Policies towards Foreign Direct Investment

Under the Private Investment Law of 2005 (PIL), qualified domestic or foreign entities may invest in all sectors of the economy.

On July 29, 2016, Afghanistan was formally admitted to the WTO which could bring about a number of benefits for Afghanistan, including improving prospects for foreign direct investment.

Article 16 of the PIL also states that approved domestic and foreign companies with similar objectives are subject to the same rights under Afghan law and the same protections against discriminatory governmental actions.

Afghanistan Investment Support Agency (AISA) is an investment promotion agency that was merged into the Ministry of Commerce and Industries (MOCI) in October 2016. The transition period is ongoing so the AISA continues to play a semi-independent role. MOCI has taken on the role of promoting business growth, investment, and trade.

The High Commission on Investment (HCI) is responsible for investment policy making. The HCI includes the Ministers of Agriculture, Economy, Finance, Foreign Affairs, Mines and Industries, the Governor of the Central Bank (Da Afghanistan Bank), and the Chief Executive Officer of AISA. The Minister of Commerce and Industries chairs the HCI. The High Economic Council (HEC), which is chaired by the President and includes both the HCI members and representatives from academia and the private sector, also plays a role in investment policy development.

The HEC, HCI, MOCI, Afghan Chamber of Commerce and Industries, and AISA are tasked with maintaining a dialogue and resolving business disputes with the government.

Limits on Foreign Control and Right to Private Ownership and Establishment

Under the PIL, foreign and domestic private entities have equal standing and may establish and own business enterprises, engage in all forms of remunerative activity, and freely acquire and dispose of interests in business enterprises.

While there is no requirement for foreigners to secure Afghan partners, the Afghan Constitution and the PIL prohibit foreign ownership of land. In practice most foreign firms find it necessary to work with an Afghan partner. Foreign land ownership is not permitted. However, foreigners may lease land for up to 50 years.

Although the HCI has authority to limit the share of foreign investment in some industries, specific economic sectors, and specific companies, that authority has never been exercised. In practice, investments may be 100 percent foreign owned.

Article 5 of the PIL prohibits investment in nuclear energy and gambling establishments.

Investment in certain sectors, such as production and sales of weapons and explosives, non-banking financial activities, insurance, natural resources, and infrastructure (defined as power, water, sewage, waste-treatment, airports, telecommunications, and health and education facilities) is subject to special consideration by the HCI, in consultation with relevant government ministries. The HCI may choose to apply specific requirements for investments in restricted sectors. Direct investment exceeding USD 3 million requires HCI approval of the investment application.

Other Investment Policy Reviews

There have been no third-party investment policy reviews by the OECD, WTO, or UNCTAD in the past three years.

Afghanistan’s last major investment policy review was the Afghanistan National Development Strategy (ANDS), which was developed with the assistance of the United Nations Development Program (UNDP) and covered the period 2008-2013. That strategy attempted to guide development investments in the focus areas of (1) agriculture and rural rehabilitation, (2) human capacity development, and (3) economic development and infrastructure, through high-priority programs chosen for contributions to job creation, broad geographic impact, and likelihood of attracting additional investment. As of March 2016 the Afghanistan Investment Support Agency (AISA) is urging the government to consider an updated strategy, potentially focusing on support to industry, electricity generation, taxation reform, industry supports, customs, technology, and the agricultural sector.

Currently a new investment law has been drafted by MoCI and is awaiting review by the Council of Ministers.

Business Facilitation

Responsibility for business facilitation, previous under AISA, was recently moved to MOCI. The HCI and HEC are responsible for investment and economic policy making.

Foreign or domestic companies investing in Afghanistan must obtain a corporate registration from the Afghanistan Central Business Registry (ACBR) and a Tax Identification Number issued by the Department of Revenue.

The websites for registration are:

• http://www.acbr.gov.af/r 
• http://ard.mof.gov.af/en/page/information/service-standards/issue-of-taxpayer-identification-number 

Companies operating in the security, telecommunications, agriculture, and health sectors require additional licenses from the relevant ministries. Companies seeking licenses to provide consultancy, legal, or audit services must meet requirements for education or related experience for top officers.

To begin the process for initial issuance of licenses, renewals, and material changes to the license, foreign firms must first obtain an introduction letter from the Ministry of Foreign Affairs (MOFA) addressed to the Ministry of Commerce and Industries. Obtaining this letter typically requires an application to the Afghan embassy located in the country where the company is incorporated or a letter of introduction from the embassy or commercial attaché in Kabul representing the country where the company is incorporated. Once this process is complete, the company will be introduced by MOFA to MOCI/AISA and may proceed to obtain a license.

These steps to register a business can take as little as two days to complete but may require longer and may require a local attorney’s help.

Ease of doing business reforms in 2016 led AISA to begin issuing licenses for three years, as opposed to one year, to attract investment. Obtaining a business license is relatively simple, however, applications for renewal are contingent upon certification from the Ministry of Finance (MOF) that all tax obligations have been met. Some companies have seen AISA license renewals delayed while MOF audits their tax status, despite MOF assurances that an ongoing tax audit should not impede AISA license renewal.

Outward Investment

The government does not promote or incentivize outward investment. However, due to the security situation capital flight is a concern.

Private investors have the right to transfer capital and profits out of Afghanistan, including for off-shore loan debt service. There are no restrictions on converting, remitting, or transferring funds associated with investment, such as dividends, return on capital, interest and principal on private foreign debt, lease payments, or royalties and management fees, into a freely usable currency at a legal market clearing rate. The PIL states that an investor may freely transfer investment dividends or proceeds from the sale of an approved enterprise abroad. MOF has in some instances frozen the domestic bank accounts of companies over tax disputes, which has effectively served to prohibit transfers of capital.

In 2004, Afghanistan signed a Trade and Investment Framework Agreement (TIFA) with the United States. Afghanistan does not have a bilateral investment treaty (BIT) with the United States.

Afghanistan has signed multiple trade, economic, and investment agreements/memoranda of understanding with other countries. The most significant is the Afghanistan Pakistan Transit Trade Agreement (APTTA), signed in 2010.

The United States, European Union, India, Canada, and Japan have granted Afghan exports preferential import tariffs under their Generalized Systems of Preference. Afghanistan is a member of the Economic Cooperation Organization (ECO), the South Asia Free Trade Area (SAFTA), the South Asian Association for Regional Cooperation (SAARC), and of Central Asian Regional Economic Cooperation (CAREC). The Afghan government has stated its intent to formally join the Transport Corridor Europe Caucasus Asia organization (TRACECA).

Bilateral Taxation Treaties

Afghanistan has concluded bilateral investment treaties with Germany, Iran, and Turkey. Afghanistan does not have a bilateral taxation treaty with the United States.

As of March 2016, the Embassy estimates that over 30 U.S. firms and U.S.-related entities are working with the Afghan government to resolve persistent differences over dividend taxes, vendor withholding tax obligations, taxation of U.S. government assistance, and other tax and contract disputes.

Transparency of the Regulatory System

Afghanistan’s Law on Publication and Enforcement of Legislation requires publication in the Official Gazette of official declarations, laws, decrees, and other legislative documents. There is no legal requirement or practice for publication and comment for domestic laws, regulations, or other measures of application that will become legally enforceable. In general, the Afghan government shares draft legislation with interested parties for comment and some ministries publish draft legislation in national newspapers for comment by the public. Foreign firms in Afghanistan follow accounting procedures consistent with international norms. The government uses ministerial orders to enforce regulatory compliance. For example, ministries have in the past taken action to freeze accounts or limit travel for companies until they comply with regulations.

International Regulatory Considerations

Afghanistan became a WTO member in 2016. The government is working to build its capacity to meet the notification requirements of the WTO.

Legal System and Judicial Independence

The legal system of Afghanistan consists of Islamic, statutory and customary (Shura) rules. The supreme law of the land is the Constitution. The judiciary system is composed of the Supreme Court, the Courts of Appeal and the Primary Courts. There are trial and appellate courts that specialize on commercial disputes. Since 2002, NGOs have been working to strengthen the rule of law in Afghanistan by identifying peaceful means for dispute resolutions, developing partnerships between state and community actors in the hopes of improving access to justice. Despite these efforts, many legal disputes are still resolved outside the formal justice system by community based tribal leaders. Contract law in Afghanistan is set out in the Afghanistan Commercial Code 1955 and the Afghanistan Civil Code 1977. Under these codes, parties are generally free to: a) enter into and perform a contract on any commercial subject matter provided that subject matter or performance is not contrary to law, public policy, or sharia; and b) agree to have the law of a foreign state govern their contract.

According to credible contacts, civil cases in the commercial court system can sometimes take more than 18 months for parties to obtain resolutions. Cases are frequently resolved more quickly through an informal system or, in some cases, pursuant to negotiations facilitated by formal justice system actors or private lawyers.

Because there is often limited access to the formal legal system in rural areas, local elders and shuras (consultative gatherings, usually of men selected by the community) are often the primary means of settling both criminal matters and civil disputes, and they are known to levy unsanctioned punishments. Some estimates suggest that 80 percent of all disputes are resolved by shuras/jirgas.

Investors should be aware that the Human Rights Report noted that arbitrary arrests occur in most provinces and that there have been a number of cases in which the Attorney General’s office, with the complicity of some police officials, imposed or threatened to impose criminal penalties on persons who may only be indirectly connected to a contractual dispute between a foreign company and an Afghan person or entity.

Laws and Regulations on Foreign Direct Investment

Under the PIL, investment is defined as currency and contributions in kind, including, without limitation, licenses, leases, machinery, equipment, and industrial and intellectual-property rights provided for the purpose of acquiring shares of stock or other ownership interests in a registered enterprise. The PIL permits investments in nearly all sectors except nuclear power, gambling, and production of narcotics and intoxicants. There are also limitations on the total value of service transactions or assets with respect to motion pictures, road transport (passenger and freight), and on the total number of people that can be employed in security companies.

Foreign investors have complained of irregularities in the court system, arbitration, and tax disputes. Disputes and disagreements have arisen from capricious application of the tax laws by MOF; penalties on compliance issues that have resulted in company officials placed on the Afghan government’s “no-fly” list and freezing of bank accounts; disinclination to respect international agreements as primacy over national law; and extrajudicial actions in commercial or contract disputes that can result in the criminalization of foreign parties. As a result of the various legal and regulatory challenges, companies operating in Afghanistan should seek local legal counsel to help navigate licensing and permitting requirements and conforming to tax regulations.

Competition and Anti-Trust Laws

There is no relevant law or authority in Afghanistan for review of competition-related concerns, though some preliminary work has been taken towards developing a law. In some sectors, such as trading, fuels, money changing, and carpet production, small groups of businessmen reportedly have ability to sway market prices and forestall competition.

Expropriation and Compensation

The PIL allows for expropriation of investments or assets by the government on a non-discriminatory basis and only for the purposes of public interest. The law stipulates that the government shall provide prompt, adequate, and effective compensation in conformity with the principles of international law, equivalent to the fair market value. In cases of investment in a foreign currency, the law requires compensation to be made in that currency. The government may also confiscate private property to settle debts. According to the PIL, investors with an ownership share of more than 25 percent may challenge the expropriation. There have been no reports of government expropriation of foreign assets, “creeping” or otherwise.

The Ministry of Finance may freeze assets to collect taxes.

Dispute Settlement

ICSID Convention and New York Convention

In 2005 Afghanistan became a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention). Under the New York Convention, Afghanistan has agreed to (a) recognize and enforce awards made in another contracted state, and (b) apply the convention to commercial disputes. Under the PIL and the Commercial Arbitration Law of 2007 (Arbitration Law), (a) parties can agree to have foreign law govern their contract and agree to have their disputes resolved through arbitration or other mechanisms inside or outside of Afghanistan, and (b) Afghan courts must enforce any resulting award or agreement.

Afghanistan has been a member state to the International Centre for Settlement of Investment Disputes (ICSID convention) since 1966.

Investor-State Dispute Settlement

Afghanistan does not have a BIT or FTA with the United States. There several ongoing disputes between the government and investors. However, they are generally not pure investment disputes. Rather companies typically dispute tax assessments and license requirements.

International Commercial Arbitration and Foreign Courts

Since 2005, Afghan law has expressly recognized alternative dispute resolution provisions. In 2014 the Afghanistan Centre for Dispute Resolution (ACDR), whose decisions are non-binding, was established with support from USAID and the Department of Commerce Commercial Law Development Program (CLDP). The ACDR offers mediation, expert witness services, and award calculation services in a limited number of cases referred by the commercial courts and plans to expand its services to include arbitration. The ACDR is at a nascent stage of operation and the Embassy is continuing to hear views as to its operations and effectiveness.

Bankruptcy Regulations

Provisions in the Banking Law provide special procedures for bank insolvency. Afghanistan’s General Law of Insolvency and Bankruptcy, however, is outdated and not applied. CLDP is providing technical assistance to the Ministry of Commerce and Industry as it works with stakeholders and other government entities on drafting replacement insolvency legislation.

Investment Incentives

The Public Procurement Law of 2015, while still awaiting approval by the Upper House of Parliament, was ratified by President Ghani and went into effect October 7, 2015. The law retains a preference for national sources and domestic products that was codified in the Public Procurement law of 2005, and in public statements since ratification, President Ghani has continued to emphasize the importance in giving preference to domestic pro