did not include allocations to military state-owned enterprises, nor allocations to and earnings from state-owned enterprises.  Information on government debt obligations was publicly available online, but up-to-date and clear information on state-owned enterprise debt guaranteed by the government was not available.  According to information the Central Bank has provided to the World Bank, the lack of information available about publicly guaranteed private sector debt meant that this debt was generally recorded as private sector non-guaranteed debt thus potentially obscuring some contingent debt liabilities.

International Regulatory Considerations

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

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

Egypt is a member of the WTO, participates actively in various committees, and notifies technical regulations to the WTO Committee on Technical Barriers to Trade.  Egypt ratified the Trade Facilitation Agreement (TFA) on June 22, 2017 by a vote of Parliament and issuance of presidential decree No. 149/2017, and deposited its formal notification to the WTO on June 24, 2019.  Egypt notified indicative and definitive dates for implementing Category B and C commitments on June 20, 2019, but to date has not notified dates for implementing Category A commitments.  In August 2020 the Egyptian Parliament passed a new Customs Law that includes provisions for key TFA reforms, including advance rulings, separation of release, a Single Window system, expedited customs procedures for authorized economic operators, post-clearance audits, and e-payments.

Legal System and Judicial Independence

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

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

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

Laws and Regulations on Foreign Direct Investment

No specialized court exists for foreign investments.

The 2017 Investment Law, as well as other FDI-related laws and regulations, are published on GAFI’s website, https://gafi.gov.eg/English/StartaBusiness/Laws-and-Regulations/Pages/default.aspx .

In 2017 the Parliament also passed the Industrial Permits Act, which reduced the time it takes to license a new factory by mandating that the Industrial Development Authority (IDA) respond to a request for a license within 30 days of the request being filed.  As of February 2020, new regulations allow IDA regional branch directors or their designees to grant conditional licenses to industrial investors until other registration requirements are complete.

In 2016, the Import-Export Law was revised to allow companies wishing to register in the Import Registry to be 51 percent owned and managed by Egyptians; formerly the law required 100 percent Egyptian ownership and management.  In November 2016, the inter-ministerial Supreme Investment Council also announced seventeen presidential decrees designed to spur investment or resolve longstanding issues. These include:

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

Competition and Anti-Trust Laws

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

Expropriation and Compensation

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

Dispute Settlement

ICSID Convention and New York Convention

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

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

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

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

Investor-State Dispute Settlement

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

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

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

International Commercial Arbitration and Foreign Courts

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

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

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

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

Bankruptcy Regulations

Egypt passed a new bankruptcy law in January 2018, which should speed up the restructuring and settlement of troubled companies.  It also replaces the threat of imprisonment with fines in cases of bankruptcy.  As of July, 2020, the Egyptian government was considering but had not yet implemented amendments to the 2018 law that would allow debtors to file for bankruptcy protection, and would give creditors the ability to determine whether debtors could continue operating, be placed under administrative control, or forced to liquidate their assets.

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

Investment Incentives

The Investment Law 72/2017 gives multiple incentives to investors as described below.  In August 2019, President Sisi ratified amendments to the Investment Law that allow its incentives programs to apply to expansions of existing investment projects in addition to new investments.

General Incentives:

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

Special Incentive Programs:

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

Additional Incentive Program:

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

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

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

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

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

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

The Tenders Law (Law 89/1998) requires the government to consider both price and best value in awarding contracts and to issue an explanation for refusal of a bid. However, the law contains preferences for Egyptian domestic contractors, who are accorded priority if their bids do not exceed the lowest foreign bid by more than 15 percent.

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

Foreign Trade Zones/Free Ports/Trade Facilitation

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

There are currently 9 public free trade zones in operation in the following locations: Alexandria, Damietta Ismailia, Qeft, Media Production City, Nasr City, Port Said, Shebin el Kom, and Suez. Private free trade zones may also be established with a decree by GAFI but are usually limited to a single project. Export-oriented industrial projects are given priority.  There is no restriction on foreign ownership of capital in private free zones.

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

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

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

Performance and Data Localization Requirements

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

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

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

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

Egypt does not impose localization barriers on ICT firms.  Egypt’s Data Protection Act, signed into law in July, 2020, will require licenses for cross-border data transfers but does not impose any data localization requirements.  Similarly, Egypt does not make local production a requirement for market access, does not have local content requirements, and does not impose forced technology or intellectual property transfers as a condition of market access.  But there are exceptions where the government has attempted to impose controls by requesting access to a company’s servers located offshore, or request servers to be located in Egypt and thus under the government’s control.

Real Property

The Egyptian legal system provides protection for real and personal property.  Laws on real estate ownership are complex and titles to real property may be difficult to establish and trace.  According to the World Bank’s 2020 Doing Business Report, Egypt ranks 130 of 190 for ease of registering property.

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

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

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

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

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

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

Intellectual Property Rights

Egypt remains on the Special 301 Watch List in 2020.  Egypt’s IPR legislation generally meets international standards, and the government has made progress enforcing those laws, reducing patent application backlogs, and in 2019 shut down a number of online illegal streaming websites.  It has also made progress establishing protection against the unfair commercial use, as well as unauthorized disclosure, of undisclosed test or other data generated to obtain marketing approval for pharmaceutical products.  Stakeholders note continued challenges with widespread counterfeiting and piracy, biotechnology patentability criteria, patent and trademark examination criteria, and pharmaceutical-related IP issues.

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

Decree 251/2020, issued in January, 2020, established a ministerial committee to address compulsory patent licensing.  According to Egypt’s 2002 IPR Law, which allows for compulsory patent licenses in some cases, the committee will have the power to issue compulsory patent licenses according to a number of criteria set forth in the law; to determine financial renumeration for the original patent owners; and to approve the expropriation of the patents.

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

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

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

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

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

IPR Contact at Embassy Cairo:
Christopher Leslie
Trade & Investment Officer
20-2-2797-2735
LeslieCG@state.gov

Capital Markets and Portfolio Investment

To date, high returns on Egyptian government debt have crowded out Egyptian investment in productive capacity.  Consistently positive and relatively high real interest rates have attracted large foreign capital inflows since 2017, most of which has been volatile portfolio capital.  Returns on Egyptian government debt have begun to come down, which could presage investment by Egyptian capital in the real economy.

The Egyptian Stock Exchange (EGX) is Egypt’s registered securities exchange.  About 246 companies were listed on the EGX, including Nilex, as of April 2020.  There were more than 500,000 investors registered to trade on the exchange in 2019 as the Egyptian market attracted 32,000 new investors.  Stock ownership is open to foreign and domestic individuals and entities.  The Government of Egypt issues dollar-denominated and Egyptian pound-denominated debt instruments.  Ownership is open to foreign and domestic individuals and entities.  The government has developed a positive outlook toward foreign portfolio investment, recognizing the need to attract foreign capital to help develop the Egyptian economy.  During 2019 foreign investors’ percentage of total transactions on the EGX reached 33 percent versus Egyptian investors’ percentage of 67 percent.

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

Settlement of transactions takes one day for treasury bonds and two days for stocks. Although Egyptian law and regulations allow companies to adopt bylaws limiting or prohibiting foreign ownership of shares, virtually no listed stocks have such restrictions. A significant number of the companies listed on the exchange are family-owned or dominated conglomerates, and free trading of shares in many of these ventures, while increasing, remains limited.  Companies are de-listed from the exchange if not traded for six months.

The Higher Investment Council extended the suspension of capital gains tax for three years, until 2020 as part of efforts to draw investors back. In March 2017, the government announced plans to impose a stamp duty on all stock transactions with a duty of 0.125 percent on all buyers and sellers starting in May 2017, followed by an increase to 0.150 percent in the second year and 0.175 percent thereafter. Egypt’s provisional stamp duty on stock exchange transactions includes for the first time a 0.3 percent levy for investors acquiring more than a third of a company’s stocks. I n May 2019 the government decided to keep the stamp duty at 0.15% without further increase, then in March 2020 the government decided to reduce the stamp tax to 0.125% for non-residents and to 0.05% for non-residents and to push back the introduction of the capital gain tax till January 2022.  Foreign investors will be exempted from the tax.

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

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

Money and Banking System

Benefitting from the nation’s increasing economic stability over the past two years, Egypt’s banks have enjoyed both ratings upgrades and continued profitability.  Thanks to economic reforms, a new floating exchange system, and a new Investment Law passed in 2017, the project finance pipeline is increasing after a period of lower activity.  Banking competition is improving to serve a largely untapped retail segment and the nation’s challenging, but potentially rewarding, small and medium-sized enterprise (SME) segment.  The Central Bank of Egypt (CBE) has mandated that 20 percent of bank loans go to SMEs within the next three years (four years from 2016).  In December 2019, the Central Bank launched a 100 billion initiative to spur domestic manufacturing through subsidized loans.  Also, with only about a quarter of Egypt’s adult population owning or sharing an account at a formal financial institution (according press and comments from contacts), the banking sector has potential for growth and higher inclusion, which the government and banks discuss frequently.  A low median income plays a part in modest banking penetration.   But the CBE has taken steps to work with banks and technology companies to expand financial inclusion.  The employees of the government, one of the largest employers, must now have bank accounts because salary payment is through direct deposit.

Egypt’s banking sector is generally regarded as healthy and well-capitalized, due in part to its deposit-based funding structure and ample liquidity, especially since the floatation and restoration of the interbank market.  The CBE declared that 4.1 percent of the banking sector’s loans were non-performing in June 2020.  However, since 2011, a high level of exposure to government debt, accounting for over 40 percent of banking system assets, at the expense of private sector lending, has reduced the diversity of bank balance sheets and crowded out domestic investment.  Given the floatation of the Egyptian Pound and restart of the interbank trading system, Moody’s and S&P have upgraded the outlook of Egypt’s banking system to stable from negative to reflect improving macroeconomic conditions and ongoing commitment to reform.  In April 2019 Moody’s upgraded Egypt’s government issuer rating to B2 with stable outlook from B3 positive and affirmed this rating in April 2020 while also changing Egypt’s Macro Profile to “weak-” from “very weak”.

Thirty-eight banks operate in Egypt, including several foreign banks. The CBE has not issued a new commercial banking license since 1979.  The only way for a new commercial bank, whether foreign or domestic, to enter the market (except as a representative office) is to purchase an existing bank.  To this end, in 2013, QNB Group acquired National Société Générale Bank Egypt (NSGB).  That same year, Emirates NBD, Dubai’s largest bank, bought the Egypt unit of BNP Paribas.  In 2015, Citibank sold its retail banking division to CIB Bank.  In 2017, Barclays Bank PLC transferred its entire shareholding to Attijariwafa Bank Group.  In 2016 and 2017, Egypt indicated a desire to partially (less than 35 percent) privatize at least one state-owned banks and a total of 23 firms through either expanded or new listings on the Egypt Stock Exchange.  As of April 2020 the only steps towards implementing this privatization program were offering 4.5 percent of the shares of state-owned Eastern Tobacco Company on the stock market.  The state owned Banque De Caire was planning to IPO some of its shares on the EGX in April but postponed due to the novel coronavirus.

According to the CBE, banks operating in Egypt held nearly EGP 6 trillion ($379 billion) in total assets as of February 2020, with the five largest banks holding EGP 3.9 trillion ($247 billion) at the end of 2019.  Egypt’s three state-owned banks (Banque Misr, Banque du Caire, and National Bank of Egypt) control nearly 40 percent of banking sector assets.

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

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

Foreign Exchange and Remittances

Foreign Exchange

There had been significant progress in accessing hard currency since the floatation of the Pound and re-establishment of the interbank currency trading system in November 2016.  While the immediate aftermath saw some lingering difficulty of accessing currency, as of 2017 most businesses operating in Egypt reported having little difficulty obtaining hard currency for business purposes, such as importing inputs and repatriating profits.   In 2016 the Central Bank lifted dollar deposit limits on households and firms importing priority goods which had been in place since early 2015.  Into 2016, businesses, including foreign-owned firms, which were not operating in priority sectors, encountered difficulty accessing currency, including importers.  But 2017 has seen an elimination of the backlog for demand for foreign currency.  With net foreign reserves of $37 billion as of April 2020, Egypt’s foreign reserves appeared to be well capitalized.

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

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

Remittance Policies

The 1992 U.S.-Egypt Bilateral Investment Treaty provides for free transfer of dividends, royalties, compensation for expropriation, payments arising out of an investment dispute, contract payments, and proceeds from sales.  Prior to reform implementation throughout 2016 and 2017, large corporations had been unable to repatriate local earnings for months at a time, but given the current record net foreign reserves, repatriation is no longer an issue that companies complain about.

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

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

Sovereign Wealth Funds

Egypt’s sovereign wealth fund (SWF), approved by the Cabinet and launched in late 2018, holds 200 billion EGP ($12.7 billion) in authorized capital.  The SWF aims to invest state funds locally and abroad across asset classes and manage underutilized government assets.  The SWF focuses on sectors considered vital to the Egyptian economy, particularly industry, energy, and tourism. The SWF participates in the International Forum of Sovereign Wealth Funds.  The government is currently in talks with regional and European institutions to take part in forming the fund’s sector-specific units.

State and military-owned companies compete directly with private companies in many sectors of the Egyptian economy. According to Public Sector Law 203/1991, state-owned enterprises should not receive preferential treatment from the government, nor should they be accorded any exemption from legal requirements applicable to private companies.  In addition to the state-owned enterprises groups above, 40 percent of the banking sector’s assets are controlled by three state-owned banks (Banque Misr, Banque du Caire, and National Bank of Egypt).   The 226 SOEs in Egypt subject to Law 203/1991 are affiliated with 10 ministries and employ 450,000 workers. The Ministry of Public Sector Enterprises controls 118 companies operating under eight holding companies that employ 209,000 workers.  The most profitable sectors include tourism, real estate, and transportation.  The ministry publishes a list of its SOEs on its website, http://www.mpbs.gov.eg/Arabic/Affiliates/HoldingCompanies/Pages/default.aspx  and http://www.mpbs.gov.eg/Arabic/Affiliates/AffiliateCompanies/Pages/default.aspx .

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

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

OECD Guidelines on Corporate Governance of SOEs 

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

Privatization Program

The Egyptian government’s most recent plans to privatize stakes in SOEs began in March 2018 with the successful public offering of a minority stake in the Eastern Tobacco Company.  Since then plans for privatizing stakes in 22 other SOEs, including up to 30 percent of the shares of Banque du Caire, have been delayed due to adverse market conditions and increased global volatility.  Egypt’s privatization program is based on Public Enterprise Law 203//1991, which permits the sale of SOEs to foreign entities.  In 1991, Egypt began a privatization program for the sale of several hundred wholly or partially SOEs and all public shares of at least 660 joint venture companies (joint venture is defined as mixed state and private ownership, whether foreign or domestic).  Bidding criteria for privatizations were generally clear and transparent.

In 2014, President Sisi signed a law limiting appeal rights on state-concluded contracts to reduce third-party challenges to prior government privatization deals.  The law was intended to reassure investors concerned by legal challenges brought against privatization deals and land sales dating back to the pre-2008 period.  Ongoing court cases had put many of these now-private firms, many of which are foreign-owned, in legal limbo over concerns that they may be returned to state ownership.  In early 2018, the Egyptian government announced that it would begin selling off stakes in some of its state-owned enterprises over the next few years through Egypt’s stock exchange.

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

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

Egypt has a set of laws to combat corruption by public officials, including an Anti-Bribery Law (which is contained within the Penal Code), an Illicit Gains Law, and a Governmental Accounting Law, among others. Countering corruption remains a long-term focus.  There have been cases involving public figures and entities, including the arrests of Alexandria’s deputy governor and the secretary general of Suez on several corruption charges and the investigation into five members of parliament alleged to have sold Hajj visas.  However, corruption laws have not been consistently enforced.  Transparency International’s Corruption Perceptions Index ranked Egypt 117 out of 180 in its 2017 survey, a drop of 9 places from its rank of 108 in 2016.  Transparency International also found that approximately 50 percent of Egyptians reported paying a bribe in order to obtain a public service.

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

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

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

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

Resources to Report Corruption

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

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

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

Resources to Report Corruption

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

Stability and economic development remain Egypt’s priorities.  The Egyptian government has taken measures to eliminate politically motivated violence while also limiting peaceful protests and political expression.  Political protests are rare, with the last known demonstrations occurring on September 20, 2019.  Egypt’s presidential elections in March 2018 and senatorial elections in August 2020 proceeded without incident.  A number of small-scale terrorist attacks against security and civilian targets in Cairo and elsewhere in the Nile Valley occurred in 2019.  An attack against a tourist bus in May 2019 injured over a dozen people, and a car bombing outside the National Cancer Institute in Cairo in August 2019 killed 22 people.  Militant groups also committed attacks in the Western Desert and Sinai.  The government has been conducting a comprehensive counterterrorism offensive in the Sinai since early 2018 in response to terrorist attacks against military installations and personnel by ISIS-affiliated militant groups.  In February 2020, ISIS-affiliated militants claimed responsibility for an attack against a domestic gas pipeline in the northern Sinai.  Although the group claimed that the attack targeted the recently-opened natural gas pipeline connecting Egypt and Israel, the pipeline itself was undamaged and the flow of natural gas was not interrupted.

Official statistics put Egypt’s labor force at approximately 29 million, with an official unemployment rate of 9.6 percent as of July 2020.  Prior to the onset of the novel coronavirus pandemic, Egypt’s official unemployment rate had been steadily decreasing, reaching a low of 7.5 percent in July 2019.  Women accounted for 25 percent of those unemployed as of May 2020, according to statistics from Egypt’s Central Agency for Public Mobilization and Statistics (CAPMAS).  Accurate figures are difficult to determine and verify given Egypt’s large informal economy in which some 62 percent of the non-agricultural workforce is engaged, according to ILO estimates.

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

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

Parliament adopted a new Trade Unions Law in late 2017, replacing a 1976 law, which experts said was out of compliance with Egypt’s commitments to ILO conventions.  After a March 2016 Ministry of Manpower and Migration (MOMM) directive not to recognize documentation from any trade union without a stamp from the government-affiliated Egyptian Trade Union Federation (ETUF), the new law established procedures for registering independent trade unions, but some of the unions noted that the directorates of the Ministry of Manpower didn’t implement the law and placed restrictions on freedoms of association and organizing for trade union elections.  Executive regulations for trade union elections stipulate a very tight deadline of three months for trade union organizations to legalize their status, and one month to hold elections, which, critics said, restricted the ability of unions to legalize their status or to campaign.  On April 3, 2018, the government registered its first independent trade union in more than two years.

In July 2019 the Egyptian Parliament passed a series of amendments to the Trade Unions Law that reduced the minimum membership required to form a trade union and abolished prison sentences for violations of the law.  The amendments reduced the minimum number of workers required to form a trade union committee from 150 to 50, the number of trade union committees to form a general union from 15 to 10 committees, and the number of workers in a general union from 20,000 to 15,000.  The amendments also decreased the number of unions necessary to establish a trade union federation from 10 to 7 and the number of workers in a trade union from 200,000 to 150,000.  Under the new law, a trade union or workers’ committee may be formed if 150 employees in an entity express a desire to organize.

Based on the new amendments to the Trade Unions Law and a request from the Egyptian government for assistance implementing them and meeting international labor standards, the International Labor Organization’s and International Finance Corporation’s joint Better Work Program launched in Egypt in March 2020.

The Trade Unions law explicitly bans compulsory membership or the collection of union dues without written consent of the worker and allows members to quit unions.  Each union, general union, or federation is registered as an independent legal entity, thereby enabling any such entity to exit any higher-level entity.

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

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

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

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

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

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

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

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

As of March, 2020, the DFC’s financing tools provide $1.25 billion in financial and insurance support to 12 renewable energy, oil and gas, water supply, and health sector projects in Egypt in addition to the ELGF.  Apache Corporation, the largest U.S. investor in Egypt, has supported its natural gas investment with OPIC and DFC risk insurance since 2004.  In December 2018, the OPIC Board approved a project to provide $430 million in political risk insurance to Noble Energy, Inc. to support the restoration, operation, and maintenance of a natural gas pipeline in Egypt and the supply of natural gas through a pipeline from Israel.  In June 2019, OPIC’s Board approved an $87 million loan guarantee for the development, construction, and operation of the 252 megawatt Lekela Egypt Wind Power project.

* Sources for Host Country Data: Central Bank of Egypt; CAPMAS; GAFI

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

Chris Leslie, Economic Officer, U.S. Embassy Cairo
02-2797-2735
LeslieCG@state.gov

Policies Towards Foreign Direct Investment

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

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

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

Limits on Foreign Control and Right to Private Ownership and Establishment

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

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

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

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

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

Other Investment Policy Reviews

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

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

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

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

Business Facilitation

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

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

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

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

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

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

Outward Investment

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

Transparency of the Regulatory System

Indonesia continues to bring its legal, regulatory, and accounting systems into compliance with international norms and agreements, but progress is slow.  Notable developments included passage of a comprehensive anti-money laundering law in 2010 and a land acquisition law in 2012.  Although Indonesia continues to move forward with regulatory system reforms 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, including the DNI, establish sectors that are either fully off-limits to foreign investors or are subject to substantive conditions.

Decentralization has introduced another layer of bureaucracy for firms to navigate, resulting in what companies have identified as additional red tape.  Certain businesses claim that Indonesia encounters challenges in launching bureaucratic reforms due to ineffective management, resistance from vested interests, and corruption.  U.S. businesses cite regulatory uncertainty and a lack of transparency as two significant factors hindering operations.  Government ministries and agencies, including the Indonesian House of Representatives (DPR), continue to publish many proposed laws and regulations in draft form for public comment; however, not all draft laws and regulations are made available in public fora and it can take years for draft legislation to become law.  Laws and regulations are often vague and require substantial interpretation by the implementers, leading to business uncertainty and rent-seeking opportunities.

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 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.

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.

In 2017, the government issued Presidential Instruction No. 7/2017, which aims to improve the coordination among ministries in the policy-making process.  The new regulation requires lead ministries to coordinate with their respective coordinating ministry before issuing a regulation.  Presidential Instruction No. 7 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.  Pursuant to various Indonesian economy policy reform packages over the past several years, the government has eliminated 220 regulations as of September 2018.  Fifty-one of the eliminated regulations are at the Presidential level and 169 at the ministerial or institutional level.

In July 2018, President Jokowi issued Presidential Regulation No. 54/2018, updating and streamlining the National Anti-Corruption Strategy to synergize corruption prevention efforts across ministries, regional governments, and law enforcement agencies.  The regulation focuses on three areas: licenses, state finances (primarily government revenue and expenditures), and law enforcement reform.  An interagency team, including KPK, leads the national strategy’s implementation efforts.

In October 2018, the government issued Presidential Regulation No. 95/2018 on e-government that requires all levels of government (central, provincial, and municipal) to implement online governance tools (e-budgeting, e-procurement, e-planning) to improve budget efficiency, government transparency, and the provision of public services.

International Regulatory Considerations

As a member of ASEAN, Indonesia has successfully implemented regional initiatives, including real-time movement of electronic import documents through the ASEAN Single Window, which reduces shipping costs, speeds customs clearance, and reduces opportunities for corruption.   Indonesia has also committed to ratify the ASEAN Comprehensive Investment Agreement (ACIA), ASEAN Framework Agreement on Services (AFAS), and the ASEAN Mutual Recognition Arrangement.  Notwithstanding 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).  At this point, Indonesia has met 88.7 percent of its commitments to the TFA provisions, including publication and availability information, consultations, advance ruling, review procedure, detention and test procedure, fee and charges discipline, goods clearance, border agency cooperation, 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 aviation sector have faced difficulty in 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 also continues to plague Indonesia’s judiciary, with graft investigations involving senior judges and court staffs.  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 the land acquisition law No.2/2012 enacted in 2012 included legal mechanisms designed to resolve some past land ownership issues.  In addition, companies find Indonesia to have a poor track record on the legal enforcement of contracts, and civil disputes are sometimes criminalized.  Government Regulation No. 79/2010 opened the door for the government to remove 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, prosecutors, and defense 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 the foreign investor holding shares in the company. In addition, the government outlines restrictions on FDI in Presidential Decree No. 44/2016, commonly referred to as the 2016 Negative Investment List or DNI. It aims to consolidate FDI restrictions in certain sectors from numerous decrees and regulations to provide greater certainty for foreign and domestic investors. The 2016 DNI enables greater foreign investment in some sectors like film, tourism, logistics, health care, and e-commerce. A number of sectors remain closed to investment or are otherwise restricted. The 2016 DNI contains a clause that clarifies that existing investments will not be affected by the 2016 revisions. The website of the Indonesia Investment Coordinating Board (BKPM) provides information on investment requirements and procedures: http://www2.bkpm.go.id/ .  Indonesia mandates reporting obligations for all foreign investors through BKPM Regulation No.7/2018.  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. In April 2017, the Indonesia DPR began deliberating a new draft of the Indonesian antitrust law, which would repeal the current Law No. 5/1999 and strengthen KPPU’s enforcement against monopolistic practices and unfair business competition.

Expropriation and Compensation

Indonesia’s political leadership has long championed economic nationalism, particularly in regard to 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 investors’ property rights, unless provided by law.  If the Indonesian government nationalizes or expropriates an investors’ property rights, it must provided market value compensation to the investor.

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 legally recognized and enforceable in the 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 addition, a Dutch arbitration court recently ruled in favor of the Indonesian government in USD 469 million arbitration case against Indian firm Indian Metals & Ferro Alloys. Two cases involved Newmont Nusa Tenggara under the BIT with 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 under legal review.

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 agreement 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.

Investment Incentives

Indonesia seeks to facilitate investment through fiscal incentives, non-fiscal incentives, and other benefits. Fiscal incentives are in the form of tax holidays, tax allowances, and exemptions of import duties for capital goods and raw materials for investment. As part of the Economic Policy Package XVI, Indonesia issued a modified tax holiday scheme in November 2018 through Ministry of Finance (MOF) Regulation 150/2018, which revokes MOF Regulation 35/2018.  This regulation is intended to attract more direct investment in pioneer industries and simplify the application process through the OSS. The period of the tax holiday is extended up to 20 years; the minimum investment threshold is IDR 100 billion (USD 6.6 million), a significant reduction from the previous regulation at IDR 500 billion (USD 33 million). In addition to the tax holiday, depending on the investment amount, this regulation also provides either 25 or 50 percent income tax reduction for the two years after the end of the tax holiday. The following table explains the parameters of the new scheme:

Based on BKPM Regulation 1/2019 as amended by BKPM Regulation 8/2019, the coverage of pioneer sectors was expanded to the digital economy, agricultural, plantation, and forestry, bringing the total to eighteen industries:

1. Upstream basic metals;
2. Oil and gas refineries;
3. Petrochemicals derived from petroleum, natural gas, and coal;
4. Inorganic basic chemicals;
5. Organic basic chemicals;
6. Pharmaceutical raw materials;
7. Semi-conductors and other primary computer components;
8. Primary medical device components;
9. Primary industrial machinery components;
10. Primary engine components for transport equipment;
11. Robotic components for manufacturing machines;
12. Primary ship components for the shipbuilding industry;
13. Primary aircraft components;
14. Primary train components;
15. Power generation including waste-to-energy power plants;
16. Economic infrastructure;
17. Digital economy including data processing; and
18. Agriculture, plantation, and forestry-based processing

Government Regulation No. 9/2016 expanded regional tax incentives for certain business categories in 2016. Apparel, leather goods, and footwear industries in all regions are now eligible for the tax incentives. In this regulation, existing tax facilities are maintained, including:

• Deduction of 30 percent from taxable income over a six-year period
• Accelerated depreciation and amortization
• Ten percent of withholding tax on dividend paid by foreign taxpayer or a lower rate according to the avoidance of double taxation agreement
• Compensation losses extended from 5 to 10 years with certain conditions for companies that are:

1. 1. Located in industrial or bonded zone;
   2. Developing infrastructure;
   3. Using at least 70 percent domestic raw material;
   4. Absorbing 500 to 1000 laborers;
   5. Doing research and development (R&D) worth at least 5 percent of the total investment over 5 years;
   6. Reinvesting capital; or,
   7. Exporting at least 30 percent of their product.

On March 31, 2020, Indonesia issued Government Regulation in Lieu of Law No. 1 of 2020 on State Financial Policy and the Stability of Financial Systems for the Handling of the Coronavirus Disease 2019 Pandemic (Perppu 1/2020). Among its provisions are plans to regulate electronic based trading activity (e-trading) and to charge value-added taxes (VAT) on taxable intangible goods and services from foreign e-commerce parties and other highly-digitalized businesses. Income tax will also be imposed upon foreign e-commerce parties that are judged to meet a “significant economic presence” threshhold, based on consolidated gross circulation of a business group, total sales value, or active Indonesian users. The regulation also introduces an electronic transaction tax (ETT) that will be imposed on foreign entities that are subject to income tax obligations under the aformentioned threshhold but would not otherwise be subject to corporate income tax in Indonesia in the absence of a permanent establishment, where taxing such transactions is prohibited by bilateral tax treaties.  Industry representatives have expressed concern that such provisions seek to circumvent bilateral tax treaties intended to avoid double taxation, including the tax treaty between Indonesia and the United States.  They have also noted a lack of clarity over the Perppu’s implementation and concerns over administrative sanctions and the high cost to comply with new measures.  The new regulation will also also cut the corporate income tax rate, lowering it to 22 percent for 2020 and 2021, and to 20 percent for 2022. In addition, a company can claim a further 3 percent reduction if it is publicly listed, with a total number of shares traded on an Indonesian stock exchange of at least 40 percent.

The government provides the facility of Government-Borne Import Duty (Bea Masuk Ditanggung Pemerintah /BMDTP) with zero percent import duty to improve industrial competitiveness and public goods procurement in high value added, labor intensive, and high growth sectors. MOF Regulation 12/2020 provides zero import duty for imported raw materials in 36 sectors including plastics, cosmetics, polyester, resins, other chemical materials, machinery for agriculture, electricity, toys, vehicle components including for electric vehicles, telecommunications, fertilizers, and pharmaceuticals until December 2020.

To cope with soaring demand and to improve domestic production of medical devices and supplies amid the COVID-19 pandemic, the government through BKPM Regulation 86/2020 streamlined licensing requirement for manufacturers of pharmaceuticals and medical devices. The Ministry of Health also accelerated product registration and certification for medical devices and household health supplies. Moreover, the Ministry of Trade issued Regulation 28/2020 to relax import requirements for certain medical-related products.

 At present, Indonesia does not have formal regulations granting national treatment to U.S. and other foreign firms participating in government-financed or subsidized research and development programs. The Ministry of Research and Technology handles applications on a case-by-case basis.

Indonesia’s vast natural resources have attracted significant foreign investment over the last century and continues 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. A ban on the export of raw minerals went into effect in January 2014. However, in July 2014, the government issued regulations that allowed, until January 2017, the temporary export of copper and several other mineral concentrates with export duties and other conditions imposed. When the full export ban came back into effect in January 2017, the government again issued new regulations that allowed exports of copper concentrate and other specified minerals, but imposed more onerous requirements. Of note for foreign investors, provisions of the regulations require that to be able to export non-smelted 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. The 2009 mining law devolved the authority to issue mining licenses to local governments, who have responded by issuing more than 10,000 licenses, many of which have been reported to overlap or be unclearly mapped. In the oil and gas sector, Indonesia’s Constitutional Court disbanded the upstream regulator in 2012, injecting confusion and more uncertainty into the natural resources sector. Until a new oil and gas law is enacted, upstream activities are supervised by the Special Working Unit on Upstream Oil and Gas (SKK Migas).

During President Jokowi’s first term, the Indonesian government invested more than  USD 350 billion in infrastructure to connect Indonesia’s more than 17,000 islands. The investments included toll roads, seaports, airports, power generation, telecommunications, and upgrades to Indonesia’s social infrastructure, such as, clean water and sanitation, and housing projects.  President Jokowi has emphasized that he will continue this infrastructure program during his second five-year term, aiming to increase Indonesia’s infrastructure stock from 43 percent of GDP in 2019 to 50 percent in 2024.

Despite high-level attention from Indonesian policymakers, many U.S. companies and investors report that the current institutional arrangement for infrastructure development still suffers from functional overlap, lack of capacity for public-private partnership (PPP) projects in regional governments, lack of solid value-for-money methodologies, crowding out of the private sector by state-owned enterprises (SOEs), legal uncertainty, lack of a solid land-acquisition framework, long-term operational risks for the private sector, unwillingness from stakeholders to be the first ones to test a new policy approach, corruption, and a relatively small Indonesian private sector. As a result of these challenges, the World Bank estimates that Indonesia faces a USD 1.5 trillion infrastructure gap in comparison to other emerging market economies.

Foreign Trade Zones/Free Trade/ Trade Facilitation

Indonesia offers numerous incentives to foreign and domestic companies that operate in special economic and trade zones throughout Indonesia. The largest zone is the free trade zone (FTZ) island of Batam, located just south of Singapore. Neighboring Bintan Island and Karimun Island also enjoy FTZ status. Investors in FTZs are exempted from import duty, income tax, VAT, and sales tax on imported capital goods, equipment, and raw materials. Fees are assessed on the portion of production destined for the domestic market which is “exported” to Indonesia, in which case fees are owed only on that portion.  Foreign companies are allowed up to 100 percent ownership of companies in FTZs. Companies operating in FTZs may lend machinery and equipment to subcontractors located outside of the zone for a maximum two-year period.

Indonesia also has numerous Special Economic Zones (SEZs), regulated under Law No. 39/2009, Government Regulation No. 1/2020 on SEZ management, and Government Regulation No. 12/2020 on SEZ facilities. These benefits include a reduction of corporate income taxes for a period of years (depending on the size of the investment), income tax allowances, luxury tax, customs duty and excise, and expedited or simplified administrative processes for import/export, expatriate employment, immigration, and licensing. As of  February 2020, Indonesia has identified fifteen SEZs in manufacturing and tourism centers that are operational or under construction. Eleven SEZs are operational (though development is sometimes limited) at: 1) Sei Mangkei, North Sumatera; 2) Tanjung Lesung, Banten; 3) Palu, Central Sulawesi; 4) Mandalika, West Nusa Tenggara; 5) Arun Lhokseumawe, Aceh; 6) Galang Batang, Bintan, Riau Islands; 7) Tanjung Kelayang, Pulau Bangka, Bangka Belitung Islands; 8) Bitung, North Sulawesi; 9) Morotai, North Maluku; 10) Maloy Batuta Trans Kalimantan, East Kalimantan; and 11) Sorong, Papua. Four more SEZs are under construction: Tanjung Api-Api, South Sumatera; Singhasari, East Java; Kendal, Central Java; and Likupang, North Sulawesi. In 2016, the government began the process of transitioning Batam from an FTZ to SEZ in order to provide further investment incentives. The Indonesian government announced in December 2018 that it plans to transition management of the Batam FTZ to the local government, creating a single regulatory authority on the island. The conversion to an SEZ is still ongoing  and will not affect the status of the neighboring FTZs on Bintan and Karimun islands.

Indonesian law also provides for several other types of zones that enjoy special tax and administrative treatment.  Among these are Industrial Zones/Industrial Estates (Kawasan  Industri), bonded stockpiling areas (Tempat Penimbunan Berikat), and Integrated Economic Development Zones (Kawasan Pengembangan Ekonomi Terpadu).  Indonesia is home to 103 industrial estates that host thousands of industrial and manufacturing companies.  Ministry of Finance Regulation No. 105/2016 provides several different tax and customs facilities available to companies operating out of an industrial estate, including corporate income tax reductions, tax allowances, VAT exemptions, and import duty exemptions depending on the type of industrial estate.  Bonded stockpile areas include bonded warehouses, bonded zones, bonded exhibition spaces, duty free shops, bonded auction places, bonded recycling areas, and bonded logistics centers. Companies operating in these areas enjoy concessions in the form of exemption from certain import taxes, luxury goods taxes, and value added taxes, based on a variety of criteria for each type of location. Most recently, bonded logistics centers (BLCs) were introduced to allow for larger stockpiles, longer temporary storage (up to three years), and a greater number of activities in a single area. The Ministry of Finance issued Regulation 28/2018, providing additional guidance on the types of BLCs and shortening approval for BLC applications. By October 2019, Indonesia had designated 106 BLCs in 159 locations, with plans to designate more in eastern Indonesia.  In 2018, Ministry of Finance and the Directorate General for Customs and Excise (DGCE) issued regulations (MOF Regulation No. 131/2018 and DGCE Regulation No. 19/2018) to streamline the licensing process for bonded zones.  Together the two regulations are intended to reduce processing times and the number of licenses required to open a bonded zone.

Shipments from FTZs and SEZs to other places in the Indonesia customs area are treated similarly to exports and are subject to taxes and duties.  Under MOF Regulation 120/2013, bonded zones have a domestic sales quota of 50 percent of the preceding realization amount on export, sales to other bonded zones, sales to free trade zones, and sales to other economic areas (unless otherwise authorized by the Indonesian government).  Sales to other special economic areas are only allowed for further processing to become capital goods, and to companies which have a license from the economic area organizer for the goods relevant to their business.

Performance and Data Localization Requirements

Indonesia expects foreign investors to contribute to the training and development of Indonesian nationals, allowing the transfer of skills and technology required for their effective participation in the management of foreign companies. Generally, a company can hire foreigners only for positions that the government has deemed open to non-Indonesians. Employers must have training programs aimed at replacing foreign workers with Indonesians. If a direct investment enterprise wants to employ foreigners, the enterprise should submit an Expatriate Placement Plan (RPTKA) to the Ministry of Manpower.

Indonesia recently made significant changes to its foreign worker regulations. Under Presidential Regulation No. 20/2018, issued in March 2018, the Ministry of Manpower now has two days to approve a complete RPTKA application, and an RPTKA is not required for commissioners or executives. An RPTKA’s validity is now based on the duration of a worker’s contract (previously it was valid for a maximum of five years). The new regulation no longer requires expatriate workers to go through the intermediate step of obtaining a Foreign Worker Permit (IMTA). Instead, expatriates can use an endorsed RPTKA to apply with the immigration office in their place of domicile for a Limited Stay Visa or Semi-Permanent Residence Visa (VITAS/VBS). Expatriates receive a Limited Stay Permit (KITAS) and a blue book, valid for up to two years and renewable for up to two extensions without leaving the country. Regulation No. 20/2018 also abolished the requirement for all expatriates to receive a technical recommendation from a relevant ministry. However, ministries may still establish technical competencies or qualifications for certain jobs, or prohibit the use of foreign worker for specific positions, by informing and obtaining approval from the Ministry of Manpower. Foreign workers who plan to work longer than six months in Indonesia must apply for employee social security and/or insurance.

Regulation No. 20/2018 provides for short-term working permits (maximum six months) for activities such as conducting audits, quality control, inspections, and installation of machinery and electrical equipment. Ministry of Manpower issued Regulation No.10/2018 to implement Regulation 20/2018, revoking its Regulation No. 16/2015 and No. 35/2015. Regulation 10/2018 provides additional details about the types of businesses that can employ foreign workers, sets requirements to obtain health insurance for expatriate employees, requires companies to appoint local “companion” employees for the transfer of technology and skill development, and requires employers to “facilitate” Indonesian language training for foreign workers. Any expatriate who holds a work and residence permit must contribute USD 1,200 per year to a fund for local manpower training at regional manpower offices. The Ministry of Manpower issued Decree 228/2019 to widen the number of jobs open for foreign workers across 18 sectors, ranging from construction, transportation, education, telecommunication, and professionals. Foreign workers  have to obtain approval from Manpower Minister or designated officials for applying positions not listed in the decree. Some U.S. firms report difficulty in renewing KITASs for their foreign executives. In February 2017, the Ministry of Energy and Natural resources abolished regulations specific to the oil and gas industry, bringing that sector in line with rules set by the Ministry of Manpower.

With the passage of a defense law in 2012 and subsequent implementing regulations in 2014, Indonesia established a policy that imposes offset requirements for procurements from foreign defense suppliers. Current laws authorize Indonesian end users to procure defense articles from foreign suppliers if those articles cannot be produced within Indonesia, subject to Indonesian local content and offset policy requirements. On that basis, U.S. defense equipment suppliers are competing for contracts with local partners. The 2014 implementing regulations still require substantial clarification regarding how offsets and local content are determined. According to the legislation and subsequent implementing regulations, an initial 35 percent of any foreign defense procurement or contract must include local content, and this 35 percent local content threshold will increase by 10 percent every five years following the 2014 release of the implementing regulations until a local content requirement of 85 percent is achieved. The law also requires a variety of offsets such as counter-trade agreements, transfer of technology agreements, or a variety of other mechanisms, all of which are negotiated on a per-transaction basis. The implementing regulations also refer to a “multiplier factor” that can be applied to increase a given offset valuation depending on “the impact on the development of the national economy.” Decisions regarding multiplier values, authorized local content, and other key aspects of the new law are in the hands of the Defense Industry Policy Committee (KKIP), an entity comprising Indonesian interagency representatives and defense industry leadership. KKIP leadership indicates that they still determine multiplier values on a case-by-case basis, but have said that once they conclude an industry-wide gap analysis study, they will publish a standardized multiplier value schedule. According to government officials, rules for offsets and local content apply to major new acquisitions only, and do not apply to routine or recurring procurements such as those required for maintenance and sustainment.

Indonesia notified the WTO of its compliance with Trade-Related Investment Measures (TRIMS) on August 26, 1998. The 2007 Investment Law states that Indonesia shall provide the same treatment to both domestic and foreign investors originating from any country. Nevertheless, the government pursues policies to promote local manufacturing that could be inconsistent with TRIMS requirements, such as linking import approvals to investment pledges or requiring local content targets in some sectors.

In October 10, 2019, Indonesia issued Government Regulation No. 71 (GR71) to replace Regulation No. 82/2012 which classifies electronic system operators (ESO) into two categories: public and private. Public ESOs are either a state institution or an institution assigned by a state institution but not a financial sector regulator or supervision authority. Private ESOs are individuals, businesses and communities that operate electronic system. Public ESOs are required to manage, process, and store their data in Indonesia, unless the storing technology is not available locally.  Private ESOs have the option to choose where they will manage, process, and store their data. However, if private ESOs choose to process data outside of Indonesia, they are required to provide access to their systems and data for government supervision and law enforcement purposes. For private financial sector ESOs, GR71 provides  that such firms are “further regulated” by Indonesia’s financial sector supervisory authorities with regards to the private sector’s ESO systems, data processing, and data storage.

In March 2020, the Ministry of Communication and Information Technology (MCIT) published a proposed draft implementing regulation of GR 71 for private ESOs. Article 6 of the draft requires private ESOs to obtain approval from MCIT before they can manage, process, and store their data outside of Indonesia. This provision has been widely criticized by foreign firms and is more restrictive than the original government regulation (GR71) which allows offshore data storage. Post continues to monitor this issue.

Additionally, pursuant to GR71, the Financial Services Authority (OJK) issued Regulation 13/2020, an amendment to Regulation 38/2016, which allows banks to operate their electronic data processing systems and disaster recovery centers outside of Indonesia, provided that the system receives approval from OJK.  Furthermore, OJK will evaluate whether the arrangement for offshore data could diminish its supervisory efficiency, negatively affect the bank’s performance, and if the data center complies with Indonesia’s laws and regulations. The regulation became effective March 31, 2020.

Real Property

The Basic Agrarian Law of 1960, the predominant body of law governing land rights, recognizes the right of private ownership and provides varying degrees of land rights for Indonesian citizens, foreign nationals, Indonesian corporations, foreign corporations, and other legal entities. Indonesia’s 1945 Constitution states that all natural resources are owned by the government for the benefit of the people. This principle was augmented by the passage of a land acquisition bill in 2011 that enshrined the concept of eminent domain and established mechanisms for fair market value compensation and appeals. The National Land Agency registers property under Regulation No. 24/1997, though the Ministry of Forestry administers all ”forest land.” Registration is sometimes complicated by local government requirements and claims, as a result of decentralization. Registration is also not conclusive evidence of ownership, but rather strong evidence of such. Government Regulation No.103/2015 on house ownership by foreigners domiciled in Indonesia allows foreigners to have a property in Indonesia with the status of a “right to use” for a maximum of 30 years, with extensions available for up to 20 additional years.

As part of President Jokowi’s second-term economic reform agenda, the Indonesian government has introduced an omnibus bill on job creation that aims to reduce uncertainty around the roles of the central and local governments, including around spatial planning and environmental and social impact assessments (AMDALs).

Intellectual Property Rights

In the U.S. Trade Representative’s (USTR) Special 301 Report released on April 29, 2020, Indonesia remains on the priority watch list due to the  lack of adequate and effective IP protection and enforcement. Indonesia’s patent law continues to raise serious concerns, including with respect to patentability criteria and compulsory licensing. Further, counterfeiting and piracy continue to be pervasive, IP enforcement remains weak, and there are continued market access restrictions for IP-intensive industries. According to U.S. stakeholders, Indonesia’s failure to effectively protect intellectual property and enforce IP rights laws has resulted in high levels of physical and online piracy. Local industry associations have reported large amounts of pirated films, music, and software in circulation in Indonesia in recent years, causing potentially billions of dollars in losses.  Indonesian physical markets, such as Mangga Dua Market, and online markets Tokopedia, Bukalapak, were included in USTR’s Notorious Markets List in 2019.

Indonesia improved market access by amending a troubling provision within the 2016 Patent Law related to compulsory licenses (CLs). Ministry of Law and Human Right (MLHR) Regulation 30/2019 aims to provide more clarity on the criteria for CLs, including provisions on the non-transferability of CLs to third parties, specific purposes, and duration. The provisions also clarify conditions where CLs can be granted based on determination of “detriment to society”, including insufficient supply and unfordable prices of patented products. The new regulation incorporates Regulation 15/2018’s renewable exemption for patent holders to delay local manufacturing requirements. While industry contacts viewed this regulation as an improvement, they still have concerns that this regulation may undermine the overall level of protection that patent holders receive by registering their patents in Indonesia.

MLHR’s Director General of Intellectual Property (DGIP)  said the GOI will further amend the 2016 Patent Law through the pending omnibus bill and a future Patent Law amendment. The job creation omnibus bill would remove a requirement under Article 20 to produce a patented product in Indonesia within 36 months of the grant of a patent. Previously, MLHR allowed a five-year exemption from local production requirements under Regulation 15/2018. The Patent Law amendment will contain revisions to Article 4 on second use and Article 82 on compulsory licensing. The 2016 Patent Law contains several other concerning provisions, including a restrictive definition of “invention” that potentially imposes an additional “meaningful benefit” requirement for patents on new forms of existing compounds, an expansive national interest test for proposed patent licenses, and disclosure of genetic information and traditional knowledge to promote access and benefit sharing.  Observers expect the omnibus bill to be passed in 2020.  Aside from the Article 20 revision in the omnibus bill, there is no concrete timeline for the Patent Law amendment. DGIP reports it is currently drafting guidelines for patent examiners on pharmacy, computer, and biotechnology patents that will be released in 2020.

DGIP has relaxed its more aggressive efforts to collect patent annuity fees by offering extensions to the deadline.  On August 16, 2018, DGIP issued a circular letter warning stakeholders that it may refuse to accept new patent applications from rights holders that have not paid patent annuity fee debts. The letter gave rights holders until February 16, 2019, to settle unpaid patent annuity payments. On February 17, 2019, DGIP issued another circular letter on its website extending the deadline to August 17, 2019. DGIP has since announced a further extension to settle any unpaid annuities to July 31, 2020. However, in order to benefit from the latest extension, companies were required to send a “commitment letter” to DGIP by January 31, 2020 indicating their intention to pay the outstanding annuities.  The U.S. government continues to monitor implementation of this policy with DGIP and industry stakeholders.

Indonesia deposited its instrument of accession to the Madrid Protocol with the World Intellectual Property Organization (WIPO) in October 2017 and issued implementing regulations in June 2018. Under the new rules, applicants desiring international mark protection under the Madrid Protocol are required to first register their application with DGIP , and must be Indonesian citizens, domiciled in Indonesia, or have clear industrial or commercial interests in Indonesia. Although the Trademark Law of 2016 expanded recognition of non-traditional marks, Indonesia still does not recognize certification marks. In response to stakeholder concerns over a lack of consistency in treatment of international well-known trademarks, the Supreme Court issued Circular Letter 1/2017, which advised Indonesian judges to recognize cancellation claims for well-known international trademarks with no time limit stipulation.

Following the issuance of Ministry of Finance (MOF) Regulation No.40/2018, on December 10, 2019, the Supreme Court ruled on MOF Regulation No. 6/2019, which further granted DGCE the legal authority to hold shipments believed to contain imitation goods for up to two days, pending inspection. Under Regulation No.6/2019, rights holders are notified by DGCE (through the recordation system) when an incoming shipment is suspected of containing infringing products. If the inspection reveals an infringement, the rights holder has four days to file a court injunction to request a suspension of the shipment. Rights holders are required to provide a refundable monetary guarantee of IDR 100 million (approximately USD 6,600) when they file a claim with the court. Rights holders can apply for a 10-day (extendable for an additional 10 days) temporary suspension of the shipment until the completion of a commercial court review.  Once the commercial court examines the evidence, the court can make a ruling that same day whether to maintain the temporary hold or to cancel the judgement.  If the court sides with the rights holder, then the guarantee money will be returned to the applicant. Despite  business stakeholder concerns, the GOI retained a requirement that only companies with offices domiciled in Indonesia may use the recordation system.

In 2015, DGIP and KOMINFO jointly released implementing regulations under the Copyright Law to provide for rights holders to report websites that offer IP-infringing products and sets forth procedures for blocking IP-infringing sites. Also in 2015, Indonesia’s Creative Economy Agency (BEKRAF) launched an anti-piracy task force with film and music industry stakeholders. BEKRAF reported that the task force remained focused on coordinating the review of complaints from industry about infringing websites in 2018.  MCIT reported that it blocked 1,946 infringing websites in 2019, a significant increase from the previous  year’s 442 cases. IndoXXI and LayarIndo21, two of the largest online pirated entertainment providers,  reportedly closed in early January. After the IndoXXI shutdown was announced, Video Coalition of Indonesia (VCI) found 200 new infringing websites with similar content. A YouGov survey published by the Asia Video Industry Association (AVIA) revealed that 63 percent of Indonesians access infringing websites for entertainment purposes. MCIT senior officials stated the Ministry is working with the Indonesia National Police Cybercrime Unit and industry groups, including AVIA, to determine and identify the source host, but admitted MCIT does not have the capability to track down the perpetrators and bring criminal charges,

DGIP reports that its directorate of investigation has increased staffing to 187 investigators, including 40 nationwide investigators and 147 staff certified to act as local investigators in 33 provinces when needed for a pending case, and saw the number of investigations double from 30 in 2018 to 47 in 2019. Trademark, Patent, and Copyright legislation requires a rights-holder complaint for investigations, and DGIP and BPOM investigators lack the authority to make arrests so must rely on police cooperation for any enforcement action.

Resources for Rights Holders

Additional information regarding treaty obligations and points of contact at local IP offices, can be found at the World Intellectual Property Organization (WIPO) country profile website http://www.wipo.int/directory/en/ .For a list of local lawyers, see: http://jakarta.usembassy.gov/us-service/attorneys.html.

Capital Markets and Portfolio Investment

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

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

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

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

Money and Banking System

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

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

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

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

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

Foreign Exchange and Remittances

Foreign Exchange

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

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

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

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

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

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

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

Remittance Policies

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

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

Sovereign Wealth Funds

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

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

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

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

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

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

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

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

Privatization Program

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

Indonesian businesses are required to undertake responsible business conduct (RBC) activities under Law 40/2007 concerning Limited Liability Companies. In addition, sectoral laws and regulations have further specific provisions on RBC. Indonesian companies tend to focus on corporate social responsibility (CSR) programs offering community and economic development, and educational projects and programs. This is at least in part caused by the fact that such projects are often required as part of the environmental impact permits (AMDAL) of resource extraction companies, which undergo a good deal of domestic and international scrutiny of their operations. Because a large proportion of resource extraction activity occurs in remote and rural areas where government services are reported to be limited or absent, these companies face very high community expectations to provide such services themselves. Despite significant investments – especially by large multinational firms – in CSR projects, businesses have noted that there is limited general awareness of those projects, even among government regulators and officials.

The government does not have an overarching strategy to encourage or enforce RBC, but regulates each area through the relevant laws (environment, labor, corruption, etc.). Some companies report that these laws  are not always enforced evenly. In 2017, the National Commission on Human Rights launched a National Action Plan on Business and Human Rights in Indonesia, based on the UN Guiding Principles on Business and Human Rights.

OJK regulates corporate governance issues, but the regulations and enforcement are not yet up to international standards for shareholder protection.

Indonesia does not adhere to the OECD Guidelines for Multinational Enterprises, and the government is not known to have encouraged adherence to those guidelines. Many companies claim that the government does not encourage adherence to the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas or any other supply chain management due diligence guidance. Indonesia does participate in the Extractive Industries Transparency Initiative (EITI). Indonesia was suspended by the EITI Board due to a missed deadline for its first EITI report, but the suspension was lifted following publication of its 2012-2013 EITI Report in 2015.

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

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

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

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

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

Resources to Report Corruption

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

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

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

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

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

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

Companies have reported that the Indonesian labor market faces a number of structural barriers, including skills shortages and lagging productivity, restrictions on the use of contract workers, and reduced gaps between minimum wages and average wages. Recent significant increases in the minimum wage for many provinces have made unskilled and semi-skilled labor more costly. In the bellwether Jakarta area, the minimum wage was raised again from IDR 3.6 million (USD 256.6) per month in 2018 to IDR 3.94 million (USD 260) per month in 2019. Unions staged largely peaceful protests across Indonesia in 2018 demanding the government increase the minimum wage, decrease the price for basic needs, and stop companies from outsourcing and employing foreign workers. Under the new wage setting policy adopted as part of the 2018 economic stimulus package, annual minimum wage increases will be indexed directly to inflation and GDP growth. Previously, minimum wage adjustments were subject to negotiations between local governments, industry, and unions, and the changes varied widely from year to year and from region to region.

As only about 7.6 percent of the workforce is unionized, the benefits of union advocacy (including increases in minimum wage) do not always filter down to the rest of the workforce. While restrictions on the use of contract workers remain in place, continued labor protests focusing on this issue suggest that government enforcement continues to be lax. Until the onset of the COVID-19 pandemic, unemployment has remained steady at 4.38 percent. Unemployment tends to be higher than the national average among young people.

Indonesian labor is relatively low-cost by world standards, but inadequate skills training and complicated labor laws combine to make Indonesia’s competitiveness lag behind other Asian competitors. Investors frequently cite high severance payments to dismissed employees, restrictions on outsourcing and contract workers, and limitations on expatriate workers as significant obstacles to new investment in Indonesia.

Employers also note that the skills provided by the education system is lower than that of neighboring countries, and successive Labor Ministers have listed improved vocational training as a top priority. Labor contracts are relatively straightforward to negotiate but are subject to renegotiation, despite the existence of written agreements. Local courts often side with citizens in labor disputes, contracts notwithstanding. On the other hand, some foreign investors view Indonesia’s labor regulatory framework, respect for freedom of association, and the right to unionize as an advantage to investing in the country. Expert local human resources advice is essential for U.S. companies doing business in Indonesia, even those only opening representative offices.

Minimum wages vary throughout the country as provincial governors set an annual minimum wage floor and district heads have the authority to set a higher rate. Indonesia’s highly fractured and historically weak labor movement has gained strength in recent years, evidenced by significant increases in the minimum wage. As noted above, recent changes to the minimum wage setting system may make the process less dependent on political factors and more aligned with actual changes in inflation and GDP growth. Labor unions are independent of the government. The law, with some restrictions, protects the rights of workers to join independent unions, conduct legal strikes, and bargain collectively. Indonesia has ratified all eight of the core ILO conventions underpinning internationally accepted labor norms. The Ministry of Manpower maintains an inspectorate to monitor labor norms, but enforcement is stronger in the formal than in the informal sector. A revised Social Security Law, which took effect in 2014, requires all formal sector workers to participate. Subject to a wage ceiling, employers must contribute an amount equal to 4 percent of workers’ salaries to this plan. In 2015, Indonesia established the Social Security Organizing Body of Employment (BPJS-Employment), a national agency to support workers in the event of work accident, death, retirement, or old age.

The government has proposed an omnibus bill on labor reforms intended to attract investors, boost economic growth and create jobs.  The bill covers foreign workers, wages, work hours, redundancy and social security.

A proposed revision to Indonesia’s 2003 labor law may establish more stringent restrictions on outsourcing, currently used by many firms to circumvent some formal-sector job benefits.

Additional information on child labor, trafficking in persons, and human rights in Indonesia can be found online through the following references:

• Child Labor Report: https://www.dol.gov/agencies/ilab/resources/reports/child-labor/indonesia .
• Trafficking in Persons Report: https://www.state.gov/reports/2019-trafficking-in-persons-report/indonesia/
• Human Rights Report: https://www.state.gov/reports/2018-country-reports-on-human-rights-practices/

The U.S. International Development Finance Corporation (DFC) and its predecessor, the Overseas Private Investment Corporation (OPIC), have invested USD 2.35 billion across 116 projects in Indonesia since 1974, including in the power generation, financial services, and agricultural sectors. The DFC’s current portfolio is USD 123.8 million across five projects in Indonesia. The bulk of its exposure is in the DFC-financed UPC Renewables Sidrap Bayu wind power plant in South Sulawesi, where a USD 120 million investment supported the construction of Indonesia’s first commercial wind farm. The project demonstrates DFC’s commitment to help eliminate blackouts and diversify Indonesia’s energy supply. On March 12, 2020, DFC approved a USD 190 million loan to Trans Pacific Networks (TPN) to support the world’s longest telecommunications cable. The cable will directly connect Singapore, Indonesia, and the United States and have the capability to serve several markets in Southeast Asia and the Pacific.

Indonesia is one of the DFC’s priority markets and the DFC remains interested in projects in the transportation, energy, and digital economy sectors. In January 2020, DFC CEO Adam Boehler visited Indonesia as part of his first overseas visit since the DFC’s formal launch. His visit followed other senior visits by DFC officials to identify projects for DFC support, including the first-ever, DFC-led, U.S.-Australia-Japan trilateral infrastructure business development mission in August 2019.

Indonesia has joined the Multilateral Investment Guarantee Agency (MIGA). MIGA, a part of the World Bank Group, is an investment guarantee agency to insure investors and lenders against losses relating to currency transfer restrictions, expropriation, war and civil disturbance, and breach of contract. In 2018, MIGA provided a guarantee loan to Indonesian state-owned financial institutions and financed a hydroelectric power plant.

*Indonesia Statistic Agency, GDP from the host country website is converted into USD with the exchange rate 14,156 for 2019

*Indonesia Investment Coordinating Board (BKPM), January 2020

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.

Source:  IMF Coordinated Direct Investment Survey for inward and outward investment data.

Source: IMF Coordinated Portfolio Investment Survey, 2018. Sources of portfolio investment are not tax havens.
The Bank of Indonesia published comparable data.

Reggie Singh
Economic Section
U.S. Embassy Jakarta
+62-21-50831000
BusinessIndonesia@state.gov

Policies Towards Foreign Direct Investment

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

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

Investment Promotion Agency

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

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

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

Limits on Foreign Control and Right to Private Ownership and Establishment

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

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

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

Other Investment Policy Reviews

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

Business Facilitation

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

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

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

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

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

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

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

Outward Investment

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

Transparency of the Regulatory System

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

The 2010 Kenyan Constitution requires government to incorporate public participation before officials and agencies make certain decisions. The draft Public Participation Bill (2016) would provide the general framework for such public participation. The Ministry of Devolution has produced a guide for counties on how to carry out public participation; many counties have enacted their own laws on public participation. The Environmental Management and Coordination Act (1999) incorporates the principles of sustainable development, including public participation in environmental management. The Public Finance Management Act mandates public participation in the budget cycle. The Land Act, Water Act, and Fair Administrative Action Act (2015) also include provisions providing for public participation in agency actions.

Kenya 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 information is published on the Public Procurement Information Portal enhances transparency and accountability (https://www.tenders.go.ke/website). However, the directive is yet to be fully implemented.

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

According to the Africa Regional Integration Index Report 2019, Kenya is the second best 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 East African Community Integration within the Ministry of East Africa and Regional Development. Kenya generally adheres to international regulatory standards. The country is a member of the WTO and provides notification of draft technical regulations to the Committee on Technical Barriers to Trade (TBT). Kenya maintains a TBT National Enquiry Point at http://notifyke.kebs.org . Additional information on Kenya’s WTO participation can be found at https://www.wto.org/english/thewto_e/countries_e/kenya_e.htm .

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

Legal System and Judicial Independence

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

Laws and Regulations on Foreign Direct Investment

The Foreign Judgments (Reciprocal Enforcement) Act (2012) provides for the enforcement of judgments given in other countries that accord reciprocal treatment to judgments given in Kenya. Kenya has entered into reciprocal enforcement agreements with Australia, the United Kingdom, Malawi, Tanzania, Uganda, Zambia, and Seychelles. Outside of such an agreement, a foreign judgment is not enforceable in the Kenyan courts except by filing a suit on the judgment. Foreign advocates 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 entitled 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 entitled 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.

Competition and Anti-Trust Laws

Kenya does not have a competition or Anti-Trust policy, however the Competition Act (2010) created the Competition Authority of Kenya (CAK) which covers restrictive trade practices, mergers and takeovers, unwarranted concentrations, and price control. All mergers and acquisitions require the CAK’s authorization before they are finalized, and the CAK regulates abuse of dominant position and other competition and consumer-welfare related issues in Kenya. In 2014, CAK imposed a filing fee for mergers and acquisitions set at one million Kenyan shillings (KSH) (approximately USD 10,000) for mergers involving turnover of between one and KSH 50 billion (up to approximately USD 500 million). KSH two million (approximately USD 20,000) will be charged for larger mergers. Company takeovers are possible if the share buy-out is more than 90 percent, although such takeovers are rarely seen in practice.

Expropriation and Compensation

The 2010 constitution guarantees protection from expropriation, except in cases of eminent domain or security concerns, and all cases are subject to the payment of prompt and fair compensation. The Land Acquisition Act (2010) governs due process and compensation in land acquisition, although land rights remain contentious and can cause significant project delays. However, there are cases where government measures could be deemed indirect expropriation that may impact foreign investment. Companies report an emerging trend in land lease renewal where foreign investors face uncertainty in lease renewals by county governments in instances where the county wants to confiscate some or all of the foreign investor’s project property.

Dispute Settlement

ICSID Convention and New York Convention

Kenya is a member of the International Centre for Settlement of Investment Disputes, also known as the ICSID Convention or the Washington Convention, and the 1958 New York Convention on the Enforcement of Foreign Arbitral Awards. 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 the Kenyan Constitution, which provides that “[e]very person having an interest or right in or over property which is compulsorily taken possession of or whose interest in or right over any property is compulsorily acquired shall have a right of direct access to the High Court.” Kenya in 2020 prevailed in an ICSID international arbitration case against WalAm Energy Inc, a U.S./Canadian geothermal company in a geothermal exploration license revocation dispute.

Investor-State Dispute Settlement

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

International Commercial Arbitration and Foreign Courts

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

Transcription of Court Proceedings in the Commercial and Tax Division

The Kenyan Judiciary reported in its 2018-2019 State of the Judiciary and Administration Report that it had commenced its court recording and transcription project with the installation of recording equipment in six courtrooms in the Commercial and Tax Division in Nairobi. The project will significantly speed up the hearing of cases as judges will no longer be required to record proceedings by hand.

Court Annexed Mediation and Small Claims Courts

The National Council on the Administration of Justice spearheaded legislative reforms to accommodate mediation in the formal court process as well as introduce small claims courts to expedite resolution of commercial cases. The Judiciary reported in its State of the Judiciary Address (2018-2019), that the Mediation Accreditation Committee accredited 645 mediators that were handling a total of 411 commercial matters during the reporting period. Additionally, the Judiciary reported that disputes with a total value of over three billion Kenyan shillings (KSH) (approximately USD 30,000,000) had been resolved through Court Annexed Mediation during the reporting period. Court Annexed Mediation serves as an effective case resolution mechanism that will significantly reduce pressure on the justice system and eventually result in expeditious determination of commercial cases.

Bankruptcy Regulations

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

Creditors’ rights are comparable to those in other common law countries, and monetary judgments typically are made in Kenyan shillings. The Insolvency Act (2015) increased the rights of borrowers and prioritizes the revival of distressed firms. The law states that a debtor will automatically be discharged from debt after three years. Bankruptcy is not criminalized in Kenya. Kenya moved up 6 ranks in the World Bank Group’s Doing Business 2020 report, moving to 50 of 190 countries in the “resolving insolvency” category.

Investment Incentives

Kenya provides both fiscal and non-fiscal incentives to foreign investors (http://www.invest.go.ke/starting-a-business-in-kenya/investment-incentives/ ). The minimum foreign investment to qualify for GOK investment incentives is USD 100,000, a potential deterrent to foreign small and medium enterprise investment, especially in the services sector. Investment Certificate benefits, including entry permits for expatriates, are outlined in the Investment Promotion Act (2004).

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

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

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

Foreign Trade Zones/Free Ports/Trade Facilitation

Kenya’s Export Processing Zones (EPZ) and Special Economic Zones (SEZ) offer special incentives for firms operating within their boundaries. By the end of 2019, Kenya had 74 designated EPZs, with 137 companies and 60,383 workers contributing KSH 77.1 billion (about USD 713 million) to the Kenyan economy. Companies operating within an EPZ benefit from the following tax benefits: a 10-year corporate-tax holiday and a 25 percent tax thereafter; a 10-year withholding tax holiday; stamp duty exemption; 100 percent tax deduction on initial investment applied over 20 years; and VAT exemption on industrial inputs.

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

While EPZs are focused on encouraging production for export, SEZs are designed to boost local economies by offering benefits for goods that are consumed both internally and externally. SEZs will allow for a wider range of commercial ventures, including primary activities such as farming, fishing, and forestry. The 2016 Special Economic Zones Regulations state that the Special Economic Zone Authority (SEZA) must maintain an open investment environment to facilitate and encourage business by the establishment of simple, flexible, and transparent procedures for investor registration. In 2019 Kenya developed the revised draft SEZ regulations with simplified and improved incentives structure. The 2019 draft regulations include customs duty exemptions to goods and services in the SEZ and no trade related restrictions including quantitative ones in import of goods and services into the SEZ. The rules also empower county governments to set aside public land for establishment of industrial zones.

Companies operating in the SEZs will receive the following benefits: all SEZ supplies of goods and services to companies and developers will be exempted from VAT; the corporate tax rate for enterprises, developers, and operators will be reduced from 30 percent to 10 percent for the first 10 years and 15 percent for the next 10 years; exemption from taxes and duties payable under the Customs and Excise Act (2014), the Income Tax Act (1974), the EAC Customs Management Act (2004), and stamp duty; and exemption from county-level advertisement and license fees. There are currently SEZs in Mombasa (2,000 sq. km), Lamu (700 sq. km), and Kisumu (700 sq. km), Naivasha, Machakos (100 acres) and private developments designated as SEZ include Tatu City in Kiambu. The Third Medium Term Plan of Kenya’s Vision 2030 economic development agenda calls for a study for an SEZ at Dongo Kundu, and an SEZ was also under consideration at a location near the Olkaria geothermal power plant.

Performance and Data Localization Requirements

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

The Public Procurement and Asset Disposal Act (2015) offers preferences to firms owned by Kenyan citizens and to products manufactured or mined in Kenya in a GOK strategy called “Buy Kenya Build Kenya” which mandates 40 percent of GOK procurement be locally produced goods and services. Tenders funded entirely by the government with a value of less than KSH 50 million (approximately USD 500,000), are reserved for Kenyan firms and goods. If the procuring entity seeks to contract with non-Kenyan firms or procure foreign goods, the act requires a report detailing evidence of an inability to procure locally. The act also calls for at least 30 percent of government procurement contracts to go to firms owned by women, youth, and persons with disabilities. The act further reserves 20 percent of county procurement tenders to residents of that county.

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

Kenya passed the Data Protection Act (2019) which imposes restrictions on the transfer of data in and out of Kenya without consent of the Data Protection Commissioner and the subject, functionally requiring data localization. The Act is similar to the European General Data Protection Regulation requirements on data processing.

Real Property

The 2010 Constitution prohibits foreigners or foreign owned firms from owning freehold interest in land in Kenya. However, unless classified as agricultural, there are no restrictions on foreign-owned companies leasing land or real estate. The cumbersome and opaque process to acquire land raises concerns about security of title, particularly given past abuses relating to the distribution and redistribution of public land. The Land (Extension and Renewal of Leases) Rules (2017) stopped the automatic renewal of leases and tied renewals to the economic output of the land that must be beneficial to the economy. If property legally purchased remains unoccupied, the property ownership can revert to other occupiers, including squatters. Privately-owned land comprised six percent of the total land area in 1990; government land was about 20 percent of the total and included national parks, forest land and alienated and un-alienated land. Trust land is the most extensive type of tenure, comprising 64 percent of the total land area in 1990.

The 2010 Constitution and subsequent land legislation created the National Land Commission, an independent government body mandated to review historical land injustices and provide oversight of government land policy and management. This had the unintended side effect of introducing coordination and jurisdictional confusion between the commission and the Ministry of Lands mainly fueled by land interests by the political class. In 2015, President Kenyatta commissioned the new National Titling Center with a promise to increase the 5.6 million title deeds issued since independence to 9 million. From 2013 to 2018, an additional 4.5 million title deeds have been issued, however 70 percent of land in Kenya remained untitled. Land grabbing resulting from double registration of titles remains prevalent. Property legally purchased but unoccupied can revert ownership to other parties.

Mortgages and liens exist in Kenya, but the recording system is not reliable – Kenya has only some 24,000 recorded mortgages in a country of 47.6 million people – and there are often complaints of property rights and interests not being enforced. The legal infrastructure around land ownership and registration has changed in recent years, and land issues have delayed several major infrastructure projects. Kenya’s 2010 Constitution required all land leases to convert from 999 years to 99 years, giving the state the power to review leasehold land at the expiry of the 99 years, deny lease renewal, and confiscate the land if it determines the land has not been used productively. The constitution also converted foreign-owned freehold interests into 99-year leases at a nominal “peppercorn rate” sufficient to satisfy the requirements for the creation of a legal contract. The GOK has not yet effectively implemented this provision. In July 2020, the Ministry of Lands and Physical planning released draft electronic land registration regulations (2020) to guide the e-transaction of land. The Ministry together with the National Land Commission agreed to commence the e-transaction on land matters pending resolution of outstanding issues.

Intellectual Property Rights

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

The Presidential Task Force on Parastatal Reforms (2013) proposed that the three intellectual property agencies, namely: the Kenya Industrial Property Institute (KIPI), the Kenya Copyright Board (KECOBO) and the Anti-Counterfeit Authority (ACA) be merged into one Government Owned Entity (GOE). A task force on the merger comprising staff from KIPI, ACA, KECOBO, the Ministry of Industrialization, Trade and Enterprise Development is drafting the instruments of the merger which has led to a draft GOE named Intellectual Property Office of Kenya (IPOK) and has also drafted Intellectual Property Office Bill, 2020 for establishing IPOK. In an attempt to combat the import of counterfeits, the Ministry of Industrialization and the Kenya Bureau of Standards (KEBS) decreed in 2009 that all locally-manufactured goods must have a KEBS standardization mark. Several categories of imported goods, specifically food products, electronics, and medicines, must have an import standardization mark (ISM). Under this program, U.S. consumer-ready products may enter the Kenyan market without altering the U.S. label but must also carry an ISM. Once the product qualifies for a Confirmation of Conformity, KEBS will issue the ISM free of charge. From time to time KEBS and the Anti-Counterfeit Agency conduct random seizures of counterfeit imports but there is no clear database of seizures kept.

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

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

Capital Markets and Portfolio Investment

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

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

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

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

Money and Banking System

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

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

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

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

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

Foreign Exchange and Remittances

Foreign Exchange Policies

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

Remittance Policies

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

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

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

Sovereign Wealth Funds

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

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

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

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

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

Privatization Program

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

The Environmental Management and Coordination Act (1999) establishes a legal and institutional framework for the management of the environment while the Factories Act (1951) safeguards labor rights in industries. The Mining Act 2016 provides for holders of mineral rights to develop a comprehensive community development agreement that secures socially responsible investment and provides for employment preference for those living in communities around mining operations. The legal system, however, has remained slow to prosecute corporate malfeasance in both areas.

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

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

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

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

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

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

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

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

Resources to Report Corruption

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

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

Contact at “watchdog” organization:

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

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

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

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

Kenya has one of the highest literacy rates in the region at 90 percent. Investors have access to a large pool of highly qualified professionals in diverse sectors from a working population of over 47.5 percent out of a population of 47.6 million people. Expatriates are allowed to work in Kenya provided they have a work (entry) permit issued under the Kenya Citizenship and Immigration Act 2011. In December 2018, the Cabinet Secretary for Interior and Coordination of National Government issued a directive that requires foreign nationals to apply for their work permits while in their country of origin and will have to prove that the skills they have are not available in the Kenya labor market. Work permits are usually granted to foreign enterprises approved to operate in Kenya as long as the applicants are key personnel. In 2015, the Directorate of Immigration Services made additions to the list of requirements for work permits and special pass applications. Issuance of a work permit now requires an assured income of at least USD 24,000 annually. Exemptions are available, however, for firms in agriculture, mining, manufacturing, or consulting sectors with a special permit. International companies have complained that the visa and work permit approval process is slow, and bribes are sometimes solicited to speed the process. A tightening of work permit issuances and enforcement begun in 2018 is now one of the largest complaints of multinational companies doing business in Kenya.

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

According to the Kenya National Bureau of Statistics (KNBS), in 2019 non-agricultural employment in the formal sector was at 18.1 million, with nominal average earnings of Ksh778,248 (USD 7,200) per person per annum. Kenya has the highest rate of youth joblessness in East Africa. According to the 2019 census data, 5,341,182 or 38.9 percent of the 13,777,600 youths eligible to work are jobless. Employment in Kenya’s formal sector was 2.9 million in 2019 up from 2.8million in 2018. The government is the largest employer in the formal sector, with an estimated 865,200 government workers in 2019. In the private sector, agriculture, forestry, and fishing employed 296,700 workers while manufacturing employed 329,000 workers. However, Kenya’s large informal sector – consisting of approximately 80 percent of the labor force – makes accurate labor reporting difficult.

The GOK has instituted different programs to link and create employment opportunities for the youth, which include a website (http://www.mygov.go.ke/category/jobs/ ). Other measures include the establishment of the National Employment Authority which hosts the National Employment Authority Integrated Management System website that provides public employment service by listing vacancies ( https://neaims.go.ke/  ). The Kenya Labour Market Information System (KLMIS) portal (https://www.labourmarket.go.ke/ ), run by the Ministry of Labour and Social Protection in collaboration with the labor stakeholders, is a one-stop shop for labor information in the country. The site seeks to help address the challenge of inadequate supply of crucial employment statistics in Kenya by providing an interactive platform for prospective employers and job seekers. Both local and foreign employers are required to register with National Industrial Training Authority (NITA) within 30 days of operating. There are no known material compliance gaps in either law or practice with international labor standards that would be expected to pose a reputational risk to investors. The International Labor Organization has not identified any material gaps in Kenya’s labor law or practice with international labor standards. Kenya’s labor laws comply, for the most part, with internationally recognized standards and conventions, and the Ministry of Labor and Social Protection is currently reviewing and ensuring that Kenya’s labor laws are consistent with the 2010 constitution. The Labor Relations Act (2007) provides that workers, including those in export processing zones, are free to form and join unions of their choice.

Collective bargaining is common in the formal sector but there is no data on the percentage of the economy covered by collective bargaining agreements (CBA). However, in 2019 263 CBAs were registered in the labor relations court with Wholesale and Retail trade sector recording the highest at 88. The law permits workers in collective bargaining disputes to strike but requires the exhaustion of formal conciliation procedures and seven days’ notice to both the government and the employer. Anti-union discrimination is prohibited, and the government does not have a history of retaliating against striking workers. The law provides for equal pay for equal work. Regulation of wages is part of the Labor Institutions Act (2014), and the government has established basic minimum wages by occupation and location.

The GOK has a growing trade relationship with the United States under the AGOA framework which requires labor standards to be upheld. The Ministry of Labor and Social Protection is reviewing its labor laws to align with international standards as labor is also a chapter in the Free Trade Agreement negotiations with the U.S. In 2019, the government continued efforts with dozens of partner agencies to implement a range of programs for the elimination of child and forced labor. However, low salaries, insufficient resources, and attrition from retirement of labor inspectors are significant challenges to effective enforcement. Employers in all sectors routinely bribe labor inspectors to prevent them from reporting infractions, especially in the area of child labor.

In 2016, the U.S. International Development Finance Corporation (formerly OPIC) established a regional office in Nairobi, but the office is not currently staffed. The agency is engaged in funding programs in Kenya with an active in-country portfolio of approximately USD 700 million, including projects in power generation, internet infrastructure, light manufacturing, and education infrastructure. 13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

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

Source: IMF Coordinated Portfolio Investment Survey (CPIS). Figures are from 2012 (latest available). IMF no longer publishes Kenya data as part of its CPIS. 14. Contact for More Information

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

Policies Towards Foreign Direct Investment

Under the concept of “one country, two systems,” Macau enjoys a high degree of autonomy in economic matters, and its economic system is to remain unchanged until at least 2049. The GOM maintains a transparent, non-discriminatory, and free-market economy. Macau has separate membership in the World Trade Organization (WTO) from that of mainland China.

There are no restrictions placed on foreign investment in Macau as there are no special rules governing foreign investment. Both overseas and domestic firms register under the same set and are subject to the same regulations on business, such as the Commercial Code (Decree 40/99/M).

Macau is heavily dependent on the gaming sector and tourism. The GOM aims to diversify Macau’s economy by attracting foreign investment and is committed to maintaining an investor-friendly environment. Corporate taxes are low, with a tax rate of 12 percent for companies whose net profits exceed MOP 300,000 (USD 37,500). For net profits less than USD 37,500, the tax ranges from three percent to 12 percent. The top personal tax rate is 12 percent. The tax rate of casino concessionaries is 35 percent on gross gaming revenue, plus a four percent contribution for culture, infrastructure, tourism, and a social security fund.

In 2002, the GOM ended a long-standing gaming monopoly, awarding two gaming concessions to consortia with U.S. interests. This opening has encouraged substantial U.S. investment in casinos and hotels and has spurred rapid economic growth. Macau is attempting to position itself to be a regional center for incentive travel, conventions, and tourism. In March 2019, the GOM extended for two years the gaming licenses of SJM (a locally-owned company) and MGM China (a joint venture with investment from U.S.-owned MGM Resorts International that holds a sub-concession from SJM), that were set to expire in 2020. The concessions of all six of Macau’s gambling concessionaires and sub-concessionaires are now set to expire in 2022. The GOM is currently drafting a bill to guide the gaming concession retendering process.

The Macau Trade and Investment Promotion Institute (IPIM) is the GOM agency responsible for promoting trade and investment activities. IPIM provides one-stop services, including notary service, for business registration, and it applies legal and administrative procedures to all local and foreign individuals or organizations interested in setting up a company in Macau.

Macau maintains an ongoing dialogue with investors through various business networks and platforms, such as the IPIM, the Macau Chamber of Commerce, AmCham Macau, and the Macau Association of Banks.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign firms and individuals are free to establish companies, branches, and representative offices without discrimination or undue regulation in Macau. There are no restrictions on the ownership of such establishments. Company directors are not required to be citizens of, or resident in, Macau, except for the following three professional services which impose residency requirements:

Education – an individual applying to establish a school must have a Certificate of Identity or have the right to reside in Macau. The principal of a school must be a Macau resident.

Newspapers and magazines – applicants must first apply for business registration and register with the Government Information Bureau as an organization or an individual. The publisher of a newspaper or magazine must be a Macau resident or have the right to reside in Macau.

Legal services – lawyers from foreign jurisdictions who seek to practice Macau law must first obtain residency in Macau. Foreign lawyers must also pass an examination before they can register with the Lawyer’s Association, a self-regulatory body. The examination is given in Chinese or Portuguese. After passing the examination, foreign lawyers are required to serve an 18-month internship before they are able to practice law in Macau.

Other Investment Policy Reviews

Macau last conducted the WTO Trade Policy Review in May 2013. https://www.wto.org/english/tratop_e/tpr_e/g281_e.pdf

Business Facilitation

Macau provides a favorable business and investment environment for enterprises and investors. The IPIM helps foreign investors in registering a company and liaising with the involved agencies for entry into the Macau market. The business registration process takes less than 10 working days. http://www.ipim.gov.mo/en/services/one-stop-service/handle-company-registration-procedures/ .

Outward Investment

Macau, as a free market economy, does not promote or incentivize outward investment, nor does it restrict domestic investors from investing abroad. Hong Kong and mainland China were the top two destinations for Macau’s outward investments in 2018.

Transparency of the Regulatory System

The GOM has transparent policies and laws that establish clear rules and do not unnecessarily impede investment. The basic elements of a competition policy are set out in Macau’s Commercial Code.

The GOM will normally conduct a three-month public consultation when amending or making legislation, including investment laws, and will prepare a draft bill based on the results of the public consultation. The lawmakers will discuss the draft bill before putting it to a final vote. All the processes are transparent and consistent with international norms.

Public comments received by the GOM are not made available online to the public. The draft bills are made available at the Legislative Assembly’s website http://www.al.gov.mo/zh/, while this website http://www.io.gov.mo/ links to the GOM’s Printing Bureau, which publishes laws, rules, and procedures.

Macau’s anti-corruption agency the Commission Against Corruption (known by its Portuguese acronym CCAC) carries out ombudsman functions to safeguard rights, freedoms, and legitimate interests of individuals and to ensure the impartiality and efficiency of public administration.

Macau’s law on the budgetary framework (Decree 15/2017) aims to reinforce monitoring of public finances and to enhance transparency in the preparation and execution of the fiscal budget.

International Regulatory Considerations

Macau is a member of WTO and adopts international norms. The GOM notified all draft technical regulations to the WTO Committee on Technical Barriers to Trade.

Macau, as a signatory to the Trade Facilitation Agreement (TFA), has achieved a 100 percent rate of implementation commitments.

Legal System and Judicial Independence

Under “one country, two systems”, Macau maintains Continental European law as the foundation of its legal system, which is based on the rule of law and the independence of the judiciary. The current judicial process is procedurally competent, fair, and reliable. Macau has a written commercial law and contract law. The Commercial Code is a comprehensive source of commercial law, while the Civil Code serves as a fundamental source of contractual law. Courts in Macau include the Court of Final Appeal, Intermediate Courts, and Primary Courts. There is also an Administrative Court, which has jurisdiction over administrative and tax cases. These provide an effective means for enforcing property and contractual rights. At present, the Court of Final Appeal has three judges; the Intermediate Courts have nine judges; and the Primary Courts have 31 judges. The Public Prosecutions Office has 38 prosecutors.

Laws and Regulations on Foreign Direct Investment

Macau’s legal system is based on the rule of law and the independence of the judiciary. Foreign and domestic companies register under the same rules and are subject to the same set of commercial and bankruptcy laws (Decree 40/99/M).

Competition and Anti-Trust Laws

Macau has no agency that reviews transactions for competition-related concerns, nor a competition law. The Commercial Code (Law No. 16/2009) contains basic elements of a competition policy with regard to commercial practices that can distort the proper functioning of markets. While the GOM has stated that existing provisions are adequate and appropriate given the scale and scope of local economy, it announced in March 2019 that it was studying a fair competition law that would protect against monopolies and price-fixing. The GOM has since not disclosed the progress of the study.

Expropriation and Compensation

The U.S. Consulate General is not aware of any direct or indirect actions to expropriate. Legal expropriations of private property may occur if it is in the public interest. In such cases, the GOM will exchange the private property with an equivalent public property based on the fair market value and conditions of the former. The exchange of property is in accordance with established principles of international law. There is no remunerative compensation.

Dispute Settlement

ICSID Convention and New York Convention

Both the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention) and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) apply to Macau. The Law on International Commercial Arbitration (Decree 55/98/M) provides for enforcement of awards under the 1958 New York Convention.

Investor-State Dispute Settlement

The U.S. Consulate General is aware of one previous investment dispute involving U.S. or other foreign investors or contractors and the GOM. In March 2010, a low-cost airline carrier was reportedly forced to cancel flight services because of a credit dispute with its fuel provider, triggering events which led to the airline’s de-licensing. Macau courts declared the airline bankrupt in September 2010. The airline’s major shareholder, a U.S. private investment company, filed a case in the Macau courts seeking a judgment as to whether a GOM administrative act led to the airline’s demise. The Court of Second Instance held hearings in May and June 2012. In November 2013, the Court of Second Instance rejected the appeal. Private investment disputes are normally handled in the courts or via private negotiation. Alternatively, disputes may be referred to the Hong Kong International Arbitration Center or the World Trade Center Macau Arbitration Center.

International Commercial Arbitration and Foreign Courts

Macau has an arbitration law (Decree 55/98/M), which adopts the UN Commission on International Trade Law (UNCITRAL) model law for international commercial arbitration. The GOM accepts international arbitration of investment disputes between itself and investors. Local courts recognize and enforce foreign arbitral awards.

Macau established the World Trade Center Macau Arbitration Center in June 1998. The objective of the Center is to promote the resolution of disputes through arbitration and conciliation, providing the disputing parties with alternative resolutions other than judicial litigation.

Foreign judgments in civil and commercial matters may be enforced in Macau. The enforcement of foreign judgments is stipulated in Articles 1199 and 1200 of the Civil Procedure Code. A foreign court decision will be recognized and enforced in Macau, provided that it qualifies as a final decision supported by authentic documentation and that its enforcement will not breach Macau’s public policy.

Bankruptcy Regulations

Commercial and bankruptcy laws are written under the Macau Commercial Code, the Civil Procedure Code, and the Penal Code. Bankruptcy proceedings can be invoked by an application from the bankrupt business, by petition of the creditor, or by the Public Prosecutor. There are four methods used to prevent the occurrence of bankruptcy: the creditors meeting, the audit of the company’s assets, the amicable settlement, and the creditor agreement. According to Articles 615-618 of the Civil Code and Article 351-353 of the Civil Procedure Code, a creditor who has a justified fear of losing the guarantee of his credits may request seizure of the assets of the debtor. Bankruptcy offenses are subject to criminal liability.

There is no credit bureau or other credit monitoring authority serving Macau’s market.

Investment Incentives

To attract foreign investment, the GOM offers investment incentives to investors on a national treatment basis. These incentives are contained in Decrees 23/98/M and 49/85/M and are provided so long as companies can prove they are doing one of the following: promoting economic diversification, contributing to the promotion of exports to new unrestricted markets, promoting added value within their activity’s value chain, or contributing to technical modernization. There is no requirement that Macau residents own shares. These incentives are categorized as fiscal incentives, financial incentives, and export diversification incentives.

Fiscal incentives include full or partial exemption from profit/corporate tax, industrial tax, property tax, stamp duty for transfer of properties, and consumption tax. The tax incentives are consistent with the WTO Agreement on Subsidies and Countervailing Measures, as they are neither export subsidies nor import substitution subsidies as defined in the WTO Agreement. In 2019, the GOM put forward an enhanced tax deduction for research and development (R&D) expenditure incurred for innovation and technology projects by companies whose registered capital reached USD 125,000, or whose average taxable profits reached USD 62,500 per year in three consecutive years. The tax deduction amounts to 300 percent for the first USD 375,000 of qualifying R&D expenditure and 200 percent for the remaining amount, subject to a limit of USD 1.9 million in total). In addition, income received from Portuguese speaking countries is exempt from the corporate tax, provided such income has been subject to tax in its place of origin.

Two new laws to encourage financial leasing activities in Macau became effective in April 2019. Under the new regime, the minimum capital requirement of a financial leasing company is reduced from USD 3.75 million to USD 1.25 million. In addition, the acquisition by the financial leasing company of a property exclusively for its sole use has an exemption of up to USD 62,500 from a stamp duty.

Financial incentives include government-funded interest subsidies. Export diversification incentives include subsidies given to companies and trade associations attending trade promotion activities organized by IPIM. Only companies registered with Macau Economic Services (MES) may receive subsidies for costs such as space rental or audio-visual material production. Macau also provides other subsidies for the installation of anti-pollution equipment.

Foreign Trade Zones/Free Ports/Trade Facilitation

Macau is a free port; however, there are four types of dutiable commodities: liquors, tobacco, vehicles, and petrol (gasoline). Licenses must be obtained from the MES prior to importation of these commodities.

In order to promote the MICE (meetings, incentives, conventions, and exhibitions) and logistics industries in Macau, the GOM has accepted the ATA Carnet (Admission Temporaire/Temporary Admission), an international customs document providing an efficient method for the temporary import and re-export of goods that eases the way for foreign exhibitions and businesses.

The latest CEPA addition established principles of trade facilitation, including simplifying customs procedures, enhancing transparency, and strengthening cooperation.

Performance and Data Localization Requirements

Macau does not follow a forced localization policy in which foreign investors must use domestic content in goods or technology.

There are no requirements by the GOM for foreign IT providers to turn over source code and/or provide access to surveillance (i.e., backdoors into hardware and software or turning over keys for encryption).

According to the Personal Data Protection Act (Decree 8/2005), if there is transfer of personal data to a destination outside Macau, the opinion of the Office for Personal Data Protection — the regulatory authority responsible for supervising and enforcing the Act — must be sought to confirm if such destination ensures an adequate level of protection.

In December 2019, Macau’s Cybersecurity Law came into force. With this law, public and private network operators in certain industries have to meet obligations, including providing real-time access to select network data to Macau authorities, with the stated aim of protecting the information network and computer systems. For example, network operators must register and verify the identity of users before providing telecommunication services. The new law creates new investment and operational costs for affected businesses, and has raised some privacy and surveillance concerns.

One major U.S. cloud computing company reported that Macau’s Gaming Inspection and Coordination Bureau had refused permission for potential clients in the gaming sector to export personal data-to-data centers located outside of Macau.

Real Property

Private ownership of property is enshrined in the Basic Law. There are no restrictions on foreign property ownership. Macau has a sound banking mortgage system, which is under the supervision of the Macau Monetary Authority (MMA). There are only a small number of freehold property interests in the older part of Macau.

According to the Cartography and Cadaster Bureau, 21 percent of land parcels in Macau do not have clear title, for unknown reasons. Industry observers commented that no one knows whether these land parcels will be privately or publicly owned in the future.

The Land Law (Decree 10/2013) stipulates that provisional land concessions cannot be renewed upon their expiration if their leaseholders fail to finish developing the respective plots of land within a maximum concession period of 25 years. The leaseholders will not only be prohibited from renewing the undeveloped concessions – regardless of who or what caused the non-development – but also have no right to be indemnified or compensated.

Intellectual Property Rights

Macau is a member of the World Intellectual Property Organization (WIPO). Macau is not listed in USTR’s Special 301 Report. Macau has acceded to the Bern Convention for the Protection of Literary and Artistic Works. Patents and trademarks are registered under Decree 97/99/M. Macau’s copyright laws are compatible with the WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights, and government offices are required to use only licensed software. The GOM devotes considerable attention to intellectual property rights enforcement and coordinates with copyright holders. Source Identification Codes are stamped on all optical discs produced in Macau. The MES uses an expedited prosecution arrangement to speed up punishment of accused retailers of pirated products. The copyright protection law has been extended to cover online privacy. Copyright infringement for trade or business purposes is subject to a fine or maximum imprisonment of four years.

Macau Customs maintains an enforcement department to investigate incidents of intellectual property (IP) theft. Macau Customs works closely with mainland Chinese authorities, foreign customs agencies, and the World Customs Organization to share best practices to address criminal organizations engaging in IP theft. In 2019, Macau Customs seized a total of 3,849 pieces of counterfeit goods, including 3,329 garments, 7 leather products, and 513 electronic appliances. In 2019, the MES filed a total of 15,391 applications for trademark registrations.

In 2019, the MES filed a total of 15,391 applications for trademark registrations.

Capital Markets and Portfolio Investment

Macau allows free flows of financial resources. Foreign investors can obtain credit in the local financial market. The GOM is stepping up its efforts to develop finance leasing businesses and exploring opportunities to establish a system for trade credit insurance in order to take a greater role in promoting cooperation between companies from Portuguese-speaking countries.

Since 2010, the People’s Bank of China (PBoC) has provided cross-border settlement of funds for Macau residents and institutions involved in transactions for RMB bonds issued in Hong Kong. Macau residents and institutions can purchase or sell, through Macau RMB participating banks, RMB bonds issued in Hong Kong and Macau. The Macau RMB Real Time Gross Settlements (RMB RTGS) System came into operation in March 2016 to provide real-time settlement services for RMB remittances and interbank transfer of RMB funds. The RMB RTGS System is intended to improve risk management and clearing efficiency of RMB funds and foster Macau’s development into an RMB clearing platform for trade settlement between China and Portuguese-speaking countries. In December 2019, the PBoC canceled an existing quota of RMB 20,000 exchanged in Macau for each individual transaction.

Macau has no stock market, but Macau companies can seek a listing in Hong Kong’s stock market. Macau and Hong Kong financial regulatory authorities cooperate on issues of mutual concern. Under the Macau Insurance Ordinance, the MMA authorizes and monitors insurance companies. There are 11 life insurance companies and 13 non-life insurance companies in Macau. Total gross premium income from insurance services amounted to USD 2.7 billion in the third quarter of 2019.

In October 2018, the Legislative Assembly took steps to tackle cross-border tax evasion. Offshore institutions in Macau, including credit institutions, insurers, underwriters, and offshore trust management companies, will be abolished by the end of 2020. Decree 9/2012, in effect since October 2012, stipulates that banks must compensate depositors up to a maximum of MOP 500,000 (USD 62,500) in case of a bank failure. To finance the deposit protection scheme, the GOM has injected MOP 150 million (USD 18.75 million) into the deposit protection fund, with banks paying an annual contribution of 0.05 percent of the amount of protected deposits held.

Money and Banking System

The MMA functions as a de facto central bank. It is responsible for maintaining the stability of Macau’s financial system and for managing its currency reserves and foreign assets. At present, there are thirty-one financial institutions in Macau, including 12 local banks and 19 branches of banks incorporated outside Macau. There is also a finance company with restrictive banking activities, two financial leasing companies and a non-bank credit institution dedicated to the issuance and management of electronic money stored value card services. In addition, there are 11 moneychangers, two cash remittance companies, two financial intermediaries, six exchange counters, and one representative office of a financial institution. The BoC and Industrial and Commercial Bank of China (ICBC) are the two largest banks in Macau, with total assets of USD 79.8 billion and USD 33.9 billion, respectively. Banks with capital originally from mainland China and Portugal had a combined market share of about 86 percent of total deposits in the banking system at the end of 2016. Total deposits amounted to USD 83.8 billion by the end of 2019. In the fourth quarter of 2019, banks in Macau maintained a capital adequacy ratio of 14.2 percent, well above the minimum eight percent recommended by the Bank for International Settlements. Accounting systems in Macau are consistent with international norms.

The MMA prohibits the city’s financial institutions, banks and payment services from providing services to businesses issuing virtual currencies or tokens.

Foreign Exchange and Remittances

Foreign Exchange

Profits and other funds associated with an investment, including investment capital, earnings, loan repayments, lease payments, and capital gains, can be freely converted and remitted. The domestic currency, Macau Official Pataca (MOP), is pegged to the Hong Kong Dollar at 1.03 and indirectly to the U.S. Dollar at an exchange rate of approximately MOP 7.99 = USD 1. The MMA is committed to exchange rate stability through maintenance of the peg to the Hong Kong Dollar.

Although Macau imposes no restrictions on capital flows or foreign exchange operations, exporters are required to convert 40 percent of foreign currency earnings into MOP. This legal requirement does not apply to tourism services.

Remittance Policies

There are no recent changes to or plans to change investment remittance policies. Macau does not restrict the remittance of profits and dividends derived from investment, nor does it require reporting on cross-border remittances. Foreign investors can bring capital into Macau and remit it freely.

A Memorandum of Understanding on AML actions between MMA and PBoC, increased information exchanges between the two parties, as well as cooperation on onsite inspections of casino operations. Furthermore, Macau’s terrorist asset-freezing law, which is based on United Nations (UN) Security Council resolutions, requires travelers entering or leaving with cash or other negotiable monetary instruments valued at MOP 120,000 (USD 15,000) or more to sign a declaration form and submit it to the Macau Customs Service.

In December 2019, the PBoC increased a daily limit set on the amount of RMB-denominated funds sent by Macau residents to personal accounts held in mainland China from RMB 50,000 to RMB 80,000.

Sovereign Wealth Funds

The International Monetary Fund (IMF) suggested in July 2014 that the GOM invest its large fiscal reserves through a fund modeled on sovereign wealth funds to protect the city’s economy from economic downturns. In November 2015, the GOM decided to establish such a fund, called the MSAR Investment and Development Fund (MIDF), through a substantial allocation from the city’s ample fiscal reserves. However, the GOM in 2019 withdrew a draft bill that proposed the use of USD 7.5 billion to seed the MIDF over public concerns about the government’s supervisory capability. The MMA said it will conduct a consultation in mid-2020 to help the public better understand the regulations and operations of the fund.

Macau does not have state-owned enterprises (SOEs). Several economic sectors – including cable television, telecommunications, electricity, and airport/port management, are run by private companies under concession contracts from the GOM. The GOM holds a small percentage of shares (ranging from one to 10 percent) in these government-affiliated enterprises. The government set out in its Commercial Code the basic elements of a competition policy with regard to commercial practices that can distort the proper functioning of markets. Court cases related to anti-competitive behavior remain rare.

Privatization Program

The GOM has given no indication in recent years that it has plans for a privatization program.

The six gaming concessionaires that dominate Macau’s economy pay four percent of gross gaming revenues to the government to fund cultural and social programs in the SAR. Several operators also directly fund gaming addiction rehabilitation programs. Some government-affiliated entities maintain active corporate social responsibility (CSR) programs. For example, Companhia de Electricidade de Macau, an electric utility, provides educational programs and repair services free-of-charge to underprivileged residents. One of the nine aspects that the GOM will consider for the renewal of gaming licenses is casino operators’ CSR performance. In November 2019, the Business Awards of Macau presented the Gold Award to Galaxy Entertainment Group for its corporate social responsibility initiatives.

Macau is not a member of the OECD, and hence, the OECD Guidelines for Multinational Enterprises are not applicable to Macau companies.

Mainland China extended in February 2006 the United Nations Convention Against Corruption to Macau. Macau has laws to combat corruption by public officials and the private sector. Anti-corruption laws are applied in a non-discriminatory manner and effectively enforced. One provision stipulates that anyone who offers a bribe to foreign public officials (including officials from mainland China, Hong Kong, and Taiwan) and officials of public international organizations in exchange for a trade deal could receive a jail term of up to three years or fines.

The CCAC is a member of the International Association of Anti-Corruption Authorities and a member of the Anti-Corruption Action Plan for Asia and the Pacific. The CCAC’s guidelines on prevention and repression of corruption in the private sector and a booklet Corruption Prevention Tips for Private Companies provide rules of conduct that private companies must observe. In January 2019, the GOM completed a public consultation on public procurement in order to create a legal framework through which the GOM will seek to promote an efficient and transparent regime. The GOM expected that a draft bill will be ready in the second half of 2020.

Resources to Report Corruption

CHAN Tsz King, Commissioner
Commission Against Corruption
105, Avenida Xian Xing Hai, 17/F, Centro Golden Dragon, Macau
+853- 2832-6300
ccac@ccac.org.mo

Macau is politically stable. The U.S. Consulate General is not aware of any incidents in recent years involving politically motivated damage to projects or installations.

Macau’s unemployment rate in January 2020 was 1.7 percent. Foreign businesses cite a constant shortage of skilled workers – a result of the past decade’s boom in entertainment facilities – as a top constraint on their operations and future expansion. The government is studying proposals to resolve the human resources problem. For example, Macau has labor importation schemes for unskilled and skilled workers who cannot be recruited locally. However, both local and foreign casino operators in Macau are required by law to employ only Macau residents as croupiers. Taxi and bus drivers must also be local residents. There is no such restriction imposed on any other sector of the economy.

Macau does not have any policies that waive labor laws in order to attract or retain investment. The rights for workers to form trade unions and to strike are both enshrined in the Basic Law, but there are no laws in Macau that specifically deal with those rights. The law does not provide that workers can collectively bargain, and while workers have the right to strike, there is no specific protection in the law from retribution if workers exercise this right. Labor unions are independent of the government and employers, by law and in practice.

According to the Labor Relations Law, a female worker cannot be dismissed, except with just cause (e.g., willful disobedience to orders given by superiors, or violation of regulations on occupational hygiene and safety), during her pregnancy or within three months of giving birth. In practice, either the employer or the employee may rescind the labor contract with or without just cause. In general, any circumstance that makes it impossible to continue the labor relation can constitute just cause for rescission of the contract. If the employer terminates the contract with the worker without just cause, the employer must pay the employee severance pay. In addition, Macau’s social security system, which is regulated by Decree 84/89/M, provides local workers with economic aid when they are old, unemployed, or sick.

Workers who believe they were dismissed unlawfully can bring a case to court or lodge a complaint with the Labor Affairs Bureau. Even without formal collective bargaining rights, companies often negotiate with unions, although the government may act as an intermediary. There is no indication that past disputes or appeals were subject to lengthy delays.

The Labor Relations Law does not contain provisions regarding collective bargaining, which is not common at the company or industry level.

The GOM has put measures in place to replace some foreign workers with Macau residents. Macau has a law imposing criminal penalties for employers of illegal migrants and preventing foreign workers from changing employers in Macau. The government has used the proceeds of a tax on the import of temporary workers for retraining local unemployed people.

Effective September 1 2019, the statutory minimum hourly wage rate increased from USD 3.8 to USD 4.0. The Legislative Assembly is discussing a draft bill on mandating across-the-board minimum wages.

Overseas Private Investment Corporation coverage is not available in Macau.

* Source for Host Country Data: Macau Statistics and Census Service

U.S. Consulate General Hong Kong
26 Garden Road, Central
Hong Kong SAR, PRC
+852-2841-2489
information_resource_center_hk@yahoo.com

Policies Towards Foreign Direct Investment

Historically, the Malaysian government has welcomed FDI as an integral component of its economic development. Over the last decade, the gradual liberalization of the economy and influx of FDI has led to the creation of new jobs and businesses and fueled Malaysia’s export-oriented growth strategy.  The Malaysian economy is highly dependent on trade.  According to World Bank data, the value of Malaysia’s imports and exports of goods and services as a share of GDP held steady at roughly 130 percent in 2018, more than double the global average.

In October 2019, the government introduced measures in its 2020 budget designed to streamline and further incentivize foreign investment, with special emphasis on investments being redirected from China as a result of shifting global supply chains.  The Malaysian government established the China Special Channel for the purpose of attracting these investments, an initiative being managed by InvestKL, an investment promotion agency under the Ministry of International Trade and Industry.  The government also established the National Committee on Investment, an investment approval body jointly chaired by the Minister of Finance and the Minister of International Trade and Industry, to expedite the regulatory process with respect to approving new investments.

Prior to the government transition in March, the previous government had announced plans to overhaul its existing incentive framework, including a revamp of the Promotion of Investments

Act of 1986 and incentives under the Income Tax Act of 1967.  It is unclear whether the new government will continue with this plan.

Malaysia has various national, regional, and municipal investment promotion agencies, including the Malaysian Investment Development Authority (MIDA) and InvestKL.  These agencies can assist with business strategy consultations, area familiarization, talent management programs, networking, and other post-investment services.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign and domestic private entities can establish and own business enterprises and engage in all forms of remunerative activity, with some exceptions.  Although Malaysia has taken steps to liberalize policies concerning foreign investment, there continue to exist requirements for local equity participation within specific sectors.  In 2009, Malaysia repealed Foreign Investment Committee (FIC) guidelines that limited transactions for acquisitions of interests, mergers, and takeovers of local companies by foreign parties.  However, certain business sectors, including logistics, industrial training, and distributive trade, are required to limit foreign equity participation when applying for operating licenses, permits and approvals.  Due to residual economic policies, this limitation most commonly manifests as a 70-30 equity split between foreign investors (maximum 70 percent) and Bumiputera (i.e., ethnic Malays and indigenous peoples) entities (minimum 30 percent).

Foreign investment in services, whether in sectors with no foreign equity caps or controlled sub-sectors, remain subject to review and approval by ministries and agencies with jurisdiction over the relevant sectors.  A key function of this review and approval process is to determine whether proposed investments meet the government’s qualifications for the various incentives in place to promote economic development goals.  The Ministerial Functions Act grants relevant ministries broad discretionary powers over the approval of investment projects.  Investors in industries targeted by the Malaysian government can often negotiate favorable terms with the ministries or agencies responsible for regulating that industry.  This can include assistance in navigating a complex web of regulations and policies, some of which can be waived on a case-by-case basis.  Foreign investors in non-targeted industries tend to receive less government assistance in obtaining the necessary approvals from various regulatory bodies and therefore can face greater bureaucratic obstacles.

Finance

Malaysia’s 2011-2020 Financial Sector Blueprint has produced partial liberalization within the financial services sector; however, it does not contain specific market-opening commitments or timelines.  For example, the services liberalization program that started in 2009 raised the limit of foreign ownership in insurance companies to 70 percent.  However, Bank Negara Malaysia, Malaysia’s central bank, would allow a greater foreign ownership stake if the investment is determined to facilitate the consolidation of the industry.  The latest Blueprint helped to codify the case-by-case approach.  Under the Financial Services Act passed in late 2012, issuance of new licenses will be guided by prudential criteria and the “best interests of Malaysia,” which may include consideration of the financial strength, business record, experience, character and integrity of the prospective foreign investor, soundness and feasibility of the business plan for the institution in Malaysia, transparency and complexity of the group structure, and the extent of supervision of the foreign investor in its home country.  In determining the “best interests of Malaysia,” BNM may consider the contribution of the investment in promoting new high value-added economic activities, addressing demand for financial services where there are gaps, enhancing trade and investment linkages, and providing high-skilled employment opportunities.  BNM, however, has never defined criteria for the “best interests of Malaysia” test, and no firms have qualified.

While there has been no policy change in terms of the 70 percent foreign ownership cap for insurance companies, the government did agree to let one foreign owned insurer maintain a 100 percent equity stake after that firm made a contribution to a health insurance scheme aimed at providing health coverage to lower income Malaysians.

BNM currently allows foreign banks to open four additional branches throughout Malaysia, subject to restrictions, which include designating where the branches can be set up (i.e., in market centers, semi-urban areas and non-urban areas).  The policies do not allow foreign banks to set up new branches within 1.5 km of an existing local bank.  BNM also has conditioned foreign banks’ ability to offer certain services on commitments to undertake certain back office activities in Malaysia.

Information & Communication

In 2012, Malaysia authorized up to 100 percent foreign equity participation among application service providers, network service providers, and network facilities providers.  An exception to this is national telecommunications firm Telekom Malaysia, which has an aggregate foreign share cap of 30 percent, or five percent for individual investors.

Manufacturing Industries

Malaysia permits up to 100 percent foreign equity participation for new manufacturing investments by licensed manufacturers.  However, foreign companies can face difficulties obtaining a manufacturing license and often resort to incorporating a local subsidiary for this purpose.

Oil and Gas

Under the terms of the Petroleum Development Act of 1974, the upstream oil and gas industry is controlled by Petroleum Nasional Berhad (PETRONAS), a wholly state-owned company and the sole entity with legal title to Malaysian crude oil and gas deposits.  Foreign participation tends to take the form of production sharing contracts (PSCs).  PETRONAS regularly requires its PSC partners to work with Malaysian firms for many tenders.  Non-Malaysian firms are permitted to participate in oil services in partnership with local firms and are restricted to a 49 percent equity stake if the foreign party is the principal shareholder.  PETRONAS sets the terms of upstream projects with foreign participation on a case-by-case basis.

Other Investment Policy Reviews

Malaysia’s most recent Organization for Economic Cooperation and Development (OECD) investment review occurred in 2013.  Although the review underscored the generally positive direction of economic reforms and efforts at liberalization, the recommendations emphasized the need for greater service sector liberalization, stronger intellectual property protections, enhanced guidance and support from Malaysia’s Investment Development Authority (MIDA), and continued corporate governance reforms.

Malaysia also conducted a WTO Trade Policy Review in February 2018, which incorporated a general overview of the country’s investment policies.  The WTO’s review noted the Malaysian government’s action to institute incentives to encourage investment as well as a number of agencies to guide prospective investors.  Beyond attracting investment, Malaysia had made measurable progress on reforms to facilitate increased commercial activity. Among the new trade and investment-related laws that entered into force during the review period were: the Companies Act, which introduced provisions to simplify the procedures to start a company, to reduce the cost of doing business, as well as to reform corporate insolvency mechanisms; the introduction of the goods and services tax (GST) to replace the sales tax; the Malaysian Aviation Commission Act, pursuant to which the Malaysian Aviation Commission was established; and various amendments to the Food Regulations.  Since the WTO Trade Policy Review, however, the new government has already eliminated the GST, and has revived the Sales and Services Tax, which was implemented on September 1, 2018.

http://www.oecd.org/investment/countryreviews.htm 

https://www.wto.org/english/tratop_e/tpr_e/tp466_e.htm 

Business Facilitation

The principal law governing foreign investors’ entry and practice in the Malaysian economy is the Companies Act of 2016 (CA), which entered into force on January 31, 2017 and replaced the Companies Act of 1965.  Incorporation requirements under the new CA have been further simplified and are the same for domestic and foreign sole proprietorships, partnerships, as well as privately held and publicly traded corporations. According to the World Bank’s Doing Business Report 2019, Malaysia streamlined the process of obtaining a building permit and made it faster to obtain construction permits; eliminated the site visit requirement for new commercial electricity connections, making getting electricity easier for businesses; implemented an online single window platform to carry out property searches and simplified the property transfer process; and introduced electronic forms and enhanced risk-based inspection system for cross-border trade and improved the infrastructure and port operation system at Port Klang, the largest port in Malaysia, thereby facilitating international trade; and made resolving insolvency easier by introducing the reorganization procedure.  These changes led to a significant improvement of Malaysia’s ranking per the Doing Business Report, from 24 to 15 in one year.

In addition to registering with the Companies Commission of Malaysia, business entities must file: 1) Memorandum and Articles of Association (i.e., company charter); 2) a Declaration of Compliance (i.e., compliance with provisions of the Companies Act); and 3) a Statutory Declaration (i.e., no bankruptcies, no convictions).  The registration and business establishment process takes two weeks to complete, on average. The new government repealed GST and installed a new sales and services tax (SST), which began implementation on September 1, 2018.

Beyond these requirements, foreign investors must obtain licenses.  Under the Industrial Coordination Act of 1975, an investor seeking to engage in manufacturing will need a license if the business claims capital of RM2.5 million (approximately USD 641,000) or employs at least 75 full-time staff.  The Malaysian Government’s guidelines for approving manufacturing investments, and by extension, manufacturing licenses, are generally based on capital-to-employee ratios. Projects below a threshold of RM55,000 (approximately USD 14,100) of capital per employee are deemed labor-intensive and will generally not qualify.  Manufacturing investors seeking to expand or diversify their operations need to apply through MIDA.

Manufacturing investors whose companies have annual revenue below RM50 million (approximately USD12.8 million) or with fewer than 200 full-time employees meet the definition of small and medium size enterprises (SMEs) and will generally be eligible for government SME incentives.  Companies in the services or other sectors that have revenue below RM20 million (approximately USD5.1 million) or fewer than 75 full-time employees also meet the SME definition.

[Reference]

• http://www.mida.gov.my/home/getting-started/posts/  – The Malaysian Investment Development Authority’s starting point for prospective foreign investors. Select the “General Guidelines and Facilities” tab.
• http://www.ssm.com.my/en  – The Malaysian Companies Commission homepage for registering sole proprietorships, partnerships, and companies.
• http://www.mdec.my/  – The Malaysia Digital Economy Corporation (MDEC) is responsible for governing the Multimedia Super Corridor (MSC), the initiative to attract investment in information and communications technologies.
• http://www.skmm.gov.my/Sectors/Broadcasting.aspx  – The Malaysian Communications and Multimedia Commission’s page for requirements in the communications sector.
• http://www.moh.gov.my/english.php/pages/view/160  – The Ministry of Health’s FAQs on liberalization of medical services.
• http://www.doingbusiness.org/content/dam/doingBusiness/country/m/malaysia/MYS.pdf 
• http://iab.worldbank.org 
• http://ger.co/how-it-works/information-portals 

Outward Investment

While the Malaysian government does not promote or incentivize outward investment, a number of Government-Linked companies, pension funds, and investment companies do have investments overseas.  These companies include the sovereign wealth fund of the Government of Malaysia, Khazanah Nasional Berhad; KWAP, Malaysia’s largest public services pension fund; and the Employees’ Provident Fund of Malaysia.  Government owned oil and gas firm Petronas also has investments in several regions outside Asia.

As a member of ASEAN, Malaysia is a party to trade agreements with Australia and New Zealand; China; India; Japan; and the Republic of Korea. During the review period, the ASEAN-India Agreement was expanded to cover trade in services. Malaysia also has bilateral FTAs with Australia; Chile; India; Japan; New Zealand; Pakistan; and Turkey.

Reference: https://www.wto.org/english/tratop_e/tpr_e/s366_sum_e.pdf 

Malaysia has bilateral investment treaties with 36 countries, but not yet with the United States.  Malaysia does have bilateral “investment guarantee agreements” with over 70 economies, including the United States. The Government reports that 65 of Malaysia’s existing investment agreements contain Investor State Dispute Settlement (ISDS) provisions.  Malaysia has double taxation treaties with over 70 countries, though the double taxation agreement with the U.S. currently is limited to air and sea transportation.

Transparency of the Regulatory System

In July 2013, the Malaysian government accelerated its efforts to modernize the regulatory processes in the country by releasing the National Policy on Development and Implementation of Regulations (NPDIR), a roadmap to achieving Good Regulatory Practice (GRP).  Under the NPDIR, the federal government formalized a comprehensive approach to improve the efficiency and transparency of the country’s regulatory framework.  The benefits to the private sector thus far have included a streamlining of project approval requirements and fees (to the point that Malaysia ranked 2nd in the World Bank’s 2020 Doing Business report on ease of “dealing with construction permits”), a greater role in the lawmaking process, and improved standardization and transparency in all phases of regulatory proceedings.  The main components of the policy are: 1) the requirement of a Regulatory Impact Assessment (RIA) (a cost-benefit analysis of all newly proposed regulations) with each new piece of regulation; and 2) the formalization of a public consultation process to take the views of stakeholders into account while formulating new legislation.  Under the NPDIR, the government has committed to reviewing all new regulations every five years to determine which ones need to be adjusted or eliminated.

In furtherance of the NPDIR, the Malaysian government published four circulars in 2013 and 2014 to explain the methodology and implementation of their new strategy.  These four documents laid out a clear framework toward increasing accountability, standardization, and transparency, as well as explaining enforcement and compliance mechanisms to be established.  Throughout its various agencies, the government of Malaysia has taken steps to actualize these circulars.  Ministries and agencies use their respective websites to publish the text and or summaries of proposed regulations prior to enactment, albeit with varying levels of consistency.  Further, Malaysia’s procurement principles include adherence to open and fair competition, public accountability, transparency, and value for money.

Despite these efforts to foster inclusion, fairness, and transparency, considerable room for improvement exists.  The Malaysian government’s 2018 Report on Modernization (sic) of Regulations emphasized the need to “Establish an accountability mechanism for the implementation of regulatory reviews by the government.”  Many foreign investors echo this lack of accountability and criticize the opacity in the government decision-making process.  One major area of concern for foreign investors remains government procurement policy, as non-Malaysian companies claim to have lost bids against Bumiputera-owned (ethnic Malay) companies despite offering better products at lower costs.  Such results are due to the government’s preference policy to facilitate greater Bumiputera participation in the private sector.  This preference policy is manifested through set-aside contracts for Bumiputera suppliers and contractors, and through the use of preferential price margins to increase the competitiveness of Bumiputera bidders.

Malaysia has a three-tiered system of legislation: federal-level (Parliament), State-level, and local-level.   Federal and state-level legislation derive their authority from the Malaysian Constitution, specifically Articles 73-79.  Parliament has the exclusive power to make laws over matters including trade, commerce and industry, and financial matters.  Parliament can delegate its authority to administrative agencies, states, and local bodies through Acts.  States have the power to make laws concerning land, local government, and Islamic courts.  Local legislative bodies derive their authority from Acts promulgated by Parliament, most notably the Local Government Act of 1976.  Local authorities have the ability to issue by-laws concerning local taxation and land use.  For foreign investors, the Parliament is the most relevant legislating body, as it governs issues related to trade, and because Article 75 of the Constitution states that in a conflict of laws between state and federal-level legislatures, the federal laws win out.

It is also important to note the role of the administrative state in the promulgation of new laws and regulations in Malaysia.  Pursuant to the Interpretation Act of 1948 and 1967,

“Any proclamation, rule, regulation, order, notification, bye-law, or other instrument made under any Act, Enactment, Ordinance or other lawful authority and having legislative effect.”  Thus, the various ministries and agencies can be delegated lawmaking authority by an Act of a legislature with the legal right to make laws.

The Malaysian government’s strides toward improving transparency are evident in its embrace of internationally accepted standards in various highly regulated fields, including auditing, accounting, and law.  In that vein, the Malaysian Accounting Standards Board (MASB) introduced the Malaysian Financial Reporting Standards (MFRS) framework, which came into effect on January 1, 2012.  The MFRS framework is fully compliant with the International Financial Reporting Standards (IFRS) framework; this compliance serves to enhance the credibility and transparency of financial reporting in Malaysia.  According to the World Economic Forum’s 2019 Global Competitiveness Report (the “WEF 2019 Report”), Malaysia ranks 29th out of 141 countries in terms of its strength of auditing and accounting standards.

Specifically regarding auditing, the Malaysian Institute of Accountants (MIA) has the authority to set standards.  The MIA’s Auditing and Assurance Standards Board (AASB) reviews standards and technical pronouncements issued by the International Auditing and Assurance Standards Board (IAASB), which sets International Standards on Auditing (ISAs) that have been adopted in more than 110 jurisdictions.

Publicly listed companies in Malaysia must comply with standard international reporting requirements.  The IFRS framework converged with the Malaysian auditing framework in 2012, compelling compliance by Malaysian publicly listed companies.  The IFRS framework has obtained force of law through Section 7 of the Financial Reporting Act (FRA) of 1997, which allows the MASB to issue approved accounting standards for application in Malaysia.  The FRA requires that financial statements prepared or lodged with the Central Bank, Securities Commission, or Registrar of Companies are required to comply with the standards issued by MASB.  Thus, the MASB’s adoption of the IFRS framework is legally binding.

In theory, pieces of legislation are to be made available for public comment through a multi-stage system of rulemaking.  The Malaysia Productivity Corporation (MPC) published the Guideline on Public Consultation Procedures in 2014 (the “Guideline”), which expanded upon information contained in the Best Practice Regulation Handbook of 2013 in furtherance of GRP.  The Guideline clarifies the roles of government and stakeholders in the consultation process and provides the guiding principles for Malaysia’s public consultation approach.  Additionally, the Guideline provides robust examples of the information that should be included in consultation papers, furnishes information on enforcement, and details the timeline of the consultation process.  As it pertains to foreign investment, the consultation procedures apply to investment laws and regulations, which usually fall under the purview of the Malaysian Securities Commission (SC), the Bursa Malaysia, or the Malaysian Central Bank.  The SC, for example, keeps public consultation papers on its website, easily accessible by stakeholders.  These papers generally contain the rationale for the proposed regulations, as well as potential impacts, and provide a list of questions for stakeholders to explain their views to regulators.

The public is also engaged in the public consultation process through the increased role of PEMUDAH (the Special Task Force to Facilitate Business), which was founded in 2007 to serve as a bridge between government, businesses, and civil society organizations.  PEMUDAH promotes the understanding of regulatory requirements that impact economic activities, by addressing unfair treatment resulting from inconsistencies in enforcement and implementation.  PEMUDAH plays an advocacy role in various points in the regulatory implementation process; it provides recommendations from the private sector to regulators before new regulations are implemented, and monitors enactment of existing pieces of regulation.

Despite the relative robustness of the Guideline, and despite the significant steps forward Malaysia has taken to reduce the regulatory burden on industry, obstacles remain.  There are frequent inconsistencies between different ministries in their implementation of the public consultation procedures, as well as in their respective interpretations of how regulations are to be applied.  Adding to the difficulty is the complicated relationship between state-level and federal-level legislation, which can overlap on a range of issues and lead to inefficiencies for investors.

There is a non-governmental website that publishes Malaysian bills and amendments from 2013 onward: https://www.cljlaw.com/?page=latestmybill&year=2019.  The site publishes the full text of the documents.  However, to the best of our knowledge, no such government-run clearinghouse of historical regulatory action exists.  However, Malaysia took a large step forward on this front in 2019, as in association with the World Bank, the MPC created a website that contains all ongoing pieces of legislation and allows public comment thereon.  The website, called the Uniform Public Consultation Portal (http://upc.mpc.gov.my/csp/sys/bi/%25cspapp.bi.index.cls?home=1), does not appear to contain legislation that was completed or implemented before 2019, but is a positive move toward standardizing and emphasizing the public consultation process.  The website is user-friendly and allows searching by due date, implementing agency, and phase of consultation.

Malaysia has a multi-faceted approach to ensuring governmental compliance with regulatory requirements.  The most important enforcement mechanism is access to judicial review.  The WEF 2019 Report lists Malaysia as the 12th ranked country in efficiency of the legal framework in challenging regulations.  Through ease in accessing administrative and judicial courts, aggrieved parties in Malaysia are able to compel action by the regulator.  Additionally, PEMUDAH (the Malaysian government’s Special Task Force to Facilitate Business) serves as an advocacy role during the various phases of the consultation process to ensure that the private sector’s voice is being heard.

Throughout the administrative state, various avenues exist through which aggrieved parties may seek recourse.  Different governmental organisms have their own enforcement mechanisms to handle specific issues they face.  For instance, the Central Bank has a dedicated “Complaints Unit,” which deals with consumer complaints against banking institutions.  The Bank lists enforcement options as “a public or private reprimand; an order to comply; an administrative and civic penalty; restitution to customer; or prosecution.  By contrast, the Inland Revenue Board of Malaysia (tax agency) has a an organism called the Special Commissioners of Income Tax, to which taxpayers may file appeals concerning judgments and new regulations.  The Malaysian Companies Commission (which regulates laws relating to companies registered in Malaysia) is also engaged in enforcement proceedings, as is the Malaysian Securities Commission.  On matters of procurement, aggrieved bidders may complain to the Public Complaints Bureau, the Malaysian Anti-Corruption Commission, the Malaysian Competition Commission, or the National Audit Department.

In addition to the various agency-led enforcement mechanisms, aggrieved parties may also go through administrative courts.  The rulings of these courts have force of law pursuant to various Acts of Parliament, and Malaysia has taken measures to increase their efficacy in order to improve its reputation as an international business hub.  The decisions of these administrative courts are subject to judicial review on grounds of illegality, irrationality, and procedural impropriety.

Reference:

• http://rulemaking.worldbank.org/  provides data for 185 economies on whether governments publish or consult with public about proposed regulations.

International Regulatory Considerations

Malaysia is one of 10 Member States that constitute the Association of Southeast Asian Nations (ASEAN).  On December 31, 2015, the ASEAN Economic Community formally came into existence. ASEAN’s economic policy leaders meet regularly to discuss promoting greater economic integration within the 10-country bloc.  Although already robust, Member States have prioritized steps to facilitate a greater flow of goods, services, and capital.  No regional regulatory system is in place.  As a member of the WTO, Malaysia provides notification of all draft technical regulations to the Committee on Technical Barriers to Trade.

Legal System and Judicial Independence

Malaysia’s legal system consists of written laws, such as the federal and state constitutions and laws passed by Parliament and state legislatures, and unwritten laws derived from court cases and local customs. The Contract Law of 1950 still guides the enforcement of contracts and resolution of disputes.  States generally control property laws for residences, although the Malaysian government has recently adopted measures, including high capital gains taxes, to prevent the real estate market from overheating.  Nevertheless, through such programs as the Multimedia Super Corridor, Free Commercial Zones, and Free Industrial Zones, the federal government has substantial reach into a range of geographic areas as a means of encouraging foreign investment and facilitating ownership of commercial and industrial property.

In 2007 the judiciary introduced dedicated intellectual property (IP) courts that consist of 15 “Sessions Courts” that sit in each state, and six ‘High Courts’ that sit in certain states (i.e. Kuala Lumpur, Johor, Perak, Selangor, Sabah and Sarawak).  Malaysia launched the IP courts to deter the use of IP-infringing activity to fund criminal activity and to demonstrate a commitment to IP development in support of the country’s goal to achieve high-income status. These lower courts hear criminal cases, and have the jurisdiction to impose fines for IP infringing acts.  There is no limit to the fines that they can impose. The higher courts are designated for civil cases to provide damages incurred by rights holders once the damages have been quantified post-trial. High courts have the authority to issue injunctions (i.e., to order an immediate cessation of infringing activity) and to award monetary damages.

Labor Courts, which the Ministry of Human Resources describes as “a quasi-judicial system that serves as an alternative to civil claims,” provide a means for workers to seek payment of wages and other financial benefits in arrears.  Proceedings are generally informal but conducted in accordance with civil court principles. The High Court has upheld decisions which Labor Courts have rendered.

Certain foreign judgments are enforceable in Malaysia by virtue of the Reciprocal Enforcement of Judgments Act 1958 (REJA).  However, before a foreign judgment can be enforceable, it has to be registered. The registration of foreign judgments is only possible if the judgment was given by a Superior Court from a country listed in the First Schedule of the REJA: the United Kingdom, Hong Kong Special Administrative Region of the People’s Republic of China, Singapore, New Zealand, Republic of Sri Lanka, India, and Brunei.  If the judgment is not from a country listed in the First Schedule to the REJA, the only method of enforcement at common law is by securing a Malaysian judgment. This involves suing on the judgment in the local Courts as an action in debt.

To register a foreign judgment under the REJA, the judgment creditor has to apply for the same within six years after the date of the foreign judgment. Any foreign judgment coming under the REJA shall be registered unless it has been wholly satisfied, or it could not be enforced by execution in the country of the original Court.

Post is not aware of instances in which political figures or government authorities have interfered in judiciary proceedings involving commercial matters.

Laws and Regulations on Foreign Direct Investment

The Government of Malaysia established the Malaysia Investment Development Authority (MIDA) to attract foreign investment and to serve as a focal point for legal and regulatory questions.  Organized as part of the Ministry of International Trade and Industry (MITI), MIDA serves as a guide to foreign investors interested in the manufacturing sector and in many services sectors.  Regional bodies providing support to investors include: Invest Kuala Lumpur, Invest Penang, Invest Selangor, the Sabah Economic Development and Investment Authority (SEDIA), and the Sarawak Economic Development Corporation, among others.

As noted, the Ministerial Functions Act authorizes government ministries to oversee investments under their jurisdiction.  Prospective investors in the services sector will need to follow requirements set by the relevant Malaysian Government ministry or agency over the sector in question.

Competition and Anti-Trust Laws

On April 21, 2010, the Parliament of Malaysia approved two bills, the Competition Commission Act 2010 and the Competition Act 2010.  The Acts took effect January 1, 2012. The Competition Act prohibits cartels and abuses of a dominant market position but does not create any pre-transaction review of mergers or acquisitions.  Violations are punishable by fines, as well as imprisonment for individual violations. Malaysia’s Competition Commission has responsibility for determining whether a company’s “conduct” constitutes an abuse of dominant market position or otherwise distorts or restricts competition.  As a matter of law, the Competition Commission does not have separate standards for foreign and domestic companies. Commission membership consists of senior officials from the Ministry of International Trade and Industry (MITI), the Ministry of Domestic Trade, Cooperatives, and Consumerism (MDTCC), the Ministry of Finance, and, on a rotating basis, representatives from academia and the private sector.

In addition to the Competition Commission, the Acts established a Competition Appeals Tribunal (CAT) to hear all appeals of Commission decisions.  In the largest case to date, the Commission imposed a fine of RM10 million on Malaysia Airlines and Air Asia in September 2013 for colluding to divide shares of the air transport services market.  The airlines filed an appeal in March 2014. In February 2016, the CAT ruled in favor of the airlines in its first-ever decision and ordered the penalty to be set aside and refunded to both airlines.

Expropriation and Compensation

The Embassy is not aware of any cases of uncompensated expropriation of U.S.-held assets, or confiscatory tax collection practices, by the Malaysian government. The government’s stated policy is that all investors, both foreign and domestic, are entitled to fair compensation in the event that their private property is required for public purposes. Should the investor and the government disagree on the amount of compensation, the issue is then referred to the Malaysian judicial system.

Dispute Settlement

ICSID Convention and New York Convention

Malaysia signed the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID) on October 22, 1965, coming into force on October 14, 1966.  In addition, it is a contracting state of the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards since November 5, 1985.

Malaysia adopted the following measures to make the two conventions effective in its territory:

The Convention on the Settlement of Investment Disputes Act, 1966. (Act of Parliament 14 of 1966); the Notification on entry into force of the Convention on the Settlement of Investment Disputes Act, 1966. (Notification No. 96 of March 10, 1966); and the Arbitration (Amendment) Act, 1980. (Act A 478 of 1980).

Although the domestic legal system is accessible to foreign investors, filing a case generally requires any non-Malaysian citizen to make a large deposit before pursuing a case in the Malaysian courts.  Post is unaware of any U.S. investors’ recent complaints of political interference in any judicial proceedings.

References:

• https://icsid.worldbank.org/en/Pages/about/MembershipStateDetails.aspx?state=ST86 
• http://www.newyorkconvention.org/countries 

Investor-State Dispute Settlement

Malaysia’s investment agreements contain provisions allowing for international arbitration of investment disputes.  Malaysia does not have a Bilateral Investment Treaty with the United States.

Post has little data concerning the Malaysian Government’s general handling of investment disputes.  In 2004, a U.S. investor filed a case against the directors of the firm, who constituted the majority shareholders.  The case involves allegations by the U.S. investor of embezzlement by the other directors, and its resolution is unknown.

The Malaysian government has been involved in three ICSID cases — in 1994, 1999, and 2005.  The first case was settled out of court. The second, filed under the Malaysia-Belgo-Luxembourg Investment Guarantee Agreement (IGA), was concluded in 2000 in Malaysia’s favor.  The 2005 case, filed under the Malaysia-UK Bilateral Investment Treaty, was concluded in 2007 in favor of the investor. However, the judgment against Malaysia was ultimately dismissed on jurisdictional grounds, namely that ICSID was not the appropriate forum to settle the dispute because the transaction in question was not deemed an investment since it did not materially contribute to Malaysia’s development.  Nevertheless, Malaysian courts recognize arbitral awards issued against the government. There is no history of extrajudicial action against foreign investors.

International Commercial Arbitration and Foreign Courts

Malaysia’s Arbitration Act of 2005 applies to both international and domestic arbitration. Although its provisions largely reflect those of the UN Commission on International Trade Law (UNCITRAL) Model Law, there are some notable differences, including the requirement that parties in domestic arbitration must choose Malaysian law as the applicable law.  Although an arbitration agreement may be concluded by email or fax, it must be in writing: Malaysia does not recognize oral agreements or conduct as constituting binding arbitration agreements.

Many firms choose to include mandatory arbitration clauses in their contracts.  The government actively promotes use of the Kuala Lumpur Regional Center for Arbitration (http://www.rcakl.org.my), established under the auspices of the Asian-African Legal Consultative Committee to offer international arbitration, mediation, and conciliation for trade disputes.  The KLRCA is the only recognized center for arbitration in Malaysia. Arbitration held in a foreign jurisdiction under the rules of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States 1965 or under the United Nations Commission on International trade Law Arbitration Rules 1976 and the Rules of the Regional Centre for Arbitration at Kuala Lumpur can be enforceable in Malaysia.

Bankruptcy Regulations

Malaysia’s Department of Insolvency (MDI) is the lead agency implementing the Insolvency Act of 1967, previously known as the Bankruptcy Act of 1967.  On October 6, 2017, the Bankruptcy Bill 2016 came into force, changing the name of the previous Act, and amending certain terms and conditions. The most significant changes in the amendment include — (1) a social guarantor can no longer be made bankrupt; (2) there is now a stricter requirement for personal service for bankruptcy notice and petition; (3) introduction of the voluntary arrangement as an alternative to bankruptcy; (4) a higher bankruptcy threshold from RM30,000 to RM50,000; (5) introduction of the automatic discharge of bankruptcy; (6) no objection to four categories of bankruptcy for applying a discharge under section 33A (discharge of bankrupt by Certificate of Director General of Insolvency); (7) introduction of single bankruptcy order as a result of the abolishment of the current two-tier order system, i.e. receiving and adjudication orders; (8) creation of the Insolvency Assistance fund.

The distribution of proceeds from the liquidation of a bankrupt company’s assets generally adheres to the “priority matters and persons” identified by the Companies Act of 2016.  After the bankruptcy process legal costs are covered, recipients of proceeds are: employees, secured creditors (i.e., creditors of real assets), unsecured creditors (i.e., creditors of financial instruments), and shareholders.  Bankruptcy is not criminalized in Malaysia. The country ranks 46th on the World Bank Group’s Doing Business Rankings for Ease of Resolving Insolvency.

• http://www.mdi.gov.my/index.php/57-announcements/1182-announcement-on-the-enforcement-date-of-insolvency-act-1967 
• http://www.ssm.com.my/sites/default/files/companies_act_2016/aktabi_20160915_companiesact2016act777_0.pdf 
• http://www.doingbusiness.org/data/exploreeconomies/malaysia 

Investment Incentives

The Malaysian Government has codified the incentives available for investments in qualifying projects in target sectors and regions.  Tax holidays, financing, and special deductions are among the measures generally available for domestic as well as foreign investors in the following sectors and geographic areas: information and communications technologies (ICT); biotechnology; halal products (e.g., food, cosmetics, pharmaceuticals); oil and gas storage and trading; Islamic finance; Kuala Lumpur; Labuan Island (off Eastern Malaysia); East Coast of Peninsular Malaysia; Sabah and Sarawak (Eastern Malaysia); Northern Corridor.

The lists of application procedures and incentives available to investors in these sectors and regions can be found at: http://www.mida.gov.my/home/invest-in-malaysia/posts/ .

Foreign Trade Zones/Free Ports/Trade Facilitation

The Free Zone Act of 1990 authorized the Minister of Finance to designate any suitable area as either a Free Industrial Zone (FIZ), where manufacturing and assembly takes place, or a Free Commercial Zone (FCZ), generally for warehousing commercial stock.  The Minister of Finance may appoint any federal, state, or local government agency or entity as an authority to administer, maintain and operate any free trade zone.  Currently there are 13 FIZs and 12 FCZs in Malaysia.  In June 2006, the Port Klang Free Zone opened as the nation’s first fully integrated FIZ and FCZ, although the project has been dogged by corruption allegations related to the land acquisition for the site.  The government launched a prosecution in 2009 of the former Transport Minister involved in the land purchase process, though he was later acquitted in October 2013.

The Digital Free Trade Zone (DFTZ) is an initiative by the Malaysian Government, implemented through MDEC, launched in November 2017 with the participation of China’s Alibaba.  DFTZ aims to facilitate seamless cross-border trading and eCommerce and enable Malaysian SMEs to export their goods internationally. According to the Malaysian government, the DFTZ consists of an eFulfilment Hub to help Malaysian SMEs export their goods with the help of leading fulfilment service providers; and an eServices Platform to efficiently manage cargo clearance and other processes needed for cross-border trade.

For more information, please visit https://mydftz.com 

Raw materials, products and equipment may be imported duty-free into these zones with minimum customs formalities. Companies that export not less than 80 percent of their output and depend on imported goods, raw materials, and components may be located in these FZs.  Ports, shipping and maritime-related services play an important role in Malaysia since 90 percent of its international trade by volume is seaborne.  Malaysia is also a major transshipment center.

Goods sold into the Malaysian economy by companies within the FZs must pay import duties.  If a company wants to enjoy Common External Preferential Tariff (CEPT) rates within the ASEAN Free Trade Area, 40 percent of a product’s content must be ASEAN-sourced.  In addition to the FZs, Malaysia permits the establishment of licensed manufacturing warehouses outside of free zones, which give companies greater freedom of location while allowing them to enjoy privileges similar to firms operating in an FZ. Companies operating in these zones require approval/license for each activity. The time needed to obtain licenses depends on the type of approval and ranges from two to eight weeks.

Performance and Data Localization Requirements

Fiscal incentives granted to both foreign and domestic investors historically have been subject to performance requirements, usually in the form of export targets, local content requirements and technology transfer requirements.  Performance requirements are usually written into the individual manufacturing licenses of local and foreign investors.

The Malaysian government extends a full tax exemption incentive of fifteen years for firms with “Pioneer Status” (companies promoting products or activities in industries or parts of Malaysia to which the government places a high priority), and ten years for companies with “Investment Tax Allowance” status (those on which the government places a priority, but not as high as Pioneer Status).  However, the government appears to have some flexibility with respect to the expiry of these periods, and some firms reportedly have had their pioneer status renewed. Government priorities generally include the levels of value-added, technology used, and industrial linkages.  If a firm (foreign or domestic) fails to meet the terms of its license, it risks losing any tax benefits it may have been awarded.  Potentially, a firm could lose its manufacturing license.  The New Economic Model stated that in the long term, the government intends gradually to eliminate most of the fiscal incentives now offered to foreign and domestic manufacturing investors.  More information on specific incentives for various sectors can be found at www.mida.gov.my.

Malaysia also seeks to attract foreign investment in the information technology industry, particularly in the Multimedia Super Corridor (MSC), a government scheme to foster the growth of research, development, and other high technology activities in Malaysia.  However, since July 1, 2018, the Government decided to put on hold the granting of MSC Malaysia Status and its incentives, including extension of income tax exemption period, or adding new MSC Malaysia Qualifying Activities in order to review and amend Malaysia’s tax incentives.  While the MSC Malaysia Status Services Incentive was published on December 31, 2018, the MSC Malaysia Status IP Incentive policy is still under review.  For further details on incentives, see www.mdec.my.  The Malaysia Digital Economy Corporation (MDEC) approves all applications for MSC status.  For more information please visit: https://www.mdec.my/msc-malaysia .

In the services sector, the government’s stated goal is to attract foreign investment in regional distribution centers, international procurement centers, operational headquarter research and development, university and graduate education, integrated market and logistics support services, cold chain facilities, central utility facilities, industrial training, and environmental management.  To date, Malaysia has had some success in attracting regional distribution centers, global shared services offices, and local campuses of foreign universities.  For example, GE and Honeywell maintain regional offices for ASEAN in Malaysia.  In 2016, McDermott moved its regional headquarters to Malaysia and Boston Scientific broke ground on a medical device manufacturing facility.

Malaysia seeks to attract foreign investment in biotechnology but sends a mixed message on agricultural and food biotechnology.  On July 8, 2010, the Malaysian Ministry of Health posted amendments to the Food Regulations 1985 [P.U. (A) 437/1985] that require strict mandatory labeling of food and food ingredients obtained through modern biotechnology.  The amendments also included a requirement that no person shall import, prepare, or advertise for sale, or sell any food or food ingredients obtained through modern biotechnology without the prior written approval of the Director.  There is no ‘threshold’ level on the labeling requirement.  Labeling of “GMO Free” or “Non-GMO” is not permitted.  The labeling requirements only apply to foods and food ingredients obtained through modern biotechnology but not to food produced with GMO feed.  The labeling regulation was supposed to go into force in 2014, but remains to date with no date announced.  A copy of the law and regulations respectively can be found at: http://www.biosafety.nre.gov.my/BiosafetyAct2007.html , and http://www.biosafety.nre.gov.my/BIOSAFETY percent20REGULATIONS percent202010.pdf .

Malaysia has not implemented measures amounting to “forced localization” for data storage.  Bank Negara Malaysia has amended its recent Outsourcing Guidelines to remove the original data localization requirement and shared that it will similarly remove the data localization elements in its upcoming Risk Management in Technology framework.  The government has provided inducements to attract foreign and domestic investors to the Multimedia Super Corridor but does not mandate use of onshore providers.  Companies in the information and communications technology sector are not required to hand over source code.

Real Property

Land administration is shared among federal, state, and local government.  State governments have their own rules about land ownership, including foreign ownership.  Malaysian law affords strong protections to real property owners. Real property titles are recorded in public records and attorneys review transfer documentation to ensure efficacy of a title transfer.  There is no title insurance available in Malaysia. Malaysian courts protect property ownership rights.  Foreign investors are allowed to borrow using real property as collateral.  Foreign and domestic lenders are able to record mortgages with competent authorities and execute foreclosure in the event of loan default.  Malaysia ranks 29th (ranked 42nd in 2018) in ease of registering property according to the Doing Business 2019 report, right behind Finland and ahead of Hungary, thanks to changes it made to its registration procedures.

[Reference]

http://www.doingbusiness.org/rankings 

Intellectual Property Rights

In December 2011, the Malaysian Parliament passed amendments to the copyright law designed to bring the country into compliance with the WIPO Copyright Treaty and the WIPO Performance and Phonogram Treaty, define Internet Service Provider (ISP) liabilities, and prohibit unauthorized recording of motion pictures in theaters.  Malaysia subsequently acceded to the WIPO Copyright Treaty and the WIPO Performance and Phonogram Treaty in September 2012.  In addition, the Ministry of Domestic Trade, Cooperatives, and Consumerism (MDTCC) took steps to enhance Malaysia’s enforcement regime, including active cooperation with rights holders on matters pertaining to IPR enforcement, ongoing training of prosecutors for specialized IPR courts, and the 2013 reestablishment of a Special Anti-Piracy Taskforce.  On December 27, 2019, Malaysia’s new Trademarks Act came into force bringing Malaysia’s trademark protections in line with the Madrid Protocol for international registration of trademarks, allowing U.S. trademark holders to more easily register their trademarks within Malaysia.

The government, acting through the Property Association of Malaysia (MyIPO), is currently preparing an overhaul of the 1976 Trade Marks Act and revisions to the 1983 Patents Act and 1987 Copyright Act in an effort to bring the country’s IP rules in line with its adoption of the Doha Declaration on Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement. While some amendments are expected to bring it in closer adherence to global standards under proposed compulsory license provisions, Malaysian private enterprises would be able to export products produced under a compulsory license to foreign markets that also have compulsory licenses in place.

In response to trends of rising internet piracy, the interagency Special Anti-Piracy Task Force established a Special Internet Forensics Unit (SIFU) within MDTCC. The SIFU team’s responsibilities include monitoring for sites suspected of being, or known as, purveyors of infringing content.  This organization follows MDTCC’s practice of launching investigations based on information and complaints from legitimate host sites and content providers. Capacity building remains a priority for the SIFU.  Coordination with the Malaysian Communications and Multimedia Commission (MCMC), which has responsibility for overall regulation of internet content, has been improving according to many rights holders in Malaysia.  The Malaysian Communications and Multimedia Commission (MCMC) is proactively combatting illegal streaming sites which provide content that breaches copyrights and is taking action against owners of non-certified Android TV boxes that are used to stream illegal content.

Despite Malaysia’s success in improving IPR enforcement, key issues remain. There is relatively widespread availability of pirated and counterfeit products in Malaysia and there are concerns that the Royal Malaysian Customs Department (RMC) is not always effectively identifying counterfeit goods in transit.  According to U.S. Customs and Border Protection (CBP)’s statistics, Malaysia ranked as the ninth largest source country for IPR seizures. Although the $4,647,447 USD worth of items seized during fiscal year 2018 was a significant increase from the previous reporting year, it still only represents a small fraction of total seized counterfeit goods.  Limited interagency cooperation and a lack a knowledge of IPR laws among RMC officers remain impediments to effective enforcement.  The MTDCC’s Enforcement Division effectively targeted counterfeit alcohol, tobacco, and other products sold domestically; however, cases are not always brought to prosecution effectively.

The September 2017 authorization of a compulsory license for U.S. pharmaceutical Gilead Sciences’ sofosbuvir, a medicine used to treat the hepatitis C virus infection, has raised serious concerns among rights holders due to the lack of transparency and due process. While the compulsory license is set to expire in October 2020, the government has not taken proactive steps to end the compulsory license following the expiration of its tender with the foreign company producing Malaysia’s sofosbuvir medication.

USTR conducted an Out-of-Cycle Review of Malaysia in 2019 to consider the extent to which Malaysia is providing adequate and effective IP protection and enforcement, including with respect to patents. During this review, the United States and Malaysia have held numerous consultations to resolve outstanding issues. In 2020, USTR extended the out of cycle review until November 2020.

The United States continues to encourage Malaysia to accede to the WIPO Budapest Treaty on the International Recognition of the Deposit of Microorganisms for the Purposes of Patent Procedure.  Additionally, the United States urges Malaysia to provide effective protection against unfair commercial use and unauthorized disclosure of test or other data generated to obtain marketing approval for pharmaceutical products, and an effective system to address patent issues expeditiously in connection with applications to market pharmaceutical products.

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

Capital Markets and Portfolio Investment

Foreigners may trade in securities and derivatives.  Malaysia houses one of Asia’s largest corporate bond markets and is the largest sukuk (Islamic bond) market in East Asia.  Both domestic and foreign companies regularly access capital in Malaysia’s bond market.  Malaysia provides tax incentives for foreign companies issuing Islamic bonds and financial instruments in Malaysia.

Malaysia’s stock market (Bursa Malaysia) is open to foreign investment and foreign corporation issuing shares.  However, foreign issuers remain subject to Bumiputera ownership requirements of 12.5 percent if the majority of their operations are in Malaysia.  Listing requirements for foreign companies are similar to that of local companies, although foreign companies must also obtain approval of regulatory authorities of foreign jurisdiction where the company was incorporated and valuation of assets that are standards applied in Malaysia or International Valuation Standards and register with the Registrar of Companies under the Companies Act 1965 or 2016.

Malaysia has taken steps to promote good corporate governance by listed companies.  Publicly listed companies must submit quarterly reports that include a balance sheet and income statement within two months of each financial quarter’s end and audited annual accounts for public scrutiny within four months of each year’s end.  An individual may hold up to 25 corporate directorships.  All public and private company directors are required to attend classes on corporate rules and regulations.

Legislation also regulates equity buybacks, mandates book entry of all securities transfers, and requires that all owners of securities accounts be identified.  A Central Depository System (CDS) for stocks and bonds established in 1991 makes physical possession of certificates unnecessary. All shares traded on the Bursa Malaysia must be deposited in the CDS.  Short selling of stocks is prohibited.

Money and Banking System

International investors generally regard Malaysia’s banking sector as dynamic and well regulated.  Although privately owned banks are competitive with state-owned banks, the state-owned banks dominate the market.  The five largest banks – Maybank, CIMB, Public Bank, RHB, and AmBank – account for an estimated 75 percent of banking sector loans.  According to the World Bank, total banking sector lending for 2017 was 140.27 percent of GDP, and 1.5 percent of the Malaysian banking sector’s loans were non-performing for 2017.

Bank Negara prohibits hostile takeovers of banks, but the Securities Commission has established non-discriminatory rules and disclosure requirements for hostile takeovers of publicly traded companies.

Foreign Exchange and Remittances

Foreign Exchange

In December 2016, the central bank, began implementing new foreign exchange management requirements.  Under the policy, exporters are required to convert 75 percent of their export earnings into Malaysian ringgit.  The goal of this policy was to deepen the market for the currency, with the goal of reducing exchange rate volatility.  The policy remains in place, with the Central Bank giving case-by-case exceptions.  All domestic trade in goods and services must be transacted in ringgit only, with no optional settlement in foreign currency.  The Central Bank has demonstrated little flexibility with respect to the ratio of earnings that exporters hold in ringgit.  Post is unaware of any instances where the requirement for exporters to hold their earnings in ringgit has impeded their ability to remit profits to headquarters.

Remittance Policies

Malaysia imposes few investment remittances rules on resident companies.  Incorporated and individual U.S. investors have not raised concerns about their ability to transfer dividend payments, loan payments, royalties or other fees to home offices or U.S.-based accounts.  Tax advisory firms and consultancies have not flagged payments as a significant concern among U.S. or foreign investors in Malaysia.  Foreign exchange administration policies place no foreign currency asset limits on firms that have no ringgit-denominated debt.  Companies that fund their purchases of foreign exchange assets with either onshore or offshore foreign exchange holdings, whether or not such companies have ringgit-denominated debt, face no limits in making remittances.  However, a company with ringgit-denominated debt will need approval from the Central Bank for conversions of RM50 million or more into foreign exchange assets in a calendar year.

The Treasury Department has not identified Malaysia as a currency manipulator.

Sovereign Wealth Funds

The Malaysian Government established government-linked investment companies (GLICs) as vehicles to harness revenue from commodity-based industries and promote growth in strategic development areas.  Khazanah is the largest of the GLICs, and the company holds equity in a range of domestic firms as well as investments outside Malaysia.  The other GLICs – Armed Forces Retirement Fund (LTAT), National Capital (PNB), Employees Provident Fund (EPF), Pilgrimage Fund (Tabung Haji), Public Employees Retirement Fund (KWAP) – execute similar investments but are structured as savings vehicles for Malaysians.  Khazanah follows the Santiago Principles and participates in the International Forum on Sovereign Wealth Funds.

Khazanah was incorporated in 1993 under the Companies Act of 1965 as a public limited company with a charter to promote growth in strategic industries and national initiatives.  As of December 31, 2018, Khazanah reported a 21 percent drop in its net worth and a decline in its “realizable” assets to RM136 billion (from USUSD 39.3 billion to USUSD 32.9 billion).  Khazanah also recorded a pre-tax loss of RM6.27 billion (USUSD 1.52 billion) compared to a pre-tax profit of RM2.89 billion (USUSD 723 million) the previous year.  The sectors comprising its major holdings include telecommunications and media, airports, banking, real estate, health care, and the national energy utility.  According to its Annual Review 2019 presentation, in 2018, Khazanah’s mandate and objectives were refreshed, and the company will now pursue its two distinct objectives (commercial vs. strategic) through a dual-fund investment structure: (1) an intergenerational wealth fund to meet its commercial objectives (which will include public and private assets); and (2) a strategic fund to meet its strategic objective (which will include strategic assets and developmental ones).

• https://www.khazanah.com.my/khazanah/files/60/60f2c749-314c-4a89-831a-c28bd45024e6.pdf 
• https://www.khazanah.com.my/getmedia/806f3b69-9bb5-452d-a3fa-ce7e77e612b4/Khazanah-Annual-Review-2019-Presentation-Deck-5-Mar-2019_2.aspx 

State-owned enterprises which in Malaysia are called government-linked companies (GLCs), play a very significant role in the Malaysian economy.  Such enterprises have been used to spearhead infrastructure and industrial projects.  A 2017 analysis by the University of Malaya estimated that the government owns approximately 42 percent of the value of firms listed on the Bursa Malaysia through its seven Government-Linked Investment Corporations (GLICs), including a majority stake in a number of companies.  Only a minority portion of stock is available for trading for some of the largest publicly listed local companies.  Khazanah, often considered the government’s sovereign wealth fund, owns stakes in companies competing in many of the country’s major industries including aerospace, construction, energy, finance, information & communication, and marine technologies.  The Prime Minister  chairs Khazanah’s Board of Directors.  PETRONAS, the state-owned oil and gas company, is Malaysia’s only Fortune Global 500 firm.

As part of its Government Linked Companies (GLC) Transformation Program, the Malaysian Government embarked on a two-pronged strategy to reduce its shares across a range of companies and to make those companies more competitive through improved corporate governance.  The Transformation Program pushes for more independent and professionalized board membership, but the OECD noted in 2018 that in practice shareholder oversight is lax an government officials exert influence over corporate boards.

Among the notable divestments of recent years, Khazanah offloaded its stake in the national car company Proton to DRB-Hicom Bhd in 2012.  In 2013, Khazanah divested its holdings in telecommunications services giant Time Engineering Bhd.  Khazanah’s annual report for 2017 noted only that the fund had completed 12 divestments that produced a gain of RM 2.5 billion (USD 625 million).  In 2018, Khazanah partially divested its shares in IHH Healthcare Berhad, saw two successful IPOs, and issued USUSD 321 million in exchangeable sukuk.  However, significant losses at domestic companies including at Axiata, Telekom Malaysia, Tenaga Nasional, IHH Healthcare Berhad, CIMB Bank, and Malaysia Airports led to the pre-tax loss of USD  1.52 billion the company experienced in 2018.  In April 2019, Khazanah sold 1.5 percent of its stake in Tenaga Nasional on Bursa Malaysia, after which Khazanah still owned 27.27 percent of the national electric company.  In its most recent annual review, Khazanah noted a 607% increase in divestment revenue from the prior year with total divestments for 2019 of RM 9.9 billion (USD 2.25 billion).

Reference: https://www.khazanah.com.my/Media-Downloads/Downloads 

GLCs with publicly traded shares must produce audited financial statements every year.  These SOEs must also submit filings related to changes in the organization’s management.  The SOEs that do not offer publicly traded shares are required to submit annual reports to the Companies Commission.  The requirement for publicly reporting the financial standing and scope of activities of SOEs has increased their transparency.  It is also consistent with the OECD’s guideline for Transparency and Disclosure.  Moreover, many SOEs prioritize operations that maximize their earnings.

The close relationships SOEs have with senior government officials, however, blur the line between strictly commercial activity pursued for its own sake and activity that has been directed to advance a policy interest.  For example, Petroliam Nasional Berhad (PETRONAS) is both an SOE in the oil and gas sector and the regulator of the industry.  Malaysia Airlines (MAS), in which the government previously held 70 percent but now holds 100 percent, required periodic infusions of resources from the government to maintain the large numbers of company’s staff and senior executives.  As of April, 2020, the government’s sovereign wealth fund, Khazanah, has shortlisted 4 of 9 bids to acquire the airline.

The Ministry of Finance holds significant minority stakes in five companies including a 50% stake in the financial guarantee insurer Danajamin Nasional Berhad.  The government also holds a golden share in 32 companies from key industries such as aerospace, marine technology, energy industries and ports.  The Ministry of Finance maintains a list of 70 companies directly controlled by the Minister of Finance Incorporated, known as MOF Inc, the largest Government Linked Investment Company (GLIC).  The seven GLICs in Malaysia are also listed.  However, a comprehensive list of the more than 200 GLCs that are controlled by these seven investment companies is not readily available.

https://www1.treasury.gov.my/index.php/en/contactus/faqs/gic.html 

With formal and informal ties between board members and government, Malaysian SOEs (GLCs) may have access to capital and financial protection from bankruptcy as well as reduced pressure to deliver profits to government shareholders.  The legal framework establishing GLCs under Malaysian law specifically seeks economic opportunity for Bumiputera entrepreneurs. There is some empirical evidence, published by the Asian Development Bank, that SOEs crowd out private investment in Malaysia.

Malaysia participates in OECD corporate governance engagements and continues to work on full adherence to the OECD Guidelines on Corporate Governance for SOEs through its Government Linked Companies (GLC) Transformation Program.  The National Resource Governance Institute’s Resource Governance Index rates Malaysia as weak on governance of its oil and gas sector; however, Malaysia also ranks as 27^th among 89 rated countries, in the top third.

Privatization Program

In several key sectors, including transportation, agriculture, utilities, financial services, manufacturing, and construction, Government Linked Corporations (GLCs) continue to dominate the market.  However, the Malaysian Government remains publicly committed to the continued, eventual privatization, though it has not set a timeline for the process and faces substantial political pressure to preserve the roles of the GLCs.  The Malaysian Government established the Public-Private Partnership Unit (UKAS) in 2009 to provide guidance and administrative support to businesses interested in privatization projects as well as large-scale government procurement projects.  UKAS, which used to be a part of the Office of the Prime Minister, is now under the Ministry of Finance.  UKAS oversees transactions ranging from contracts and concessions to sales and transfers of ownership from the public sector to the private sector.

Foreign investors may participate in privatization programs, but foreign ownership is limited to 25 percent of the privatized entity’s equity.  The National Development Policy confers preferential treatment to the Bumiputera, which are entitled to at least 30 percent of the privatized entity’s equity.

The privatization process is formally subject to public bidding.  However, the lack of transparency has led to criticism that the government’s decisions tend to favor individuals and businesses with close ties to high-ranking officials.

The development of RBC programs in Malaysia has transformed from a government-led initiative into a concept embraced by the private sector.  Through the efforts of the Bursa Malaysia and other governmental bodies, awareness of corporate responsibility now exists across wide swathes of the private sector in Malaysia.

The government initially viewed RBC through the lens of Corporate Social Responsibility (CSR) and philanthropic activities.  In 2006, the Malaysian Securities Commission published a CSR framework for all publicly listed companies (PLCs), which are required to disclose their CSR programs in their annual financial reports.  In 2007, the Women, Family and Community Ministry launched the Prime Minister’s CSR Awards to encourage the spread of CSR programs, and to honor those companies whose commitment to CSR had made a difference in their respective communities.

In 2011, the Malaysian government began to take a more holistic approach to RBC, using it as a way to facilitate change in Malaysian society.  That year the government launched the 1Malaysia Training Plan (SL1M), an employment incentive program that allows businesses to double the permitted tax deduction for expenses incurred in hiring and training graduates from rural areas and low-income families.  The Business Council for Sustainable Development Malaysia (BCSDM) (formerly known as the Board for Corporate Sustainability and Responsibility Malaysia) also supplanted the Institute for Corporate Responsibility Malaysia as the focal point for the country’s RBC programs.  This was an important development on the road to meeting international norms, as BCSDM is the local affiliate of the World Business Council for Sustainable Development, and aims to meet the World Bank’s Sustainable Development Goals.  Additionally, BCSDM has laid out its own Vision 2050 plan, which aims to facilitate an improvement in global living standards through the implementation of a series of environmentally responsible steps.

In the arena of Environmental, Social, and Governance (ESG) issues related to RBC, Bursa Malaysia has been the main catalyst in the drive to enhance corporate accountability.  In 2014, Bursa Malaysia launched the FTSE4Good Bursa Malaysia Index, which is composed of companies selected from the top 200 Malaysian stocks in the FTSE Bursa Malaysia EMAS Index.  These companies are screened in accordance with transparent and defined ESG criteria, and the index provides an avenue for investors to make ESG-focused investments and increase ESG exposure in their investment portfolios, thereby putting indirect pressure on companies to behave more responsibly.

In a subsequent step in 2015, Bursa Malaysia launched a Sustainability Framework, which was comprised of amendments to the Listing Requirement (which all PLCs must meet), and the publication of a Sustainability Reporting Guide Toolkit.  As part of their new responsibilities, PLCs were required to disclose sustainability statements in their annual reports, incorporating ESG issues related to their respective businesses.  In 2018 Bursa Malaysia launched a 2nd edition of the Sustainability Reporting Guidelines, which include recommendations for PLCs regarding how to integrate sustainability into their businesses, and how to conduct more extensive reporting on material Economic, Environmental, and Social (EES) risks and opportunities.

Various governmental entities have enacted measures to encourage RBC.  In 2015, SUHAKAM, the Malaysian Human Rights Commission, published a framework for a national plan of action on business and human rights (BHR Framework).  The goal of the BHR Framework was to facilitate the adoption and implementation of the UN Guiding Principles on Business and Human Rights by both state and non-state actors in Malaysia.  Subsequent to the creation of the BHR Framework, Parliament passed an amended Companies Act in 2016, which included the optional disclosure of a business review, containing information about: (i) environmental matters, including the impact of the company’s business on the environment; (ii) the company’s employees; and (iii) social and community issues.   In the wake of the Companies Act 2016, The Companies Commission of Malaysia similarly sought to push RBC, by developing a best practices circular that promotes adherence to international sustainability reporting standards.  This circular endorses specific international standards such as the Global Reporting Initiative (GRI) framework and the UN Guiding Principles on Business and Human Rights.

The push toward effectuating RBC by the government has not only involved human rights, but has also addressed environmental concerns.  The Ministry of Energy, Science, Technology, Environment & Climate Change (MESTECC) has published multiple roadmaps to that end, including: Green Technology Master Plan Malaysia 2017-2030; Malaysia’s Roadmap towards Zero Single-use Plastics 2018-2030; and National Energy Efficiency Master Plan.  Despite the efforts across multiple ministries to emphasize RBC, there is nothing in Malaysia’s official procurement policy that mentions it as a factor in government contracting.

In September 2019, U.S. Customs and Border Protection (CBP) issued a Withhold Release Order (WRO), thereby suspending imports of medical gloves from WRP Asia Pacific, a Malaysian manufacturer, citing widespread reports of the company’s use of forced labor to produce the gloves.  This came on the heels of a December 2018 report by The Guardian accusing WRP and another Malaysian glove manufacturer, Top Glove, of “forced labor, forced overtime, debt bondage, withheld wages and passport confiscation.”  Malaysia is the world’s largest exporter of medical gloves, and the U.S. is its largest export market, so the response from the Malaysian government to the WRO was prompt.   Soon after the WRO, then-Human Resources Minister M. Kulasegaran vowed to include a chapter on forced labor in the amended  Employment Act  to protect workers’ rights; however, the amendment to the Employment Act has not come before parliament.  Irrespective of the internal steps that the Malaysian government may have taken to codify protection of workers, CBP provided feedback to WRP to adjust its manufacturing and labor practices to ensure they are compliant with U.S. and international labor standards.  In March 2020, CBP revoked the WRO on WRP-produced rubber gloves, citing information “showing the company is no longer producing the rubber gloves under forced labor conditions.”

A 2019 chemical dumping incident paints a blurry picture regarding Malaysia’s ability to effectively and fairly enforce domestic laws on environmental protection.  In the state of Johor in March 2019, a lorry dumped a mixture of toxic chemicals into the Kim Kim River, causing the hospitalization of almost 3,000 individuals.  The overwhelming majority of those hospitalized did not get sick after the initial dumping, but rather days later aided by strong winds.  The authorities did not immediately remove the chemicals from the river due to the costliness of the procedure, leading to a political backlash.  The state government took straightforward legal steps against the responsible parties, and completed its investigation in a thorough and impartial manner.  The Johor government charged the driver of the lorry under the Environmental Quality Act 1974, and charged the owners of the factory responsible for the dumping pursuant to the Environment Quality Regulations (Scheduled Wastes) 2005 and Environmental Quality Regulations (Clean Air) Regulations 2014.

The Malaysian Securities Commission leads issues regarding corporate governance and shareholder protection.  In furtherance of its goal of safeguarding investors, in 2017 the SC released an updated version of the Malaysian Code of Corporate Governance (MCCG).  This -document includes principles on board leadership and effectiveness, audit and risk management, integrity in corporate reporting, and meaningful relationships with stakeholders.  The SC publishes an annual report called the CG Monitor to ascertain which of their suggested best practices in the MCCG are being implemented.  The CG Monitor evaluates issues ranging from executive compensation standards to the quality of disclosures made by PLCs.  The SC also issues policy papers on a range of related issues, including rules on takeovers, mergers, and acquisitions, with an eye on protecting shareholders.

Bursa Malaysia is similarly interested in ensuring shareholder protection, and has a dedicated chapter in its Listing Requirements to corporate governance.  This chapter lays out in detail the requirements for listed companies concerning board composition, rights of directors, and auditing practices.  The Listing Requirements circle back to the MCCG, and require that the board of PLCs disclose which of the best practices annunciated in the MCCG the company is following.

Promotion of RBC in Malaysia has been increasing due to pressure from institutional investors and government-linked investment funds.  In 2014, the Minority Shareholders Watch Group (an independent research organization on corporate governance matters, originally funded by four state-owned investment funds) (MSWG) and the SC worked together to draft the Malaysian Code for Institutional Investors (MCII).  The MCII includes six principles of effective stewardship by institutional investors, as well as guidance to facilitate implementation.   Furthermore, the MCII encourages institutional investors to invest responsibly by taking stock of the RBC and corporate governance standards of the company.  As a response to the MCII, the Institutional Investor Council (IIC) was formed in 2015.  The IIC is an industry-led initiative that represents the common interests of institutional investors in Malaysia, and promotes good governance (including ESG considerations) to PLCs.

The interest in RBC and good governance has taken hold not only in industry, but in governmental funds as well.  The government of Malaysia’s strategic investment fund (Khazanah Nasional Berhad), the government pension fund (KWAP), and the Employees Provident Fund (EPF) are signatories to the UN-supported Principles for Responsible Investment (PRI).  As signatories, they are required to carry out PRI principles, including taking ESG into consideration during the due diligence phase before making a potential investment, and ensuring that ESG best practices are met in companies in which they invest.

Post is not aware of any governmental interference in the efforts of regulators, business associations, and investors to improve responsible business practices amongst Malaysian corporations.

The Malaysian government established the Malaysian Anti-Corruption Commission (MACC) in 2008 and the Whistleblower Protection Act in 2010 and considers bribery a criminal act.  Malaysia’s anti-corruption law prohibits bribery of foreign public officials, permits the prosecution of Malaysians for offense committed overseas, prohibits bribes from being deducted from taxes, and provides for the seizure of property.

The MACC conducts investigations, but prosecutorial discretion remains with the Attorney General’s Chambers (AGC).  There is no systematic requirement for public officials to disclose their assets and the Whistleblower Protection Act does not provide protection for those who disclose allegations to the media.

The former Pakatan Harapan government prioritized anti-corruption efforts in its campaign manifesto.  After taking office in May 2018, it established Royal Commissions of Inquiry into alleged corruption at the Federal Land Development Authority (FELDA), the Council of Trust for the People (MARA), and the Hajj Pilgrims Fund (Tabung Haji), all government or government-linked agencies.  On May 21, 2018 the MACC established a 1MDB taskforce, including the police and central bank.  The government subsequently charged former Prime Minister Najib with 42 counts of money laundering, criminal breach of trust, and abuse of power for his alleged involvement in the 1MDB corruption scandal.  The current Prime Minister Muhyiddin has said to the media that his Perikatan Nasional (PN) government will continue to implement the National Anti-Corruption Plan (NACP) put in place by the previous Pakatan Harapan (PH) coalition government.  It remains to be seen how robustly this plan will be implemented.

Resources to Report Corruption

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

Datuk Seri Azam Baki -Chief Commissioner
Malaysia Anti-Corruption Commission
Block D6, Complex D, Pusat Pentadbiran
Kerajaan Persekutuan, Peti Surat 6000
62007 Putrajaya
+6-1800-88-6000
Email: info@sprm.gov.my

Contact at a “watchdog” organization:

Cynthia Gabriel, Director
The Center to Combat Corruption and Cronyism (C4)
C Four Consultancies Sdn Bhd
A-2-10, 8 Avenue
Jalan Sg Jernih 8/1, Seksyen 8, 46050 Petaling Jaya
Selangor, Malaysia
Email: info@c4center.org

There have been no significant incidents of political violence since the 1969 national elections.  The May 9, 2018 national election led to the first transition of power between coalitions since independence and was peaceful.  The Pakatan Harapan administration collapsed on February 24, 2020 and was replaced by the Perikatan Nasional coalition led by Muhyiddin Yassin.  In April 2012, the Peaceful Assembly Act took effect, which outlaws street protests and places other significant restrictions on public assemblies.  Following the July 2014 Israeli incursion into Gaza, several Malaysian non-governmental entities organized a boycott of McDonald’s.  Over a several week period, protestors picketed at several McDonalds restaurants, at times taunting and harassing employees.  Periodically, Malaysian groups will organize modest protests against U.S. government policies, usually involving demonstrations outside the U.S. embassy.  To date, these have remained peaceful and localized, with a strong police presence.  Likewise, several non-governmental organizations have organized mass rallies in major cities in peninsular and East Malaysia related to domestic policies that have been peaceful.

Malaysia’s two million documented and 3.9 to 5.5 million undocumented foreign workers make up over 30 percent of the country’s workforce.  The previous government pledged to reduce Malaysia’s reliance on foreign labor while bringing the nation’s laws up to international standards, and had taken steps toward reforming a foreign worker recruitment process plagued by allegations of corruption and debt bondage before being replaced by Prime Minister Muhyiddin’s government in March.

Malaysia’s shortage of skilled labor is the most frequently mentioned impediment to economic growth cited in numerous studies.  Malaysia has an acute shortage of highly qualified professionals, scientists, and academics.  U.S. firms operating in Malaysia have echoed this sentiment, noting that the shortage of skilled labor has resulted in more on-the-job training for new hires.

The Malaysian labor market, traditionally accustomed to operating at or near full employment, has been heavily impacted by the prolonged shutdown as part of the government’s response to the global pandemic.  The unemployment rate reached five percent in April 2020, Malaysia’s highest in over 30 years, with economic observers predicting it will climb higher during the year.

Malaysia is a member of the International Labor Organization (ILO).  Labor relations in Malaysia are generally non-confrontational.  While  a system of government controls strongly discourages strikes and restricts the formation of unions, the new government has created a National Labor Advisory Council – comprised of the Malaysian Trade Unions Congress and Malaysian Employer’s Federation – to increase labor participation in unions.  The government amended its Trade Unions Act and Industrial Relations Act in July 2019 to increase freedom of association in Malaysia.  Some labor disputes are settled through negotiation or arbitration by an industrial court.  Malaysian authorities have pledged to move forward with amendments to the country’s labor laws as a means of boosting the economy’s overall competitiveness and combatting forced labor conditions.  The previous government prohibited outsourcing companies, improved oversight of employment agencies, and brought the Employment Act, Children and Young Persons Act, and Occupational Safety and Health Act in line with ILO principles.

Although national unions are currently proscribed due to sovereignty issues within Malaysia, there are a number of territorial federations of unions (the three territories being Peninsular Malaysia, Sabah and Sarawak).  The government has prevented some trade unions, such as those in the electronics and textile sectors, from forming territorial federations.  Instead of allowing a federation for all of Peninsular Malaysia, the electronics sector is limited to forming four regional federations of unions, while the textile sector is limited to state-based federations of unions, for those states which have a textile industry.  Proposed changes to the Trade Unions Act should address this issue and allow unions to form.  Employers and employees share the costs of the Social Security Organization (SOSCO), which covers an estimated 12.9 million workers and has been expanded to cover foreign workers.  No systematic welfare programs or government unemployment benefits exist; however, the Employee Provident Fund, which employers and employees are required to contribute to, provides retirement benefits for workers in the private sector.  Civil servants receive pensions upon retirement.

The regulation of employment in Malaysia, specifically as it affects the hiring and redundancy of workers, remains a notable impediment to employing workers in Malaysia.  The high cost of terminating employees, even in cases of wrongdoing, is a source of complaint for domestic and foreign employers.  The former prime minister formed an Independent Committee on Foreign Workers to study foreign worker policies.  The Committee submitted 40 recommendations for streamlining the hiring of foreign workers and protecting employees from debt bondage and forced labor conditions.  It is unclear whether or how the new government will act on these recommendations.

Executives at U.S. companies operating in Malaysia have reported that the government monitors the ethnic balance among employees and enforces an ethnic quota system for hiring in certain areas.  Race-based preferences in hiring and promotion are widespread in government, government-owned universities, and government-linked corporations.

The former government increased and standardized the minimum wage across the country to RM 1100 (USD 275), a raise from RM 1,000 (USD 250) in Peninsular Malaysia and RM 920 (USD 230) in East Malaysia.

In 2018, the Department of Labor’s Trafficking Victims Protection Reauthorization Act (TVPRA) listing of goods produced with child labor and forced labor included Malaysian palm oil (forced and child labor), electronics (forced labor), and garments (forced labor).  Senior officials across the Malaysian interagency have taken this listing seriously and have been working with the private sector and civil society to address concerns relating to the recruitment, hiring, and management of foreign workers in all sectors of the Malaysian economy, including palm oil and electronics.

Malaysia has a limited investment guarantee agreement with the United States under the U.S. Overseas Private Investment Corporation (OPIC), the predecessor agency to the U.S. International Development Finance Corporation (DFC), for which it has qualified since 1959.  Few investors have sought OPIC insurance in Malaysia.

Embassy Kuala Lumpur Economic Section
376 Jalan Tun Razak / 50400 Kuala Lumpur Malaysia
+6-03-2168-5153
Email: KualaLumpurEcon@state.gov

Policies Towards Foreign Direct Investment

The Nigerian Investment Promotion Commission (NIPC) Act of 1995 dismantled controls and limits on FDI, allowing for 100 percent foreign ownership in all sectors, except the petroleum sector where FDI is limited to joint ventures or production-sharing contracts.  It also created the NIPC with a mandate to encourage and assist investment in Nigeria.  The NIPC features a One-Stop Investment Center (OSIC) that nominally includes participation of 27 governmental and parastatal agencies (not all of which are physically present at the OSIC) to consolidate and streamline administrative procedures for new businesses and investments.  Foreign investors receive largely the same treatment as domestic investors in Nigeria, including tax incentives.  The NIPC’s ability to attract new investment has been limited because of the unresolved challenges to investment and business.

The Nigerian government continues to promote import substitution policies such as trade restrictions, foreign exchange restrictions, and local content requirements in a bid to attract investment that would develop domestic production capacity and services that would otherwise be imported.  The import bans and high tariffs used to advance Nigeria’s import substitution goals have been undermined by smuggling of targeted products (most notably rice and poultry) through the country’s porous borders, and by corruption in the import quota systems developed by the government to incentivize domestic investment.  The government began closing land borders to commercial trade in August 2019 to try and curb smuggling.  Investors generally find Nigeria a difficult place to do business despite the government’s stated goal to attract investment.

Limits on Foreign Control and Right to Private Ownership and Establishment

There are currently no limits on foreign control of investments; however, Nigerian regulatory bodies may insist on domestic equity as a prerequisite to doing business.  The NIPC Act of 1995 liberalized the ownership structure of business in Nigeria allowing foreign investors to own and control 100 percent of the shares in any company except the petroleum industry.  Ownership prior to the NIPC Act was limited to a 60/40 percentage in favor of majority Nigeria control.   The foreign control of investments applies to all industries minus a few exceptions.  Investment in the oil and gas sector is limited to joint ventures or production-sharing agreements.  Laws also control investment in the production of items critical to national security (i.e. firearms, ammunition, and military and paramilitary apparel) to domestic investors.  Foreign investors must register with the NIPC after incorporation under the Companies and Allied Matters Decree of 1990.  The NIPC Act prohibits the nationalization or expropriation of foreign enterprises except in case of national interest.

Other Investment Policy Reviews

The OECD completed an investment policy review of Nigeria in 2015. (http://www.oecd.org/countries/nigeria/oecd-investment-policy-reviews-nigeria-2015-9789264208407-en.htm ).  The WTO published a trade policy review of Nigeria in 2017, which also includes a brief overview and assessment of Nigeria’s investment climate.  That review is available at https://www.wto.org/english/tratop_e/tpr_e/tp456_e.htm .

The United Nations Council on Trade and Development (UNCTAD) published an investment policy review of Nigeria and a Blue Book on Best Practice in Investment Promotion and Facilitation in 2009 (available at unctad.org ).  The recommendations from its reports continue to be valid:  Nigeria needs to diversify FDI away from the oil and gas sector by improving the regulatory framework, investing in physical and human capital, taking advantage of regional integration and reviewing external tariffs, fostering linkages and local industrial capacity, and strengthening institutions dealing with investment and related issues.  NIPC and the Federal Inland Revenue Service published a compendium of investment incentives which is available online at https://nipc.gov.ng/compendium .

Business Facilitation

Although the NIPC offers the OSIC, Nigeria does not have an online single window business registration website, as noted by Global Enterprise Registration (www.GER.co ).  The Nigerian Corporate Affairs Commission (CAC) maintains an information portal and in 2018 the Trade Ministry launched an online portal for investors called “iGuide Nigeria” (https://theiguides.org/public-docs/guides/nigeria ).  Many steps for business registration can be completed online, but the final step requires submitting original documents to a CAC office to complete registration.  On average, a foreign-owned limited liability company (LLC) in Nigeria (Lagos) can be established in 10 days through eight steps.  This average is significantly faster than the 23-day average for Sub-Saharan Africa.  Timing may vary in different parts of the country.  Only a local legal practitioner accredited by the CAC can incorporate companies in Nigeria.  According to the Nigerian Foreign Exchange (Monitoring and Miscellaneous Provisions) Act, foreign capital invested in an LLC must be imported through an authorized dealer, which will issue a Certificate of Capital Importation.  This certificate entitles the foreign investor to open a bank account in foreign currency.  Finally, a company engaging in international trade must get an import-export license from the Nigerian Customs Service (NCS).

Although not online, the OSIC co-locates relevant government agencies to provide more efficient and transparent services to investors.  The OSIC assists with visas for investors, company incorporation, business permits and registration, tax registration, immigration, and customs issues.  Investors may pick up documents and approvals that are statutorily required to establish an investment project in Nigeria.  The Nigerian government has not established uniform definitions for micro, small, and medium enterprises (MSMEs) with different agencies using different definitions, so the process may vary from one company to another.

Outward Investment

The Nigerian Export Promotion Council (NEPC) administered an Export Expansion Grant (EEG) scheme to improve non-oil export performance, but the government suspended the program in 2014 due to concerns about corruption on the part of companies that collected grants but did not actually export.  The program was revised and re-launched in 2018 when the federal government set aside 5.12 billion naira (roughly USD 14.2 million) in the 2019 budget for the EEG scheme.  The Nigerian Export-Import (NEXIM) Bank provides commercial bank guarantees and direct lending to facilitate export sector growth, although these services are underused.  NEXIM’s Foreign Input Facility provides normal commercial terms of three to five years (or longer) for the importation of machinery and raw materials used for generating exports.

Agencies created to promote industrial exports remain burdened by uneven management, vaguely defined policy guidelines, and corruption.  Nigeria’s inadequate power supply and lack of infrastructure coupled with the associated high production costs leave Nigerian exporters at a significant disadvantage.  Many Nigerian businesses fail to export because they find meeting international packaging and safety standards is too difficult or expensive.  Similarly, firms often are unable to meet consumer demand for a consistent supply of high-quality goods in sufficient quantities to support exports and meet domestic demand.  Most Nigerian manufacturers remain unable to or uninterested in competing in the international market,  given the size of Nigeria’s domestic market.

Transparency of the Regulatory System

Nigeria’s legal, accounting, and regulatory systems comply with international norms, but application and enforcement remain uneven.  Opportunities for public comment and input into proposed regulations sometimes occur.  Professional organizations set standards for the provision of professional services, such as accounting, law, medicine, engineering, and advertising.  These standards usually comply with international norms.  No legal barriers prevent entry into these sectors.

Ministries and regulatory agencies develop and make public anticipated regulatory changes or proposals and publish proposed regulations before their application.  The general public has opportunity to comment through targeted outreach, including business groups and stakeholders, and during the public hearing process before a bill becomes law.  There is no specialized agency tasked with publicizing proposed changes and the time period for comment may vary.  Ministries and agencies do conduct impact assessments, including environmental, but assessment methodologies may vary.  The National Bureau of Statistics reviews regulatory impact assessments conducted by other agencies.  Laws and regulations are publicly available.

Fiscal management occurs at all three tiers of government: federal, 36 state governments and Federal Capital Territory (FCT) Abuja, and 774 local government areas (LGAs).  Revenues from oil and non-oil sources are collected into the federation account and then shared among the different tiers of government by the Federal Account Allocation Committee (FAAC) in line with a statutory sharing formula.  All state governments can collect internally generated revenues, which vary from state to state.  The fiscal federalism structure does not compel states to be accountable to the federal government or transparent about revenues generated or received from the federation account.  The federal government’s finances are more transparent as budgets are made public and the financial data are published by the Central Bank of Nigeria (CBN), Debt Management Office (DMO), the Budget Office of the Federation, and the National Bureau of Statistics.  The state-owned oil company’s (Nigerian National Petroleum Corporation) financial data is very opaque.

The DMO puts Nigeria’s total debt stock at USD 84 billion as of December 2019 – USD 27.7 billion or nearly 33 percent of which is external.  The total debt figures presented by the DMO usually do not include off-balance-sheet financing such as sovereign guarantees.

International Regulatory Considerations

Foreign companies operate successfully in Nigeria’s service sectors, including telecommunications, accounting, insurance, banking, and advertising.  The Investment and Securities Act of 2007 forbids monopolies, insider trading, and unfair practices in securities dealings.  Nigeria is not a party to the WTO’s Government Procurement Agreement (GPA).  Nigeria generally regulates investment in line with the WTO’s Trade-Related Investment Measures (TRIMS) Agreement, but the government’s local content requirements in the oil and gas sector and the Information and Communication Technology (ICT) sector may conflict with Nigeria’s commitments under TRIMS.

In 2013, the National Information Technology Development Agency (NITDA), under the auspices of the Ministry of Communication, issued the Guidelines for Nigerian Content Development in the ICT sector.  The Guidelines require original ICT equipment manufacturers, within three years from the effective date of the guidelines, to use 50 percent local manufactured content and to use Nigerian companies to provide 80 percent of value added on networks.  The Guidelines also require multinational companies operating in Nigeria to source all hardware products locally; all government agencies to procure all computer hardware only from NITDA-approved original equipment manufacturers; and ICT companies to host all consumer and subscriber data locally, use only locally manufactured SIM cards for telephone services and data, and to use indigenous companies to build cell towers and base stations.  Enforcement of the Guidelines is largely inconsistent.  The Nigerian government generally lacks capacity and resources to monitor labor practices, technology compliancy, and digital data flows.  There are reports that individual Nigerian companies periodically lobby the National Assembly and/or NITDA to address allegations (warranted or not) against foreign firms that they are in non-compliance with the Guidelines.

The goal is to promote development of domestic production of ICT products and services for the Nigerian and global markets, but the guidelines pose risks to foreign investment and U.S. companies by interrupting their global supply chain, increasing costs, disrupting global flow of data, and stifling innovative products and services.  Industry representatives remain concerned about whether the guidelines would be implemented in a fair and transparent way toward all Nigerian and foreign companies.  All ICT companies, including Nigerian companies, use foreign manufactured equipment as Nigeria does not have the capacity to supply ICT hardware that meets international standards.

Nigeria is a member of the Economic Community of West African States (ECOWAS), which implemented a Common External Tariff (CET) beginning in 2015 with a five-year phase in period.  An internal CET implementation committee headed by the Fiscal Policy/Budget Monitoring and Evaluation Department of the NCS was set up to develop the implementation work plans that were consistent with national and ECOWAS regulations.  The CET was slated to be fully harmonized by 2020, but in practice some ECOWAS Member States have maintained deviations from the CET beyond the January 1, 2020, deadline.  The country has put in place a CET monitoring committee domiciled at the Ministry of Finance, consisting of several ministries, departments, and agencies (MDAs) related to the CET.  Nigeria applies five tariff bands under the CET:  zero duty on capital goods, machinery, and essential drugs not produced locally; 5 percent duty on imported raw materials; 10 percent duty on intermediate goods; 20 percent  duty on finished goods; and 35 percent duty on goods in certain sectors such as palm oil, meat products, dairy, and poultry that the Nigerian government seeks to protect.  The CET permits ECOWAS member governments to calculate import duties higher than the maximum allowed in the tariff bands (but not to exceed a total effective duty of 70 percent) for up to 3 percent of the 5,899 tariff lines included in the ECOWAS CET.

Legal System and Judicial Independence

Nigeria has a complex, three-tiered legal system comprised of English common law, Islamic law, and Nigerian customary law.  Most business transactions are governed by common law modified by statutes to meet local demands and conditions.  The Supreme Court is the pinnacle of the judicial system and has original and appellate jurisdiction in specific constitutional, civil, and criminal matters as prescribed by Nigeria’s constitution.  The Federal High Court has jurisdiction over revenue matters, admiralty law, banking, foreign exchange, other currency and monetary or fiscal matters, and lawsuits to which the federal government or any of its agencies are party.  The Nigerian court system is slow and inefficient, lacks adequate court facilities and computerized document-processing systems, and poorly remunerates judges and other court officials, all of which encourages corruption and undermines enforcement.  Judges frequently fail to appear for trials and court officials lack proper equipment and training.

The constitution and law provide for an independent judiciary; however, the judicial branch remains susceptible to pressure from the executive and legislative branches.  Political leaders have influenced the judiciary, particularly at the state and local levels.

The World Bank’s publication, Doing Business 2020, ranked Nigeria 73 out of 190 on enforcement of contracts, a significant improvement from previous years.  The Doing Business report credited business reforms for improving contract enforcement by issuing new rules of civil procedure for small claims courts which limit adjournments to unforeseen and exceptional circumstances but noted that there can be variation in performance indicators between cities in Nigeria (as in other developing countries).  For example, resolving a commercial dispute takes 476 days in Kano but 376 days in Lagos.  In the case of Lagos, the 376 days includes 40 days for filing and service, 194 days for trial and judgment, and 142 days for enforcement of the judgment with total costs averaging 42 percent of the claim.  In Kano, however, filing and service only takes 21 days with enforcement of judgement only taking 90 days, but trial and judgment accounts for 365 days with total costs averaging lower at 28 percent of the claim.  In comparison, in OECD countries the corresponding figures are an average of 589.6 days and averaging 21.5 percent of the claim and in sub-Saharan countries an average of 654.9 days and averaging 41.6 percent of the claim.

Laws and Regulations on Foreign Direct Investment

The NIPC Act of 1995 allows 100 percent foreign ownership of firms, except in the oil and gas sector where investment remains limited to joint ventures or production-sharing agreements.  Laws restrict industries to domestic investors if they are considered crucial to national security, such as firearms, ammunition, and military and paramilitary apparel.  Foreign investors must register with the NIPC after incorporation under the Companies and Allied Matters Decree of 1990.  The NIPC Act prohibits the nationalization or expropriation of foreign enterprises except in case of national interest, but the Embassy is unaware of specific instances of such interference by the government.

Competition and Anti-Trust Laws

After years of debate, the Nigerian government enacted the Federal Competition and Consumer Protection (FCCPC) Act in February 2019.  The act repealed the Consumer Protection Act of 2004 and replaced the previous Consumer Protection Council with a Federal Competition and Consumer Protection Commission while also creating a Competition and Consumer Protection Tribunal to handle issues and disputes arising from the operations of the Act.  Under the terms of the Act, businesses will be able to lodge anti-competitive practices complaints against other firms in the Tribunal.  The act prohibits agreements made to restrain competition, such as price fixing, price rigging, collusive tendering, etc. (with specific exemptions for collective bargaining agreements and employment, among other items).  The act empowers the President of Nigeria to regulate prices of certain goods and services on the recommendation of the Commission.

The law prescribes stringent fines for non-compliance.  The law mandates a fine of up to 10 percent of the company’s annual turnover in the preceding business year for offences.  The law harmonizes oversight for consumer protection, consolidating it under the FCCPC.

Expropriation and Compensation

The FGN has not expropriated or nationalized foreign assets since the late 1970s, and the NIPC Act of 1995 forbids nationalization of a business or assets unless the acquisition is in the national interest or for a public purpose.  In such cases, investors are entitled to fair compensation and legal redress.  A U.S.-owned waste management investment expropriated by Abia State in 2008 is the only known U.S. expropriation case in Nigeria.

Dispute Settlement

ICSID Convention and New York Convention

Nigeria is a member of the International Center for Settlement of Investment Disputes and the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards (also called the “New York Convention”).  The Arbitration and Conciliation Act of 1988 provides for a unified and straightforward legal framework for the fair and efficient settlement of commercial disputes by arbitration and conciliation.  The Act created internationally-competitive arbitration mechanisms, established proceeding schedules, provided for the application of the United Nations Commission on International Trade Law (UNCITRAL) arbitration rules or any other international arbitration rule acceptable to the parties, and made the New York Convention applicable to contract enforcement, based on reciprocity.  The Act allows parties to challenge arbitrators, provides that an arbitration tribunal shall ensure that the parties receive equal treatment, and ensures that each party has full opportunity to present its case.  Some U.S. firms have written provisions mandating International Chamber of Commerce (ICC) arbitration into their contracts with Nigerian partners.  Several other arbitration organizations also operate in Nigeria.

Investor-State Dispute Settlement

Nigeria’s civil courts have jurisdiction over disputes between foreign investors and the Nigerian government as well as between foreign investors and Nigerian businesses.  The courts occasionally rule against the government.  Nigerian law allows the enforcement of foreign judgments after proper hearings in Nigerian courts.  Plaintiffs receive monetary judgments in the currency specified in their claims.

Section 26 of the NIPC Act of 1995 provides for the resolution of investment disputes through arbitration as follows:

• Where a dispute arises between an investor and any Government of the Federation in respect of an enterprise, all efforts shall be made through mutual discussion to reach an amicable settlement.
• Any dispute between an investor and any Government of the Federation in respect of an enterprise to which this Act applies which is not amicably settled through mutual discussions, may be submitted at the option of the aggrieved party to arbitration as follows:
  1. in the case of a Nigerian investor, in accordance with the rules of procedure for arbitration as specified in the Arbitration and Conciliation Act; or
  2. in the case of a foreign investor, within the framework of any bilateral or multilateral agreement on investment protection to which the Federal Government and the country of which the investor is a national are parties; or
  3. in accordance with any other national or international machinery for the settlement of investment disputes agreed on by the parties.
• Where in respect of any dispute, there is disagreement between the investor and the Federal Government as to the method of dispute settlement to be adopted, the International Centre for Settlement of Investment Dispute Rules shall apply.

Nigeria is a signatory to the 1958 Convention on Recognition and Enforcement of Foreign Arbitral Awards.  Nigerian Courts have generally recognized contractual provisions that call for international arbitration.  Nigeria does not have a Bilateral Investment Treaty or Free Trade Agreement with the United States.

Bankruptcy Regulations

Reflecting Nigeria’s business culture, entrepreneurs generally do not seek bankruptcy protection.  Claims often go unpaid, even in cases where creditors obtain judgments against defendants.  Under Nigerian law, the term bankruptcy generally refers to individuals whereas corporate bankruptcy is referred to as insolvency.  The former is regulated by the Bankruptcy Act of 1990, as amended by Bankruptcy Decree 109 of 1992.  The latter is regulated by Part XV of the Companies and Allied Matters Act Cap 59 1990 which replaced the Companies Act, 1968.  The Embassy is not aware of U.S. companies that have had to avail themselves of the insolvency provisions under Nigerian law.

Investment Incentives

The Nigerian government maintains different and overlapping incentive programs.  The Industrial Development/Income Tax Relief Act, Cap 17, Laws of the Federation of Nigeria, 2004 provides incentives to pioneer industries deemed beneficial to Nigeria’s economic development and to labor-intensive industries, such as apparel.  There are currently 99 industries and products that qualify for the pioneer status incentive through the NIPC, following the addition of 27 industries and products added to the list in 2017.  The government has added a stipulation calling for a review of the qualifying industries and products to occur every two years.  Companies that receive pioneer status may benefit from a tax holiday from payment of company income tax for an initial period of three years, extendable for one or two additional years.  A pioneer industry sited in an economically disadvantaged area is entitled to a 100 percent tax holiday for seven years and an additional five percent depreciation allowance over and above the initial capital depreciation allowance.  Additional tax incentives are available for investments in domestic research and development, for companies that invest in LGAs deemed disadvantaged, for local value-added processing, for investments in solid minerals and oil and gas, and for several other investment scenarios.  For a full list of incentives, refer to the NIPC website at https://www.nipc.gov.ng/investment-incentives/ .

The NEPC administers an EEG scheme to improve non-oil export performance.  The program was suspended in 2014 due to concerns about corruption on the part of companies that collected grants but did not actually export.  It was revised and relaunched in 2018.  The federal government set aside 5.12 billion naira (roughly USD 14.2 million) in the 2019 budget for the EEG scheme.  The NEXIM Bank provides commercial bank guarantees and direct lending to facilitate export sector growth, although these services are underused.  NEXIM’s Foreign Input Facility provides normal commercial terms for the importation of machinery and raw materials used for generating exports.  Repayment terms are typically up to seven years, including a moratorium period of up to two years depending on the loan amount and the project being finance.  Agencies created to promote industrial exports remain burdened by uneven management, vaguely defined policy guidelines, and corruption.

The NIPC states that up to 120 percent of expenses on research and development (R&D) are tax deductible, provided that such R&D activities are carried out in Nigeria and relate to the business from which income or profits are derived.  Also, for the purpose of R&D on local raw materials, 140 percent of expenses are allowed.  Long-term research will be regarded as a capital expenditure and written off against profit.

Foreign Trade Zones/Free Ports/Trade Facilitation

The Nigerian Export Processing Zone Authority (NEPZA) allows duty-free import of all equipment and raw materials into its export processing zones.  Up to 100 percent of production in an export processing zone may be sold domestically based on valid permits and upon payment of applicable duties.  Investors in the zones are exempt from foreign exchange regulations and taxes and may freely repatriate capital.  The Nigerian government also encourages private sector participation and partnership with state and local governments under the free trade zones (FTZ) program, resulting in the establishment of the Lekki FTZ (owned by Lagos State), and the Olokola FTZ (which straddles Ogun and Ondo States and is owned by those two states, the federal government, and private oil companies).  Workers in FTZs may unionize but may not strike for an initial ten-year period.

Nigeria ratified the WTO Trade Facilitation Agreement (TFA) in 2016 and the Agreement entered into force in 2017.  Nigeria already implements items in Category A under the TFA and has identified, but not yet implemented, its Category B and C commitments.  In 2016, Nigeria requested additional technical assistance to implement and enforce its Category C commitments.  (See https://www.wto.org/english/tratop_e/tradfa_e/tradfa_e.htm )

Performance and Data Localization Requirements

Foreign investors must register with the NIPC, incorporate as a limited liability company (private or public) with the CAC, procure appropriate business permits, and register with the Securities and Exchange Commission (when applicable) to conduct business in Nigeria.  Manufacturing companies sometimes must meet local content requirements.  Long-term expatriate personnel do not require work permits but are subject to needs quotas requiring them to obtain residence permits that allow salary remittances abroad.  Expatriates looking to work in Nigeria on a short-term basis can either request a temporary work permit, which is usually granted for a two-month period and extendable to six months, or a business visa, if only traveling to Nigeria for the purpose of meetings, conferences, seminars, trainings, or other brief business activities.  Authorities permit larger quotas for professions deemed in short supply, such as deep-water oilfield divers.  U.S. companies often report problems in obtaining quota permits.  The Nigerian government’s Immigration Regulations 2017 introduced additional means by which foreigners can obtain residence in Nigeria.  Foreign nationals who have imported an annual minimum threshold of capital over a certain period may be issued a permanent residence permit, if the investment is not withdrawn.  The Nigerian Oil and Gas Content Development Act, 2010 restricts the number of expatriate managers to five percent of the total number of personnel for companies in the oil and gas sector.

The National Office of Industrial Property Act of 1979 established the National Office for Technology Acquisition and Promotion (NOTAP) to regulate the international acquisition of technology while creating an environment conducive to developing local technology.  NOTAP recommends local technical partners to Nigerian users in a bid to reduce the level of imported technology, which currently accounts for over 90 percent of technology in use in Nigeria.  NOTAP reviews the Technology Transfer Agreements (TTAs) required to import technology into Nigeria and for companies operating in Nigeria to access foreign currency.  NOTAP reviews three major aspects prior to approval of TTAs and subsequent issuance of a certificate:

• Legal – ensuring that the clauses in the agreement are in accordance with Nigerian laws and legal frameworks within which NOTAP operates;
• Economic – ensuring prices are fair for the technology offered; and

• Technical – ensuring transfer of technical knowledge.

U.S. firms complain that the approval process for TTAs is lengthy and can routinely take three months or more.  NOTAP took steps to automate the TTA process to reduce processing time to one month or less; however, from the date of filing the application to the issuance of confirmation of reasonableness, TTA processing still requires 60 business days.  https://notap.gov.ng/sites/default/files/stages_involved.pdf .

The Nigerian Oil and Gas Content Development Act of 2010 has technology-transfer requirements that may violate a company’s intellectual property rights.

The Guidelines for Nigerian Content Development in the ICT sector issued by the NITDA in 2013, require ICT companies to host all consumer and subscriber data locally to ensure the security of government data and promote development of the ICT sector by mandating all government ministries, departments, and agencies to source and procure software from only local and indigenous software development companies.  Enforcement of the guidelines is largely absent as the Nigerian government lacks capacity and resources to monitor digital data flows.  Federal government data is hosted locally in data centers that meet international standards.  In 2019, NITDA updated the 2013 Guidelines for Data Protection (https://nitda.gov.ng/wp-content/uploads/2019/01/Nigeria%20Data%20Protection%20Regulation.pdf ) and rolled out the regulatory framework for providers of public internet access services such that only registered, verified and vetted providers can provide public internet access service in Nigeria.

The NCS and the Nigerian Ports Authority (NPA) exercise exclusive jurisdiction over customs services and port operations respectively.  Nigerian law allows importers to clear goods on their own, but most importers employ clearing and forwarding agents to minimize tariffs and lower landed costs.  Others ship their goods to ports in neighboring countries, primarily Benin, after which they transport overland legally or smuggle into the country.  The Nigerian government began closing land borders to trade in August 2019, reportedly to stem the tide of smuggled goods entering from neighboring countries and has not reopened borders as this year’s report.  The Nigerian government implements a destination inspection scheme whereby all inspections occur upon arrival into Nigeria, rather than at the ports of origin.  In 2013, the NCS regained the authority to conduct destination inspections, which had previously been contracted to private companies.  NCS also introduced the Nigeria Integrated Customs Information System (NICIS) platform and an online system for filing customs documentation via a Pre-Arrival Assessment Report (PAAR) process.  The NCS still carries out 100 percent cargo examinations, and shipments take more than 20 days to clear through the process.

Shippers report that efforts to modernize and professionalize the NCS and the NPA have largely been unsuccessful – port congestion persists and clearance times are long.  A  presidential directive in 2017 for the Apapa Port, which handles over 40 percent of Nigeria’s legal trade, to run a 24-hour operation and achieve 48-hour cargo clearance is not effective.  The port is congested, inefficient and the proliferation of customs units incentivizes corruption from official and unofficial middlemen who complicate and extend the clearance process.  Freight forwarders usually resort to bribery of customs agents and port officials to avoid long delays clearing imported goods through the NPA and NCS.  Other ports face logistical and security challenges leaving most operating well below capacity.  Nigeria does not currently have a true deep-sea port although one is under construction near Lagos but not expected to be finished before 2021.  Smuggled goods routinely enter Nigeria’s seaports and cross its land borders.

Investors sometimes encounter difficulties acquiring entry visas and residency permits. Foreigners must obtain entry visas from Nigerian embassies or consulates abroad, seek expatriate position authorization from the NIPC, and request residency permits from the Nigerian Immigration Service.  In 2018, Nigeria instituted a visa-on-arrival system, which works relatively well, but still requires lengthy processing at an embassy or consulate abroad before an authorization is issued.  Some U.S. businesses have reported being solicited for bribes in the visa-on-arrival program.  Visa-on-arrival is not valid for employment or residence.  Investors report that the residency permit process is cumbersome and can take from two to 24 months and cost USD 1,000 to USD 3,000 in facilitation fees.  The Nigerian government announced a visa rule in 2011 to encourage foreign investment, under which legitimate investors can obtain multiple-entry visas at points of entry.  Obtaining a visa prior to traveling to Nigeria is strongly encouraged.

Real Property

The Nigerian government recognizes secured interests in property, such as mortgages.  The recording of security instruments and their enforcement remain subject to the same inefficiencies as those in the judicial system.  In the World Bank Doing Business 2020 Report, Nigeria ranked 183 out of the 190 countries surveyed for registering property, a decline of one point over its 2019 ranking.  Property registration in Lagos required an average of 12 steps over 105 days at a cost of 11.1 percent of the property value while in Kano registering property averages 11 steps over 47 days at a cost of 11.8 percent of the property value.

Fee simple property rights remain rare.  Owners transfer most property through long-term leases, with certificates of occupancy acting as title deeds.  Property transfers are complex and must usually go through state governors’ offices, as state governments have jurisdiction over land ownership.  Authorities have often compelled owners to demolish buildings, including government buildings, commercial buildings, residences, and churches, even in the face of court injunctions.  Acquiring and maintaining rights to real property can be problematic.

Clarity of title and registration of land ownership remain significant challenges throughout rural Nigeria, where many smallholder farmers have only ancestral or traditional use claims to their land.  Nigeria’s land reforms have attempted to address this barrier to development but with limited success.

Intellectual Property Rights

Nigeria’s legal and institutional infrastructure for protecting intellectual property rights (IPR) remains in need of further development and more funding, even though there are laws on the books for enforcing most IPR. The areas in which the legislation is deficient include online piracy, geographical indications, and plant and animal breeders’ rights.  A bill to establish the industrial property commission to take over the functions of registration of trademarks, patents, designs, plant varieties, animal breeders and farmers’ rights, and supervise the new registries created under the industrial property act has been in the works since 2016.  No new IPR legislation has been enacted.

Copyright protection in Nigeria is governed by the Copyright Act of 1988, as amended in 1992 and 1999, which provides an adequate basis for enforcing copyright and combating piracy.  The Nigerian Copyright Commission, a division of the Ministry of Justice, administers the Act.  The International Anti-Counterfeiting Coalition (IACC) has long noted that the Copyright Act should be amended to provide stiffer penalties for violators. Nigeria is a member of the World Intellectual Property Organization (WIPO) and in 2017 passed legislation to ratify two WIPO treaties that it signed in 1997:  the Copyright Treaty and the Performances and Phonograms Treaty.  These treaties address important digital communication and broadcast issues that have become increasingly relevant in the 18 years since Nigeria signed them.  The  Draft Copyright Bill in 2016 was revised to bring it into compliance with these two treaties and sent to the National Assembly in 2017, but it was never enacted.

In 2013, he Ministry of Communication Technology (MCT) issued local content guidelines (Guidelines for Nigerian Content Development in Information and Communications Technology) that  raised IPR concerns. Among other issues,  there is concern about the future ability of the Nigerian government to protect data and trade secrets because of the localization processes requiring the disclosure of source code and other sensitive design elements as a condition of doing business.  The ICT industry in Nigeria has pushed back strongly against several of the measures in those guidelines, which remain in effect but have not been fully enforced.  While the NITDA does not currently require in-country product manufacturing due to the difficult business environment in Nigeria, it has noted that it would continue to press for local ICT capacity building programs.

Violations of Nigerian IPR laws continue to be widespread largely due to a culture of inadequate enforcement.  That culture stems from several factors, including insufficient resources among enforcement agencies, lack of political will and focus on IPR, porous borders, entrenched trafficking systems that make enforcement difficult (and sometimes dangerous), and corruption.  The Nigerian Copyright Commission (NCC) has primary responsibility for copyright enforcement but is widely viewed as understaffed and underfunded relative to the magnitude of the IPR challenge in Nigeria.  Nevertheless, the NCC continues to carry out enforcement actions on a regular basis.  According to its report for 2018, the NCC conducted  five anti-piracy operations and seized 288 copyrighted works, including DVDs, books, MP3s, and software.  Anti-piracy operations in 2018 led to  seven arrests.

The NCS has general authority to seize and destroy contraband.  Under current law, copyrighted works require a notice issued by the rights owner to Customs to treat such works as infringing, but implementing procedures have not been developed and this procedure is handled on a case- by-case basis between the NCS and the NCC.  Once seizures are made, the NCS invites the NCC to inspect and subsequently take delivery of the consignment of fake goods for purposes of further investigation because the NCC has the statutory responsibility to investigate and prosecute copyright violations.  The NCC bears the costs of moving and storing infringing goods.   If, after investigations, any persons are identified with the infringing materials, a decision to prosecute may be made. Where no persons are identified or could be traced, the NCC may obtain an order of court to enable it to destroy such works.  The NCC works in cooperation with rights owners’ associations and stakeholders in the copyright industries on such matters.

Nigeria is not listed in the United States Trade Representative (USTR) Special 301Report or the Notorious Markets List. For additional information about treaty obligations and points of contact at local IP offices, please see the WIPO country profiles at http://www.wipo.int/directory/en/ .

Capital Markets and Portfolio Investment

The NIPC Act of 1995 liberalized Nigeria’s foreign investment regime, which has facilitated access to credit from domestic financial institutions.  Foreign investors who have incorporated their companies in Nigeria have equal access to all financial instruments.  Some investors consider the capital market, specifically the Nigerian Stock Exchange, a financing option, given commercial banks’ high interest rates and the short maturities of local debt instruments.

The Nigeria Stock Exchange (NSE) was reflective of the sluggishness in the larger economy in 2019 as it posted a negative return of -14.6 percent to close the year with its All Share Index at 26,842.07.   The poor performance was mostly attributed to government regulatory uncertainty and the 2019 presidential elections.   However, the equity market capitalization increased by 11 percent to USD 36.0 billion from USD 32.5 billion in 2018, largely due to the notable listings of telecom companies MTN Nigeria Communications Plc and Airtel Africa which had been long awaited.   As of December 2019 the NSE had 164 listed companies.  The total number of securities listed increased by 26 percent to 361 from 286 securities in 2018, largely due to a growth in government bonds.  The Nigerian government has considered requiring companies in certain sectors such as telecoms, oil and gas, or over a certain size to list on the NSE as a means to encourage greater corporate participation and sectoral balance in the Nigerian Stock Exchange, but those proposals have not been enacted to date.

The Government employs debt instruments, issuing bonds of various maturities ranging from two to 20 years.  Nigeria has issued bonds to restructure the government’s domestic debt portfolio from short- to medium- and long-term instruments.  Some state governments have issued bonds to finance development projects, while some domestic banks have used the bond market to raise additional capital.  The Nigerian Securities and Exchange Commission has issued stringent guidelines for states wishing to raise funds on capital markets, such as requiring credit assessments conducted by recognized credit rating agencies.

Money and Banking System

The CBN currently licenses 22 deposit-taking commercial banks in Nigeria.  Following a 2009 banking crisis, CBN officials intervened in eight of 24 commercial banks (roughly one-third of the system by assets) due to insolvency or serious undercapitalization.  At the same time, it established the government-owned Asset Management Company of Nigeria (AMCON) to address bank balance sheet disequilibria via discounted purchases of non-performing loans.  The Nigerian banking sector emerged stronger from the crisis thanks to AMCON and a number of other reforms undertaken by the CBN, including the adoption of uniform year-end International Financial Reporting Standards (IFRS) to increase transparency, a stronger emphasis on risk management and corporate governance, and the nationalization of three distressed banks.

In 2013, the CBN introduced a stricter supervision framework for the country’s top banks, identified as “Systemically Important Banks” (SIBs) as they account for more than 70 percent of the industry’s total assets, loans and deposits, and their failure or collapse could disrupt the entire financial system and the country’s real economy.  These banks are:  First Bank of Nigeria, United Bank for Africa, Zenith Bank, Access Bank, Ecobank Nigeria, Guaranty Trust Bank, and Polaris Bank.  Under the new supervision framework, the operations of SIBs are closely monitored with regulatory authorities conducting stress tests on the SIBs’ capital and liquidity adequacy.  Moreover, SIBs are required to maintain a higher minimum capital adequacy ratio of 15 percent.  In September 2018, the CBN revoked the operating license of one of the SIBs, due to the deterioration of its share capital and its board’s failure to recapitalize the bank, making it the fourth bank to be nationalized.

The CBN reported that total deposits increased by N2.34tn or 10.7 percent and aggregate credit grew by N2.2tn or 14.5 percent by December 2019.  Non-performing loans (NPLs) declined to 6.1 percent in December, 2019 from 14.2 percent in 2018.  However, NPLs are expected to rise following the CBN’s directive to banks to increase their loan to deposit ratio to 6 percent or be penalized.  This has forced several banks to grant more credits, many of which may result in default.  Nigerian government and private sector analysts assess that the volume of NPLs may be higher than these figures, owing in part to banks not reporting non-performing insider loans made to banks’ owners and directors.

The CBN supports non-interest banking.  Several banks have established Islamic banking operations in Nigeria including Jaiz Bank International Plc, Nigeria’s first full-fledged non-interest bank, which commenced operations in 2012.  A second non-interest bank, Taj Bank, started operations in December 2019.   There are five licensed merchant banks: Coronation Merchant Bank Limited, FBN Merchant Bank, FSDH Merchant Bank Ltd, NOVA Merchant Bank, and Rand Merchant Bank Nigeria Limited.

The CBN has issued regulations for foreign banks regarding mergers with or acquisitions of existing local banks in the country.  Foreign institutions’ aggregate investment must not be more than 10 percent of the latter’s total capital.

Foreign Exchange and Remittances

Foreign Exchange

Foreign currency for most transactions is procured through local banks in the inter-bank market.  Low value foreign exchange may also be procured at a premium from foreign exchange bureaus, called Bureaus de Change.  Domestic and foreign businesses have frequently expressed strong concern about the CBN’s foreign exchange restrictions, which they report prevent them from importing needed equipment and goods and from repatriating naira earnings.  Foreign exchange demand remains high because of the dependence on foreign inputs for manufacturing and refined petroleum products.

In 2015, the CBN published a list of 41 product categories which could no longer be imported using official foreign exchange channels; the number of categories has since been increased to 44.  Affected businesses (American and Nigerian) have complained publicly and privately that the policy in effect bans the import of some 700 individual items and severely hampers their ability to source inputs and raw materials.  In February 2019, the Governor of the Central Bank commented that the Bank is currently considering adding more items to the list and bringing the number as high as 50 items.

https://www.cbn.gov.ng/out/2015/ted/ted.fem.fpc.gen.01.011.pdf 

In 2017, the CBN began providing more foreign exchange to the interbank market via wholesale and retail forward contract auctions in order to meet some of the demand that had been forced to the parallel market.    The CBN also established the “investors and exporters” window in 2017, which allows trade to occur at prevailing market rates (around 360 naira to the dollar in December 2019).  In March 2020, the CBN announced it had collapsed its multiple exchange rate policy following a currency adjustment such that the investor and exporters window rate was increased to 380 naira to the dollar, and government transactions are now contracted at approximately 360 naira to the dollar.

Remittance Policies

The NIPC guarantees investors unrestricted transfer of dividends abroad (net a 10 percent withholding tax).  Companies must provide evidence of income earned and taxes paid before repatriating dividends from Nigeria.  Money transfers usually take no more than 48 hours.  In 2015, the CBN implemented restrictions on foreign exchange remittances.  All such transfers must occur through banks.  Such remittances may take several weeks depending on the size of the transfer and the availability of foreign exchange at the remitting bank.  Transfers of currency are protected by Article VII of the International Monetary Fund Articles of Agreement (http://www.imf.org/External/Pubs/FT/AA/index.htm#art7 ).

Sovereign Wealth Funds

The Nigeria Sovereign Investment Authority (NSIA) manages Nigeria’s sovereign wealth fund.  It was created by the NSIA Act in 2011 and began operations in October 2012 with USD 1 billion seed capital and received an additional USD 500 million in 2017.  In its most recent annual report, the total assets being managed by NSIA, increased to N617.7 billion (USD 2.0 billion) in 2018, an increase of 15.7 percent from 2017.  The NSIA also posted total comprehensive income of N44.3 billion (USD 144.9 million) in 2018, a 58.8 percent growth over the 2017 figure of N27.9 billion (USD 91.2 million).  http://www.nsia.com.ng/~nsia/sites/default/files/annual-reports/NSIA%20Annual%20Report%202018.pdf   It was created to receive, manage, and grow a diversified portfolio that will eventually replace government revenue currently drawn from non-renewable resources, primarily hydrocarbons.

The NSIA is a public agency that subscribes to the Santiago Principles, which are a set of 24 guidelines that assign “best practices” for the operations of Sovereign Wealth Funds globally. The NSIA invests through three funds:  the Future Generations Fund for diversified portfolio of long term growth, the Nigeria Infrastructure Fund for domestic infrastructure development, and the Stabilization Fund to act as a buffer against short-term economic instability.  The NSIA does not take an active role in management of companies.  The Embassy has not received any report or indication that NSIA activities limit private competition.

The Nigerian government does not have an established practice consistent with the OECD Guidelines on Corporate Governance for state-owned enterprises (SOEs), but SOEs do have enabling legislation that governs their ownership.  To legalize the existence of state-owned enterprises, provisions have been made in the Nigerian constitution under socio-economic development in section 16 (1) of the 1979 and 1999 Constitutions respectively.  The government has privatized many former SOEs to encourage more efficient operations, such as state-owned telecommunications company Nigerian Telecommunications and mobile subsidiary Mobile Telecommunications in 2014.

Nigeria does not operate a centralized ownership system for its state-owned enterprises.  The enabling legislation for each SOE stipulates its ownership and governance structure.  The Boards of Directors are usually appointed by the President on the recommendation of the relevant Minister.  The Boards operate and are appointed in line with the enabling legislation which usually stipulates the criteria for appointing Board members.  Directors are appointed by the Board within the relevant sector.  In a few cases, however, appointments have been viewed as a reward to political affiliates.

The Nigerian National Petroleum Corporation (NNPC) is Nigeria’s most prominent state-owned enterprise.  NNPC Board appointments are made by the presidency, but day-to-day management is overseen by the Group Managing Director (GMD).  The GMD reports to the Minister of Petroleum.  In the current administration the President has retained that ministerial role for himself, and the appointed Minister of State for Petroleum acts as the de facto Minister of Petroleum in the President’s stead.  The National Assembly passed a Petroleum Industry Governance Bill in March 2018, but the President sent it back to the National Assembly requesting amendments.  The bill would clarify regulatory, policy, and operational roles in the petroleum sector and pave the way for partial privatization of NNPC.

NNPC is Nigeria’s biggest and arguably most important state-owned enterprise and is responsible for exploration, refining, petrochemicals, products transportation, and marketing.  It owns and operates Nigeria’s four refineries (one each in Warri and Kaduna and two in Port Harcourt), all of which operate far below capacity, if at all.  Nigeria’s tax agency receives taxes on petroleum profits and other hydrocarbon-related levies, while the Department of Petroleum Resources under the Ministry of Petroleum Resources collects rents, royalties, license fees, bonuses, and other payments.  In an effort to provide greater transparency in the collection of revenues that accrue to the government, the Buhari administration requires these revenues, including some from the NNPC, to be deposited in the Treasury Single Account.

Another key state-owned enterprise is the Transmission Company of Nigeria (TCN), responsible for the operation of Nigeria’s national electrical grid.  Private power generation and distribution companies have accused the TCN grid of significant inefficiency and inadequate technology which greatly hinder the nation’s electricity output and supply.  TCN emerged from the defunct National Electric Power Authority as an incorporated entity in 2005.  It is the only major component of Nigeria’s electric power sector, which was not privatized in 2013.

Privatization Program

The Privatization and Commercialization Act of 1999 established the National Council on Privatization, the policy-making body overseeing the privatization of state-owned enterprises, and the Bureau of Public Enterprises (BPE), the implementing agency for designated privatizations.  The BPE has focused on the privatization of key sectors, including telecommunications and power, and calls for core investors to acquire controlling shares in formerly state-owned enterprises.

The BPE has privatized and concessioned more than 140 enterprises since 1999, including an aluminum complex, a steel complex, cement manufacturing firms, hotels, a petrochemical plant, aviation cargo handling companies, vehicle assembly plants, and electricity generation and distribution companies.  The electricity transmission company remains state-owned.  Foreign investors can and do participate in BPE’s privatization process.  The BPE also retains partial ownership in some of the privatized companies.  (It holds a 40 percent stake in the power distribution companies.)

The National Assembly has questioned the propriety of some of these privatizations, with one ongoing case related to an aluminum complex privatization the subject of a Supreme Court ruling on ownership.  In addition, the failure of the 2013 power sector privatization to restore financial viability to the sector has raised criticism of the privatized power generation and distribution companies.  Nevertheless, the government’s long-delayed sale in 2014 of state-owned Nigerian Telecommunications and Mobile Telecommunications shows a continued commitment to the privatization model.

There is no specific Responsible Business Conduct law in Nigeria.  Several legislative acts incorporate within their provisions certain expectations that directly or indirectly regulate the observance or practice of corporate social responsibility.  In order to reinforce responsible behavior, various laws have been put in place for the protection of the environment.  These laws stipulate criminal sanctions for non-compliance.  There are also regulating agencies which exist to protect the rights of consumers.  While the Nigerian government has no specific action plan regarding OECD Responsible Business Conduct guidelines, most government procurements are done transparently and in line with the Public Procurement Act which stipulates advertisement and a transparent bidding process.

Nigeria participates in the Extractive Industries Transparency Initiative (EITI) and is an EITI compliant country.  Specifically, in February 2019 the EITI Board determined that Nigeria had made satisfactory progress overall with implementing the EITI Standard after having fully addressed the corrective actions from the country’s first Validation in 2017.  The next EITI Validation study of Nigeria will occur in 2022.

The Department of Petroleum Resources (DPR), an arm of the Ministry of Petroleum Resources, also ensures comprehensive standards and guidelines to direct the execution of projects with proper consideration for the environment.  The DPR Environmental Guidelines and Standards of 1991 for the petroleum industry is a comprehensive working document with serious consideration for the preservation and protection of the Niger Delta.

The Nigerian government provides oversight of competition, consumer rights, and environmental protection issues.  The Federal Competition and Consumer Protection Commission (FCCPC), the National Agency for Food and Drug Administration and Control, the Standards Organization of Nigeria, and other entities have the authority to impose fines and ensure the destruction of harmful substances that otherwise may have sold to the general public.  The main regulators and enforcers of corporate governance are the Securities and Exchange Commission and the Corporate Affairs Commission (which register all incorporated companies).  Nigeria has adopted multiple reforms on corporate governance.  Environmental pollution by multinational oil companies has resulted in fines being imposed locally while some cases have been pursued in foreign jurisdictions resulting in judgments being granted in favor of the oil producing communities.

The Companies Allied Matter Act 1990 and the Investment Securities Act provide basic guidelines on company listing.  More detailed regulations are covered in the Nigeria Stock Exchange Listing rules.  Publicly listed companies are expected to disclose indicate their level of compliance with the Code of Corporate Governance in their Annual Financial Reports.

Foreign companies, whether incorporated in Nigeria or not, may bid on government projects and generally receive national treatment in government procurement, but may also be subject to a local content vehicle (e.g., partnership with a local partner firm or the inclusion of one in a consortium) or other prerequisites which are likely to vary from tender to tender.  Corruption and lack of transparency in tender processes has been a far greater concern to U.S. companies than discriminatory policies based on foreign status.  Government tenders are published in local newspapers, a “tenders” journal sold at local newspaper outlets, and occasionally in foreign journals and magazines.  The Nigerian government has made modest progress on its pledge to conduct open and competitive bidding processes for government procurement with the introduction of the Nigeria Open Contracting Portal in 2017 under the Bureau of Public Procurement.

The Public Procurement Law of 2007 established the Bureau of Public Procurement as the successor agency to the Budget Monitoring and Price Intelligence Unit.  It acts as a clearinghouse for government contracts and procurement and monitors the implementation of projects to ensure compliance with contract terms and budgetary restrictions.  Procurements above 100 million naira (about USD 277,550) reportedly undergo full “due process,” but government agencies routinely flout public procurement requirements.  Some of the 36 states of the federation have also passed public procurement legislation.

The reforms have also improved transparency in procurement by the state-owned NNPC.  Although U.S. companies have won contracts in numerous sectors, difficulties in receiving payment are not uncommon and can deter firms from bidding.  Supplier or foreign government subsidized financing arrangements appear in some cases to be a crucial factor in the award of government procurements.  Nigeria is not a signatory to the WTO Agreement on Government Procurement.

In 2016, Nigeria announced its participation in the Open Government Partnership, a potentially significant step forward on public financial management and fiscal transparency.  The Ministry of Justice presented Nigeria’s National Action Plan for the Open Government Partnership.  Implementation of its 14 commitments has made some progress, particularly on the issues such as tax transparency, ease of doing business, and asset recovery.  The National Action Plan, which ran through 2019, covered five major themes:  ensuring citizens’ participation in the budget cycle, implementing open contracting and adoption of open contracting data standards, increasing transparency in the extractive sectors, adopting common reporting standards like the Addis Tax initiative, and improving the ease of doing business.  Full implementation of the National Action Plan would be a significant step forward for Nigeria’s fiscal transparency, although Nigeria has not fully completed any commitment to date.

Businesses report that bribery of customs and port officials remains common and often necessary to avoid extended delays in the port clearance process, and that smuggled goods routinely enter Nigeria’s seaports and cross its land borders.

Domestic and foreign observers identify corruption as a serious obstacle to economic growth and poverty reduction.  Nigeria scored 26 out of 100 in Transparency International’s 2019 Corruption Perception Index, with an overall ranking of 146 out of the 180 countries, a two-point drop since 2018.  The Economic and Financial Crimes Commission (EFCC) Establishment Act of 2004 established the EFCC to prosecute individuals involved in financial crimes and other acts of economic “sabotage.”  Traditionally, the EFCC has achieved the most success in prosecuting low-level Internet scam operators.  A relative few high-profile convictions have taken place, such as a former governor of Adamawa State, a former governor of Bayelsa State, a former Inspector General of Police, and a former Chair of the Board of the Nigerian Port Authority.  However, in the case of the convicted governor of Bayelsa State, the President of Nigeria pardoned him in 2013.  The case of the former governor of Adamawa, who was convicted in 2017, is under appeal, and he is currently free on bail.

Since taking office in 2015, President Buhari has focused on implementing a campaign pledge to address corruption, though his critics contend his anti-corruption efforts often target political rivals.  Since then, the EFCC arrested a former National Security Advisor (NSA), a former Minister of State for Finance, a former NSA Director of Finance and Administration, and others on charges related to diversion of funds intended for government arms procurement.

The Corrupt Practices and Other Related Offences Act of 2001 established an Independent Corrupt Practices and Other Related Offences Commission (ICPC) to prosecute individuals, government officials, and businesses for corruption.  The Corrupt Practices Act punishes over 19 offenses, including accepting or giving bribes, fraudulent acquisition of property, and concealment of fraud.  Nigerian law stipulates that giving and receiving bribes constitute criminal offences and, as such, are not tax deductible.  Since its inauguration, the ICPC has secured convictions in 71 cases (through 2015, latest data available) with nearly 300 cases still open and pending as of July 2018.  In 2014, a presidential committee set up to review Nigeria’s ministries, departments, and agencies recommended that the EFCC, the ICPC, and the Code of Conduct Bureau (CCB) be merged into one organization.  The federal government, however, rejected this proposal to consolidate the work of these three anti-graft agencies.

Nigeria gained admittance into the Egmont Group of Financial Intelligence Units in 2007.  In July 2017 the Egmont Group suspended Nigeria due to concerns about the Nigeria Financial Intelligence Unit’s operational autonomy and ability to protect classified information. It lifted the suspension in September 2018 due to the Nigerian government’s efforts to address the Egmont Group’s concerns, through the passage of the Nigerian Financial Intelligence Agency Act in July 2018.

The Paris-based Financial Action Task Force (FATF) removed Nigeria from its list of Non-Cooperative Countries and Territories in 2006.  In 2013, the FATF decided that Nigeria had substantially addressed the technical requirements of its FATF Action Plan and agreed to remove Nigeria from its monitoring process conducted by FATF’s International Cooperation Review Group.  Nigeria, as a member of the Inter-governmental Action Group Against Money Laundering in West Africa, is an associated member of FATF.

The Nigeria Extractive Industries Transparency Initiative (NEITI) Act of 2007 provided for the establishment of the NEITI organization, charged with developing a framework for transparency and accountability in the reporting and disclosure by all extractive industry companies of revenue due to or paid to the Nigerian government.  NEITI serves as a member of the international Extractive Industries Transparency Initiative, which provides a global standard for revenue transparency for extractive industries like oil and gas and mining.  Nigeria is party to the United Nations Convention Against Corruption.  Nigeria is not a member of the OECD and not party to the OECD Convention on Combating Bribery.

Resources to Report Corruption

Economic and Financial Crimes Commission
Headquarters:  No. 5, Fomella Street, Off Adetokunbo Ademola Crescent, Wuse II, Abuja, Nigeria.
Branch offices in Ikoyi, Lagos State; Port Harcourt, Rivers State; Independence Layout, Enugu State; Kano, Kano State; Gombe, Gombe State.
Hotline: +234 9 9044752 or +234 9 9044753

Independent Corrupt Practices and Other Related Offences Commission:
Abuja Office – Headquarters
Plot 802 Constitution Avenue, Central District, PMB 535, Garki Abuja
Phone/Fax: 234 9 523 8810   Email: info@icpc.gov.ng

Political, religious, and ethnic violence continue to affect Nigeria.  The Islamist group Jama’atu Ahl as-Sunnah li-Da’awati wal-Jihad, popularly known as Boko Haram, and the ISIS-WA have waged a violent campaign to destabilize the Nigerian government, killing tens of thousands of people, forcing over two million to flee to other areas of Nigeria or into neighboring countries, and leaving more than seven million people in need of humanitarian assistance in the country’s northeast.  Boko Haram has targeted markets, churches, mosques, government installations, educational institutions, and leisure sites with improvised explosive devices (IEDs) and suicide vehicle-borne IEDs across nine northern states and in Abuja.  In 2017, Boko Haram employed hundreds of suicide bombings against the local population.  Women and children were forced to carry out many of the attacks.  There were multiple reports of Boko Haram killing entire villages suspected of cooperating with the government.  ISIS-WA targeted civilians with attacks or kidnappings less frequently than Boko Haram.  ISIS-WA employed targeted acts of violence and intimidation against civilians in order to expand its area of influence and gain control over critical economic resources.  As part of a violent and deliberate campaign, ISIS-WA also targeted government figures, traditional leaders, and contractors.

President Buhari has focused on matters of insecurity in Nigeria and in neighboring countries.   While the two insurgencies maintain the ability to stage forces in rural areas and launch attacks against civilian and military targets across the northeast, Nigeria is also facing rural violence in the Nigeria’s north-central states caused by criminal actors and by conflicts between migratory pastoralist and farming communities, often over scarce resources.  Another major trend is the rise in kidnappings for ransom and attacks on villages by armed gangs.

Due to challenging security dynamics throughout the country, the U.S. Mission to Nigeria has significantly limited official travel in the northeast and travel to other parts of Nigeria requires security precautions.

Decades of neglect, persistent poverty, and environmental damage caused by oil spills have left Nigeria’s oil rich Niger Delta region vulnerable to renewed violence.  Though each oil-producing state receives a 13 percent derivation of the oil revenue produced within its borders, and several government agencies, including the Niger Delta Development Corporation (NDDC) and the Ministry of Niger Delta Affairs, are tasked with implementing development projects, bureaucratic mismanagement and corruption have prevented these investments from yielding meaningful economic and social development in the region.  Niger Delta militants have demonstrated their ability to attack and severely damage oil instillations at will as seen when they cut Nigeria’s production by more than half in 2016.  Attacks on oil installations have since decreased due to a revamped amnesty program and continuous high-level engagement with the region.

Other security challenges facing Nigeria include thousands of refugees fleeing to Nigeria from Cameroon’s English-speaking region due to tensions there and kidnappings for ransom.

Nigeria’s skilled labor pool has declined over the past decade due to inadequate educational systems, limited employment opportunities, and the migration of educated Nigerians to other countries, including the United Kingdom, the United States, Canada, and South Africa.  The low employment capacity of Nigeria’s formal sector means that almost three-quarters of all Nigerians work in the informal and agricultural sectors or are unemployed.  Companies involved in formal sector businesses, such as banking and insurance, possess an adequately skilled workforce.  Manufacturing and construction sector workers often require on-the-job training.  The result is that while individual wages are low, individual productivity is also low, which means overall labor costs can be high.  The Buhari Administration is pushing reforms in the education sector to improve the supply of skilled workers but this and other efforts run by state governments are in their initial stages.

Labor organizations in Nigeria remain politically active and are prone to call for strikes on a regular basis against the national and state governments.  While most labor actions are peaceful, difficult economic conditions fuel the risk that these actions could become violent.

Nigeria’s constitution guarantees the rights of free assembly and association, and protects workers’ rights to form or belong to trade unions.  Several statutory laws, nonetheless, restrict the rights of workers to associate or disassociate with labor organizations.  Nigerian unions belong to one of three trade union federations:  the Nigeria Labor Congress (NLC), which tends to represent junior (i.e., blue collar) workers; the United Labor Congress of Nigeria (ULC), which represents a group of unions that separated from the NLC in 2015; and the Trade Union Congress of Nigeria (TUC), which represents the “senior” (i.e., white collar) workers.  According to figures provided by the Ministry of Labor and Employment, total union membership stands at roughly 7 million.  A majority of these union members work in the public sector, although unions exist across the private sector.  The Trade Union Amendment Act of 2005 allowed non-management senior staff to join unions.

Collective bargaining occurred throughout the public sector and the organized private sector in 2019.  However, public sector employees have become increasingly concerned about the Nigerian governments’ and state governments’ failure to honor previous agreements from the collective bargaining process.

Collective bargaining in the oil and gas industry is relatively efficient compared to other sectors. Issues pertaining to salaries, benefits, health and safety, and working conditions tend to be resolved quickly through negotiations.  Workers under collective bargaining agreements cannot participate in strikes unless their unions comply with the requirements of the law, which includes provisions for mandatory mediation and referral of disputes to the Nigerian government.  Despite these restrictions on staging strikes, unions occasionally conduct strikes in the private and public sectors without warning.  Localized strikes occurred in the education, government, energy, power, and healthcare sectors in 2019.  The law forbids employers from granting general wage increases to workers without prior government approval, but the law is not often enforced.

Despite widespread opposition from state governors, in April 2019, President Buhari signed into law a new minimum wage, increasing it from 18,000 naira (USD 50) to 30,000 naira (USD 83) per month.  After months of negotiations, the government finally reached an agreement with organized labor in October 2019 on the consequential adjustments in civil servants’ salaries that must be implemented across the board to apply the new minimum wage.  While the VAT rate was recently raised from 5.5 to 7.5 percent to help fund the increased minimum wage, it will not be enough to offset the cost of the adjustments.  This, in turn, means that the government will need to borrow more money, which will not only increase the debt burden but open it to criticism that that money should be used for critical infrastructure projects rather than civil servant salaries.

The Nigerian Minister of Labor and Employment may refer unresolved disputes to the Industrial Arbitration Panel (IAP) and the National Industrial Court (NIC).  In 2015, the NIC launched an Alternative Dispute Resolution Center.  Union officials question the effectiveness and independence of the NIC, believing it unable to resolve disputes stemming from Nigerian government failure to fulfill contract provisions for public sector employees.  Union leaders criticize the arbitration system’s dependence on the Minister of Labor and Employment’s referrals to the IAP.

Nigeria’s laws regarding minimum age for child labor and hazardous work are inconsistent. Article 59 of the Labor Act of 1974 sets the minimum age of employment at 12, and it is in force in all 36 states of Nigeria.  The Act also permits children of any age to do light work alongside a family member in agriculture, horticulture, or domestic service.

The Federal 2003 Child Rights Act (CRA) codifies the rights of children in Nigeria and must be ratified by each State to become law in its territory.  To date, 25 states and the FCT have ratified the CRA, with all 11 of the remaining states located in northern Nigeria.

The CRA states that the provisions related to young people in the Labor Act apply to children under the CRA, but also that the CRA supersedes any other legislation related to children.  The CRA restricts children under the age of 18 from any work aside from light work for family members; however, Article 59 of the Labor Act applies these restrictions only to children under the age of 12.  This language makes it unclear what minimum ages apply for certain types of work in the country.

While the Labor Act forbids the employment of youth under age 18 in work that is dangerous to their health, safety, or morals, it allows children to participate in certain types of work that may be dangerous by setting different age thresholds for various activities.  For example, the Labor Act allows children age 16 and older to work at night in gold mining and the manufacturing of iron, steel, paper, raw sugar, and glass.  Furthermore, the Labor Act does not extend to children employed in domestic service.  Thus, children are vulnerable to dangerous work in industrial undertakings, underground, with machines, and in domestic service.  In addition, the prohibitions established by the Labor Act and CRA are not comprehensive or specific enough to facilitate enforcement.  In 2013, the National Steering Committee (NSC) for the Elimination of the Worst Forms of Child Labor in Nigeria validated the Report on the Identification of Hazardous Child Labor in Nigeria.  The report has languished with the Ministry of Labor and Employment and still awaits the promulgation of guidelines for operationalizing the report.

The Nigerian government adopted the Trafficking in Persons (Prohibition), Enforcement, and Administration Act of 2015.  While not specifically directed against child labor, many sections of the  law support anti-child labor efforts.  The Violence against Persons Prohibition Act was signed into law in May 2015 and again while not specifically focused on child labor, it covers related elements such as “depriving a person of his/her liberty,” “forced financial dependence/economic abuse,” and “forced isolation/separation from family and friends” and is applicable to minors.

Nigeria’s Labor Act provides for a 40-hour work week, two to four weeks of annual leave, and overtime and holiday pay for all workers except agricultural and domestic workers.  No law prohibits compulsory overtime.  The Act establishes general health and safety provisions, some of which specifically apply to young or female workers, and requires the Ministry of Labor and Employment to inspect factories for compliance with health and safety standards.  Under-funding and limited resources undermine the Ministry’s oversight capacity, and construction sites and other non-factory work sites are often ignored.  Nigeria’s labor law requires employers to compensate injured workers and dependent survivors of workers killed in industrial accidents.

Draft legislation, such as a new Labor Standards Act which includes provisions on child labor, and an Occupational Safety and Health Act that would regulate hazardous work, have remained under consideration in the National Assembly since 2006.

Admission of foreign workers is overseen by the Federal Ministry of the Interior.  Employers must seek the consent of the Ministry in order to employ foreign workers by applying for an “expatriate quota.”  The quota allows a company to employ foreign nationals in specifically approved job designations as well as specifying the validity period of the designations provided on the quota.

There are two types of visas which may be granted, depending on the length of stay.  For short-term assignments, an employer must apply for and receive a temporary work permit, allowing the employee to carry out some specific tasks.  The temporary work permit is a single-entry visa, and expires after three months.  There are no numerical limitations on short-term visas, and foreign nationals who meet the conditions for grant of a visa may apply for as many short-term visas as required.

Nigeria does not have current programs under the DFC but has Overseas Private Investment Corporation (OPIC) programs in food manufacturing, banking, construction, and power sectors.

Table 4: Sources of Portfolio Investment
Data not available.

Trade and Investment Officer
Plot 1075 Diplomatic Drive
Abuja, Nigeria
Telephone: +234 (0)9 461 4000
Email: EconNigeria@state.gov

Policies Toward Foreign Direct Investment

Attracting foreign direct investment remains a critical component of the SAG’s broader Vision 2030 program to diversify an economy overly dependent on oil and to create employment opportunities for a growing youth population. As such, the SAG seeks foreign investment that explicitly promotes economic development, transfers foreign expertise and technology to Saudi Arabia, creates jobs for Saudi nationals, and increases Saudi Arabia’s non-oil exports. The government encourages investment in nearly all economic sectors, with priority given to transportation, health/biotechnology, information and communications technology (ICT), media/entertainment, industry (mining and manufacturing), and energy.

Saudi Arabia’s economic reforms are opening up new areas for potential investment. For example, in a country where most public entertainment was once forbidden, the SAG now regularly sponsors and promotes entertainment programming, including live concerts, dance exhibitions, sports competitions, and other public performances. Significantly, the audiences for many of those events are now gender-mixed, representing a larger consumer base. In addition to the reopening of cinemas in 2018, the SAG has hosted Formula E races, PGA European Tour professional golf tournaments, a world heavyweight boxing title match, and a professional tennis tournament. Saudi Arabia launched the Saudi Seasons initiative in 2019 with 11 tourism seasons held in each region of the Kingdom. The program includes events and activities specifically designed to complement the cultural, touristic, and historical touchstones of Saudi Arabia. As part of the Riyadh Season, the Kingdom organized a first-ever car exhibition and auction in Riyadh, which attracted 350 U.S. exhibitors.

The SAG is proceeding with “economic cities” and new “giga-projects” that are at various stages of development and is seeking foreign investment in them. In 2020, the Kingdom announced the opening of a NEOM Airport, an important milestone for opening the northwest territory for development. These projects are large-scale and self-contained developments in different regions focusing on particular industries, e.g., technology, energy, tourism, and entertainment. Principal among these projects are:

• Qiddiya, a new, large-scale entertainment, sports, and cultural complex near Riyadh;
• King Abdullah Financial District, a commercial center development with nearly 60 skyscrapers in Riyadh;
• Red Sea Project, a massive tourism development on the archipelago of islands along the western Saudi coast, which aims to create 70,000 jobs and attract one million tourists per year.
• Amaala, a wellness, healthy living, and meditation resort on the Kingdom’s northwest coast, projected to include more than 2,500 luxury hotel rooms and 700 villas.
• NEOM, a $500 billion long-term development project to build a futuristic “independent economic zone” in northwest Saudi Arabia.

Pressure on Saudi Arabia’s fiscal situation from the sharp downturn in oil prices and unexpected spending needed to respond to COVID-19 will have a negative impact on the budgets of ministries and state-owned entities. While it is unclear what the impact on specific development projects will be, fiscal pressure is likely to dampen the SAG’s ambitious plans in the near term.

The Ministry of Investment of Saudi Arabia (MISA), formerly the Saudi Arabian General Investment Authority (SAGIA), governs and regulates foreign investment in the Kingdom, issues licenses to prospective investors, and works to foster and promote investment opportunities across the economy. Established originally as a regulatory agency, MISA has increasingly shifted its focus to investment promotion and assistance, offering potential investors detailed guides and a catalogue of current investment opportunities on its website (https://investsaudi.sa/en/sectors-opportunities/).

MISA has introduced e-licenses for the first time as part of its ongoing efforts to provide a more efficient and user-friendly process. An online “instant” license issuance or renewal service is now being offered by MISA to foreign investors that are listed on a local or international stock market and meet certain conditions. Saudi Arabia recently opened the following additional sectors to foreign investors: (i) road transport, (ii) real estate brokerage, (iii) audiovisual services and (iv) recruitment and related services.

Despite Saudi Arabia’s overall welcoming approach to foreign investment, some structural impediments remain. Foreign investment is currently prohibited in 10 sectors on the Negative List, including:

1. Oil exploration, drilling, and production;
2. Catering to military sectors;
3. Security and detective services;
4. Real estate investment in the holy cities, Mecca and Medina;
5. Tourist orientation and guidance services for religious tourism related to Hajj and umrah;
6. Printing and publishing (subject to a variety of exceptions);
7. Certain internationally classified commission agents;
8. Services provided by midwives, nurses, physical therapy services, and quasi-doctoral services;
9. Fisheries; and
10. Poison centers, blood banks, and quarantine services.

In addition to the negative list, older laws that remain in effect prohibit or otherwise restrict foreign investment in some economic subsectors not on the list, including some areas of healthcare. At the same time, MISA has demonstrated some flexibility in approving exceptions to the “negative list” exclusions.

Foreign investors must also contend with increasingly strict localization requirements in bidding for certain government contracts, labor policy requirements to hire more Saudi nationals (usually at higher wages than expatriate workers), an increasingly restrictive visa policy for foreign workers, and gender segregation in business and social settings (though gender segregation is becoming more relaxed as the SAG introduces socio-economic reforms).

Additionally, in a bid to bolster non-oil income, the government implemented new taxes and fees in 2017 and early 2018, including significant visa fee increases, higher fines for traffic violations, new fees for certain billboard advertisements, and related measures. On July 1, 2020, the SAG will increase the value-added tax (VAT) from five percent to 15 percent. The VAT was originally introduced in January 2018, in addition to excise taxes implemented in June 2017 on cigarettes (at a rate of 100 percent), carbonated drinks (at a rate of 50 percent), and energy drinks (at a rate of 100 percent).

Limits on Foreign Control and Right to Private Ownership and Establishment

Saudi Arabia fully recognizes rights to private ownership and the establishment of private business. As outlined above, the SAG excludes foreign investors from some economic sectors and places some limits on foreign control. With respect to energy, Saudi Arabia’s largest economic sector, foreign firms are barred from investing in the upstream hydrocarbon sector, but the SAG permits foreign investment in the downstream energy sector, including refining and petrochemicals. There is significant foreign investment in these sectors. ExxonMobil, Shell, China’s Sinopec, and Japan’s Sumitomo Chemical are partners with Saudi Aramco (the SAG’s state-owned oil firm) in domestic refineries. ExxonMobil, Chevron, Shell, and other international investors have joint ventures with Aramco and/or the Saudi Basic Industries Corporation (SABIC) in large-scale petrochemical plants that utilize natural gas feedstock from Aramco’s operations. The Dow Chemical Company and Aramco are partners in a $20 billion joint venture for the world’s largest integrated petrochemical production complex.

With respect to other non-oil natural resources, the national mining company, Ma’aden, has a $12 billion joint venture with Alcoa for bauxite mining and aluminum production and a $7 billion joint venture with the leading American fertilizer firm Mosaic and SABIC to produce phosphate-based fertilizers.

Joint ventures almost always take the form of limited liability partnerships in Saudi Arabia, to which there are some disadvantages. Foreign partners in service and contracting ventures organized as limited liability partnerships must pay, in cash or in kind, 100 percent of their contribution to authorized capital. MISA’s authorization is only the first step in setting up such a partnership.

Professionals, including architects, consultants, and consulting engineers, are required to register with, and be certified by, the Ministry of Commerce. In theory, these regulations permit the registration of Saudi-foreign joint venture consulting firms. As part of its WTO commitments, Saudi Arabia generally allows consulting firms to establish a local office without a Saudi partner. Foreign engineering consulting companies, however, must have been incorporated for at least 10 years and have operations in at least four different countries to qualify. Foreign entities practicing accounting and auditing, architecture, or civil planning, or providing healthcare, dental, or veterinary services, must still have a Saudi partner.

In recent years, Saudi Arabia has opened additional service markets to foreign investment, including financial and banking services; aircraft maintenance and repair; computer reservation systems; wholesale, retail, and franchise distribution services; both basic and value-added telecom services; and investment in the computer and related services sectors. In 2016, Saudi Arabia formally approved full foreign ownership of retail and wholesale businesses in the Kingdom. While some companies have already received licenses under the new rules, the restrictions attached to obtaining full ownership – including a requirement to invest over $50 million during the first five years and ensure that 30 percent of all products sold are manufactured locally – have proven difficult to meet and precluded many investors from taking full advantage of the reform.

Other Investment Policy Reviews

Saudi Arabia completed its second WTO trade policy review in late 2015, which included investment policy (https://www.wto.org/english/tratop_e/tpr_e/tp433_e.htm ).

Business Facilitation

In addition to applying for a license from MISA, foreign and local investors must register a new business via the Ministry of Commerce (MOC), which has begun offering online registration services for limited liability companies at: https://mc.gov.sa/en/ . Though users may submit articles of association and apply for a business name within minutes on MOC’s website, final approval from the ministry often takes a week or longer. Applicants must also complete a number of other steps to start a business, including obtaining a municipality (baladia) license for their office premises and registering separately with the Ministry of Labor and Social Development, Chamber of Commerce, Passport Office, Tax Department, and the General Organization for Social Insurance. From start to finish, registering a business in Saudi Arabia takes a foreign investor on average three to five months from the time an initial MISA application is completed, placing the country at 141 of 190 countries in terms of ease of starting a business, according to the World Bank (2019 rankings). With respect to foreign direct investment, the investment approval by MISA is a necessary, but not sufficient, step in establishing an investment in the Kingdom; there are a number of other government ministries, agencies, and departments regulating business operations and ventures. In 2019, MISA established offices in the United States, starting in Washington D.C., to further facilitate investment in Saudi Arabia.

Saudi officials have stated their intention to attract foreign small- and medium-sized enterprises (SMEs) to the Kingdom. To facilitate and promote the growth of the SME sector, the SAG established the Small and Medium Enterprises General Authority in 2015 and released a new Companies Law in 2016. It also substantially reduced the minimum capital and number of shareholders required to form a joint stock company from five to two. Additionally, as of 2019, women no longer need a male guardian to apply for a business license.

Outward Investment

Saudi Arabia does not restrict domestic investors from investing abroad. Private Saudi citizens, Saudi companies, and SAG entities hold extensive overseas investments. The SAG has been transforming its Public Investment Fund (PIF), traditionally a holding company for government shares in state-controlled enterprises, into a major international investor and sovereign wealth fund. In 2016, the PIF made its first high-profile international investment by taking a $3.5 billion stake in Uber. The PIF has also announced a $400 million investment in Magic Leap, a Florida-based company that is developing “mixed reality” technology, and a $1 billion investment in Lucid Motors, a California-based electric car company. In the first half of 2020, the PIF made a number of new investments, including in Facebook, Starbucks, Disney, Boeing, Citigroup, LiveNation, Marriott, several European energy firms, and Carnival Cruise Lines. Saudi Aramco and SABIC are also major investors in the United States. In 2017, Aramco acquired full ownership of Motiva, the largest refinery in North America, in Port Arthur, Texas. SABIC has announced a multi-billion dollar joint venture with ExxonMobil in a petrochemical facility in Corpus Christi, Texas.

Transparency of the Regulatory System

Saudi Arabia received the lowest score possible (zero out of five) in the World Bank’s 2018 Global Indicators of Regulatory Governance Report, which places the Kingdom in the bottom 13 countries among 186 countries surveyed (http://rulemaking.worldbank.org/ ). Few aspects of the SAG’s regulatory system are entirely transparent, although Saudi investment policy is less opaque than other areas. Bureaucratic procedures are cumbersome, but red tape can generally be overcome with persistence. Foreign portfolio investment in the Saudi stock exchange is well-regulated by the Capital Markets Authority (CMA), with clear standards for interested foreign investors to qualify to trade on the local market. The CMA has progressively liberalized requirements for “qualified foreign investors” to trade in Saudi securities. Insurance companies and banks whose shares are listed on the Saudi stock exchange are required to publish financial statements according to International Financial Reporting Standards (IFRS) accounting standards. All other companies are required to follow accounting standards issued by the Saudi Organization for Certified Public Accountants.

Stakeholder consultation on regulatory issues is inconsistent. Some Saudi organizations are diligent in consulting businesses affected by the regulatory process, while others tend to issue regulations with no consultation at all. Proposed laws and regulations are not always published in draft form for public comment. An increasing number of government agencies, however, solicit public comments through their websites. The processes and procedures for stakeholder consultation are not generally transparent or codified in law or regulations. There are no private-sector or government efforts to restrict foreign participation in the industry standards-setting consortia or organizations that are available. There are no informal regulatory processes managed by NGOs or private-sector associations.

International Regulatory Considerations

Saudi Arabia uses technical regulations developed both by the Saudi Arabian Standards Organization (SASO) and by the Gulf Standards Organization (GSO). Although the GCC member states continue to work toward common requirements and standards, each individual member state, and Saudi Arabia through SASO, continues to maintain significant autonomy in developing, implementing, and enforcing technical regulations and conformity assessment procedures in its territory. More recently, Saudi Arabia has moved toward adoption of a single standard for technical regulations. This standard is often based on International Organization for Standardization (ISO) or International Electrotechnical Commission (IEC) standards, to the exclusion of other international standards, such as those developed by U.S.-domiciled standards development organizations (SDOs).

Saudi Arabia’s exclusion of these other international standards, which are often used by U.S. manufacturers, can create significant market access barriers for industrial and consumer products exported from the United States. The United States government has engaged Saudi authorities on the principles for international standards per the WTO Technical Barriers to Trade Committee Decision and encouraged Saudi Arabia to adopt standards developed according to such principles in their technical regulations, allowing all products that meet those standards to enter the Saudi market. Several U.S.-based standards organizations, including SDOs and individual companies, have also engaged SASO, with mixed success, in an effort to preserve market access for U.S. products, ranging from electrical equipment to footwear.

A member of the WTO, Saudi Arabia notifies all draft technical regulations to the WTO Committee on Technical Barriers to Trade.

Legal System and Judicial Independence

The Saudi legal system is derived from Islamic law, known as sharia. Saudi commercial law, meanwhile, is still developing. In 2016, Saudi Arabia took a significant step in improving its dispute settlement regime with the establishment of the Saudi Center for Commercial Arbitration (see “Dispute Settlement” below). Through its Commercial Law Development Program, the U.S. Department of Commerce provides capacity-building programs for Saudi stakeholders in the areas of contract enforcement, public procurement, and insolvency.

The Saudi Ministry of Justice oversees the sharia-based judicial system, but most ministries have committees to rule on matters under their jurisdictions. Judicial and regulatory decisions can be appealed. Many disputes that would be handled in a court of law in the United States are handled through intra-ministerial administrative bodies and processes in Saudi Arabia. Generally, the Saudi Board of Grievances has jurisdiction over commercial disputes between the government and private contractors. The Board also reviews all foreign arbitral awards and foreign court decisions to ensure that they comply with sharia. This review process can be lengthy, and outcomes are unpredictable.

The Kingdom’s record of enforcing judgments issued by courts of other GCC states under the GCC Common Economic Agreement, and of other Arab League states under the Arab League Treaty, is somewhat better than enforcement of judgments from other foreign courts. Monetary judgments are based on the terms of the contract – e.g., if the contract is calculated in U.S. dollars, a judgment may be obtained in U.S. dollars. If unspecified, the judgment is denominated in Saudi riyals. Non-material damages and interest are not included in monetary judgments, based on the sharia prohibitions against interest and against indirect, consequential, and speculative damages.

As with any investment abroad, it is important that U.S. investors take steps to protect themselves by thoroughly researching the business record of a proposed Saudi partner, retaining legal counsel, complying scrupulously with all legal steps in the investment process, and securing a well-drafted agreement. Even after a decision is reached in a dispute, enforcement of a judgment can still take years. The U.S. government recommends consulting with local counsel in advance of investing to review legal options and appropriate contractual provisions for dispute resolution.

ICSID Convention and New York Convention

The Kingdom of Saudi Arabia ratified the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards in 1994. Saudi Arabia is also a member state of the International Center for the Settlement of Investment Disputes Convention (ICSID), though under the terms of its accession it cannot be compelled to refer investment disputes to this system absent specific consent, provided on a case-by-case basis. Saudi Arabia has yet to consent to the referral of any investment dispute to the ICSID for resolution.

Investor-State Dispute Settlement

The use of any international or domestic dispute settlement mechanism within Saudi Arabia continues to be time-consuming and uncertain, as all outcomes are subject to a final review in the Saudi judicial system and carry the risk that principles of sharia law may potentially supersede a judgment or legal precedent. The U.S. government recommends consulting with local counsel in advance of investing to review legal options and contractual provisions for dispute resolution.

International Commercial Arbitration and Foreign Courts

Traditionally, dispute settlement and enforcement of foreign arbitral awards in Saudi Arabia have proven time-consuming and uncertain, carrying the risk that sharia principles can potentially supersede any foreign judgments or legal precedents. Even after a decision is reached in a dispute, effective enforcement of the judgment can be lengthy. In several cases, disputes have caused serious problems for foreign investors. For instance, Saudi partners and creditors have blocked foreigners’ access to or right to use exit visas, forcing them to remain in Saudi Arabia against their will. In cases of alleged fraud or debt, foreign partners may also be jailed to prevent their departure from the country while awaiting police investigation or court adjudication. Courts can in theory impose precautionary restraint on personal property pending the adjudication of a commercial dispute, though this remedy has been applied sparingly.

In recent years, the SAG has demonstrated a commitment to improve the quality of commercial legal proceedings and access to alternative dispute resolution mechanisms. Local attorneys indicate that the quality of final judgments in the court system has improved, but that cases still take too long to litigate. In 2012, the SAG updated certain provisions in Saudi Arabia’s domestic arbitration law, paving the way for the establishment of the Saudi Center for Commercial Arbitration (SCCA) in 2016. Developed in accordance with international arbitration rules and standards, including those set by the American Arbitration Association’s International Centre for Dispute Resolution and the International Chamber of Commerce’s International Court of Arbitration, the SCCA offers comprehensive arbitration services to domestic and international firms. The SCCA reports that both domestic and foreign law firms have begun to include referrals to the SCCA in the arbitration clauses of their contracts. However, it is currently too early to assess the quality and effectiveness of SCCA proceedings, as the SCCA is still in the early stages of operation. Awards rendered by the SCCA can be enforced in local courts, though judges remain empowered to reject enforcement of provisions they deem noncompliant with sharia law.

In December 2017, the United Nations Commission on International Trade Law (UNCITRAL) recognized Saudi Arabia as a jurisdiction that has adopted an arbitration law based on the 2006 UNCITRAL Model Arbitration Law. UNCITRAL took this step after Saudi judges clarified that sharia would not affect the enforcement of foreign arbitral awards. The potential impact of the decision is that foreign investors and companies in Saudi Arabia have slightly more certainty that their arbitration agreements and awards will be enforced, as in other UNCITRAL countries. Whether (and how) Saudi courts will apply this latest interpretation of the relationship between foreign arbitral awards and sharia law remains to be seen.

Laws and Regulations on Foreign Direct Investment

In January 2019, the Saudi government established the Foreign Trade General Authority (FTGA), which aims to strengthen Saudi Arabia’s non-oil exports and investment, increase the private sector’s contribution to foreign trade, and resolve obstacles encountered by Saudi exporters and investors. The new authority monitors the Kingdom’s obligations under international trade agreements and treaties, negotiates and enters into new international commercial and investment agreements, and represents the Kingdom before the World Trade Organization. The Governor of the FTGA reports to the Minister of Commerce.

Despite the list of activities excluded from foreign investment (see “Policies Toward Foreign Direct Investment”), foreign minority ownership in joint ventures with Saudi partners may be allowed in some of these sectors. Foreign investors are no longer required to take local partners in many sectors and may own real estate for company activities. They are allowed to transfer money from their enterprises out of the country and can sponsor foreign employees, provided that “Saudization” quotas are met (see “Labor Section” below). Minimum capital requirements to establish business entities range from zero to 30 million Saudi riyals ($8 million), depending on the sector and the type of investment.

MISA offers detailed information on the investment process, provides licenses and support services to foreign investors, and coordinates with government ministries to facilitate investment. According to MISA, it must grant or refuse a license within five days of receiving an application and supporting documentation from a prospective investor. MISA has established and posted online its licensing guidelines, but many companies looking to invest in Saudi Arabia continue to work with local representation to navigate the bureaucratic licensing process.

MISA licenses foreign investments by sector, each with its own regulations and requirements: (i) services, which comprise a wide range of activities including IT, healthcare, and tourism; (ii) industrial, (iii) real estate, (iv) public transportation, (v) entrepreneurial, (vi) contracting, (vii) audiovisual media, (viii) science and technical office, (ix) education (colleges and universities), and (x) domestic services employment recruitment. MISA also offers several special-purpose licenses for bidding on and performance of government contracts. Foreign firms must describe their planned commercial activities in some detail and will receive a license in one of these sectors at MISA’s discretion. Depending on the type of license issued, foreign firms may also require the approval of relevant competent authorities, such as the Ministry of Health or the Ministry of Tourism.

An important MISA objective is to ensure that investors do not just acquire and hold licenses without investing, and MISA sometimes cancels licenses of foreign investors that it deems do not contribute sufficiently to the local economy. MISA’s periodic license reviews, with the possibility of cancellation, add uncertainty for investors and can provide a disincentive to longer-term investment commitments.

MISA has agreements with various SAG agencies and ministries to facilitate and streamline foreign investment. These agreements permit MISA to facilitate the granting of visas, establish MISA branch offices at Saudi embassies in different countries, prolong tariff exemptions on imported raw materials to three years and on production and manufacturing equipment to two years, and establish commercial courts. To make it easier for businesspeople to visit the Kingdom, MISA can sponsor visa requests without involving a local company. Saudi Arabia has implemented a decree providing that sponsorship is no longer required for certain business visas. While MISA has set up the infrastructure to support foreign investment, many companies report that despite some improvements, the process remains cumbersome and time-consuming.

Competition and Anti-Trust Laws

MISA and the MOC review transactions for competition-related concerns, including allegations of price fixing for certain products. The Ministry of Commerce has looked to the GCC’s reference pricing approach on subsidized products to assist the SAG in determining market-price suggested norms.

Saudi competition law prohibits certain vertically-integrated business combinations. Consequently, companies doing business in Saudi Arabia may find it difficult to register exclusivity clauses in distribution agreements, but are not necessarily precluded from enforcing such clauses in Saudi courts.

Expropriation and Compensation

The Embassy is not aware of any cases in Saudi Arabia of expropriation from foreign investors without adequate compensation. Some small- to medium-sized foreign investors, however, have complained that their investment licenses have been cancelled without justification, causing them to forfeit their investments.

Bankruptcy Regulations

In August 2018, the SAG implemented new bankruptcy legislation which seeks to “further facilitate a healthy business environment that encourages participation by foreign and domestic investors, as well as local small and medium enterprises.” The new law clarifies procedural processes and recognizes distinct creditor classes (e.g., secured creditors). The new law also includes procedures for continued operation of the distressed company via financial restructuring. Alternatively, the parties may pursue an orderly liquidation of company assets, which would be managed by a court-appointed licensed bankruptcy trustee. Saudi courts have begun to accept and hear cases under this new legislation.

Investment Incentives

MISA advertises a number of financial advantages for foreigners looking to invest in the Kingdom, including the lack of personal income taxes and a corporate tax rate of 20 percent on foreign companies’ profits. MISA also lists various SAG-sponsored regional and international financial programs to which foreign investors have access, such as the Arab Fund for Economic and Social Development, the Arab Trade Financing Program, and the Islamic Development Bank.

The Saudi Industrial Development Fund (SIDF), a government financial institution established in 1974, supports private-sector industrial investments by providing medium- and long-term loans for new factories and for projects to expand, upgrade, and modernize existing manufacturing facilities. The SIDF offers loans of 50 to 75 percent of a project’s value, depending on the project’s location. Foreign investors that set up manufacturing facilities in developed areas (Riyadh, Jeddah, Dammam, Jubail, Mecca, Yanbu, and Ras al-Khair), for example, can receive a 15-year loan for up to 50 percent of a project’s value; investors in the Kingdom’s least developed areas can receive a 20-year loan for up to 75 percent of the project’s value. The SIDF also offers consultancy services for local industrial projects in the administrative, financial, technical, and marketing fields. (The SIDF’s website is https://www.sidf.gov.sa/en/Pages/default.aspx .)

The SAG offers several incentive programs to promote employment of Saudi nationals in certain cases. The Saudi Human Resources Development Fund (HRDF) (https://www.hrdf.org.sa/), for example, will pay 30 percent of a Saudi national’s wages for the first year of work, with a wage subsidy of 20 percent and 10 percent for the second and third year of employment, respectively (subject to certain limits and caps).

American and other foreign firms are able to participate in SAG-financed and/or -subsidized research-and-development (R&D) programs. Many of these programs are run though the King Abdulaziz City for Science and Technology (KACST), which funds many of the Kingdom’s R&D programs.

Foreign Trade Zones/Free Ports/Trade Facilitation

Saudi Arabia does not operate free trade zones or free ports. However, as part of its Vision 2030 program, the SAG has announced it will create special zones with special regulations to encourage investment and diversify government revenues. The SAG is considering the establishment of special regulatory zones in certain areas, including at NEOM and the King Abdullah Financial District in Riyadh.

Saudi Arabia has established a network of “economic cities” as part of the country’s efforts to reduce its dependence on oil. Overseen by MISA, these four economic cities aim to provide a variety of advantages to companies that choose to locate their operations within the city limits, including in matters of logistics and ease of doing business. The four economic cities are: King Abdullah Economic City near Jeddah, Prince AbdulAziz Bin Mousaed Economic City in north-central Saudi Arabia, Knowledge Economic City in Medina, and Jazan Economic City near the southwest border with Yemen. The cities are in various stages of development, and their future development potential is unclear, given competing Vision 2030 economic development projects.

The Saudi Industrial Property Authority (MODON in Arabic) oversees the development of 35 industrial cities, including some still under development. MODON offers incentives for commercial investment in these cities, including competitive rents for industrial land, government-sponsored financing, export guarantees, and certain customs exemptions. (MODON’s website is https://www.modon.gov.sa/en/Pages/default.aspx .)

The Royal Commission for Jubail and Yanbu (RCJY) was formed in 1975 and established the industrial cities of Jubail, located in eastern Saudi Arabia on the Persian Gulf coast, and Yanbu, located in north western Saudi Arabia on the Red Sea coast. A significant portion of Saudi Arabia’s refining, petrochemical, and other heavy industries are located in the Jubail and Yanbu industrial cities. The RCJY’s mission is to plan, promote, develop, and manage petrochemicals and energy intensive industrial cities. In connection with this mission, RCJY promotes investment opportunities in the two cities and can offer a variety of incentives, including tax holidays, customs exemptions, low cost loans, and favorable land and utility rates. More recently, the RCJY has assumed responsibility for managing the Ras Al Khair City for Mining Industries (2009) and the Jazan City for Primary and Downstream Industries (2015). (The RCJY’s website is https://www.rcjy.gov.sa).

Performance and Data Localization Requirements

The government does not impose systematic conditions on foreign investment. For example, there are no requirements to locate in a specific geographic area (except for some restrictions on the distribution of retail outlets and the location of industrial activities). Investors are not required to export a certain percentage of output. There is no requirement that the share of foreign equity be reduced over time. Investors are not required to disclose proprietary information to the SAG as part of the regulatory approval process, except where issues of health and safety are concerned.

Although investors have not been required heretofore to purchase from local sources, the situation is changing. In line with its bid to diversify the economy and provide more private sector jobs for Saudi nationals, the SAG has embarked on a broad effort to source goods and services domestically and is seeking commitments from investors to do so. In 2017, the Council of Economic and Development Affairs (CEDA) established the Local Content and Private Sector Development Unit (NAMAA in Arabic) to promote local content and improve the balance of payments. NAMAA is responsible for monitoring and implementing regulations, suggesting new policies, and coordinating with the private sector on all local content matters.

Government-controlled enterprises are also increasingly introducing local content requirements for foreign firms. Aramco’s “In-Kingdom Total Value Added” (IKTVA) program, for example, strongly encourages the purchase of goods and services from a local supplier base and aims to double Aramco’s percentage of locally-manufactured energy-related goods and services to 70 percent by 2021.

In the defense sector, Saudi Arabia’s military is in the process of reforming its procurement processes and policies to incorporate new ambitious goals of Saudi employment and localized production. The SAG has shifted over the last two years away from offsets in favor of “localization” of purchases of goods and services and “Saudization” of the labor force. Previously, the government required offsets in investments equivalent to up to 40 percent of a program’s value for defense contracts, depending on the value of the contract. The SAG is currently mandating increasingly strict localization requirements for government contracts in the defense sector. The SAG’s Vision 2030 program calls for 50 percent of defense materials to be produced and procured locally by 2030, and simultaneously seeks comparable increases in the number of Saudis employed in this sector.

The government encourages recruitment of Saudi employees through a series of incentives (see section 11 on “Labor Policies” for details of the “Saudization” program) and limits placed on the number of visas for foreign workers available to companies. The Saudi electronic visitor visa system defaults to five-year visas for all U.S. citizen applicants. “Business visas” are routinely issued to U.S. visitors who do not have an invitation letter from a Saudi company, but the visa applicant must provide evidence that he or she is engaged in legitimate commercial activity. “Commercial visas” are issued by invitation from Saudi companies to applicants who have a specific reason to visit a Saudi company.

In the fall of 2016, the SAG implemented a series of significant visitor fee increases for expatriates whose countries do not have reciprocity agreements with Saudi Arabia, doubling the cost of a single-entry business visit visa to $533. (U.S. citizens are exempt from such increases on the basis of reciprocity.) The SAG also imposed higher exit and reentry visa fees for all foreign workers residing in the Kingdom, including U.S. citizens. Furthermore, in January 2018, the SAG implemented new fees for expatriate employers ranging between $80 and $107 per employee per month and increased levies on expatriates with dependents to a $54 monthly fee for each dependent (see section 11 on “Labor Policies”). In January 2019, fees on expatriate employees increased to between $133 to $160 per month, and levies on expatriate dependents increased to $80 per month. These fees are scheduled to increase again in 2020 to between $186 to $212, but no additional increases are planned beyond 2020.

Data Treatment

Saudi Arabia is undergoing a digital transformation as part of its Vision 2030 National Transformation Program strategy to enable private sector growth. Emerging technology spheres include significant investment in developing Artificial Intelligence (AI), the Internet of Things (IoT), cloud computing, and other information and communications technology (ICT) sectors. As such, data protection and cybersecurity laws and regulations are rapidly evolving.

Saudi Arabia aims to be the Middle East’s high-technology hub. While there is no dedicated data protection legislation in force in Saudi Arabia, personal data is protected under general provisions of Saudi law imposing strict obligations on businesses in relation to how, who, and when personal data can be collected, used, and stored.

Saudi E-Commerce Law applies to all e-commerce providers (domestic and international) that offer goods and services to customers based in Saudi Arabia. Its provisions regulate e-commerce business practices, requiring transparency and consumer protection, as well as protection of the personal data of customers, with the goal to enhance cybersecurity and trust in online transactions. Data retention is also restricted; service providers are not allowed to retain personal data any longer than required to complete business transactions for which data was collected. Also, sharing of data and customer information with third-party providers is prohibited without express permission.

Saudi Arabia’s Cloud Computing Regulatory Framework (CCF) governs the rights and obligations of cloud service providers, customers, businesses, and government entities, and includes principles of data protection. CCF divides customer data protection into four levels: from non-sensitive to highly sensitive, with security breach notification required to be given to customers, and in certain situations breaches must be registered with the Communication and Information Technology Commission (CITC), which regulates Saudi telecommunications. CCF regulations do not allow cross-border data flows by cloud service providers or customers of sensitive business content from private and government sectors, as well as highly-sensitive and secret content belonging to government agencies and institutions, unless expressly allowed by Saudi law.

Saudi Arabia’s Internet of Things (IoT) Regulatory Framework regulates the use of all IoT services and includes data security, privacy, and protection requirements. IoT providers and implementors must comply with existing and future published laws, regulations, and requirements concerning data management, which will likely continue to focus on cybersecurity and data security. The IoT Regulatory Framework specifies data security measures, such as limited retention and data localization for IoT services and networks, which are also regulated by the CITC.

Saudi Arabia’s Electronic Transactions Law imposes obligations on internet service providers (ISPs) to maintain confidentiality of business information and personal data in electronic transactions.

Saudi Arabia’s Anti-Cyber Crime Law seeks to protect the national economy by deterring cybercrimes such as destruction or alteration of data, illegal access to bank or credit information, interruption of computer and information network transmissions, and other disruptions to ICT infrastructure. The law also requires consent from individuals whose personal data or documents are to be disclosed.

Saudi Arabia’s Essential Cyber Controls (ECC) regulations are currently being drafted with input from multiple Saudi cybersecurity and ICT authorities, and for the first time, in consultation with large American cloud, ISP, and ICT industry representatives, who have provided feedback on how to protect consumer data while still enabling innovation and growth of the digital economy and cross-border trade.

There are no requirements for foreign IT providers to turn over source code or provide access to encryption. Other than a requirement to retain records locally for ten years for tax purposes, there is no requirement regarding data storage or access to surveillance.

Real Property

The Saudi legal system protects and facilitates acquisition and disposition of all property, consistent with the Islamic practice of upholding private property rights. Non-Saudi corporate entities are allowed to purchase real estate in Saudi Arabia in accordance with the foreign-investment code. Other foreign-owned corporate and personal property is protected by law. Saudi Arabia has a system of recording security interests, and plans to modernize its land registry system. Saudi Arabia ranked 19th out of 190 countries for ease of registering property in the 2020 World Bank Doing Business Report.

In 2017, the Saudi Ministry of Housing implemented an annual vacant land tax of 2.5 percent of the assessed value on vacant lands in urban centers in an attempt to spur development. Additionally, in January 2018, in an effort to increase Saudis’ access to finance and stimulate the mortgage and housing markets, Saudi Arabia’s central bank lifted the maximum loan-to-value rate for mortgages for first-time homebuyers to 90 percent from 85 percent, and increased interest payment subsidies for first-time buyers. This further liberalized stringent down-payment requirements that prevailed up to 2016, when the central bank raised the maximum loan-to-value rate from 70 percent to 85 percent.

Intellectual Property Rights

In 2017, Saudi Arabia established SAIP to regulate, support, develop, sponsor, protect, enforce, and upgrade IP fields in accordance with the best international practices. Over the past two years, SAIP has worked to consolidate IP protection capability, coordinated and led online and in-market IP enforcement efforts, worked to establish specialized IP courts, and promoted awareness of the importance of respecting IP and the consequences of violating another’s IP rights. SAIP cooperated with USTR and the U.S. Patent and Trademark Office (USPTO) over the past year, resulting in the signing of a Cooperation Arrangement in October 2018 between SAIP and USPTO. SAIP has made a commendable effort to increase transparency, join international treaties, improve stakeholder involvement in policymaking, and continue legislative development. Saudi Arabia Customs Authority has also significantly enhanced its IP enforcement efforts and capacity, having seized over 3 million counterfeit and other illegal goods in 2019, having partnered closely with trademark and copyright owners, and having systematically notified right holders of suspected shipments. Saudi Arabia was included in the U.S. Trade Representative’s (USTR) Special 301 Report’s “Priority Watch List” in April 2020 for the second consecutive year. USTR plans to conduct an Out-of-Cycle Review focused on addressing protection against unfair commercial use, as well as the unauthorized disclosure, of undisclosed test or other data generated to obtain marketing approval of pharmaceutical products. Saudi Arabia was not included in the 2019 Notorious Markets List.

Saudi Arabia was included in the U.S. Trade Representative’s (USTR) Special 301 Report’s “Priority Watch List” in April 2020 for the second consecutive year. USTR plans to conduct an Out-of-Cycle Review focused on addressing protection against unfair commercial use, as well as the unauthorized disclosure, of undisclosed test or other data generated to obtain marketing approval of pharmaceutical products. Saudi Arabia was not included in the 2019 Notorious Markets List.

Since 2016, the Saudi Arabia Food and Drug Authority (SFDA), which the Minister of Health oversees, has continuously granted marketing approval to domestic companies relying on another company’s undisclosed test or other data for products despite the protection provided by Saudi regulations.

The United States government also remains concerned about reportedly high levels of online piracy in Saudi Arabia, particularly through illicit streaming devices (ISDs), which right holders report are widely available and generally unregulated in Saudi Arabia. In June 2020 the World Trade Organization’s court decision sided with Qatar’s complaint that beoutQ, a Saudi-based rampant satellite and online piracy service had violated the IP rights of dozens of rights holders and has forced Saudi Arabia to establish enforcement methods to remove the readily available boxes. In August 2019, it was reported that BeoutQ ceased operations, although there continues to be reports of pirated boxes being readily available in country.

U.S. software firms report that the Saudi government continues to use unlicensed and “under-licensed” (in which an insufficient number of licenses is procured for the total number of users) software on government computer systems in violation of their copyrights. Other concerns include the lack of seizure and destruction of counterfeit goods in enforcement actions by the MOC, and limits on the ability of MOC to enter facilities suspected of involvement in the sale or manufacture of counterfeit goods, including facilities located in residential areas.

Resources for Rights Holders

Embassy point of contact:

Elizabeth Trobough
Economic Officer
+966 11 488-3800 Ext. 4270
trobaughem@state.gov

Regional IPR Attaché:

Pete C. Mehravari
U.S. Intellectual Property Attaché for Middle East and North Africa
Patent Attorney
U.S. Embassy Kuwait | U.S. Department of Commerce
Office: +965 2259-1455
Peter.mehravari@trade.gov

Capital Markets and Portfolio Investment

Saudi Arabia’s financial policies generally facilitate the free flow of private capital and currency can be transferred in and out of the Kingdom without restriction. Saudi Arabia maintains an effective regulatory system governing portfolio investment in the Kingdom. The Capital Markets Law, passed in 2003, allows for brokerages, asset managers, and other nonbank financial intermediaries to operate in the Kingdom. The law created a market regulator, the Capital Market Authority (CMA), established in 2004, and opened the Saudi stock exchange (Tadawul) to public investment.

Prior to 2015, the CMA only permitted foreign investors to invest in the Saudi stock market through indirect “swap arrangements,” through which foreigners had accumulated ownership of one per cent of the market. In June 2015, the CMA opened the Tadawul to “qualified foreign investors,” but with a stringent set of regulations that only large financial institutions could meet. Since 2015, the CMA has progressively relaxed the rules applicable to qualified foreign investors, easing barriers to entry and expanding the foreign investor base. The CMA adopted regulations in 2017 permitting corporate debt securities to be listed and traded on the exchange; in March 2018, the CMA authorized government debt instruments to be listed and traded on the Tadawul. The Tadawul was incorporated into the FTSE Russell Emerging Markets Index in March 2019, resulting in a foreign capital injection of $6.8 billion. Separately, the $11 billion infusion into the Tadawul from integration into the MSCI Emerging Markets Index took place in May 2019. The Tadawul was also added to the S&P Dow Jones Emerging Market Index.

Money and Banking System

The banking system in the Kingdom is generally well-capitalized and healthy. The public has easy access to deposit-taking institutions. The legal, regulatory, and accounting systems used in the banking sector are generally transparent and consistent with international norms. The Saudi Arabian Monetary Authority (SAMA), the central bank, which oversees and regulates the banking system, generally gets high marks for its prudential oversight of commercial banks in Saudi Arabia. SAMA is a member and shareholder of the Bank for International Settlements in Basel, Switzerland.

In 2017, SAMA enhanced and updated its previous Circular on Guidelines for the Prevention of Money Laundering and Terrorist Financing. The enhanced guidelines have increased alignment with the Financial Action Task Force (FATF) 40 Recommendations, the nine Special Recommendations on Terrorist Financing, and relevant UN Security Council Resolutions. Saudi Arabia is a member of the Middle East and North Africa Financial Action Task Force (MENA-FATF). In 2019, Saudi Arabia became the first Arab country to be granted full membership of the FATF, following the organization’s recognition of the Kingdom’s efforts in combating money laundering, financing of terrorism, and proliferation of arms. Saudi Arabia had been an observer member since 2015.

The SAG has authorized increased foreign participation in its banking sector over the last several years. SAMA has granted licenses to a number of new foreign banks to operate in the Kingdom, including Deutsche Bank, J.P. Morgan Chase N.A., and Industrial and Commercial Bank of China (ICBC). A number of additional, CMA-licensed foreign banks participate in the Saudi market as investors or wealth management advisors. Citigroup, for example, returned to the Saudi market in early 2018 under a CMA license.

Credit is normally widely available to both Saudi and foreign entities from commercial banks and is allocated on market terms. The Saudi banking sector has one of the world’s lowest non-performing loan (NPL) ratios, in the range of 2.0 percent for 2018. In addition, credit is available from several government institutions, such as the SIDF, which allocate credit based on government-set criteria rather than market conditions. Companies must have a legal presence in Saudi Arabia to qualify for credit. The private sector has access to term loans, and there have been a number of corporate issuances of sharia-compliant bonds, known as sukuk.

Foreign Exchange and Remittances

Foreign Exchange

There is no limitation in Saudi Arabia on the inflow or outflow of funds for remittances of profits, debt service, capital, capital gains, returns on intellectual property, or imported inputs, other than certain withholding taxes (withholding taxes range from five percent for technical services and dividend distributions to 15 percent for transfers to related parties, and 20 percent or more for management fees). Bulk cash shipments greater than $10,000 must be declared at entry or exit points. Since 1986, when the last currency devaluation occurred, the official exchange rate has been fixed by SAMA at 3.75 Saudi riyals per U.S. dollar. Transactions typically take place using rates very close to the official rate.

Remittance Policies

Saudi Arabia is one of the largest remitting countries in the world, with roughly 75 percent of the Saudi labor force comprised of foreign workers. Remittances totaled approximately $33.4 billion in 2019. There are currently no restrictions on converting and transferring funds associated with an investment (including remittances of investment capital, dividends, earnings, loan repayments, principal on debt, lease payments, and/or management fees) into a freely usable currency at a legal market-clearing rate. There are no waiting periods in effect for remitting investment returns through normal legal channels.

The Ministry of Labor and Social Development is progressively implementing a “Wage Protection System” designed to verify that expatriate workers, the predominant source of remittances, are being properly paid according to their contracts. Under this system, employers are required to transfer salary payments from a local Saudi bank account to an employee’s local bank account, from which expatriates can freely remit their earnings to their home countries.

Sovereign Wealth Funds

The Public Investment Fund (PIF, www.pif.gov.sa ) is the Kingdom’s officially designated sovereign wealth fund. While PIF lacks many of the attributes of a traditional sovereign wealth fund, it has evolved into the SAG’s primary investment vehicle.

Established in 1971 to channel oil wealth into economic development, the PIF has historically been a holding company for government shares in partially privatized state-owned enterprises (SOEs), including SABIC, the National Commercial Bank, Saudi Telecom Company, Saudi Electricity Company, and others. Crown Prince Mohammed bin Salman is the chairman of the PIF and announced his intention in April 2016 to build the PIF into a $2 trillion global investment fund, relying in part on proceeds from the initial public offering of up to five percent of Saudi Aramco shares.

Since that announcement, the PIF has made a number of high-profile international investments, including a $3.5 billion investment in Uber, a commitment to invest $45 billion into Japanese SoftBank’s VisionFund, a commitment to invest $20 billion into U.S. Blackstone’s Infrastructure Fund, a $1 billion investment in U.S. electric car company Lucid Motors, and a partnership with cinema company AMC to operate movie theaters in the Kingdom. Under the Vision 2030 reform program, the PIF is financing a number of strategic domestic development projects, including: “NEOM,” a planned $500 billion project to build an “independent economic zone” in northwest Saudi Arabia; “Qiddiya,” a new, large-scale entertainment, sports, and cultural complex near Riyadh; “the Red Sea Project”, a massive tourism development on the western Saudi coast; and “Amaala,” a wellness, healthy living, and meditation resort also located on the Red Sea.

At the end of 2019, the PIF reported its investment portfolio was valued at $300-$330 billion, mainly in shares of state-controlled domestic companies. In an effort to rebalance its investment portfolio, the PIF has divided its assets into six investment pools comprising local and global investments in various sectors and asset classes: Saudi holdings; Saudi sector development; Saudi real estate and infrastructure development; Saudi giga-projects; international strategic investments; and an international diversified pool of investments.

In addition to previous investments in Uber, Magic Leap, and Lucid Motors, the PIF made a number of new investments in the first half of 2020. These include equity investments in Facebook, Starbucks, Disney, Boeing, Citigroup, LiveNation, Marriott, several European energy firms, and Carnival Cruise Lines. The Ministry of Finance announced in 2020 that $40 billion was being transferred from the Kingdom’s foreign reserves, held by the central bank SAMA, to the PIF to fund investments.

In practice, SAMA’s foreign reserve holdings also operate as a quasi-sovereign wealth fund, accounting for the majority of the SAG’s foreign assets. SAMA invests the Kingdom’s surplus oil revenues primarily in low-risk liquid assets, such as sovereign debt instruments and fixed-income securities. SAMA’s foreign reserves fell from $502 billion in January 2020 to $449 billion in April 2020. SAMA’s foreign reserve holdings peaked at $746 billion in mid-2014.

Though not a formal member, Saudi Arabia serves as a permanent observer to the International Working Group on Sovereign Wealth Funds.

There is a growing awareness of corporate social responsibility (CSR) in Saudi Arabia. The King Khalid Foundation issues annual “responsible competitiveness” awards to companies doing business in Saudi Arabia for outstanding CSR activities.

Foreign firms have identified corruption as a barrier to investment in Saudi Arabia.  Saudi Arabia has a relatively comprehensive legal framework that addresses corruption, but many firms perceive enforcement as selective.  The Combating Bribery Law and the Civil Service Law, the two primary Saudi laws that address corruption, provide for criminal penalties in cases of official corruption.  Government employees who are found guilty of accepting bribes face 10 years in prison or fines of up to one million riyals (USD 267,000).  Ministers and other senior government officials appointed by royal decree are forbidden from engaging in business activities with their ministry or organization.  Saudi corruption laws cover most methods of bribery and abuse of authority for personal interest, but not bribery between private parties.  Only senior Control and Anti-Corruption Commission (“Nazaha”) officials are subject to financial disclosure laws.  The government is considering disclosure regulations for other officials, but has yet to finalize them.  Some officials have engaged in corrupt practices with impunity, and perceptions of corruption persist in some sectors.

Nazaha, established in 2011, is responsible for promoting transparency and combating all forms of financial and administrative corruption.  Nazaha’s ministerial-level director reports directly to the King.  In December 2019, King Salman issued three royal decrees consolidating the Control and Investigation Board and the Mabahith’s Administrative Investigations Directorate under the National Anti-Corruption Commission, and renaming the new entity as the Control and Anti-Corruption Commission (“Nazaha”). The decrees consolidated investigations under the new Commission and mandated that the Public Prosecutor’s Office transition its on-going investigations to the new consolidated commission. The Control and Anti-Corruption Commission report directly to King Salman. The Commission recommends anti-corruption reforms, administers and audits anti-corruption databases and program, and investigates and prosecutes alleged corruption.  Furthermore, the Commission has the power to dismiss a government employee even if they are not found guilty by the specialized anti-corruption court.

Some evidence suggests Nazaha has not shied away from prosecuting influential players whose indiscretions may previously have been ignored.  In 2016, for example, it referred the Minister of Civil Service for investigation over allegations of abuse of power and nepotism.  On March 15, Nazaha announced it would charge 298 Saudi and foreign individuals with a range of corruption charges, including a major general and at least two judges.  In April, Nazaha indicted eight individuals, including two individuals from Riyadh’s regional health directorate, on corruption charges related to contracts for quarantine accommodations related to the COVID-19 pandemic.  The Commission regularly publishes news of its investigations on its website (http://www.nazaha.gov.sa/en/Pages/Default.aspx).

SAMA, the central bank, oversees a strict regime to combat money laundering.  Saudi Arabia’s Anti-Money Laundering Law provides for sentences up to 10 years in prison and fines up to USD1.3 million.  The Basic Law of Governance contains provisions on proper management of state assets and authorizes audits and investigation of administrative and financial malfeasance.

The Government Tenders and Procurement Law regulates public procurements, which are often a source of corruption.  The law provides for public announcement of tenders and guidelines for the award of public contracts.  Saudi Arabia is an observer of the WTO Agreement on Government Procurement (GPA)

Saudi Arabia ratified the UN Convention against Corruption in April 2013 and signed the G20 Anti-Corruption Action Plan in November 2010.

Globally, Saudi Arabia ranks 51st out of 180 countries in Transparency International’s Corruption Perceptions Index 2019.

Resources to Report Corruption

The National Anti-Corruption Commission’s address is:

National Anti-Corruption Commission
P.O. Box (Wasl) 7667, AlOlaya – Ghadir District
Riyadh 2525-13311
The Kingdom of Saudi Arabia
Fax: 0112645555
E-mail: info@nazaha.gov.sa

Nazaha accepts complaints about corruption through its website www.nazaha.gov.sa  or mobile application.

Saudi Arabia is a monarchy ruled by King Salman bin Abdulaziz Al Saud. The King’s son, Crown Prince Mohammed bin Salman, has assumed a central role in government decision-making. The Department of State regularly reviews and updates a travel advisory to apprise U.S. citizens of the security situation in Saudi Arabia and frequently reminds U.S. citizens of recommended security precautions. In addition to a Global Travel Advisory due to COVID-19, the Department of State has a current travel advisory for Saudi Arabia that was updated in September 2019. The Travel Advisory urges U.S. citizens to exercise increased caution when traveling to Saudi Arabia due to terrorism and the threat of missile and drone attacks on civilian targets and to not travel within 50 miles of the Saudi Arabia-Yemen border. The Travel Warning notes that terrorist groups continue plotting possible attacks in Saudi Arabia and that terrorists may attack with little or no warning, targeting tourist locations, transportation hubs, markets/shopping malls, and local government facilities. In the past, terrorists have targeted both Saudi and Western government interests, mosques and other religious sites (both Sunni and Shia), and places frequented by U.S. citizens and other Westerners.

Missile attacks have targeted major cities such as Riyadh and Jeddah, Riyadh’s international airport, Saudi Aramco facilities, and vessels in Red Sea shipping lanes. Houthi rebel groups operating in Yemen have fired missiles and rockets into Saudi Arabia, targeting populated areas and civilian infrastructure, and have publicly stated their intent to continue to do so. The Houthi rebel groups are also in possession of unmanned aerial systems (drones), which they have used to target civilian infrastructure and military facilities in Saudi Arabia. U.S. citizens living and working on or near such installations, particularly in areas near the border with Yemen, are at heightened risk of missile and drone attack.

Please visit www.travel.state.gov for further information, including the latest Travel Advisory.

The Ministry of Labor and Social Development sets labor policy and, along with the Ministry of Interior, regulates recruitment and employment of expatriate labor, which makes up a majority of the private-sector workforce. About 75 percent of total jobs in the country are held by expatriates, who number roughly 12.6 million out of a total population of approximately 33.4 million. The largest groups of foreign workers come from India, Pakistan, Bangladesh, Egypt, the Philippines, and Yemen. Saudis occupy about 96 percent of government jobs, but only about 25 percent of the total jobs in the Kingdom. Over one-third of Saudi nationals are employed in the public sector.

Saudi Arabia’s General Authority for Statistics estimates unemployment at 5.5 percent for the total population and 12 percent for Saudi nationals (Q3 2019 figures), but these figures mask a high youth unemployment rate, a Saudi female unemployment rate of 21.3 percent, and low Saudi labor participation rates (45.5 percent overall; 18.9 percent for women). With approximately 60 percent of the Saudi population under the age of 30, job creation for new Saudi labor market entrants will prove a serious challenge for years.

The SAG encourages Saudi employment through “Saudization” policies that place quotas on employment of Saudi nationals in certain sectors, coupled with limits placed on the number of visas for foreign workers available to companies. In 2011, the Ministry of Labor and Social Development laid out a sophisticated plan known as Nitaqat, under which companies are divided into categories, each with a different set of quotas for Saudi employment based on company size. Reforms enacted in 2017 refined the program to incentivize further the employment of women, individuals with disabilities, and managerial and high-wage positions. Each company is determined to be in one of four strata based on its actual percentage of Saudi employees, with platinum and green strata for companies meeting or exceeding the quota for their sector and size, and yellow and red strata for those failing to meet it. Expatriate employees in red and yellow companies can move freely to green or platinum companies, without the approval of their current employers, and green and platinum companies have greater privileges in securing and renewing work permits for expatriates.

Over the past few years, the SAG has taken additional measures to strengthen the Nitaqat program and expand the scope of Saudization to require the hiring of Saudi nationals. The Ministry of Labor and Social Development has mandated that certain job categories in specific economic sectors only employ Saudi nationals, beginning with mobile phone stores in 2016. The ministry has since broadened the policy to include car rental agencies, retail sales jobs in shopping malls, and other sectors. The ministry has likewise mandated that only Saudi women can occupy retail jobs in certain businesses that cater to female customers, such as lingerie and cosmetics shops. In 2017, the Ministry of Labor and Social Development began to phase in rules forbidding employment of foreigners in retail sales positions in 12 sectors, including: watches, eyewear, medical equipment and devices, electrical and electronic appliances, auto parts, building materials, carpets, cars and motorcycles, home and office furniture, children’s clothing and men’s accessories, home kitchenware, and confectioneries. Because many retail shops in sectors subject to Saudization are owned and operated by expatriates, these policies have resulted in numerous store closures across the country. Many elements of Saudization and Nitaqat have garnered criticism from the private sector, but the SAG claims these policies have substantially increased the percentage of Saudi nationals working in the private sector over the last several years, despite near-record unemployment levels.

In 2017, the Ministry of Labor and Social Development and the Ministry of Interior launched the latest phase of an ongoing campaign to deport illegal and improperly documented workers. The combination of Saudization and Nitaqat policies, new expatriate fees, increased visa and entry/exit permit fees, the increased VAT, and other measures that have raised the cost of living, has prompted approximately 1.9 million expatriates to depart the Kingdom over the past few years. These measures have also significantly increased labor costs for employers, both Saudi and foreign alike.

Saudi Arabia’s labor laws forbid union activity, strikes, and collective bargaining. However, the government allows companies that employ more than 100 Saudis to form “labor committees” to discuss work conditions and grievances with management. In 2015, the SAG published 38 amendments to the existing labor law with the aim of expanding Saudi employees’ rights and benefits. Domestic workers are not covered under the provisions of the latest labor law; separate regulations covering domestic workers were issued in 2013, stipulating employers provide at least nine hours of rest per day, one day off a week, and one month of paid vacation every two years.

Saudi Arabia has taken significant steps to address labor abuses, but weak enforcement continues to result in credible reports of employer violations of foreign employee labor rights. In some instances, foreign workers and particularly domestic staff encounter employer practices (including passport withholding and non-payment of wages) that constitute trafficking in persons. The Department’s annual Trafficking in Persons Report details concerns about labor law enforcement within Saudi Arabia’s sponsorship system is available at: https://www.state.gov/j/tip/rls/tiprpt/.

Overtime is normally compensated at time-and-a-half rates. The minimum age for employment is 14. The SAG does not adhere to the International Labor Organization’s convention protecting workers’ rights. Non-Saudis have the right to appeal to specialized committees in the Ministry of Labor and Social Development regarding wage non-payment and other issues. Penalties issued by the ministry include banning infringing employers from recruiting foreign and/or domestic workers for a minimum of five years.

Saudi Arabia has been a member of the Multilateral Investment Guarantee Agency since April 1988. Additionally, Saudi Arabia signed an Investment Incentive Agreement Washington, D.C. on February 27, 1975.

* Source for Host Country Data: Saudi General Authority for Statistics

According to the 2020 UNCTAD World Investment Report, Saudi Arabia’s total FDI inward stock was $236.1 billion and total FDI outward stock was $123.1 billion (in both cases, as of 2019).

Detailed data for inward direct investment (below) is as of 2010, which is the latest available breakdown of inward FDI by country.

*Source: IMF Coordinated Direct Investment Survey (2010 – latest available complete data)

Source: IMF’s Coordinated Portfolio Investment Survey (CPIS); data as of December 2017.

Economic Section and Foreign Commercial Service Offices
Embassy of the United States of America
P.O. Box 94309
Riyadh 11693, Saudi Arabia
Phone: +966 11 488-3800

Policies Toward Foreign Direct Investment

The Government of Senegal welcomes foreign investment. The investment code provides for equitable treatment of foreign and local firms. There is no restriction on ownership of businesses by foreign investors in most sectors. Foreign firms generally can invest in Senegal free from systematic discrimination in favor of local firms. Nevertheless, some U.S. and other foreign firms have noted that, in practice, Senegal’s investment environment favors incumbents and insiders – often other foreign firms – at the expense of new market entrants. Common complaints include excessive and inconsistently applied bureaucratic processes, nontransparent judicial processes, and an opaque decision-making process for public tenders and contracts. Financial and capital markets are open, attracting domestic, regional, and international capital.

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

Limits on Foreign Control and Right to Private Ownership and Establishment

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

The Government of Senegal does some screening of proposed investments, primarily to verify compatibility with the country’s overall development goals and compliance with environmental regulations. The Ministry of Finance and Budget reviews project financing arrangements for projects implicating public funds to ensure compatibility with budget and debt policies. Senegal’s Investment Promotion Agency (APIX) can facilitate government review of investment proposals and the project approval process.

Other Investment Policy Reviews

On January 10, 2020, the Executive Board of the International Monetary Fund (IMF) approved a new three-year Policy Coordination Instrument (PCI) for Senegal. For more information, see: https://www.imf.org/en/News/Articles/2020/01/10/pr206-senegal-imf-executive-board-approves-three-year-policy-coordination-instrument 

Business Facilitation

The point of entry for business registration is Senegal’s Investment Promotion Agency (APIX), www.investinsenegal.com , which provides a range of administrative services to foreign investors. Since 2007, APIX has significantly reduced the average number of days it takes to start a business. While the government claims the average for starting a business is two days, the World Bank Doing Business 2020 estimates it takes six days to register a firm. In addition to other bureaucratic and documentary requirements, registering a business requires certification of certain documents by a public notary registered in Senegal. Senegalese law provides special preferences to facilitate investment and business operations by medium and small enterprises including reduced interest rates for Senegalese-owned companies. The government continues to expand its “single window” system offering one-stop government services for businesses, opening a new service centers in various locations and projecting to have at least one service center in each of the country’s 45 regional departments by 2021. Property owners can apply for construction permits online.  In 2019, the GOS made tax information and some payment options available online. With the support of UNCTAD and the government of Luxembourg, APIX recently launched an online portal, https://senegal.eregulations.org/ , containing extensive information regarding regulations applicable to businesses and investments in Senegal.

Despite these efforts, business climate challenges remain. Because the informal sector dominates Senegal’s economy, legitimate companies bear a relatively heavy tax burden.  Some U.S. companies complain about delays in the project development process due to excessive red tape and uncertainty over rules and processes.

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

Outward Investment

The government neither promotes nor restricts outward investment.

Transparency of the Regulatory System

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

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

The Commission de Regulation du Secteur de l’Electricite (CRSE) was established in 1998 to regulates the electricity sector and set electricity tariffs.  Although the CRSE is, by law, an independent agency, observers note that the government frequently exercises influence over its decisions. Under the Millennium Challenge Corporation (MCC) Compact focused on the power sector, the government has committed to reforms in the sector, including enacting a new electricity code and strengthening the CRSE’s capacity and independence. As part of these efforts, the MCC Compact, will fund technical assistance and capacity building for CRSE and other key stakeholders who govern the power sector.

The Autorite de Regulation des Telecommunications et des Postes is responsible for licensing and regulating telecommunications and postal services in Senegal. The Dakar-based regional Central Bank of West African States (known by its French acronym BCEAO) regulates the banking sector.

There is no legal requirement to conduct impact assessments of proposed regulations, and regulatory agencies rarely do so. There is no specialized government body tasked with reviewing and monitoring regulatory impacts. Legal, regulatory, and accounting systems closely follow French models. Financial statements must be prepared in accordance with the SYSCOA system, based on Generally Accepted Accounting Principles in France.

Senegal’s budget and information on debt obligations are widely and easily accessible to the public, including online.  The budget was substantially complete and considered generally reliable.  Senegal’s supreme audit institution reviewed the government’s accounts and has published its audit reports for Senegal’s budgets through 2017 online. Senegal is the first Francophone country in sub-Saharan Africa to submit to a fiscal transparency evaluation (FTE) by the IMF. In its January 30, 2019 FTE, the IMF rated Senegal “average” overall for countries of similar income and institutional capacity. Senegal was rated “advanced” or “good” on fiscal forecasting, budgeting, and fiscal reporting. It was rated “basic” on monitoring risks triggered by subnational governments. Senegal’s fiscal transparency would be improved by the supreme audit authority making its reports on the budget available in a timely manner.

The process for allocating licenses and contracts for natural resource extraction was outlined in law and appeared to be followed in practice.  In 2019, Senegal approved a new Petroleum Code, clarifying investment terms and local content requirements for foreign investment in the sector.  Senegal is currently offering new offshore exploration blocks through an open tender conducted in accordance with international standards. In February 2020, Senegal finalized a new Gas Code to govern development of a mid-stream gas distribution network that will be the subject of a competitive tender. Basic information on natural resource extraction awards was publicly available, and the government participated actively in the Extractive Industries Transparency Initiative (EITI).

International Regulatory Considerations

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

Legal System and Judicial Independence

Senegal has well-developed commercial and investment laws. Although settlement of commercial disputes has historically been cumbersome and slow, in February 2018 Senegal launched a new commercial court system with jurisdiction over commercial matters and a mandate to resolve cases within three months.  The business community has welcomed the move, and in the past two years, the court has heard 11,054 cases involving disputes with a combined total value of nearly $500 million.  Companies may nevertheless encounter challenges in executing court decisions and enforcing their contractual rights.

While Senegal’s constitution mandates that the judiciary operate independently of the legislature and executive, the executive frequently exerts influence, particularly in high-profile criminal cases. This type of influence is rare in strictly commercial matters. Some foreign investors, however, report discriminatory treatment by local courts. Investors may consider including provisions for binding arbitration in their contracts to avoid prolonged and unpredictable entanglements in Senegalese courts.

Companies may seek judicial redress against regulatory decisions. Regulatory appeals are heard in administrative tribunals that specialize in adjudicating claims against the state.

Senegal is a member of the World Intellectual Property Organization and the Bern Copyright Convention, and in June 2019 hosted a regional workshop on protecting intellectual property in the pharmaceutical and pesticide industries that gathered prosecutors, customs, and law enforcement officers. Nevertheless, the country has insufficient capacity to reliably protect intellectual property rights.

Laws and Regulations on Foreign Direct Investment

Senegal’s 2004 Investment Code provides basic guarantees for equal treatment of foreign investors and repatriation of profit and capital. It also specifies tax and customs exemptions according to the investment volume, company size and location, with investments outside of Dakar eligible for longer tax exemptions. A law to enhance transparency in public procurement and public tenders entered into force in 2008, establishing a public procurement regulatory body, the Autorité de Régulation des Marchés Publics (ARMP), which publishes annual reviews of public procurement. Procedures for challenging tender awards are available. The government enacted a law on public-private partnerships in 2014 to facilitate expedited approval of projects that include a minimum share of domestic investment. As of July 2020, the GOS was in the process of revising the public-private partnership law.

Regulations of the Central Bank of West African States (known by its French acronym BCEAO) proscribe the use of offshore accounts in project finance transactions within the WAEMU except where approved by the Ministry of Finance and Budget, with the express consent (“avis conforme”) of the BCEAO. According to the BCEAO, these restrictions allow visibility over international transactions, deter money laundering, and help the BCEAO maintain adequate foreign currency reserves. The BCEAO emphasizes the importance of these rules in enabling it to fulfill its mandate of maintaining the stability of the franc CFA’s peg to the euro.

Since 2018, the BCEAO and Senegalese Ministry of Finance Budget have tightened their approach to the approvals of offshore accounts. Although there is no strict “maximum” number of accounts that will be permitted, informal guidelines suggest that transactions using one to three such accounts have the greatest chance of being approved. According the BCEAO, the intent is to encourage the minimum number of such accounts necessary to legitimately conduct the transaction. Project managers and lenders should raise the subject of offshore accounts with the Ministry of Finance as early in the process as possible and should be prepared to submit a functional justification for each requested account. All offshore accounts must be “reauthorized” on an annual basis.

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

• Investment Code:
• Mining Code:
• Petroleum Code:

Competition and Anti-Trust Laws

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

Expropriation and Compensation

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

Dispute Settlement

ICSID Convention and New York Convention

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

Investor-State Dispute Settlement

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

International firms have pursued a variety of investment disputes during the last decade, including at least two U.S. firms involved in tax and customs disputes. Other foreign companies in the mining and telecommunications sectors have pursued commercial disputes over licensing. These disputes have often been resolved through arbitration or an amicable settlement.

Senegal has no history of extrajudicial action against foreign investors.

International Commercial Arbitration and Foreign Courts

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

Bankruptcy Regulations

Senegal has commercial and bankruptcy laws that address liquidation of business liabilities. Foreign creditors receive equal treatment under Senegalese bankruptcy law in making claims against liquidated assets. Monetary judgments are normally in local currency. As a member of OHADA, Senegal permits three different types of bankruptcy liquidation through a negotiated settlement, company restructuring, or complete liquidation of assets. Senegal ranked 96th out of 190 countries on the “Resolving Insolvency” indicator in the 2020 World Bank Doing Business Index. According to the index, it takes an average of 36 months to complete liquidation proceedings in Senegal. Secured creditors recover an average of 30 cents per every dollar owed in such proceedings, compared to an average of 20.5 for sub-Saharan Africa and 70.2 for OECD high income countries.

Investment Incentives

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

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

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

An existing firm requesting an extension of such incentives must be at least 20 percent self-financed. To qualify for these benefits, firms are required to create at least 150 full-time positions for Senegalese nationals, to contribute the hard currency equivalent of at least 100 million CFA ($165,000 USD), and keep regular accounts that conform to Senegalese (European accounting system) standards. In addition, firms must provide APIX with details on company products, production, employment, and consumption of raw materials.

Foreign Trade Zones/Free Ports/Trade Facilitation

In 2017, Senegal passed legislation to create Special Economic Zones (SEZ) regime. Enterprises approved under the SEZ regime may be granted tax and customs concessions for up to 25 years. Benefits may include: exemptions from duties and taxes on imports of goods, raw materials and equipment (except for community levies); application of a reduced 15 percent corporate tax rate; and exemption from certain taxes and charges such as the business tax and property taxes. To qualify for these benefits, companies must represent a minimum investment of CFA 100 million ($165,000), create at least 150 direct jobs during their first year of operation, and generate at least 60 percent of their revenue from exports. In November 2018, President Sall inaugurated the country’s first SEZ, the Integrated Industrial Platform of Diamniadio, a suburb of Dakar. The platform is now operational with seven companies established. It is expected to create approximately 20,000 jobs by 2023. The government has launched two additional SEZ, one in Sandiara, 80 kilometers from the capital city Dakar, and the other in Ndiass, in the vicinity of Dakar’s International Airport. With growing interest in economic zones, there is a need for more clarity and coherence in the incentives offered by the government.

Performance and Data Localization Requirements

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

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

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

Real Property

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

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

The government generally pays compensation when it takes private property through eminent domain actions. Senegal’s housing finance market is under-developed and few long-term mortgage-financing vehicles exist. There is no secondary market for mortgages or other bundled revenue streams. The judiciary is inconsistent when adjudicating property disputes. Senegal ranked 116 out of 190 countries in the 2020 Doing Business Index for Registering Property. According to the World Bank methodology, it requires an average of 41 days to register property against an average of 51.6 days in sub-Saharan Africa and 23.6 days in OECD high-income countries. Five separate procedures are required for property registration.

Intellectual Property Rights

Senegal maintains an adequate legal framework for protection of intellectual property rights (IPR), but the country has limited institutional capacity to implement this framework and enforce IPR protections. Senegal has been a member of the World Intellectual Property Organization (WIPO) since its inception. Senegal is also a member of the African Organization of Intellectual Property (OAPI), a grouping of 15 francophone African countries with a common system for obtaining and maintaining protection for patents, trademarks, and industrial designs. Local statutes recognize reciprocal protection for authors or artists who are nationals of countries adhering to the 1991 Paris Convention on Intellectual Property Rights. Patents may be registered with the Agence sénégalaise pour la Propriété industrielle et l’Innovation technologique (ASPIT) and are protected for 20 years. An annual charge is levied during this period. Registered trademarks are protected for a period of 20 years. Trademarks may be renewed indefinitely by subsequent registrations. Senegal is a signatory to the Berne Convention for the Protection of Literary and Artistic Works. The Senegalese Copyright Office, part of the Ministry of Culture, protects copyrights. Bootlegging of music CDs is common and concerns the local music industry. The Copyright Office has taken actions to combat media piracy, including seizure of counterfeit cassettes and CD/DVDs. In 2008, the government established a special police unit to better enforce the country’s anti-piracy and counterfeit laws. In general, however, the government has limited capacity to combat IPR violations or to seize counterfeit goods. Customs screening for counterfeit goods production is weak, and confiscated goods occasionally re-appear in the market. Nevertheless, the government has made efforts to raise awareness of the impact of counterfeit products on the Senegalese marketplace, especially regarding pharmaceuticals, and officers have participated in trainings offered by manufacturers to identify counterfeit products.

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

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

Capital Markets and Portfolio Investment

Senegalese authorities take a generally positive view of portfolio investment. Assisted by the debt management office of the BCEAO and thanks to a well-functioning regional debt market, Senegal has historically issued regular debt instruments in local currency to manage its finances. Beginning in 2011, the government began accessing international debt markets, issuing U.S. dollar-denominated Eurobonds in 2011, 2014, 2017, and 2018. Some observers, including the IMF, have expressed concern over the recent rise in Senegal’s external debt, which reached 62 percent of GDP in 2019, compared to 52 percent in 2018. Due to borrowing needed to fund its COVID-19 response, Senegal’s debt-to-GDP ratio is expected to rise further, to 68 percent in 2020.

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

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

Money and Banking System

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

Foreign Exchange and Remittances

Foreign Exchange

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

Remittance Policies

Remittances from Senegal’s large diaspora represent about 10 percent of GDP and are one of the main resources for the country. According to the last IMF review of Senegal’s economy, remittances remains a significant component of the current account but are expected to decline as a percent of GDP over the medium term. Remittances fell sharply in 2020 as a result of the global COVID-19 crisis.

Sovereign Wealth Funds

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

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

Senegal has generally reduced government involvement in state-owned enterprises (SOEs) during the last three decades. However, the government still owns full or majority interests in approximately 20 such companies, including the national electricity company (Senelec), Dakar’s public bus service, the Port of Dakar, the national postal company (National Post), the national rail company, and the national water utility. The state-owned electricity company, Senelec, retains control over power transmission and distribution, but it relies increasingly on independent power producers to generate power. The government has also retained control of the national oil company, Petrosen, which is involved in hydrocarbon exploration in partnership with foreign oil companies and operates a small refinery dependent on government subsidies. The government has modest and declining ownership of agricultural enterprises, including a state-owned company involved in rice production. In 2018, the government re-launched a wholly state-owned airline, Air Senegal. The government owns a minority share in Sonatel-Orange Senegal, the country’s largest internet and mobile communications provider.

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

Privatization Program

The government has no program for privatizing the remaining SOEs.

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

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

Senegalese law provides criminal penalties for corruption. The National Anti-Corruption Commission (OFNAC) has a mandate to enforce anti-corruption laws. In January 2020, OFNAC released long overdue reports on its activities for 2017 and 2018 and swore in six new executive-level officials, bringing its managing board to a full complement for the first time in several years. A 2014 law requires the president, cabinet ministers, speaker and chief financial officer of the National Assembly, and managers of public funds in excess of one billion CFA francs (approximately $1.8 million) to disclose their assets to OFNAC.

The government has made some limited progress in improving its anti-corruption efforts. The curre