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China

Executive Summary

In 2020, the People’s Republic of China (PRC) became the top global Foreign Direct Investment (FDI) destination. As the world’s second-largest economy, with a large consumer base and integrated supply chains, China’s economic recovery following COVID-19 reassured investors and contributed to higher FDI and portfolio investments. In 2020, China took significant steps toward implementing commitments made to the United States on a wide range of IP issues and made some modest openings in its financial sector. China also concluded key trade agreements and implemented important legislation, including the Foreign Investment Law (FIL).

China remains, however, a relatively restrictive investment environment for foreign investors due to restrictions in key economic sectors. Obstacles to investment include ownership caps and requirements to form joint venture partnerships with local Chinese firms, industrial policies such as Made in China 2025 (MIC 2025) that target development of indigenous capacity, as well as pressure on U.S. firms to transfer technology as a prerequisite to gaining market access. PRC COVID-19 visa and travel restrictions significantly affected foreign businesses operations increasing their labor and input costs. Moreover, an increasingly assertive Chinese Communist Party (CCP) and emphasis on national companies and self-reliance has heightened foreign investors’ concerns about the pace of economic reforms.

Key investment announcements and new developments in 2020 included:

On January 1, the FIL went into effect and effectively replaced previous laws governing foreign investment.

On January 15, the U.S. and China concluded the Economic and Trade Agreement between the Government of the United States of America and the Government of the People’s Republic of China (the Phase One agreement). Under the agreement, China committed to reforms in its intellectual property regime, prohibit forced transfer technology as a condition for market access, and made some openings in the financial and energy sector. China also concluded the Regional Comprehensive Economic Partnership (RCEP) agreement on November 15 and reached a political agreement with the EU on the China-EU Comprehensive Agreement on Investment (CAI) on December 30.

In mid-May, PRC leader Xi Jinping announced China’s “dual circulation” strategy, intended to make China less export-oriented and more focused on the domestic market.

On June 23, the National Development and Reform Commission (NDRC) and Ministry of Commerce (MOFCOM) announced new investment “negative lists” to guide foreign FDI.

Market openings were coupled, however, with restrictions on investment, such as the Rules on Security Reviews on Foreign InvestmentsChina’s revised investment screening mechanism.

While Chinese pronouncements of greater market access and fair treatment of foreign investment are welcome, details and effective implementation are still needed to ensure foreign investors truly experience equitable treatment.

 

Table 1: Key Metrics and Rankings

 

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2020 78 of 180 http://www.transparency.org/research/cpi/overview 
World Bank’s Doing Business Report 2020 31 of 190 http://www.doingbusiness.org/en/rankings 
Global Innovation Index 2020 14 of 131 https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, historical stock positions) 2020 USD 116.2 https://apps.bea.gov/international/factsheet/ 
World Bank GNI per capita 2020 USD 10,410 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD 

1. Openness To, and Restrictions Upon, Foreign Investment

3. Legal Regime

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. As part of the Phase One Agreement, China committed to providing at least 45 days for public comment on all proposed laws, regulations, and other measures implementing the Phase One Agreement. While China has made some progress, 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.

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 stakeholders 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, administrative rules, and Supreme People’s Court (SPC) judicial interpretations, among other sources. While China does not have specialized commercial courts, it has created specialized courts and tribunals for the hearing of intellectual property disputes (IP), including in Beijing, Guangzhou, Shanghai, and Hainan.  In 2020, the original IP Courts continued to be popular destinations for both Chinese and foreign-related IP civil and administrative litigation, with the IP court in Shanghai experiencing a year-on-year increase of above 100 percent. China’s constitution and laws, however, are clear that Chinese courts cannot exercise power independent of the Party.  Further, in practice, influential businesses, local governments, and regulators routinely influence courts.  U.S. companies may hesitate in challenging administrative decisions or bringing commercial disputes before local courts due to perceptions of futility or fear of government retaliation.

Laws and Regulations on Foreign Direct Investment

China’s new investment law, the FIL, 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. The FIL standardized 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 foreign investors complaints by explicitly banning forced technology transfers, promising better IPR, and the establishment of a complaint mechanism for investors to report administrative abuses. However, foreign investors remain concerned that the FIL and its implementing regulations provide Chinese ministries and local officials significant regulatory discretion, including the ability to retaliate against foreign companies.

In December 2020, China also issued a revised investment screening mechanism under the Rules on Security Reviews on Foreign Investments without any period for public comment or prior consultation with the business community. Foreign investors complained that China’s new rules on investment screening were expansive in scope, lacked an investment threshold to trigger a review, and included green field investments – unlike most other countries. Moreover, new guidance on Neutralizing Extra-Territorial Application of Unjustified Foreign Legislation Measures, a measure often compared to “blocking statutes” from other markets, added to foreign investors’ concerns over the legal challenges they would face in trying to abide by both their host-country’s regulations and China’s. Foreign investors complained that market access in China was increasingly undermined by national security-related legislation. In 2020, the State Council and various central and local government agencies issued over 1000 substantive administrative regulations and departmental/local rules on foreign investment. While not comprehensive, a list of published and official Chinese laws and regulations is available here .

FDI Requirements for Investment Approvals

Foreign investments in industries and economic sectors that are not explicitly restricted on China’s negative 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 such as 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.

4. Industrial Policies

Investment Incentives

To attract foreign investment, different provinces and municipalities offer preferential packages like a temporary reduction in taxes, import/export duties, land use, 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.  However, many economic sectors that China deems sensitive due to broadly defined national or economic security concerns remain closed to foreign investment.

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 a total of 20 FTZs and one Free Trade Port.  China’s FTZs are in: Shanghai, Tianjin, Guangdong, Fujian, Chongqing, Hainan, Henan, Hubei, Liaoning, Shaanxi, Sichuan, Zhejiang, Jiangsu, Shandong, Hebei, Heilongjiang, Guangxi, Yunnan provinces, Beijing, Shanghai FTZ Lingang Special Area and Hainan Free Trade Port.  The goal of China’s FTZs/FTP 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” investment in industries and sectors not listed on China’s negative lists.  However, the 2020 FTZ negative list lacked substantive changes, and many foreign firms report that in practice, the degree of liberalization in FTZs is comparable to opportunities in other parts of China.

5. Protection of Property Rights

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 it 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, 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 it must be acquired through state-owned asset management firms, and it is difficult to liquidate.

Intellectual Property Rights

China remained on the USTR Special 301 Report Priority Watch List in 2020 and was subject to continued Section 306 monitoring. Multiple Chinese physical and online markets were included in the 2020 USTR Review of Notorious Markets for Counterfeiting and Piracy. Of note, in 2020, China did take significant steps toward addressing long-standing U.S. concerns on a wide range of IP issues, from patents, to trademarks, to copyrights and trade secrets. The reforms addressed the granting and protection of IP rights as well as their enforcement, and included changes made in support of the Phase One Trade Agreement. In April 2020, China National Intellectual Property Administration (CNIPA) issued the 2020-2021 Plan for Implementing the Opinions on Strengthening IP Protection which contained 133 specific “steps” that CNIPA and other Chinese government entities intended to take in 2020 and 2021 – to strengthen IP protection and implement China’s IP-related commitments under Phase One. The 2020-2021 Implementing Plan, together with the work plans of the SPC’s and IP-related administrative organs, portended a year of aggressive IP reforms in China. The Chinese legislative, administrative, and judicial organs issued over 60 new and amended measures related to IP protection and enforcement, in both draft and final form, including amendments to core IP laws, such as the Copyright Law, the Patent Law, and the Criminal Law. Updates also included administrative measures addressing trademark and patent protection and enforcement, as well as enforcement of copyright and trade secrets.

Despite these reforms, IP rights remain subject to Chinese government policy objectives, which appear to have intensified in 2020. For U.S. companies in China, infringement remained both rampant and a low-risk “business strategy” for bad-faith actors. Further enforcement and regulatory authorities continue to signal to U.S. rights holders that application of China’s IP system remains subject to the discretion of the PRC government and its policy goals. High-level remarks by PRC leader Xi Jinping and senior leaders signaled China’s commitment to cracking down on IP infringement in the years ahead. However, they also reflected China’s vision of the IP system as an important tool for eliminating foreign ownership of critical technology and ensuring national security. While on paper China’s IP protection and enforcement mechanisms have inched closer to near parity with other foreign markets, in practice, fair, transparent, and non-discriminatory treatment will very likely continue to be denied to U.S. rights holders whose IP ownership and exploitation impede PRC industrial policy goals.

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

6. Financial Sector

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 third largest stock market in the world with over USD11 trillion in assets, according to statistics from World Federation of Exchanges.  China’s bond market has similarly expanded significantly to become the second largest worldwide, totaling approximately USD17 trillion.  In 2020, China fulfilled its promises to open certain financial sectors such as securities, asset management, and life insurance. Direct investment by private equity and venture capital firms has increased but has also faced setbacks due to China’s capital controls, which obfuscate the repatriation of returns. As of 2020, 54 sovereign entities and private sector firms, including BMW and Xiaomi Corporation, have since issued roughly USD41 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, trust products, and wealth management. 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.  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.

Money 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 ended 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 would serve as an anchor reference for other loans.  The one-year LPR is based on the interest rate that 18 banks offer to their best customers and serves as the benchmark for rates provided for other loans.  In 2020, the PBOC requested financial institutions to shift towards use of the one-year LPR for their outstanding floating-rate loan contracts from March to August. 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. In 2020, the China Banking and Insurance Regulatory Commission (CBIRC) also began issuing laws to regulate online lending by banks including internet companies such as Ant Financial and Tencent, which had previously not been subject to banking regulations.

The CBIRC oversees China’s 4,607 lending institutions, about USD49 trillion in total assets.  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 2020, the PBOC announced in “China Financial Stability Report 2020” that 12.4 percent of the 4400 banking financial institutions received a “fail” rating (high risk) following an industry-wide review in 2019.  The assessment deemed 378 firms, all small and medium sized rural financial institutions, “extremely risky.”  The official rate of non-performing loans among China’s banks is relatively low: 1.92 percent as of the end of 2020.  However, analysts believed the actual figure may be significantly higher.  Bank loans continue to provide the majority of credit options (reportedly around 60.2 percent in 2020) for Chinese companies, although other sources of capital, such as corporate bonds, equity financing, and private equity are quickly expanding in scope, reach, and sophistication in China.

As part of a broad campaign to reduce debt and financial risk, Chinese regulators 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. In December 2020, CBIRC published the first “Shadow Banking Report,” and claimed that the size of China’s shadow banking had shrunk sharply since 2017 when China started tightening the sector. By the end of 2019, the size of China’s shadow banking by broad measurement dropped to 84.8 trillion yuan from the peak of 100.4 trillion yuan in early 2017. Shadow banking to GDP ratio had also dropped to 86 percent at the end of 2019, yet the report did not provide statistics beyond 2019. Foreign owned banks can now establish wholly-owned banks and branches in China, however, onerous licensing requirements and an industry dominated by local players, have limited foreign banks market penetration. 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.  China has since announced that it would 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).  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 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.

Remittance Policies

According to China’s FIL, as of January 1, 2020, funds associated with any forms of investment, including profits, capital gains, returns from asset disposal, IPR loyalties, compensation, and liquidation proceeds, may be freely converted into any world currency for remittance. Based on the “2020 Guidance for Foreign Exchange Business under the Current Account” released by SAFE in August, firms do not need any supportive documents or proof that it is under USD50,000. For remittances over USD50,000, firms need to submit supportive documents and taxation records.  Under Chinese law, FIEs do not need pre-approval to open foreign exchange accounts and are allowed to retain income as foreign exchange or 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, 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. Based on guidance for remittance of royalties and management fees, firms shall submit relevant contracts and invoice.  In October 2020, SAFE cut the reserve requirement for foreign currency transactions from 20 percent to zero, reducing the cost of foreign currency transactions as well as easing Renminbi appreciation pressure.

Sovereign Wealth Funds

China officially has only one sovereign wealth fund (SWF), the China Investment Corporation (CIC), which was launched in 2007 to help diversify China’s foreign exchange reserves. CIC is ranked the second largest SWF by total assets by Sovereign Wealth Fund Institute (SWFI). With USD200 billion in initial registered capital, CIC manages over USD1.04 trillion in assets as of 2020 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, real estate, private equity, 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 investments in long-term assets.
  • Central Huijin makes equity investments in Chinese state-owned financial institutions.

China also operates other funds that function in part like sovereign wealth funds, including: China’s National Social Security Fund, with an estimated USD372 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 BRI 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. While CIC affirms that they do not have any formal government guidance to invest funds consistent with industrial policies or designated projects, CIC is still expected to pursue government objectives.

7. State-Owned Enterprises

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.  State funds are spread throughout the economy and the state may also be the majority or controlling shareholder in an ostensibly 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 SOEs independence and professionalism, including relying on Boards of Directors that are free 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 make minimal progress in primarily 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 party members who report directly to the CCP, and double as the company’s party secretary.  SOE executives often 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, finance, and telecommunications.  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.

8. Responsible Business Conduct

Additional Resources

 

Department of State

Department of Labor

Since 2016, China established an RBC platform but general awareness of RBC standards (including environmental, social, and governance issues) is a relatively new concept, especially for 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, independent worker unions, and other business associations that promote RBC, further contributing to the general lack of awareness.  The Foreign NGO Law remains a concern for U.S. organizations, including those looking to promote RBC and corporate social responsibility (CSR) best practices, due to restrictions the Law places on their operations in China.  For U.S. investors looking to partner with a Chinese firm or expand operations, finding partners that meet internationally recognized standards in areas like labor rights, environmental protection, 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.

9. Corruption

Since 2012, China has undergone a large-scale anti-corruption campaign, with investigations reaching into all sectors of the government, military, and economy.  CCP General Secretary Xi labeled endemic corruption an “existential threat” to the very survival of the Party.  In 2018, the CCP restructured its 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.  From 2012 to 2020, the NSC-CCDI claimed it investigated 3.4 million cases. In 2020, the NSC-CCDI investigated 618,000 cases and disciplined 522,000 individuals, of whom 41 were at or above the provincial or ministerial level. Since 2014, the PRC’s overseas fugitive-hunting campaign, called “Operation Skynet,” has led to the capture of more than 8,350 fugitives suspected of corruption who were living in other countries, including over 2,200 CCP members and government employees. In most cases, the PRC did not notify host countries of these operations.  In 2020, the government reported apprehending 1,421 alleged fugitives and recovering approximately USD457 million through this program.

In June 2020 the CCP passed a law on Administrative Discipline for Public Officials, continuing their effort to strengthen supervision over individuals working in the public sector. The law further enumerates targeted illicit activities such as bribery and misuse of public funds or assets for personal gain. The CCP also issued Amendment 11 to the Criminal Law, which increased the maximum punishment for acts of corruption committed by private entities to life imprisonment, from the previous maximum of 15-year imprisonment. 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 “blacklists” of firms and agents involved in commercial bribery, including several foreign companies. 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.   10. Political and Security Environment

10. Political and Security Environment

Foreign companies operating in China face a low risk of political violence.  However, the ongoing PRC crackdown on virtually all opposition voices in Hong Kong and continued attempts by PRC organs to intimidate Hong Kong’s judges threatens the judicial independence of Hong Kong’s courts – a fundamental pillar for Hong Kong’s status 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 Hong Kong protesters. Apart from Hong Kong, the PRC government has also previously 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 such as the boycott campaigns against Korean retailer Lotte in 2016 and 2017 in response to the South Korean government’s decision to deploy the Terminal High Altitude Area Defense (THAAD); and the PRC’s retaliation against Canadian companies and citizens for Canada’s arrest of Huawei’s Chief Financial Officer Meng Wanzhou. PRC authorities also have broad authority to prohibit travelers from leaving China and have imposed “exit bans” to compel U.S. citizens to resolve business disputes, force settlement of court orders, or facilitate PRC investigations. U.S. citizens, including children, not directly involved in legal proceedings or 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.     11. Labor Policies and Practices

11. Labor Policies and Practices

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, especially as labor costs, including salaries and inputs continue to rise. Foreign companies also complain of difficulty navigating China’s labor and social insurance laws, including local implementation guidelines. Compounding the complexity, due to ineffective enforcement of labor 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.  The All-China Federation of Trade Unions (ACFTU) is the only union recognized under PRC 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 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.

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. Uyghurs and members of other minority groups are subjected to forced labor in Xinjiang and throughout China via PRC government-facilitated labor transfer programs. In 2020, the U.S. government took additional actions to prevent the importation of products produced by forced labor into the United States, including by issuing a Xinjiang supply chain business advisory that outlined the legal, economic, and reputational risks of forced labor exposure in China-based supply chains. The U.S. Customs and Border Protection bureau issued multiple Withhold Release Orders  barring importation into the United States of products produced in Xinjiang, which were determined to be produced with prison or forced labor in violation of U.S. import laws.  The Commerce Department added Chinese commercial and government entities to its Entity List for their complicity in human rights abuses and the Department of Treasury sanctioned the Xinjiang Production and Construction Corps to hold human rights abusers accountable in Xinjiang. Some PRC firms continued to employ North Korean workers in violation of UN Security Council sanctions.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

 

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

Host Country Statistical source* USG or international statistical source USG or International Source of Data: BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2020 $14,724,435 2019 $14,343,000 www.worldbank.org/en/country 
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data: BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2019 $87,880 2019 $116,200 BEA data available at https://apps.bea.gov/international/factsheet/ 
Host country’s FDI in the United States ($M USD, stock positions) 2019 $7,721,700 2019 $37,700 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data 
Total inbound stock of FDI as % host GDP 2020 $16.5% 2019 12.4% UNCTAD data available at https://unctadstat.unctad.org/wds/TableViewer/tableView.aspx  https://unctadstat.unctad.org/CountryProfile/GeneralProfile/en-GB/156/index.html 

* Source for Host Country Data:

Table 3: Sources and Destination of FDI

Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward $2,938,482 100% Total Outward $2,198,881 100%
China, P.R., Hong Kong $1,430,303 48.7% China, P.C., Hong Kong $1,132,549 51.5%
British Virgin Islands $316,836 10.8% Cayman Islands $259,614 11.8%
Japan $147,881 5.0% British Virgin Islands $127,297 5.8%
Singapore $102,458 3.5% United States $67,855 3.1%
Germany $67,879 2.3% Singapore $38,105 1.7%
“0” reflects amounts rounded to +/- USD 500,000.

Table 4: Sources of Portfolio Investment

Portfolio Investment Assets
Top Five Destinations (Millions, current US Dollars)
Total Equity Securities Total Debt Securities
All Countries $645,981 100% All Countries $373,780 100% All Countries $272,201 100%
China, P. R.: Hong Kong $226,426 35% China, P. R.: Hong Kong $166,070 44% United States $68,875 25%
United States $162,830 25% United States $93,955 25% China, P. R.: Hong Kong $60,356 22%
Cayman Islands $55,086 9% Cayman Islands $36,192 10% British Virgin Islands $43,486 16%
British Virgin Islands $45,883 7% United Kingdom $11,226 3% Cayman Islands $18,894 7%
United Kingdom $21,805 3% Luxembourg $9,092 2% United Kingdom $10,579 4%

14. Contact for More Information

U.S.  Embassy Beijing Economic Section

55 Anjialou Road, Chaoyang District, Beijing, P.R.  China  +86 10 8531 3000

+86 10 8531 3000

Colombia

Executive Summary

With improving security conditions in metropolitan areas, a market of 50 million people, an abundance of natural resources, and an educated and growing middle-class, Colombia continues to be an attractive destination for foreign investment in Latin America. Colombia ranked 67 out of 190 countries in the “Ease of Doing Business” index of the World Bank’s 2020 Doing Business Report.

The Colombian economy contracted for the first time in more than two decades in 2020, with the effects of COVID-19 and lower oil prices resulting in a 6.8 percent decline in GDP. Measures to alleviate the pandemic’s effects led to a temporary suspension of Colombia’s fiscal rule and the deficit surpassing eight percent of GDP for 2020, with a similar deficit expected in 2021.

Colombia’s legal and regulatory systems are generally transparent and consistent with international norms. The country has a comprehensive legal framework for business and foreign direct investment (FDI). The 2012 U.S.-Colombia Trade Promotion Agreement (CTPA) has strengthened bilateral trade and investment. Colombia’s dispute settlement mechanisms have improved through the CTPA and several international conventions and treaties. Weaknesses include protection of intellectual property rights (IPR), as Colombia has yet to implement certain IPR-related provisions of the CTPA. Colombia became the 37th member of the Organization for Economic Cooperation and Development (OECD) in 2020, bringing the obligation to adhere to OECD norms and standards in economic operations.

The Colombian government has made a concerted effort to develop efficient capital markets, attract investment, and create jobs. Restrictions on foreign ownership in specific sectors still exist. FDI inflows increased 25.6 percent from 2018 to 2019, with a third of the 2019 inflow dedicated to the extractives sector and another 21 percent to professional services and finance. Roughly half of the Colombian workforce in metropolitan areas is employed in the informal economy, a share that increases to four-fifths in rural areas. Unemployment ended 2020 at 17.3 percent, a 4.3 percentage point increase from a year prior.

Since the 2016 peace agreement between the government and the Revolutionary Armed Forces of Colombia (FARC), Colombia has experienced a significant decrease in terrorist activity. Several powerful narco-criminal operations still pose threats to commercial activity and investment, especially in rural zones outside of government control.

Corruption remains a significant challenge. The Colombian government continues to work on improving its business climate, but U.S. and other foreign investors have voiced complaints about non-tariff, regulatory, and bureaucratic barriers to trade, investment, and market access at the national, regional, and municipal levels. Investors also note concern at a heavy reliance by the national competition and regulatory authority (SIC) on decrees to remedy perceived problems.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2020 92 of 180 http://www.transparency.org/research/cpi/overview 
World Bank’s Doing Business Report 2020 67 of 190 http://www.doingbusiness.org/en/rankings 
Global Innovation Index 2020 68 of 131 https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, historical stock positions) 2019 $8,264 https://apps.bea.gov/international/factsheet/ 
World Bank GNI per capita 2019 $6,510 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD 

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

The Colombian government actively encourages foreign direct investment (FDI). The economic liberalization reforms of the early 1990s provided for national treatment of foreign investors, lifted controls on remittance of profits and capital, and allowed foreign investment in most sectors. Colombia imposes the same investment restrictions on foreign investors that it does on national investors. Generally, foreign investors may participate in the privatization of state-owned enterprises without restrictions. All FDI involving the establishment of a commercial presence in Colombia requires registration with the Superintendence of Corporations and the local chamber of commerce. All conditions being equal during tender processes, national offers are preferred over foreign offers. Assuming equal conditions among foreign bidders, those with major Colombian national workforce resources, significant national capital, and/or better conditions to facilitate technology transfers are preferred.

ProColombia is the Colombian government entity that promotes international tourism, foreign investment, and non-traditional exports. ProColombia assists foreign companies that wish to enter the Colombian market by addressing specific needs, such as identifying contacts in the public and private sectors, organizing visit agendas, and accompanying companies during visits to Colombia. All services are free of charge and confidential. Priority sectors include business process outsourcing, software and IT services, cosmetics, health services, automotive manufacturing, textiles, graphic communications, and electric energy. ProColombia’s “Invest in Colombia” web portal offers detailed information about opportunities in agribusiness, manufacturing, and services in Colombia (www.investincolombia.com.co/sectors ). The Duque administration – including senior leaders at the Presidency, ProColombia, and the Ministry of Commerce, Industry, and Trade – continue to stress Colombia’s openness to foreign investors and aggressively market Colombia as an investment destination.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign investment in the financial, hydrocarbon, and mining sectors is subject to special regimes, such as investment registration and concession agreements with the Colombian government, but is not restricted in the amount of foreign capital. The following sectors require that foreign investors have a legal local representative and/or commercial presence in Colombia: travel and tourism agency services; money order operators; customs brokerage; postal and courier services; merchandise warehousing; merchandise transportation under customs control; international cargo agents; public service companies, including sewage and water works, waste disposal, electricity, gas and fuel distribution, and public telephone services; insurance firms; legal services; and special air services, including aerial fire-fighting, sightseeing, and surveying.

According to the Colombian constitution and foreign investment regulations, foreign investment in Colombia receives the same treatment as an investment made by Colombian nationals. Foreign investment is permitted in all sectors, except in activities related to defense, national security, and toxic waste handling and disposal. There are no performance requirements explicitly applicable to the entry and establishment of foreign investment in Colombia.

Foreign investors face specific exceptions and restrictions in the following sectors:

Media: Only Colombian nationals or legally constituted entities may provide radio or subscription-based television services. For National Open Television and Nationwide Private Television Operators, only Colombian nationals or legal entities may be granted concessions to provide television services. Foreign investment in national television is limited to a maximum of 40 percent ownership of an operator.

Accounting, Auditing, and Data Processing: To practice in Colombia, providers of accounting services must register with the Central Accountants Board and have uninterrupted domicile in Colombia for at least three years prior to registry. A legal commercial presence is required to provide data processing and information services in Colombia.

Banking: Foreign investors may own 100 percent of financial institutions in Colombia, but are required to obtain approval from the Financial Superintendent before making a direct investment of ten percent or more in any one entity. Foreign banks must establish a local commercial presence and comply with the same capital and other requirements as local financial institutions. Every investment of foreign capital in portfolios must be through a Colombian administrator company, including brokerage firms, trust companies, and investment management companies.

Fishing: A foreign vessel may engage in fishing activities in Colombian territorial waters only through association with a Colombian company holding a valid fishing permit. If a ship’s flag corresponds to a country with which Colombia has a complementary bilateral agreement, this agreement shall determine whether the association requirement applies for the process required to obtain a fishing license. The costs of fishing permits are greater for foreign flag vessels.

Private Security and Surveillance Companies: Companies constituted with foreign capital prior to February 11, 1994 cannot increase the share of foreign capital. Those constituted after that date can only have Colombian nationals as shareholders.

Transportation: Foreign companies can only provide multimodal freight services within or from Colombian territory if they have a domiciled agent or representative legally responsible for its activities in Colombia. International cabotage companies can provide cabotage services (i.e. between two points within Colombia) “only when there is no national capacity to provide the service.” Colombia prohibits foreign ownership of commercial ships licensed in Colombia. The owners of a concession providing port services must be legally constituted in Colombia, and only Colombian ships may provide port services within Colombian maritime jurisdiction, unless there are no capable Colombian-flag vessels.

Other Investment Policy Reviews

The WTO most recently reviewed Colombia’s trade policy in June 2018. https://www.wto.org/english/tratop_e/tpr_e/tp472_e.htm 

Business Facilitation

New businesses must register with the chamber of commerce of the city in which the company will reside. Applicants also register using the Colombian tax authority’s (DIAN) portal at: www.dian.gov.co  to obtain a taxpayer ID (RUT). Business founders must visit DIAN offices to obtain an electronic signature for company legal representatives, and obtain – in-person or online – an authorization for company invoices from DIAN. In 2019, Colombia made starting a business a step easier by lifting a requirement of opening a local bank account to obtain invoice authorization. Companies must submit a unified electronic form to self-assess and pay social security and payroll contributions to the Governmental Learning Service (Servicio Nacional de Aprendizaje, or SENA), the Colombian Family Welfare Institute (Instituto Colombiano de Bienestar Familiar, or ICBF), and the Family Compensation Fund (Caja de Compensación Familiar). After that, companies must register employees for public health coverage, affiliate the company to a public or private pension fund, affiliate the company and employees to an administrator of professional risks, and affiliate employees with a severance fund.

According to the World Bank’s “Doing Business 2020” report, recent reforms simplified starting a business, trading across borders, and resolving insolvency. According to the report, starting a company in Colombia requires seven procedures and takes an average of 10 days. Information on starting a company can be found at http://www.ccb.org.co/en/Creating-a-company/Company-start-up/Step-by-step-company-creation ; https://investincolombia.com.co/how-to-invest.html ; and http://www.dian.gov.co .

Outward Investment

Colombia does not incentivize outward investment nor does it restrict domestic investors from investing abroad.

2. Bilateral Investment Agreements and Taxation Treaties

Bilateral Investment Treaties and Free Trade Agreements: Colombia has free trade agreements or treaties with investment provisions with the United States, the European Union, the European Free Trade Association, MERCOSUR, CARICOM, Bolivia, Canada, Chile, Costa Rica, Cuba, Ecuador, El Salvador, Guatemala, Honduras, Israel, Mexico, Panama, Peru, the Republic of Korea, and Venezuela. Colombia has signed a trade agreement with the United Kingdom, but it is not yet in effect. Trade agreement negotiations are underway with Australia, Japan, New Zealand, and Singapore. Additionally, Colombia has stand-alone bilateral investment treaties with China, France, India, Japan, Peru, Singapore, Spain, Switzerland, Turkey, and the United Kingdom.

Bilateral Taxation Treaties: Colombia has active Agreements for the Elimination of Double Taxation in Income Tax Matters with the Andean Community of Nations, Canada, Chile, the Czech Republic, India, Mexico, Portugal, the Republic of Korea, Spain, Switzerland, and the United Kingdom. It has signed but not yet implemented additional treaties with France, Italy, Japan, and the United Arab Emirates, is currently negotiating agreements with Germany and the Netherlands, and has expressed interest in renewing negotiations with the United States. It has Agreements to Eliminate the Double Taxation of Air and Maritime Navigation Companies with Argentina, Brazil, Chile, Germany, Italy, Panama, the United States, and Venezuela.

3. Legal Regime

Transparency of the Regulatory System

The Colombian legal, accounting, and regulatory systems are generally transparent and consistent with international norms. The written commercial code and other laws cover broad areas, including banking and credit, bankruptcy/reorganization, business establishment/conduct, commercial contracts, credit, corporate organization, fiduciary obligations, insurance, industrial property, and real property law. The civil code contains provisions relating to contracts, mortgages, liens, notary functions, and registries. There are no identified private-sector associations or non-governmental organizations leading informal regulatory processes. The ministries generally consult with relevant actors, both foreign and national, when drafting regulations. Proposed laws are typically published as drafts for public comment, although sometimes with limited notice. Information on Colombia’s public finances and debt obligations is readily available and is published in a timely manner.

Enforcement mechanisms exist, but historically the judicial system has not taken an active role in adjudicating commercial cases. The Constitution establishes the principle of free competition as a national right for all citizens and provides the judiciary with administrative and financial independence from the executive branch. Colombia has transitioned to an oral accusatory system to make criminal investigations and trials more efficient. The new system separates the investigative functions assigned to the Office of the Attorney General from trial functions. Lack of coordination among government entities as well as insufficient resources complicate timely resolution of cases.

Colombia is a member of UNCTAD’s international network of transparent investment procedures (see http://www.businessfacilitation.org  and Colombia’s websites http://colombia.eregulations.org  and https://www.colombiacompra.gov.co). Foreign and national investors can find detailed information on administrative procedures for investment and income generating operations, including the number of steps, name, and contact details of the entities and people in charge of procedures, required documents and conditions, costs, processing time, and legal bases justifying the procedures.

International Regulatory Considerations

Colombia became the 37th member of the OECD in April 2020. Colombia is part of the World Trade Organization (WTO). The government generally notifies all draft technical regulations to the WTO Committee on Technical Barriers to Trade. In August 2020, Colombia fully joined the WTO Trade Facilitation Agreement (TFA). Regionally, Colombia is a member of organizations such as the Inter-American Development Bank (IADB), the Pacific Alliance, and the Andean Community of Nations (CAN).

Legal System and Judicial Independence

Colombia has a comprehensive, civil law-based legal system. Colombia’s judicial system defines the legal rights of commercial entities, reviews regulatory enforcement procedures, and adjudicates contract disputes in the business community. The judicial framework includes the Council of State, the Constitutional Court, the Supreme Court of Justice, and various departmental and district courts, which collectively are overseen administratively by the Superior Judicial Council. The 1991 Constitution provided the judiciary with greater administrative and financial independence from the executive branch. Regulations and enforcement actions are appealable through the different stages of legal court processes in Colombia. The judicial system in general remains hampered by time-consuming bureaucratic requirements.

Laws and Regulations on Foreign Direct Investment

Colombia has a comprehensive legal framework for business and FDI that incorporates binding norms resulting from its membership in the Andean Community of Nations and the WTO, as well as other free trade agreements and bilateral investment treaties.

Colombia’s official investment portal explains procedures and relevant laws for those wishing to invest (see https://investincolombia.com.co/en/how-to-invest).

Competition and Antitrust Laws

The Superintendence of Industry and Commerce (SIC), Colombia’s independent national competition authority, monitors and protects free economic competition, consumer rights, compliance with legal requirements and regulations, and protection of personal data. It also manages the national chambers of commerce. The SIC has been strengthened in recent years with the addition of personnel, including economists and lawyers. The SIC has recently investigated companies, including U.S.-based technology firms and Colombian banks, for failing to protect customer data. Other investigations include those related to pharmaceutical pricing, “business cartelization” among companies supplying public entities, and misleading advertising by a major brewing company. One U.S. gig-economy platform was temporarily barred from operating in Colombia in early 2020, although other similarly-situated companies remained; a court overturned the prohibition on appeal. U.S. companies have expressed concern about limited ability to appeal SIC orders and the SIC’s increasing reliance on orders to remedy perceived problems. Other U.S. companies have noted that SIC investigations can be drawn-out and opaque, similar to the judicial system in general.

Expropriation and Compensation

Article 58 of the Constitution governs indemnifications and expropriations and guarantees owners’ rights for legally-acquired property. For assets taken by eminent domain, Colombian law provides a right of appeal both on the basis of the decision itself and on the level of compensation. The Constitution does not specify how to proceed in compensation cases, which remains a concern for foreign investors. The Colombian government has sought to resolve such concerns through the negotiation of bilateral investment treaties and strong investment chapters in free trade agreements, such as the CTPA.

Dispute Settlement

ICSID Convention and New York Convention

Colombia is a member of the New York Convention on Investment Disputes, the International Center for the Settlement of Investment Disputes (ICSID), and the Multilateral Investment Guarantee Agency. Colombia is also party to the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards. The National and International Arbitration Statute (Law 1563), modeled after the UNCITRAL Model Law, has been in effect since 2012.

Investor-State Dispute Settlement

Domestic law allows contracting parties to agree to submit disputes to international arbitration, provided that: the parties are domiciled in different countries; the place of arbitration agreed to by the parties is a country other than the one in which they are domiciled; the subject matter of the arbitration involves the interests of more than one country; and the dispute has a direct impact on international trade. The law permits parties to set their own arbitration terms, including location, procedures, and the nationality of rules and arbiters. Foreign investors have found the arbitration process in Colombia complex and dilatory, especially with regard to enforcing awards, and slow and unresponsive at times. However, some progress has been made in the number of qualified professionals and arbitrators with ample experience on transnational transactions, arbitrage centers with cutting-edge infrastructure and administrative capacity, and courts that are progressively more accepting of arbitration processes.

There were several pending investment disputes in Colombia in 2020, including:

  • A project management consultant contract with a state-owned entity related to the refurbishment of an oil refinery. Claims arise out of a $2.4 billion liability imposed by the national comptroller general.
  • Two separate shareholder claims related to a Colombian bank that Colombia put under new management and ultimately seized in 1998.
  • Three separate claims related to ownership and mining rights related to the Constitutional Court’s decision to ban mining in a range of high-altitude wetlands.
  • Ownership of a mobile communications subsidiary, with claims arising out of the government’s order that certain assets revert to State control on expiration of a concession.
  • Majority shareholder claims arising out of the government’s decision to seize and liquidate an electricity provider.

According to the Doing Business 2020 report, the time from the moment a plaintiff files a lawsuit until actual payment and enforcement of the contract averages 1,288 days. Traditionally, most court proceedings are carried out in writing and only the evidence-gathering stage is carried out through hearings, including witness depositions, site inspections, and cross-examinations. The government has accelerated proceedings and reduced the backlog of court cases by allowing more verbal public hearings and creating alternative court mechanisms. The Code of General Procedure that entered into force in 2014 also establishes oral proceedings that are carried out in two hearings, and there are now penalties for failure to reach a ruling in the time limit set by the law. Enforcement of an arbitral award can take between six months and one and a half years; a regular judicial process can take up to seven years for private parties and upwards of 15 years in conflicts with the State. Thus, arbitration results are cheaper and much more efficient. According to the Doing Business report, Colombia has made enforcing contracts easier by simplifying and speeding up the proceedings for commercial disputes. In 2020, Colombia’s global ranking in the enforcing contracts category of the report held at 177.

International Commercial Arbitration and Foreign Courts

Foreign judgments are recognized and enforced in Colombia once an application is submitted to the Civil Chamber of the Supreme Court. In 2012, Colombia approved the use of the arbitration process via adoption of new legislation (Law 1563) based on the UNCITRAL Model Law. The statute stipulates that arbitral awards are governed by both domestic law as well as international conventions (New York Convention, Panama Convention, etc.). This has made the enforcement of arbitral awards easier for all parties involved. Arbitration in Colombia is completely independent from judiciary proceedings, and, once arbitration has begun, the only competent authority is the arbitration tribunal itself. The CTPA protects U.S. investments by requiring a transparent and binding international arbitration mechanism and allowing investor-state arbitration for breaches of investment agreements if certain parameters are met. The judicial system is notoriously slow, leading many foreign companies to include international arbitration clauses in their contracts.

Bankruptcy Regulations

Colombia’s 1991 Constitution grants the government the authority to intervene directly in financial or economic affairs, and this authority provides solutions similar to U.S. Chapter 11 filings for companies facing liquidation or bankruptcy. Colombia’s bankruptcy regulations have two major objectives: to regulate proceedings to ensure creditors’ protection, and to monitor the efficient recovery and preservation of still-viable companies. This was revised in 2006 to allow creditors to request judicial liquidation, which replaces the previous forced auctioning option. Now, inventories are valued, creditors’ rights are considered, and either a direct sale takes place within two months or all assets are assigned to creditors based on their share of the company’s liabilities. The insolvency regime for companies was further revised in 2010 to make proceedings more flexible and allow debtors to enter into a long-term payment agreement with creditors, giving the company a chance to recover and continue operating. Bankruptcy is not criminalized in Colombia. In 2013, a bankruptcy law for individuals whose debts surpass 50 percent of their assets value entered into force.

Restructuring proceedings aim to protect the debtors from bankruptcy. Once reorganization has begun, creditors cannot use collection proceedings to collect on debts owed prior to the beginning of the reorganization proceedings. All existing creditors at the moment of the reorganization are recognized during the proceedings if they present their credit. Foreign creditors, equity shareholders (including foreign equity shareholders), and holders of other financial contracts (including foreign contract holders) are recognized during the proceeding. Established creditors are guaranteed a vote in the final decision. According to the Doing Business 2020 report Colombia is ranked 32nd for resolving insolvency and it takes an average of 1.7 years – the same as OECD high-income countries – to resolve insolvency; the average time in Latin America is 2.9 years.

4. Industrial Policies

Investment Incentives

The Colombian government offers investment incentives such as income tax exemptions and deductions in specific priority sectors, including the so-called “orange economy” (creative industries), agriculture, and entrepreneurship. In 2020, the government announced additional incentive schemes that aim to attract large investments exceeding $350 million and create at least 250 local jobs, facilitate COVID-19 recovery, and generate investments in former conflict municipalities. Investment incentives through free trade agreements between Colombia and other nations include national treatment and most-favored-nation treatment of investors; establishment of liability standards assumed by countries regarding the other nation’s investors, including the minimum standard of treatment and establishment of rules for investor compensation from expropriation; establishment of rules for transfer of capital relating to investment; and specific tax treatment.

The government offers tax incentives to all investors, such as preferential import tariffs, tax exemptions, and credit or risk capital. Some fiscal incentives are available for investments that generate new employment or production in areas impacted by natural disasters and former conflict-affected municipalities. Companies can apply for these directly with participating agencies. Tax and fiscal incentives are often based on regional, sector, or business size considerations. Border areas have special protections due to currency fluctuations in neighboring countries which can impact local economies. National and local governments also offer special incentives, such as tax holidays, to attract specific industries.

The Colombian government introduced a variety of incentives for specific sectors as part of the 2019 tax reform. Among the incentives are:

  • Income from hotels built, renovated, or extended through January 1, 2029 in municipalities of less than 200,000 inhabitants will be taxed at nine percent for 20 years. The same facilities in larger municipalities will be taxed at nine percent for 10 years.
  • Income normally taxed at 33 percent that is invested in agricultural projects or orange (creative) economy initiatives will be tax free.
  • Income from the sale of electric power generated by wind, biomass, solar, geothermal, or tidal movement will be tax free, provided carbon dioxide emission certificates are sold in accordance with the Kyoto Protocol and 50 percent of the income from the certificate sale is invested in social projects benefiting the region where the power was generated.

Foreign investors can participate without discrimination in government-subsidized research programs, and most Colombian government research has been conducted with foreign institutions. Investments or grants to technological research and development projects are fully tax deductible in the year the investment was made. R&D incentives include Value-Added Tax (VAT) exemptions for imported equipment or materials used in scientific, technology, or innovation projects, and qualified investments may receive tax credits.

In a tax reform passed in 2016, the Colombian government created two tax incentives to support investment in the 344 municipalities most affected by the armed conflict (ZOMAC). Small and microbusinesses that invest in ZOMACs and meet a series of other criteria will be exempt from paying any taxes through 2021, pay 25 percent of the general rate through 2024, and 50 percent through 2027. Medium and large-sized businesses will pay 50 percent of their normal taxes through 2021 and 75 percent through 2024. The second component is entitled “works for taxes” (“Obras por Impuestos”), a program through which the private sector can directly fund social investments and infrastructure projects in lieu of paying taxes.

Foreign Trade Zones/Free Ports/Trade Facilitation

To attract foreign investment and promote the importation of capital goods, the Colombian government uses a number of duty deferral programs. One example is free trade zones (FTZs). While DIAN oversees requests to establish FTZs, the Colombian government is not involved in their operations. Benefits under the FTZ regime include a single 20 percent tax rate (compared to 31 percent normally) and no customs value-added taxes or duties on raw material imports for use in the FTZ. Each FTZ must meet specific investment and direct job creation commitments, depending on their total assets, during the first three years.

Colombia also has initiated Special Economic Zones for Exports in the municipalities of Buenaventura, Cucuta, Valledupar, and Ipiales in order to encourage investment. These zones receive the same import benefits of FTZs, and operators are exempt from some payroll taxes and surcharges. Infrastructure projects in the zones are also exempt from some income taxes.

Performance and Data Localization Requirements

Performance requirements are not imposed on foreigners as a condition for establishing, maintaining, or expanding investments. The Colombian government does not have performance requirements, local employment requirements, or require excessively difficult visa, residency, permission, or work permit requirements for investors. Under the CTPA, Colombia grants substantial market access across its entire services sector.

The SIC, under the Deputy Office for Personal Data Protection, is the Data Protection Authority (DPA) and has the legal mandate to ensure proper data protection. It has defined adequate data protection and responsibilities with respect to international data transfers. The SIC requires data storage facilities that hold personal data to comply with government security and privacy requirements, and data storage companies have one year to register. The SIC enforces the rules on local data storage within the country through audits/investigations and imposed sanctions.

Software and hardware are protected by IPR. There is no obligation to submit source code for registered software.

5. Protection of Property Rights

Real Property

The 1991 Constitution explicitly protects individual rights against state actions and upholds the right to private property. Secured interests in real property, and to a lesser degree movable property, are recognized and generally enforced after the property is properly registered. In terms of protecting third-party purchasers, existing law is inadequate. The concepts of a mortgage, trust, deed, and other types of liens exist, as does a reliable system of recording such secured interests. Deeds, however, present some legal risk due to the prevalence of transactions that have never been registered with the Public Instruments Registry. According to a survey made shortly before the signing of the FARC peace accord, some eight million hectares of land – 14 percent of the country – had been abandoned or acquired illegally. The government is working to title these plots and has started a formalization program for land restitution. The 2020 Doing Business report ranked Colombia 62nd for ease of registering property.

Intellectual Property Rights

In Colombia, the granting, registration, and administration of intellectual property rights (IPR) are carried out by four primary government entities. The SIC acts as the Colombian patent and trademark office. The Colombian Agricultural Institute (ICA) is in charge of issuing plant variety protections and data protections for agricultural products. The Ministry of Interior administers copyrights through the National Copyright Directorate (DNDA). The Ministry of Health and Social Protection handles data protection for products registered through the National Food and Drug Institute (INVIMA). Primary responsibility for enforcement resides with the Fiscalia General de la Republica (FGR), the Tax and Customs Authority (DIAN), and the Fiscal and Customs Police (POLFA).

The Intersectoral Intellectual Property Commission (CIPI) serves as the interagency technical body for IPR issues. Colombia aims to ratify the Treaty of Marrakesh in 2021, and CIPI has also mentioned progress toward ratification of the Beijing Treaty, the reactivation and update of the Anti-Piracy Agreement for Colombia, and the possible accession of Colombia to the Hague System on Industrial Designs. The last comprehensive interagency policy for IPR issues (Conpes 3533) was issued by the National Planning Department in 2008; the pandemic delayed its planned 2020 publication of a new national policy for IPR. Colombia is subject to Andean Community Decision 486 on trade secret protection, which is fully implemented domestically by the Unfair Competition Law of 1996.

Colombia provides a 20-year protection period for patents, a 10-year term for industrial designs, and 20- or 15-year protection for new plant varieties, depending on the species. Colombia has been on the U.S. Trade Representative’s Special 301 Watch List every year since 1991, and in 2019 was upgraded from “Priority Watch List” to “Watch List” status.

The CTPA improved standards for the protection and enforcement of a broad range of IPR. Improvements include state-of-the-art protections for digital products such as software, music, text, and videos; stronger protection for U.S. patents, trademarks, and test data; and prevention of piracy and counterfeiting by criminalizing end-use piracy. However, Colombia has outstanding CTPA commitments related to IPR. Colombian officials continue discussing with the United States draft legislation regulating internet service providers on issues such as compulsory takedown of online content and the protection of intermediaries with “safe harbor” provisions for unintentional copyright infringement. The legislation has not yet been introduced to Congress. Colombia has not yet signed the International Union for the Protection of New Varieties of Plants (UPOV 91). Colombia maintains that the existing Andean Community Decision 345 is in effect and equivalent to UPOV 91, but this is not an interpretation shared by the United States. On Colombia’s request, UPOV conducted a review and identified a non-conformity that Colombia asserts are addressed by two decrees, 2468 and 2687. Colombia is a member of the Inter-American Convention for Trademark and Commercial Protection.

Colombia reformed its copyright law under Decree 1915 of July 2018. The bill extends the term of copyright protection, imposes civil liability for circumvention of technological protection measures, and strengthens enforcement of copyright and related rights. On July 31, 2019 the Colombian Constitutional Court issued ruling C-345-19 that recognizes the constitutionality of statutory damages for copyright infringement.

Colombia’s success combating counterfeiting and IPR violations, and enforcement in the digital space, remains limited.  In March 2021, Colombia’s National Copyright Directorate (DNDA) imposed an order requiring internet providers to block IP addresses used to transmit pirated digital content, the first such order in Colombia.  Industry advocates called this an important precedent for combatting IP theft. A 2015 law increased penalties for those involved in running contraband, but more effective implementation is needed. Colombian authorities coordinate with the United States on investigations, but key agencies often do not have the requisite authorities or sufficient numbers of trained personnel to effectively inspect and seize merchandise and to investigate smugglers and counterfeiters. Despite high-profile seizures of counterfeit goods, such goods remain widely available in Colombia’s “San Andresitos” markets. No Colombian markets are listed in the U.S. Trade Representative’s (USTR) Review of Notorious Markets for Counterfeiting and Piracy.

U.S. stakeholders continue to raise concerns about Colombia’s regulation of the pharmaceutical sector, where regulatory barriers, a focus by the government on cost containment over health outcomes, delays in processing pharmaceutical registrations at INVIMA, and Congressional proposals to limit pharmaceutical IP restrict market entry and reduce the attractiveness of Colombia as a place to invest and do business.

Colombia is on the Watch List in USTR’s 2021 Special 301 Report.

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/.

6. Financial Sector

Capital Markets and Portfolio Investment

The Colombian Securities Exchange (BVC after its acronym in Spanish) is the main forum for trading and securities transactions in Colombia. The BVC is a private company listed on the stock market. The BVC, as a multi-product and multi-market exchange, offers trading platforms for the stock market, along with fixed income and standard derivatives. The BVC also provides listing services for issuers.

Foreign investors can participate in capital markets by negotiating and acquiring shares, bonds, and other securities listed by the Foreign Investment Statute. These activities must be conducted by a local administrator, such as trust companies or Financial Superintendence-authorized stock brokerage firms. Direct and portfolio foreign investments must be registered with the Central Bank. Foreigners can establish a bank account in Colombia as long as they have a valid visa and Colombian government identification.

The market has sufficient liquidity for investors to enter and exit sizeable positions. The central bank respects IMF Article VIII and does not restrict payments and transfers for current international transactions. The financial sector in Colombia offers credit to nationals and foreigners that comply with the requisite legal requirements.

Money and Banking System

In 2005, Colombia consolidated supervision of all aspects of the banking, financial, securities, and insurance sectors under the Financial Superintendence. Colombia has an effective regulatory system that encourages portfolio investment, and the country’s financial system is strong by regional standards. Commercial banks are the principal source of long-term corporate and project finance in Colombia. Loans rarely have a maturity in excess of five years. Unofficial private lenders play a major role in meeting the working capital needs of small and medium-sized companies. Only the largest of Colombia’s companies participate in the local stock or bond markets, with the majority meeting their financing needs either through the banking system, by reinvesting their profits, or through credit from suppliers.

Colombia’s central bank is charged with managing inflation and unemployment through monetary policy. Foreign banks are allowed to establish operations in the country, and must set up a Colombian subsidiary in order to do so. The Colombian central bank has a variety of correspondent banks abroad.

Foreign Exchange and Remittances

Foreign Exchange

There are no restrictions on transferring funds associated with FDI. Foreign investment into Colombia must be registered with the central bank in order to secure the right to repatriate capital and profits. Direct and portfolio investments are considered registered when the exchange declaration for operations channeled through the official exchange market is presented, with few exceptions. The official exchange rate is determined by the central bank. The rate is based on the free market flow of the previous day. Colombia does not manipulate its currency to gain competitive advantages.

Remittance Policies

The government permits full remittance of all net profits regardless of the type or amount of investment. Foreign investments must be channeled through the foreign exchange market and registered with the central bank’s foreign exchange office within one year in order for those investments to be repatriated or reinvested. There are no restrictions on the repatriation of revenues generated from the sale or closure of a business, reduction of investment, or transfer of a portfolio. Colombian law authorizes the government to restrict remittances in the event that international reserves fall below three months’ worth of imports. International reserves have remained well above this threshold for decades.

Sovereign Wealth Funds

In 2012, Colombia began operating a sovereign wealth fund called the Savings and Stabilization Fund (FAE), which is administered by the central bank with the objective of promoting savings and economic stability in the country. Colombia is not a member of the International Forum of Sovereign Wealth Funds. The fund can administer up to 30 percent of annual royalties from the extractives industry. Its primary investments are in fixed securities, sovereign and quasi-sovereign debt (both domestic and international), and corporate securities, with just eight percent invested in stocks. The government transfers royalties not dedicated to the fund to other internal funds to boost national economic productivity through strategic projects, technological investments, and innovation. In 2020, the government authorized up to 80 percent of the FAE’s USD 3.9 billion in assets to be lent to the Fund for the Mitigation of Emergencies (FOME) created in response to the pandemic.

7. State-Owned Enterprises

Since 2015, the Government of Colombia has concentrated its industrial and commercial enterprises under the supervision of the Ministry of Finance. According to Ministry’s 2019 annual report, the number of state-owned companies is 105, with a combined value of USD 20 billion. The government is the majority shareholder of 39 companies and a minority shareholder in the remaining 66. Among the most notable companies with a government stake are Ecopetrol (Colombia’s majority state-owned and privately-run oil company), ISA (electricity distribution), Banco Agrario de Colombia, Bancoldex, and Satena (regional airline). SOEs competing in the Colombian market do not receive non-market-based advantages from the government. The Ministry of Finance normally updates their annual report on SOEs every June.

Privatization Program

Colombia has privatized state-owned enterprises under article 60 of the Constitution and Law Number 226 of 1995.  This law stipulates that the sale of government holdings in an enterprise should be offered to two groups:  first to cooperatives and workers’ associations of the enterprise, then to the general public.  During the first phase, special terms and credits have to be granted, and in the second phase, foreign investors may participate along with the general public.  A series of privatizations planned for 2020 were postponed to 2021 due to the pandemic.  The government views stimulating private-sector investment in roads, ports, electricity, and gas infrastructure as a high priority.  The government is increasingly turning to concessions and using public-private partnerships (PPPs) to secure and incentivize infrastructure development.

In order to attract investment and promote PPPs, Colombian modified infrastructure regulations to clarify provisions for frequently-cited obstacles to participate in PPPs, including environmental licensing, land acquisition, and the displacement of public utilities.  The law puts in place a civil procedure that facilitates land expropriation during court cases, allows for expedited environmental licensing, and clarifies that the cost to move or replace public utilities affected by infrastructure projects falls to private companies.  However, infrastructure development companies considering bidding on tenders have raised concerns about unacceptable levels of risk that result from a law (Ley 80) establishing a framework for public works projects.  Interpretations of Ley 80 do not establish a liability cap on potential judgments and view company officials equal to those with fiscal oversight authority when it comes to criminal liability for misfeasance.

Municipal enterprises operate many public utilities and infrastructure services.  These municipal enterprises have engaged private sector investment through concessions.  There are several successful concessions involving roads.  These kinds of partnerships have helped promote reforms and create a more attractive environment for private, national, and foreign investment.

8. Responsible Business Conduct

In 2020, the Colombian government released its second National Action Plan on Business and Human Rights for the period 2020-2022, which responds to the UN Guiding Principles on Business and Human Rights and the OECD’s Guidelines for Multinational Enterprises. Colombia also adheres to the corporate social responsibility (CSR) principles outlined in the OECD Guidelines for Multinational Enterprises. CSR cuts across many industries and Colombia encourages public and private enterprises to follow OECD CSR guidelines. Beneficiaries of CSR programs include students, children, populations vulnerable to Colombia’s armed conflict, victims of violence, and the environment. Larger companies structure their CSR programs in accordance with accepted international principles. Companies in Colombia have been recognized on an international level for their CSR initiatives, including by the State Department.

Overall, Colombia has adequate environmental laws, is proactive at the federal level in enacting environmental protections, and does not waive labor or environmental regulations to attract investors. Colombian law also has provisions requiring consultations with indigenous communities before many large projects. However, the Colombian government struggles with enforcement, particularly in more remote areas. Geography, lack of infrastructure, and lack of state presence all play a role, as does a general shortage of resources in national and regional institutions. Environmental defenders face threats from narcotics traffickers, paramilitaries, and other illegal armed groups, particularly in areas with limited state presence. The Environmental Chapter of the CTPA requires Colombia to maintain and enforce environmental laws, protect biodiversity, and promote opportunities for public participation. Colombia participates in the Extractive Industries Transparency Initiative (EITI).

In parallel with its OECD accession, the Colombian government worked with the OECD in a series of assessments in order to develop and implement the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Afflicted and High-Risk Areas, especially related to gold mining. The Colombian government faces challenges in formalizing illegal gold mining operations. Colombia ratified the Minamata Convention on Mercury in 2018 and banned the use of mercury in mining. It has committed to phase out mercury use from all other industries by 2023. Colombia is still determining how to enforce laws to achieve this goal.

Buyers, sellers, traders, and refiners of gold may wish to conduct additional due diligence as part of their risk management regimes to account for the influx of illegally-mined Colombian gold into existing supply chains. Throughout the country, Colombian authorities have taken some steps to dismantle illegal gold mining operations that are responsible for negative environmental, criminal, and human health impacts, and often employ forced labor. The Colombian government has focused its efforts on transnational criminal elements involved in the production, laundering, and sale of illegally-mined gold, and the fraudulent documentation that is used to obscure the origin of illegally-mined gold. Colombia is actively pursuing new policies, proposing new legislation, and changing mechanisms to enforce laws against illegal gold mining.

Colombia has not signed the Montreux Document. In 2020, its National Organization for Accreditation (ONAC) and Institute for Technical Standards and Certification (ICONTEC) began ISO 18788 compliance certification processes for private security companies.

Additional Resources 

Department of State

Department of Labor

9. Corruption

Corruption, and the perception of it, is a serious obstacle for companies operating or planning to invest in Colombia. Analyses of the business environment, such as the WEF Global Competitiveness Index, consistently cite corruption as a problematic factor, along with high tax rates, inadequate infrastructure, and inefficient government bureaucracy. Transparency International’s latest “Corruption Perceptions Index” ranked Colombia 92nd out of 180 countries assessed and assigned it a score of 39/100, a slight improvement from the year prior. Customs, taxation, and public works contracts are commonly-cited areas where corruption exists.

Colombia has adopted the OECD Convention on Combating Bribery of Foreign Public Officials and is a member of the OECD Anti-Bribery Committee. It also passed a domestic anti-bribery law in 2016. It has signed and ratified the UN Anticorruption Convention and adopted the OAS Convention against Corruption. The CTPA protects the integrity of procurement practices and criminalizes both offering and soliciting bribes to/from public officials. It requires both countries to make all laws, regulations, and procedures regarding any matter under the CTPA publicly available. Both countries must also establish procedures for reviews and appeals by any entities affected by actions, rulings, measures, or procedures under the CTPA.

Resources to Report Corruption

Useful resources and contact information for those concerned about combating corruption in Colombia include the following:

  • The Transparency and Anti-Corruption Observatory is an interactive tool of the Colombian government aimed at promoting transparency and combating corruption available at http://www.anticorrupcion.gov.co/ 
  • The Transparency and Anti-Corruption Observatory is an interactive tool of the Colombian government aimed at promoting transparency and combating corruption available at http://www.anticorrupcion.gov.co/  • The National Civil Commission for Fighting Corruption, or Comisión Nacional Ciudadana para la Lucha Contra la Corrupción (CNCLCC), was established by Law 1474 of 2011 to give civil society a forum to discuss and propose policies and actions to fight corruption in the country. Transparencia por Colombia is the technical secretariat of the commission. http://ciudadanoscontralacorrupcion.org/es/inicio 
  • The National Civil Commission for Fighting Corruption, or Comisión Nacional Ciudadana para la Lucha Contra la Corrupción (CNCLCC), was established by Law 1474 of 2011 to give civil society a forum to discuss and propose policies and actions to fight corruption in the country. Transparencia por Colombia is the technical secretariat of the commission. http://ciudadanoscontralacorrupcion.org/es/inicio 
  • The Presidential Secretariat of Transparency advises and assists the president to formulate, design, and coordinate the implementation of public policy about transparency and anti-corruption. http://wsp.presidencia.gov.co/secretaria-transparencia/Paginas/default.aspx/ 

Government Agency:
Secretary of Transparency
Calle 7 No.6-54, Bogota (+57)1 562 9300
contacto@presidencia.gov.co

Watchdog Organization:
Transparencia Por Colombia (local chapter of Transparency International)
Cra. 45A No. 93 – 61, Barrio La Castellana, Bogota
(+57)1 610 0822
comunicaciones@transparenciacolombia.org.co

10. Political and Security Environment

Security in Colombia has improved significantly over recent years, most notably in large urban centers. Terrorist attacks and powerful narco-criminal group operations pose a threat to commercial activity and investment in some rural zones where government control is weak. In 2016, Colombia signed a peace agreement with the FARC to end half a century of confrontation. Congressional approval of that peace accord put in motion a disarmament, demobilization, and reintegration process, which granted the FARC status as a legal political organization and took over 13,000 combatants off the battlefield. Currently the peace negotiations with the National Liberation Army (ELN), which began in 2017, are suspended. This terrorist group continues a low-cost, high-impact asymmetric insurgency, including an attack on the Colombian police academy in 2019 that killed 22 cadets. The ELN often focuses attacks on oil pipelines, mines, roads, and electricity towers to disrupt economic activity and pressure the government. The ELN also extorts businesses in their areas of operation, kidnaps personnel, and destroys property of entities that refuse to pay for protection.

11. Labor Policies and Practices

An OECD economic survey of Colombia was published in October 2019. The report mentions progress on labor market reforms, but cites a weakening of the labor market given decelerating economic growth, stalled progress on labor force participation, and persistently high income inequality. At the end of 2020, 49.2 percent of the urban workforce was working in the informal economy. The overall unemployment rate at that time was 17.3 percent. Both figures represent deteriorations due to the economic shock of the COVID-19 pandemic. Colombia has a wide range of skills in its workforce, including managerial-level employees who are often bilingual, but faces large skills gaps. Colombia has made strong efforts to incorporate Venezuelan migrants into the formal economy, most notably the February 2021 announcement of ten-year Temporary Protected Status for the country’s estimated 1.8 million Venezuelan migrants.

Labor rights in Colombia are set forth in its Constitution, the Labor Code, the Procedural Code of Labor and Social Security, sector-specific legislation, and ratified international conventions, which are incorporated into national legislation. Colombia’s Constitution guarantees freedom of association and provides for collective bargaining and the right to strike (with some exceptions). It also addresses forced labor, child labor, trafficking, discrimination, protections for women and children in the workplace, minimum wages, working hours, skills training, and social security. Colombia has ratified all eight of the International Labor Organization’s (ILO’s) fundamental labor conventions, and all are in force. Colombia has also ratified conventions related to hours of work, occupational health and safety, and minimum wage.

The 1991 Constitution protects the right to constitute labor unions. Pursuant to Colombia’s labor law, any group of 25 or more workers, regardless of whether they are employees of the same company or not, may form a labor union. Employees of companies with fewer than 25 employees may affiliate themselves with other labor unions. Colombia has a low trade union density (9.5 percent). Where unions are present, multiple affiliation sometimes poses challenges for collective bargaining. The largest and most influential unions are composed mostly of public-sector employees, particularly of the majority state-owned oil company and the state-run education sector. Only 6.2 percent of all salaried workers are covered by collective bargaining agreements (CBAs), according to the OECD. The Ministry of Labor has expressed commitment to working on decrees to incentivize sectoral collective bargaining and to strengthen union representation within companies and regulate strikes in the essential public services sector. Strikes, when held in accordance with the law, are recognized as legal instruments to obtain better working conditions, and employers are prohibited from using strike-breakers at any time during the course of a strike. After 60 days of strike action, the parties are subject to compulsory arbitration. Strikes are prohibited in certain “essential public services,” as defined by law, although Colombia has been criticized for having an overly-broad interpretation of “essential.”

Foreign companies operating in Colombia must follow the same hiring rules as national companies, regardless of the origin of the employer and the place of execution of the contract. No labor laws are waived in order to attract or retain investment. In 2010, Law 1429 eliminated the mandatory proportion requirement for foreign and national personnel; 100 percent of the workforce, including the board of directors, can be foreign nationals. Labor permits are not required in Colombia, except for minors of the minimum working age. Foreign employees have the same rights as Colombian employees. Employers may use temporary service agencies to subcontract additional workers for peaks of production. Employers must receive advance permission from the Ministry of Labor before undertaking permanent layoffs. The Ministry of Labor typically does not grant permission to lay off workers who have enhanced legal protections (for example, those with work-related injuries or union leaders). The Ministry of Labor has been cracking down on using temporary or contract workers for jobs that are not temporary in nature, although challenges remain in this area.

Reputational risks to investors come with a lack of effective and systematic enforcement of labor law, especially in rural sectors. Homicides of unionists (social leaders) remain a concern. In January 2017, the U.S. Department of Labor issued a public report of review in response to a submission filed under Chapter 17 (the Labor Chapter) of the CTPA by the American Federation of Labor and Congress of Industrial Organizations and five Colombian workers’ organizations that alleged failures on the part of the government to protect labor rights in line with CTPA commitments. In January 2018, the Department of Labor published the first periodic review of progress to address issues identified in the submission report. For additional information on labor law enforcement see:

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Colombia Statistical source* USG or international statistical source USG or International
Source of Data:
BEA; IMF; Eurostat;
UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($B USD) 2019 $299.1 2019 $323.6 www.worldbank.org/en/country 
Foreign Direct Investment Colombia Statistical source* USG or international statistical source USG or international
Source of data:
BEA; IMF; Eurostat;
UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2019 $2,611 2019 $8,264 BEA data available at
https://apps.bea.gov/
international/factsheet/ 
Host country’s FDI in the United States ($M USD, stock positions) 2019 $50 2019 $174 BEA data available at
https://www.bea.gov/
international/direct-investment-
and-multinational-enterprises-
comprehensive-data 
Total inbound stock of FDI as % host GDP 2019 4.8% 2019 4.6% UNCTAD data available at https://stats.unctad.org/
handbook/Economic
Trends/Fdi.html 

*Data from the Colombian Statistics Departments, DANE, (https://www.dane.gov.co/) and the Colombian central bank (http://www.banrep.gov.co). Note: U.S. FDI reported by Banco de la Republica is not historically adjusted.

Table 3: Sources and Destination of FDI

Colombian data is not available from the IMF’s coordinated direct investment survey.

Table 4: Sources of Portfolio Investment
Portfolio Investment Assets
Top Five Partners (Millions, current US Dollars)
Total Equity Securities Total Debt Securities
All Countries 39,471 100% All Countries 26,135 100% All Countries 13,336 100%
United States 24,784 63% United States 17,995 69% United States 6,790 51%
Luxembourg 4,848 12% Luxembourg 3,854 15% Japan 1,025 8%
Ireland 2,230 6% Ireland 2,165 8% Luxembourg 994 7%
Japan 1,125 3% UK 537 2% France 463 3%
UK 944 2% Brazil 249 1% UK 407 3%

14. Contact for More Information

U.S. Embassy Bogota
Economic Section
Carrera 45 #22B-45, Bogota, Colombia
(+57)1 275-2000
BogotaECONShared@state.gov 

El Salvador

Executive Summary

Since President Nayib Bukele took office on June 1, 2019, his administration has sought to attract foreign investment and has taken steps to reduce cumbersome bureaucracy and improve security conditions. The COVID-19 pandemic complicated implementation of reforms and dampened investment.

To respond to COVID-19, the Government of El Salvador (GOES) implemented several emergency measures, including travel restrictions beginning in February 2020 and a nationwide lockdown from March to June 2020. Unclear or conflicting wording among the numerous emergency decrees created uncertainty, complicated business operations, and increased the risks of inadvertent non-compliance. The discretionary application of emergency measures and severe penalties for non-compliance contributed to the uncertainty. Lockdown measures disrupted and limited business operations with even manufacturers of medical supplies and other essential products unable to receive formal permission to reopen. The Supreme Court found the GOES phased reopening decrees to be unconstitutional, mandating a complete nationwide reopening of the economy at the end of August 2020.

As a result of the lockdown and worldwide recession, El Salvador lost approximately 20 percent of formal jobs in 2020. El Salvador’s Gross Domestic Product (GDP) is forecasted to drop by 8.5 percent in 2020 according to the Central Bank, with recovery to pre-pandemic production in 2022.

Following the reopening, perceptions of the investment climate began to slowly recover. However, political gridlock and electoral uncertainty dampened business confidence. The victory of President Bukele’s New Ideas Party in the February 28 legislative and municipal elections should remove obstacles to governability during the remaining three years of Bukele’s presidential term. With a large majority of the seats in the Legislative Assembly, Bukele should be able to pass legislation and reforms. His administration has pledged to enact legislation to strengthen institutions and improve the regulatory environment to spur investment and create jobs. Policies and reforms, however, will take time to implement and show results.

Commonly cited challenges to doing business in El Salvador include the discretionary application of laws and regulations, lengthy and unpredictable permitting procedures, as well as customs delays. El Salvador has lagged its regional peers in attracting foreign direct investment (FDI). The sectors with the largest investment have historically been textiles and retail establishments, though investment in energy has increased in recent years.

The Bukele administration has proposed several large infrastructure projects, which could provide opportunities for U.S. investment. The GOES has established a technical working group to help prioritize investment projects and attract private sector participation. Project proposals include enhancing road connectivity and logistics, expanding airport capacity and improving access to water and energy, as well as sanitation. Having inherited a large public debt, the Bukele administration has begun pursuing Public-Private Partnerships (PPPs) to execute infrastructure projects. El Salvador awarded its first PPP project in October 2020 to expand the cargo terminal at the international airport. The contract award is pending legislative approval. It launched a second PPP to install highway lighting and video surveillance in January 2020 and extended the deadline to submit bids until March 15, 2021 due to COVID-19. With these two PPPs, the Bukele administration delivered on its commitment under the Millennium Challenge Corporation (MCC) Compact, which ends April 30, 2021.

As a small energy-dependent country with no Atlantic coast, El Salvador relies on trade. It is a member of the Central American Dominican Republic Free Trade Agreement (CAFTA-DR) and the United States is El Salvador’s top trading partner. Proximity to the U.S. market is a competitive advantage for El Salvador. As most Salvadoran exports travel by land to Guatemalan and Honduran ports, regional integration is crucial for competitiveness. Although El Salvador officially joined the Customs Union established by Guatemala and Honduras in 2018, implementation has stalled. The Bukele administration announced in 2020 that it would prioritize bilateral trade facilitation with Guatemala.

The Bukele administration has taken initial steps to facilitate trade. In 2019, the government of El Salvador (GOES) relaunched the National Trade Facilitation Committee (NTFC), which produced the first jointly developed private-public action plan to reduce trade barriers. The plan contains 60 strategic measures focused on simplifying procedures, reducing trade costs, and improving connectivity and border infrastructure. In 2020, NTFC technical committees continued working to implement the action plan, as well as develop a national trade facilitation strategy. However, the NFTC has not presented progress on the action plan. The NFTC did not convene in 2020.

Table 1
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2020 104 of 180 http://www.transparency.org/research/cpi/overview 
World Bank’s Doing Business Report “Ease of Doing Business” 2020 91 of 190 http://www.doingbusiness.org/rankings 
Global Innovation Index 2020 92 of 131 http://www.globalinnovationindex.org/content/page/data-analysis 
U.S. FDI in partner country ($M USD, stock positions) 2019 3,380 https://apps.bea.gov/international/factsheet/factsheet.cfm 
World Bank GNI per capita 2019 4,000 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD 

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Toward Foreign Direct Investment

The GOES recognizes the benefits of attracting FDI. El Salvador does not have laws or practices that discriminate against foreign investors. The GOES does not screen or prohibit FDI. However, FDI levels still lag behind regional neighbors, except for Nicaragua. The Central Bank reported net FDI inflows of $232.95 million at the end of September 2020.

The Exports and Investment Promotion Agency of El Salvador (PROESA) supports investment in seven main sectors: textiles and apparel; business services; tourism; aeronautics; agro-industry; light manufacturing; and energy. PROESA provides information for potential investors about applicable laws, regulations, procedures, and available incentives for doing business in El Salvador. Websites: https://investelsalvador.com/  and http://www.proesa.gob.sv/investment/sector-opportunities .

The National Association of Private Enterprise (ANEP), El Salvador’s umbrella business chamber, serves as the primary private sector representative in dialogues with GOES ministries. http://www.anep.org.sv/ .

In 2019, the Bukele administration created the Secretariat of Commerce and Investment, a position within the President’s Office responsible for the formulation of trade and investment policies, as well as coordinating the Economic Cabinet. In addition, the Bukele administration created the Presidential Commission for Strategic Projects to lead the GOES major projects.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign citizens and private companies can freely establish businesses in El Salvador.

No single natural or legal person – whether national or foreign – can own more than 245 hectares (605 acres) of land. The Salvadoran Constitution stipulates there is no restriction on foreign ownership of rural land in El Salvador, unless Salvadoran nationals face restrictions in the corresponding country. Rural land to be used for industrial purposes is not subject to the reciprocity requirement.

The 1999 Investments Law grants equal treatment to foreign and domestic investors. With the exception of limitations imposed on micro businesses, which are defined as having 10 or fewer employees and yearly sales of $121,319.40 or less, foreign investors may freely establish any type of domestic business. Investors who begin operations with 10 or fewer employees must present plans to increase employment to the Ministry of Economy’s National Investment Office.

The Investment Law provides that extractive resources are the exclusive property of the state. The GOES may grant private concessions for resource extraction, though concessions are infrequently granted.

Other Investment Policy Reviews

El Salvador has been a World Trade Organization (WTO) member since 1995. The latest trade policy review performed by the WTO was published in 2016 (document: WT/TPR/S/344/Rev.1). https://docs.wto.org/dol2fe/Pages/FE_Search/FE_S_S006.aspx?Query=(@Symbol=%20wt/tpr/s/*)%20and%20((%20@Title=%20el%20salvador%20)%20or%20(@CountryConcerned=%20el%20salvador))&Language=ENGLISH&Context=FomerScriptedSearch&languageUIChanged=true# 

https://docs.wto.org/dol2fe/Pages/FE_Search/FE_S_S006.aspx?Query=(@Symbol=%20wt/tpr/s/*)%20and%20((%20@Title=%20el%20salvador%20)%20or%20(@CountryConcerned=%20el%20salvador))&Language=ENGLISH&Context=FomerScriptedSearch&languageUIChanged=true# 

The latest investment policy review performed by the United Nations Conference on Trade and Development (UNCTAD) was in 2010. http://unctad.org/en/Docs/diaepcb200920_en.pdf

Business Facilitation

El Salvador has various laws that promote and protect investments, as well as providing benefits to local and foreign investors. These include: the Investments Law, the International Services Law; the Free Trade Zones Law; the Tourism Law, the Renewable Energy Incentives Law; the Law on Public Private Partnerships; the Special Law for Streamlining Procedures for the Promotion of Construction Projects; and the Legal Stability Law for Investments.

Business Registration

Per the World Bank, registering a new business in El Salvador requires nine steps taking an average of 16.5 days. According to the World Bank’s 2020 Doing Business Report, El Salvador ranks 148 in the “Starting a Business” indicator. El Salvador launched an online business registration portal in 2017 designed as a one-stop shop for registering new companies. The online portal allows new businesses the ability to formalize registration within three days and conduct administrative operations online. The portal ( https://miempresa.gob.sv/ ) is available to all, though services are available only in Spanish.

The GOES’ Business Services Office (Oficina de Atención Empresarial) caters to entrepreneurs and investors. The office has two divisions: “Growing Your Business” (Crecemos Tu Empresa) and the National Investment Office (Dirección Nacional de Inversiones, DNI). “Growing Your Businesses” provides business advice, especially for micro-, small- and medium-sized enterprises. The DNI administers investment incentives and facilitates business registration.

Contact information:

Business Services Office
Telephone: (503) 2590-5107
Address: Boulevard Del Hipódromo, Colonia San Benito, Century Tower, 7th Floor , San Salvador. Schedule: Monday-Friday, 7:30 a.m. – 3:30 p.m.
Crecemos Tu Empresa
E-mail: crecemostuempresa@minec.gob.sv
Website: http://www.minec.gob.sv/ 

The National Investment Office:

Stephanie Argueta de Rengifo , National Director of Investments, sargueta@minec.gob.sv;
Sandra Llirina Sagastume de Sandoval, Deputy Director of Special Investments , llirina.sagastume@minec.gob.sv Christel Schulz, Business Climate Deputy, cdearce@minec.gob.sv 
Laura Rosales de Valiente, Deputy Director of Investment Facilitation, lrosales@minec.gob.sv
Telephone: (503) 2590-5116/ (503) 2590-5264.

The Productive Development Fund (FONDEPRO) provides grants to small enterprises to strengthen competitiveness. Website: http://www.fondepro.gob.sv/ 

The National Commission for Micro and Small Businesses (CONAMYPE) supports micro and small businesses by providing training, technical assistance, financing, venture capital, and loan guarantee programs. CONAMYPE also provides assistance on market access and export promotion, marketing, business registration, and the promotion of business ventures led by women and youth. Website: https://www.conamype.gob.sv/ 

The Micro and Small Businesses Promotion Law defines a microenterprise as a natural or legal person with annual gross sales up to 482 minimum monthly wages, equivalent to $146,609.94 and up to ten workers. A small business is defined as a natural or legal person with annual gross sales between 482 minimum monthly wages ($146,609.94) and 4,817 minimum monthly wages ($1,465,186.89) and up to 50 employees. To facilitate credit to small businesses, Salvadoran law allows for inventories, receivables, intellectual property rights, consumables, or any good with economic value to be used as collateral for loans.

El Salvador provides equitable treatment for women and under-represented minorities. The GOES does not provide targeted assistance to under-represented minorities. CONAMYPE provides specialized counseling to female entrepreneurs and women-owned small businesses.

Outward Investment

While the government encourages Salvadoran investors to invest in El Salvador, it neither promotes nor restricts investment abroad.

2. Bilateral Investment Agreements and Taxation Treaties

El Salvador has bilateral investment treaties in force with Argentina, Belize, BLEU (Belgium-Luxembourg Economic Union), Chile, Czech Republic, Finland, France, Germany, Israel, Republic of Korea, Morocco, the Netherlands, Paraguay, Peru, Spain, Switzerland, United Kingdom, and Uruguay. El Salvador is one of the five Central American Common Market countries, which have an investment treaty among themselves.

The CAFTA-DR entered into force in 2006, between the United States and El Salvador. CAFTA-DR’s investment chapter provides protection to most categories of investment, including enterprises, debt, concessions, contract, and intellectual property. Under this agreement, U.S. investors enjoy the right to establish, acquire, and operate investments in El Salvador on an equal footing with local investors. Among the rights afforded to U.S. investors are due process protections and the right to receive a fair market value for property in the event of expropriation. Investor rights are protected under CAFTA-DR by an effective, impartial procedure for dispute settlement that is transparent and open to the public.

El Salvador also has free trade agreements (FTAs) with Mexico, Chile, Panama, Colombia, and Taiwan. Although the GOES announced the cancellation of the Taiwan FTA in February 2019, the Supreme Court halted the cancellation in March 2019 and the FTA remains in force pending a Supreme Court ruling.

In January 2020, the South Korea -Central America FTA entered into effect. This FTA includes investment provisions. El Salvador’s FTAs with Mexico, Chile, Dominican Republic, and Panama also include investment provisions. El Salvador continues trade agreement negotiations with Canada, which will likely include investment provisions. The Salvadoran government signed a Partial Scope Agreement (PSA) with Cuba in 2011 and an additional Protocol to the PSA in October 2018. El Salvador and Bolivia signed a PSA in November 2018 that is pending ratification in the Legislative Assembly. A PSA with Ecuador entered into force in 2017.

El Salvador, along with Costa Rica, Guatemala, Honduras, Nicaragua, and Panama, signed an Association Agreement with the European Union that establishes a Free Trade Area. The agreement entered into force with El Salvador in 2013. The United Kingdom-Central America Association Agreement entered into force in January 2021. The agreement ensures continuity of commercial ties following Brexit and provides a framework for cooperation and investment.

El Salvador does not have a bilateral taxation treaty with the United States. El Salvador has one tax agreement with Spain, in effect since 2008.

El Salvador is a signatory of the Central American Mutual Assistance and Technical Cooperation Agreement in Tax and Customs Matters in force since 2012. On October 2018, El Salvador’s Legislative Assembly ratified the OECD Multilateral Convention on Mutual Administrative Assistance in Tax Matters . The jurisdictions participating in the Convention can be found at:  www.oecd.org/ctp/exchange-of-tax-information/Status_of_convention.pdf

El Salvador became a member of the Global Forum on Transparency and Exchange of Information for Tax Purposes in 2011. The OECD published El Salvador’s Phase 1 peer review report, which demonstrates its commitment to international standards for tax transparency and exchange of information, in 2015. The Phase 2 peer review on implementation of the standards, published in 2016, concluded that El Salvador is “largely compliant.”

In November 2020, El Salvador eliminated the Security Special Contribution on Large Taxpayers (CESC). Enacted in 2015, the CESC levied a five-percent tax on companies whose net income exceeded $500,000 to finance security measures, including the GOES’ Plan Control Territorial (Territorial Control Plan).

In May 2019, the legislature also approved an Authentic Interpretation of the Income Tax Law to clarify that energy distributors may deduct energy losses from the income tax, as energy losses are an unavoidable cost of distribution.  Prior to the authentic interpretation, tax authorities repeatedly imposed back taxes, interest, and penalties for improper deductions. Companies successfully challenged most of the tax assessments , but incurred legal costs and increased financial exposure.

3. Legal Regime

Transparency of the Regulatory System

The laws and regulations of El Salvador are relatively transparent and generally foster competition. Legal, regulatory, and accounting systems are transparent and consistent with international norms. However, the discretionary application of rules can complicate routine transactions, such as customs clearances and permitting applications. Regulatory agencies are often understaffed and inexperienced in dealing with complex issues. New foreign investors should review the regulatory environment carefully. In addition to applicable national laws and regulations, localities may impose permitting requirements on investors.

Companies note the GOES has enacted laws and regulations without following notice and comment procedures. The Regulatory Improvement Law, which entered into force in 2019, requires GOES agencies to publish online the list of laws and regulations they plan to approve, reform, or repeal each year. Institutions cannot adopt or modify regulations and laws not included in that list. The implementation of the law is gradual; the Regulatory Agenda is required for the executive branch since 2020, for the legislative and judicial branches, and autonomous entities in 2022, and municipalities in 2023. Prior to adopting or amending laws or regulations, the Simplified Administrative Procedures Law requires the GOES to perform a Regulatory Impact Analysis (RIA) based on a standardized methodology. Proposed legislation and regulations, as well as RIAs, must be made available for public comment. In practice, the Legislative Assembly does not publish draft legislation on its website and does not solicit comments on pending legislation. The GOES does not yet require the use of a centralized online portal to publish regulatory actions. The reforms have not been fully implemented. In 2020, only three GOES agencies drafted and published their regulatory agendas. GOES agencies performed only three RIAs prior to approving new legislation. Although the implications of the reforms are still not apparent, private sector stakeholders have expressed support for the measures.

El Salvador began implementing the Simplified Administrative Procedures Law in February 2019. This law seeks to streamline and consolidate administrative processes among GOES entities to facilitate investment. In 2016, El Salvador adopted the Electronic Signature Law to facilitate e-commerce and trade. Policies, procedures and needed infrastructure (data centers and specialized hardware and software) are in place for implementation, but work continues on licensing digital certification providers. El Salvador also enacted the Electronic Commerce Law, which entered into force in February 2021. The law establishes the framework for commercial and financial activities, contractual or not, carried out by electronic and digital means, introduces fair and equitable standards to protect consumers and providers, and sets processes to minimize risks arising from the use of new technologies. The law aims to support rapidly growing online businesses and financial technology (FinTech).

In 2018, El Salvador enacted the Law on the Elimination of Bureaucratic Barriers, which created a specialized tribunal to verify that regulations and procedures are implemented in compliance with the law and sanction public officials who impose administrative requirements not contemplated in the law. However, the law is pending implementation until the GOES appoints members of the tribunal.

The GOES controls the price of some goods and services, including electricity, liquid propane gas, gasoline, public transport fares, and medicines. The government also directly subsidizes water services and residential electricity rates.

The Superintendent of Electricity and Telecommunications (SIGET) oversees electricity rates, telecommunications, and distribution of electromagnetic frequencies. The Salvadoran government subsidizes residential consumers for electricity use of up to 105 kWh monthly. The electricity subsidy costs the government between $50 million to $64 million annually.

El Salvador’s public finances are relatively transparent. Budget documents, including the executive budget proposal, enacted budget, and end-of-year reports, as well as information on debt obligations are accessible to the public at: http://www.transparenciafiscal.gob.sv/ptf/es/PTF2-Index.html  An independent institution, the Court of Accounts, audits the financial statements, economic performance, cash flow statements, and budget execution of all GOES ministries and agencies. The results of these audits are publicly available online.

However, the GOES provided incomplete information about its execution of $8.1 billion, including extraordinary resources to tackle COVID-19. The GOES also has not disclosed expenditure information requested by the Assembly nor provided the Court of Accounts with unrestricted access to pandemic-related financial records and procurement documentation, as well as to the accounts of the Intelligence Agency.

International Regulatory Considerations

El Salvador belongs to the Central American Common Market and the Central American Integration System (SICA), organizations which are working on regional integration, (e.g., harmonization of tariffs and customs procedures). El Salvador commonly incorporates international standards, such as the Pan-American Standards Commission (Spanish acronym COPANT), into its regulatory system.

El Salvador is a member of the WTO, adheres to the Agreement on Technical Barriers to Trade (TBT Agreement), and has adopted the Code of Good Practice annexed to the TBT Agreement. El Salvador is also a signatory to the Trade Facilitation Agreement (TFA) and has notified its Categories A, B, and C commitments. El Salvador has established a National Trade Facilitation Committee (NTFC) as required by the TFA, which was reactivated in July 2019 as it had not met since 2017.

El Salvador is a member of the U.N. Conference on Trade and Development’s international network of transparent investment procedures: http://tramites.gob.sv . Investors can find information on administrative procedures applicable to investment and income-generating operations including the name and contact details for those in charge of procedures, required documents and conditions, costs, processing time, and legal bases for the procedures.

Legal System and Judicial Independence

El Salvador’s legal system is codified law. Commercial law is based on the Commercial Code and the corresponding Commercial and Civil Code of Procedures. There are specialized commercial courts that resolve disputes.

Although foreign investors may seek redress for commercial disputes through Salvadoran courts, many investors report the legal system to be slow, costly, and unproductive. Local investment and commercial dispute resolution proceedings routinely last many years. The judicial system is independent of the executive branch, but may be subject to manipulation by diverse interests. Final judgments are at times difficult to enforce. The Embassy recommends that potential investors carry out proper due diligence by hiring competent local legal counsel.

In February 2021, the Constitutional Chamber of the Supreme Court declined to review a 2019 civil judgement against a foreign bank on grounds that the case had no constitutional merits. The civil ruling that ordered the bank to pay substantial compensation caused widespread concern in the private sector due to perceived irregularities. .

Laws and Regulations on Foreign Direct Investment

Miempresa is the Ministry of Economy’s website for new businesses in El Salvador. At Miempresa, investors can register new companies with the Ministry of Labor (MOL), Social Security Institute, pension fund administrators, and certain municipalities; request a tax identification number/card; and perform certain administrative functions. Website: https://www.miempresa.gob.sv/ 

The country’s eRegulations site provides information on procedures, costs, entities, and regulations involved in setting up a new business in El Salvador. Website: http://tramites.gob.sv/ 

The Exports and Investment Promoting Agency of El Salvador (PROESA) is responsible for attracting domestic and foreign private investment, promoting exports of goods and services, evaluating and monitoring the business climate, and driving investment and export policies. PROESA provides technical assistance to investors interested in starting operations in El Salvador, regardless of the size of the investment or number of employees. Website: http://www.proesa.gob.sv/ 

Competition and Anti-Trust Laws

The Office of the Superintendent of Competition reviews transactions for competition concerns. The OECD and the Inter-American Development Bank note the Superintendent employs enforcement standards that are consistent with global best practices and has appropriate authority to enforce the Competition Law effectively. Superintendent decisions may be appealed directly to the Supreme Court, the country´s highest court. Website: http://www.sc.gob.sv/home/ 

Expropriation and Compensation

The Constitution allows the government to expropriate private property for reasons of public utility or social interest. Indemnification can take place either before or after the fact. There are no recent cases of expropriation. In 1980, a rural/agricultural land reform established that no single natural or legal person could own more than 245 hectares (605 acres) of land, and the government expropriated the land of some large landholders. In 1980, private banks were nationalized, but were subsequently returned to private ownership in 1989-90. A 2003 amendment to the Electricity Law requires energy-generating companies to obtain government approval before removing fixed capital from the country.

Dispute Settlement

ICSID Convention and New York Convention

El Salvador is a member state to the ICSID Convention. ICSID is included in a number of El Salvador’s investment treaties as the forum available to foreign investors.

Investor-State Dispute Settlement

In 2016, ICSID ruled in favor of El Salvador on a case brought by an international mining company that sought to force government acceptance of a gold-mining project.  Following the ruling, El Salvador banned the exploration and extraction of metal mining in the country.

The rights of investors from CAFTA-DR countries are protected under the trade agreement’s dispute settlement procedures. There have been no successful claims by U.S. investors under CAFTA-DR. There are currently no pending claims by U.S. investors.

For foreign investors from a country without a trade agreement with El Salvador, amended Article 15 of the 1999 Investment Law limits access to international dispute resolution and may obligate them to use national courts. Submissions to national dispute panels and panel hearings are open to the public. Interested third parties have the opportunity to be heard.

International Commercial Arbitration and Foreign Courts

A 2002 law allows private sector organizations to establish arbitration centers to resolve commercial disputes, including those involving foreign investors. In 2009, El Salvador modified its arbitration law to allow parties to appeal a ruling to the Salvadoran courts. Investors have complained that the modification dilutes the efficacy of arbitration as an alternative method of resolving disputes. Arbitrations takes place at the Arbitration and Mediation Center, a branch of the Chamber of Commerce and Industry of El Salvador. Website: http://www.mediacionyarbitraje.com.sv/ 

El Salvador is a signatory to the convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention) and the Inter-American Convention on International Commercial Arbitration (Panama Convention). Local courts recognize and enforce foreign arbitral awards and judgments, but the process can be lengthy and difficult.

Bankruptcy Regulations

The Commercial Code, the Commercial Code of Procedures, and the Banking Law contain sections that deal with the process for declaring bankruptcy. There is no separate bankruptcy law or court. According to data collected by the 2020 World Bank’s Doing Business report, resolving insolvency in El Salvador takes 3.5 years on average and costs 12 percent of the debtor’s estate, with the most likely outcome being that the company will be sold piecemeal. The average recovery rate is 32.4 percent. Globally, El Salvador ranks 92 out of 190 on Ease of Resolving Insolvency. Website: http://www.doingbusiness.org/content/dam/doingBusiness/country/e/el-salvador/SLV.pdf

4. Industrial Policies

Investment Incentives

The International Services Law, approved in 2007, established service parks and centers with incentives similar to those received by El Salvador’s free trade zones. Service park developers are exempted from income tax for 15 years, municipal taxes for ten years, and real estate transfer taxes. Service park administrators are exempted from income tax for 15 years and municipal taxes for ten years.

Firms located in the service parks/service centers may receive the following permanent incentives:

Tariff exemption for the import of capital goods, machinery, equipment, tools, supplies, accessories, furniture, and other goods needed for the development of the service activities;

Full exemption from income tax and municipal taxes on company assets.

Service firms operating under the existing Free Trade Zone Law are also eligible for the incentives, though firms providing services to the Salvadoran market cannot receive the incentives. Eligible services include: international distribution, logistical international operations, call centers, information technology, research and development, marine vessels repair and maintenance, aircraft repair and maintenance, entrepreneurial processes (e.g., business process outsourcing), hospital-medical services, international financial services, container repair and maintenance, technology equipment repair, elderly and convalescent care, telemedicine, cinematography postproduction services, including subtitling and translation, and specialized services for aircraft (e.g., supply of beverages and prepared food, laundry services and management of inventory).

The Tourism Law establishes tax incentives for those who invest a minimum of $25,000 in tourism-related projects in El Salvador, including: value-added tax exemption for the acquisition of real estate; import tariffs waiver for construction materials, goods, equipment (subject to limitation); and, a ten-year income tax waiver. The investor also benefits from a five-year exemption from land acquisition taxes and a 50 percent reduction of municipal taxes. To take advantage of these incentives, the enterprise must contribute five percent of its profits during the exemption period to a government-administered Tourism Promotion Fund. More information about tax incentives for tourism, please visit: http://www.mitur.gob.sv/ii-aspectos-legales-en-beneficio-de-la-inversion-contemplados-en-la-ley-de-turismo/ 

The Renewable Energy Incentives Law promotes investment projects that use renewable energy sources. In 2015, the Legislative Assembly approved amendments to encourage the use of renewable energy sources and reduce dependence on fossil fuels. These reforms extended the incentives to power generation using renewable energy sources, such as hydro, geothermal, wind, solar, marine, biogas and biomass. The incentives include a 10-year exemption from customs duties on the importation of machinery, equipment, materials, and supplies used for the construction and expansion of substations, transmission or sub-transmission lines. Revenues directly derived from renewable power generation enjoy full income tax exemptions for a period of five years in case of projects above 10 MW and 10 years for smaller projects. The Law also provides a tax exemption on income derived directly from the sale of certified emission reductions (CERs) under the Mechanism for Clean Development of the Kyoto Protocol, or carbon markets (CDM).

El Salvador does not issue guarantees or directly co-finance foreign direct investment projects. However, El Salvador has a Public-Private Partnerships Law that allows private investment in the development of infrastructure projects, including in areas of health, education, and security. Under the second MCC Compact, El Salvador launched international tenders for two Public-Private Partnerships projects. In October 2020, the GOES awarded the first-ever PPP project to design, expand, construct, and operate expanded cargo operations of El Salvador’s primary international airport.  The estimated $57 million contract award is pending Legislative Assembly approval. A second PPP tender was released in January 2020 for the design, financing, installation, equipment, operation and maintenance of a public lighting and video surveillance systems on approximately 143 kilometers of roads in San Salvador, La Libertad and La Paz departments.  The estimated investment for the project is $17 million.  Due to COVID-19, the deadline for the submission of bids was extended to March 15, 2021. El Salvador has also undertaken pre-feasibility studies on other potential PPP projects, including a second airport in eastern El Salvador, a toll road concession to connect its biggest port (Acajutla) to the La Hachadura border with Guatemala, and improvements of four border crossings (La Hachadura, Anguiatu, El Poy and El Amarillo) and three intermediate customs facilities (Metalio, Santa Ana and San Bartolo). The GOES has planned a total of 16 PPPs.

Foreign Trade Zones/Free Ports/Trade Facilitation

The 1998 Free Trade Zone Law is designed to attract investment in a wide range of activities, although the vast majority of the businesses in free trade zones are textile plants. A Salvadoran partner is not needed to operate in a free trade zone, and some textile operations are completely foreign-owned.

Foreign Trade Zones/Free Ports/Trade Facilitation

There are 17 free trade zones in El Salvador. They host 202 companies in sectors including textiles, distribution, call centers, business process outsourcing, agribusiness, agriculture, electronics, and metallurgy. Owned primarily by Salvadoran, U.S., Taiwanese, and Korean investors, free trade zone firms employ more than 73,000 people. The point of contact is the Chamber of Textile, Apparel and Free Trade Zones of El Salvador (CAMTEX) at: https://www.camtex.com.sv/site/ .

The 1998 law established rules for free trade zones and bonded areas. The free trade zones are outside the nation’s customs jurisdiction while the bonded areas are within its jurisdiction, but subject to special treatment. Local and foreign companies can establish themselves in a free trade zone to produce goods or services for export or to provide services linked to international trade. The regulations for the bonded areas are similar.

Qualifying firms located in the free trade zones and bonded areas may enjoy the following benefits:

Exemption from all duties and taxes on imports of raw materials and the machinery and equipment needed to produce for export;

Exemption from taxes for fuels and lubricants used for producing exports if they not domestically produced;

Exemption from income tax, municipal taxes on company assets and property for either 15 years (if the company is located in the metropolitan area of San Salvador) or 20 years (if the company is located outside of the metropolitan area of San Salvador);

Exemption from taxes on certain real estate transfers, e.g., the acquisition of goods to be employed in the authorized activity; and

Exemption from value-added tax on goods and services sourced locally to be employed in the authorized activity, including goods that are not incorporated into the final product, security and transportation services, as well as construction services and materials.

Companies in the free trade zones are also allowed to sell goods or services in the Salvadoran market if they pay applicable taxes on the proportion sold locally. Additional rules apply to textile and apparel products.

Regulations allow a WTO-complaint “drawback” to refund custom duties paid on imported inputs and intermediate goods exclusively used in the production of goods exported outside of the Central American region. Regulations also included the creation of a Business Production Promotion Committee with the participation of the private and public sector to work on policies to strengthen the export sector, and the creation of an Export and Import Center.

All import and export procedures are handled by the Import and Export Center (Centro de Trámites de Importaciones y Exportaciones – CIEX El Salvador). More information about the procedures can be found at: http://www.ciexelsalvador.gob.sv/registroSIMP/ 

Performance and Data Localization Requirements

El Salvador’s Investment Law does not require investors to meet export targets, transfer technology, incorporate a specific percentage of local content, turn over source code or provide access to surveillance, or fulfill other performance criteria. Business-related data may be freely transferred outside of El Salvador.

Labor laws require that 90 percent of the workforce in plants and in clerical positions be Salvadoran citizens. Nationality restrictions are relaxed for professional and technical jobs.

Foreign investors and domestic firms are eligible for the same incentives. Exports of goods and services are exempt from value-added tax.

A new Immigration Law, enacted in May 2019, introduces the investment, business, or commercial representation visa for foreign nationals of countries with a visa requirement who want to conduct temporary business-related activities in El Salvador. This visa can be issued for a single entry or multiple entries with a duration of up to two years. Eligible nationals can enter El Salvador for business purposes without a visa for up to 90 days, extendable once for an additional 90 days, for a total maximum stay of 180 days.  The law institutes the Frequent Traveler Card for foreign nationals who frequently visit El Salvador for business. This card can be issued for up to three years and allows multiple entries for stays of up to 90 days per entry.

Investors who plan to live and work in El Salvador for an extended period need to obtain temporary residency, which may be renewed periodically. Under Article 11 of the Investment Law, foreigners with investments totaling more than $1 million may obtain Investor’s Residency status, which allows them to work and remain in the country. This residency may be requested within 30 days of registering the investment. It allows residency for the investor and family members for a period of two years and may be extended thereafter.

It is customary for companies to hire local attorneys to manage the process of obtaining residency. The American Chamber of Commerce in El Salvador can also provide information regarding the process. Website: http://amchamsal.com/ 

The International Services Law establishes tax benefits for businesses that invest at least $150,000 during the first year of operations, including working capital and fixed assets, hire at least 10 permanent employees, and have at least a one-year contract. For hospital/medical services , the minimum capital investment must be $10 million, if surgical services are provided, or a minimum of $3 million, if surgical services are not provided. Hospitals or clinics must be located outside of major metropolitan areas, and medical services must be provided only to patients with insurance.

5. Protection of Property Rights

Real Property

Private property, both non-real estate and real estate, is recognized and protected in El Salvador. Mortgages and real property liens exist. Companies that plan to buy property are advised to hire competent local legal counsel to guide them on the property’s title prior to purchase.

Per the Constitution, no single natural or legal person–whether national or foreign–can own more than 245 hectares (605 acres) of land. Reciprocity applies to the ownership of rural land, i.e., El Salvador does not restrict the ownership of rural land by foreigners, unless Salvadoran citizens are restricted in the corresponding states. The restriction on rural land does not apply if used for industrial purposes.

Real property can be transferred without government authorization. For title transfer to be valid regarding third parties, however, it needs to be properly registered. Laws regarding rental property tend to favor the interests of tenants. For instance, tenants may remain on property after their lease expires, provided they continue to pay rent. Likewise, the law limits the permissible rent and makes eviction processes extremely difficult.

Squatters occupying private property in “good faith” can eventually acquire title. If the owner of the property is unknown, squatters can acquire title after 20 years of good faith possession through a judicial procedure; if the owner is known, squatters can acquire title after 30 years.

Squatters may never acquire title to public land, although municipalities often grant the right of use to the squatter.

Zoning is regulated by municipal rules. Municipalities have broad power regarding property use within their jurisdiction. Zoning maps, if they exist, are generally not available to the public.

The perceived ineffectiveness of the judicial system discourages investments in real estate and makes execution of real estate guarantees difficult. Securitization of real estate guarantees or titles is legally permissible but does not occur frequently in practice.

El Salvador ranks 79th of 190 economies on the World Bank’s Doing Business 2020 report in the Ease of Registering Property category. According to the report, registering a property takes an average of six steps over a period of 31 days, and costs 3.8 percent of the reported property value.

Intellectual Property Rights

El Salvador’s intellectual property rights (IPR) legal framework is strong. El Salvador revised several laws to comply with CAFTA-DR’s provisions on IPR, such as extending the copyright term to 70 years. The Intellectual Property Promotion and Protection Law (1993, revised in 2005), Law of Trademarks and Other Distinctive Signs (2002, revised in 2005), and Penal Code establish the legal framework to protect IPR. Investors can register trademarks, patents, copyrights, and other forms of intellectual property with the National Registry Center’s Intellectual Property Office. In 2008, the government enacted test data exclusivity regulations for pharmaceuticals (for five years) and agrochemicals (for 10 years) and ratified an international agreement extending protection to satellite signals.

El Salvador’s enforcement of IPR protections falls short of its written policies. Salvadoran authorities have limited resources to dedicate to enforcement of IPR laws. The National Civil Police (PNC) has an Intellectual Property Section with three investigators, while the Attorney General’s Office (FGR) has 13 prosecutors in its Private Property division that also has responsibility for other property crimes including cases of extortion. According to ASPI, the PNC section coordinates well with other government and private entities. Nevertheless, the PNC admits that a lack of resources and expertise (e.g., regarding information technology) hinders its effectiveness in combatting IPR crimes.

The National Directorate of Medicines (DNM) has 42 products registered for data protection, including five in 2019. The DNM protects the confidentiality of relevant test data and the list of such protected medications is available on the DNM website: https: https://www.medicamentos.gob.sv/index.php/es/servicios-m/informes/unidad-de-registro-y-visado/listado-de-productos-farmaceuticos-con-proteccion-de-datos-de-prueba .

The Salvadoran Intellectual Property Association (ASPI – Asociacion Salvadoreña de Propiedad Intelectual) notes that piracy is common in El Salvador because the police focus on investigating criminal networks rather than points of sale. Trade in counterfeit medicines and pirated software is common.

In 2020, the PNC arrested five individuals for copyright and trademark infringement. The PNC also conducted five inspections and ten raids, where it seized pirated optical media discs (CDs and DVDs) and fake products, including , footwear, belts and buckles. . Customs officials have identified some counterfeit products arriving directly from China through the Salvadoran seaport of Acajutla. In 2020, Customs officials seized 36 shipments based on the presumption of containing counterfeit products. These shipments primarily involved toys (e.g. Disney, Mattel and Nickelodeon), clothing and handbags (e.g. Cartier, Puma, Nike, and Tommy Hilfiger), mobile phone accessories (e.g. Huawei, iPhone, and Samsung), and accessories for vehicles (e.g. Toyota, Honda and Hyundai).Contraband and counterfeit products, especially cigarettes, liquor, toothpaste, and cooking oil, remain widespread. According to the GOES and private sector contacts, most unlicensed or counterfeit products are imported to El Salvador. The Distributors Association of El Salvador (ADES) estimated in 2019 that the annual cost of illicit trade in El Salvador amounts to $1 billion. . Most contraband cigarettes come in from China, Panama, South Korea, and Paraguay and undercut legitimately-imported cigarettes, which are subject to a 39 percent tariff. According to ADES, most contraband cigarettes are smuggled in by gangs, with the complicity of Salvadoran authorities.

The national Intellectual Property Registry has 22 registered geographical indications for El Salvador. In 2018, the GOES registered four geographical indications involving Denominations of Origin for “Jocote Barón Rojo San Lorenzo” (a sour fruit), “Pupusa de Olocuilta” (a variant of El Salvador’s traditional food), “Camarones de la Bahía de Jiquilisco” (shrimp from the Jiquilisco Bay), and “Loroco San Lorenzo” (flower used in Salvadoran cuisine). Existing geographic indications include “Balsamo de El Salvador” (balm for medical, cosmetic, and gastronomic uses – since 1935), “Café Ilamatepec” (coffee – since 2010), and “Chaparro” (Salvadoran hard liquor- since 2016).

El Salvador is not listed in the U.S. Trade Representative’s Special 301 Report or its Review of Notorious Markets for Counterfeiting and Piracy. There are no IP-related laws pending.

El Salvador is a signatory of the Berne Convention for the Protection of Literary and Artistic Works; the Paris Convention for the Protection of Industrial Property; the Geneva Convention for the Protection of Producers of Phonograms Against Unauthorized Duplication; the World Intellectual Property Organization (WIPO) Copyright Treaty; the WIPO Performance and Phonograms Treaty; the Rome Convention for the Protection of Performers, Phonogram Producers, and Broadcasting Organizations; and the Beijing Treaty on Audiovisual Performances (2012), which grants performing artists certain economic rights (such as rights over broadcast, reproduction, and distribution) of live and recorded works.

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

6. Financial Sector

Capital Markets and Portfolio Investment

The Superintendent of the Financial System ( https://www.ssf.gob.sv/ ) supervises individual and consolidated activities of banks and non-bank financial intermediaries, financial conglomerates, stock market participants, insurance companies, and pension fund administrators. Foreign investors may obtain credit in the local financial market under the same conditions as local investors. Interest rates are determined by market forces, with the interest rate for credit cards and loans capped at 1.6 times the weighted average effective rate established by the Central Bank. The maximum interest rate varies according to the loan amount and type of loan (consumption, credit cards, mortgages, home repair/remodeling, business, and microcredits).

In January 2019, El Salvador eliminated a Financial Transactions Tax (FTT), which was enacted in 2014 and greatly opposed by banks.

The 1994 Securities Market Law established the present framework for the Salvadoran securities exchange. Stocks, government and private bonds, and other financial instruments are traded on the exchange, which is regulated by the Superintendent of the Financial System.

Foreigners may buy stocks, bonds, and other instruments sold on the exchange and may have their own securities listed, once approved by the Superintendent. Companies interested in listing must first register with the National Registry Center’s Registry of Commerce. In 2020, the exchange traded $5.8 billon, with average daily volumes between $10 million and $24 million. Government-regulated private pension funds, Salvadoran insurance companies, and local banks are the largest buyers on the Salvadoran securities exchange. For more information, visit: https://www.bolsadevalores.com.sv/ 

Money and Banking System

All but two of the major banks operating in El Salvador are regional banks owned by foreign financial institutions. Given the high level of informality, measuring the penetration of financial services is difficult; however, it remains relatively low between 30 percent- according to the Salvadoran Banking Association (ABANSA) – and 35 percent- reported by the Superintendence of the Financial System (SSF). The banking system is sound and generally well-managed and supervised. El Salvador’s Central Bank is responsible for regulating the banking system, monitoring compliance of liquidity reserve requirements, and managing the payment systems. No bank has lost its correspondent banking relationship in recent years. There are no correspondent banking relationships known to be in jeopardy.

The banking system’s total assets as of December 2020 were $20.4 billion. Under Salvadoran banking law, there is no difference in regulations between foreign and domestic banks and foreign banks can offer all the same services as domestic banks.

The Cooperative Banks and Savings and Credit Associations Law regulates the organization, operation, and activities of financial institutions such as cooperative banks, credit unions, savings and credit associations, , and other microfinance institutions. The Money Laundering Law requires financial institutions to report suspicious transactions to the Attorney General. Despite having regulatory scheme in place to supervise the filing of reports by cooperative banks and savings and credit associations, these entities rarely file suspicious activity reports.

The Insurance Companies Law regulates the operation of both local and foreign insurance firms. Foreign firms, including U.S., Colombian, Dominican, Honduran, Panamanian, Mexican, and Spanish companies, have invested in Salvadoran insurers.

Foreign Exchange and Remittances

Foreign Exchange Policies

There are no restrictions on transferring investment-related funds out of the country. Foreign businesses can freely remit or reinvest profits, repatriate capital, and bring in capital for additional investment. The 1999 Investment Law allows unrestricted remittance of royalties and fees from the use of foreign patents, trademarks, technical assistance, and other services. Tax reforms introduced in 2011, however, levy a five percent tax on national or foreign shareholders’ profits. Moreover, shareholders domiciled in a state, country or territory that is considered a tax haven or has low or no taxes, are subject to a tax of twenty-five percent.

The Monetary Integration Law dollarized El Salvador in 2001. The U.S. dollar accounts for nearly all currency in circulation and can be used in all transactions. Salvadoran banks, in accordance with the law, must keep all accounts in U.S. dollars. Dollarization is supported by remittances – almost all from workers in the United States – that totaled $5.91 billion in 2020.

Remittance Policies

There are no restrictions placed on investment remittances. The Caribbean Financial Action Task Force’s Ninth Follow-Up report on El Salvador ( https://www.cfatf-gafic.org/index.php/member-countries/el-salvador ) noted that El Salvador has strengthened its remittances regimen, prohibiting anonymous accounts and limiting suspicious transactions. In 2015, the Legislature approved reforms to the Law of Supervision and Regulation of the Financial System so that any entity sending or receiving systematic or substantial amounts of money by any means, at the national and international level, falls under the jurisdiction of the Superintendence of the Financial System.

Sovereign Wealth Funds

El Salvador does not have a sovereign wealth fund.

7. State-Owned Enterprises

El Salvador has successfully liberalized many sectors, though it maintains state-owned enterprises (SOEs) in energy production, water supply and sanitation, ports and airports, and the national lottery (see chart below).

SOE 2021 Budgeted Revenue Number of Employees
National Lottery $ 50,974,850 147
State-run Electricity Company (CEL) $ 250,180,895 831
Water Authority (ANDA) $ 231,991,560 4,291
Port & Airport Administrator (CEPA) $ 117,556,539 2,537

Although the GOES privatized energy distribution in 1999, it maintains significant energy production facilities through state-owned Rio Lempa Executive Hydroelectric Commission (CEL), a significant producer of hydroelectric and geothermal energy. The primary water service provider is the National Water and Sewer Administration (ANDA), which provides services to 97 percent of urban areas and 78 percent of rural areas in El Salvador. As an umbrella institution, ANDA defines policies, regulates, and provides services. The Autonomous Executive Port Commission (CEPA) operates both the seaports and the airports. CEL, ANDA, and CEPA Board Chairs hold Minister-level rank and report directly to the President.

The Law on Public Administration Procurement and Contracting (LACAP) covers all procurement of goods and services by all Salvadoran public institutions, including the municipalities. Exceptions to LACAP include: procurement and contracting financed with funds coming from other countries (bilateral agreements) or international bodies; agreements between state institutions; and the contracting of personal services by public institutions under the provisions of the Law on Salaries, Contracts and Day Work. Additionally, LACAP allows government agencies to use the auction system of the Salvadoran Goods and Services Market (BOLPROS) for procurement. Although BOLPROS is intended for use in purchasing standardized goods (e.g., office supplies, cleaning products, and basic grains), the GOES uses BOLPROS to procure a variety of goods and services, including high-value technology equipment and sensitive security equipment. As of September 2020, public procurement using BOLPROS totaled $86.7 million. The United Nations Office for Project Services (UNOPS) and United Nations Development Program (UNDP) also support government agencies in the procurement of a wide range of infrastructure projects. The GOES has created a dedicated procurement website to publish tenders by government institutions ( https://www.comprasal.gob.sv/comprasal_web/ ).

In August 2020, President Bukele signed an executive order allowing the submission of bids for contractual services via email and eliminating bidders’ obligation to register online with the public procurement system (Comprasal), as well as lifting the responsibility of procurement officers to keep a record of companies and individuals who receive tender documents. Civil society organizations challenged the order, claiming it violates transparency standards and facilitates the manipulation of procurement information. The order is pending review in the Supreme Court of Justice.

Alba Petroleos is a joint venture between a consortium of mayors from the FMLN party and a subsidiary of Venezuela’s state-owned oil company PDVSA. As majority PDVSA owned, Alba Petroleos has been subject to Office of Foreign Assets Control (OFAC) sanctions since January 2019. Alba Petroleos operates a diminishing number of gasoline service stations and businesses in other industries, including energy production, food production, medicines, micro-lending, supermarkets, and bus transportation. Alba Petroleos has been surrounded by allegations of mismanagement, corruption and money laundering. Critics charged that the conglomerate received preferential treatment during FMLN governments and that its commercial practices, including financial reporting, are non-transparent. In May 2019, the Attorney General’s Office initiated an investigation against Alba Petroleos and its affiliates for money laundering. Alba Petroleos’ assets are frozen by court order and some of its gasoline service stations are being managed by the National Council for Asset Administration (CONAB).

Privatization Program

El Salvador is not engaged in a privatization program and has not announced plans to privatize.

8. Responsible Business Conduct

The private sector in El Salvador, including several prominent U.S. companies, has embraced the concept of responsible business conduct (RBC). Many companies donated to COVID-19 relief efforts in 2020. Several local foundations promote RBC practices, entrepreneurial values, and philanthropic initiatives. El Salvador is also a member of international institutions such as Forum Empresa (an alliance of RBC institutions in the Western Hemisphere), AccountAbility (UK), and the InterAmerican Corporate Social Responsibility Network. Businesses have created RBC programs to provide education and training, transportation, lunch programs, and childcare. In addition, RBC programs have included inclusive hiring practices and assistance to communities in areas such as health, education, senior housing, and HIV/AIDS awareness. Organizations monitoring RBC are able to work freely.

Following a reorganization under the Bukele administration, the Legal Secretariat is responsible for developing strategies and actions to promote transparency and accountability of government agencies, as well as fostering citizen participation in government. The watchdog organization Transparency International is represented in-country by the Salvadoran Foundation for Development (FUNDE).

El Salvador does not waive or weaken labor laws, consumer protection, or environmental regulations to attract foreign investment. El Salvador’s ability to effectively and fairly enforce domestic laws is limited by a lack of resources. El Salvador does not allow metal mining activity.

Additional Resources

Department of State

Country Reports on Human Rights Practices ( https://www.state.gov/reports-bureau-of-democracy-human-rights-and-labor/country-reports-on-human-rights-practices/);

Trafficking in Persons Report ( https://www.state.gov/trafficking-in-persons-report/);

Guidance on Implementing the “UN Guiding Principles” for Transactions Linked to Foreign Government End-Users for Products or Services with Surveillance Capabilities ( https://www.state.gov/key-topics-bureau-of-democracy-human-rights-and-labor/due-diligence-guidance/) and;

North Korea Sanctions & Enforcement Actions Advisory ( https://home.treasury.gov/system/files/126/dprk_supplychain_advisory_07232018.pdf ).

Department of Labor

Findings on the Worst forms of Child Labor Report ( https://www.dol.gov/agencies/ilab/resources/reports/child-labor/findings  );

List of Goods Produced by Child Labor or Forced Labor ( https://www.dol.gov/agencies/ilab/reports/child-labor/list-of-goods );

Sweat & Toil: Child Labor, Forced Labor, and Human Trafficking Around the World ( https://www.dol.gov/general/apps/ilab ) and;

Comply Chain ( https://www.dol.gov/ilab/complychain/ ).

9. Corruption

U.S. companies operating in El Salvador are subject to the U.S. Foreign Corrupt Practices Act (FCPA).

Corruption can be a challenge to investment in El Salvador. El Salvador ranks 104 out of 180 countries in Transparency International’s 2020 Corruption Perceptions Index. While El Salvador has laws, regulations, and penalties to combat corruption, their effectiveness is at times questionable. Soliciting, offering, or accepting a bribe is a criminal act in El Salvador. The Attorney General’s Anticorruption and Anti-Impunity Unit handles allegations of public corruption. The Constitution establishes a Court of Accounts that is charged with investigating public officials and entities and, when necessary, passing such cases to the Attorney General for prosecution. Executive-branch employees are subject to a code of ethics, including administrative enforcement mechanisms, and the government established an Ethics Tribunal in 2006.

In September 2019, El Salvador signed an agreement with the Organization of American States (OAS) for the establishment of the International Commission Against Impunity and Corruption (CICIES), which was followed by an agreement to determine CICIES objectives and competences. The CICIES will run for four years as an independent entity outside the GOES and underneath the OAS. The OAS has signed Memorandums of Understanding (MOUs) with the Attorney General’s Office, the Supreme Court of Justice, and the Ministry of Justice and Public Security codifying the role of the CICIES with each entity. CICIES will assist in instituting policies to combat corruption and impunity, support investigations conducted by the Attorney General‘s Office and the National Civil Police, and capacity building to strengthen institutions actively involved in the fight against corruption.

In April 2020, CICIES announced the deployment of a team of 30 multidisciplinary professionals to audit and implement a follow-up mechanism on the use of funds devoted to fight the pandemic. In November 2020, the Attorney General’s Office launched a series of investigations into COVID-19 contracts and expenditures based on the preliminary results of CICIES audits. The Attorney General’s Office is currently investigating at least 17 government agencies for alleged procurement fraud and misuse of public funds.On March 25,2021, CICIES submitted to the GOES a proposal to amend a several laws to prevent corruption and strengthen transparency and accountability, as well as to create crime typologies.

Corruption scandals at the federal, legislative, and municipal levels are commonplace and there have been credible allegations of judicial corruption. Three of the past four presidents have been indicted for corruption, a former Attorney General is in prison on corruption-related charges, a former president of the Legislative Assembly, who also served as president of the investment promotion agency during the prior administration, faces charges for embezzlement, fraud and money laundering, and the former Minister of Defense during two FMLN governments is under arrest for providing illicit benefits to gangs in exchange for reducing homicides (an agreement known as the 2012-2014 Truce). The law provides criminal penalties for corruption, but implementation is generally perceived as ineffective. In 2017, a civil court found former president Mauricio Funes guilty of illicit enrichment and ordered him to repay over $200,000. Additionally, Funes faces criminal charges for embezzlement and money laundering. In 2020, the Attorney General formally filed charges against Funes and other public officials for allegedly misappropriating $45 million in public funds in connection with a procurement fraud involving the Chaparral Hydroelectric Dam . Although there are several pending arrest warrants against Funes, he has fled to Nicaragua and cannot be extradited because he was granted Nicaraguan citizenship. In 2018, former president Elias Antonio (Tony) Saca pleaded guilty to embezzling more than $300 million in public funds. The court sentenced him to 10 years in prison and ordered him to repay $260 million.

The NGO Social Initiative for Democracy stated that officials, particularly in the judicial system, often engaged in corrupt practices with impunity. Long-standing government practices in El Salvador, including cash payments to officials, shielded budgetary accounts, and diversion of government funds, facilitate corruption and impede accountability.  For example, the accepted practice of ensuring party loyalty through off-the-books cash payments to public officials (i.e., sobresueldos) persisted across five presidential administrations. However, President Bukele eliminated these cash payments to public officials and the “reserved spending account,” nominally for state intelligence funding. At his direction, in July 2019, the Court of Accounts began auditing reserve spending of the Sanchez Ceren administration.

El Salvador has an active, free press that reports on corruption. In 2015, the Probity Section of the Supreme Court began investigating allegations of illicit enrichment of public officials. In 2017, Supreme Court Justices ordered its Probity Section to audit legislators and their alternates. In 2019, in observance of the Constitution, the Supreme Court instructed the Probity Section to focus its investigations only on public officials who left office within ten years. In July 2020, the Supreme Court issued regulations to standardize the procedures to examine asset declarations of public officials and carry out illicit enrichment investigations, as well as to set clear rules for decision-making. The enacted regulations seek to avoid discretion and enhance transparency on corruption-related investigations. The illicit enrichment law requires appointed and elected officials to declare their assets to the Probity Section. The declarations are not available to the public, and the law only sanctions noncompliance with fines of up to $500.

In 2011, El Salvador approved the Law on Access to Public Information. The law provides for the right of access to government information, but authorities have not always effectively implemented the law. The law gives a narrow list of exceptions that outline the grounds for nondisclosure and provide for a reasonably short timeline for the relevant authority to respond, no processing fees, and administrative sanctions for non-compliance. In 2020, in response to press reports about irregular purchases using COVID-19 funds, several government agencies declared pandemic-related procurements and financial records to be reserved (i.e., confidential) information. Transparency advocates raised concerns about shielding information to avoid citizen oversight of public funds.

In 2011, El Salvador joined the Open Government Partnership. The Open Government Partnership promotes government commitments made jointly with civil society on transparency, accountability, citizen participation and use of new technologies ( http://www.opengovpartnership.org/country/el-salvador ).

UN Anticorruption Convention, OECD Convention on Combating Bribery

El Salvador is not a signatory to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. El Salvador is a signatory to the UN Anticorruption Convention and the Organization of American States’ Inter-American Convention against Corruption.

Resources to Report Corruption

The following government agency or agencies are responsible for combating corruption:

Doctor Jose Nestor Castaneda Soto, President of the Court of Government Ethics
Court of Government Ethics (Tribunal de Etica Gubernamental)
87 Avenida Sur, No.7, Colonia Escalón, San Salvador (503) 2565-9403
(503) 2565-9403
Email: n.castaneda@teg.gob.sv 
http://www.teg.gob.sv/ 

Licenciado Raúl Ernesto Melara Morán
Fiscalia General de La Republica (Attorney General’s Office)
Edificio Farmavida, Calle Cortéz Blanco
Boulevard y Colonia Santa Elena
(503) 2593-7400
(503) 2593-7172
Email: xvpocasangre@fgr.gob.sv
http://www.fiscalia.gob.sv/ 

Chief Justice
Oscar Armando Pineda Navas
Avenida Juan Pablo II y 17 Avenida Norte
Centro de Gobierno
(503) 2271-8743
Email: conchita.presidenciacsj@gmail.com 
http://www.csj.gob.sv 

Contact at “watchdog” organization (international, regional, local, or nongovernmental organization operating in the country/economy that monitors corruption, such as Transparency International):

Roberto Rubio-Fabián
Executive Director
National Development Foundation (Fundación Nacional para el Desarrollo – FUNDE)
Calle Arturo Ambrogi #411, entre 103 y 105 Avenida Norte, Colonia Escalón, San Salvador (503) 2209-5300
(503) 2209-5300
Email: direccion@funde.org 

Resources to request government information

Access to Public Information Institute (IAIP for its initials in Spanish)
Ricardo Gómez Guerrero
Commissioner President of the IAIP
Prolongación Ave. Alberto Masferrer y
Calle al Volcán, Edif. Oca Chang # 88
(503) 2205-3800
Email: gomez@iaip.gob.sv
https://www.iaip.gob.sv/ 

10. Political and Security Environment

El Salvador’s 12-year civil war ended in 1992. Since then, there has been no political violence aimed at foreign investors.

In September 2020, the State Department adjusted the U.S. travel advisory for El Salvador from Level 2 (Exercise Increased Caution) to Level 3 (Reconsider Travel), due to COVID-19 Level 4 (Very High) Travel Health Notice issued by the Centers for Disease Control and Prevention (CDC).   The travel advisory also warns U.S citizens of high rates of crime and violence. . Most serious crimes in El Salvador are never solved. El Salvador lacks sufficient resources to properly investigate and prosecute cases and to deter crime.  For more information, visit: https://travel.state.gov/content/travel/en/international-travel/International-Travel-Country-Information-Pages/ElSalvador.html

El Salvador has thousands of known gang members from several gangs including Mara Salvatrucha (MS-13) and 18th Street (M18). Gang members engage in violence or use deadly force if resisted. These “maras” concentrate on extortion, violent street crime, car-jacking, narcotics and arms trafficking, and murder for hire. Extortion is a common crime in El Salvador. U.S. citizens who visit El Salvador for extended periods are at higher risk for extortion demands. Bus companies and distributors often must pay extortion fees to operate within gang territories, and these costs are passed on to customers. The World Economic Forum’s 2019 Global Competitiveness Index reported that costs due to organized crime for businesses in El Salvador are the highest among 141 countries.

11. Labor Policies and Practices

In 2020, El Salvador had a labor force of just over three million, according to the Ministry of Economy. Informal employment accounts for approximately 75 percent of the economy. While Salvadoran labor is regarded as hard-working, general education and professional skill levels are low. According to many large employers, there is a lack of middle management-level talent, which sometimes results in the need to bring in managers from abroad. Employers do not report labor-related difficulties in incorporating technology into their workplaces.

The law provides for the right of most workers to form and join independent unions, to strike, and to bargain collectively. The law also prohibits antiunion discrimination, although it does not require reinstatement of workers fired for union activity. Military personnel, national police, judges, and high-level public officers may not form or join unions. Workers who are representatives of the employer or in “positions of trust” also may not serve on a union’s board of directors. Only Salvadoran citizens may serve on unions’ executive committees. The labor code also bars individuals from holding membership in more than one trade union.

Unions must meet complex requirements to register, including having a minimum membership of 35 individuals. If the Ministry of Labor (MOL) denies registration, the law prohibits any attempt to organize for up to six months following the denial. Collective bargaining is obligatory only if the union represents the majority of workers.

The law contains cumbersome and complex procedures for conducting a legal strike. The law does not recognize the right to strike for public and municipal employees or for workers in essential services. The law does not specify which services meet this definition, and courts therefore interpret this provision on a case-by-case basis. The law requires that 30 percent of all workers in an enterprise must support a strike for it to be legal and that 51 percent must support the strike before all workers are bound by the decision to strike. Unions may strike only to obtain or modify a collective bargaining agreement or to protect the common professional interests of the workers. They must also engage in negotiation, mediation, and arbitration processes before striking, although many unions often skip or expedite these steps. The law prohibits workers from appealing a government decision declaring a strike illegal.

The government did not effectively enforce the laws on freedom of association and the right to collective bargaining. Penalties remained insufficient to deter violations. Judicial procedures were subject to lengthy delays and appeals. According to union representatives, the government inconsistently enforced labor rights for public workers, maquiladora/textile workers, food manufacturing workers, subcontracted workers in the construction industry, security guards, informal-sector workers, and migrant workers.

Unions functioned independently from the government and political parties, although many generally were aligned with the traditional political parties of ARENA and the FMLN. Workers at times engaged in strikes regardless of whether the strikes met legal requirements.

Employers are free to hire union or non-union labor. Closed shops are illegal. Labor laws are generally in accordance with internationally-recognized standards, but are not enforced consistently by government authorities. Although El Salvador has improved labor rights since the CAFTA-DR entered into force and the law prohibits all forms of forced or compulsory labor, there remains room for better implementation and enforcement.

The MOL is responsible for enforcing the law. The government proved more effective in enforcing the minimum wage law in the formal sector than in the informal sector. Unions reported the ministry failed to enforce the law for subcontracted workers hired for public reconstruction contracts. The government provided its inspectors updated training in both occupational safety and labor standards and conducted thousands of inspections in 2019.

The law sets a maximum normal workweek of 44 hours, limited to no more than six days and to no more than eight hours per day, but allows overtime, which is to be paid at a rate of double the usual hourly wage.  The law mandates that full-time employees receive pay for an eight-hour day of rest in addition to the 44-hour normal workweek. The law provides that employers must pay double time for work on designated annual holidays, a Christmas bonus based on the time of service of the employee, and 15 days of paid annual leave. The law prohibits compulsory overtime. The law states that domestic employees are obligated to work on holidays if their employer makes this request, but they are entitled to double pay in these instances. The government does not adequately enforce these laws.

There is no national minimum wage; the minimum wage is determined by sector. In 2018, a minimum wage increase went into effect that included increases of nearly 40 percent for apparel assembly workers and more than 100 percent for workers in coffee and sugar harvesting. All of these wage rates were above poverty income levels.

On March 14, 2020, the Legislative Assembly unanimously approved Legislative Decree 593, which stated that workers could not be fired for being quarantined for COVID-19 or because they could not report to work due to immigration or health restrictions. President Bukele also mandated persons older than 60 and pregnant women to work from home.

Responding to COVID-19 pandemic and to legalize telework, El Salvador adopted the Telework Regulation Law on March 20, 2020. The law is applicable in both private and public sectors and requires a written agreement between employer and employee outlining the terms and conditions of the arrangement, including working hours, responsibilities, workload, performance evaluations, reporting and monitoring, and duration of the arrangement, among others. Legislation prescribes that employers are responsible for providing the equipment, tools, and programs necessary to perform duties remotely. Employers are subject to the obligations contained in labor laws, while workers are entitled to the same rights as staff working at the employer’s premises, including benefits and freedom of association. According to the Exports and Investment Promotion Agency of El Salvador (PROESA), the implementation of the Telework Bill enabled El Salvador to save around 20,000 jobs that otherwise could have been lost to the pandemic, especially in the call center sector.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source* USG or international statistical source USG or International Source of Data: BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2019 $27,022.64 2019 $27,023 https://data.worldank.org/country/el-salvador 
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data: BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2019 $22,183.96 2019 $3,380 BEA data available at
https://apps.bea.gov/international/
factsheet/factsheet.cfm?Area=209 
Host country’s FDI in the United States ($M USD, stock positions) 2019 N.A. 2019 $26.0 BEA data available at
http://bea.gov/international/direct_
investment_multinational_companies_
comprehensive_data.htm 
Total inbound stock of FDI as % host GDP 2019 37% 2019 126%

* Central Bank, El Salvador. In 2018, the Central Bank released GDP estimates using the new national accounts system from 2008 and using 2005 as the base year.

Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data (2019)*
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward 10,113 100% Total Outward 4.4 100%
Panama 3,304 32.7% Guatemala 2.57 64.3%
United States 2,184 21.6% Honduras 1.32 33%
Spain 1,087 10.7% Costa Rica 0.48 12%
Colombia 819 8.1% Nicaragua 0.07 1.8%
Mexico 764 7.6%
“0” reflects amounts rounded to +/- USD 500,000.

*Coordinated Direct Investment Survey, International Monetary Fund 

Table 4: Sources of Portfolio Investment
Data not available.

14. Contact for More Information

Michael L. Benton
Deputy Economic Counselor
U.S. Embassy San Salvador
Address: Final Blvd. Santa Elena, Antiguo Cuscatlán, La Libertad, El Salvador
Phone: + (503) 2501-2999
Email: bentonML2@state.gov 
Website: http://sansalvador.usembassy.gov/index.html
To reach the U.S. Foreign Commercial Service (FCS) Office, please email: Office.Sansalvador@trade.gov 

Guatemala

Executive Summary

Guatemala has the largest economy in Central America, with a $ 77.4 billion gross domestic product (GDP) in 2020. The economy contracted by an estimated 1.5 percent in 2020 due to the impacts of COVID-19 and tropical storms Eta and Iota. Remittances, mostly from the United States, increased by 7.9 percent in 2020 and were equivalent to 14.6 percent of GDP. The United States is Guatemala’s most important economic partner. The Guatemalan government continues to make efforts to enhance competitiveness, promote investment opportunities, and work on legislative reforms aimed at supporting economic growth. More than 200 U.S. and other foreign firms have active investments in Guatemala, benefitting from the U.S. Dominican Republic-Central America Free Trade Agreement (CAFTA-DR). Foreign direct investment (FDI) stock was $17.3 billion in 2020, a 4.2 percent increase over 2019. Despite increased stock, FDI flows dropped by 6.1 percent in 2020. Some of the activities that attracted most of the FDI flows in the last three years were financial and insurance activities, manufacturing, commerce and vehicle repair, water, electricity, and sanitation services.

Despite steps to improve Guatemala’s investment climate, international companies choosing to invest in Guatemala face significant challenges. Complex laws and regulations, inconsistent judicial decisions, bureaucratic impediments, and corruption continue to impede investment. Citing Guatemala’s CAFTA-DR obligations, the United States has raised concerns with the Guatemalan government regarding its enforcement of both its labor and environmental laws.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2020 149 of 180 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2020 96 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2020 106 of 131 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2019 USD 746 https://apps.bea.gov/international/factsheet/
World Bank GNI per capita 2019 USD 4,610 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

The Guatemalan government continues to promote investment opportunities and work on reforms to enhance competitiveness and the business environment. As part of the government’s efforts to promote economic recovery during and after the COVID-19 pandemic, the Ministry of Economy (MINECO) began implementing an economic recovery plan, which focuses on recovering lost jobs and generating new jobs, attracting new strategic investment, and promoting consumption of Guatemalan goods and services locally and globally. Private consultants contributed to the government’s September 2020 economic recovery plan, which focuses on increasing exports and attracting foreign direct investment.

Guatemala’s investment promotion office operates within MINECO´s National Competitiveness Program (PRONACOM). PRONACOM supports potential foreign investors by offering information, assessment, coordination of country visits, contact referrals, and support with procedures and permits necessary to operate in the country. Services are offered to all investors without discrimination. The World Bank’s Doing Business 2020 report ranked Guatemala 96 out of 190 countries, one position lower than its rank in 2019. The two areas where the country had the highest rankings were electricity and access to credit. The areas of the lowest ranking were protecting minority investors, enforcing contracts, and resolving insolvency.

International investors tend to engage with the Guatemalan government via chambers of commerce and industry associations, or directly with specific government ministries. PRONACOM began to prioritize investment retention in 2020.

Limits on Foreign Control and Right to Private Ownership and Establishment

The Guatemalan Constitution recognizes the right to hold private property and to engage in business activity. Foreign private entities can establish, acquire, and dispose freely of virtually any type of business interest, with the exception of some professional services as noted below. The Foreign Investment Law specifically notes that foreign investors enjoy the same rights of use, benefits, and ownership of property as Guatemalan citizens. Guatemalan law prohibits foreigners, however, from owning land immediately adjacent to rivers, oceans, and international borders.

Guatemalan law does not prohibit the formation of joint ventures or the purchase of local companies by foreign investors. The absence of a developed, liquid, and efficient capital market, in which shares of publicly owned firms are traded, makes equity acquisitions in the open market difficult. Most foreign firms operate through locally incorporated subsidiaries.

The law does not restrict foreign investment in the telecommunications, electrical power generation, airline, or ground-transportation sectors. The Foreign Investment Law removed limitations to foreign ownership in domestic airlines and ground-transport companies in January 2004. The Guatemalan government does not have any screening mechanisms for inbound foreign investment.

Some professional services may only be supplied by professionals with locally recognized academic credentials. Public notaries must be Guatemalan nationals. Foreign enterprises may provide licensed, professional services in Guatemala through a contract or other relationship with a Guatemalan company. In July 2010, the Guatemalan congress approved an insurance law that allows foreign insurance companies to open branches in Guatemala, a requirement under CAFTA-DR. This law requires foreign insurance companies to fully capitalize in Guatemala.

Other Investment Policy Reviews

Guatemala has been a World Trade Organization (WTO) member since 1995. The Guatemalan government had its last WTO trade policy review (TPR) in November 2016. In 2011, the United Nations Conference on Trade and Development (UNCTAD) conducted an investment policy review on Guatemala. The WTO TPR highlighted Guatemala’s efforts to increase trade liberalization and economic reform efforts by eliminating export subsidies for free trade zones, export-focused manufacturing and assembly operations (maquilas) regimes, as well as amendments to the government procurement law to improve transparency and efficiency. The WTO TPR noted that Guatemala continues to lack a general competition law and a corresponding competition authority. The UNCTAD IPR recommended strengthening the public sector’s institutional capacity and highlighted that adopting a competition law and policy should be a priority in Guatemala’s development agenda. The government agreed to approve a competition law by November 2016 as part of its commitments under the Association Agreement with the European Union, but the draft law has not been approved as of March 2021. Other important recommendations from the UNCTAD IPR were to further explore alternative dispute resolution mechanisms and the establishment of courts for commercial and land disputes, though the government had not made substantive progress on these recommendations as of March 2021.

Business Facilitation

The Guatemalan government has a business registration website (https://minegocio.gt/), which facilitates on-line registration procedures for new businesses. Foreign companies that are incorporated locally are able to use the online business registration window, but the system is not yet available to other foreign companies. As a result of the entry into force of the commercial code amendments in January 2018, the time to register a new business online for a locally incorporated company went down from an average of 18.5 days in 2016 to an average of six days in 2019. The legal cost to register a business also fell by approximately 75 percent. The new procedures allow locally incorporated businesses to receive their business registration certificates online. Every company must register with the business registry, the tax administration authority, the social security institute, and the labor ministry.

Outward Investment

Guatemala does not incentivize nor restrict outward investment.

3. Legal Regime

Transparency of the Regulatory System

Tax, labor, environment, health, and safety laws do not directly impede investment in Guatemala. Bureaucratic hurdles are common for both domestic and foreign companies, including lengthy processes to obtain permits and licenses as well as clear shipments through Customs. The legal and regulatory systems can be confusing and administrative decisions are often not transparent. Laws and regulations often contain few explicit criteria for government administrators, resulting in ambiguous requirements that are applied inconsistently by different government agencies and the courts. Such inconsistencies can favor local firms with more familiarity about the system as well as more extensive local networks.

Public participation in the formulation of laws or regulations is rare. In some cases, private sector or civil society groups are able to submit comments to the issuing government office or to the congressional committee reviewing the bill, but with limited effect. There is no legislative oversight of administrative rule making. The Guatemalan congress publishes all draft bills on its official website, but does not make them available for public comment. The congress often does not disclose last-minute amendments before congressional decisions. Final versions of laws, once signed by the President, must be published in the official gazette before going into force. Congress publishes scanned versions of all laws that are published in the official gazette. Information on the budget and debt obligations is publicly available at the Ministry of Finance’s primary website, but information on debt obligations does not include contingent liabilities and state-owned enterprise debt.

The Guatemalan congress passed a law to strengthen fiscal transparency and governance of Guatemala’s Tax and Customs Authority (SAT) in July 2016, which included amendments to SAT’s organic law, the tax code, and other legislation to allow SAT access to banking records for auditing purposes with a judge’s approval. Guatemala’s Constitutional Court (CC) suspended the 2016 law’s provision that allowed SAT access to banking records in August 2018 due to a claim of unconstitutionality filed against that provision, later issuing its final decision in August 2019, in which it revoked the provisional suspension and restored SAT’s access to banking records.

International Regulatory Considerations

Guatemala is a member of the Central American Common Market and has adopted the Central American uniform customs tariff schedule. As a member of the WTO, the Guatemalan government notifies the WTO Committee on Technical Barriers to Trade (TBT) of draft technical regulations. The Guatemalan congress approved the WTO’s Trade Facilitation Agreement in January 2017, which entered into force for Guatemala March 8, 2017. Guatemala classified 63.9 percent of its commitments under Category A, which includes commitments implemented upon entry into the agreement; 8.8 percent under Category B, which includes commitments to be implemented between February 2019 to July 2020; and 27.3 percent under Category C, which includes commitments to be implemented between February 2020 and July 2024. Guatemala transmitted its list of official websites with information for governments and trade participants to the WTO’s Committee on Trade Facilitation in March 2019.

In 1996, Guatemala ratified Convention 169 of the International Labor Organization (ILO 169), which entered into force in 1997. Article 6 of the Convention requires the government to consult indigenous groups or communities prior to initiating a project that could affect them directly. Potential investors should determine whether their investment will affect indigenous groups and, if so, request that the Guatemalan government lead a consultation process in compliance with ILO 169. The Guatemalan congress is currently considering a draft law to create a community consultation mechanism to fulfill its ILO-mandated obligations. The lack of a clear consultation process significantly impedes investment in large-scale projects.

Legal System and Judicial Independence

Guatemala has a civil law system. The codified judicial branch law stipulates that jurisprudence or case law is also a source of law. Guatemala has a written and consistently applied commercial code. Contracts in Guatemala are legally enforced when the holder of a property right that has been infringed upon files a lawsuit to enforce recognition of the infringed right or to receive compensation for the damage caused. The civil law system allows for civil cases to be brought before, after, or concurrently with criminal claims. Guatemala does not have specialized commercial courts, but it does have civil courts that hear commercial cases and specialized courts that hear labor, contraband, or tax cases.

The judicial system is designed to be independent of the executive branch, and the judicial process for the most part is procedurally competent, fair, and reliable. There are continued accusations of corruption within the judicial branch.

Laws and Regulations on Foreign Direct Investment

More than 200 U.S. firms as well as hundreds of foreign firms have active investments in Guatemala. CAFTA-DR established a more secure and predictable legal framework for U.S. investors operating in Guatemala. Under CAFTA-DR, all forms of investment are protected, including enterprises, debt, concessions, contracts, and intellectual property. U.S. investors enjoy the right to establish, acquire, and operate investments in Guatemala on an equal footing with local investors in almost all circumstances. The U.S. Embassy in Guatemala places a high priority on improving the investment climate for U.S. investors. Guatemala passed a foreign investment law in 1998 to streamline and facilitate processes in foreign direct investment. In order to ensure compliance with CAFTA-DR, the Guatemalan congress approved in May 2006 a law that strengthened existing legislation on intellectual property rights (IPR) protection, government procurement, trade, insurance, arbitration, and telecommunications, as well as the penal code. Congress approved an e-commerce law in August 2008, which provides legal recognition to electronically executed communications and contracts; permits electronic communications to be accepted as evidence in all administrative, legal, and private actions; and, allows for the use of electronic signatures. The Guatemalan government does not regulate online payments outside of the formal financial sector, however.

The United States has filed two separate cases related to the Guatemalan government’s adherence to its CAFTA-DR obligations. For a labor law case, the government established an arbitration panel, pursuant to CAFTA-DR procedures, to consider whether Guatemala met its obligations to effectively enforce its labor laws. The arbitration panel held a hearing in June 2015 and issued a decision favorable to Guatemala in June 2017. Regarding an environmental case, the CAFTA-DR Secretariat for Environmental Matters suspended its investigation in 2012 when the Guatemalan government provided evidence that the relevant facts of the case were under consideration by Guatemala’s Constitutional Court. The constitutional court dismissed the case on procedural grounds in 2013.

Complex and confusing laws and regulations, inconsistent judicial decisions, bureaucratic impediments and corruption continue to constitute practical barriers to investment. According to the World Bank’s Doing Business Reports for 2015 and 2016, Guatemala made paying taxes easier and less costly by improving the electronic filing and payment system (“Declaraguate”) and by lowering the corporate income tax rate. The Guatemalan government developed a useful website to help navigate the laws, procedures and registration requirements for investors (http://asisehace.gt/). The website provides detailed information on laws and regulations and administrative procedures applicable to investment, including the number of steps, names, and contact details of the entities and persons in charge of procedures, required documents and conditions, costs, processing time and legal grounds justifying the procedures.

Companies that carry out export activities or sell to exempted entities have the right to claim value added tax (VAT) credit refunds for the VAT paid to suppliers and documented with invoices for purchases of the goods and services used for production. Local and foreign companies continue to experience significant delays in receiving their refunds. Guatemala’s Tax and Customs Authority (SAT) began implementing a new plan in 2017 to streamline the process and expedite VAT credit refunds. The Guatemalan congress approved legal provisions in April 2019 that went into effect in November 2019, which were expected to contribute to expediting VAT credit refunds to exporters, but there were still delays in VAT refunds as of March 2021.

As part of its 2012 income tax reform, the Guatemalan government began implementing transfer pricing provisions in 2016. The Guatemalan congress approved a leasing law in February 2021 to regulate real estate and other types of leasing operations, including lease contracts with an option to purchase.

Competition and Antitrust Laws

Guatemala does not have a law to regulate monopolistic or anti-competitive practices. The Guatemalan government agreed to approve a competition law by November 2016 as part of its commitments under the Association Agreement with the European Union. The Guatemalan government submitted a draft competition law to Congress in May 2016, but it was still pending approval by Congress as of March 2021.

Expropriation and Compensation

Guatemala’s constitution prohibits expropriation, except in cases of eminent domain, national interest, or social benefit. The Foreign Investment Law requires proper compensation in cases of expropriation. Investor rights are protected under CAFTA-DR by an impartial procedure for dispute settlement that is fully transparent and open to the public. Submissions to dispute panels and dispute panel hearings are open to the public, and interested parties have the opportunity to submit their views.

The Guatemalan government maintains the right to terminate a contract at any time during the life of the contract, if it determines the contract is contrary to the public welfare. It has rarely exercised this right and can only do so after providing the guarantees of due process.

In June 2007, a U.S. company operating in Guatemala filed a claim under the investment chapter of CAFTA-DR against the Guatemalan government with the International Centre for Settlement of Investment Disputes (ICSID Convention). The claimant alleged the Guatemalan government indirectly expropriated the company’s assets through a breach of contract. The company requested $65 million in compensation and damages from the government. The ICSID court issued its ruling on this case in June 2012 and stated that the Guatemalan government had in fact breached the minimum standard of treatment under Article 10.5 of CAFTA-DR and required the government to pay an award of $14.6 million. The government paid the award in November 2013.

Dispute Settlement

ICSID Convention and New York Convention

Guatemala is a signatory to the convention on the Recognition and Enforcement of Foreign Arbitration Awards (1958 New York Convention), the Inter-American Convention on International Commercial Arbitration (Panama Convention), and is a member state to the International Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention).

Investor-State Dispute Settlement

CAFTA-DR incorporated dispute resolution mechanisms for investors. Over the past ten years, two investment disputes involving U.S. businesses were filed under the investment chapter of CAFTA-DR against the Guatemalan government with the ICSID –one in 2010 and the other in 2018. A Colombian investor filed a claim with the ICSID in November 2020 on a dispute related to the 2009 Power Transmission System Expansion Plan. The ICSID suspended the proceeding in accordance with the parties’ agreement a few days later.

In October 2010, a U.S. company operating in Guatemala filed the second claim against the Guatemalan government with the ICSID. The claim seeks to resolve a dispute against the government regarding the regulation of electricity rates and the eventual sale of the company. In 2013, ICSID’s arbitration tribunal issued its judgment and awarded the company over $ 21 million in damages over electricity rates and $ 7.5 million to cover legal expenses. In 2014, the Guatemalan government filed an appeal to have the 2013 award annulled. On the same date, the company also filed for a partial annulment of the award. The ICSID ad-hoc committee issued its decision on both annulment proceedings in April 2016. The company then filed a request to resubmit the dispute over the sale to a new tribunal in October 2016. The new ICSID tribunal issued its ruling on the resubmission proceeding over the sale of the company in May 2020 and awarded the company over $27.5 million in damages to recover the cash flow shortfall and the pre-sale interest. The company filed a request for supplementary decision of the award with ICSID in June 2020. The ICSID tribunal issued its ruling on the supplementary decision in October 2020 and stated that the Guatemalan government shall pay the company $7.5 million of its costs incurred in the original arbitration plus interest running from December 2013. The Guatemalan government paid $37 million to the company in November 2020 that corresponded to the 2013 award. In February 2021, the ICSID Secretary General registered an application for annulment of the award filed by the Republic of Guatemala and notified the parties of the provisional stay of enforcement of the award. The case remains pending before the ICSID as of April 2021.

In December 2018, a U.S company operating in Guatemala filed the third claim against the Guatemalan government under the investment chapter of CAFTA-DR with the ICSID. The claim seeks to resolve a dispute against the government regarding the suspension of the claimant’s mining exploitation license by the Guatemalan courts in 2016 due to lack of consultations with local communities pursuant to International Labor Organization (ILO) Convention 169. The ICSID tribunal, constituted in July 2019, held a hearing on preliminary objections in December 2019. The company filed a memorial, (an arbitration specific term similar to a pleading) on the merits with the ICSID in July 2020 and the Guatemalan government filed a memorial on jurisdiction and a counter-memorial on the merits including a counter-claim with the ICSID in December 2020. The case is pending before the ICSID as of April 2021.

International Commercial Arbitration and Foreign Courts

Guatemala’s Foreign Investment Law allows alternative dispute resolution mechanisms, if agreed to by the parties. Currently, there are two alternative dispute resolution mechanisms available in Guatemala to settle disputes between two private parties: the Center of Arbitration and Conciliation of the Guatemalan Chamber of Commerce (CENAC) and the Conflict Resolution Commission of the Guatemalan Chamber of Industry (CRECIG). Both dispute resolution centers provide support with arbiters and logistics. Guatemala’s Arbitration Law of 1995 uses the U.N. Commission on International Trade Law (UNCITRAL) Model Law as the basis for its rules on international arbitration. The Convention on the Recognition and Enforcement of Foreign Arbitration Awards (1958 New York Convention), of which Guatemala is a signatory, recognizes the subsequent enforcement of arbitration awards under these arbitration rules. The Law of the Judiciary recognizes judgments of foreign courts, but judgments must be final and comply with a legalization process to corroborate validity of the judgment.

Bankruptcy Regulations

Guatemala does not have an independent bankruptcy law. However, the Code on Civil and Mercantile Legal Proceedings contains a specific chapter on bankruptcy proceedings. Under the code, creditors can request to be included in the list of creditors; request an insolvency proceeding when a debtor has suspended payments of liabilities to creditors; and constitute a general board of creditors to be informed of the proceedings against the debtor. Bankruptcy is not criminalized, but it can become a crime if a court determines there was intent to defraud. According to the World Bank’s 2020 Doing Business Report, Guatemala ranked 157 out of 190 countries in resolving insolvency. The Ministry of Economy and members of the Congressional Economic and Foreign Trade Committee submitted a draft bankruptcy law to Congress in May 2018, which is pending Congressional approval as of March 2021.

4. Industrial Policies

Investment Incentives

Guatemala’s main investment incentive programs are specified in law and are offered nationwide to both foreign and Guatemalan investors without discrimination.

Guatemala’s primary incentive program – the Law for the Promotion and Development of Export Activities and Maquilas (factories that produce products in free trade zones) – is aimed mainly at the apparel and textile sector and at services exporters such as call centers and business processes outsourcing (BPO) companies. The government grants investors in these two sectors a 10-year income tax exemption. Additional incentives include an exemption from duties and value-added taxes (VAT) on imported machinery and equipment and a one-year suspension of the same duties and taxes on imports of production inputs, samples, and packing material. The Free Trade Zone Law provides similar incentives to the incentive program described above, but its beneficiaries include only some services providers and a limited number of manufacturing activities such as apparel manufacturers and motorcycle assemblers. The Guatemalan congress approved the Law for Conservation of Employment (Decree 19-2016) in February 2016, amending Guatemala’s two major incentive programs to replace tax incentives related to exports that Guatemala dismantled on December 31, 2015, per WTO requirements.

The public Free Trade Zone of Industry and Commerce Santo Tomas de Castilla (ZOLIC) that operates contiguous to the state-owned port Santo Tomas de Castilla issued a regulation in January 2019 allowing the establishment of ZOLIC’s special public economic development zones outside of ZOLIC’s customs perimeter. The ZOLIC law grants businesses operating within the new special public economic development zones a 10-year income tax exemption. Additional exemptions include an exemption from VAT, customs duties, and other charges on imports of goods entering the area, including raw materials, supplies, machinery and equipment, as well as a VAT exemption on all taxable transactions carried out within the free trade zone when goods are exported. The law states that the incentives are available to local and foreign investors engaged in manufacturing and commercial activities as well as the provision of services.

Foreign Trade Zones/Free Ports/Trade Facilitation

Decree 65-89, Guatemala’s Free Trade Zones Law and its amendments approved through Decree 19-2016, Law for Conservation of Employment, permits the establishment of free trade zones (FTZs) in any region of the country. Developers of private FTZs must obtain authorization from MINECO to install and manage a FTZ. Businesses operating within authorized FTZs also require authorization from MINECO. The law specifies investment incentives, which are available to both foreign and Guatemalan investors without discrimination. As of March 2021, there were seven authorized FTZs operating in Guatemala. Currently, services and a limited number of manufacturing activities are the only beneficiaries of Guatemala’s Free Trade Zones Law. The Guatemalan congress is considering amendments to the Free Trade Zones Law to reinstate tax incentives to some of the activities removed during the previous reform. Decree 22-73, ZOLIC’s law and its amendments approved through Decree 30-2018, allow the establishment of ZOLIC’s special public economic development zones outside of ZOLIC’s customs perimeter as described under the Investment Incentives subsection above. Special public economic development zones can be installed in ZOLIC´s facilities or property owned by third parties that is leased or granted in usufruct to ZOLIC. Administrators of special public economic development zones must obtain authorization from ZOLIC´s board of directors for a minimum period of 12 years. ZOLIC´s board of directors has approved two special public economic development zones as of March 2021.

Performance and Data Localization Requirements

Guatemalan law does not impose performance, purchase, or export requirements nor does the government require foreign investors to use domestic content in goods or technology. The Labor Code requires that at least 90 percent of employees must be Guatemalan, but the requirement does not apply to high-level positions such as managers and directors. Companies are not required to include local content in production.

Guatemalan companies do not require foreign IT providers to turn over source code. Some industries, such as the banking and financial sector, can request in the software license contract that their institution or a source code facilities management company receive a copy of the source code in case of potential problems with the IT provider.

5. Protection of Property Rights

Real Property

Guatemala follows the real property registry system. Defects in the titles and ownership gaps in the public record can lead to conflicting claims of land ownership, especially in rural areas. The government stepped up efforts to enforce property rights by helping to provide a clear property title. Nevertheless, when rightful ownership is in dispute, it can be difficult to obtain and subsequently enforce eviction notices.

Mortgages are available to finance homes and businesses. Most banks offer mortgage loans with terms as long as 20 years for residential real estate. Mortgages and liens are recorded at the real estate property registry. According to the 2020 World Bank’s Doing Business Report, registering property in Guatemala takes 24 days, and it costs 3.6 percent of the property value. In the 2020 report, Guatemala ranked 89 out of 190 countries in the category of Registering Property.

The legal system is accessible to foreigners who may buy, sell, and file suit under the law. However, the legal system is not easily navigated without competent counsel. Foreign investors are advised to seek reliable local counsel early in the investment process.

Intellectual Property Rights

Guatemala has been a member of the WTO since 1995 and the World Intellectual Property Organization (WIPO) since 1983. It is also a signatory to the Paris Convention, Berne Convention, Rome Convention, Phonograms Convention, and the Nairobi Treaty. Guatemala has ratified the WIPO Copyright Treaty (WCT) and the WIPO Performances and Phonograms Treaty (WPPT). In June 2006, as part of CAFTA-DR implementation, Guatemala ratified the Patent Cooperation Treaty and the Budapest Treaty on the International Recognition of the Deposit of Microorganisms for the Purposes of Patent Procedure. Also in June 2006, the Guatemalan congress approved the International Convention for the Protection of New Varieties of Plants (UPOV Convention). Implementing legislation that would allow Guatemala to become a party to the convention, however, is still pending. The Guatemalan congress approved the Trademark Law Treaty (TLT) and the Marrakesh Treaty in February 2016.. The Guatemalan government is currently reviewing draft amendments to the Industrial Property Law to incorporate TLT provisions into local law.

Guatemala has a registry for intellectual property. Trademarks, copyrights, patents rights, industrial designs, and other forms of intellectual property must be registered in Guatemala to obtain protection in the country.

Guatemala has a sound intellectual property rights (IPR) legal framework. The Guatemalan congress passed an industrial property law in August 2000, bringing the country’s intellectual property rights laws into compliance with the WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement. Congress modified the legislation in 2003 to provide pharmaceutical test data protection consistent with international practice and again in 2005 to comply with IPR protection requirements in CAFTA-DR. CAFTA-DR provides for improved standards for the protection and enforcement of a broad range of IPR, which are consistent with U.S. standards of protection and enforcement as well as emerging international standards. Congress approved a law to prohibit the production and sale of counterfeit medicine in November 2011. It approved amendments to the Industrial Property Law in June 2013 to allow the registration of geographical indications (GI), as required under the Association Agreement with the European Union. Guatemalan administrative authorities issued rulings on applications to register GIs that appear sound and well-reasoned for compound GI names, but U.S. exporters are concerned that 2014 rulings on single-name GIs will effectively prohibit new U.S. products in the Guatemalan market from using what appear to be generic or common names when identifying their goods locally.

Guatemala remains on the U.S. Trade Representative (USTR) Special 301 Report’s Watch List in 2021 and has been on the Watch List for more than 10 years. Despite a generally strong legal framework, IPR enforcement is weak due to lack of resource prioritization and poor coordination among law enforcement agencies. Piracy and copyright and trademark infringement, including those of some major U.S. food and pharmaceutical brands, remain problematic in Guatemala.

Guatemala is not included in USTR’s 2020 Review of Notorious Markets for Counterfeiting and Piracy.

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

6. Financial Sector

Capital Markets and Portfolio Investment

Guatemala’s capital markets are weak and inefficient because they lack a securities regulator. The local stock exchange (Bolsa Nacional de Valores) deals almost exclusively in commercial paper, repurchase agreements (repos), and government bonds. The Guatemalan Central Bank (Banguat) and the Superintendent of Banks (SIB) were drafting an updated capital markets bill that included a chapter on securitization companies and the securitization process as of March 2021. Notwithstanding the lack of a modern capital markets law, the government debt market continues to develop. Domestic treasury bonds represented 56.9 percent of total public debt as of December 2020.

Guatemala lacks a market for publicly traded equities, which raises the cost of capital and complicates mergers and acquisitions. As of December 2020, borrowers faced a weighted average annual interest rate of 15.5 percent in local currency and 6.6 percent in foreign currency, with some banks charging over 40 percent on consumer or micro-credit loans. Commercial loans to large businesses offered the lowest rates and were on average 6.8 percent in local currency as of December 2020. Dollar-denominated loans typically are some percentage points lower than those issued in local currency. Foreigners rarely rely on the local credit market to finance investments.

Money and Banking System

Overall, the banking system remains stable. The Monetary Board, Banguat, and SIB approved various temporary measures during 2020 to increase liquidity of the banking system during the first months of the pandemic and to allow banks to approve restructuring of loans or deferral of loans to businesses and individuals affected by the pandemic. Non-performing loans represented 2 percent of total loans as of January 2021. According to information from the SIB, Guatemala’s 17 commercial banks had an estimated $51 billion in assets in December 2020. The six largest banks control about 87 percent of total assets. In addition, Guatemala has 11 non-bank financial institutions, which perform primarily investment banking and medium- and long-term lending, and three exchange houses. Access to financial services is very high in Guatemala City, as well as in major regional cities. Guatemala has 17.2 access points per 10,000 adults at the national level and 24.1 access points per 10,000 adults in the capitol area as of December 2020. There were 15,024 banking accounts per 10,000 adult at the national level and 35,901 banking accounts per 10,000 adults in the capital area as of December 2020. Most banks offer a variety of online banking services.

Foreigners are normally able to open a bank account by presenting their passport and a utility bill or some other proof of residence. However, requirements may vary by bank.

In April 2002, the Guatemalan congress passed a package of financial sector regulatory reforms that increased the regulatory and supervisory authority of the SIB, which is responsible for regulating the financial services industry. The reforms brought local practices more in line with international standards and spurred a round of bank consolidations and restructurings. The 2002 reforms required that non-performing assets held offshore be included in loan-loss-provision and capital-adequacy ratios. As a result, a number of smaller banks sought new capital, buyers, or mergers with stronger banks, reducing the number of banks from 27 in 2005 to 17 in 2020.

Guatemalan banking and supervisory authorities and the Guatemalan congress actively work on new laws in the business and financial sectors. In August 2012, the Guatemalan congress approved reforms to the Banking and Financial Groups Law and to the Central Bank Organic Law that strengthened supervision and prudential regulation of the financial sector and resolution mechanisms for failed or failing banks. The Guatemalan government submitted to congress proposed amendments to the Banking and Financial Groups Law in November 2016 and an anti-money laundering and counter-terrorism financing draft law in August 2020. Both proposed laws were pending congressional approval as of April 2021.

Foreign banks may open branches or subsidiaries in Guatemala subject to Guatemalan financial controls and regulations. These include a rule requiring local subsidiaries of foreign banks and financial institutions operating in Guatemala to meet Guatemalan capital and lending requirements as if they were stand-alone operations. Groups of affiliated credit card, insurance, financial, commercial banking, leasing, and related companies must issue consolidated financial statements prepared in accordance with uniform, generally accepted, accounting practices. The groups are audited and supervised on a consolidated basis.

The total number of correspondent banking relationships with Guatemala’s financial sector showed a slight decline in 2016, but the changes in the relationships were similar to those seen throughout the region and reflected a trend of de-risking. The situation stabilized in 2017. The number of correspondent banking relationships increased in 2020.

Alternative financial services in Guatemala include credit and savings unions and microfinance institutions.

Foreign Exchange and Remittances

Foreign Exchange

Guatemala’s Foreign Investment Law and CAFTA-DR commitments protect the investor’s right to remit profits and repatriate capital. There are no restrictions on converting or transferring funds associated with an investment into a freely usable currency at a market-clearing rate. U.S. dollars are freely available and easy to obtain within the Guatemalan banking system. In October 2010, monetary authorities approved a regulation to establish limits for cash transactions of foreign currency to reduce the risks of money laundering and terrorism financing. The regulation establishes that monthly deposits over $3,000 will be subject to additional requirements, including a sworn statement by the depositor stating that the money comes from legitimate activities. There are no legal constraints on the quantity of remittances or any other capital flows and there have been no reports of unusual delays in the remittance of investment returns.

The Law of Free Negotiation of Currencies allows Guatemalan banks to offer different types of foreign-currency-denominated accounts. In practice, the majority of such accounts are in U.S. dollars. Some banks offer pay through dollar-denominated accounts in which depositors make deposits and withdrawals at a local bank while the bank maintains the actual account on behalf of depositors in an offshore bank.

Capital can be transferred from Guatemala to any other jurisdiction without restriction. The exchange rate moves in response to market conditions. The government sets one exchange rate as reference, which it applies only to its own transactions and which is based on the commercial rate. The Central Bank intervenes in the foreign exchange market only to prevent sharp movements. The reference exchange rate of quetzals (GTQ) to the U.S. dollar has remained relatively stable since 1999. However, as U.S. inflation has been lower than Guatemalan inflation over this period there has been significant real exchange appreciation of about 100 percent of the quetzal against the dollar since 1999 that has reduced Guatemala’s export competitiveness.

Remittance Policies

There are no time limitations on remitting different types of investment returns.

Sovereign Wealth Funds

Guatemala does not have a sovereign wealth fund.

7. State-Owned Enterprises

Guatemala has three state owned enterprises: National Electricity Institute (INDE) and two state-owned ports, Santo Tomas on the Caribbean coast, and Port Quetzal on the Pacific coast. INDE is a state-owned electricity company responsible for expanding the provision of electricity to rural communities. INDE owns approximately 14 percent of the country’s installed effective generation capacity, and it participates in the wholesale market under the same rules as its competitors. It also provides a subsidy to consumers of up to 88 kilowatt-hours (kWh) per month. Its board of directors comprises representatives from the government, municipalities, business associations, and labor unions. The board of directors appoints the general manager. The President appoints the Ports’ boards of directors, and each board of Directors hires the respective general managers.

The Guatemalan government currently owns 16 percent of the shares of the Rural Development Bank (Banrural), the second largest bank in Guatemala, and holds 3 out of 10 seats on its board of directors. Banrural is a mixed capital company and operates under the same laws and regulations as other commercial banks. The Guatemalan government also appoints the manager of GUATEL, the former state-owned telephone company dedicated to providing rural and government services that split off from the fixed-line telephone company during its privatization in 1998. GUATEL’s operations are small and it continuously fails to generate sufficient revenue to cover expenses. The GUATEL director reports to the Guatemalan president and to the board of directors.

Privatization Program

The Guatemalan government privatized a number of state-owned assets in industries and utilities in the late 1990s, including power distribution, telephone services, and grain storage. Guatemala does not currently have a privatization program.

8. Responsible Business Conduct

There is a general awareness of expectations of standards for responsible business conduct (RBC) on the part of producers and service providers, as well as Guatemalan business chambers. A local organization called the Center for Socially Responsible Business Action (CentraRSE) promotes, advocates, and monitors RBC in Guatemala. They operate freely with multiple partner organizations, ranging from private sector to United Nations entities. CentraRSE currently has over 100 affiliated companies from 20 different sectors that provide employment to over 150,000 individuals. CentraRSE defines RBC as a business culture based on ethical principles, strong law enforcement, and respect for individuals, families, communities, and the environment, which contributes to businesses competitiveness, general welfare, and sustainable development. The Guatemalan government does not have a definition of RBC as of March 2021. Guatemala joined the Extractive Industries Transparency Initiative (EITI) in February 2011 and was designated EITI compliant in March 2014. The EITI board suspended Guatemala in February 2019 for failing to publish the 2016 EITI report and the 2017 annual progress report by the December 31, 2018 deadline. Guatemala published the 2016-2017 EITI report and the 2017 annual progress report in February and March 2019. The EITI board suspended Guatemala again in January 2020 after deciding that Guatemala has made inadequate progress in implementing the 2016 EITI standard. The EITI board requested Guatemala to undertake corrective actions before a second validation related to the requirements starts on July 23, 2021. On December 24, 2020, the EITI board agreed to postpone the date to start Guatemala’s second validation process to April 1, 2022.

In January 2014, the State Department recognized a U.S.-based company as one of twelve finalists for the Secretary of State’s 2013 Award for Corporate Excellence for its contributions to sustainable development in Guatemala. The Department has also recognized U.S. companies such as McDonald’s, Starbucks, and Denimatrix for corporate social responsibility (CSR) programs in Guatemala that aimed to foster safe and productive workplaces as well as provide health and education programs to workers, their families, and local communities. Communities with low levels of government funding for health, education, and infrastructure generally expect companies to implement CSR practices.

Conflict surrounding certain industrial projects – in particular mining and hydroelectric projects – is frequent, and there have been several cases of violence against protestors in the recent past, including several instances of murder. The Guatemalan government continues to improve its capacity to respond to protests and help facilitate a peaceful resolution. Protests against companies are normally peaceful and usually take place only after the aggrieved parties have attempted to dialogue directly with the company in question.

Additional Resources

Department of State

Department of Labor

9. Corruption

Bribery is illegal under Guatemala’s Penal Code. However, corruption remains a serious problem that companies may encounter at many levels. Guatemala scored 25 out of 100 points on Transparency International’s 2020 Corruption Perception Index, ranking it 149 out of 180 countries globally, and 28 out of 32 countries in the region. The score dropped one point compared to the score observed in the 2019 report.

Investors find corruption pervasive in government procurement. In the past few years, the Public Ministry (MP – equivalent to the U.S. Department of Justice) has investigated and prosecuted various corruption cases that involved the payment of bribes in exchange for awarding public construction contracts. Investors and importers are frequently frustrated by opaque customs transactions, particularly at ports and borders away from the capital. The Tax and Customs Authority (SAT) launched a customs modernization program in 2006, which implemented an advanced electronic manifest system and resulted in the removal of many corrupt officials. However, reports of corruption within customs’ processes remain. From 2006 to 2019, the UN-sponsored International Commission against Impunity in Guatemala (CICIG) undertook numerous high-profile official corruption investigations, leading to significant indictments. Notably, CICIG unveiled a customs corruption scheme in 2015 that led to the resignations of the former president and vice president.

Guatemala’s Government Procurement Law requires most government purchases over $116,580 to be submitted for public competitive bidding. Since March 2004, Guatemalan government entities are required to use Guatecompras (https://www.guatecompras.gt/), an Internet-based electronic procurement system to track government procurement processes. Guatemalan government entities must also comply with government procurement commitments under CAFTA-DR. In August 2009, the Guatemalan congress approved reforms to the Government Procurement Law, which simplified bidding procedures; eliminated the fee previously charged to receive bidding documents; and provided an additional opportunity for suppliers to raise objections over the bidding process. Despite these reforms, large government procurements are often subject to appeals and injunctions based on claims of irregularities in the bidding process (e.g., documentation issues and lack of transparency). In November 2015, the Guatemalan congress approved additional amendments to the Government Procurement Law that improved transparency of procurement processes by barring government contracts for some financers of political campaigns and parties, members of congress, other elected officials, government workers, and their immediate family members. The 2015 reforms expanded the scope of procurement oversight to include public trust funds and all institutions (including NGOs) executing public funds. The U.S. government continues to advocate for the use of open, fair, and transparent tenders in government procurement as well as procedures that comply with CAFTA-DR obligations, which would allow open participation by U.S. companies.

Guatemala ratified the U.N. Convention against Corruption in November 2006, and the Inter-American Convention against Corruption in July 2001. Guatemala is not a party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. In October 2012, the Guatemalan congress approved an anti-corruption law that increases penalties for existing crimes and adds new crimes such as illicit enrichment, trafficking in influence, and illegal charging of commissions.

Resources to Report Corruption

Contact at government agencies responsible for combating corruption:

Public Ministry
Address: 23 Calle 0-22 Zona 1, Ciudad de Guatemala
Phone: (502) 2251-4105; (502) 2251-4219; (502) 2251-5327; (502) 2251-8480; (502) 2251-9225
Email address: fiscaliacontracorrupcion@mp.gob.gt 

Comptroller General’s Office
Address: 7a Avenida 7-32 Zona 13
Phone: (502) 2417-8700

Contact at “watchdog” organization:

Accion Ciudadana (Guatemalan Chapter of Transparency International)
Address: Avenida Reforma 12-01 Zona 10, Edificio Reforma Montufar, Nivel 17, Oficina 1701
Phone: (502) 2388- 3400
Toll free to submit corruption complaints: 1-801-8111-011
Email address: alac@accionciudadana.org.gt ; accionciudadana@accionciudadana.org  

10. Political and Security Environment

Historically, Guatemala had one of the highest violent crime rates in Latin America; however, according to the National Civil Police (PNC), the murder rate in 2020 was 15 per 100,000, a 28% drop from 2019.  The Attorney General’s Office (AG) recorded 455 femicides in 2020 and reported 23 in the first month of 2021. Departments reporting the highest rate of violent crimes were Guatemala, Escuintla, and Izabal.  The AG credits the general decline in violence to the economic shutdown due to the corona virus pandemic, including interdepartmental travel restrictions and the prohibition of most alcohol sales.  Rule of law is still lacking, and the judicial system is weak, overworked, and inefficient. The police are often understaffed and sometimes corrupt.  Local police may lack the resources to respond effectively to serious criminal incidents.  Although security remains a widespread concern, foreigners are not usually singled out as targets of crime.  Recent examples of violence include extrajudicial killings, illegal detentions, and property damage as a result of protests of against some investment projects.

The political climate in Guatemala, marked by its 36 years of armed conflict, is characterized by occasional civil disturbances and politically motivated violence.  The most recent example is the November 2020 civil unrest sparked by congressional approval of the 2021 budget proposal, which added to long-standing grievances.  Peaceful protests marred by acts of vandalism and violence resulted in fire damage to the national congress building, as well as allegations of brutality against protestors by Guatemalan security forces, as well as acts of violence by some protestors against security forces.  The main source of tension among indigenous communities, Guatemalan authorities, and private companies is the lack of prior consultation and alleged environmental damage.

Damage to projects or installations is rare. However, there were instances in October 2018 and January 2019 in which unidentified arsonists burned machinery and other equipment at the site of a hydroelectric construction project near the northern border with Mexico.

11. Labor Policies and Practices

The Guatemala workforce consists of an estimated 2.5 million individuals employed in the formal sector and roughly 4.7 million individuals who work in the informal sector, including some who are too young for formal sector employment. According to the 2017 Survey on Employment and Income, the most recent survey available, child labor, particularly in rural areas, remains a serious problem in certain industries. Approximately 30 percent of the total labor force is engaged in agricultural work. The availability of a large, unskilled, and inexpensive labor force led many employers, such as construction and agricultural firms, to use labor-intensive production methods. Roughly, 14 percent of the employed workforce is illiterate. In developed urban areas, however, education levels are much higher, and a workforce with the skills necessary to staff a growing service sector emerged. Even so, highly capable technical and managerial workers remain in short supply, with secondary and tertiary education focused on social science careers.

No special laws or exemptions from regular labor laws cover export-processing zones. In December 2015, then-President Alejandro Maldonado issued an executive order establishing a lower minimum wage for workers employed by light manufacturing export companies in four of 340 municipalities of the country, with the intention of attracting foreign investment and creating jobs in those areas. The order never took effect due to a temporary injunction. The Morales Administration revoked the executive order in February 2016. The Labor Code requires that at least 90 percent of employees be Guatemalan, but the requirement does not apply to high-level positions. The Labor Code sets out: employer responsibilities regarding working conditions, especially health and safety standards; benefits; severance pay; premium pay for overtime work; minimum wages; and bonuses. Mandatory benefits, bonuses, and employer contributions to the social security system can add up to about 55 percent of an employee’s base pay. However, many workers, especially in the agricultural sector, do not receive the full compensation package mandated in the labor law. All employees are subject to a two-month trial period during which time they may resign or be discharged without any obligation on the part of the employer or employee. An employer may dismiss an employee at any time, for any reason (except pregnancy) and without giving the employee any notice during the trial period. For any dismissal after the two-month trial period, the employer must pay unpaid wages for work already performed, proportional bonuses, and proportional vacation time. If an employer dismisses an employee without just cause, the employer must also pay severance equal to one month’s regular pay for each full year of employment. Guatemala does not have unemployment insurance or other social safety net programs for workers laid off for economic reasons.

Guatemala’s Constitution guarantees the right of workers to unionize and to strike, with an exception to the right to strike for security force members and workers employed in hospitals, telecommunications, and other public services considered essential to public safety. Before a strike can be declared, workers and employers must engage in mandatory conciliation and then approve a strike vote by 50 percent plus one worker in the enterprise. If conciliation fails, either party may ask the judge for a ruling on the legality of conducting a strike or lockout. Legal strikes in Guatemala are extremely rare. The Constitution also commits the state to support and protect collective bargaining, and holds that international labor conventions ratified by Guatemala establish the minimum labor rights of workers if they offer greater protections than national law. In most cases, labor unions operate independently of the government and employers both by law and in practice. The law requires unions to register with the Ministry of Labor (MinTrab) and their leadership must obtain credentials from MinTrab to carry out their functions. Delays in such proceedings are common. The law prohibits anti-union discrimination and employer interference in union activities and requires employers to reinstate workers dismissed for organizing union activities. A combination of inadequate allocation of budget resources to MinTrab and other relevant state institutions, and inefficient administrative and justice sector processes, act as significant impediments for more effective enforcement of labor laws to protect these workers’ rights. As a result, investigating, prosecuting, and punishing employers who violate these guarantees remain a challenge, particularly the enforcement of labor court orders requiring reinstatement and payment of back wages resulting from dismissal. The rate of unionization in Guatemala is very low. The PDH’s 2019 report indicates that there were 532 active unions.64 percent in the public sector. The PDH report notes a reduction of 34 percent in the number of private sector active unions in 2019.

Both the U.S. government and Guatemalan workers have filed complaints against the Guatemalan government for allegedly failing to adequately enforce its labor laws and protect the rights of workers. In September 2014, the U.S. government convened an arbitration panel alleging that Guatemala had failed to meet its obligations under CAFTA-DR to enforce effectively its labor laws related to freedom of association and collective bargaining and acceptable conditions of work. The panel held a hearing in June 2015 and issued a decision favorable to Guatemala in June 2017. Separately, the Guatemalan government faced an International Labor Organization (ILO) complaint filed by workers in 2012 alleging that the government had failed to comply with ILO Convention 87 on Freedom of Association. The complaint called for the establishment of an ILO Commission of Inquiry, which is the ILO’s highest level of scrutiny when all other means failed to address issues of concern. In 2013, the Guatemalan government agreed to a roadmap with social partners in an attempt to avoid the establishment of a Commission. The government took some steps to implement its roadmap, including the enactment of legislation in 2017 that restored administrative sanction authority to the labor inspectorate for the first time in 15 years. As part of a tripartite agreement reached at the ILO in November 2017, a National Tripartite Commission on Labor Relations and Freedom of Association was established in February 2018 to monitor and facilitate implementation of the 2013 roadmap. Based in large part on the 2017 tripartite agreement, the ILO Governing Body closed the complaint against Guatemala in November 2018.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Guatemala has the largest economy in Central America, reaching a USD 77.4 billion gross domestic product (GDP) in 2020 with an estimated contraction of 1.5 percent in 2020 due to COVID-19 impact.  Remittances, mostly from the United States, increased by 7.9 percent in 2020 from the $10.5 billion received in 2019 to $11.34 billion in 2020 and were equivalent to 14.6 percent of GDP.  The United States is Guatemala’s most important economic partner. According to preliminary Banguat data, FDI stock was $17.3 billion in 2020, a 4.2 percent increase in relation to 2019.  Preliminary foreign portfolio investment totaled $7.59 billion in 2020, with about 79.4 percent invested in government bonds.  There is no official data available on sources of stock of FDI or foreign portfolio investment.

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source* USG or international statistical source USG or International Source of Data:  BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2020 $77,431 2019 $76,710 www.worldbank.org/en/country
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data:  BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) N/A N/A 2019 $746 BEA data available at https://apps.bea.gov/international/factsheet/
Host country’s FDI in the United States ($M USD, stock positions) N/A N/A 2019 $9 BEA data available at
https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data
Total inbound stock of FDI as % host GDP 2020 22.3 2019 21.1 UNCTAD data available at
https://stats.unctad.org/handbook/
EconomicTrends/Fdi.html 

* Bank of Guatemala http://www.banguat.gob.gt.  Preliminary GDP year-end figures were published in December 2020 and preliminary FDI year-end data were published in March 2021.

Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward 17,299 100% Total Outward 1,665 100%
United States 3,852 22.3% El Salvador 324 19.5%
Mexico 2,609 15.1% The Bahamas 294 17.7%
Colombia 2,022 11.7% Barbados 184 11.1%
Spain 854 4.9% Mexico 182 10.9%
Switzerland 818 4.7% Costa Rica 112 6.7%
“0” reflects amounts rounded to +/- USD 500,000.

According to data from the Coordinated Investment Survey for 2019 published by the IMF, about one fifth of FDI in Guatemala comes from the United States.  Other important sources of FDI are Mexico, Colombia, and Spain (please see Table 3 on sources and destinations of FDI above).  Preliminary data from Banguat also show that the flow of FDI totaled $915.2 million in 2020 (1.18 percent of GDP), a 6.1 percent decline compared to $974.7 million (1.27 percent of GDP) received in 2019.  Some of the activities that attracted most of the FDI flows in the last three years were financial and insurance activities, manufacturing, commerce and vehicle repair, and water, electricity, and sanitation services.

Table 4: Sources of Portfolio Investment
Portfolio investment data are not available for Guatemala.

14. Contact for More Information

Tim Sarraille
sarrailletc@state.gov
Economic Officer
U.S. Embassy Guatemala
Av. Reforma 7-01 Zona 10, Guatemala (502) 2326-4000
(502) 2326-4000
GuatemalaPOL-ECON@state.gov
Drafters: Maricely Maldonado and Chris Kane +512 4861-1520

Honduras

Executive Summary

The United States is Honduras’ most important economic partner.  During the past year, the Honduran government has continued to implement reforms to attract investment and promote economic growth, but meaningful improvement has been slow.  Macroeconomic reforms and continued commitment to fiscal stability have led to a stable macroeconomic environment, ongoing financial assistance from the International Monetary Fund (IMF), and stable credit ratings from the major international agencies.

Foreign investors operating in Honduras operate thriving enterprises, but all face challenges including unreliable and expensive electricity, corruption, unpredictable tax application and enforcement, high crime, low education levels, and poor infrastructure. Squatting on private land is a growing problem in Honduras and anti-squatting laws are poorly enforced. Continued low-level protests and uncertainty surrounding the November 2021 general elections are additional concerns for private investors. The World Bank’s Ease of Doing Business Report points to the difficulty of starting a new business, the high burden of paying taxes, and poor contract law enforcement as major disincentives to private investment.

The impact of the COVID-19 pandemic on the economy was both immediate and severe.  The March 2020 shutdown of the formal and informal economies placed a tremendous strain on workers who rely on daily wages.  Approximately 175,000 Hondurans were temporarily suspended from their jobs, 250,000 became unemployed, and almost 300,000 saw their income decrease by at least 40 percent.  This economic contraction was further exacerbated by back-to-back Category 4 hurricanes in November, which caused severe flooding and mudslides, damaging roads, washing away 134 bridges, and killing over 100 people. The combined effects of COVID-19 and the November hurricanes caused an economic recession, with GDP contracting by 8 percent in 2020 and job losses as high as 800,000 workers (18 percent of the labor force). Honduran authorities report economic destruction as high as $10 billion from the storms. The storms’ effects were particularly damaging to the agriculture and tourism industries, both crucial for millions of Hondurans. NGOs, development banks and Honduran officials are working to reactivate the economy via cash injections and technical assistance for small business and farms, rehabilitation of key infrastructure, and improving climate change resiliency.

The Government of Honduras (GOH) implements a variety of measures to attract investment and facilitate trade.  Trade policy is overseen by the National Trade Committee, chaired by the Minister of Economic Development.  Honduras is a ratifying country of the WTO Trade Facilitation Agreement, which contains provisions for expediting the movement, release, and clearance of goods, and sets out measures for effective cooperation on customs compliance and trade facilitation.  Honduras, Guatemala, and El Salvador operate a trilateral customs union to foster and increase efficient cross-border trade, but implementation remains inconsistent.  In June 2020, Honduras switched to digitized import permits for agricultural products, reducing costs and dispatch times dramatically. Also in 2020, Honduras and Guatemala launched an online pre-arrival screening protocol to reduce border times and transit costs for goods. Many processes, including applications for permitting and licensing businesses are now available online as part of Honduras’ Sin Filas (no lines) initiative.

Many of the approximately 200 U.S. companies that operate in Honduras take advantage of the commercial framework established by the Central American and Dominican Republic Free Trade Agreement (CAFTA-DR).  Through its participation in CAFTA-DR, Honduras has enhanced U.S. export opportunities and diversified the composition of bilateral trade.  Substantial intra-industry trade now occurs in textiles and electrical machinery, alongside continued trade in traditional Honduran exports such as coffee and bananas.  In addition to liberalizing trade in goods and services, CAFTA-DR includes important requirements relating to investment, customs administration and trade facilitation, technical barriers to trade, government procurement, telecommunications, electronic commerce, intellectual property rights, transparency, and labor and environmental protection.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2020 157 of 180 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2020 133 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2020 103 of 131 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2019 $1,281 https://apps.bea.gov/international/factsheet/
World Bank GNI per capita (USD) 2019 $2,390 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

The GOH is open to foreign investment, and low labor costs, proximity to the U.S. market, and the large Caribbean port of Puerto Cortes can make Honduras attractive to investors.

The legal framework for investment includes the Honduran constitution, the investment chapter of CAFTA-DR (which takes precedence over most domestic law), and the 2011 Law for the Promotion and Protection of Investments. The Honduran constitution requires all foreign investment to complement, but not substitute for, national investment. Honduras’ legal obligations guarantee national treatment and most favored nation treatment for U.S. investments in most sectors of the Honduran economy and include enhanced benefits in the areas of insurance and arbitration for domestic and foreign investors. CAFTA-DR has equal status with the constitution in most sectors of the Honduran economy.

Critics complain that lack of clarity and overlapping responsibilities among the multiple entities charged with attracting increased foreign direct investment undermine the government’s ability to effectively promote Honduras as a profitable destination for foreign capital. The National Investment Council, the Ministry of Investment Promotion, and the Ministry of Economic Development all have equities in attracting foreign investment and an ambitious job creation mandate.

Limits on Foreign Control and Right to Private Ownership and Establishment

Honduras’ Investment Law does not limit foreign ownership of businesses, except for those specifically reserved for Honduran investors, including small firms with capital less than $6,300 and the domestic air transportation industry. For all investments, at least 90 percent of companies’ labor forces must be Honduran, and companies must pay at least 85 percent of their payrolls to Hondurans. Majority ownership by Honduran citizens is required for companies in the commercial fishing sector, forestry, local transportation, radio, television, or benefiting from the Agrarian Reform Law. There is no screening or approval process specific to foreign direct investments in Honduras. Foreign investors are subject to the same requirements for environmental and other regulatory approvals as domestic investors.

According to the law, investors can establish, acquire, and dispose of enterprises at market prices under freely negotiated conditions without government intervention, but some foreign business operators report difficulty closing businesses. Private enterprises fairly compete with public enterprises on market access, credit, and other business operations. Foreign investors have the right to own property, subject to certain restrictions established by the Honduran constitution and several laws relating to property rights. Investors may acquire, profit, use, and dispose of property ownership with the exception of land within 40 kilometers of international borders and shorelines. Honduran law does permit, however, foreign individuals to purchase properties close to shorelines in designated “tourism zones.”

Other Investment Policy Reviews

In 2016, the World Trade Organization conducted a Trade Policy review of Honduras: https://www.wto.org/english/tratop_e/tpr_e/tp436_e.htm .

Business Facilitation

The Honduran government has worked to simplify administrative procedures for establishing a company in recent years, including by offering many processes online. GOH officials are pressing for, and have made good progress in, the digitalization of business, import, permitting and licensing, and taxation processes to increase efficiency and transparency, but procedural red tape to obtain government approval for investment activities remains common, especially at the local level. Honduras’ business registration information portal ( https://honduras.eregulations.org/ ) provides clear step-by-step information on registering a business, including fees, agencies, and required documents.

Honduras ratified the World Trade Organization’s (WTO) Trade Facilitation Agreement (TFA) in July 2016, agreeing to expedite the movement, release, and clearance of goods, including goods in transit. The TFA also sets out measures for effective cooperation between customs and other appropriate authorities on trade facilitation and customs compliance issues. According to the WTO/TFA database, Honduras’ current rate of implementation of TFA Category A notification commitments stands at 59.2 percent.

During the past year the GOH moved 38 of its ministries and agencies into the newly finished Centro Civico government complex, where it hopes to achieve efficiencies in business facilitation and other processes. In addition to moving information storage to digital formats across the government, the GOH plans to streamline public services though use of single windows for multiple services at the new center.

Outward Investment

Honduras does not promote or incentivize outward investment.

2. Bilateral Investment Agreements and Taxation Treaties

A Bilateral Investment Treaty (BIT) between the United States and Honduras entered into force in 2001. The U.S.-Honduras Treaty of Friendship, Commerce and Consular Rights (1928) provides for Most Favored Nation treatment for investors of either country. The United States and Honduras also signed an agreement for the guarantee of private investments in 1955 and an agreement on investment guarantees in 1966. CAFTA-DR supersedes most provisions of these agreements. Honduras and the United States signed a Tax Information Exchange Agreement in 1990. In 2014, Honduras and the United States signed the Foreign Account Tax Compliance Act.

Provisions for investment are included in free trade agreements between Honduras and the United States, Canada, Chile, Costa Rica, El Salvador, Guatemala, Mexico, Nicaragua, Panama, Peru, the Dominican Republic, Colombia, Taiwan, South Korea, and the European Union. These agreements supersede many of the provisions of Honduras’ separate Bilateral Investment Treaties with these countries. Honduras also has separate Bilateral Investment Treaties with the Republic of Korea and with Switzerland.

3. Legal Regime

Transparency of the Regulatory System

The government of Honduras publishes approved regulations in the official government Gazette. Honduras lacks an indexed legal code so lawyers and judges must maintain the publication of laws on their own.

CAFTA-DR requires host governments publish proposed regulations that could affect businesses or investments. Honduras made significant progress in 2019 and 2020 in relation to the publication and availability of information under CAFTA-DR. Honduras notified Article 1 technical provisions, per CAFTA-DR requirements, and the Customs Administration (ADUANAS) and Sanitary Regulatory Agency (ARSA) have improved publication of regulations through their official online portals.

Some U.S. investors experience long waiting periods for environmental permits and other regulatory and legislative approvals. Sectors in which U.S. companies frequently encounter problems include infrastructure, telecoms, mining, and energy. Generally, regulatory requirements are complex and lengthy and easily influenced by political factors. Regulatory approvals require congressional intervention if the time exceeds a presidential term of four years. Current regulations are available at the Honduran government’s eRegulations website ( http://honduras.eregulations.org/ ). While the majority of regulations are at the national level, municipal level regulations also exist and can be very discouraging to investment. No significant regulatory changes of relevance to foreign investors were announced since the last report. Public comments received by regulators are not published

International Regulatory Considerations

As a member of the WTO, Honduras notifies all draft technical regulations to the WTO Committee on Technical Barriers to Trade (TBT).

Legal System and Judicial Independence

Honduras has a civil law system. The Honduran Commercial Code, enacted in 1950, regulates business operations and falls under the jurisdiction of the Honduran civil court system. The Civil Procedures Code, which entered into force in 2010, introduced the use of open, oral arguments for adversarial procedures. The Civil Procedures Code provides improved protection of commercial transactions, property rights, and land tenure. It also offered a more efficient process for the enforcement of rulings issued by foreign courts. Despite these codes, U.S. claimants have noted the lack of transparency and the slow administration of justice in the courts. U.S. firms report favoritism, external pressure, and bribes within the judicial system. They also mention the poor quality of legal representation from Honduran attorneys.

Resolving an investment or commercial dispute in the local Honduran courts is often a lengthy process. Foreign investors report dispute resolution typically involves multiple appeals and decisions at different levels of the Honduran judicial system. Each decision can take months or years, and it is usually not possible for the parties to predict the time required to obtain a decision. Final decisions from Honduran courts or from arbitration panels often require subsequent enforcement from lower courts to take effect, requiring additional time. Foreign investors sometimes prefer to resolve disputes with suppliers, customers, or partners out of court when possible. Honduras has a very high-quality mechanism for alternate dispute resolution.

Laws and Regulations on Foreign Direct Investment

Honduras’ Investment Law requires all local and foreign direct investment be registered with the Investment Office in the Secretariat of Industry and Commerce. Upon registration, the Investment Office issues certificates to guarantee international arbitration rights under CAFTA-DR. An investor who believes the government has not honored a substantive obligation under CAFTA-DR may pursue CAFTA-DR’s dispute settlement mechanism, as detailed in the Investment Chapter. The claim’s proceedings and documents are generally open to the public.

The Government of Honduras requires authorization for both foreign and domestic investments in the following areas:

  • Basic health services
  • Telecommunications
  • Generation, transmission, and distribution of electricity
  • Air transport
  • Fishing, hunting, and aquaculture
  • Exploitation of forestry resources
  • Agricultural and agro-industrial activities exceeding land tenancy limits established by the Agricultural Modernization Law of 1992 and the Land Reform Law of 1974
  • Insurance and financial services
  • Investigation, exploration, and exploitation of mines, quarries, petroleum, and related substances.

The Government of Honduras offers one-stop business set-up at its My Business Online website, which helps domestic and international investors submit initial business registry information and provides step-by-step instructions. https://www.miempresaenlinea.org/  ) However, formalizing a business still requires visiting a municipal chamber of commerce window for registration and permits, a process vulnerable to rent-seeking and corruption.

Competition and Anti-Trust Laws

The Commission for the Defense and Promotion of Competition (CDPC) is the Honduran government agency that reviews proposed transactions for competition-related concerns. Honduras’ Competition Law established the CDPC in 2005 as part of the effort to implement CAFTA-DR. The Honduran Congress appoints the members of the CDPC, which functions as an independent regulatory commission.

Expropriation and Compensation

The Honduran government has the authority to expropriate property for purposes of land reform or public use. The National Agrarian Reform Law provides that idle land fit for farming can be expropriated and awarded to indigent and landless persons via the Honduran National Agrarian Institute. In 2013, the Honduran government passed legislation regarding recovery and reassignment of concessions on underutilized assets. Both local and foreign firms have expressed concerns that the law does not specify what the government considers “underutilized.” The government has not published implementing regulations for the law nor indicated plans to use the law against any private sector firm.

Government expropriation of land owned by U.S. companies is rare. Seizure actions by squatters on both Honduran and non-U.S. foreign landowners are most common in agricultural areas. Some occupations have turned violent. Owners of disputed land have found pursuing legal avenues costly, time consuming, and legally inconclusive. CAFTA-DR’s Investment Chapter Section 10.7 states no party may expropriate or nationalize a covered investment either directly or indirectly, with limited public purpose exceptions that require prompt and adequate compensation.

Under the Agrarian Reform Law, the Honduran government must compensate expropriated land partly in cash and partly in 15-, 20-, or 25-year government bonds. The portion to be paid in cash cannot exceed $1,000 if the expropriated land has at least one building and it cannot exceed $500 if the land is in use but has no buildings. If the land is not in use, the government will compensate entirely in 25-year government bonds.

Dispute Settlement

ICSID Convention and New York Convention

Honduras is a member state to the International Centre for the Settlement of Investment Disputes (ICSID) Convention. Honduras has also ratified the convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention)

Investor State Dispute Settlement

CAFTA-DR provides dispute settlement procedures between the United States and Honduras. CAFTA-DR’s Investment Chapter dispute settlement mechanism allows an investor who believes the government has not honored a substantive obligation under CAFTA-DR to request a binding international arbitration. Proceedings and documents submitted to substantiate the claim are generally open to the public. The agreement provides basic protections, such as non-discriminatory treatment, limits on performance requirements, the free transfer of funds related to an investment, protection from expropriation other than in conformity with customary international law, a minimum standard of treatment, and the ability to hire key managerial personnel regardless of nationality.

International Commercial Arbitration and Foreign Courts

Honduras’ Conciliation and Arbitration Law, established in 2000, outlines procedures for arbitration and defines the procedures under which they take place. The Investment Law permits investors to request arbitration directly, a swifter and more cost-effective means of resolving disputes between commercial entities. Arbitrators and mediators may have specialized expertise in technical areas involved in specific disputes. Local courts recognize and enforce foreign arbitral awards issues against the government. Judgements from foreign courts are recognized and enforceable under local courts.

The following links provide more localized information:

  • Tegucigalpa Chamber of Industry and Commerce – Center for Conciliation and Arbitration:
  • San Pedro Sula Chamber of Industry and Commerce – Center for Conciliation and Arbitration:

Numerous U.S. investors who have been involved with the judicial system in Honduras mention it can be inefficient, lacks transparency, and is subject to political influence and/or corruption.

Bankruptcy Regulations

Companies that default in payment of their obligations in Honduras can declare bankruptcy. A Honduran court must ratify a bankruptcy in order for it to take effect. These cases are regulated by the country’s Commercial Code.

The judicial ruling that declares the bankruptcy of the company establishes the value of the assets, the recognition and classification of the credits, the procedure for the sale of assets and the schedule for the payment of the obligations, in the case that it is not possible for the company to continue its operations. The ruling must be published in The Gazette. The liquidation of companies is always a judicial matter, except in the case of banking institutions which are liquidated by the National Banking and Insurance Commission.

Any creditor or a company itself may initiate the liquidation procedure, which is generally a civil matter. The Judge appoints a liquidator to execute the procedure. A mechanism that a company may exercise to prevent bankruptcy is to request a suspension of payments from the judge. If approved by the judge and the creditors, the company may be able to reach an agreement with its creditors that allows the same administrative board to maintain control of the company.

A company may be prosecuted for fraudulently declaring bankruptcy in the case that the administrative board or shareholders withdraw their assets before the declaration, alter accounting books making it impossible to determine the real situation of the company, or favor certain creditors granting them benefits that they would not be entitled to otherwise.

4. Industrial Policies

Investment Incentives

The 2017 Tourism Incentives Law offers tax exemptions for national and international investment in tourism development projects. The law provides income tax exemptions for the first 10 years of a project and permits the duty-free import of goods needed for a project, including publicity materials. To receive benefits, a business must be located in a designated tourism zone. Restaurants, casinos, nightclubs, movie theaters, and certain other businesses are not eligible for incentives under this law. Foreigners or foreign companies seeking to purchase property exceeding 3,000 square meters for tourism or other development projects in designated tourism zones must present an application to the Honduran Tourism Institute at the Ministry of Tourism. The buyer must prove a contract to purchase the property exists and present feasibility studies and plans about the proposed tourism project.

In view of grave losses suffered by small and medium enterprises from the 2020 Hurricanes Eta and Iota, the GOH and the Honduran Association of Banking Institutions (AHIBA) agreed to greater flexibility for restructuring loans and credit card debt, as well as a 2 percent reduction in applicable interest rates. The expectation is that with the implementation of these financial relief measures, vulnerable SMEs could avoid bankruptcy and contribute to the reactivation of the Honduran economy.

Foreign Trade Zones/Free Ports/Trade Facilitation

The Honduran government does not provide direct export subsidies, but does offer tax exemptions to firms operating in a free trade zone. The Temporary Import Law allows exporters to introduce raw materials, parts, and capital equipment (except vehicles) into Honduras exempt from surcharges and customs duties if a manufacturer incorporates the input into a product for export (up to five percent can be sold locally). The government allows the establishment of export processing zones (EPZ) anywhere in the country. Companies operating in EPZs are exempt from paying import duties and other charges on goods and capital equipment. In addition, the production and sale of goods within EPZs are exempt from state and municipal income taxes for the first 10 years of operation. In May 2020 the Honduran Congress updated the law to extend the tax incentives and duty and surcharge exemptions from 10 to 15 years, renewable for an additional 10 years if the company meets certain investment and job creation criteria. Also in 2020, the GOH announced the ability to apply for EPZ status and status extensions through an online portal.

The government permits companies operating in an EPZ unrestricted repatriation of profits and capital. Companies are required, however, to purchase the Lempiras needed for their local operations from Honduran commercial banks or from foreign exchange trading houses registered with the Central Bank.

Most industrial parks and EPZs are located in the northern Department of Cortes, with close access to Puerto Cortes, Honduras’ major Caribbean port, and San Pedro Sula, Honduras’ largest commercial city. The government treats industrial parks and EPZs as offshore operations, requiring companies to pay customs duties on products manufactured in the parks and sold in Honduras. In addition, the government treats Honduran inputs as exports, which companies must pay for in U.S. dollars. Most companies operating in these parks are involved in apparel assembly, though the government and park operators have begun to diversify into other types of light industry, including automotive parts and electronics assembly. Additional information on Honduran free trade zones and EPZs is available from the Honduran Manufacturers Association ( http://www.ahm-honduras.com/ ).

In 2013, the Government of Honduras signed a law to allow establishment of a second type of Economic Development and Employment Zone (ZEDE) with its own governance structure, to boost job growth and attract foreign investment. Following a backlash from local and international NGOs concerned about labor rights, land issues, and environmental protection, the push for ZEDEs remained dormant until August 2017, when President Hernández promoted the concept as a key job creation policy of his reelection campaign.  In 2019, two companies received Government of Honduras (GOH) approval to move forward with ZEDE planning and development.

Completion of enough construction on the country’s new Palmerola International Airport to allow a soft opening is expected in 2022.  Located on an open plateau in the center of the country, Palmerola will not require specially licensed pilots to land in mountainous terrain, unlike the airport in Tegucigalpa. The airport will facilitate trade by reducing costs for airlines, passengers, and shipping companies. Its development will impact freight, logistics, distribution, the ease of doing business, and tourist travel for the entire country.  The airport connects with a newly completed highway (the ‘Dry Canal’) to the Pacific coast and with another highway to the Caribbean coast and its deep-water port – for a sea-to-sea logistics and transit system.

Performance and Data Localization Requirements

The Honduran government encourages foreign investors to hire locally and to make use of domestic content, especially in manufacturing and agriculture. The government looks favorably on investment projects that contribute to employment growth, either directly or indirectly. U.S. investors in Honduras have not reported instances in which the government has imposed performance or localization requirements on investments.

The Honduran government and courts can require foreign and domestic investors that operate in Honduras to turn over data for use in criminal investigations or civil proceedings. Honduran law enforcement, prosecutors, and civil courts have the authority to make such requests.

5. Protection of Property Rights

Real Property

Honduran law recognizes secured interests in movable and real property. The Chamber of Commerce and Industry of Tegucigalpa (CCIT) and the Chamber of Commerce and Industry of San Pedro Sula (CCIC) both manage their own merchant records. The national property registry is managed by the Property Institute. The right for CCIT and CCIC to administer their own merchant registries is derived from a concession in Honduras’ secured transactions law.

Land title procedures have been an issue leading to investment disputes involving U.S. nationals who are landowners, especially, but not limited to, the tourist destination of Roatan. Title insurance is not widely available in Honduras and approximately 80 percent of the privately held land in the country is either untitled or improperly titled. Resolution of disputes in court often takes years. There are claims of widespread corruption in land sales, deed filing, and dispute resolution, including claims against attorneys, real estate companies, judges, and local officials. Although Honduras has made some progress, the property registration system is perceived as unreliable and represents a constraint on investment, particularly in the Bay Islands. In addition, a lack of implementing regulations leads to long delays in the awarding of titles in some regions.

Intellectual Property Rights

The legislative framework for the protection of intellectual property rights (IPR), which includes the Honduran copyright law and its industrial property law, is generally adequate but often poorly implemented. Honduras implements its obligations under the Agreement on Trade- Related Aspects of Intellectual Property Rights (TRIPS) of the World Trade Organization (WTO). Honduran law protects data exclusivity for a period of five years and protects process patents, but does not recognize second-use patents. The Property Institute (IP) and Public Ministry handle IPR protection and enforcement.

CAFTA-DR Chapter 15 on Intellectual Property Rights further provides for the protection and enforcement of a range of IPR, which are consistent with U.S. and international standards as well as with emerging international standards of IPR protection and enforcement. There are also provisions on deterrence of piracy and counterfeiting. Additionally, CAFTA-DR provides authorities the ability to confiscate pirated goods and investigate intellectual property cases on their own initiative.

The Honduran legal framework provides deterrence against piracy and counterfeiting by requiring the seizure, forfeiture, and destruction of counterfeit and pirated goods and the equipment used to produce them. The law also provides for statutory damages for copyright and trademark infringement, to ensure monetary damages are awarded even when losses associated with an infringement are difficult to assign.

In spite of this regulatory framework, digital piracy is widespread and frequently ignored in Honduras, especially by telecommunications companies.

Honduras is not listed in United States Trade Representative’s 2021 Special 301 Report or its 2020 Review of Notorious Markets for Counterfeiting and Piracy.

Resources for Rights Holders

A list of local attorneys is available at https://hn.usembassy.gov/u-s-citizen-services/local-resources-of-u-s-citizens/attorneys/. The U.S. Commercial Service office also maintains a screened list of attorneys through its Business Service Provider (BSP) directory . The Honduran-American Chamber of Commerce works with U.S. and Honduran companies that encounter commercial challenges, including intellectual property rights issues ( http://www.amchamhonduras.org/ ). For additional information about national laws and points of contact at local IP offices, please see World Intellectual Property Organization’s country profiles: http://www.wipo.int/directory/en/ .

6. Financial Sector

Capital Markets and Portfolio Investment

There are no government restrictions on foreign investors’ access to local credit markets, though the local banking system generally extends only limited amounts of credit. Investors should not consider local banks a significant capital resource for new foreign ventures unless they use specific business development credit lines made available by bilateral or multilateral financial institutions such as the Central American Bank for Economic Integration.

A limited number of credit instruments are available in the local market. The only security exchange operating in the country is the Central American Securities Exchange (BCV) in Tegucigalpa, but investors should exercise caution before buying securities listed on it. Supervised by the National Banking and Insurance Commission (CNBS), the BCV theoretically offers instruments to trade bankers’ acceptances, repurchase agreements, short-term promissory notes, Honduran government private debt conversion bonds, and land reform repayment bonds. In practice, however, the BCV is almost entirely composed of short- and medium-term government securities and no formal secondary market for these bonds exists.

A few banks have offered fixed rate and floating rate notes with maturities of up to three years, but outside of the banks’ issuances, the private sector does not sell debt or corporate stock on the exchange. Any private business is eligible to trade its financial instruments on the BCV, and firms that participate are subject to a rigorous screening process, including public disclosure and ratings by a recognized rating agency. Historically, most traded firms have had economic ties to the other business and financial groups represented as shareholders of the exchange. As a result, risk management practices are lax and public confidence in the institution is limited.

Money and Banking System

The Honduran financial system is comprised of commercial banks, state-owned banks, savings and loans institutions, and financial companies. There are currently 16 commercial banks operating in Honduras. There is no offshore banking or homegrown blockchain technology in Honduras. Honduras has a highly professional, independent Central Bank and an effective banking regulator, the Comisión Nacional de Bancos y Seguros. While access to credit remains limited in Honduras, especially for historically underserved populations, the financial sector is a source of economic stability in the country.

Foreign Exchange and Remittances

Foreign Exchange

Article 10.8 of CAFTA-DR ensures the free transfer of funds related to a covered investment. Local financial institutions freely exchange U.S. dollars and other foreign currencies. Foreigners may open bank accounts with a valid passport. For deposits exceeding the maximum deposits specified for different account types (corporate or small-medium enterprises), banks require documentation verifying the fund’s origin.

The Investment Law guarantees foreign investors access to foreign currency needed to transfer funds associated with their investments in Honduras, including:

  • Imports of goods and services necessary to operate
  • Payment of royalty fees, rents, annuities, and technical assistance
  • Remittance of dividends and capital repatriation

The Central Bank of Honduras  instituted a crawling peg in 2011 that allows the lempira to fluctuate against the U.S. dollar by seven percent per year. The Central Bank mandates any daily price of the crawling peg be no greater than 100.075 percent of the average for the prior seven daily auctions. These restrictions limit devaluation to a maximum of 4.8 percent annually. As of March 31, 2021, the exchange rate is 24.0199 lempira to the U.S. dollar.

The Central Bank uses an auction system to allocate foreign exchange based on the following regulations:

  • The Central Bank sets base prices every five auctions according to the differential between the domestic inflation rate and the inflation rate of Honduras’ main commercial partners.
  • The Central Bank’s Board of Directors determines the procedure to set the base.
  • The Board of Directors establishes the exchange commission and the exchange agencies in their foreign exchange transactions.
  • Individuals and corporate bodies can participate in the auction system for dollar purchases, either by themselves or through an exchange agency. The offers can be no less than $10,000, no more than $300,000 for individuals, and no more than $1.2 million for corporations.

To date, the U.S. Embassy in Honduras has not received complaints from individuals regarding the process for converting or transferring funds associated with investments.

Remittance Policies

The Investment Law guarantees investors the right to remit their investment returns and, if they liquidate their investments, to remit the principal capital invested. Foreign investors that choose to remit their investment proceeds from Honduras do so through foreign exchange transactions at Honduran banks or foreign banks operating in Honduras. These exchange transactions are subject to the same foreign exchange process and regulation as other transactions.

Sovereign Wealth Funds

Honduras does not have a sovereign wealth fund.

7. State-Owned Enterprises

Most state-owned enterprises are in telecommunications, electricity, water utilities, and commercial ports. The main state-owned Honduran telephone company, Hondutel, has private contracts with eight foreign and domestic carriers. The Government of Honduras has yet to establish a legal framework for foreign companies to obtain licenses and concessions to provide long distance and international calling. As a result, investors remain unsure if they can become fully independent telecommunication service providers.

The state-owned National Electric Energy Company (ENEE) is the single greatest contributor to the country’s fiscal deficit.  According to the IMF, in 2019, ENEE’s total losses reached 1.2 percent of GDP, while its $3.2 billion debt level was almost ten percent of GDP. Energy reform legislation, passed in 2014, called for the separation of ENEE into three independent units for distribution, transmission, and generation. Lack of political will and vested interests, however, have stalled efforts to unbundle ENEE. The electrical sector faces serious structural problems, including high electricity system losses, a transmission system in need of upgrades, vulnerability of generation costs to volatile international oil prices, an electricity tariff that does not reflect actual costs, and the high costs of long-term power purchase agreements (PPAs), which are often awarded directly to companies with political connections instead of via a fair and transparent tendering and procurement process.

ENEE controls most hydroelectric generation, which made up about 28 percent of total installed capacity and 24 percent of all power generation in 2020. Fossil fuels accounted for about 33 percent of installed capacity and 45 percent of power generation, while other renewable sources (wind, solar, biomass, and geothermal) accounted for about 40 percent of installed capacity and 21 percent of power generation. Together, renewable sources accounted for about 53 percent of power generation. The Honduran government plans to increase renewable energy sources to 80 percent of installed capacity by 2037. Many businesses have installed on-site power generation systems to supplement or substitute for power from ENEE due to frequent blackouts and high tariffs.

Honduran law grants municipalities the right to manage water distribution and to grant concessions to private enterprises. Major cities with public-private concessions include San Pedro Sula, Puerto Cortes, and Choloma. The state water authority National Autonomous Aqueduct and Sewer Service (SANAA) manages Tegucigalpa’s water distribution. The Honduran National Port Company (ENP) is the state-owned organization that oversees management of the country’s government-operated maritime ports, including Puerto Cortes, La Ceiba, Puerto Castilla, and San Lorenzo. Private companies Central American Port Operators and Maritime Ports of Honduras have 30-year concessions to operate container and bulk shipping facilities at Honduras’ principal port Puerto Cortes.

Privatization Program

The Honduran government is not actively seeking to privatize state-owned enterprises though it is seeking to increase private sector participation in the electric system. As part of the IMF’s December 2014 Stand-By Arrangement (SBA), concluded in December 2017, the Honduran government began to reform the state-owned energy company ENEE, creating an independent regulator, the Electric Energy Regulatory Commission. Under a new IMF SBA signed in July 2019, the Honduran government is preparing a plan to separate ENEE. While the structure of the new entity is unclear, under the previous SBA, Honduras was supposed to reform ENEE by creating a holding company with four components: a distribution company with an operations subcontractor supported by a trust agreement; a concession for the transmission network; a not-for-profit organization with public-private ownership to control the overall electrical system; and a privatized generation company that owns all ENEE generating facilities. These reforms were not realized, with the exception of a 2016 sub-contract by a Colombian-Honduran consortium to manage energy distribution.

8. Responsible Business Conduct

Awareness of the importance of Responsible Business Conduct (RBC) is growing among both producers and consumers in Honduras. An increasing number of local and foreign companies operating in Honduras include conduct-related responsibility practices in their business strategies. The Honduran Corporate Social Responsibility Foundation (FUNDAHRSE) has become a strong proponent in its efforts to promote transparency in the business climate and provides the Honduran private sector, particularly small- and medium-sized businesses, with the skills to engage in responsible business practices. FUNDAHRSE’s approximately110 members can apply for the foundation’s “Corporate Social Responsibility Enterprise” seal for exemplary responsible business conduct involving work in areas related to health, education, environment, codes of ethics, employment relations, and responsible marketing.

RBC related to the environment and outreach to local communities is especially important to the success of investment projects in Honduras. Several major foreign investment projects in Honduras have stalled due to concerns about environmental impact, land rights issues, lack of transparency, and problematic consultative processes with local communities, particularly indigenous communities. Although the International Labor Organization Convention 169 on Indigenous and Tribal Peoples was ratified by the GOH in 1995 and Honduras voted in favor of UN’s Indigenous People’s rights in 2007, there is still much to do in the area. There is still a need for foreign investors to build trust with local communities, while employing international best practices and standards to reduce the risk of conflict and promote sustainable and equitable development.

Examples of international best practices include the following:

  • Voluntary Principles on Security and Human Rights Initiative
  • The UN Guiding Principles on Business and Human Rights
  • The Organization for Economic Co-operation and Development Guidelines for Multinational Enterprises.

Additional Resources

Department of State

Department of Labor

9. Corruption

Despite international pressure, President Hernandez allowed the four-year mandate of the OAS Mission Against Corruption and Impunity in Honduras (MACCIH) to expire in January 2020.  MACCIH began work in 2015 following widespread anti-corruption protests in the wake of a scandal involving Honduras’ social security fund. During its tenure, MACCIH worked with the Public Ministry to bring cases against current and former public officials and to advance justice reform, including by presenting draft legislation for a Law of Effective Collaboration (plea-bargaining law) which remains stalled in Congress.  MACCIH and the Public Ministry created a special anti-corruption unit (UFECIC) to pursue large-scale corruption cases which continues to exist despite the end of MACCIH’s mandate. Its replacement, UFERCO, operates within the Public Ministry with fewer resources and personnel.

U.S. businesses and citizens report corruption in the public sector and the judiciary is a significant constraint to investment in Honduras.  Historically, corruption has been pervasive in government procurement, issuance of government permits, customs, real estate transactions (particularly land title transfers), performance requirements, and the regulatory system.  Civil society groups are critical of recent legislation granting qualified immunity to government officials and a law that gives the highly politicized government audit agency a first look at corruption cases.  In 2018, Congress passed a revision of the 1984 penal code that lowered penalties for some corruption offenses. The new code went into effect in June 2020 and was retroactively applied to several high-profile corruption cases resulting in a spate of dismissals and retrials.  Since 2012, the Honduran government has signed agreements with Transparency International, the Construction Sector Transparency Initiative, and the Extractive Industry Transparency Initiative.  In late 2020, the GOH created a new Ministry of Transparency to act as the government’s lead institution in coordinating and implementing efforts to promote transparency and integrity and prevent government corruption.

Honduras’s Rankings on Key Corruption Indicators:

Measure Year Index/Ranking
TI Corruption Index 2020 24/100, 157 of 180
World Bank Doing Business May 2020 133/190
MCC Government Effectiveness FY 2021 -0.19 (32 percent)
MCC Rule of Law FY 2021 -0.59 (7 percent)
MCC Control of Corruption FY 2021 -0.29 (18 percent)

The United States Foreign Corrupt Practices Act (FCPA) deems it unlawful for a U.S. person, and certain foreign issuers of securities to make corrupt payments to foreign public officials for the purpose of obtaining or retaining business for directing business to any person. The FCPA also applies to foreign firms and persons who take any act in furtherance of such a corrupt payment while in the United States. For more information, see the FCPA Lay-Person’s Guide: http://www.justice.gov/criminal/fraud/ .

Honduras ratified the UN Anticorruption Convention, in December 2005. The UN Convention requires countries to establish criminal penalties for a wide range of acts of corruption. The UN Convention covers a broad range of issues from basic forms of corruption such as bribery and solicitation, embezzlement, trading in influence, and the concealment and laundering of the proceeds of corruption. The UN Convention contains transnational business bribery provisions that are functionally similar to those in the Organization for Economic Cooperation and Development Anti-Bribery Convention.

Honduras ratified the Inter-American Convention against Corruption (OAS Convention) in1998. The OAS Convention establishes a set of preventive measures against corruption; provides for the criminalization of certain acts of corruption, including transnational bribery and illicit enrichment; and contains a series of provisions to strengthen the cooperation between its states’ parties in areas such as mutual legal assistance and technical cooperation.

Resources to Report Corruption

Companies that face corruption-related challenges in Honduras may contact the following organizations to request assistance.

Public Ministry
Eva Nazar
Coordinator for External Cooperation
cooperacionexterna.mp@gmail.com 

The Public Ministry is the Honduran government agency responsible for criminal prosecutions, including corruption cases.

Association for a More Just Society (ASJ)
Yahayra Yohana Velasquez Duce
Director of Transparency
Residencial El Trapiche, 2da etapa Bloque B, Casa #25
+504-2235-2291
info@asjhonduras.com 

ASJ is a nongovernmental Honduran organization that works to reduce corruption and increase transparency. It is an affiliate of Transparency International.

National Anti-Corruption Council (CNA)
Alejandra Ferrera
Executive Board Assistant
Colonia San Carlos, calle Republica de Mexico
504-2221-1181
aferrera@cna.hn 

CNA is a Honduran civil society organization comprised of Honduran business groups, labor groups, religious organizations, and human rights groups.

U.S. Embassy Tegucigalpa, Honduras
Attention: Economic Section
Avenida La Paz
Tegucigalpa M.D.C., Honduras
Telephone Numbers: (504) 2236-9320, 2238-5114
Fax Number: (504) 2236-9037

Companies can also report corruption through the Department of Commerce Trade Compliance Center Report a Trade Barrier website: http://tcc.export.gov/Report_a_Barrier/index.asp .

10. Political and Security Environment

Crime and violence rates remain high and add cost and constraint to investments. Demonstrations occur regularly in Honduras and political uncertainty poses a challenge to ongoing stability. Tensions could increase significantly in advance of the November 2021 presidential and general elections.

U.S. citizens should be aware that large public gatherings might become unruly or violent quickly. For more information, consult the Department of State’s latest travel warning: https://travel.state.gov/content/travel/en/international-travel/International-Travel-Country-Information-Pages/Honduras.html.

Although violent crime remains a persistent problem, Honduras has successfully reduced homicides to less than 40 per 100,000 inhabitants, the lowest in a decade.  Cases of violence, extortion, and kidnapping are still relatively common, particularly in urban areas where gang presence is more pervasive.  Drug traffickers continue to use Honduras as a transit point for cocaine and other narcotics en route to the United States and Europe, which fuels local turf battles in some areas and injects illicit funds into judicial proceedings and local governance structures to distort justice.  The business community historically had been a target for ransom kidnappings, but the number of such kidnappings dropped from 92 in 2013 to 13 in 2020, primarily through the establishment of the USG-supported Honduran National Police National Anti-Kidnapping Unit. Although violent crime rates are trending downward, there is a neutral to upward trend in corruption and white-collar crime, including money laundering, that negatively affects economic prosperity and stability for the business community.

11. Labor Policies and Practices 

The Honduran Labor Law prescribes a maximum eight-hour workday, 44-hour workweek, and at least one 24-hour rest period per week. The Labor Code provides for paid national holidays and annual leave. Most employment sectors also receive two one-month bonuses as part of the base salary, known as the 13th and 14th month salary, issued in mid-December and mid-June, respectively. New hires receive a prorated amount based on time-in-service during their first year of employment. The Labor Code requires companies to pay one month’s salary to employees terminated without cause. Companies do not owe severance to employees who resign or are terminated for cause. Employees terminated for cause can contest the basis for the termination in court to claim severance. There are no government-provided unemployment benefits in Honduras, although unemployed individuals may have access to their accumulated pension funds.

Many employers hire employees on a temporary basis under the Temporary Employment Law. In some cases, employers will renew employees under short-term contracts, sometimes over a period of years. Labor groups allege that some employers use temporary contracts to avoid responsibility for severance, provide employee benefits, and prevent union formation. The STSS is responsible for registering collective bargaining agreements. The Labor Code prohibits the employment of persons under the age of 14. Minors between the ages of 14 and 18 must receive special permission from STSS to work. The majority of the violations of the labor-related provisions of the children’s code occur in the agricultural sector and informal economy.

While Honduran labor law closely mirrors International Labor Organization standards, the U.S. Department of Labor has raised serious concerns regarding the effective enforcement of Honduran labor laws. Labor organizations allege the STSS fails to enforce labor laws, including laws on the right to form unions, reinstating employees unjustly fired for union activities, child labor, minimum wages, hours of work, and occupational safety and health. A U.S. Department of Labor report provided recommendations to address labor concerns in Honduras and called for a monitoring and action plan (MAP) to improve labor law enforcement in Honduras. In October 2018, the U.S. Department of Labor released a MAP assessment update noting significant progress toward addressing areas of concern and extending the MAP’s mandate. The MAP was further extended in May 2020 as a result of the COVID-19 pandemic.

The U.S. Department of State Country Report on Human Rights Practices describes a number of labor and human rights compliance issues that affect the Honduran labor market (https://www.state.gov/reports/2020-country-reports-on-human-rights-practices/honduras/). These include employers’ anti-union discrimination, refusal to engage in collective bargaining, and employer control of unions.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical Source USG or International Statistical Source Source
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) N/A N/A 2019 $25.095 billion World Bank Honduras
https://data.worldbank.org/country/honduras
Foreign Direct Investment Host Country Statistical source USG or International Statistical Source Source
U.S. FDI in Partner Country N/A N/A 2019 $1.3
billion
BEA Data
http://bea.gov/international/direct
_investment_multinational_companies_
comprehensive_data.htm
Host Country’s FDI in the United States N/A N/A 2019 $-84 BEA Data
http://bea.gov/international/direct
_investment_multinational_companies
_comprehensive_data.htm
Total Inbound Stock of FDI as % host GDP N/A N/A 2019 2% UNCTAD data available at
https://stats.unctad.org/handbook/Economic
Trends/Fdi.html
    
Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions), 2019
Inward Direct Investment Outward Direct Investment
Total Inward $16,479 100% Total Outward $2,456 100%
USA $3,944 24% Panama $1,194 49%
Panama $2,903 18% El Salvador    $481 20%
Guatemala $1,612 10% Guatemala    $314 13%
Mexico $1,409   9% Costa Rica    $224 9%
Colombia $1,050   6% Colombia    $151  6%
“0” reflects amounts rounded to +/- USD 500,000.
Table 4: Sources of Portfolio Investment
Portfolio Investment Assets
Top Five Partners (Millions, US Dollars)
Total Equity Securities Total Debt Securities
All Countries $322 100% All Countries $8 100% All Countries $315 100%
International Organizations $190 59% United States $6 75% International Organizations $190 61%
Unites States $81 26% Panama $1 12.5% United States $75 24%
Costa Rica $25 8% Not Specified $8 3%
Not Specified $8 3% N/A N/A N/A Canada $4 1%
Canada $4 2% N/A N/A N/A France $4 1%

14. Contact for More Information

Deputy Economic Counselor Matt Yarrington
U.S. Embassy
Avenida La Paz
Tegucigalpa, M.D.C.
Tel: (504) 2236-9320, Ext. 4531
E-mail: YarringtonMD@state.gov

Hong Kong

Executive Summary

Hong Kong became a Special Administrative Region (SAR) of the People’s Republic of China (PRC) on July 1, 1997, with its status defined in the Sino-British Joint Declaration and the Basic Law.  Under the concept of “one country, two systems,” the PRC government promised that Hong Kong will retain its political, economic, and judicial systems for 50 years after reversion.  The PRC’s imposition of the National Security Law (NSL) on June 30, 2020 undermined Hong Kong’s autonomy and introduced heightened uncertainty for foreign and local firms operating in Hong Kong.  As a result, the U.S. Government has taken measures to eliminate or suspend Hong Kong’s preferential treatment and special trade status, including suspension of most export control waivers, revocation of reciprocal shipping income tax exemption treatments, establishment of a new marking rule requiring goods made in Hong Kong to be labeled “Made in China,”  and imposition of sanctions against former and current Hong Kong government officials.

On July 16, 2021, the Department of State, along with the Department of the Treasury, the Department of Commerce, and the Department of Homeland Security, issued an advisory to U.S. businesses regarding potential risks to their operations and activities in Hong Kong.

 

Since the enactment of the NSL in Hong Kong, U.S. citizens traveling or residing in Hong Kong may be subject to increased levels of surveillance, as well as arbitrary enforcement of laws and detention for purposes other than maintaining law and order.

On economic issues, Hong Kong generally pursues a free market philosophy with minimal government intervention.  The Hong Kong government (HKG) generally welcomes foreign investment, neither offering special incentives nor imposing disincentives for foreign investors.

Hong Kong provides for no distinction in law or practice between investments by foreign-controlled companies and those controlled by local interests.  Foreign firms and individuals are able to incorporate their operations in Hong Kong, register branches of foreign operations, and set up representative offices without encountering discrimination or undue regulation.  There is no restriction on the ownership of such operations.  Company directors are not required to be citizens of, or resident in, Hong Kong.  Reporting requirements are straightforward and are not onerous.

Despite the imposition of the NSL by Beijing, significant curtailments in individual freedoms, and the end of Hong Kong’s ability to exercise the degree of autonomy it enjoyed in the past, Hong Kong remains a popular destination for U.S. investment and trade.  Even with a population of less than eight million, Hong Kong is the United States’ twelfth-largest export market, thirteenth largest for total agricultural products, and sixth-largest for high-value consumer food and beverage products.  Hong Kong’s economy, with world-class institutions and regulatory systems, is bolstered by its competitive financial and professional services, trading, logistics, and tourism sectors, although tourism suffered steep drops in 2020 due to COVID-19.  The service sector accounted for more than 90 percent of Hong Kong’s nearly USD 348 billion gross domestic product (GDP) in 2020.  Hong Kong hosts a large number of regional headquarters and regional offices.  Approximately 1,300 U.S. companies are based in Hong Kong, according to Hong Kong’s 2020 census data, with more than half regional in scope.  Finance and related services companies, such as banks, law firms, and accountancies, dominate the pack.  Seventy of the world’s 100 largest banks have operations in Hong Kong.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2020 11 of 180 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2020 3 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2020 11 of 131 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2019 USD 81,883 https://apps.bea.gov/international/factsheet/
World Bank GNI per capita 2019 USD 50,800 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Hong Kong is the world’s second-largest recipient of foreign direct investment (FDI), according to the United Nations Conference on Trade and Development’s (UNCTAD) World Investment Report 2020, with a significant amount bound for mainland China.  The HKG’s InvestHK encourages inward investment, offering free advice and services to support companies from the planning stage through to the launch and expansion of their business.  U.S. and other foreign firms can participate in government financed and subsidized research and development programs on a national treatment basis.  Hong Kong does not discriminate against foreign investors by prohibiting, limiting, or conditioning foreign investment in a sector of the economy.

Capital gains are not taxed, nor are there withholding taxes on dividends and royalties.  Profits can be freely converted and remitted.  Foreign-owned and Hong Kong-owned company profits are taxed at the same rate – 16.5 percent.  The tax rate on the first USD 255,000 profit for all companies is currently 8.25 percent.  No preferential or discriminatory export and import policies affect foreign investors.  Domestic industries receive no direct subsidies.  Foreign investments face no disincentives, such as quotas, bonds, deposits, or other similar regulations.

According to HKG statistics, 3,983 overseas companies had regional operations registered in Hong Kong in 2020.  The United States has the largest number with 690.  Hong Kong is working to attract more start-ups as it works to develop its technology sector, and about 26 percent of start-ups in Hong Kong come from overseas.

Hong Kong’s Business Facilitation Advisory Committee is a platform for the HKG to consult the private sector on regulatory proposals and implementation of new or proposed regulations.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign investors can invest in any business and own up to 100 percent of equity.  Like domestic private entities, foreign investors have the right to engage in all forms of remunerative activity.

The HKG owns virtually all land in Hong Kong, which the HKG administers by granting long-term leases without transferring title.  Foreign residents claim that a 15 percent Buyer’s Stamp Duty on all non-permanent-resident and corporate buyers discriminates against them.

The main exceptions to the HKG’s open foreign investment policy are:

Broadcasting – Voting control of free-to-air television stations by non-residents is limited to 49 percent.  There are also residency requirements for the directors of broadcasting companies.

Legal Services – Foreign lawyers at foreign law firms may only practice the law of their jurisdiction.  Foreign law firms may become “local” firms after satisfying certain residency and other requirements.  Localized firms may thereafter hire local attorneys but must do so on a 1:1 basis with foreign lawyers.  Foreign law firms can also form associations with local law firms.

Other Investment Policy Reviews

Hong Kong last conducted the Trade Policy Review in 2018 through the World Trade Organization (WTO).  https://www.wto.org/english/tratop_e/tpr_e/g380_e.pdf

Business Facilitation

The Efficiency Office under the Innovation and Technology Bureau is responsible for business facilitation initiatives aimed at improving the business regulatory environment of Hong Kong.

The e-Registry (https://www.eregistry.gov.hk/icris-ext/apps/por01a/index) is a convenient and integrated online platform provided by the Companies Registry and the Inland Revenue Department for applying for company incorporation and business registration.  Applicants, for incorporation of local companies or for registration of non-Hong Kong companies, must first register for a free user account, presenting an original identification document or a certified true copy of the identification document.  The Companies Registry normally issues the Business Registration Certificate and the Certificate of Incorporation on the same day for applications for company incorporation.  For applications for registration of a non-Hong Kong company, it issues the Business Registration Certificate and the Certificate of Registration two weeks after submission.

Outward Investment

As a free market economy, Hong Kong does not promote or incentivize outward investment, nor restrict domestic investors from investing abroad.  Mainland China and British Virgin Islands were the top two destinations for Hong Kong’s outward investments in 2019 (based on most recent data available).

2. Bilateral Investment Agreements and Taxation Treaties

Hong Kong has bilateral investment agreements with Australia, Austria, the Belgium-Luxembourg Economic Union, Canada, Chile, Denmark, Finland, France, Germany, Italy, Japan, South Korea, Kuwait, the Netherlands, New Zealand, Sweden, Switzerland, Thailand, the United Arab Emirates, the United Kingdom, and the Association of Southeast Asian Nations (ASEAN).  It has concluded but not yet signed agreements with Bahrain, Myanmar, and Maldives.  Hong Kong has also signed an investment agreement with Mexico, but it is not yet in force.  The HKG is currently negotiating agreements with Iran, Turkey, and Russia.  All such agreements are based on a model text approved by mainland China through the Sino-British Joint Liaison Group.  U.S. firms are generally not at a competitive or legal disadvantage.

Hong Kong has a free trade agreement (FTA) with mainland China, the Closer Economic Partnership Arrangement (CEPA), which provides tariff-free export to mainland China of Hong Kong-origin goods and preferential access for specific services.  CEPA has gradually expanded since its signing in 2003.  Under the CEPA framework, Hong Kong enjoys liberalized trade in services using a “negative list” covering 134 service sectors for Hong Kong and grants national treatment to Hong Kong’s 62 service industries.  Hong Kong also enjoys most-favored nation treatment, with liberalization measures included in FTAs signed by mainland China and other countries automatically extended to Hong Kong.  Hong Kong and mainland China have also signed an investment agreement and an economic and technical cooperation agreement.  The investment agreement includes provision of national treatment and non-services investment using a negative list approach.

Hong Kong also has FTAs with New Zealand, member states of the European Free Trade Association, Chile, Macau, ASEAN, Georgia, the Maldives, and Australia.  These agreements are consistent with the provisions of the WTO.  Hong Kong is exploring FTAs with the Pacific Alliance (Chile, Colombia, Mexico, and Peru) and the United Kingdom.  Hong Kong is keenly interested in joining the Regional Comprehensive Economic Partnership.

The United States does not have a bilateral treaty on the avoidance of double taxation with Hong Kong, but has a Tax Information Exchange Agreement and an Inter-Government Agreement on the Foreign Account Tax Compliance Act with Hong Kong.  As of April 2020, the HKG had Comprehensive Avoidance of Double Taxation Agreements (CDTAs) with 43 tax jurisdictions, and negotiations with 14 tax jurisdictions are underway.  The HKG targets to bring the total number of CDTAs to 50 by the end of 2022.  In September 2018, the Multilateral Convention on Mutual Administrative Assistance in Tax Matters signed by mainland China entered into force for Hong Kong.  Effective January 2021, the number of reportable jurisdictions increased from 75 to 126.

Under the President’s Executive Order on Hong Kong Normalization, which directs the suspension or elimination of special and preferential treatment for Hong Kong, the United States notified the Hong Kong authorities in August 2020 of its suspension of the Reciprocal Tax Exemptions on Income Derived from the International Operation of Ships Agreement.

3. Legal Regime

Transparency of the Regulatory System

Hong Kong’s regulations and policies typically strive to avoid distortions or impediments to the efficient mobilization and allocation of capital and to encourage competition.  Bureaucratic procedures and “red tape” are usually transparent and held to a minimum.

In amending or making any legislation, including investment laws, the HKG conducts a three-month public consultation on the issue concerned which then informs the drafting of the bill.  Lawmakers then discuss draft bills and vote.  Hong Kong’s legal, regulatory, and accounting systems are transparent and consistent with international norms.

Gazette is the official publication of the HKG.  This website https://www.gld.gov.hk/egazette/english/whatsnew/whatsnew.html is the centralized online location where laws, regulations, draft bills, notices, and tenders are published.  All public comments received by the HKG are published at the websites of relevant policy bureaus.

The Office of the Ombudsman, established in 1989 by the Ombudsman Ordinance, is Hong Kong’s independent watchdog of public governance.

Public finances are regulated by clear laws and regulations.  The Basic Law prescribes that authorities strive to achieve a fiscal balance and avoid deficits.  There is a clear commitment by the HKG to publish fiscal information under the Audit Ordinance and the Public Finance Ordinance, which prescribe deadlines for the publication of annual accounts and require the submission of annual spending estimates to the Legislative Council (LegCo).  There are few contingent liabilities of the HKG, with details of these items published about seven months after the release of the fiscal budget.  In addition, LegCo members have a responsibility to enhance budgetary transparency by urging government officials to explain the government’s rationale for the allocation of resources.  All LegCo meetings are open to the public so that the government’s responses are available to the general public.

On March 29, 2021, the Hong Kong Financial Services and Treasury Bureau submitted to Hong Kong’s Legislative Council plans to restrict the public from accessing certain information about executives in the Company Registry.  If passed, companies will be allowed immediately to withhold information on the residential addresses and identification numbers of directors and secretaries.  Corporate governance and financial experts warned that the proposal could enable fraud and further hurt the city’s status as a transparent financial hub.   Media organizations criticized the plan for undermining transparency and freedom of information.

International Regulatory Considerations

Hong Kong is an independent member of the WTO and Asia-Pacific Economic Co-operation (APEC), adopting international norms.  It notifies all draft technical regulations to the WTO Committee on Technical Barriers to Trade and was the first WTO member to ratify the Trade Facilitation Agreement (TFA).  Hong Kong has achieved a 100 percent rate of implementation commitments.

Legal System and Judicial Independence

Hong Kong’s common law system is based on the United Kingdom’s, and judges are appointed by the Chief Executive on the recommendation of the Judicial Officers Recommendation Commission.  Regulations or enforcement actions are appealable, and they are adjudicated in the court system.

Hong Kong’s commercial law covers a wide range of issues related to doing business.  Most of Hong Kong’s contract law is found in the reported decisions of the courts in Hong Kong and other common law jurisdictions.

The imposition of the NSL and pressure from the PRC authorities raised serious concerns about the longevity of Hong Kong’s judicial independence.  The NSL authorizes the mainland China judicial system, which lacks judicial independence and has a 99 percent conviction rate, to take over any national security-related case at the request of the Hong Kong government or the Office of Safeguarding National Security.  Under the NSL, the Hong Kong Chief Executive is required to establish a list of judges to handle all cases concerning national security-related offenses.  Although Hong Kong’s judiciary selects the specific judge(s) who will hear any individual case, some commentators argued that this unprecedented involvement of the Chief Executive weakens Hong Kong’s judicial independence.

Media outlets controlled by the PRC central government in both Hong Kong and mainland China repeatedly accused Hong Kong judges of bias following the acquittals of protesters accused of rioting and other crimes.  Some Hong Kong and PRC central government officials questioned the existence of the “separation of powers” in Hong Kong, including some statements that judicial independence is not enshrined in Hong Kong law and that judges should follow “guidance” from the government.

Laws and Regulations on Foreign Direct Investment

Hong Kong’s extensive body of commercial and company law generally follows that of the United Kingdom, including the common law and rules of equity.  Most statutory law is made locally.  The local court system, which is independent of the government, provides for effective enforcement of contracts, dispute settlement, and protection of rights.  Foreign and domestic companies register under the same rules and are subject to the same set of business regulations.

The Hong Kong Code on Takeovers and Mergers (1981) sets out general principles for acceptable standards of commercial behavior.

The Companies Ordinance (Chapter 622) applies to Hong Kong-incorporated companies and contains the statutory provisions governing compulsory acquisitions.  For companies incorporated in jurisdictions other than Hong Kong, relevant local company laws apply.  The Companies Ordinance requires companies to retain accurate and up to date information about significant controllers.

The Securities and Futures Ordinance (Chapter 571) contains provisions requiring shareholders to disclose interests in securities in listed companies and provides listed companies with the power to investigate ownership of interests in its shares.  It regulates the disclosure of inside information by listed companies and restricts insider dealing and other market misconduct.

Competition and Antitrust Laws

The independent Competition Commission (CC) investigates anti-competitive conduct that prevents, restricts, or distorts competition in Hong Kong.  In December 2020, the CC filed Hong Kong’s first abuse of substantial market power case in the Competition Tribunal against Linde HKO and its Germany-based parent company Linde GmbH for leveraging substantial market power in the production and supply of medical oxygen, medical nitrous oxide, Entonox, and medical air to maintain a stranglehold over the downstream maintenance market.

Expropriation and Compensation

The U.S. Consulate General is not aware of any expropriations in the recent past.  Expropriation of private property in Hong Kong may occur if it is clearly in the public interest and only for well-defined purposes such as implementation of public works projects.  Expropriations are to be conducted through negotiations, and in a non-discriminatory manner in accordance with established principles of international law.  Investors in and lenders to expropriated entities are to receive prompt, adequate, and effective compensation.  If agreement cannot be reached on the amount payable, either party can refer the claim to the Land Tribunal.

Dispute Settlement

ICSID Convention and New York Convention

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 Hong Kong.  Hong Kong’s Arbitration Ordinance provides for enforcement of awards under the 1958 New York Convention.

Investor-State Dispute Settlement

The U.S. Consulate General is not aware of any investor-state disputes in recent years involving U.S. or other foreign investors or contractors and the HKG.  Private investment disputes are normally handled in the courts or via private mediation.  Alternatively, disputes may be referred to the Hong Kong International Arbitration Center.

International Commercial Arbitration and Foreign Courts

The HKG accepts international arbitration of investment disputes between itself and investors and has adopted the United Nations Commission on International Trade Law model law for domestic and international commercial arbitration.  It has a Memorandum of Understanding with mainland China modelled on the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) for reciprocal enforcement of arbitral awards.

Under Hong Kong’s Arbitration Ordinance emergency relief granted by an emergency arbitrator before the establishment of an arbitral tribunal, whether inside or outside Hong Kong, is enforceable.  The Arbitration Ordinance stipulates that all disputes over intellectual property rights may be resolved by arbitration.

The Mediation Ordinance details the rights and obligations of participants in mediation, especially related to confidentiality and admissibility of mediation communications in evidence.

Third party funding for arbitration and mediation came into force on February 1, 2019.

Foreign judgments in civil and commercial matters may be enforced in Hong Kong by common law or under the Foreign Judgments (Reciprocal Enforcement) Ordinance, which facilitates reciprocal recognition and enforcement of judgments based on reciprocity.  A judgment originating from a jurisdiction that does not recognize a Hong Kong judgment may still be recognized and enforced by the Hong Kong courts, provided that all the relevant requirements of common law are met.  However, a judgment will not be enforced in Hong Kong if it can be shown that either the judgment or its enforcement is contrary to Hong Kong’s public policy.

In January 2019, Hong Kong and mainland China signed a new Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters by the Courts of the mainland and of Hong Kong to facilitate enforcement of judgments in the two jurisdictions.  The arrangement, which as of February 2021 is still pending implementing legislation, will cover the following key features: contractual and tortious disputes in general; commercial contracts, joint venture disputes, and outsourcing contracts; intellectual property rights, matrimonial or family matters; and judgments related to civil damages awarded in criminal cases.

Bankruptcy Regulations

Hong Kong’s Bankruptcy Ordinance provides the legal framework to enable i) a creditor to file a bankruptcy petition with the court against an individual, firm, or partner of a firm who owes him/her money; and ii) a debtor who is unable to repay his/her debts to file a bankruptcy petition against himself/herself with the court.  Bankruptcy offenses are subject to criminal liability.

The Companies (Winding Up and Miscellaneous Provisions) Ordinance aims to improve and modernize the corporate winding-up regime by increasing creditor protection and further enhancing the integrity of the winding-up process.

The Commercial Credit Reference Agency collates information about the indebtedness and credit history of SMEs and makes such information available to members of the Hong Kong Association of Banks and the Hong Kong Association of Deposit Taking Companies.

Hong Kong’s average duration of bankruptcy proceedings is just under ten months, ranking 45th in the world for resolving insolvency, according to the World Bank’s Doing Business 2020 rankings.

4. Industrial Policies

Investment Incentives

Hong Kong imposes no export performance or local content requirements as a condition for establishing, maintaining, or expanding a foreign investment.  There are no requirements that Hong Kong residents own shares, that foreign equity is reduced over time, or that technology is transferred on certain terms.  The HKG does not have a practice of issuing guarantees or jointly financing foreign direct investment projects.

The HKG allows a deduction on interest paid to overseas-associated corporations and provides an 8.25 percent concessionary tax rate derived by a qualifying corporate treasury center.

The HKG offers an effective tax rate of around three to four percent to attract aircraft leasing companies to develop business in Hong Kong.

The HKG has set up multiple programs to assist enterprises in securing trade finance and business capital, expanding markets, and enhancing overall competitiveness.  These support measures are available to any enterprise in Hong Kong, irrespective of origin.

Hong Kong-registered companies with a significant proportion of their research, design, development, production, management, or general business activities located in Hong Kong are eligible to apply to the Innovation and Technology Fund (ITF), which provides financial support for research and development (R&D) activities in Hong Kong.  Hong Kong Science & Technology Parks (Science Park) and Cyberport are HKG-owned enterprises providing subsidized rent and financial support through incubation programs to early-stage startups.

The HKG offers additional tax deductions for domestic expenditure on R&D incurred by firms.  Firms enjoy a 300 percent tax deduction for the first HKD 2 million (USD 255,000) qualifying R&D expenditure and a 200 percent deduction for the remainder.  Since 2017, the Financial Secretary has announced over HKD 120 billion (USD 15.3 billion) in funding to support innovation and technology development in Hong Kong.  These funds are largely directed at supporting and adding programs through the ITF, Science Park, and Cyberport.

In February 2009, HKD 20 billion (USD 2.6 billion) was  earmarked for the Research Endowment Fund, which provides research grants to academics and universities.  In February 2018, another HKD 10 billion (USD 1.3 billion) was set aside to provide financial incentives to foreign universities to partner with Hong Kong universities and establish joint research projects housed in two research clusters in Science Park, one specializing in artificial intelligence and robotics and the other specializing in biotechnology.  In February 2018, another HKD 20 billion (USD 2.6 billion) was appropriated to begin construction on a second, larger Science Park, located on the border with Shenzhen, which is intended to provide a much larger number of subsidized-rent facilities for R&D which are also expected to have special rules allowing mainland residents to work onsite without satisfying normal immigration procedures.

The Technology Talent Admission Scheme provides a fast-track arrangement for eligible technology companies/institutes to admit overseas and mainland technology talent to undertake R&D for them in the areas of biotechnology, artificial intelligence, cybersecurity, robotics, data analytics, financial technologies, and material science are eligible for application.  The Postdoctoral Hub Program provides funding support to recipients of the ITF, as well as incubatees and tenants of Science Park and Cyberport, to recruit up to two postdoctoral talents for R&D. Applicants must have a doctoral degree in a science, technology, engineering, and mathematics-related discipline from either a local university or a well-recognized non-local institution.

In July 2020, the HKG launched a USD 256.4 million Re-industrialization Funding Scheme to subsidize manufacturers, on a matching basis, setting up smart production lines in Hong Kong.

The Pilot Bond Grant Scheme launched by the Hong Kong Monetary Authority (HKMA) in May 2018 is aimed at improving Hong Kong’s competitiveness in the international bond market by enhanced tax concessions for qualifying debt instruments.  The HKG supports first-time issues with a grant of up to 50 percent of the eligible issuance expenses, with a cap of HKD 2.5 million (USD 320,500) for issues with a credit rating from a credit rating agency recognized by the Hong Kong Monetary Authority (HKMA), or a cap of HKD 1.25 million (USD 160,200) for issues that do not have a credit rating and where neither the issuer nor the issue’s guarantor have a credit rating.

In October 2020, the HKG launched a USD 38 million pilot subsidy scheme to encourage the logistics industry to enhance productivity through the application of technology.

Starting from December 2020, a USD 25.6 million Green Tech Fund (GTF) is open for applications.  The GTF provides funding supports to R&D projects which can help Hong Kong decarbonize and enhance environmental protection.  The amount of funding for each project ranges from USD 320,500 to USD 3.9 million, and each project may last up to five years.

In February 2021, the HKG announced a proposal to strengthen Hong Kong’s position as an asset management center.  The HKG planned to introduce in the second quarter of 2021 new legislation to facilitate the re-domicile of foreign investment funds to Hong Kong for registration as Open-ended Fund Companies (OFCs).  The HKG would provide subsidies to cover 70 percent of the expenses (capped at HKD 1 million or USD 125,000) paid to local professional service providers for OFCs set up in or re-domiciled to Hong Kong in the coming three years.

In February 2021, the HKG announced it would consolidate the Pilot Bond Grant Scheme and the Green Bond Grant Scheme into a Green and Sustainable Finance Grant Scheme to subsidize eligible bond issuers and loan borrowers to cover their expenses on bond issuance and external review services.

Foreign Trade Zones/Free Ports/Trade Facilitation

Hong Kong, a free port without foreign trade zones, has modern and efficient infrastructure making it a regional trade, finance, and services center.  Rapid growth has placed severe demands on that infrastructure, necessitating plans for major new investments in transportation and shipping facilities, including a planned expansion of container terminal facilities, additional roadway and railway networks, major residential/commercial developments, community facilities, and environmental protection projects.  Construction on a third runway at Hong Kong International Airport is scheduled for completion by 2023.

Hong Kong and mainland China have a Free Trade Agreement Transshipment Facilitation Scheme that enables mainland-bound consignments passing through Hong Kong to enjoy tariff reductions in the mainland.  The arrangement covers goods traded between mainland China and its trading partners, including ASEAN members, Australia, Bangladesh, Chile, Costa Rica, Iceland, India, New Zealand, Pakistan, Peru, South Korea, Sri Lanka, Switzerland, and Taiwan.

The HKG launched in December 2018 phase one of the Trade Single Window (TSW) to provide a one-stop electronic platform for submitting ten types of trade documents, promoting cross-border customs cooperation, and expediting trade declaration and customs clearance.  Phase two is expected to be implemented in 2023.

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

Performance and Data Localization Requirements

The HKG does not mandate local employment or performance requirements.  It does not follow a forced localization policy making foreign investors use domestic content in goods or technology.

Foreign nationals normally need a visa to live or work in Hong Kong.  Short-term visitors are permitted to conduct business negotiations and sign contracts while on a visitor’s visa or entry permit.  Companies employing people from overseas must show that a prospective employee has special skills, knowledge, or experience not readily available in Hong Kong.

Hong Kong allows free and uncensored flow of information, though the imposition of the NSL created certain limits on freedom of expression and content, especially those that may be viewed as politically-sensitive such as advocating for Hong Kong’s independence from mainland China.  The freedom and privacy of communication is enshrined in Basic Law Article 30.  The HKG has no requirements for foreign IT providers to turn over source code and does not interfere with data center operations.  However, the NSL introduced a heightened risk of PRC and Hong Kong authorities using expanded legal authorities to collect data from businesses and individuals in Hong Kong for actions that may violate “national security.” For more information, please refer to the Hong Kong business advisory released jointly by the Department of State, along with the Department of the Treasury, the Department of Commerce, and the Department of Homeland Security on July 16, 2021.

The NSL grants Hong Kong police broad authorities to conduct wiretaps or electronic surveillance without warrants in national security-related cases.  The NSL also empowers police to conduct searches, including of electronic devices, for evidence in national security cases.  Police can also require Internet service providers to provide or delete information relevant to these cases.  In January 2021, the organizer of an online platform alleged that local Internet providers have made the site inaccessible for users in Hong Kong following requests from the Hong Kong government.  One ISP subsequently confirmed that they it blocked a website “in compliance with the requirement issued under the National Security Law.”

Hong Kong does not currently restrict transfer of personal data outside the SAR, but the dormant Section 33 the Personal Data (Privacy) Ordinance would prohibit such transfers unless the personal data owner consents or other specified conditions are met.  The Privacy Commissioner is authorized to bring Section 33 into effect at any time, but it has been dormant since 1995.

In January 2020, the HKG introduced a discussion paper to the LegCo and proposed certain changes to the Personal Data (Privacy) Ordinance with the aim of strengthening data protection in Hong Kong.  One of the amendments proposed was to require data users to formulate a clear data retention policy which specified a retention period for the personal data collected.  Feedback from the LegCo on this discussion paper formed the basis of further consultations with stakeholders and more concrete legislative amendment proposals.  There is no indication on the timeline of any legislative amendments to the Ordinance.

In December 2020, Hong Kong’s Securities and Futures Commission (SFC) required licensed corporations in Hong Kong to seek the SFC’s approval before using the following for storing regulatory records: 1) premises controlled exclusively by an external data storage provider(s) located inside or outside Hong Kong, such as cloud service providers like Google Cloud, Microsoft Azure or Amazon AWS; or 2) server(s) for data storage at data centers located inside or outside Hong Kong.

5. Protection of Property Rights

Real Property

The Basic Law ensures protection of leaseholders’ rights in long-term leases that are the basis of the SAR’s real property system.  The Basic Law also protects the lawful traditional rights and interests of the indigenous inhabitants of the New Territories.  The real estate sector, one of Hong Kong’s pillar industries, is equipped with a sound banking mortgage system.  HK ranked 51st for ease of registering property, according to the World Bank’s Doing Business 2020 rankings.

Land transactions in Hong Kong operate on a deeds registration system governed by the Land Registration Ordinance.  The Land Titles Ordinance provides greater certainty on land title and simplifies the conveyancing process.

Intellectual Property Rights

Hong Kong generally provides strong intellectual property rights (IPR) protection and enforcement and for the most part has instituted an IP regime consistent with international standards.  Hong Kong has effective IPR enforcement capacity, and a judicial system that supports enforcement efforts with an effective public outreach program that discourages IPR-infringing activities.   Despite the robustness of Hong Kong’s IP system, challenges remain, particularly in copyright infringement and effective enforcement against the heavy, bi-directional flow of counterfeit goods.

Hong Kong’s commercial and company laws provide for effective enforcement of contracts and protection of corporate rights.  Hong Kong has filed its notice of compliance with the Trade-Related Aspects of Intellectual Property Rights (TRIPs) requirements of the WTO.  The Intellectual Property Department, which includes the Trademarks and Patents Registries, is the focal point for the development of Hong Kong’s IP regime.  The Customs and Excise Department (CED) is the sole enforcement agency for intellectual property rights (IPR).  Hong Kong has acceded to the Paris Convention for the Protection of Industrial Property, the Bern Convention for the Protection of Literary and Artistic Works, and the Geneva and Paris Universal Copyright Conventions.  Hong Kong also continues to participate in the World Intellectual Property Organization as part of mainland China’s delegation; the HKG has seconded an officer from CED to INTERPOL in Lyon, France to further collaborate on IPR enforcement.

The HKG devotes significant resources to IPR enforcement.  Hong Kong courts have imposed longer jail terms than in the past for violations of Hong Kong’s Copyright Ordinance.  CED works closely with foreign customs agencies and the World Customs Organization to share best practices and to identify, disrupt, and dismantle criminal organizations engaging in IP theft that operate in multiple countries.  The government has conducted public education efforts to encourage respect for IPR.  Pirated and counterfeit products remain available on a small scale at the retail level throughout Hong Kong.

Other IPR challenges include end-use piracy of software and textbooks, internet peer-to-peer downloading, and the illicit importation and transshipment of pirated and counterfeit goods from mainland China and other places in Asia.  Hong Kong authorities have taken steps to address these challenges by strengthening collaboration with mainland Chinese authorities, prosecuting end-use software piracy, and monitoring suspect shipments at points of entry.  It has also established a task force to monitor and crack down on internet-based peer-to-peer piracy.

The Drug Office of Hong Kong imposes a drug registration requirement that requires applicants for new drug registrations to make a non-infringement patent declaration.  The Copyright Ordinance protects any original copyrighted work created or published anywhere in the world and criminalizes copying and distribution of protected works .  The Ordinance also provides rental rights for sound recordings, computer programs, films, and comic books and includes enhanced penalty provisions and other legal tools to facilitate enforcement.  The law defines possession of an infringing copy of computer programs, movies, TV dramas, and musical recordings (including visual and sound recordings) for use in business as an offense but provides no criminal liability for other categories of works.  In June 2020, an amendment bill to implement the Marrakesh Treaty came into effect.

The HKG has consulted unsuccessfully with internet service providers and content user representatives on a voluntary framework for IPR protection in the digital environment.  It has also failed to pass amendments to the Copyright Ordinance that would enhance copyright protection against online piracy.  As of February 2021, the Infringing Website List Scheme (IWLS) established by the Hong Kong Creative Industries Association to clamp down on websites that display pirated content reportedly included 137 infringing websites in the portal.  In addition, 27 HKG agencies have been assigned with an individual password for checking with the IWLS before placing digital advertisements and tenders.

The Patent Ordinance allows for granting an independent patent in Hong Kong based on patents granted by the United Kingdom and mainland China.  Patents granted in Hong Kong are independent and capable of being tested for validity, rectified, amended, revoked, and enforced in Hong Kong courts.  Hong Kong’s Original Grant Patent system, which came into operation in December 2019, takes into account the patent systems generally established in regional and international patent treaties, while maintaining the re-registration system for the granting of standard patents.

The Registered Design Ordinance is modeled on the EU design registration system.  To be registered, a design must be new, and the system requires no substantive examination.  The initial period of five years protection is extendable for four periods of five years each, up to 25 years.

Hong Kong’s trademark law is TRIPS-compatible and allows for registration of trademarks relating to services.  All trademark registrations originally filed in Hong Kong are valid for seven years and renewable for 14-year periods.  Proprietors of trademarks registered elsewhere must apply anew and satisfy all requirements of Hong Kong law.  When evidence of use is required, such use must have occurred in Hong Kong.  In June 2020, Hong Kong implemented the Madrid Protocol.  The HKG will liaise with mainland China to seek application of the Madrid Protocol to Hong Kong beginning in 2022.

Hong Kong has no specific ordinance to cover trade secrets; however, the government has a duty under the Trade Descriptions Ordinance to protect information from being disclosed to other parties.  The Trade Descriptions Ordinance prohibits false trade descriptions, forged trademarks, and misstatements regarding goods and services supplied during trade.

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/.

6. Financial Sector

Capital Markets and Portfolio Investment

There are no impediments to the free flow of financial resources.  Non-interventionist economic policies, complete freedom of capital movement, and a well-understood regulatory and legal environment make Hong Kong a regional and international financial center.  It has one of the most active foreign exchange markets in Asia.

Assets and wealth managed in Hong Kong posted a record high of USD 3.7 trillion in 2019 (the latest figure available), with two-thirds of that coming from overseas investors.  To enhance the competitiveness of Hong Kong’s fund industry, OFCs as well as onshore and offshore funds are offered a profits tax exemption.

The HKMA’s Infrastructure Financing Facilitation Office (IFFO) provides a platform for pooling the efforts of investors, banks, and the financial sector to offer comprehensive financial services for infrastructure projects in emerging markets.  IFFO is an advisory partner of the World Bank Group’s Global Infrastructure Facility.

Under the Insurance Companies Ordinance, insurance companies are authorized by the Insurance Authority to transact business in Hong Kong.  As of February 2021, there were 165 authorized insurance companies in Hong Kong, 70 of them foreign or mainland Chinese companies.

The Hong Kong Stock Exchange’s total market capitalization surged by 24.0 percent to USD 6.1 trillion in 2020, with 2,538 listed firms at year-end.  Hong Kong Exchanges and Clearing Limited, a listed company, operates the stock and futures exchanges.  The Securities and Futures Commission (SFC), an independent statutory body outside the civil service, has licensing and supervisory powers to ensure the integrity of markets and protection of investors.

No discriminatory legal constraints exist for foreign securities firms establishing operations in Hong Kong via branching, acquisition, or subsidiaries.  Rules governing operations are the same for all firms.  No laws or regulations specifically authorize private firms to adopt articles of incorporation or association that limit or prohibit foreign investment, participation, or control.

In 2020, a total of 291 Chinese enterprises had “H” share listings on the stock exchange, with combined market capitalization of USD 906 billion.  The Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connects allow individual investors to cross trade Hong Kong and mainland stocks.  In December 2018, the ETF Connect, which was planned to allow international and mainland investors to trade in exchange-traded fund products listed in Hong Kong, Shanghai, and Shenzhen, was put on hold indefinitely due to “technical issues.” However, China approved two cross-listings of ETFs between Shanghai Stock exchange and the Tokyo Stock Exchange in June 2019, and between Shenzhen Stock Exchange and Hong Kong Stock Exchange in October 2020.

By the end of 2020, 50 mainland mutual funds and 29 Hong Kong mutual funds were allowed to be distributed in each other’s markets through the mainland-Hong Kong Mutual Recognition of Funds scheme. Hong Kong also has mutual recognition of funds programs with Switzerland, Thailand, Ireland, France, the United Kingdom, and Luxembourg.

Hong Kong has developed its debt market with the Exchange Fund bills and notes program.  Hong Kong Dollar debt stood at USD 292 billion by the end of 2020.  As of November 2020, RMB 1,203.5 billion (USD 180.5 billion) of offshore RMB bonds were issued in Hong Kong.  Multinational enterprises, including McDonald’s and Caterpillar, have also issued debt.  The Bond Connect, a mutual market access scheme, allows investors from mainland China and overseas to trade in each other’s respective bond markets through a financial infrastructure linkage in Hong Kong.  In the first eight months of 2020, the Northbound trading of Bond Connect accounted for 52 percent of foreign investors’ total turnover in the China Interbank Bond Market.  In December 2020, the HKMA and the People’s Bank of China (PBoC) set up a working group to drive the initiative of Southbound trading, with the target of launching it within 2021.

In June 2020, the PBoC, the China Banking and Insurance Regulatory Commission, the China Securities Regulatory Commission, the State Administration of Foreign Exchange, the HKMA and the Monetary Authority of Macau announced that they decided to implement a cross-boundary Wealth Management Connect pilot scheme in the Greater Bay Area (GBA), an initiative to economically integrate Hong Kong and Macau with nine cities in Guangdong Province.  Under the scheme, residents in the GBA can carry out cross-boundary investment in wealth management products distributed by banks in the GBA.  These authorities are still working on the implementation details for the scheme.

In December 2020, the SFC concluded its consultation on proposed customer due diligence requirements for OFCs.  The new requirements will enhance the anti-money laundering and counter-financing of terrorism measures with respect to OFCs and better align the requirements for different investment vehicles for funds in Hong Kong.  Upon the completion of the legislative process, the new requirements will come into effect after a six-month transition period.

In February 2021, the HKG announced it would issue green bonds regularly and expand the scale of the Government Green Bond Program to USD 22.5 billion within the next five years.

The HKG requires workers and employers to contribute to retirement funds under the Mandatory Provident Fund (MPF) scheme.  Contributions are expected to channel roughly USD five billion annually into various investment vehicles.  By September of 2020, the net asset values of MPF funds amounted to USD 131 billion.

Money and Banking System

Hong Kong has a three-tier system of deposit-taking institutions: licensed banks (161), restricted license banks (17), and deposit-taking companies (12).  HSBC is Hong Kong’s largest banking group.  With its majority-owned subsidiary Hang Seng Bank, HSBC controls more than 50.9 percent of Hong Kong Dollar (HKD) deposits.  The Bank of China (Hong Kong) is the second-largest banking group, with 15.4 percent of HKD deposits throughout 200 branches.  In total, the five largest banks in Hong Kong had more than USD 2 trillion in total assets at the end of 2019.  Thirty-five U.S. “authorized financial institutions” operate in Hong Kong, and most banks in Hong Kong maintain U.S. correspondent relationships.  Full implementation of the Basel III capital, liquidity, and disclosure requirements completed in 2019.

Credit in Hong Kong is allocated on market terms and is available to foreign investors on a non-discriminatory basis.  The private sector has access to the full spectrum of credit instruments as provided by Hong Kong’s banking and financial system.  Legal, regulatory, and accounting systems are transparent and consistent with international norms.  The HKMA, the de facto central bank, is responsible for maintaining the stability of the banking system and managing the Exchange Fund that backs Hong Kong’s currency.  Real Time Gross Settlement helps minimize risks in the payment system and brings Hong Kong in line with international standards.

Banks in Hong Kong have in recent years strengthened anti-money laundering and counterterrorist financing controls, including the adoption of more stringent customer due diligence (CDD) process for existing and new customers.  The HKMA stressed that “CDD measures adopted by banks must be proportionate to the risk level and banks are not required to implement overly stringent CDD processes.”

In November 2020, the HKG launched a three-month public consultation on its proposed amendments to the Anti-Money Laundering and Counter-Terrorist Financing Ordinance.  Among other proposed changes, the HKG suggested introducing a licensing regime for virtual asset services providers and a two-tier registration regime for precious assets dealers.  The HKG will analyze feedback from the public before introducing a draft bill to the LegCo.

The NSL granted police authority to freeze assets related to national security-related crimes.  In October 2020, the HKMA advised banks in Hong Kong to report any transactions suspected of violating the NSL, following the same procedures as for money laundering.  Hong Kong authorities reportedly asked financial institutions to freeze bank accounts of former lawmakers, civil society groups, and other political targets who appear to be under investigation for their pro-democracy activities.

The HKMA welcomes the establishment of virtual banks, which are subject to the same set of supervisory principles and requirements applicable to conventional banks.  The HKMA has granted eight virtual banking licenses by the end of January 2021.

The HKMA’s Fintech Facilitation Office (FFO) aims to promote Hong Kong as a fintech hub in Asia.  FFO has launched the faster payment system to enable bank customers to make cross-bank/e-wallet payments easily and created a blockchain-based trade finance platform to reduce errors and risks of fraud.  The HKMA has signed nine fintech co-operation agreements with the regulatory authorities of Brazil, Dubai, France, Poland, Singapore, Switzerland, Thailand, the United Arab Emirates, and the United Kingdom.

Foreign Exchange and Remittances

Foreign Exchange

Conversion and inward/outward transfers of funds are not restricted.  The HKD is a freely convertible currency linked via de facto currency board to the U.S. dollar.  The exchange rate is allowed to fluctuate in a narrow band between HKD 7.75 – HKD 7.85 = USD 1.

Remittance Policies

There are no recent changes to or plans to change investment remittance policies.  Hong Kong has no restrictions on the remittance of profits and dividends derived from investment, nor reporting requirements on cross-border remittances.  Foreign investors bring capital into Hong Kong and remit it through the open exchange market.

Hong Kong has anti-money laundering (AML) legislation allowing the tracing and confiscation of proceeds derived from drug-trafficking and organized crime.  Hong Kong has an anti-terrorism law that allows authorities to freeze funds and financial assets belonging to terrorists.  Travelers arriving in Hong Kong with currency or bearer negotiable instruments (CBNIs) exceeding HKD 120,000 (USD 15,385) must make a written declaration to the CED.  For a large quantity of CBNIs imported or exported in a cargo consignment, an advanced electronic declaration must be made to the CED.

Sovereign Wealth Funds

The Future Fund, Hong Kong’s wealth fund, was established in 2016 with an endowment of USD 28.2 billion.  The fund seeks higher returns through long-term investments and adopts a “passive” role as a portfolio investor.  About half of the Future Fund has been deployed in alternative assets, mainly global private equity and overseas real estate, over a three-year period.  The rest is placed with the Exchange Fund’s Investment Portfolio, which follows the Santiago Principles, for an initial ten-year period.  In February 2020, the HKG announced that it will deploy 10 percent of the Future Fund to establish a new portfolio, which is called the Hong Kong Growth Portfolio (HKGP), focusing on domestic investments to lift the city’s competitiveness in financial services, commerce, aviation, logistics and innovation.  Between December 2020 and January 2021, the HKMA conducted a market survey to better understand the profiles of private equity firms with interest to become a general partner for the HKGP.

7. State-Owned Enterprises

Hong Kong has several major HKG-owned enterprises classified as “statutory bodies.” Hong Kong is party to the Government Procurement Agreement (GPA) within the framework of WTO.  Annex 3 of the GPA lists as statutory bodies the Housing Authority, the Hospital Authority, the Airport Authority, the Mass Transit Railway Corporation Limited, and the Kowloon-Canton Railway Corporation, which procure in accordance with the agreement.

The HKG provides more than half the population with subsidized housing, along with most hospital and education services from childhood through the university level.  The government also owns major business enterprises, including the stock exchange, railway, and airport.

Conflicts occasionally arise between the government’s roles as owner and policymaker.  Industry observers have recommended that the government establish a separate entity to coordinate its ownership of government-held enterprises and initiate a transparent process of nomination to the boards of government-affiliated entities.  Other recommendations from the private sector include establishing a clear separation between industrial policy and the government’s ownership function and minimizing exemptions of government-affiliated enterprises from general laws.

The Competition Law exempts all but six of the statutory bodies from the law’s purview.  While the government’s private sector ownership interests do not materially impede competition in Hong Kong’s most important economic sectors, industry representatives have encouraged the government to adhere more closely to the Guidelines on Corporate Governance of State-owned Enterprises of the Organization for Economic Cooperation and Development (OECD).

Privatization Program

All major utilities in Hong Kong, except water, are owned and operated by private enterprises, usually under an agreement framework by which the HKG regulates each utility’s management.

8. Responsible Business Conduct

The Hong Kong Stock Exchange adopts a higher standard of disclosure – ‘comply or explain’ – about its environmental key performance indicators for listed companies.  Results of a consultation process to review its environmental, social, and governance (ESG) reporting guidelines indicate strong support for enhancing the ESG reporting framework.  It has implemented proposals from the consultation process since July 2020.  Because Hong Kong is not a member of the OECD, OECD Guidelines for Multinational Enterprises are not applicable to Hong Kong companies.  The HKG, however, commends enterprises for fulfilling their social responsibility.  Hong Kong is not a signatory of the Montreux Document on Private Military and Security Companies.  Under the Security Bureau, the Security and Guarding Services Industry Authority is responsible for formulating issuing criteria and conditions for security company licenses and security personnel permits and determining applications for security company licenses.

Additional Resources

Department of State

Department of Labor

9. Corruption

Mainland China ratified the United Nations Convention Against Corruption in January 2006, and it was extended to Hong Kong in February 2006.  The Independent Commission Against Corruption (ICAC) is responsible for combating corruption and has helped Hong Kong develop a track record for combating corruption.  U.S. firms have not identified corruption as an obstacle to FDI.  A bribe to a foreign official is a criminal act, as is the giving or accepting of bribes, for both private individuals and government employees.  Offenses are punishable by imprisonment and large fines.

The Hong Kong Ethics Development Center (HKEDC), established by the ICAC, promotes business and professional ethics to sustain a level-playing field in Hong Kong.  The International Good Practice Guidance – Defining and Developing an Effective Code of Conduct for Organizations of the Professional Accountants in Business Committee published by the International Federation of Accountants (IFAC) and is in use with the permission of IFAC.

Resources to Report Corruption

Simon Peh, Commissioner
Independent Commission Against Corruption
303 Java Road, North Point, Hong Kong
+852-2826-3111
Email: com-office@icac.org.hk

10. Political and Security Environment

Beijing’s imposition of the National Security Law (NSL) on June 30, 2020 has introduced heightened uncertainties for companies operating in Hong Kong.  As a result, U.S. citizens traveling through or residing in Hong Kong may be subject to increased levels of surveillance, as well as arbitrary enforcement of laws and detention for purposes other than maintaining law and order.

As of March 2021, police have carried out at least 100 arrests of opposition politicians and activists under the NSL, including one U.S. citizen, in an effort to suppress all pro-democracy views and political activity in the city.  Police have also reportedly issued arrest warrants under the NSL for approximately thirty individuals residing abroad, including U.S. citizens.  Since June 2019, police have arrested over 10,000 people on various charges in connection with largely peaceful protests against government policies.

Please see the July 16, 2021 business advisory issued by the Department of State, along with the Department of the Treasury, the Department of Commerce, and the Department of Homeland Security.

The Department of State assesses that Hong Kong does not maintain a sufficient degree of autonomy under the “one country, two systems” framework to justify continued special treatment by the United States for bilateral agreements and programs per the Hong Kong Policy Act.  As a result of Hong Kong’s lack of autonomy from China, the Department of Commerce ended Hong Kong’s treatment as a separate trade entity from China, including the removal of many of Department of Commerce’s License Exceptions.  U.S. Customs and Borders Protection (CBP) requires goods produced in Hong Kong to be marked to show China, rather than Hong Kong, as their country of origin.  This requirement took effect November 9, 2020.  It does not affect country of origin determinations for purposes of assessing ordinary duties or temporary or additional duties.  Hong Kong has requested World Trade Organization dispute consultations to examine the issue.  As of March 2021, the Department of Treasury has sanctioned 35 former and current Hong Kong and mainland Chinese government officials and 44 Chinese-military companies identified by the Department of Defense.

The PRC government does not recognize dual nationality.  In January 2021, the Hong Kong government moved to enforce existing provisions of the Nationality Law of the People’s Republic of China in place since 1997, effectively ending its longstanding recognition of dual citizenship in Hong Kong.  The action ended consular access to two detained U.S. citizens as of March 2021 and potentially removed consular protection from about half of the estimated 85,000 U.S. citizens in Hong Kong.  U.S.-PRC, U.S.-Hong Kong and U.S. citizens of Chinese heritage may be subject to additional scrutiny and harassment, and the PRC government may prevent the U.S. Embassy or U.S. Consulate from providing consular services.

Hong Kong financial regulators have conducted outreach to stress the importance of robust anti-money laundering (AML) controls and highlight potential criminal sanctions implications for failure to fulfill legal obligations under local AML laws.  However, Hong Kong has a low number of prosecutions and convictions compared to the number of cases investigated.

Under the President’s Executive Order on Hong Kong Normalization, which directs the suspension or elimination of special and preferential treatment for Hong Kong, the United States notified the Hong Kong authorities in August 2020 of its suspension of the Surrender of Fugitive Offenders Agreement and the Transfer of Sentenced Persons Agreement.  The Reciprocal Tax Exemptions on Income Derived from the International Operation of Ships Agreement was also suspended.  In response, the Hong Kong government suspended the Agreement Between the Government of the United States of America and the Government of Hong Kong on Mutual Legal Assistance in Criminal Affairs, which entered into force in 2000.

11. Labor Policies and Practices

Hong Kong’s unemployment rate stood at 6.6 percent in the fourth quarter of 2020, with the unemployment rate of youth aged 15-19 rising to 17.6 percent.  In 2020, skilled personnel working as administrators, managers, professionals, and associate professionals accounted for 40.6 percent of the total working population.  At the end of 2019, there were about 399,320 foreign domestic helpers working in Hong Kong.  In 2020, about 8,842 foreign professionals came to work in the city, more than 10,089 fewer than the previous year.  The Employees Retraining Board provides skills re-training for local employees.  To address a shortage of highly skilled technical and financial professionals, the HKG seeks to attract qualified foreign and mainland Chinese workers.

The Employment Ordinance (EO) and the Employees’ Compensation Ordinance prohibit the termination of employment in certain circumstances: 1) Any pregnant employee who has at least four weeks’ service and who has served notice of her pregnancy; 2) Any employee who is on paid statutory sick leave and; 3) Any employee who gives evidence or information in connection with the enforcement of the EO or relating to any accident at work, cooperates in any investigation of his employer, is involved in trade union activity, or serves jury duty may not be dismissed because of those circumstances. Breach of these prohibitions is a criminal offense.

According to the EO, someone employed under a continuous contract for not less than 24 months is eligible for severance payment if: 1) dismissed by reason of redundancy; 2) under a fixed term employment contract that expires without being renewed due to redundancy; or 3) laid off.

Unemployment benefits are income- and asset-tested on an individual basis if living alone; if living with other family members, the total income and assets of all family members are taken into consideration for eligibility.  Recipients must be between the ages of 15-59, capable of work, and actively seeking full-time employment.

Parties in a labor dispute can consult the free and voluntary conciliation service offered by the Labor Department (LD).  A conciliation officer appointed by the LD will help parties reach a contractually binding settlement.  If there is no settlement, parties can start proceedings with the Labor Tribunal (LT), which can then be raised to the Court of First Instance and finally the Court of Appeal for leave to appeal.  The Court of Appeal can grant leave only if the case concerns a question of law of general public importance.

Local law provides for the rights of association and of workers to establish and join organizations of their own choosing.  The government does not discourage or impede the formation of unions.  As of 2019, Hong Kong’s 866 registered unions had 923,239 members, a participation rate of about 25.7 percent.  In 2020, 491 new worker unions formed to improve chances of winning seats in the legislature.  Hong Kong’s labor legislation is in line with international laws.  Hong Kong has implemented 41 conventions of the International Labor Organization in full and 18 others with modifications.  Workers who allege discrimination against unions have the right to a hearing by the Labor Relations Tribunal.  Legislation protects the right to strike.  Collective bargaining is not protected by Hong Kong law; there is no obligation to engage in it; and it is not widely used.  For more information on labor regulations in Hong Kong, please visit the following website: http://www.labour.gov.hk/eng/legislat/contentA.htm (Chapter 57 “Employment Ordinance”).

The LT has the power to make an order for reinstatement or re-engagement without securing the employer’s approval if it deems an employee has been unreasonably and unlawfully dismissed.  If the employer does not reinstate or re-engage the employee as required by the order, the employer must pay to the employee a sum amounting to three times the employee’s average monthly wages up to USD 9,300.  The employer commits an offense if he/she willfully and without reasonable excuse fails to pay the additional sum.

Starting from January 2019, male employees are entitled to five days’ paternity leave (increased from three days).

Starting from December 2020,  the statutory maternity leave increases to 14 weeks from ten weeks.

Effective May 1, 2019, the statutory minimum hourly wage rate increases from USD 4.4 to USD 4.8.

In February 2020, about 2,500 medical workers of the Hospital Authority took part in an industrial action, demanding the HKG close its border to mainland China to prevent the spread of  COVID-19.  They ended the strike a few days later without getting their demands realized.

12. U.S. International Development Finance Corporation (DFC) and Other Investment Insurance and Development Finance Programs

As a developed economy, there is little potential for the DFC to operate in Hong Kong.  However, there is scope for cooperation between companies based in Hong Kong with regional operations to work with the DFC.  Hong Kong is a member of the World Bank Group’s Multilateral Investment Guarantee Agency.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source* USG or international statistical source USG or International Source of Data:  BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount  
Host Country Gross Domestic Product (GDP) ($M USD) 2020 $347,529 2019 $365,712 www.worldbank.org/en/country
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data:  BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2019 $44,974 2019 $81,883 BEA data available at
https://apps.bea.gov/
international/factsheet/
Host country’s FDI in the United States ($M USD, stock positions) 2019 $14,679 2019 $14,110 BEA data available at
https://www.bea.gov/international/
direct-investment-and-multinational-
enterprises-comprehensive-data
Total inbound stock of FDI as % host GDP 2019 507.5% 2019 506.5% UNCTAD data available at
https://stats.unctad.org/
handbook/EconomicTrends/Fdi.html

* Source for Host Country Data: Hong Kong Census and Statistics Department 

Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward 1,732,495 100% Total Outward 1,763,164 100%
British Virgin Islands 606,804 35% China, P.R.: Mainland 800,640 45%
China, P.R.: Mainland 475,641 27% British Virgin Islands 579,860 33%
Cayman Islands 152,048 9% Cayman Islands 70,492 4%
United Kingdom 139,120 8% Bermuda 55,091 3%
Bermuda 99,514 6% United Kingdom 53,858 3%
“0” reflects amounts rounded to +/- USD 500,000.
Table 4: Sources of Portfolio Investment
Portfolio Investment Assets
Top Five Partners (Millions, current US Dollars)
Total Equity Securities Total Debt Securities
All Countries 1,830,229 100% All Countries 1,167,955 100% All Countries 662,274 100%
Cayman Islands 635,236 35% Cayman Islands 608,914 52% United States 156,543 24%
China, P.R.: Mainland 352,531 19% China, P.R.: Mainland 206,829 18% China, P.R.: Mainland 145,702 22%
United States 204,360 11% Bermuda 109,838 9% Japan 51,682 8%
Bermuda 112,021 6% United Kingdom 60,483 5% Luxembourg 42,742 6%
United Kingdom 85,496 5% United States 47,817 4% Australia 37,143 6%

14. Contact for More Information

Eveline Tseng, Consul, Economic Affairs
U.S. Consulate General Hong Kong and Macau
26 Garden Road, Central

Vietnam

Executive Summary

Vietnam continues to welcome foreign direct investment (FDI), and the government has policies in place that are broadly conducive to U.S. investment. Factors that attract foreign investment include recently-signed free trade agreements, political stability, ongoing economic reforms, a young and increasingly urbanized population, and competitive labor costs. Vietnam has received USD 231 billion in FDI from 1988 through 2020, per the Ministry of Public Affairs (MPI), which oversees foreign investments.

Vietnam’s exceptional handling of the COVID-19 pandemic, which has included proactive management of health policy, fiscal stimulus, and monetary policy, combined with supply chain shifts, contributed to Vietnam receiving USD 19.9 billion in FDI in 2020 – almost as much as the USD 20.3 billion received in 2019. Of the 2020 investments, 48 percent went into manufacturing – especially in the electronics, textiles, footwear, and automobile parts industries; 18 percent in utilities and energy; 15 percent in real estate; and smaller percentages in assorted industries. The government approved the following significant FDI projects in 2020: Delta Offshore’s USD 4 billion investment in the Bac Lieu liquified natural gas (LNG) power plant; Siam Cement Group’s (SCG) USD 1.8 billion investment in the Long Son Integrated Petrochemicals Complex; a Daewoo-led, South Korean consortium’s USD 774 million investment in the West Lake Capital Township real estate development in Hanoi; and Taiwan-based Pegatron’s USD 481 million investment in electronics production.

Vietnam recently moved forward on free trade agreements that will likely make it easier to attract future FDI by providing better market access for Vietnamese exports and encouraging investor-friendly reforms. The EU-Vietnam Free Trade Agreement (EVFTA) came into force August 1, 2020. Vietnam signed the UK-Vietnam Free Trade Agreement on December 31, 2020, which will come into effect May 1, 2021. On November 15, 2020, Vietnam signed the Regional Comprehensive Economic Partnership (RCEP). While these agreements lower certain trade and investment barriers for companies from participating countries, U.S. companies may find it more difficult to compete without similar advantages.

In February 2021, the 13th Party Congress of the Communist Party approved a ten-year economic strategy that calls for shifting foreign investments to high-tech industries and ensuring those investments include provisions relating to environmental protection. On January 1, 2021, Vietnam’s Securities Law and new Labor Code Law, which the National Assembly originally approved in 2019, came into force. The Securities Law formally states the government’s intention to remove foreign ownership limits for investments in most industries, and the new Labor Code provides more contract flexibility – including provisions that make it easier for an employer to dismiss an employee and allow workers to join independent trade unions – although no such independent trade unions yet exist in Vietnam. On June 17, 2020, Vietnam passed a revised Investment Law and a new Public Private Partnership Law, both designed to encourage foreign investment into large infrastructure projects, reduce the burden on the government to finance such projects, and increase linkages between foreign investors and the Vietnamese private sector.

Despite a comparatively high level of FDI inflow as a percentage of GDP – 7.3 percent in 2020 – significant challenges remain in Vietnam’s investment climate. These include corruption, weak legal infrastructure, poor enforcement of intellectual property rights (IPR), a shortage of skilled labor, restrictive labor practices, and the government’s slow decision-making process.

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2020 104 of 180 http://www.transparency.org/research/cpi/overview 
World Bank’s Doing Business Report 2020 70 of 190 http://www.doingbusiness.org/en/rankings 
Global Innovation Index 2020 42 of 131 https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, historical stock positions) 2019 USD 2,615 https://apps.bea.gov/international/factsheet/ 
World Bank GNI per capita 2019 USD 2,590 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD 
Table 1: Key Metrics and Rankings

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Toward Foreign Direct Investment

Since Vietnam embarked on economic reforms in 1986 to transition to a market-based economy, the government has welcomed FDI, recognizing it as a key component of Vietnam’s high rate of economic growth over the last two decades. Foreign investments continue to play a crucial role in the economy: according to Vietnam’s General Statistics Office (GSO), Vietnam exported USD 281 billion in goods in 2020, of which 72 percent came from projects utilizing FDI.

The Politburo issued Resolution 55 in 2019 to increase Vietnam’s attractiveness to foreign investment. This Resolution aims to attract USD 50 billion in new foreign investment by 2030. In 2020, the government revised laws on investment and enterprise, in addition to passing the Public Private Partnership Law, to further the goals of this Resolution. The revisions encourage high-quality investments, use and development of advanced technologies, and environmental protection mechanisms.

While Vietnam’s revised Investment Law says the government must treat foreign and domestic investors equally, foreign investors have complained about having to cross extra hurdles to get ordinary government approvals. The government continues to have foreign ownership limits (FOLs) in industries Vietnam considers important to national security. In January 2020, the government removed FOLs on companies in the eWallet sector and reformed electronic payments procedures for foreign firms. Some U.S. investors report that these changes have provided more regulatory certainty, which has, in turn, instilled greater confidence as they consider long-term investments in Vietnam.U.S. investors continue to cite concerns about confusing tax regulations and retroactive changes to laws – including tax rates, tax policies, and preferential treatment of state-owned enterprises (SOEs). In 2020, members of the American Chamber of Commerce (AmCham) in Hanoi noted that fair, transparent, stable, and effective legal frameworks would help Vietnam better attract U.S. investment.

The Ministry of Planning and Investment (MPI) is the country’s national agency charged with promoting and facilitating foreign investment; most provinces and cities also have local equivalents. MPI and local investment promotion offices provide information and explain regulations and policies to foreign investors. They also inform the Prime Minister and National Assembly on trends in foreign investment. However, U.S. investors should still consult lawyers and/or other experts regarding issues on regulations that are unclear.

The Prime Minister, along with other senior leaders, has stated that Vietnam prioritizes both investment retention and ongoing dialogue with foreign investors. Vietnam’s senior leaders often meet with foreign governments and private-sector representatives to emphasize Vietnam’s attractiveness as an FDI destination. The semiannual Vietnam Business Forum includes meetings between foreign investors and Vietnamese government officials; the U.S.-ASEAN Business Council (USABC), AmCham, and other U.S. associations also host multiple yearly missions for their U.S. company members, which allow direct engagement with senior government officials. Foreign investors in Vietnam have reported that these meetings and dialogues have helped address obstacles.

Limits on Foreign Control and Right to Private Ownership and Establishment

Both foreign and domestic private entities have the right to establish and own business enterprises in Vietnam and engage in most forms of legal remunerative activity in non-regulated sectors.

Vietnam has some statutory restrictions on foreign investment, including FOLs or requirements for joint partnerships, projects in banking, network infrastructure services, non-infrastructure telecommunication services, transportation, energy, and defense. By law, the Prime Minister can waive these FOLs on a case-by-case basis. In practice, however, when the government has removed or eased FOLs, it has done so for the whole industry sector rather than for a specific investment.

MPI plays a key role with respect to investment screening. All FDI projects require approval by the provincial People’s Committee in which the project would be located. By law, large-scale FDI projects must also obtain the approval of the National Assembly before investment can proceed. MPI’s approval process includes an assessment of the investor’s legal status and financial strength; the project’s compatibility with the government’s long- and short-term goals for economic development and government revenue; the investor’s technological expertise; environmental protection; and plans for land use and land clearance compensation, if applicable. The government can, and sometimes does, stop certain foreign investments if it deems the investment harmful to Vietnam’s national security.

The following FDI projects also require the Prime Minister’s approval: airports; grade 1 seaports (seaports the government classifies as strategic); casinos; oil and gas exploration, production, and refining; telecommunications/network infrastructure; forestry projects; publishing; and projects that need approval from more than one province. In the period between this year’s Investment Climate Statement and last year’s, the government removed the requirement that the Prime Minister needs to approve investments over USD 271 million or investments in the tobacco industry.

Other Investment Policy Reviews

Recent third-party investment policy reviews include the World Bank’s Review from 2020: https://openknowledge.worldbank.org/handle/10986/33598 

https://openknowledge.worldbank.org/handle/10986/33598 

And OECD’s 2018 Review: https://www.oecd.org/countries/vietnam/oecd-investment-policy-reviews-viet-nam-2017-9789264282957-en.htm 

https://www.oecd.org/countries/vietnam/oecd-investment-policy-reviews-viet-nam-2017-9789264282957-en.htm 

UNCTAD released a report in 2009: https://unctad.org/webflyer/investment-policy-review-viet-nam 

https://unctad.org/webflyer/investment-policy-review-viet-nam 

Business Facilitation

The World Bank’s 2020 Ease of Doing Business Index ranked Vietnam 70 of 190 economies. The World Bank reported that in some factors Vietnam lags behind other Southeast Asian countries. For example, it takes businesses 384 hours to pay taxes in Vietnam compared with 64 in Singapore, 174 in Malaysia, and 191 in Indonesia.

In May 2021, USAID and the Vietnam Chamber of Commerce and Industry (VCCI) released the Provincial Competitiveness Index (PCI) 2020 Report, which examined trends in economic governance: http://eng.pcivietnam.org/ . This annual report provides an independent, unbiased view on the provincial business environment by surveying over 8,500 domestic private firms on a variety of business issues. Overall, Vietnam’s median PCI score improved, reflecting the government’s efforts to improve economic governance and the quality of infrastructure, as well as a decline in the prevalence of corruption (bribes).

Outward Investment

The government does not have a clear mechanism to promote or incentivize outward investment, nor does it have regulations restricting domestic investors from investing abroad. Vietnam does not release periodical statistics on outward investment, but reported that by the end of 2019 total outward FDI investment from Vietnam was USD 21 billion in more than 1,300 projects in 78 countries. Laos received the most outward FDI, with USD 5 billion, followed by Russia and Cambodia with USD 2.8 billion and USD 2.7 billion, respectively. SOEs like PetroVietnam, Viettel, and SOCB are Vietnam’s largest sources of outward FDI, and have invested more than USD 13 billion in outward FDI, per media reports.

3. Legal Regime

Transparency of the Regulatory System

U.S. companies continue to report that they face frequent and significant challenges with inconsistent regulatory interpretation, irregular enforcement, and an unclear legal framework. AmCham members have consistently voiced concerns that Vietnam lacks a fair legal system for investments, which affects U.S. companies’ ability to do business in Vietnam. The 2020 PCI report documented companies’ difficulties dealing with land, taxes, and social insurance issues, but also found improvements in procedures related to business administration and anti-corruption.

Accounting systems are inconsistent with international norms, and this increases transaction costs for investors. The government had previously said it intended to have most companies transition to International Financial Reporting Standards (IFRS) by 2020. Unable to meet this target, the Ministry of Finance in March 2020 extended the deadline to 2025.

In Vietnam, the National Assembly passes laws, which serve as the highest form of legal direction, but often lack specifics. Ministries provide draft laws to the National Assembly. The Prime Minister issues decrees, which provide guidance on implementation. Individual ministries issue circulars, which provide guidance on how a ministry will administer a law or decree.

After implementing ministries have cleared a particular law to send the law to the National Assembly, the government posts the law for a 60-day comment period. However, in practice, the public comment period is sometimes truncated. Foreign governments, NGOs, and private-sector companies can, and do, comment during this period, after which the ministry may redraft the law. Upon completion of the revisions, the ministry submits the legislation to the Office of the Government (OOG) for approval, including the Prime Minister’s signature, and the legislation moves to the National Assembly for committee review. During this process, the National Assembly can send the legislation back to the originating ministry for further changes. The Communist Party of Vietnam’s Politburo reserves the right to review special or controversial laws.

In practice, drafting ministries often lack the resources needed to conduct adequate data-driven assessments. Ministries are supposed to conduct policy impact assessments that holistically consider all factors before drafting a law, but the quality of these assessments varies.

The Ministry of Justice (MOJ) is in charge of ensuring that government ministries and agencies follow administrative procedures. The MOJ has a Regulatory Management Department, which oversees and reviews legal documents after they are issued to ensure compliance with the legal system. The Law on the Promulgation of Legal Normative Documents requires all legal documents and agreements to be published online and open for comments for 60 days, and to be published in the Official Gazette before implementation.

Business associations and various chambers of commerce regularly comment on draft laws and regulations. However, when issuing more detailed implementing guidelines, government entities sometimes issue circulars with little advance warning and without public notification, resulting in little opportunity for comment by affected parties. In several cases, authorities allowed comments for the first draft only and did not provide subsequent draft versions to the public. The centralized location where key regulatory actions are published can be found here:   http://vbpl.vn/  .

While general information is publicly available, Vietnam’s public finances and debt obligations (including explicit and contingent liabilities) are not transparent. The National Assembly set a statutory limit for public debt at 65 percent of nominal GDP, and, according to official figures, Vietnam’s public debt to GDP ratio in late 2020 was 55.3 percent – down from 56 percent the previous year. However, the official public-debt figures exclude the debt of certain large SOEs. This poses a risk to Vietnam’s public finances, as the government is liable for the debts of these companies. Vietnam could improve its fiscal transparency by making its executive budget proposal, including budgetary and debt expenses, widely and easily accessible to the general public long before the National Assembly enacts the budget, ensuring greater transparency of off-budget accounts, and by publicizing the criteria by which the government awards contracts and licenses for natural resource extraction.

International Regulatory Considerations

Vietnam is a member of ASEAN, a 10-member regional organization working to advance economic integration through cooperation in economic, social, cultural, technical, scientific and administrative fields. Within ASEAN, the ASEAN Economic Community (AEC) has the goal of establishing a single market across ASEAN nations (similar to the EU’s common market), but member states have not made significant progress. To date, AEC’s greatest success has been in reducing tariffs on most products traded within the bloc.

Vietnam is also a member of the Asia-Pacific Economic Cooperation (APEC), an inter-governmental forum for 21 member economies in the Pacific Rim that promotes free trade throughout the Asia-Pacific region. APEC aims to facilitate business among member states through trade facilitation programming, senior-level leaders’ meetings, and regular dialogue. However, APEC is a non-binding forum. ASEAN and APEC membership has not resulted in Vietnam incorporating international standards, especially when compared with the EU or North America.

Vietnam is a party to the WTO’s Trade Facilitation Agreement (TFA) and has been implementing the TFA’s Category A provisions. Vietnam submitted its Category B and Category C implementation timelines on August 2, 2018. According to these timelines, Vietnam will fully implement the Category B and C provisions by the end of 2023 and 2024, respectively.

Legal System and Judicial Independence

Vietnam’s legal system mixes indigenous, French, and Soviet-inspired civil legal traditions. Vietnam generally follows an operational understanding of the rule of law that is consistent with its top-down, one-party political structure and traditionally inquisitorial judicial system.

The hierarchy of the country’s courts is: 1) the Supreme People’s Court; 2) the High People’s Court; 3) Provincial People’s Courts; 4) District People’s Courts, and 5) Military Courts. The People’s Courts operate in five divisions: criminal, civil, administrative, economic, and labor. The Supreme People’s Procuracy is responsible for prosecuting criminal activities as well as supervising judicial activities.

Vietnam lacks an independent judiciary and separation of powers among Vietnam’s branches of government. For example, Vietnam’s Chief Justice is also a member of the Communist Party’s Central Committee. According to Transparency International, there is significant risk of corruption in judicial rulings. Low judicial salaries engender corruption; nearly one-fifth of surveyed Vietnamese households that have been to court declared that they had paid bribes at least once. Many businesses therefore avoid Vietnamese courts as much as possible.

The judicial system continues to face additional problems: for example, many judges and arbitrators lack adequate legal training and are appointed through personal or political contacts with party leaders or based on their political views. Regulations or enforcement actions are appealable, and appeals are adjudicated in the national court system. Through a separate legal mechanism, individuals and companies can file complaints against enforcement actions under the Law on Complaints.

The 2005 Commercial Law regulates commercial contracts between businesses. Specific regulations prescribe specific forms of contracts, depending on the nature of the deals. If a contract does not contain a dispute-resolution clause, courts will have jurisdiction over a dispute. Vietnamese law allows dispute-resolution clauses in commercial contracts explicitly through the Law on Commercial Arbitration. The law follows the United Nations Commission on International Trade Law (UNCITRAL) model law as an international standard for procedural rules.

Vietnamese courts will only consider recognition of civil judgments issued by courts in countries that have entered into agreements on recognition of judgments with Vietnam or on a reciprocal basis. However, with the exception of France, these treaties only cover non-commercial judgments.

Laws and Regulations on Foreign Direct Investment

The legal system includes provisions to promote foreign investment. Vietnam uses a “negative list” approach to approve foreign investment, meaning foreign businesses are allowed to operate in all areas except for six prohibited sectors – from which domestic businesses are also prohibited. These include illicit drugs, wildlife trade, prostitution, human trafficking, human cloning, and debt collection services.

The law also requires that foreign and domestic investors be treated equally in cases of nationalization and confiscation. However, foreign investors are subject to different business-licensing processes and restrictions, and companies registered in Vietnam that have majority foreign ownership are subject to foreign-investor business-license procedures.

The new Labor Code, which came into effect January 1, 2021, provides greater flexibility in contract termination, allows employees to work more overtime hours, increases the retirement age, and adds flexibility in labor contracts.

The Investment Law, revised in June 2020, stipulated Vietnam would encourage FDI, through incentives, in university education, pollution mitigation, and certain medical research. Public Private Partnership Law, passed in June 2020 lists transportation, electricity grid and power plants, irrigation, water supply and treatment, waste treatment, health care, education and IT infrastructure as prioritized sectors for FDI and private public partnerships.

Vietnam has a “one-stop-shop” website for investment that provides relevant laws, rules, procedures, and reporting requirements for investors:  https://vietnam.eregulations.org/  

Competition and Antitrust Laws

In 2018, Vietnam passed a new Law on Competition, which came into effect on July 1, 2019, replacing Vietnam’s Law on Competition of 2004. The Law includes punishments – such as fines – for those who violate the law. The government has not prosecuted any person or entity under this law since it came into effect, though there were prosecutions under the old law in the early 2000s. The law does not appear to have affected foreign investment. On March 24, 2020, Decree 35, the second decree to implement the Law on Competition, came into effect. Decree 35 addresses issues on anti-competitive agreements, abuse of dominance, and merger control. For merger control, the decree replaces the single market share threshold for when parties must notify a merger with an approach that puts forward four alternative benchmarks based on the value of assets, transaction value, revenue, and market share. The decree also provides details on merger filing assessment.

Expropriation and Compensation

Under the law, the government of Vietnam can only expropriate investors’ property in cases of emergency, disaster, defense, or national interest, and the government is required to compensate investors if it expropriates property. Under the U.S.-Vietnam Bilateral Trade Agreement, Vietnam must apply international standards of treatment in any case of expropriation or nationalization of U.S. investor assets, which includes acting in a non-discriminatory manner with due process of law and with prompt, adequate, and effective compensation. The U.S. Mission in Vietnam is unaware of any current expropriation cases involving U.S. firms.

Dispute Settlement

ICSID Convention and New York Convention

Vietnam has not acceded to the International Center for Settlement of Investment Disputes (ICSID) Convention but is a member of UN Commission on International Trade Laws for the period 2019-2025. MPI has submitted a proposal to the government to join the ICSID, but the government has not moved forward on it. Vietnam is a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”), meaning that Vietnam courts should recognize foreign arbitral awards rendered by a recognized international arbitration institution without a review of cases’ merits.

Investor-State Dispute Settlement

Vietnam has signed 67 bilateral investment treaties, is party to 26 treaties with investment provisions, and is a member of 15 free trade agreements in force. Some of these include provisions for Investor-State Dispute Settlement. As a signatory to the New York Convention, Vietnam is required to recognize and enforce foreign arbitral awards within its jurisdiction, with few exceptions. Technically, foreign and domestic arbitral awards are legally enforceable in Vietnam; however, foreign investors in Vietnam generally prefer international arbitration for predictability. Vietnam courts may reject foreign arbitral awards if the award is contrary to the basic principles of domestic laws. The new Investment law provides that only Vietnam arbitration and courts can solve disputes between investors and government authorities, while investors can select foreign or mutually agreed arbitrations to solve their disputes.

According to UNCTAD, over the last 10 years, there were two dispute cases against the Vietnamese government involving U.S. companies.  The courts decided in favor of the government in one case, and the parties decided to discontinue the other.  The government is currently in two pending, active disputes (with the UK and South Korea). More details are available at  https://investmentpolicy.unctad.org/investment-dispute-settlement/country/229/viet-nam.

International Commercial Arbitration and Foreign Courts

With an underdeveloped legal system, Vietnam’s courts are often ineffective in settling commercial disputes. Negotiation between concerned parties or arbitration are the most common means of dispute resolution. Since the Law on Arbitration does not allow a foreign investor to refer an investment dispute to a court in a foreign jurisdiction, Vietnamese judges cannot apply foreign laws to a case before them, and foreign lawyers cannot represent plaintiffs in a court of law. The Law on Commercial Arbitration of 2010 permits foreign arbitration centers to establish branches or representative offices (although none have done so).

There are no readily available statistics on how often domestic courts rule in favor of SOEs. In general, the court system in Vietnam works slowly. International arbitration awards, when enforced, may take years from original judgment to payment. Many foreign companies, due to concerns related to time, costs, and potential for bribery, have reported that they have turned to international arbitration or have asked influential individuals to weigh in.

Bankruptcy Regulations

Under the 2014 Bankruptcy Law, bankruptcy is not criminalized unless it relates to another crime. The law defines insolvency as a condition in which an enterprise is more than three months overdue in meeting its payment obligations. The law also provides provisions allowing creditors to commence bankruptcy proceedings against an enterprise and procedures for credit institutions to file for bankruptcy. According to the World Bank’s 2020 Ease of Doing Business Report, Vietnam ranked 122 out of 190 for resolving insolvency. The report noted that it still takes, on average, five years to conclude a bankruptcy case in Vietnam. The Credit Information Center of the State Bank of Vietnam provides credit information services for foreign investors concerned about the potential for bankruptcy with a Vietnamese partner.

4. Industrial Policies

Investment Incentives

Foreign investors are exempt from import duties on goods imported for their own use that cannot be procured locally, including machinery; vehicles; components and spare parts for machinery and equipment; raw materials; inputs for manufacturing; and construction materials. Remote and mountainous provinces and special industrial zones are allowed to provide additional tax breaks and other incentives to prospective investors.

Investment incentives, including lower corporate income tax rates, exemption of some import tariffs, or favorable land rental rates, are available in the following sectors: advanced technology; research and development; new materials; energy; clean energy; renewable energy; energy saving products; automobiles; software; waste treatment and management; and primary or vocational education.

The government rarely issues guarantees for financing FDI projects; when it does so, it is usually because the project links to a national security priority. Joint financing with the government occurs when a foreign entity partners with an SOE. The government’s reluctance to guarantee projects reflects its desire to stay below a statutory 65 percent public debt-to-GDP ratio cap, and a desire to avoid incurring liabilities from projects that would not be economically viable without the guarantee. This has delayed approval of many large-scale FDI projects.

Foreign Trade Zones/Free Ports/Trade Facilitation

Vietnam has prioritized efforts to establish and develop foreign trade zones (FTZs) over the last decade. Vietnam currently has more than 350 industrial zones (IZs) and export processing zones (EPZs). Many foreign investors report that it is easier to implement projects in IZs because they do not have to be involved in site clearance and infrastructure construction. Enterprises in FTZs pay no duties when importing raw materials if they export the finished products. Customs warehouse companies in FTZs can provide transportation services and act as distributors for the goods deposited.

Additional services relating to customs declaration, appraisal, insurance, reprocessing, or packaging require the approval of the provincial customs office. In practice, the time involved for clearance and delivery of goods by provincial custom officials can be lengthy and unpredictable. Companies operating in economic zones are entitled to more tax reductions as measures to incentivize investments.

Performance and Data Localization Requirements

Vietnamese law states that employers can only recruit foreign nationals for high-skilled positions such as manager, managing director, expert, or technical worker. Local companies must also justify that their efforts to hire suitable local employees were unsuccessful before recruiting foreigners, and local authorities and/or the national government must approve these justifications in writing. This does not apply to board members elected by shareholders or capital contributors.

The government has implemented entry suspension and quarantine regulations for foreigners since March 2020, as a measure to contain COVID-19. Vietnam’s borders are closed for all foreign nationals with only few exceptions for diplomatic, experts, and special cases determined by the government. Foreign nationals travelling to Vietnam are subject to testing, quarantine, and lockdowns with little or no advance notice.

On June 17, 2020, the National Assembly passed the Law on Investment (LOI) 2020, which prescribes market entry conditions for foreign investors, particularly in “conditional” sectors. All investors, foreign or domestics, must obtain formal approval, in the form of business licenses or other certifications, to satisfy “necessary conditions for reasons of national defense, security or order, social safety, social morality, and health of the community.” These sectors are listed in Appendix IV (“List of Conditional Investments and Businesses”) of the Law.

LOI 2020 includes two conditions for foreign investors investing in or acquiring capital/share in a Vietnamese company:

  • The investment must not compromise national defense and security of Vietnam; and
  • The investment must comply with the conditions relating to the use of islands, border areas, and coastal areas in accordance with the applicable laws.

The LOI does not define “national defense and security.”

On January 1, 2019, the Law on Cybersecurity (LOCS) came into effect, requiring cross-border services providers to store data of Vietnamese users in Vietnam – despite sustained international and domestic opposition to the regulation. The July 2019 draft of the LOCS implementing decree by the Ministry of Public Security (MPS) sparked concerns among foreign digital services firms regarding the draft decree’s provisions on data localization and local presence for a broad range of services in the Internet economy – from cloud computing to email. Provisions of the LOCS require firms to provide unencrypted user information upon request by law enforcement. However, application of this requirement hinges on issuance of the implementing Decree, which is still pending as of April 2021.

In September 2020, MPS released a revised LOCS decree draft, which requires all local companies to comply with data localization requirements and forces foreign services providers to localize their data and establish local presence when they violate Vietnamese laws and fail to cooperate with MPS to address violations. U.S. companies complain that the data localization regulations are impractical, and if implemented, would be unnecessarily burdensome.

The 2019 Law on Tax Administration, which came into force July 1, 2020, requires foreign entities that employ digital platforms without a permanent physical presence in Vietnam to register as tax-paying entities in Vietnam. The Ministry of Finance released a draft circular with guidance on implementation of the Law in March 2021, and is working to revise the law based on stakeholder comments, as of April 2021. American companies have expressed concerns that the original draft circular included unnecessarily complex and unclear regulations of Corporate Income Tax (CIT) and Value Added Tax (VAT) collections, and does not address areas that overlap with Vietnam’s international tax treaties already in force.

In early 2020, the Ministry of Public Security (MPS) released a draft outline of the Personal Data Protection Decree (PDPD) and published the first full draft in February 2021 for public comment with an expected effective date of December 1, 2021. Industry and human rights activists have major concerns about data localization provision for personal data, including requirements for local presence, licensing, and registration procedures. If implemented as written, the regulations of cross-border transfer of personal data would affect a wide range of companies.

The Ministry of Information and Communication (MIC) released a draft of Decree 72 on Internet Services and Information Content Online for public comment on April 19, 2020. Foreign companies reported concerns regarding the draft Decree provisions on mandatory licensing requirements; tightened regulations on social media companies; compulsory content review; and policies requiring responses to government takedown requests within 24 to 48 hours. The draft Decree requires local Internet service providers to terminate services for companies that fail to cooperate with the new regulations. The revised decree is scheduled to go into effect in late 2021. The Ministry of Public Security has applied the broadest possible definition of “data,” in the decree, which could threaten some activities of U.S. payment and financial services companies.

MIC is also revising Decree 06 on Management, Provision and Utilization of Radio and Television Services, which applies specifically to streaming services. The first draft, released August 2019, required onerous licensing procedures, local-presence requirements, local-content quotas, content preapproval, compulsory translation, and local advertising agents that are inconsistent with Vietnam’s commitments under the World Trade Organization (WTO). The latest, December 2020, draft continues to include licensing requirements for cross-border over-the-top (OTT) services providers and pre-check content censorship.

5. Protection of Property Rights

Real Property

The State collectively owns and manages all land in Vietnam, and therefore neither foreigners nor Vietnamese nationals can own land. However, the government grants land-use and building rights, often to individuals. According to the Ministry of National Resources and Environment (MONRE), as of September 2018 – the most recent time period in which the government has made figures available – the government has issued land-use rights certificates for 96.9 percent of land in Vietnam. If land is not used according to the land-use rights certificate or if it is unoccupied, it reverts to the government. If investors do not use land leased within 12 consecutive months or delay land use by 24 months from the original investment schedule, the government is entitled to reclaim the land. Investors can seek an extension of delay but not for more than 24 months. Vietnam is building a national land-registration database, and some localities have already digitized their land records.

State protection of property rights are still evolving, and the law does not clearly demarcate circumstances in which the government would use eminent domain. Under the Housing Law and Real Estate Business Law of November 2014, the government can take land if it deems it necessary for socio-economic development in the public or national interest if the Prime Minister, the National Assembly, or the Provincial People’s Council approves such action. However, the law loosely defines “socio-economic development.”

Disputes over land rights continue to be a significant driver of social protests in Vietnam. Foreign investors also may be exposed to land disputes through merger and acquisition activities when they buy into a local company or implement large-scale infrastructure projects.

Foreign investors can lease land for renewable periods of 50 years, and up to 70 years in some underdeveloped areas. This allows titleholders to conduct property transactions, including mortgages on property. Some investors have encountered difficulties amending investment licenses to expand operations onto land adjoining existing facilities. Investors also note that local authorities may seek to increase requirements for land-use rights when current rights must be renewed, particularly when the investment in question competes with Vietnamese companies.

Intellectual Property Rights

Vietnam does not have a strong record on protecting and enforcing intellectual property (IP). Lack of coordination among ministries and agencies responsible for enforcement is a primary obstacle, and capacity constraints related to enforcement persist, in part, due to a lack of resources and IP expertise. Vietnam continues to rely heavily on administrative enforcement actions, which have consistently failed to deter widespread counterfeiting and piracy.

There were some positive developments in 2020-2021, such as the issuance of a national IP strategy, public awareness campaigns and training activities, and reported improvements on border enforcement in some parts of the country. Overall, however,IP enforcement continues to be a challenge.

The United States is closely monitoring and engaging with the Vietnamese government in the ongoing implementation of amendments to the 2015 Penal Code, particularly with respect to criminal enforcement of IP violations. Counterfeit goods are widely available online and in physical markets. In addition, issues continue to persist with online piracy (including the use of piracy devices and applications to access unauthorized audiovisual content), book piracy, lack of effective criminal measures for cable and satellite signal theft, and both private and public-sector software piracy..

Vietnam’s system for protecting against the unfair commercial use and unauthorized disclosure of undisclosed tests or other data generated to obtain marketing approval for pharmaceutical products needs further clarification.  The United States is monitoring the implementation of IP provisions of the CPTPP, which the National Assembly ratified in November 2018, and the EVFTA, which Vietnam’s National Assembly ratified in June 2020. The EVFTA grandfathered prior users of certain cheese terms from the restrictions in the geographical indications provisions of the EVFTA, and it is important that Vietnam ensure market access for prior users of those terms who were in the Vietnamese market before the grandfathering date of January 1, 2017.

In its international agreements, Vietnam committed to strengthen its IP regime and is in the process of drafting implementing legislation and other measures in a number of IP-related areas, including in preparation for acceding to the World Intellectual Property Organization (WIPO) Copyright Treaty and the WIPO Performances and Phonograms Treaty.  In September 2019, Vietnam acceded to the Hague Agreement Concerning the International Registration of Industrial Designs, and the United States will monitor implementation of that agreement.

The United States, through the U.S.-Vietnam Trade and Investment Framework Agreement (TIFA) and other bilateral fora, continues to urge Vietnam to address IP issues and to provide interested stakeholders with meaningful opportunities for input as it proceeds with these reforms. The United States and Vietnam signed a Customs Mutual Assistance Agreement in December 2019, which will facilitate bilateral cooperation in IP enforcement.

In 2020, the Intellectual Property Office of Vietnam (IP Vietnam) reported receiving 119,986 IP applications of all types (down 0.7 percent from 2019), of which 76,072 were registered for industrial property rights (up 1.7 percent from 2019). IP Vietnam reported granting 4,591 patents in 2020 (up 63 percent from 2019). Industrial designs registrations reached 2,054 in 2020 (down 5.4 percent from 2019). In total, IP Vietnam granted more than 47,168 protection titles for industrial property, out of 76,072 applications in 2020 (up 15.6 percent from 2019). The General Department of Market Management in 2020 detected 7,442 cases relating to counterfeit goods on physical and online markets, copyright and IP violations, imposing fines of USD 5 million. The Copyright Office of Vietnam received and settled 12 copyright petitions and five requests for copyright assessment in 2020. In 2020, the Ministry of Culture, Sports, and Tourism’s Inspector General carried out inspections for software licensing compliance, resulting in total fines of USD 23,000. For more information, please see the following reports from the U.S. Trade Representative:

  • Special 301 Report:  https://ustr.gov/sites/default/files/2020_Special_301_Report.pdf
  • Notorious Markets Report: https://ustr.gov/sites/default/files/2020_Special_301_Report.pdf
  • For additional information about national laws and points of contact at local IP offices, please see WIPO’s country profiles at .

6. Financial Sector

Capital Markets and Portfolio Investment

The government generally encourages foreign portfolio investment. The country has two stock markets: the Ho Chi Minh City Stock Exchange (HOSE), which lists publicly traded companies, and the Hanoi Stock Exchange, which lists bonds and derivatives. The Law on Securities, which came into effect January 1, 2021, states that Vietnam Exchange, a parent company to both exchanges, with board members appointed by the government, will manage trading operations. Vietnam also has a market for unlisted public companies (UPCOM) at the Hanoi Securities Center.

Although Vietnam welcomes portfolio investment, the country sometimes has difficulty in attracting such investment. Morgan Stanley Capital International (MSCI) classifies Vietnam as a Frontier Market, which precludes some of the world’s biggest asset managers from investing in its stock markets.

Vietnam did not meet its goal to be considered an “emerging market” in 2020, and pushed back the timeline to 2025. Foreign investors often face difficulties in making portfolio investments because of cumbersome bureaucratic procedures. Furthermore, in the first three months of 2021, surges in trading frequently crashed the HOSE’s decades-old technology platform, resulting in investor frustration.

There is enough liquidity in the markets to enter and maintain sizable positions. Combined market capitalization at the end of 2020 was approximately USD 230 billion, equal to 84 percent of Vietnam’s GDP, with the HOSE accounting for USD 177 billion, the Hanoi Exchange USD 9 billion, and the UPCOM USD 43 billion. Bond market capitalization reached over USD 50 billion in 2019, the majority of which were government bonds held by domestic commercial banks.

Vietnam complies with International Monetary Fund (IMF) Article VIII. The government notified the IMF that it accepted the obligations of Article VIII, Sections 2, 3, and 4, effective November 8, 2005.

Local banks generally allocate credit on market terms, but the banking sector is not as sophisticated or capitalized as those in advanced economies. Foreign investors can acquire credit in the local market, but both foreign and domestic firms often seek foreign financing since domestic banks do not have sufficient capital at appropriate interest rate levels for a significant number of FDI projects.

Money and Banking System

Vietnam’s banking sector has been stable since recovering from the 2008 global recession. Nevertheless, the State Bank of Vietnam (SBV), Vietnam’s central bank, estimated in 2019 that 55 percent of Vietnam’s population is underbanked or lacks bank accounts due to a preference for cash, distrust in commercial banking, limited geographical distribution of banks, and a lack of financial acumen. The World Bank’s Global Findex Database 2017 (the most recent available) estimated that only 31 percent of Vietnamese over the age of 15 had an account at a financial institution or through a mobile money provider.

The COVID-19 pandemic increased strains on the financial system as an increasing number of debtors were unable to make loan payments. Slow credit growth, together with increases in debtors’ inability to pay back loans, squeezed bank profits in 2020. At the end of 2020, the SBV reported that the percentage of non-performing loans (NPLs) in the banking sector was 2.14 percent, up from 1.9 percent at the end of 2019.

By the end of 2020, per SBV, the banking sector’s estimated total assets stood at USD 572 billion, of which USD 236 billion belonged to seven state-owned and majority state-owned commercial banks – accounting for 41 percent of total assets in the sector. Though classified as joint-stock (private) commercial banks, the Bank of Investment and Development Bank (BIDV), Vietnam Joint Stock Commercial Bank for Industry and Trade (VietinBank), and Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank) all are majority-owned by SBV. In addition, the SBV holds 100 percent of Agribank, Global Petro Commercial Bank (GPBank), Construction Bank (CBBank), and Oceanbank.

Currently, the total foreign ownership limit (FOL) in a Vietnamese bank is 30 percent, with a 5 percent limit for non-strategic individual investors, a 15 percent limit for non-strategic institutional investors, and a 20 percent limit for strategic institutional partners.

The U.S. Mission in Vietnam did not find any evidence that a Vietnamese bank had lost a correspondent banking relationship in the past three years; there is also no evidence that a correspondent banking relationship is currently in jeopardy.

Foreign Exchange and Remittances

Foreign Exchange

There are no legal restrictions on foreign investors converting and repatriating earnings or investment capital from Vietnam. A foreign investor can convert and repatriate earnings provided the investor has the supporting documents required by law proving they have completed financial obligations. The SBV sets the interbank lending rate and announces a daily interbank reference exchange rate. SBV determines the latter based on the previous day’s average interbank exchange rates, while considering movements in the currencies of Vietnam’s major trading and investment partners. The government generally keeps the exchange rate at a stable level compared to major world currencies.

Remittance Policies

Vietnam mandates that in-country transactions must be made in the local currency – Vietnamese dong (VND). The government allows foreign businesses to remit lawful profits, capital contributions, and other legal investment earnings via authorized institutions that handle foreign currency transactions. Although foreign companies can remit profits legally, sometimes these companies find bureaucratic difficulties, as they are required to provide supporting documentation (audited financial statements, import/foreign-service procurement contracts, proof of tax obligation fulfillment, etc.). SBV also requires foreign investors to submit notification of profit remittance abroad to tax authorities at least seven working days prior to the remittance; otherwise there is no waiting period to remit an investment return.

The inflow of foreign currency into Vietnam is less constrained. There are no recent changes or plans to change investment remittance policies that either tighten or relax access to foreign exchange for investment remittances.

Sovereign Wealth Funds

Vietnam does not have a sovereign wealth fund.

7. State-Owned Enterprises

The 2020 Enterprises Law, which came into effect January 1, 2021, defines an SOE as an enterprise that is more than 50 percent owned by the government. Vietnam does not officially publish a list of SOEs.

In 2018, the government created the Commission for State Capital Management at Enterprises (CMSC) to manage SOEs with increased transparency and accountability. The CMSC’s goals include accelerating privatization in a transparent manner, promoting public listings of SOEs, and transparency in overall financial management of SOEs.

SOEs do not operate on a level playing field with domestic or foreign enterprises and continue to benefit from preferential access to resources such as land, capital, and political largesse. Third-party market analysts note that a significant number of SOEs have extensive liabilities, including pensions owed, real estate holdings in areas not related to the SOE’s ostensible remit, and a lack of transparency with respect to operations and financing.

Privatization Program

Vietnam officially started privatizing SOEs in 1998. The process has been slow because privatization typically transfers only a small share of an SOE (two to three percent) to the private sector, and investors have had concerns about the financial health of many companies. Additionally, the government has inadequate regulations with respect to privatization procedures.

8. Responsible Business Conduct

Companies are required to publish their corporate social responsibility activities, corporate governance work, information of related parties and transactions, and compensation of management. Companies must also announce extraordinary circumstances, such as changes to management, dissolution, or establishment of subsidiaries, within 36 hours of the event.

Most multinational companies implement Corporate Social Responsibility (CSR) programs that contribute to improving the business environment in Vietnam, and awareness of CSR programs is increasing among large domestic companies. The VCCI conducts CSR training and highlights corporate engagement on a dedicated website ( http://www.csr-vietnam.eu/  ) in partnership with the UN.

AmCham also has a CSR group that organizes events and activities to raise awareness of social issues. Non-governmental organizations collaborate with government bodies, such as VCCI and the Ministry of Labor, Invalids, and Social Affairs (MOLISA), to promote business practices in Vietnam in line with international norms and standards.

Vietnam is not a part of the Extractive Industries Transparency Initiative.

Overall, the government has not defined responsible business conduct (RBC), nor has it established a national plan or agenda for RBC. The government has yet to establish a national point of contact or ombudsman for stakeholders to get information or raise concerns regarding RBC. The new Labor Code, which came into effect January 1, 2021, recognizes the right of employees to establish their own representative organizations, allows employees to unilaterally terminate labor contract without reason, and extends legal protection to non-written contract employees. For a detailed description of regulations on worker/labor rights in Vietnam, see the Department of State’s Human Rights Report ( https://www.state.gov/reports/2018-country-reports-on-human-rights-practices/vietnam/).

Vietnam’s Law on Consumer Protection is designed to protect consumers, but in practice the law is ineffective. A consumer who has a complaint on a product or service can petition the Association for Consumer Protection (ACP) or district governments. ACP is a non-governmental, volunteer organization that lacks law enforcement or legal power, and local governments are typically unresponsive to consumer complaints. The Vietnamese government has not focused on consumer protection over the last several years.

Vietnam allows foreign companies to work in private security. Vietnam has not ratified the Montreux Documents, is not a supporter of the International Code of Conduct or Private Security Service Providers, and is not a participant in the International Code of Conduct for Private Security Service Providers’ Association (ICoCA).

Vietnamese legislation clearly specifies businesses’ responsibilities regarding environmental protection. The revised 2020 Environmental Protection Law, which will come into effect on January 1, 2022, states that environmental protection is the responsibility and obligation of all organizations, institutions, communities, households, and individuals.

The Penal Code, revised in 2017, includes a chapter with 12 articles regulating different types of environmental crimes. In accordance with the Penal Code, penalties for infractions carry a maximum of 15 years in prison and a fine equivalent to USD 650,000. However, enforcement remains a problem. To date, no complaint or request for compensation due to damages caused by pollution or other environmental violations has ever been successfully resolved in court due to difficulties in identifying the level of damages and proving the relationship between violators and damages.

In the past several years, there have been high-profile, controversial instances of private sector impact on human rights – particularly over the revocation of land for real estate development projects. Government suppression of these protests ranged from intimidation and harassment via the media (including social media) to imprisonment. There are numerous examples of government-supported forces beating protestors, journalists, and activists covering land issues. Victims have reported they are unable to press claims against their attackers.

Additional Resources

Department of State

  • Country Reports on Human Rights Practices ();
  • Trafficking in Persons Report ();
  • Guidance on Implementing the “UN Guiding Principles” for Transactions Linked to Foreign Government End-Users for Products or Services with Surveillance Capabilities () and;
  • North Korea Sanctions & Enforcement Actions Advisory ().

Department of Labor

  • Findings on the Worst forms of Child Labor Report ( );
  • List of Goods Produced by Child Labor or Forced Labor ();
  • Sweat & Toil: Child Labor, Forced Labor, and Human Trafficking Around the World () and;
  • Comply Chain ().

9. Corruption

Vietnam has laws to combat corruption by public officials, and they extend to all citizens. Corruption is due, in large part, to low levels of transparency, accountability, and media freedom, as well as poor remuneration for government officials and inadequate systems for holding officials accountable. Competition among agencies for control over businesses and investments has created overlapping jurisdictions and bureaucratic procedures that, in turn, create opportunities for corruption.

The government has tasked various agencies to deal with corruption, including the Central Steering Committee for Anti-Corruption (chaired by the Communist Party of Vietnam General Secretary), the Government Inspectorate, and line ministries and agencies. Formed in 2007, the Central Steering Committee for Anti-Corruption has been under the purview of the CPV Central Commission of Internal Affairs since February 2013. The National Assembly provides oversight on the operations of government ministries. Civil society organizations have encouraged the government to establish a single independent agency with oversight and enforcement authority to ensure enforcement of anti-corruption laws.

Resource to Report Corruption

Contact at government agency responsible for combating corruption:

Mr. Phan Dinh TracChairman, Communist Party Central Committee Internal Affairs4 Nguyen Canh Chan; +84 0804-3557Contact at NGO:Ms. Nguyen Thi Kieu VienExecutive Director, Towards TransparencyTransparency International National Contact in VietnamFloor 4, No 37 Lane 35, Cat Linh street, Dong Da, Hanoi, Vietnam; +84-24-37153532Fax: +84-24-37153443; kieuvien@towardstransparency.vn 

10. Political and Security Environment

Vietnam is a unitary single-party state, and its political and security environment is largely stable. Protests and civil unrest are rare, though there are occasional demonstrations against perceived or real social, environmental, labor, and political injustices.

In August 2019, online commentators expressed outrage over the slow government response to an industrial fire in Hanoi that released unknown amounts of mercury. Other localized protests in 2019 and early 2020 broke out over alleged illegal dumping in waterways and on public land, and the perceived government attempts to cover up potential risks to local communities.

Citizens sometimes protest actions of the People’s Republic of China (PRC), usually online. For example, in June 2019, when PRC Coast Guard vessels harassed the operations of Russian oil company Rosneft in Block 06-01, Vietnam’s highest-producing natural gas field, Vietnamese citizens protested via Facebook and, in a few instances, in public.

In April 2016, after the Formosa Steel plant discharged toxic pollutants into the ocean and caused a large number of fish deaths, affected fishermen and residents in central Vietnam began a series of regular protests against the company and the government’s lack of response to the disaster. Protests continued into 2017 in multiple cities until security forces largely suppressed the unrest. Many activists who helped organize or document these protests were subsequently arrested and imprisoned.

11. Labor Policies and Practices

Vietnam’s new Labor Code came into effect on January 1, 2021. The CPTPP and the EVFTA have helped advance labor reform in Vietnam. In June 2020, EVFTA helped push Vietnam to ratify International Labor Organization (ILO) Convention 105 – on the abolition of forced labor – which will come into force July 14, 2021. EVFTA also requires Vietnam to ratify Convention 87, on freedom of association and protection of the right to organize, by 2023. Although Vietnam has made some progress on labor issues in recent years, including, in theory, allowing the formation of independent unions, the sole union that has any real authority is the state-controlled Vietnam General Confederation of Labor. Workers will not be able to form independent unions, legally, until the Ministry of Labor, Invalids, and Social Affairs (MOLISA) issues guidance on implementation of the Labor Code.

According to Vietnam’s General Statistics Office (GSO), in 2020 there were 54.6 million people participating in the formal labor force in Vietnam out of over 74 million people aged 15 and above. The labor force is relatively young, with workers 15-39 years of age accounting for half of the total labor force.

Estimates on the size of the informal economy differ widely. The IMF states 40 percent of Vietnam’s laborers work on the informal economy; the World Bank puts the figure at 55 percent; the ILO puts the figure as high as 79 percent if agricultural households are included. Vietnam’s GSO stated that among 53.4 million employed people, 20.3 million people worked in the informal economy.

An employer is permitted to lay off employees due to technological changes, organizational changes (in cases of a merger, consolidation, or cessation of operation of one or more departments), when the employer faces economic difficulties, or when the employees are harassing others at work. There are no waivers on labor requirements to attract foreign investment. COVID-19 increased the number of layoffs in the Vietnamese economy. In March and April 2020, and again in September 2020, the government provided cash payments and supplemental cash for companies, to help pay salaries for workers and offer unemployment insurance.

The constitution affords the right of association and the right to demonstrate. The 2019 Labor Code, which came into effect on January 1, 2021, allows workers to establish and join independent unions of their choice. However, the relevant governmental agencies are still drafting the implementing decrees on procedures to establish and join independent unions, and to determine the level of autonomy independent unions will have in administering their affairs.

Labor dispute resolution mechanisms vary depending on the situation. Individual labor disputes and rights-based collective labor disputes must go through a defined process that includes labor conciliation, labor arbitration, and a court hearing.

Vietnam has been a member of the ILO since 1992, and has ratified six of the core ILO labor conventions (Conventions 100 and 111 on discrimination, Conventions 138 and 182 on child labor, Convention 29 on forced labor, and Convention 98 on rights to organize and collective bargaining). While the constitution and law prohibit forced or compulsory labor, Vietnam has not ratified Convention 105 on forced labor as a means of political coercion and discrimination and Convention 87 on freedom of association and protection of the rights to organize.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

 

Host Country Statistical source* USG or international statistical source USG or International Source of Data:BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) (millions USD) 2020 2370 2020 3400 General Statistics Office (GSO) for Host Country and IMF for International Source https://www.imf.org/en/Countries/VNM#countrydata 
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data: BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2020 10,418 2019 2,615 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  
Host country’s FDI in the United States ($M USD, stock positions) 2020 N/A 2019 57 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  
Total inbound stock of FDI as % host GDP 2020 N/A 2019 49.3 UNCTAD data available at https://unctad.org/en/Pages/DIAE/World%20Investment%20Report/ountry-Fact-Sheets.aspx  
Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy

* General Statistics Office (GSO)

Table 3: Sources and Destination of FDI

Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward Amount 100% Total Outward Amount 100%
Singapore 6,828 32%
South Korea 2,946 14%
China 2,070 10%
Hong Kong 1,737 8%
Taiwan 1,707 8%
“0” reflects amounts rounded to +/- USD 500,000.

Data not available.

Portfolio Investment Assets
Top Five Partners (Millions, current US Dollars) (From MPI)
Total Equity Securities Total Debt Securities
All Countries Amount 100% N/A N/A
Singapore 2,166 29%
Japan 1,149 15%
South Korea 1,003 13%
Netherlands 445 6%
China 390 5%
Table 4: Sources of Portfolio Investment

14. Contact for More Information

Economic SectionU.S. Embassy7 Lang Ha, Ba Dinh, Hanoi, Vietnam +84-24-3850-5000+84-24-3850-5000 InvestmentClimateVN@state.gov 

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